Good morning, ladies and gentlemen. Welcome to the audio conference call that will review Embraer's first quarter 2013 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. If you should require assistance during the call, please press the star key followed by 0. As a reminder, this conference is being recorded and webcasted at ri.embraer.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, 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 believe, may, will, estimates, continues, anticipates, intends, expects, and similar words are intended to identify forward-looking statements. Embraer undertakes no obligations 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 Curado, President and CEO, Mr. José Filippo, Chief Financial Officer and IRO. This is Elaine Fino, Director, Tax Accounting, and Mr. Luciano Fróes, Director of Investor Relations.
I would now like to turn the conference over to Mr. Frederico Curado. Please go ahead, sir.
Good morning, everyone. I'll just turn this to Filippo so he can make the formal presentation. Both of us, plus Luciano, will be back at the end for Q&A. Thank you.
Okay. Thank you, Fred. We're going to go through the presentation of the first quarter of 2013 results. Starting on page three with the highlights of the business, starting with the commercial jets business. We had the delivery of 17 E-Jets in the first quarter of this year, which led us to reach the total of 925 aircraft since the entering to service. We had the confirmation of the Republic deal. Last time, we mentioned about the need for confirmation approval from the court in the U.S., and that happened in the end of March. Now it's already included in the first quarter backlog we have just announced. Important as well, the new contracts with important customers for parts service management and logistic solutions with Republic, Azul, and Trip. The continuing of the program for the new generation of the E-Jet.
As communicated, we continue to announce main suppliers for the project. At this stage, we have most of the main suppliers already selected. To finalize the highlights in the commercial aviation, the announcement of the contract of the sale for two E190 for Austral Líneas Aéreas. This was already included in the backlog of the first quarter in the end of March. Going to page four, regarding executive jet highlights. The delivery of 12 jets in the first quarter, reflecting the typical seasonality. But it's important that we had the good mix where we had the participation of four large jets in the deliveries of this quarter. Regarding Phenom 300 capabilities, it's important confirmation of this aircraft highlights with the record of three speed for the lightweight class that happened recently.
An important recognition of quality and value proposition of the models Legacy 500, 450, and 650 was honored by the luxury press Hurun Report from China. The program of the Legacy 500 had an important milestone, which was the third prototype flight that happened recently. We still keep the projections for expecting to deliver by the first half of 2014. Concluding the highlights for executive jets, we had the information of a sale of one Lineage 1000 in China. Next page, in page five, regarding defense and security. The KC-390 program. Another important milestone was reached with the conclusion of the critical design review. We have the expectation of the first flight for the second half of 2014 on track of our expectations. Two important announcements of commercial activity. Sales was for Guatemala and Senegal of aircraft, Super Tucanos, and also surveillance and protection systems.
Regarding the LAS program, we are moving forward with the activities. We had the opening ceremony of Jacksonville facility, where those planes will be manufactured. Concluding the defense and security highlights, another support contract for Brazilian Air Force for the existing Super Tucano fleet. That will conclude the highlights. We start on page six, information of aircraft deliveries. In the chart in the left, commercial jets, we had 17 deliveries in the first quarter. We missed a few aircraft in the first quarter, but expect to have this delivered in the second quarter. This is following a typical pattern. We expect to improve this in the second quarter. If we go to the chart on the right side, the executive jets, same 12 deliveries in the first quarter. As well, the seasonality impact. We faced some customer financing delays that will be resolved soon.
We expect to have a stronger second quarter in terms of delivery. To conclude the deliveries, we are just confirming and keeping our guidance for 2013, which is shown in the table in the bottom of this page. Moving to next page seven, the backlog. We had amount of $13.3 billion for the end of the first quarter. An increase from the fourth quarter of last year, primarily because of the Republic deal in the commercial aviation as well as some contracts in the defense business. On page eight, the same information of revenues. The information revenues by segment. We had the total in the top left chart. The total of $1.086 billion of revenues in the first quarter, slightly below the first quarter of last year, primarily as a result of aircraft deliveries in the commercial aviation.
This was partially offset, if we see each chart for each business, partially offset by the growth in the Defense and Executive Aviation business. We accounted for a total of $1.086 billion in the first quarter of this year. Next page nine, is the consolidation of the revenues in USD and BRL. We had this amount of $1.086 billion in the first quarter, and we are keeping our guidance figures for the year, a range of $5.9 billion-$6.4 billion for the full year of 2013. Going forward, next page 10, talking about expenses, information in BRL and in USD. We had a total of $161 million as G&A expenses for the first quarter. This is a reduction compared to the last quarter of last year and also compared to the first quarter of 2012.
We see commercial aviation stable in terms of selling expenses, but a reduction in the G&A. The main drivers is really the focus that we have been putting into cost reduction and controls, coupled with the dollar impact and also the stimulus package, which been reducing some of the expenses. Next page 11, income from operations. We had a total, in the left, total income of $40 million for the first quarter of this year, with a 3.6% operating margin. Although we had a typical weak quarter, we had some important considerations to impacting these figures, which is the lower revenues and gross margin, combined with two non-recurring items, which basically provisions made for labor disputes and accounting from complementation of retroactive salary adjustments, the residue that we have in 2012.
These two adjustments, combined to the lower gross margin, returning to a lower margin for this quarter. Also important to remind that if we compare to the first quarter of 2012, we had to consider that in 2012, we had important liquidation damage revenues here that impacted positively the expenses and the operating income in last year. That also impacted the comparison from both quarters. Regarding the guidance, we are keeping our projections with the range of $530 million-$610 million, with a margin of 9%-9.5% for 2013. Next page 12, in terms of EBITDA. We had the total of $100 million in EBITDA for the first quarter, a margin of 9.2%. This is basically the reflection of all the already mentioned impacts in operating margin that is reflected here.
For the EBITDA, we are still also keeping on track on the guidance for 2013, with a range of $770 million-$900 million for EBITDA for the year, with a margin in the range of 13%-14%. Next page 13. Net income, total of $30 million in the chart on the left for the quarter, with a gross margin of 2.8%. We didn't have major effects of exchange rate for this quarter. Basically, the consequence of the margins and the effects that we mentioned before. A total of $30 million at 2.8% net margin for this quarter. In page 14, talking about inventories. We had the total amount in the end of the quarter of $2.5 billion, in line with our expectation. We had a typical increase from year-end figures, and we see that we are slightly below the first quarter of last year.
We are still on track, so we are confident that we have a good control and monitoring of inventory, which is key important for us in terms of the results. Next page 15. The free cash flow. We had a weak first quarter, negative $205 million. Some considerations. Basically, operating activities is associated to some missed deliveries, which caused some increase in inventory, and some payments related to guarantees of American Airlines restructuring, a total of $66 million. Regarding the intangible increase, it is mostly associated to the development of the Legacy 450 and 500 model. In terms of CapEx, $50 million, in line with our expectations. We expect to see improvements in the next quarter, but still negative, with recovery in the second half. It is good to remind that for the full year, we expect positive cash generation of double digit for this year.
Next page 16. In terms of the investments, the breakdown. As we see here, we are on track and in line with our projections. Year to date, $134 million, broken by $21 million in research, $61 million in development, and $45 million in CapEx. For the full year, we are keeping our guidance of $580 million for 2013. The last page, in terms of our capital structure. We see we have in the left, we have a debt with comfortable profile. We have increased our long-term portion, and we had a strong cash position of over $2.5 billion position. This is the profile of our debt. With that, we finish the presentation, and then we open for questions. Thank you.
Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Noah Poponak of Goldman Sachs. Please go ahead.
Hi. Good morning, everybody.
Morning, Noah.
Wanted to follow up on the reiteration of the margin guidance. I know the past several years have had a fairly back-end loaded EBIT and EBITDA contribution, but now to get to the range for the full year, it looks severely back-end loaded. I just wondered, first, as a clarification, is the reiteration including the one-time items in the quarter, meaning you're getting there despite those one-time items? Secondarily, can you just maybe talk about the degree to which this quarter's margin was what you thought it was going to be when you first put out that guidance, and just the level of comfort you have in reiterating the full-year target? Thanks a lot.
Okay, Noah. Trying to combine the two questions. Yeah, we still feel comfortable with our predictions, with our guidance. Yes, we had a little bit lower margins than we expected for two reasons. One, we missed a few deliveries, a handful of deliveries in the commercial aircraft, and a few deliveries also in the executive jets business. That, of course, did not contribute to dilute our fixed costs. We had this non-recurring event, as Filippo mentioned. We will have
A back-loaded year. We will have probably, let's say, higher loads the back of the year than we had last year. Last year, we had a more calibrated flow throughout the year. Again, the numbers still show, still makes us believe that we are on track for delivering those results.
Are you expecting to get into the ranges even after the negative recurring items you talked this quarter?
Yeah. They did. Of course, they were not expected, but they are not. When you consider the whole year, they're not that material, and we always have also some positive surprises that may offset that. I think it would be too premature to throw the towel on that. We're still firm on those numbers.
Okay, great. I just wanted to ask one other thing. On the light cabin business jet market, broadly, we all saw what Cessna announced a couple of weeks ago. You mentioned fewer cancellation penalties, at least, which is somewhat positive, I guess, in the quarter. Can you maybe just touch on what you're seeing broadly in terms of demand trends, and how what you're seeing compares to what Cessna said a couple of weeks ago? Thanks.
Yeah. We do not dispute this is a tough market. It's the toughest segment of the executive jet market. We have, in our 80 to 90 aircraft delivery guidance, we have a higher load of Phenom 300s, which are selling well, lower quantities of Phenom 100, which is the hardest part of the market. We don't have 100% of our aircraft sold, but we have probably between two-thirds and three-quarters of those airplanes sold. Two factories, one in Brazil, one in the United States. We, again, it's not a walk in the park, but we firmly believe it's doable, we're sticking to our delivery targets as well. Mainly driven by the Phenom 300, which is really outselling everybody in the segment. It's just a very popular aircraft.
Okay. Thanks a lot.
Thank you.
Our next question comes from Joe Nadol of JPMorgan. Please go ahead.
Thanks. Good morning.
Good morning.
Let's dig into the gross margin specifically. If we adjust for the settlements, your gross margin was still down a little bit. It's been my sense, certainly, that the Republic Airways, and now the United Airlines orders are probably going to be dilutive when they start, and they haven't started delivering yet. Of course, you have the big payroll tax item, which has been a big help. Could you give a little bit better sense as to how all those items combine when you look forward from, say, the 22.7%, ex the settlement this quarter, as we look sequentially forward, do you expect dilution? Can we hold it flat? What do you expect?
We expect to have, of course, a compensation because we had a weak quarter. For example, in terms of the impact compared to last year, in terms of lower gross margin revenues, we had a 2.5% reduction in operating margin. The provisions were 0.9% impact. We see that, in terms of the expenses, it should be one time. We don't expect to see that going forward. For the gross margin, we see a maintenance of that amount. We still work on a projection close to the number that you mentioned for the full year, which, of course, with the higher delivery amounts going forward.
Okay. Can you quantify what the benefit in the quarter was from the payroll tax?
The total of the payroll tax, about $8 million. Sorry, $18 million.
Yeah.
Okay. On the cash flow, Filippo, I think you mentioned that this was, I didn't quite catch it, but that in that number was, a payment on some of the guarantees. Could you just repeat that?
Yeah. That didn't impact the margin because already had a provision for that. It's more cash.
No, I understand. Yeah, I'm changing the conversation to cash flow now.
Yeah, the cash flow. Let me get the numbers correctly here. It's about $60 million impact.
$60 million. Okay. I think you mentioned that free cash flow would be negative in Q2, but better, and then positive in the second half, and positive for the full year overall. Am I getting that right?
No, correct. That's what we mentioned. We expect to see a recovery, but still negative in the short term.
Here, two-digit positive cash flow.
Two digit. Okay. Okay, just finally, Fred, congratulations on the order from United Airlines. Just wondering, you get this question every quarter. Thought I'd just throw it out there, if you could give your latest and greatest on the outlook for commercial aircraft, the demand outlook, particularly focusing on the U.S. carriers, of course.
Thank you, Joe. Thank you. That was a nice one. Let me try to give a helicopter view where we are. To date, we've been saying that we estimated some 300-400 aircraft over the next, let's say, year and a half, two years of orders to be delivered over the next, maybe three, four, five years. If those numbers are correct, so far we have probably about a third of those orders already committed. If I recall correctly, 40 aircraft for Delta Air Lines, 47 for Republic Airways, and now 30 for United Airlines. This is roughly 120, so let's say a third. Those three orders, they have the same number of options attached to them. There's another 120 options out there, which, of course, may or may not be confirmed.
If we take, let's say, just an overall balance, we see that 120 aircraft are done, and maybe some 200-250 or so to be contracted. The sources of those new orders will come from, number one, the existing options, number two, the direct procurement from American Airlines for American Eagle, which is still out there to be decided. Of course, some other regional airlines which have not yet done anything in those new category of aircraft. I think so far we're doing good, but we still have some room ahead of us, and some important battles are still to be fought and to be won.
Do you anticipate that some of these battles will happen by the Paris Air Show?
Maybe, Joe. I don't know. Maybe. There's a lot of activity out there, but, as you know, that's not under our control. It will depend on the customers and how they get their act together.
Okay. Thank you.
Sure.
Our next question comes from Pete Skibitsky of Drexel Hamilton. Please go ahead.
Good morning. A couple more questions on margin rate. I wanted to focus on the administrative and selling. Administrative costs were very low this quarter on an absolute basis. I'm wondering if that absolute level of $50 million and change is your expectation for the rest of the year, or should we expect that to ramp? Selling expenses were roughly flat on an absolute basis year-over-year. I'm wondering if it should ramp the rest of the year as well with sales, or if those will decline at all.
Yeah. That's, Pete, what we project. We had this number in the first quarter in terms of G&A. We expect to see the same trend going forward. There's not an expectation. It's good to remind that in the last quarter, we had some pre-op expenses that were accounted that we changed, it's not material, just for fair comparison. We still keep that we have this level going forward, which is a reduction. In terms of the selling expenses, it should be flat through all the year as well.
Excellent. Okay, thank you. Then, I guess, Frederico, on the United win, I was just wondering if you could help us out in terms of how we should think about our RJ rates in 2014 given the win. Then maybe you could help us out with timing. Will these all deliver in 2014 or maybe split over 2014 and 2015?
Yes, they are. They start in 2014. I don't have the exact breakdown, it's 2014 and 2015. As far as rates, maybe taking the benefit of your question, which probably, with that order, we pretty much are assured the current level of production for our company next year as far as commercial jets. Of course, we are still pursuing some new orders. There is a possibility that we, of course, are getting a few more orders. We can come back to the 2011, 2012 production levels, which is something 10%-15% above where we are this year. It's looking good, 2014, therefore, is looking good. 2015 also starting to look good as we get those new orders.
Very helpful. Then if I could, again, the U.S. Air Force LAS contract, that's obviously been a lot of drama getting that through, it seems like you're actually doing work on LAS now. I wanted to ask you, I think it's 20 aircraft. Do you expect to deliver all 20 in 2014? If so, I'm guessing your overall Super Tucano deliveries will be very high in 2014.
That contract is also spread in two years. We will start 2014. I think we're starting delivering aircraft in the second half of 2014, which will be quite a challenge because, just, like, 15 or 16 months away from now. We are indeed doing a lot of work already in that program. It's going to be probably more loaded in 2015 than 2014. I don't have, again, the precise numbers, but we certainly deliver more aircraft in 2015 than 2014, the aircraft is a Tucano.
Great. Thank you very much.
Thank you.
Our next question comes from Tarun Quettawala of Scotiabank. Please go ahead.
An order yesterday. I guess maybe, Fred, I know you talked about the production rate just in the last question. Can you give us a sense of what % of the 2014 and 2015 production is sold on the E-Jets?
If we take, let's say, the current year, 2013 current levels, we're pretty much done for 2014. I would say probably around maybe two-thirds or so for 2015. Of course, we have the ability to ramp up production a little bit up, again back to 2011, 2012 levels, between 100 and 110 aircraft. Some 10%-15% above where we are. If we kept the production stable next year compared to this year, we would be pretty much sold out at this stage.
That's great. Thank you. I guess, you need what, 12 months or so just to ramp up production. Is that fair, in terms of the time?
Yeah. That's a fair assumption, yes. Of course, there is a limit. There's load, is also important, but the lead time is about correct, yes.
Okay, great. I just have one more question. I know that the RJs have been the biggest area of opportunity here in the last few months in terms of orders, but I'm just wondering about some of the larger planes. Maybe you can talk a little bit about what's happening in emerging markets, with the E-Jet and also just as the CS100 becomes more of a reality. Are you seeing that come up as a competitor in any of your campaigns?
Well, the activity on the 195 segment, it continues. In Latin America, we have some activity. We just announced those two extra aircraft for Australia and Argentina. China, also, there's some activity going on, Africa, Middle East. There is not huge-sized orders, but smaller, some option confirmation, some smaller campaigns. It's, I think, in the average of that segment of the market. The CS100, we see, of course, as far as size, it's an aircraft about the same size as our 195. Those are very different aircraft as far as performance. The CS300 is an aircraft, which is much heavier than the 195. It has longer range than the 195. We still believe in the merits of our 195. We still believe that the 195 is really optimized, or 190/195 optimized for the mission.
As far as range, we cover something like 98% of the average missions in the world. We don't see the real benefit of this extra range in the CS100. Again, when it's out there, it's going to be another aircraft fighting for customers. Of course, we respect that.
Okay, great. Thank you very much.
Thank you.
Our next question comes from Cai von Rumohr of Cowen and Company. Please go ahead.
Yes. Thank you, Fred, and congratulations on the United order.
Thank you, Cai.
Is the United pricing comparable to the Republic order?
Of course, I cannot tell precisely, I would say, in the order of magnitude, all those campaigns, I think they have similar price level. Of course, I cannot comment or compare prices between the two airlines.
Okay. You mentioned of the order potential in the U.S., the options you have from Republic and United. What is the lead time on those options, i.e., do they have to give you at least 12 months notice? Given that, I believe, both current orders go, well, at least the Republic, what goes through what the middle of 2014 or a little farther, what's the earliest you could get those options? It doesn't look like that they would get more in the current timeframe. It would just extend the deliveries, or could you get those options sooner?
Cai, the Republic Airways deliveries, they actually stretch out to 2015. We have 2013, we start in the second half, 2014, and some remaining aircraft in 2015. Their options, they start in continuation of the last firm order. It's more backload into 2015 and 2016, as a continuous flow of orders. The options that we have, I'm not 100% precise here, but they start really to get more heavier loaded from 2015 on, 2015 and 2016 on. There's not much room. There is some, but not much room for options in 2014.
Got it. The Legacy. My sense is that slipped a little bit, and while it's entry in service in the first half of 2014, is it more likely to be closer to midyear than the beginning of the year?
Well, I think that's a fair assumption. We always sustain first half. Of course, we realize it's a relatively broad range. We have been talking about entry into service. We're doing a lot of work to assure that once we get the Legacy 500 into service, it's really debugged, and it's mature. We invest in a lot of efforts and resources in flight test campaign and maturity campaign. Also, both in the ground and in flight. We may have a certification earlier in the year and elect to enter into service a little bit later. We are giving ourselves this 6 months, let's say, flexibility. I would agree with your comment that it's more likely to have airplanes being delivered to customers more towards the mid part of the year.
Got it. Thank you. The Gen2 really looks, I think, more impressive at this point. You have the new engines than it might have, 12 or 18 months ago. Presumably, this also costs somewhat more money. Can you give us any kind of color, if you launch it as, I mean, presumably you will, at midyear. What a rough range of what the development might run and the profile of when that spending will start to hit your P&L, will start to hit your cash flow?
Cai, of course, I would ask you for a few more months to talk about volume. Profile, if we do launch, let's say, this year, which, of course, is our intention to working towards that. This starts to get really more loaded in the, say, in the '16. It's a ramp-up of '15, there is, of course, there will be an I mean, sorry, '15 and '16. Next year, 2014, we will see the start of the ramp-up. As we certify the Legacy 500 and 450, then we start really moving our engineering resources in higher quantities to the second generation. As far as the investment in the company, we probably should see something flattish. As far as the program itself, it really starts to pick up in sizable resources, probably in 2015.
Terrific. Thank you very much.
Thank you.
Our next question comes from Ron Epstein of Bank of America Merrill Lynch. Please go ahead.
Hey. Good morning, Fred.
Good morning.
Following up on Cai's question on the second generation E-Jets, in the preliminary customer conversations you've had so far, how's the aircraft been received? Vis-a-vis, say the CS100, what's your feedback?
Ron, let me talk about Embraer. I don't have any feedback on the CS100. I can tell you that there is real interest in the aircraft. We have to keep in mind that this is not a new aircraft, per se. This is, let's say that it will be a significant improvement over an existing aircraft, which has 60 plus customers in 40 plus countries. There is about 1,100 or so aircrafts. The customer base is there. We are starting from a solid start. I mean, from a solid base. Now that we are really talking to more details with the airlines and leasing companies about the new aircraft. I'm encouraged, to be frank, about the prospects of those new second-generation airplanes. It will be, I think, a very important, let's say, change in the history of regional aviation.
If you look back at the history of regional aircraft, what we see is segments going up and down, products coming up and disappearing. I think we will set a new reference now by really extending the life of an existing family of products. The E-Jets family, we see as a family, which has a very potential longevity. Beyond the current generation to the second generation and perpetuating our presence in that market segment. I'm really encouraged and really trying hard to put together the business plan, which is sound as far as return on investment. Market response has been good.
Great. Again, following up on another question that Cai asked. In terms of the investment required, I think at one point, I think you said it might be in the range of a billion and a half dollars. Is that still right?
No, I never said that, Ron.
Okay.
I don't recall saying that. Maybe somebody did here in Embraer. I really ask you to wait for a few more months when we get the number. Of course, we'll disclose it formally, and it will be something more solid. That's where we are.
Okay, great. Fair enough. Just maybe switching to the defense business for a minute. The KC-390 program, we haven't talked much about that on the call yet. How is that going? How's the development going? Are you seeing any other customer interest outside of the existing customers that you already have for it, or potential customers you have for it?
Until we actually fly I think there's two events which are very important, Ron, let's say for the start of a commercial campaign for the aircraft. First, of course, is the flight of the aircraft, which is scheduled for the end of next year. Very importantly also is the execution of the contract with the Brazilian Air Force for the delivery of the airplanes. Because what we have so far is just a development contract. Once we have a contract to deliver X number of airplanes to the Brazilian Air Force with a firm price, firm configuration, everything settled down, we then, from that reference, we can start selling the aircraft for other customers. Starting, of course, with those who have a participation in the program. The first flight also, I think, is a key element. We're able to show the aircraft.
I would anticipate some, let's say, more commercial activity, more towards end of next year into 2015. Let's say, a stronger pace in our marketing efforts in the aircraft.
Okay, great. Maybe just one last question about an operational question. Where is São José dos Campos now in terms of the final assembly cycle on a 170 or 190? How many days does it take now?
Maybe Luciano can help me. I think it's seven or eight days.
Yeah.
Let me suggest we have crosscheck as well. I think we have the information here.
Sure.
Yeah. My memory is still acceptable. Seven days is our cycle time for final assembly in our E-Jet hangar.
Okay, great. Thank you very much.
Thank you.
Our next question comes from Stephen Trent of Citi. Please go ahead.
Hi. Good morning, everybody, and thanks for taking my questions.
Morning, Steve.
Morning, Fred. Just curious, I was wondering if you could give us a little bit of color on what was going on with this labor lawsuit, where there was, you were already paying a settlement?
Could you take that, Luciano?
Okay. Stephen. Yes, I can do this. Actually, this is not a settlement. This is just a provision that we made. We have to go back to the '90s. This is prior to privatization. There was some labor reduction, preparing the company for privatization and some of the things entering some challenging processes. We are working on this. The decision to make a provision is based on the opinion on the legal that support us on this, that said that would be good, that we should do. It is just a provision, it's not a settlement. It's still discussing and so still waiting for that. It's not a final settlement.
Okay. Great. Just two other quick questions, if I may. I share a congrats on the United order.
Thank you.
I'm curious, when I actually take the valuation at firm value, at list price that you guys mentioned and divide by the number of planes, and I do the same exact thing with the Republic order, I actually get a moderately lower implied list price with United than I do.
Right
on Republic. Is this just simple rounding, or are you making an effort to adjust list?
Steve, my sincere answer to your question is, I don't know. I have to check. Of course, as everybody else in the industry, we just inform quantity of aircraft times list prices. I don't know. I didn't even notice. Thank you for the inputs. If you agree, we'll get back to you with an answer.
Not a problem, Freddy. Not a problem. Just one last thing, as you look at ongoing potential order flow from the U.S. market, and you have guys like American and United, that as they're getting larger planes, are also getting rid of their 50-seaters. While American, it's clear what's occurring, how do you see United Airlines or customers like United progressing in terms of getting rid of their 50-seaters and the guarantees that you have on those aircraft?
Well, I think the wave of bankruptcies seems to be over. All majors, without exception, have gone through consolidation, have gone through bankruptcy. All the aircraft that had to be returned under bankruptcy have been returned. For the industry, I'm talking about. Let's keep in mind that the bulk of the existing 50-seaters fleet was delivered between late 1990s, first half of the 2000s. If you take a typical 12 to 15-year financing, we can see a gradual dilution, substitution of those old aircraft by the new 70, 75-seaters being contracted right now. We believe there will be, let's say, an organized way out of those aircraft. Whoever is holding those equities will seek secondary markets, in Africa, Latin America, Eastern Europe. A lot has been done, has been digested already by the industry with the bankruptcy of the last five, six, eight years.
Okay. Appreciate that, Fred. Let me leave it at that. Thanks for the time.
Thank you.
Our next question comes from Myles Walton of Deutsche Bank. Please go ahead.
Thanks. Good morning. It's Amit Mehrotra here from Myles. Just wanted to ask one quick question on the services revenue. Can you just provide us what the services revenue level was in the quarter?
Yes. Hi, Amit. This is Luciano. Services was around $195 million for total, considering all the business units.
Okay. Thanks. Then just one follow-up on the EBIT margin in the quarter. Even if after adjusting for the non-recurring items and the stimulus, it was still well below the full-year target. I'm just wondering, in addition to mix, is there also some big step-up in stimulus benefit sequentially that drives the improvement? Can you just walk us through that a little bit?
Okay. Amit, yes. In line with what we mentioned previously, the stimulus should add up to about $100 million for the year. Of course, you have to generate the revenues, to start seeing that inflow primarily, in the COGS. Right? As we deliver more aircraft, we should see a step-up in the stimulus benefits, and that, of course, in addition to the operating leverage and growth in revenues, et cetera, to meet the guidance, should bring us more at par with the figures that we've indicated.
Okay. Okay, thanks. Just one last one on the defense business. The KC-390, can you just give us what the revenue contribution was in the quarter on that business and maybe, what we should expect, as sort of total revenue for this year and maybe, what the slope of that business could be over the next couple of years? Thanks.
Yeah. We don't typically break down revenues per contract. Let's say that the revenues in Brazil, taking all the contracts in Brazil, and the KC-390 is the main contract that we have in Brazil. It's probably transitioning from some, let's say, 50% to 70% of our total revenues. If you consider something in that ballpark, about 60%, 70% of revenues to Brazilian market and KC-390 being, let's say, the major contract there, Yeah. For the year, you mean. For the year. Luciano's just adding some $450 million for the year. That is our expectation.
Okay, great. Thanks so much.
Our next question comes from Darryl Genovesi of UBS. Please go ahead.
Good morning, guys.
Morning.
Can you just comment on what you're seeing on business jet pricing, particularly at the high end? I know you said the Phenom 100s are tough, when I just look at your growth rate on a unit basis for the last couple of quarters relative to last year, it would seem to me that you should be seeing high 20-ish% kind of growth rates there. What you're actually seeing is sort of mid-teens growth. I'm just wondering if you're really seeing that big of a pricing hit, particularly at the top end.
Yeah, we're not seeing a bump-up in prices, but we're not seeing, let's say, a stronger pressure than we had before. I think it has at least flattened out and some more discipline in the production rates. In a certain way, we kind of welcome what Cessna mentioned about maybe reducing their white tail production. That discipline will certainly bring a perspective of better margin to everybody. I could not say that as in the whole business, we are seeing a material upside as far as pricing. We are just about where we were. It's not getting worse, at least. I think if it is moving, it's moving a little bit up, but not moving the needle yet, not for us.
Okay. I guess, just the other question I had, just in terms of the stimulus, can you just give some color on how you expect that to sort of play out? When does it go away, and is it a cliff, or does it sort of step down a little at a time the way it sort of scaled up last year? Assuming that it's not extended.
We had in the first quarter, $18 million in this impact. We keep what we indicated for the year, about $100 million.
Right. I guess I was asking more about 2014.
Some of this, the payroll, impact, is for two years. We're still keeping there. They may be renewed, but we don't have anything formal for that.
Would that take you to kind of the second quarter of 2014? I think you started to see the benefit initially in kind of the second quarter of 2012.
No. What Filippo is trying to say is that, this benefit, which actually is a change in tax, is valid at least until the end of 2014. We're going to see in 2014, what we will see in 2013.
Okay.
In that sense. Beyond 2014, that's where we do not have any firm indication yet.
Okay. Thank you.
Our next question comes from Chelsea Cumsko of TIAA. Please go ahead.
Hi. Regarding the delays in your deliveries this quarter, you had mentioned it was due to some financing issues at your customers. Can you please just confirm that those issues have been resolved and that the deliveries are either set, already delivered in Q2, or are set to definitely be delivered?
Pretty much so. Those are, of course, there are point issues. Either they have been delivered or will be delivered this quarter. If not all, but the majority of the aircraft. We should see a step-up in deliveries in both commercial and executive jets in Q2.
Okay, thank you.
Our next question is a follow-up from Peter Skibitski of Drexel Hamilton. Please go ahead.
Yeah. Frederico, are you still on track to deliver the first Legacy 650 from China in Q4? I was just wondering if you expect the economics of those 650 to meaningfully differ from the Brazil-delivered 650s.
Yes, we are on track. Actually, as a matter of fact, I was there just last week, and the aircraft is already in the assembly line. It will depend on the rate of production. If we stay in the lower range of three or four aircraft a year, probably going to have a little bit less margin than when we have here in Brazil. If we go up to a higher range of six to nine to 10 aircraft a year, I would say very comparable. This is based on our history of the 145 in Harbin.
Got it. Very helpful. I appreciate that. Then last one. Can you talk about the delivery ramp on the Legacy 500? I think you touched upon this earlier, but I stepped off on the call. It sounds like you're on track to deliver the 500, I guess, in the middle of 2014. I'm wondering, should we think about single-digit deliveries next year, or is there opportunity for more than that? Just looking for some color.
Well, I'll give you a very faint color. I cannot, of course, make much more precise comments on that yet. Probably, I'll say a low double digits. Beyond 10 aircraft, I think we would be looking at least a low double digits, 10 plus, 12, whatever, on 2014, and ramping up according to our backlog. It won't be just single digit. It'll be more than that.
Okay, great. Thanks very much.
Thank you.
Our next question is a follow-up from Cai von Rumohr of Cowen and Company. Please go ahead.
Yes. You had an abnormally low tax rate in the first quarter. I know this is a difficult question, but could you give us a range on the tax rate for the year barring any major FX fluctuations?
What we have is that we didn't have any major effect of exchange rate in the first quarter. We don't expect to see fluctuations so far. As you know, this is something that impacts the way you calculate, because we have the dollar as our functional currency, and the tax rate is calculated based on the reais figures. Normally, you have to consider maybe the standard of 25% as the income tax that we use for projection. It could be used, like, 25% would be enough now.
You never really get to 25%. Is a range of 15% to 20%? Give me a realistic range. Assume, obviously, that the FX is relatively stable from here on out.
Yeah, that's the number that we should consider. There's some treatment sometimes that you go to the current income tax and the deferred income tax. They all tend to put together in a 25% if you take a full year.
Cai, we did have years where we had extremely high tax ratio, totally artificial non-cash. I appreciate, let's say your difficulty is the same as ours. We have the same trouble here giving projections to ourselves, to our board. It's just these two different systems, one accounting, one to calculate tax based on Brazilian reais. It makes it virtually impossible for us to make a prediction. I think, I try to give you the best guess that we have. It may really be all over the place, depending on how the FX develops.
Thank you very much.
Our next question comes from Stephen Trent of Citi. Please go ahead.
Hello. Thanks, guys. Sorry about the follow-up. I was wondering if you could tell us approximately what FX is something you're using for 2013.
Welcome back, Steve. I think it's two, right, Filippo?
Yeah. It's two BRL per USD for the full year. We're going flat for the year.
Great, thanks. I also didn't hear your response on, for the first quarter, what was the level of service revenue you mentioned?
$195 million, approximately, Steve.
About $200 million.
$200. Perfect. Thanks very much.
Thank you.
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.
Just to thank you all for the participation. Look forward to talking to you in the next quarter. Take care. Bye-bye. Have a nice week.
That does conclude Embraer's audio conference call for today. Thank you very much.