Good afternoon, ladies and gentlemen, welcome to the audio conference call that will review Embraer's fourth quarter 2013 results.
Hi. Welcome, everyone. We're going to go ahead and start with the earnings call per the agenda. With that, with no further ado, let's dive right into it, please.
Good afternoon, ladies and gentlemen, welcome to the audio conference call that will review Embraer's fourth quarter 2013 results. Thank you for standing by. This conference call is being held during the Embraer Day in Brazil with the presence of investors and market analysts. At this time, the company will present its fourth quarter 2013 results. Afterwards, we will conduct a question and answer session, and instructions to participants will be given at that time. If you should require assistance during the call, please press star key followed by one. As a reminder, this conference is being recorded and webcast at ri.embraer.com.br. This conference call includes forward-looking statements or statements about events or circumstances.
Just to remind you, this first part of the event is also being webcast, and we have colleagues joining us from abroad and obviously locally, but not here, dialing into the call.
which have not occurred. Embraer has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance. These forward-looking statements are subject to risks, uncertainties, and assumptions, including, among other things, general economic, political, and business conditions in Brazil and in other markets where the company is present. The words believes, may, will, estimates, continues, anticipates, intends, expects, and similar words are intended to identify forward-looking statements. Embraer undertakes no obligation to update publicly or revise any forward-looking statements because of new information, future events, or other factors. In light of these risks and uncertainties, the forward-looking events and circumstances discussed on this conference call may not occur. The company's actual results could differ substantially from those anticipated in forward-looking statements.
Participants on today's conference call are Mr. Frederico Curado, President and CEO, Mr. José Filippo, Chief Financial Officer and IRO, and Mr. Luciano Froes, Director of Investor Relations. I would now like to turn the conference over to Mr. Frederico Curado. Please go ahead, sir.
Good afternoon, everyone. Thank you for coming. Thank you for those attending our conference call through the web. I'll just say a few words at the beginning about 2013 and 2014. 2013 was a very challenging year for the company. We had a difficult start, but we were always confident about our ability to deliver on the results we promised. Revenue results, profitability results, meeting our investment targets, and also the progress in our programs. It was a great satisfaction that the whole team was able to deliver on all those guidance parameters. Of course, we had the reversion of a provision, which we had entered a few years ago regarding the bankruptcy process of American Airlines. With the very positive outcome of that Chapter 11 process, we were able to cancel that provision, and that gave us an extraordinary result above what we delivered operationally speaking.
It was, in the end, a very positive year for the company. We were able to restore our backlog. We successfully launched the E2, the E190-E2, E195-E2, and E175-E2, which will be, of course, a mainstream product for us towards the end of the decade. We also made progress in both defense and security and business jets, increasing our revenue and cash generation and margins. For 2014, we see another step towards growth, towards quality growth. We are trying to balance out rate of growth with profitability and cash generation and trying to keep a very solid balance sheet, solid cash position.
In 2014, we will step up our investments, especially in the E2, as we ramp up the E2, but also in consolidation of some of our CapEx expenditures, capital expenditures such as the consolidation of the factories in Évora and also, in the U.S. Also, the preparation for the serialization of E2 and the KC-390. It's another challenging year for us. Probably, we're going to our record high investment level, $650 million, which is a little bit above 10% of our 2013 revenues. We have the solidity and the strength to do that. Everything, of course, we are investing in will translate into future results. That's why we are doing that. Our overall strategy to diversify the company, make it stronger, make it more global, will continue.
Our continuous pursuit for excellence, for productivity, for effectiveness in our processes, all of that is present in our agenda. We'll be able to, again, produce what we consider solid results towards the end of the year. We have devoted our guidance for revenues and margins and cash flow. This is the first time we do a more formal guidance on cash flow. That's a demand that we had from many of you gentlemen and ladies. Despite the higher level of investments, we still expect to be positive in the cash flow in the low double digits area. With that, I'll turn to Filippo, in the end of the session, we'll be all back to Q&A. Thank you.
Okay. Thanks, Fred. We go to the presentation now, then we'll be open for the questions. Starting with page three, with the financial highlights for the year and the quarter. In 2013, the company met the main guidance figures. We had the net revenues of $6.2 billion in 2013 and $2.3 billion in the fourth quarter. This is the highest ever quarterly results for the company. As far as operating results, we had the EBIT of $713 million and the EBIT margin of 11.4%. For EBITDA, we had the total amount of $1 billion and 16.1% margin. This was the reported numbers. Through the presentation, we'll be able to explain in numbers the non-recurring effect that Fred mentioned regarding American Airlines . Continuing, the free cash flow generation, it was positive, at $213 million, primarily driven by the strong fourth quarter results.
An important financial highlight for the year was the liability management operation, where we were able to exchange bonds that mature in 2017-2020 by new bonds that will mature in 2023. We had about $500 million of exchange, that led us to a better profile in our debt, which I'll be able to detail later in the presentation. Finalizing the financial highlights, we have the firm order, the backlog. We reached $18.2 billion. This information was released in mid-January, it reflects the solid growth of this backlog. It's the highest level of the company in the last five years. Next page, moving to corporate highlights. We were honored to receive several recognitions by important institutions, both in Brazil and abroad. I think it was an important year for Embraer in that area.
Two important governance information, that we joined the World Economic Forum Partnership Against Corruption, and also, we were able to be listed in the Dow Jones Sustainability Index for the fourth continuing year, and also in the ISE in Bovespa. Next page, now entering in the business segments highlights. Starting with Commercial Aviation business. We had delivery of 90 E-Jets in 2013, 32 in the last quarter, meeting our guidance. Also, like Fred mentioned, in mid-June at Le Bourget Air Show, we launched the E2 Program, and to date, we have reached 200 firm orders and additional 200 options. We also had a very good year in terms of orders. It was 349 new E-Jets that were sold within the current generation and the second generation. That led us to reach over 1,400 aircraft, over 65 airlines in 45 countries. A well-spread distribution.
Continuing with the important achievements in the Commercial Aviation, starting with the delivery of the E-Jet number 1,000. This was for Republic Airways that will operate on behalf of American Eagle. We announced in the end of December, an important order for American Airlines for up to 150 E-Jet, E175 model, split by 60 firm and 90 options. We will welcome our first Russian operation. Saratov Airlines became our first operating in Russia, the E-195. It's important because we consider this a potential very good market going forward. Finalizing the highlights for Commercial Aviation, the recent announcement of Air Costa's order was this year, after we had, of course, the last announcement, for 50 firm orders, plus 50 options of the E2 model. The highlights, now in the Executive Jet business.
We delivered 119 Executive Jets in 2013, meeting our guidance, with 90 light jets and 29 large. 53 of them delivered in the fourth quarter. Some important achievements of the Phenom family, that they surpassed in both 100 and 300, 470 aircraft deliveries to 29 countries. We were recognized by the Phenom 300. It was the most delivered aircraft in the Executive Jet business in the industry in 2013. Regarding the new Legacy 450 and 500 Program, the Legacy 500 reached 1,100 hours of flight test campaigns, scheduled to enter into service in the first half of this year. The Legacy 450 had its first flight at the end of December last year. It's expected to enter into service in 2015. The Executive Jet highlights, we had the first delivery of the China-assembled Legacy 650. It's early January this year.
We launched the new Lineage 1000E, which includes enhanced range and also interior features. Regarding recognition of Embraer for customer support, we continue to be recognized by industry references, best of class. We had this for the second consecutive year, recognition by AIN. We expanded and continue to expand our service center network, adding 60 facilities in 2013, which now accounts for 76 services centers globally. Moving on to Defense & Security segment. Revenues grew over 15% in 2013, reaching $1.2 billion. It's a record for the segment of Embraer. Some activities of our subsidiaries. The Atech growing activities, highlighting the signing of another air traffic control contract with Brazilian Air Force. Visiona, our joint venture with Telebras, that developed the Brazilian Satellite Program. We continue to select important suppliers for this project.
Related to BRADAR, in 2013, it continued to increase its activities in the radar business with serving Brazilian Air Force. In other parts of defense and security, our Jacksonville operation is moving along as planned. The first delivery of the Super Tucano is scheduled for mid-2014. We also concluded the delivery of the final 3 Super Tucanos for the National Air Force of Angola. In the modernization program, we continue to advance with the delivery of the 2nd modernized A-1 fighter jet for the Brazilian Air Force and performed the first flight of the 2-seat prototype. Regarding the KC-390 program, the assembly process is underway. First flight scheduled to the end of 2014. Moving on, financial figures and results, starting with the deliveries. Just consolidating information.
We had this delivery of 90 aircraft for commercial aviation and 119 for executive jets within our range for the year. The backlog, as we released in mid-January, the total amount this year, at the end of the year 2013, grew 46% compared to 2012 to BRL 18.2 billion, reaching, like we mentioned, its highest level in 5 years. Most of it comes from commercial aviation, reflecting the strong orders for both the current and the 2nd generation of E-Jets. Here, you see the breakdown of this backlog, 67% for commercial aviation, 20% defense and security, and also 13% for executive business. In relation to net revenues, we total of BRL 6.2 billion in 2013, slightly above last year and meeting the guidance. This figure also represents the highest since 2008 and meeting our guidance range of between $5.9 billion-$6.4 billion.
In terms of splitting the revenues by segment and region, we see the continued diversification by segment with the relative reduction in commercial aviation and growth of executive and defense. We see in the left side that coming from 61% in 2012 to 53% in 2013, that's what we already indicated when we released our guidance range for 2013. This is confirmed. 27% executive aviation, 19% for defense. In relation to regions, on the right side, we see a well-balanced distribution with our main markets being North America, Europe, and Brazil. Page 15, the net revenues on a quarterly basis in Brazilian reais and dollars highlight for the strong fourth quarter, where we had, in terms of dollars, $2.3 billion in terms of revenues, the amount total of $6.2 billion in the year. In Brazilian reais, about almost BRL 5.3 billion in the last quarter, BRL 13.6 billion in the full year.
Page 16, the SG&A expenses and its evolution in the last years, reflecting our cost control focus, bringing the SG&A to its lowest level in 3 years. It's important that this program and that this process is something very important for the company. We've been working very hard on this, and I will be able to see the results. We had the total amount of $664 million in 2013, which accounts for 11% of sales reduction compared to the previous years. Next page, when we broke by quarter. We show the consistent control of figures, so we see by quarter that we have these figures stable. Total, like we mentioned, $664 million for the year in dollars and BRL 1.4 billion in 2013. Next page, talking about operating results. At this point, it's good to mention that we had this positive impact of the American provision reverse.
Like Fred mentioned, as the company concluded its restructuring program, we had a positive impact of $147 million. The reported numbers of $713 million, with a margin of 11.4%, would be $566 million with a margin of 9.1%. Even excluding this effect, we were in line or within our range that we indicated, not only in terms of amount of dollars, but also in terms of margin. In page 19, operating results by quarter. We see the strong performance and the operating leverage in the last quarter, 20.1% margin in dollars and 13.7% without the American non-recurring effect. Also in Brazilian reais, the total amount of BRL 1 billion last quarter and BRL 733 excluding the American effect. In page 20, in relation to EBITDA, we also show the strong results in the fourth quarter with $1 billion of EBITDA and 16.1% margin.
In the same way, if we exclude the American non-recurring impact, it would be of $857 million in terms of EBITDA with 13.8% margin in our range of guidance. The information of EBITDA by quarter, following the same pattern that we saw in EBIT. We had a strong fourth quarter. Most of the results were coming from that period. Over $500 million in EBITDA, with almost $400 excluding the American effect in dollar terms. Net income in page 22 results in 2013, $342 million, with a net margin of 5.5%. Net income divided by quarter. We have this strong fourth quarter with margins that will definitely contribute to the blended one. Over 10% margin in the last quarter. The earnings per ADR, which is $1.88 in 2013. That reflects a payout of 36%.
This is consistent with our strategy, which includes the quarterly payments that we've been doing. Next page 25. Far as inventories, we finished 2013, with $2.3 billion in inventory, similar levels to prior years. Also reflecting important focus of the management to avoid the increasing and keeping inventories under control. In page 26, in terms of free cash flow, we ended the year with a positive figure of $213 million. This was, of course, as a consequence of the strong performance in the fourth quarter, primarily due to the aircraft delivery in that period. If we break here, we have the total cash generation through operating activities of $967 million, partially compensated by the investments in PPE of $438 and intangible assets of $317, with a net of $213 million in 2013. Page 27. Total investments in 2013 of $534 million, slightly below our outlook.
We had the split by $193 million in CapEx, $265 in development, and $75 in research. The total investments was a little bit below that in our outlook that we gave of $580 million. In terms of our capital structure and finalizing the presentation before we do the guidance, we had an improvement of the debt profile this year. You can see in the left side, the debt maturity. We were able to extend the terms from 5.8 years average terms in the end of 2012 to 6.2 in the end of 2013, mostly because of the exchange operation that we mentioned of the bonds, but also important that we reduced our short-term portion of the debt from 16% last year, 2012, to 4% in 2013. Our net cash position was $429 million, because of the cash generation that we mentioned in the page before.
With that, we enter into the outlook 2014 with our guidance range. Figures for 2014. As Fred mentioned in the beginning of this call, we are slightly increasing our net revenues range to $6 billion-$6.5 billion, if we compare to what we gave last year. EBIT and EBITDA margins remain stable, in the range of 9%-9.5% for EBIT and 13%-14% for EBITDA. A range of $540 million-$620 million for EBIT and $780 million-$910 million for EBITDA, as far as those absolute ranges. In terms of cash flow, we are introducing this information in our guidance for free cash flow. According to outlook that we released, we indicate that this free cash flow should be positive in the line of low double digits. In page two of the guidance, revenues and deliveries range by business segments.
In the Commercial Aviation, our forecast a slight increase of aircraft deliveries in the range of 92-97, which reflects into the range of revenues to $3.2 billion-$3.4 billion for the year. In Executive Jet, the delivery should be stable in the range of 80-90 light jets and 25-30 large jets, and the revenues of $1.5 billion-$1.7 billion in 2014. In Defense & Security segment, we are increasing the range from last year to $1.2 billion-$1.3 billion when we compare to the released figures. To finalize and to sum up the amount of Embraer as a whole. We are indicating the other revenues of $100 billion that we close to the range that we indicate for Embraer as a whole.
If we take the midpoint of the range of revenues by each business, we would have 53% of the revenues coming from Commercial Aviation, 26% for Executive Aviation, and 20% to Defense & Security. The others will be 1%. Next page, closing our guidance for 2014. In terms of investment, we are indicating the total amount of $650 million for the year. It is an increase compared to 2013, basically, due to the E2 development program and the final stages of the development of the Legacy 500 and 450. We have the indication of research for $80 million, development, $320 million, and CapEx, $250 million, for a total of $650 million for 2014. Okay. With that, we finish the presentation, and we will be open for questions. Thank you.
Now we will open for questions, starting with participants in the audience and followed by participants in the conference call.
Hello. Hi, Fred. Hi, guys. Congratulations on the results. Eduardo from Morgan Stanley. I have two questions, one regarding the guidance. Can you tell us what is the BRL? What is the currency that you're assuming for this 2014 guidance? The second question is more on the defense division. There are some news recently that the Brazilian government is cutting the budget for expenses. There was, I think, a big cut on the defense sector. Just want to know if this is going to affect Embraer, if this is going to affect the current project like the SIVAM, like the KC-390. What is this budget cut could mean for your jet?
Thank you. The FX assumption in our guidance is actually very close to the current level, 235, at this stage, we have not received any indication of any cuts in the budgets of our programs. We understand the KC-390 and the SIVAM and the other smaller programs which we are engaged are key to the strategy of the Ministry of Defence. We would not, in principle, expect any budgetary cuts. Of course, that may happen. Having said that, we are still comfortable with our guidance, under $1.2 billion-$1.3 billion for the year.
Fred, I've got one here. Myles Walton, Deutsche Bank. When you have the 9%-9.5% gross margin, can you give us some color as to the gross margin versus the SG&A portion? Also, as you look to 2015, what your opinion is or outlook is for stimulus that you have in 2014 that may or may not be there in 2015?
Thank you, Myles. Welcome to Brazil. Of course, the major headwinds we have in 2013, in 2015, 2014, I'm sorry, is probably 1.5%-2.2% reduction in gross margins on the commercial jets, which is your main business. We intend to compensate that with better margins in executive aviation, hopefully also in defense. Of course, the BRL, in the specific case of defense, as we grow the participation of revenues in BRL, that effect may turn out actually to be a little bit negative, the valuation of the currency. It's good for the company overall. Probably, we're going to miss a little bit in gross margin and make that difference in SG&A. Gross margin should not be way off of what we saw. I mean, compounded margin for the company, not much lower than what we saw in 2013.
If there is any slight decrease there, we are continuously striving with all the SG&A to keep reducing it to levels which are competitive. As far as 2015, we are a year away from that outlook. We keep the strategy the same. Investment wise, I think we're probably going to see similar levels of investment. We will have most likely a better performance on the executive jets due to the ramp-up of the Legacy 500, which will be already in production for six months by the beginning of the year. 2015, we expect higher deliveries of the 500s, of course, and also the introduction of the 450.
We should have better picture for business jets. We don't see, at this stage, certainly not any worse in the commercial jets. We see a stable, and with maybe some upside risk on commercial jets, because there's several options which are to be confirmed, especially for the U.S., which if they are confirmed, we may have some more deliveries in 2015. 2015 just looks good. There's one more in the back.
From Citigroup.
Oh, sorry.
I think the last time.
Sorry. Go ahead. I can't see you. Where are you? Oh, I'm sorry.
Sorry.
Dark.
from Citigroup. I think the last time you kind of gave an indication that we could have margin in the commercial aviation in 2014 of between 200-300 basis points, and that you have now a more positive view on that possible decline of margin in 2014. Is that the case, or have I misunderstood?
Have you said I don't remember. No. Go ahead.
Before the first quarter results.
Yeah, maybe. Yeah.
Yeah. We reiterated generally at the previous Investor Day in New York that it would've been roughly around 200-300. After some final, let's say, definitions. The headwind is still there, but it tends to be probably in the range of 150-200 basis points.
Could you give some color on what is not so bad as you expected before?
It wasn't so bad. Maybe Paulo can help us here. I don't have precisely the numbers in my head. We have a decent pricing on the aircraft, so I think there was maybe an over-pessimistic expectation about what would be an E175 pricing for those campaigns in the U.S. Pricing was hold relatively firm. Of course, on the cost side, we keep working on that. Paulo will talk about that a little bit more details during his presentation. The fact that the E175 with the fuel burn improvements is actually burning incredible 6.4% less fuel than, let's say, the previous E175, is a major cost reduction element for the airlines. I think that's going to help us to keep a stronger pricing than what we forecasted initially for this product. Paulo, if you can add some more light, please. Okay, perfect. Thank you.
Yeah. In addition to this, we have also the good mix of sweet pricing for the E190 helped a lot in the contribution of the margin. Also important to mention the depreciation of the BRL, which of course will help out in the margin. The third element is the development of the services, selling of parts business, which provides a very good margin, a very good cushion for the business unit.
Thank you, Paulo.
Yeah, just complimenting there exactly on the exchange rate. We saw from the time of the end of the third quarter when we were discussing those figures, the BRL was at around 220, 223. We just spoke, of course, of our assumptions here as well.
Noah has been raising his hands in the back for a while.
Okay, thanks. Good morning, everyone. I wondered if you could just provide a little bit more detail on where you are with the development of the Legacies. There's no change in the timeline here, but as you get into very late stages on those aircraft, are you feeling a little better than you were three, six months ago? What's left to be done? How likely are they to now stick to the current timelines?
Thank you, Noah. Thank you for coming all the way down to Brazil. We feel really good about what we see in the Legacy. As Filippo just mentioned, we just surpassed 1,100 hours of flight tests. Prototypes are flying well, high dispatch ability. We do have, of course, typical challenges of this final sprint of certification, which we're still shooting for mid-year. Probably we deliver something between three and six airplanes in the second semester. It's a slow ramp-up, deliberately slow. We invest significantly in maturity of all systems. As you may recall, we did have some issues in production of the Phenoms in the marketplace, which of course, is more costly to improve the fleet in service than it is investing in maturity up front. Several dozens of rigs for several systems. Our prototype, which will be flying, just for F&R, functioning reliability, will start flying.
I think has already started flying, right? Until the end of the month, it's like tomorrow. We'll have this airplane flying very intensively as functioning reliability. The idea is to have a smooth ramp-up in the second semester, and really make it steeper in 2015. The 450, of course, we inherit all the benefits of what we do in the 500. The airplanes have a very high degree of commonality. They are fundamentally the same plane, shorter fuselage. All the systems are the same. It will be differently from what we had in the Phenom 100 and 300, which are two different aircraft. The 450 seems to be even smoother than the 500, with all the lessons learned in the 12 months of operation of the 500.
At this stage, we feel good, and Marco, for sure, will go into more details during his presentation.
Okay, thanks. Fred, I just wanted to ask you for your latest thoughts around the overall health of the overall small and mid-cabin business jet market, not just your business. There's been a little bit of hope in some of the recent data, whether it's utilization or pricing in the secondary market. But there's also extremely easy comparisons in some of that data. You're calling for a flat production level, 2014 versus 2013. What's just your latest overall thoughts on the health of the market and when we could finally see a more substantial recovery?
Noah, I have a little bit of a hard time to hear you, but if I don't answer what you asked, please interrupt me or correct me. The lower end of the market is still the weakest in our point of view. We are favoring more, let's say, higher production rates on the Phenom 300 than the 100. We have a specific effort to increase the pricing on the Phenom 100, even if that costs us a slight reduction in production. On the other hand, the 300 is really performing well, selling well, and has a strong pricing. We have this perfect situation in the 300, where we have the market leadership and the highest price in the segment. I think we have to do a better job in the 100 to improve its pricing power. It's a lot of airplane to what we have been selling for.
We have overall good feelings about the industry. Looks like those faint signals are getting more and more visible. Let's see how 2014 unfolds. Not sure I answered your question, but
Yeah, no. That is helpful. I appreciate it. Thank you.
Thank you.
Fred, good afternoon. Good afternoon, everyone. You have been investing quite heavily in services on the commercial side, and particularly the spare parts pool, which I think Paulo just mentioned as a driver. Could you characterize where you are in terms of the earnings recognition on that investment? Is this very strong result this quarter, is that a significant driver or only a very small one? When we look over 2014, 2015, could that be a source of margin upside that we have not really been seeing yet?
I need a little help here.
Yeah. Joe, to give you a bit of the sense of the revenues, we have seen continued growth in the services side. For 2013, total services revenues represented around $840 million. That's, of course, between all the business units. The investment that you're referring to, they'll occur as, of course, we're able to expand our base of customers that enter into our pool program spare parts. It's an ongoing strategy on that front, which is already showing some growth, as I mentioned, in the figures of the revenue contribution.
Is that, when we look at this year and next year, 2015, because there's so much cash going into it, maybe there's, I mean, in the second inning, in baseball terms, of starting to get a pickup. I'm really focused more on the margins than I am on the sales. I know, of course, it comes to the sales and margins, but they seem to be a very high margin point of your business.
Yeah, it does tend to be higher in the range of the operating margin. That continues to be the case, and we do expect to see some continued growth in that participation, yes.
Okay. Just on the executive guidance. I understand the market's not coming back as everyone would like it to. You do have the Legacy 500 deliveries, three to six, I think you said, coming in this year. You have your Chinese venture contributing, I think, more this year. What level of conservatism do you think you baked into your executive guidance instincts?
Joe, that's a very fair question. We are not having the success we thought we would in China by having the factory there. Delivering this aircraft, we'll probably deliver another one or maybe two this year. As you may recall, our plans would be for many more than that. That's one side. I guess, when you look at the large cabin, we are still trying to play with, what's the right balance of pushing whitetails down the line and, having to make concession on pricing or having more balanced production, more control, and try to keep prices up. There are situations, there is at least one competitor, which has a very, very aggressive pricing strategy to cash-driven strategy, which really, it's still creating some disturbance in the market.
Overall, we decided to favor pricing and strengthening of our working capital, other than just push numbers out. If the market rebounds, we have a relatively, I would say, a very competitive speed in reacting to any potential upside. We can probably turn out an increase in production rate faster than, I would guess, most of the OEMs. It was a call that we did to hold growth a little bit and try to get our act together, in a better way as far as cash, as far as margins. I'm sorry.
Yeah. Right here in the front.
Oh, yeah. Go ahead, Tarun.
Fred, my question is also about the margins. Just, I know we are not giving guidance for 2015 today. Just trying to understand, as we look from 2014 to 2015, is the currency and, I guess, maybe the stimulus package, the only two major wild cards? I guess also the executive aviation market, maybe if that comes back, that would be upside. I am just trying to think about downside risks to margins in 2015. Is it just the currency and the stimulus package that would be the major important factors there?
I am not sure I fully understood your question.
Well.
That is for 2015?
Yes, for 2015. If I'm assuming sort of flat margins from 2014 to 2015.
Would the risk really come from those two factors or is there something else?
Yes. Sorry. Now I get it. Currency, of course, is something hard to forecast. Our view is that, or our plans are not based on any major spike up or down. 235 is our, the assumption for this year. I think the pressures are more for the real to be devalued other than valued. Brazil has a very strong macroeconomic position, so I don't think Brazil would just let its currency melt down. I think, the current level, we don't expect a major devaluation in the real. If there is any change there, probably it would be on the slight side favorable than unfavorable. As far as the stimulus package, as you may know, part of it was already removed in 2013.
It's not renewed, which is that slight compensation for the taxes embedded in our supply chain in Brazil, which affect all exporters in Brazil. Most importantly, that was removed, but the problem is still present in our lives. On the payroll, we will not know until the end of the year, but all the indications are that this change, which affects hundreds of thousands of companies and most of the sectors of the Brazilian economy. The expectation is strongly that this will be maintained, will be something for good. We will not know until we know it.
I guess maybe just, probably the progression in the margins in 2013 was a lot more Q4-weighted. I guess, I know it's usually Q4 is a big quarter, but it was a lot more so, I would say, in 2013. Should we expect something similar in 2014, or is it going to be a little bit more stable next year?
Yes. Would you like to have.
Right here.
Ta.
Yeah. Tarun, of course, broadly speaking, yes, we would imagine starting off with a relatively light first quarter, then building up in the second quarter. Third quarter, relatively flattish, maybe slightly down. Of course, we'll have to see how things end compared to second quarter, then a busier fourth quarter, generally speaking. That should be the layout of 2014.
Just complementing. This has to do with Joe's question about the business jets. Of course, the more backlog you have in the short term, the easier it is to plan production. When you plan too much of a whitetail in the end of the year, they irreversibly will fall into the last quarter. That's something we don't like, and that behavior of having a very strong fourth quarter, which is a stressful situation for management. Probably we could make some progress this year. Hopefully, we have more stable, in the next few years.
Thank you.
There.
Hi, this is Alexandre Falcao from HSBC.
Alexandre.
Just wanted to get a glimpse on, or a little bit more color on where we could see surprises in 2014 in terms of the three segments. On the upside, of course, is Business Jet that could surprise you to the upside, or commercial with a new round on American aviation or even Asia aviation. Thank you.
I apologize, guys, but the sound is really tough here to understand. Well, I think, if I get the question right about the upsides, I would not consider any upside risk beyond our guidance at this stage. As I said a few minutes ago, if there is a market rebound stronger than what we expect, we can react pretty quickly. We have the ability not only to mobilize our internal resource, but also our supply chain to make a fairly quick reaction to a potential upside in the market. I'm not sure that was your question.
Yes. Thank you. Just one follow-up on commercial aviation, in terms of the competitive scenario. Do you see as Bombardier at least should deliver or start delivering their new aircraft, and Mitsubishi and COMAC are also stepping into the plate here. Do you think that the competitive scenario is going to get tougher going forward, or same scenario as we saw in 2013? Thank you.
Yeah. I don't think there will be any material difference between what we saw in 2013 and 2014. Mid to longer term, it always gets worse. We cannot rule Bombardier out of the game. They are there. They are a strong company. We continue not to believe in the business case of the C Series. They have the CRJ line. They took about a quarter of the sales for the U.S. We got three quarters, they got one quarter. That shows us, instead of celebrating that we got three quarters, they are still there, and we lost a quarter of the market to them. We have to watch how the Russian Superjet performs outside the Russian environment. We have to follow their operation in Mexico to see how much, let's say, they're really prepared to face a tough airline environment, of a high frequency, high dispatch reliability.
Keeping in mind, of course, that that airplane is of the current generation. We feel good about the E190s E1 ability to compete against the Superjet, and we feel really good about the E2, E190-E2 to compete against the C Series. Same with the Chinese. We continue to see a difficulty. Obviously, the focus in China is much more now to the C919, other than the ARJ21. We respectfully believe that they'll have some difficulty to sell their airplane abroad in large quantities, the ARJ21. Again, that is also an airplane of the current technology, which the E190 E1 can give a very good fight. The E2 can really be a leap ahead. The Mitsubishi has the new engines, Pratt & Whitney. On paper, the airplane is more in line with our 175 Plus, not E175 Enhanced, and the E175-E2.
With the new delay that they announced last year, they will not come into the market until 2017. Is that correct, Paulo?
Yeah.
2017. The big advantage that they would have, which was the early access to market, is pretty much gone. I think, we still have a sound case with both the E1 and certainly with the E2 towards the end of the decade.
Thank you.
Yeah. Guys, it's about time to stop. I think, should we give also the chance for the people in line, too?
Yes, please.
Let's take this question here, please.
Okay.
There's one there as well. Okay.
Just want to ask one on defense revenue in the quarter. It came in a little below guidance. Was that solely due to the Real devaluating, or is there something else going on? The part B is sort of on the 2014 defense guidance. Does that reflect kind of underlying double-digit growth, but you have the Real headwind? Is that the right thing, Paulo?
Yeah. I think it has a lot to do with the real. As I said, as of today, we have no real change to the scenario of organic growth in the programs. The reality, there's a difference of $0.35 in a dollar from last year to this year. That's driven by that.
Thank you.
We have one there. We can always close the line and then continue here, of course.
Yes. We'll go ahead and see if there are any questions from people that are attending from telephone.
Could you hold the question just to check whether we have somebody line? We can shut off, and we'll come back to you.
Now we will open for participants on the conference call. Now we will open for participants on the conference call. Again, ladies and gentlemen, if you do have a question at this time, please press star then the number 1 key on your touch-tone telephone. Our first question comes from the line of Ronald Epstein with Bank of America. Your line is open.
Hey. Good afternoon, Fred. I hope you're doing well. Quick question. We haven't talked much about how should we think about the bridge between the demand for the current generation E-Jets and the E2 jets, right? I guess, they go into service in 2018, and here we are, I guess it's 2014. How should we think about the bridge between the two series of jets, and how you're seeing demand for that bridge?
Hello?
Hello?
Hello.
Hello.
We feel good about it. That's wrong, right?
Yeah.
We feel good about it. 2014, the numbers are out there. 2015, cautiously optimistic. 2016 and 2017, I think we have two situations. One, there's a large number of options, which, in our point of view, have a likelihood to be confirmed, especially as Paulo calls a second wave of renewal of the RJ fleet in the U.S. We believe the 175E1 will be very well positioned to take that. Also, the activity that Paulo will go into more details later, that we see today, we see still a demand for the E-Jet types, and sometimes combined order for E-Jet then E2s. At this stage, we feel relatively comfortable about our ability to make that bridge without any major hurdle from now to the introduction of the E190-E2.
Okay, great. Maybe just one more quick question. There's been a fair amount of, I guess, trade press that there's a push to do more regional flying within Brazil. Avianca Brasil-
No more questions from the phone line?
Hello?
Ron, please proceed with your question.
Oh, yeah. There's been some press about more regional flying in Brazil, with airlines like, I guess, Avianca Brasil and TAM pushing more into regional flying, I guess, by a mandate from the Brazilian government. Do you think that's a real opportunity? If it is, how big could it be?
Package to Congress about regional aviation in Brazil. Let's keep in mind that between Azul and Trip, we already have 83 E-Jets flying in Brazil compared to zero a few years ago. There has been a strong development already. If this package goes through Congress, I have all the reason to believe it will go through Congress, that's a desire of the Brazilian government to really foster the social development in the hinterland of Brazil. Again, I think we are well-poised to benefit from that. We do in the U.S., we do in Europe, we do in China, I have to believe that we'll do, as a minimum, as well as we do abroad, we'll do in Brazil. Hard to put numbers into that. Let me just give you one figure. About 25 years ago, Brazil had 252 airports with commercial service.
Today, we're down to 150. The potential is there. There's 100 airports, which with little investment, they can receive, again, commercial traffic. The densities of those passengers, they would probably go towards a smaller aircraft rather than a big narrow-body aircraft. That's how we see it. It's an upside.
Okay, great. Thank you so much.
Okay.
We have one more question from the line.
From Davina.
Hello?
Hello? Yes, thank you. We have one more question from the line, and then we'll come back for the final two questions here in the local audience and conclude. Please. Thank you.
There'll be more Q&A at the end again, so we'll be here.
Okay. Our next question comes from the line of Cai von Rumohr with Cowen and Company. Your line is open.
Yes. Thank you very much, and good results. Quick question on development. You said $320 million in 2014. Could you give us some color on the expected profile in the next couple of years, given you've said the development of the E2 would total $1.7 billion? Thank you.
Thank you, Cai. In 2015, we foresee at this stage, a pretty much stable total investment. CapEx will probably be equal to or less than the 2014 figures. We may have some increase in R&D, especially with E2, but as the 500 will be certified and the 450 will be in the final sprint of certification, there will probably be an offset there. As a model, if we model out pretty much in line with 2014, I don't think you will be wrong.
Then the last question, you talked about CapEx of $250. Does that include the spending done under contract for government, and what does that assume about spare parts inventories?
In those numbers, there are no figures for the contracted CapEx, the CapEx which are embedded in development contracts such as the KC-390. That's CapEx fundamentally for commercial and executive jets. I'm not sure that answers your question.
That does. Thank you.
Another question on the order environment. Another question on the order environment, more specifically in 2014. Coming off a strong year in 2013, how should we be thinking about book-to-bill?
Mari, I'm not hearing.
In commercial aviation.
The sound is really bad. I don't believe. Sorry. Guys, I really apologize. The sound is terrible here. Would you mind to repeat the question?
Sure. Just a question on the order environment in 2014 after a strong year in 2013.
Okay.
How should we think about the book-to-bill?
I hope Paulo and Marco Tulio and Jackson tell you that we are shooting for at least a one-to-one book-to-bill ratio. There's a big momentum in commercial aviation. We feel good about it. There'll be a very strong push from Marco to increase sales so we can enter 2015 with a higher backlog coming in executive aviation as well. Minimum one-to-one book-to-bill ratio, that's what we consider.
I think there was another question.
Hello, this is Derek Spronck at RBC Capital Markets. Most of my questions have been answered, but a quick one. How much additional production capacity do you have on the E175 or the Phenom 300 lines?
We do not have exactly production rates, but the limitation today is not our production infrastructure. It's the market, it's sales. Historically, we delivered, I think our record year was, I think, like 165 E-Jets. That can tell easily how much capacity we have in-house. Of course, we have to add people if we have a production rate, but the infrastructure, tooling, and everything else is in place. As far as the Phenoms, between Melbourne and Brazil, we also have, let's say, sufficient room to accommodate increase in market demand.
Would you say your production ramp would be roughly, say, 8 to 12 months?
The ramp-up? That's probably a fair figure. Yeah.
Thank you.
Probably more on the eight months.
Thanks.
This concludes today's question-and-answer session. I would like to invite Mr. Frederico Curado to proceed with his closing statements. Please go ahead, sir.
Well, just to thank everyone for attending our conference. Have a nice Carnival. Carnival is next year in Brazil. A wonderful 2014. Thank you.
That does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day.