Good morning, ladies and gentlemen, and welcome to the Audio Conference Call that will review Embraer's Second Quarter twenty thirteen Results. Thank you for standing by. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions to participate will be given at that time. As a reminder, this conference call is being recorded and webcasted at ri.embrayer.com.br.
This conference call includes forward looking statements or statements about events or circumstances 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 and 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 might not occur. The company's actual results could differ substantially from those anticipated in the forward looking statements. Participants on today's conference call are Mr. Frederico Corrado, President and CEO Mr. Jose Filippo, Chief Financial Officer and IRO Ms.
Elaine Funo, Director Taxi Accounting Andre Gualda, Controller and Mr. Luciano Froze, Director of Investor Relations. I would now like to turn the conference over to Mr. Federico Corrado. Please go ahead sir.
Thank you. Good morning all. This quarter came very much in line with our planning as far as the operations of the company. As everybody is aware, we did have a strong devaluation of Brazil's currency during this quarter. And that according to IFRS that creates the need for a provision on our income tax related to our non monetary assets, which it's a non cash event that turned to all of our operating profit into a net loss in the quarter.
And Filippo here, our CFO, will explain of course this effect in more details during our conference. So I will ask Filippo to go through our presentation. And later on, I'll be back with the rest of the team for Q and A. Thank you.
Okay. Thank you, Fred. We'll go through the presentation and then we open for the questions then. So starting page three with the corporate highlights. We had this quarter one important milestone in the company's history.
It was the launch of the E2 E Jet program following the early this year announcements of contracting major suppliers. So we're able to launch it during the Paris Air Show in June. And I'll go to some highlights of the commercial activity of this aircraft in the commercial page. So here is this important milestone then the launch followed by an important upgrade that we received from Standard and Poor's credit rating upgrading from BBB minus to BBB with highlights for the recent commercial orders, the business diversification and also operational efficiency. So this is important recognition with the neutral trend.
Important for also for corporate highlights, the Embraer's recent recognition from major magazines and institution. We were awarded by the Company of the Year from Brazilian Exami Magazine as well as maintaining our position in the one of the best companies to work in Latin America from the Great Place to Work as well as awarding from the Brazilian National Industry Conference, the C and I National Innovation Award. Next page in terms of highlights of the commercial aviation business. We delivered in the quarter 22 aircrafts, increasing quantity compared to the first quarter. We have currently year to date 39 aircrafts delivered.
Important also orders for the current generation of the E Jet, The United Airlines order of 30 aircrafts with an option for additional 40. Also we had the Conveyaza Venezuela order for seven together with SkyWest which signed a 40 E175 jet plus 60 reconfirmables and also options for additional 100. This is expected to be delivered in the following three years and it's good activity for first the current generation of the E Jet. This finalizing to mention that we had disclosed firm orders for five E Jets from Air Costa in India and Japan Airlines. Regarding the E2 program, which I mentioned of the launch, We had the launch with launch orders of three sixty five aircrafts with 100 firm orders from SkyWest plus option of 100 and also 50 firm orders from ILFC, which at the time of the launch we couldn't disclose and couldn't confirm actually.
There were LOIs. Now we are able to confirm those orders with 50 plus options. Together with the total orders for this product LOIs for another 65 undisclosed customers. Okay. Moving to next page in the executive jets activity the highlights, the delivery of 29 aircrafts in the quarter.
Good deliveries and increase from the first quarter more in the light jets with the market as Fred mentioned with still some challenges. Important as well with the net jet receiving the first Phenom 300 entitled the Signature Series, which is one major customer potential contract for 125 aircrafts. Also the confirmation of quality product recognition from Best of the Best by Rob report for Finland one hundred and three hundred for the third consecutive year important for this business. We'll finalize these highlights for executive jets with important milestones for this business from the delivery of the Phenom No. 400 jet and also the first lever of the Phenom 300 sold in actually sold of sale of the Phenom 300 to China.
Regarding manufacturing, the Melbourne facility received the FAA certification for the Pheno 300. And in the ongoing certification campaign for the Legos 500, we completed 45% of the test campaign now with four fifty hours flight of the three prototypes of this equipment. And finalizing important information of maturity of our program, the Lineage 1,000, which is the ten thousand hours flown. With that, we finalized the highlights of objective jets and we turn to next page on defense and security. Another important contract announcement with the Brazilian Air Force, the contract for logistics support and service for the Super Tucano aircraft.
Also following recent MOU announcement during the Paris Air Show with Boeing, we now were able to disclose the sign of the partnership with Boeing to sell the KC-three 90 in specific markets. Regarding the strategic communication satellite program, we continue advances in selection of major suppliers. For the Cisform project, we are also advancing well in supercell selection and we were able to complete part of this process during the second quarter. Moving to next page, now starting to the quarter activity. In terms of aircraft deliveries, we had in page seven, the commercial jets deliveries and executive jets delivery split by category.
So we had 51 deliveries in the second quarter. It's now accumulated 80 aircrafts within commercial and executive business in the year. This expectation that we increase this amount of deliveries during the second half and we are maintaining the guidance towards the low end of the range for here the executive jets 25 to 30 large jets, 80 to 90 light jets and commercial jets 90 to 95 deliveries in the year. Next page, page eight regarding backlog. We recently announced the amount for the second half second quarter in the June, total of 17,100,000,000 of backlog, strong increase of 29% compared to the first semester the first quarter.
This reflects orders primarily in the commercial business units and we got back to levels of the third quarter of twenty nineteen. And it's good to recall that this does not include so far the 50 Itsu orders that we recently confirmed from ILFC. Next page, page nine, regarding revenues by segment. Total of billion in the second quarter with a cumulative of $2,600,000,000 year to date, increasing revenues from the first quarter in all of the business segments and we expect to continue the growth for the second half of the year. It's good to recall here that the defense and security although it had increased, this has half of its revenues denominated in reais, which had the impact of the dollar devaluation.
But despite this fact, it's still growing getting to $3.00 $9,000,000 in the second half accumulated of second quarter accumulated of BRL551 million in the first half. So next page, page 10, the consolidation of the net revenues in dollar terms and real terms. Total reais here the new information of BRL5.4 billion. So we are at this point maintaining our guidance range for the year between 5,900,000,000.0 and $6,400,000,000 range. Next page, SG and A expenses in dollar and reais.
In terms of G and A, we show stable expenses compared to the first quarter. This reflects our focus on cost control and maintaining the monitoring of these expenses. So we're confident we can keep this level throughout the year. We show an increase in selling expenses, primarily as a consequence of the level of commercial activity in the first half in the second quarter both in commercial and executive activities. Going forward to page 12, income from operations.
We had operating profit of $135,000,000 in the quarter with a margin of 8.7 accumulated margin for the year is 6.6% and $175,000,000 in operating profit. We had this quarter the second quarter an increase from the first quarter in the direction of the guidance range, which we are maintaining at this time. So in addition to the SG and A expenses, we had an increase in the research expenses mainly related to the final stages of the E2 program launch. When we compare to the second quarter of twenty twelve, It's important to recall that it has here the impact in 2012 of cancellation fees, which didn't occur this year. So that explains part of the reduction that we had in terms of the second quarter of last year.
So again, we are maintaining the guidance for the year, which is for operating results from a range from $530,000,000 to $610,000,000 and operating margin from 9% to 95. Page 13, EBITDA. We had then the total of BRL204 million in the second quarter, BRL204 million accumulated in the year with a margin of 13.1% in the second quarter, accumulated of 11.5% year to date. So the target the guidance for the year, the range of $770,000,000 to $900,000,000 and EBITDA margin between 13 to 14%. In page 14, regarding net income, we had a net loss of $5,000,000 in the second quarter accumulated profit of $25,000,000 in the year.
And as we did experience before in previous situations where the dollar get stronger against the real, because of the recognition this in the economics of the balance sheet, we had the non cash impact, which generated a deferred tax effect, which led to this number. If we do in a pro form a basis just an exercise without this effect, we should have reported $92,000,000 of profit in the second half sorry second quarter of the year. In page 15, inventories. We had $2,500,000,000 in the end of the second quarter of the year. Inventories level stable compared to the first quarter and compatible with the planned deliveries that we have in the second half.
We are in line then with the first quarter of this year. Page 16, free cash flow. Total free cash flow of $2,000,000 in the second quarter, We saw an increase in operating cash generation when compared to 2012 and to the first quarter as well, which supported the company's investment strategy, which was the in terms of CapEx, we are maintaining we had mainly the increase was related to the agro plant. This was planned there's an increase in the expenses this quarter. And this is the seasonal effect that we have for the year.
So we have a little bit more of CapEx this quarter. It doesn't it's not going to happen throughout the remaining of the year. And regarding the development programs, we continue to invest mainly here in fact the legacy $50,000,000,450,000,000 program. We expect to see going forward in the second half of the year, a positive cash generation reflecting the nature of the business. In page 17, investments.
We had a total amount of million dollars in the first half. We're still projecting the guidance of BRL580 million for the full year. So as I mentioned before, we had a concentration in CapEx in the first half, which is reflected in this year to date figure. We don't expect to see the same amount for the second half in terms of CapEx. So we're still keeping the guidance given the 180,000,000 for the full year.
So the outlook for the year then total investment of $550,000,000 is what we are expecting. Million. Five Page 18, regarding our capital structure. We had an improvement in the debt profile in this quarter. As you can see, the increase in the long term portion of the debt now 94% compared to 85% in the previous quarter and also an increase of the average maturity of the debt from five point one years to five point four years.
In the net cash position, we had $51,000,000 of net cash in the June already considering the $30,000,000 paid as interest in shareholders active made in the second quarter. So the total debt in the end of the second quarter was BRL2.2 billion and the total cash BRL2.3 billion in these numbers. Okay. With that, we'll finalize the presentation and we open now for questions. Thank you.
Thank you. Our first question comes from Joe Nadeau with JPMorgan. Please go ahead with your question. Thanks. Good morning.
Good morning, Joe.
My first question is just on the
income
statement. The other operating expense line, I understand that you had liquidated damages last year that offset expense. But you have an 18,000,000 or $19,000,000 expense each quarter so far this year. What is the run rate there without items?
Joe, what we had here of course you got the comparison to the previous year that we had a positive effect last year. But we have mainly here was the discontinuing some engineering project and also some adjustments in the impairment of used aircraft. Basically, we understand that this year what we have is expected normal level of other expenses here. Basically there's two items on this line.
So in the first quarter you had a provision I think of $9 or $10,000,000 in that line item. So my expectation was that the expense would come down quite a bit because of that provision going away. Is that not going to be the case going forward?
No, no. That provision that we had was related to labor disputes. Though there was those only it was not expected to see any of this going forward.
Right. No, I understand that. I'm just trying to get understand the normal level of that line because you had the provision in the first quarter it went away, but the expense did not go down. So is the normal level $10,000,000 or $20,000,000 per quarter? Joe,
this is Luciano. If I may add here. So also in the first quarter, you had still back to Filippo's point as well a higher level of cancellation fees roughly around $6,000,000 or so of more cancellation fees. So again some of that delta of the provision is taken away by that lower cancellation in the second quarter, number one. Number two, going forward this is an expense line.
So typically you will see in that low double digit range mid teens range let's say for the for expenses going forward. So for modeling purposes that's what I would say you should be.
Okay. Okay. That's helpful. Then second question, any update on the corporate jet business on demand in general? And then also on the certification process for the legacy 500, how is that going?
Sure, Joe. This is Fred. On the certification, we are about half of the campaign through. So we feel very comfortable about our targets of entering to service by mid next year of the Lagos five hundred and one year after that the four fifty, which we are already in assembly. Assembly is the first prototype.
So we're on track. No showstopper. Of course, we learned a lot with all these fly by wire problems, which made us of course delay this program a year. So now we feel much, much more comfortable about where we are. And so far the campaign is going well.
The airplane is flying well. The aerodynamic configuration is pretty much confirmed. And we are optimistic about the final result of our not only certification, but the success of this product in the market. It will be in our point of view another champion if you will. As far as the market, we see I mean on the low end on the let's say the phenom category, it's been the same story over.
I mean it's a very fierce disputed market. We are doing relatively well there. We feel comfortable about meeting our guidance numbers there. We see some softening on the upper range on the legacy six fifty market in this higher end business jet market. So we also have challenges there.
So at this stage, Joe, I would say that we are probably going more towards the lower end of our guidance than the higher end, but it's still confident that we can meet our numbers. It's important to say that if you compare where we are vis a vis last year, we are actually a little bit better than we were last year. Although we do have challenges to meet our numbers and we're working hard to do that.
Fred, just on the softening you're seeing in the six fifty category, is that do you think that's competitive because there's new aircraft coming into the market? Or do you think that is just the market overall that's getting weaker?
Good question. I think it's I mean, may be a preliminary, but we see a market softening not competitive. But it's a bit early to tell. But some signs of some I'm not talking about of course, let's say the Gulfstream six fifty all the way up that's very resilient. But this super midsize segment large cabin in our point of view, it's kind of an early symptoms of maybe some softening altogether.
And geographically, is that outside of The U. S. Mostly?
I would not know Joe. We can begin with our business jet guys later. Okay.
Right. Thank you. Next comes from Peter Skibitski with Drexel Hamilton. Please go ahead with your question. Good morning, guys.
I'm just wondering on the spike in research this quarter, you mentioned that was sort of due to the E2 introduction or launch. I just wanted to and I know you kept research the guidance intact for the year at $100,000,000 But shouldn't we expect the research line to decline meaningfully now
that
the E2 I'm assuming E2 expenses will now be capitalized per IFRS?
You are correct. The expenses of the E2 tend to be capitalized, but they were not that high. So it was just like starting some of the starting expenses. So it has increased now, it's going to be capitalized. So it's not going to be something that we already expensing too much.
It's going to be changing the line in terms of being capitalized. So it doesn't impact the projection because of this effect.
I see. I see. I understand. Okay. So just in terms of the margin ramp the rest of the year, should we assume margin rate is margin expands sequentially in the third quarter and then we get another large spike in the fourth quarter?
Is that kind of the profile that you're anticipating?
Yes. Go ahead, Luciano. Yes. Hi, Pete. So I would say roughly speaking, of course, going to be more back end loaded.
So Q4 particularly, we don't see margin suppression in Q3 necessarily. But again, the spike more trending more towards the back end of the year really in Q4.
Understood. Understood. Okay. Thanks. And I guess maybe the last one given the commercial order flow in the quarter, I know you kept the guidance for this year in terms of commercial deliveries intact.
Frederico, have you set your delivery rates for commercial yet for 2014? Do you have a view of the profile there? And then and maybe 2015 as well. Is 2015 sold out at this point? Can you give us some color on that?
We I mean, we are the best vision we have at this stage is a stable production rate for the next few years. 2015, of course, is a little bit out. So there some may upside there. It's we still have like eighteen months to sell aircraft which are can be deliverable in 2015. So talking about more 2014, I think more like I think most likely scenarios like a stable production rates, a bit different mix of course, because there will be more contents of 175s rather than 190s due to these campaigns in The United States.
But that's the best we can see now.
Okay. Thanks very much.
Thank you.
Our next question comes from Chiron Quintala with Scotiabank. Please go ahead with your question. Chiron, your line is open. Could you try pressing your mute button? Good morning.
Can you hear me now? Yes. We can hear you.
Great. Thank you. So I guess my first question was on The U. S. Super Tucano order here within The U.
S. Is that helping you with sales campaigns in other countries? And when can we see maybe some more traction there on that product?
We expect so. Of course, the cycles in the defense business are pretty long. And of course, we are still also at a very early stage in the LAS. So we will not see aircraft actually being physically built in Jacksonville until another six to eight months. As I think as we deliver aircraft to the U.
S. Air Force and of course the aircraft going to service then our expectation is yes, this seal of credibility on the product will help us out. It's somewhat subjective. And we I mean, we don't see like a short term immediate reaction, but I think it's very it's a very strong endorsement for the program in the mid and long run.
Great. And if I could just ask one more Fred on the numbers here. So you talked about the stable production rate next year in 2014. And you also said obviously that there are going to be more 170s and obviously a lot of those are from The U. S.
Campaigns here. Does that mean that margins are going to have a bit of a tough time next year just based on all those different things?
Well, on pricing side, obviously, we have pressure coming from of course a smaller aircraft. So the top line is smaller will be smaller on each unit. And as we all know large campaigns they put pressure on pricing. And on the cost side, we are working very hard of course to maintain our margins. And obviously, some tailwinds are important such as the currency devaluation in Brazil.
So a bit early to talk about margins, but on the pricing side for sure it's going to be a challenge because of the nature of the mix of the aircraft.
Great. Thank you very much.
Our next question comes from Noah Poponak with Goldman Sachs. Please go ahead with your question. Hi. Good morning, everybody.
Good morning, Noah. Fred, I wanted to go back to the business jet market. I know you already asked about it, but hoping to get a little bit more color. In the small or the light end of things, I mean your main competitor has taken production down 20%, 25% from where they basically started this year and you're essentially not changing. It's a pretty big variance.
Do you feel like you're taking share back? Or is the market just so volatile that it's almost random? Or is it something else?
No. I think definitely, Noah, we are taking some share. Let's keep in mind that this year is probably the first year where we do not have Beachcraft delivering aircraft in that segment. I think it's fair to say that we are probably taking most of that let's say empty space. We have delivered 31 phenoms in the first half and our guidance is between 8090%.
So yes, it's below a little bit below 40%. We have a very we will have a very busy fourth quarter. And again last year, we were in a the outlook for the year was even more challenging than it is this year. So I'm not underestimating the challenges. But we still believe and strongly believe it is doable, again more maybe probably towards the lower end of the guidance.
And the fact is the Phenom 300 is really the best in class and it's been a great success. So it is the aircraft which is leading the sales in the segment with a that's taking most of the market share in the segment. So I think it's very much due to the quality of the 300. The 100 as well, but it's a smaller market demand. So 300 is really the driver here.
Okay. And then on your larger aircraft or the super mid, I know you were just asked how your which geographies you're seeing a little bit more softness in and you couldn't you said it's sort of hard to tell. But what makes you say you are seeing that? Is it just a quarter or two of softness on your aircraft specifically? Or are you looking at market wide pricing activity or inventory levels?
Or what drives you to say you're seeing some softness there?
At least on our side, we saw a stronger demand last year on the for example on China than we are seeing this year. The U. S. Is still the level of activity in this particular case of The U. S.
Is more us than maybe the market. So we have to capture a little bit more market share in The United States. That's we are probably underperforming compared to even compared to ourselves in other regions. And but there are some reports that of course we follow specialized people who are tracking the markets. And again, I do not have the specifics here with me, but those reports they suggest that there is some softening there.
So talking more broadly, Noah, you look at the control panel everything looks good. There is there are some clouds ahead in the worldwide economic horizon we think and we see that. So the question is how this turbulence will how far it is from where we are, is it going to happen or not. So the softening of China, Brazil is slowing down for sure, Europe stabilizing. So I think there's an overall macroeconomical, I would say concern or at least awareness that there are some there may be some bumps ahead.
And the Executive Jets segment is very, very sensitive to that. So perception there creates an immediate reaction. But having said all that, we have a challenge there. We have delivered 10 airplanes out of a guidance of 25 to 30. That's where it lies our major challenge is to find another 15 aircraft to be delivered, be it again fourth quarter with high activity.
And at this stage, we still believe it's doable.
Okay. I appreciate the market color. Thanks.
Thank you.
Our next question comes from Myles Walton of Deutsche Bank. Please go ahead with your question. Thanks. Good morning. Fred, at a high level, can
you talk more about the defense environment, particularly in Latin America and particularly on some of the larger contracts that are relevant to you? Is there a slowdown in contracting activity? Is there any type of pullback from some of the larger initiatives that they've started with respect to SISFRAN and SISCAS? And also on SISCAS and the FX program, could you give us a timeline of what you see today?
Sure, Myles. We are I mean, have accumulated a strong backlog. So we have a strong execution challenge in our programs. And your question is more towards more the new programs. I think it's undeniable that Brazil has now some budget challenges as a country.
You may or may not have read about some recent cuts on twenty thirteen's budget. And we'll be naive to imagine that those cuts and whatever comes for 2014 will not affect the defense budget. So we feel on one side comfortable that the existing programs will be capped and will be maintained at their present scores. And of course, we have the strong execution challenge. It's I think it's less evident what's going to happen to the new large defense contracts in Brazil.
So, seas gas it's of course, it's a necessity, but it's also a large dollar amount another pressure on the budget. So it's at this stage, as I said, it's hard to predict whether or not that's going to happen. But I think it's less likely than it was a few months ago when there was still some positive outlook for the Brazilian economy. FX, the FX too, it's well falls in the same basket. It's hard to maybe it's a more can be different because there is an operational need for the Brazilian Air Force.
I mean, they just have to sometime in the future they have to renew their fighter fleet, which is aging. So I'm not sure the FX can be only analyzed through the spectrum of budget, but also strategically for the Brazil's defense. So maybe that's the best vision I can give at this stage Myles.
Okay. And then one quick one. I think net jets was a big contributor this year to differentiating your business jet deliveries maybe versus the competition. As you look to next year, is that buyer's profile of deliveries a headwind, a tailwind or neutral?
No. I don't think net jets as far as quantities has been that much relevant this year. Next year, I think we will have probably a I mean, I don't Luciano can confirm that later. But as far as I remember, I think we have more deliveries next year than this year for net Okay. Great.
Thanks again. Thank you.
Our next question comes from Ron Epstein with Merrill Lynch. Please go ahead with your question.
Yeah. Hey, good morning. So just a follow-up on maybe Miles' question in a broader sense. Given all the recent, I don't know call it social unrest in Brazil, have you seen any impact at all in terms of your labor force or impact on the business or maybe just broadly speaking?
In January, no, not at all. We the protest in Brazil they were against let's say the status quo of overall social issues such as healthcare, such as transportation, security in the large cities, urban transportation. And it's more like towards criticizing politicians and political parties and I'd say the major institutions. Companies in general that were not affected by that. There is and in particular Embraer, we felt absolutely no effect in that regard.
Okay. And then maybe moving back to aerospace stuff now. When we think about now and the rest of the year, how are the campaigns going? And I think everybody knows that there's an active one with Eagle right now. But what else is going on around the world when we think about campaigns for either the updated current generation 170s and 190s and then the E2 family?
Ron, as you know, there was a strong concentration of orders announced in Paris, something around 1,000 or 1,100 aircraft something of that order of magnitude. Most of those airplanes were narrow body and original aircraft. So there is a natural hangover of the post Paris. So I don't think we should expect major orders announced by anybody in the very short term. U.
S. Is probably the brightest prospect for the industry at this stage. The profit of the airlines there for this year is projected around $4,500,000,000 So the clear consolidation positive consolidation outcome in the industries. The relaxation of the school closures of course bringing opportunities for us. We just are in the first wave of orders for the renewal of the regional fleet.
When you talk about Europe, the LCC is giving the network carriers a very hard time as you know. So that's a tough environment for the network carriers for the let's say the flag carriers or the classic ones. We are on our side seeing some opportunities on the Eastern Part Of Europe. The recent certification in Russia for the one hundred ninety one hundred ninety five opens up possibilities there for the region. And in that region, think we have some like I think eight customers or maybe seven or nine, but around eight customers.
So we have some expansion there. Middle East some activity brewing up. It's been quiet for a while. Some nice resumption of discussions. Africa kind of stable, but we maybe just to mention one example, we are initiating a let's say a business model tryout with a couple of 190s in Royal Airmarac, which is a short term lease from one of our lessors Jetscape.
If that it's almost like as I said a tryout of a business model. So that hopefully opens up a regional feeding system conclusion of this regional feeding system something which can bring value to African airlines. Of course, if that proves to be correct, does not mean that Embraer will seize everything. We are just let's say the guinea pig in supporting that initiative. Hopefully that will play in our favor in the future.
India air cost as we mentioned China some discussions about existing, but also about each opportunities I would say nothing short term. And Brazil losing momentum. So we have a backlog in Brazil. And this backlog we feel very, very comfortable about executing that backlog with Azul and Trip. But there is a clear slowdown in the domestic market here.
So I tried to walk you through the whole world. This is where we are. So in the end, we are seeing a strong market. Think $12,000,000,000 or $13,000,000,000 or something like that is the IATA profit forecast for the year, which is a stronger industry than it was certainly a few years ago. So we are cautiously feeling good about let's say the general state of the airline industry.
And then maybe just one last question jumping back to defense. Can you give us an update on how that KC-three 90 program is doing? Where we are? And where we have to go?
Sure. We have I mean, we are in the middle of let's say the massive delivery of drawings release of drawings to from engineering to production. So we are I do not have specific numbers, but we are pretty much on schedule as far as the production of drawings. It's important to say that the way we have set up the program, we are releasing the let's say the most complicated parts. I'm talking about for example spars and ribs and ribs also for both wings and fuselages.
So it's going pretty much as planned. We probably will start building a prototype, would say around early next year for maybe we'll start even maybe later this year or early next year. And everything tells us that a flight the first flight is doable before year the year end of twenty fourteen before eighteen months from now approximately. So as far as the cash flow, the government program is also on schedule. So we have no delays in payments.
And as I told Myles, we expect the existing programs to be protected by any business I mean any budget restrictions that might affect the defense business in Brazil. So I think if there are some constraints, there'll be more towards new programs rather than cutting existing programs.
Great. Super. Thank you. Thank you.
Our next question comes from Stephen Trent of Citi. Please go ahead with your question.
Good morning. This is Kevin Kasnik on behalf of Stephen Trent.
Good morning. Morning.
Just a couple of questions. Now when should we think of a firm order as a firm order when the contract is signed and the customer approves they have the financing and they put down a deposit? We were just a little bit confused about some news that came out recently stating that Republic Airways only recently received financing for that order that they got that announced in January. Was there something different about that announcement? Is the underlying host company still operating under bankruptcy protection?
I'm not sure you understand. Are talking about Republic or somebody else?
Republic Airways.
Yes. Well, they're not that. Should I? Yes. Well, we I mean, we are absolutely following up our procedures since I mean, since ever for the last I don't know at least fifteen years.
We a contract is firm and it's firm and we have nonrefundable deposits on our accounts. So this is true for Republic. It was true for Republic. What was recently announced, I'm not sure I answered your question, but what was recently announced was that Republic assured financing for the 47 aircraft, but the contract was firm. Commercially, it was absolutely firm between Embraer and Republic since January or February when we announced it then.
Okay. So they had put down a deposit at that point then?
Oh, yes, absolutely. Other people would not consider that firm.
Okay. Thank you. Just one more follow-up. Now over the long term, what extent do you think Embraer plans to continue acting as an aircraft lessor? Like do you believe that the driver behind KLM Cityhopper's decision to lease E190s instead of purchasing them?
What do you think is that something that you plan on like kind of integrating in your model further or?
No. We that's an important question. We have been focusing clearly in expanding our customer base also through leasing companies. You know, leasing companies are fundamentally working with Boeing and Airbus airplanes only, except for of course some specific examples. But fundamentally, the leasing industry works with Boeing and Airbus products.
And that's we see that as a very important distribution channel. And for the last two or three years, we've been focusing a lot in expanding our customer base and opening up new lessors, not of course to have enormous number of lessors, but having some important ones as we have succeeded. So having a large customer base as we have now with 67 customers that attracts lessors. So down the road, we see a combination of direct sales and the participation of lessors. So if you look at Boeing and Airbus, they probably have something between 2530%, 35% of their backlog to the source.
We are not at that level. We are probably around 20% or 15% or 20%. We kind of see as a healthy strategy down the road.
Okay. Thank you. That was very helpful.
Thank you.
Our next question comes from Edward Cuoto with Morgan Stanley. Please go ahead with your question.
Hi, good morning guys. Just one question from my side. On the currency side, we had this 10% depreciation on the BRL since the beginning of the year. Can you give us some color on when can we start to see the weaker currency really impacting the results of the company? Just some color on that.
Yes. Eduardo, good morning. Actually as you know the devaluation when it affects the cost which is positive, it has to go to follow the flow through the production and then to the delivery. So we expect to see that effect going forward, sometimes till this year definitely, but not in the very short term. The very short term as you know there's a negative impact because of the accounting method of the deferred income tax.
But the benefit on the cost and the margin will come forward. So probably more towards the end of the year.
So we can say that your costs on the second quarter they are pretty much based on the like BRL2 per dollar BRL?
Yes, definitely. That's correct.
Yes. On part one maybe. It was a
little bit more. At the end of the first quarter, we had almost a little bit more than BRL2. But this level that we're having today was not affecting the second quarter.
Okay. Thank you.
Our next question comes from Bruno Amarin with Bank of Santander. Please go ahead with your question.
Yes. Hi, good morning. Just a follow-up on the previous question. The Brazilian real has depreciated significantly since the beginning of the year when you provided the market with an EBIT margin guidance of a margin between 99.5%. Don't you see upside risk to this guidance given the move we saw in FX?
Thank you.
No, Bruno. Actually, still maintain the range. As we indicated, there are some challenges of course in the business activity. And so it's part of the whole impact in the year. So the margin between 9% to 95% as we indicated that probably now we foresee more than the low end of the range.
So the exchange rate will be part of this projection that we have. So we don't see that as an upside risk at this moment at least at this moment.
Okay. And could you please try to clarify what is the part that is pressuring margins?
No. It's more in the delivery trend. Okay.
And on the revenue. On the revenue side.
Okay. It's more about number of deliveries or prices?
It's volume delivery.
Okay. Thank you very much.
I'm not showing any other questions in the queue. I'd like to turn it back over for closing comments at this time.
Well, just thank you all for your attention and consideration and be in touch with you. See you in the next earnings call. Thank you and have a nice day. Have a nice weekend.
Thank you. This concludes today's question and answer session. And this concludes Embraer's conference call for today. Thank you very much for your participation and have a good day.