Good morning, ladies and gentlemen, and welcome to the Audio Conference Call that will review Embraer's First Quarter twenty thirteen Results. Thank you for standing by. At this time, all participants are in a listen only mode. Later, will conduct a question and answer session and instructions to participate will be given at that time. As a reminder, this conference 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, 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 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. Federico Corrado, President and CEO Mr. Jose Cipo, Chief Financial Officer and IRO Mrs.
Alain Pino, Director, Tax and Accounting and Mr. Luciano Ferrez, Director of Investor Relations. I would now like to turn the conference over to Mr. Federico Corrado. Please go ahead, sir.
Good morning, everyone. I'll just turn this to Filippo, so he can make the formal presentation and both of us plus Luciano will be back at the end for Q and A. Thank you.
Thank you, Fred. We're going to go through the presentation of the first quarter of twenty thirteen results, starting on Page three with the highlights of the business, starting with the commercial jet business. We had the delivery of 17 E Jets in the first quarter of this year, which led us to reach the total of nine twenty five aircrafts since the entry into service. We had the confirmation of the Republic deal. Last year, we about the need for confirmation approval from the court in The U.
S. That happened in the March. So 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. And 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. And to finalize the highlights in the Commercial Aviation, the announcement of the contract of the sale for two E190 for Austral Lineaz Arias. This was already included in the backlog of the first quarter in the March. Going to Page four, regarding executive jet highlights. The delivery of 12 jets in the first quarter, reflected typical seasonality, but it's important that we had a good mix where we had the participation of large jets four large jets in the deliveries of this quarter.
Regarding Fino 300 capabilities, it's important confirmation of this aircraft highlights with the record of three speed for the lightweight class that happened recently. Also, an important recognition of quality and value proposition of the models Legacy 500, four fifty and six fifty was honored by the Luxury Press Forum report from China. The program of the Legacy 500 has an important milestone, which was the third prototype flight that happened recently, and we still keep the projections for expecting to deliver by the first half of twenty fourteen. Concluding the highlights for Executive Jets, we had the information of the sale of one Lineage 1,000 in China. Next page, Page five, regarding defense and security.
The KC-three 90 program, another important milestone was reached with the conclusion of the critical design review, and we have the expectation of the first flight for the second half of twenty fourteen on track of our expectations. Two important announcements of commercial activity, sales for Guatemala and Senegal of aircraft Super Tucanoes and also surveillance and protection systems. Regarding the LAS program, we are moving forward with the activities, and we have the opening ceremony of Jacksonville facility where those airplanes will be manufactured. And concluding the defense and security highlights, another support contract for Brazilian Air Force for the existing Super Tucano fleet. That will conclude the highlights, and we start on Page six, the information of aircraft deliveries.
In the chart from in the left, commercial jets, we had 17 deliveries in the first quarter. We missed a few aircrafts in the first quarter, expect to have this delivered in the second quarter. This is following a typical pattern, but we expect to improve this in the second quarter. If we go to the chart on the right side, the injector on the ship jets, same 12 deliveries in the first quarter as well the seasonality impact. We had we faced some customer financing delays that will be resolved soon.
So we expect to have a stronger second quarter in terms of delivery. And to conclude the deliveries, we're just confirming and keeping our guidance for 2013 and 2019, which is shown in the table in the bottom of this page. Moving to next page, Page seven, the backlog. We had the amount of $13,300,000,000 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. Page eight, the same information of revenues the information revenues by segment.
We have the total in the left the top left chart, the total of $1,086,000,000 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 the executive aviation business. So we accounted for a total of $1,068,600,000 in the first quarter of this year. Next page, Page nine, is the consolidation of the revenues in dollars and Brazilian reais. We had then this amount of BRL1.086 billion in the first quarter, and we are keeping our guidance figures for the year, the range of 5,900,000,000.0 to $6,400,000,000 for the full year of 2013.
Going forward, next page, page 10, talking about expenses. Information in reais and in dollars. We had a total of $161,000,000 SG and 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 twenty twelve. And we see Commercial Aviation stable in terms of selling expenses, but the reduction in G and A and the main drivers is really the focus that we've been putting into cost reduction and controls, coupled with the dollar impact and also the stimulus packaging, which being reducing some of the expenses.
Next page, Page 11, income from operations. We had a total in the left, total income of $40,000,000 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 lower revenues and gross margin, combined with some with two nonrecurring items, which basically provisions made for labor disputes and accounting from complementation of retroactive salary adjustments, the decision that we have in 2012. So 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 twenty twelve, we had to consider that in 2012, we had important liquidation damage revenues here that impacted positively the expenses and the operation income in last year.
So that also impacted the comparison from both quarters. And regarding the guidance, we're keeping our projections with the range of $530,000,000 to $610,000,000 with a margin of nine percent to 9.5% for 2013. Next page, Page 12, in terms of EBITDA. We had a total of $100,000,000 in EBITDA for the first quarter, margin of 9.2%. And this is basically the reflection of all the mentioned the already mentioned impacts in operating margin that is reflected here.
For the EBITDA, we're still also keeping on track on the guidance for 2013 with a range of $770,000,000 to $900,000,000 for EBITDA for the year with a margin in the range of 13 to 14%. Next page, Page 13. Net income, total of $30,000,000 in the chart on the left for the quarter with a gross margin of 2.8%. This is the we don't we didn't have major effects of exchange rate for this quarter. It's basically the consequence of the margins and the mentioned effects that we mentioned before.
So a total of $30,000,000 a 2.8% net margin for this quarter. In Page 14, talking about inventories. We had a total amount in the end of the quarter of February 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. So we're still on track.
So we're confident that we have a good control and monitoring of inventory, which is key important for us in terms of the results. Next page, Page 15, the free cash flow. We had a weak first quarter, negative ARS205 million. Some considerations. Basically, operating activities is associated to some mixed deliveries, which caused some increase in inventory and some payments related to guarantees of American Airlines restructuring, the total of BRL66 million.
And regarding the intangible increase, it's mostly associated to the development of the Lagos five fifty hundred model. And in terms of CapEx, 68,000,000 sorry, 50,000,000 in line with expectations. We expect to see improvements in the next quarter, but still negative with recovery in the second half. It's good to remind that for the full year, we expect positive cash generation of double digit for this year. Next page, Page 16, in terms of the investments, the breakdown.
As you see here, we have we're on track and in line with our projections. Year to date, 134,000,000 broken by 21,000,000 in research, dollars 61,000,000 in development and 45,000,000 in CapEx. So for the full year, we're keeping our guidance of $580,000,000 for 2013. The last page, in terms of our capital structure, we see we have in the left, we had debt with comfortable profile. We have increased our long term portion, and we had a strong cash position of over $2,500,000,000 position.
So this is the profile of our debt. And with that, we finish the presentation and then we open for questions. Thank you.
Our first question comes from Noah Poponak of Goldman Sachs. Please go ahead.
Hi, good morning everybody.
Good morning, Noah.
Just 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, looks severely back end loaded. I just wondered, first as a clarification, is the reiteration including the onetime items in the quarter meaning you're getting there despite those onetime items? And then 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. So trying to combine the two questions. Yes, 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 commercial aircraft and a few deliveries also in the executive jets business.
And so that, of course, did not contribute dilute our fixed costs. And we have this nonrecurring event as Filippo mentioned. We will have a back loaded year. We will have probably, let's say, a higher load back of the year than we had last year. Last year we had a more equilibrated flow throughout the year.
But again the numbers is to show is to 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 took Yes. This
They didn't. 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 some also some positive surprises that may offset that. So I think it's too premature would be too premature to throw the towel on that. So we are we're still firm on those numbers.
Okay. Great. And then 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 you're seeing how what you're seeing compares to what Cessna said a couple of weeks ago? Thanks.
Yes. We I mean, 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.
So we again it's not a walk in the park, but we firmly believe it's doable. So we are sticking to our delivery targets as well. So 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 Nadall of JPMorgan. Please go ahead.
Thanks. Good morning.
Good morning.
So I'd to dig into the gross margin specifically. If we adjust for the settlement, your gross margin was still down a little bit. And it's been my sense certainly that The Republic and now The United orders are probably going to be dilutive when they start and they haven't started delivering yet. So and then of course you have the big payroll tax item, which has been a big help. So 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? But what do you expect?
We expect to have, of course, 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, had a 2.5% reduction in operating margin. The provisions were 0.9% impact. So we see that in terms of the expenses, it should be onetime. We don't expect to see that going forward.
And for the gross margin, we see a maintenance of that amount. So 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 of about $8,000,000 sorry, 18,000,000. Okay.
And then 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. Was that could you just repeat that?
Yes. But that's not it didn't impact the margin because we already had a provision for that.
No, understand. But yes, I'm changing the conversation to cash flow now.
Yes, the cash flow. This was let me get the number correctly. It's about $60,000,000 impact.
$60,000,000 okay. And you mentioned that 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?
Correct. That's what we mentioned. We expect to see a recover, but still negative in the short term. Here, two digit positive cash flow.
Two digit, okay. Okay. And then just finally, Fred, congratulations on the order from United. 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. Well, let me try to give a helicopter view where we are. So to date, we've been saying that we estimated some 300 to 400 aircraft over the next, let's say, one years, point two years of orders to be delivered over the next maybe three, four, five years.
So if those numbers are correct, so far we have probably about onethree of those orders already committed. If I recall correctly, 40 aircraft for Delta, 47 for Republic and now 30 for United. So this is roughly 120, so let's say, onethree. And those three orders, they have the same number of options attached to them. So there's another 120 options out there, which of course may or may not be confirmed.
So if we take a, let's say, just overall balance, we see that 120 aircraft are done and maybe some 200 to two fifty or so to be contracted. And this will be the sources of those new orders will come from, number one, the existing option number two, the direct procurement from American Airlines for American Eagle, which is still out there to be decided. And of course, some other regional airlines, have not yet done anything in those new category of aircraft. So I think we are so far we're doing good, but we still have some room ahead of us and the battles 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. So I don't know, maybe. A lot of activity out there, but as you know, it's not under our control. So it will depend on the customers and how they wrap their they get their act together.
Okay. Thank you.
Our next question comes from Pete Skibitski of Drexel Hamilton. Please go ahead.
Good morning. 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 $50,000,000 and change is kind of your expectation for the rest of the year or should we expect that to ramp?
And selling expenses were roughly flat on an absolute basis year over year. I'm wondering if those should ramp the rest of year as well with sales or if those will decline at all?
Yes, that's Pete, we project. We had this number in the first quarter in terms of G and A, and we expect to see the same trend going forward. There's not an expectation, but it's good to remind that in the last quarter, we had some pre op expenses that were accounted that we changed, but it's not material just for fair comparison. But we still keep that we have this level going forward, which is a reduction. In terms of the selling expenses, it should be flat throughout the year as well.
Excellent. Excellent. Okay. Thank you. And then I guess, Frederico, on the United win, was just wondering if you could help us out in terms of how we should think about RJ rates in 2014 given the win?
And then maybe you could help us out with timing. Will these all deliver in 2014 or maybe split over 2014 and 2015?
Yes, are. They are they start in 2014. I don't have the exact breakdown, but it's twenty fourteen twenty fifteen. So as far as rates and maybe taking the benefit of your question and which probably we with that order, we pretty much are assured the current level of production for our company next year as far as commercial jets. And so we of course, we are still pursuing some new orders.
So 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% to 15% above where we are this year. So it's looking good. And 2014 therefore is looking good. And 2015 also starting to look good as we get those new orders.
Helpful. Very helpful. And then if I could again the U. S. Air Force last contract that's obviously been a lot of driving that through it seems like you're actually doing work on LAS now.
And I wanted to ask you, I think it's '20 aircraft. You expect to deliver all 20 in 2014? And if so, I'm guessing your overall Super Tucano deliveries will very high in 2014.
They also that contract is also spread in two years. So we will start 2014. I think we'll start delivering aircraft in the second half of twenty fourteen, which will be quite a challenge because just by fifteen sixteen months away from now, and we are indeed doing a lot of work already in that program. So it's going be 14 probably more loaded in '15 than 14. I don't have again the precise numbers, but we certainly delivered more aircraft in 15 than 14 in aircraft case of Tucano.
Thank you very much.
Thank you.
Our next question comes from Taran Kotawala of Scotiabank. Please go ahead.
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 percent of the 2014 and 2015 production is sold on the E Jets?
Well, if we take, let's say, current year, 2013 current levels, we are pretty much done for 2014. I would say probably around maybe two thirds or so for 2015. But of course, we have the ability to ramp up production a little bit up again back to the 2011, 2012 levels between 01/2020 I mean, sorry 01/2010 aircraft, so some 10% to 15% above where we are. So for 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. And I guess you need what twelve months or so just to ramp up production. Is that fair in terms of the Yes.
That's a fair assumption. Yes. Of course, there is a limit. So there's loads. It's also important.
But the lead time is about correct. Yes.
Okay. Great. And I just have one more question. I know that the RGs 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 Jets? 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 190, 195 segment continues. In Latin America, we have activity. We just announced those two extra aircraft for Australia and Argentina. So China is also there is some activity going on Africa, Middle East. So there is not huge sized orders, but smaller some option confirmation, some smaller campaigns.
So it's kind of I think 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. It's those are very different aircraft as far as performance. So the CS300 is an aircraft which is much heavier than the 195. It has longer range than the 195.
So we still believe that in the merits of our 195, we still believe that 195,000,000 is really optimized one hundred ninety one hundred ninety five million optimized for the mission. And as far as range, we cover something like 98% of the average missions in the world. So we don't see the real benefit of this extra range in the CS100. But again, when it's out there, it's going be another aircraft fighting for customers. So we 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, Kai.
Is the United pricing comparable to the Republic order?
Of course, I cannot tell precisely. But I would say in the order of magnitude all those campaigns they I think they have similar price level. But of course, I cannot compare I mean comment or compare prices between the two airlines.
Okay. And 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 twelve months notice?
And given that I believe both current orders go, at least the Republic what goes through the middle of twenty fourteen or a little farther, what's the earliest you could get those options? I mean, because it doesn't look like that they would get more in the current timeframe, it would just extend the deliveries or would it could you get those options sooner?
Cai, the Republic deliveries, they actually stretch out to 2015. So we have 2013. We'll start in the second half 2014 and some remaining aircraft in 2015. And their options they start in continuation of the last firm orders. So it's more back loaded into 2015 and 2016 at a continuous flow of orders.
So the orders that we the options that we have, maybe not I'm not 100% precise here, but the start rate, we had more heavier loaded from 2015 on 2015, 2016 on. So there's not much room. There is some, but not much room for options in 2014.
Got it. And then
the legacy, my sense is that slipped a little bit. And while its entry in service in the first half of twenty fourteen, is it more likely to be closer to midyear than the beginning of the year?
I think that's a fair assumption. We always sustain first half. Of course, we realize it's a relatively broad range. And we have been talking about the entry into service. So we're doing a lot of work to assure that once we get into the Lagos 500 into service, it's really debugged and it's mature.
So we're investing a lot of efforts and resources in flight test campaign and maturity campaign also, I mean, in the ground and in flight. So we may have a certification earlier in the year and elect to enter into service a little bit later. So we are giving ourselves the six months, let's say, flexibility. But 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. And then the Gen two really looks I think more impressive at this point. You have the new engines than it might have twelve or eighteen months ago. Presumably this also costs somewhat more money.
Can you give us any kind of color if you launch it as presumably you will at mid year, a rough range of what the development might run and kind of the profile of when that spending will start to hit your P and L? It 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 let's say in the 2016. And so it's a ramp up of 2015. There is, of course, there will be a I mean, sorry, 2015 and 2016. So next year, 2014, we will see the start of the ramp up.
So as we certify the legacy 05/1950, then we start really moving our engineering resources in a higher quantities to the second generation. So as far as investment in the company, we probably should see something flattish. But 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.
Hi. Good morning, Fred. Following up on Kai's question on the second generation E Jets, how in the preliminary customer conversations you've had so far, I mean, how has the aircraft been received? And vis a vis, say, CS100, I mean, 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, I mean, real interest in the aircraft. We have to keep in mind that this is not a new aircraft per se. This is a let's say, that it will be a significant improvement over an existing aircraft, which has 60 plus customers in 40 plus countries.
So there is about 1,100 or so aircraft sold. So the customer base is there. So we are starting from a solid start mean from a solid base. So 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. And it will be, I think, a very important, let's say, change in the history of regional aviation.
Because if you look back at the history of regional aircraft, what we see is segments going up and down, products coming up and disappearing. And we I think we will set a new reference now by really extending the life of an existing family of products. So the E Jets family, we see as a family, which has a very long and very potential longevity. So beyond the current generation to the second generation and perpetuating our presence in that market segment. So 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. And then again following up on another question that Kai asked. In terms of the investment required, I think at one point I think you said it might be in the range of 1,000,000,000 point dollars Is that still right?
No, I never said that one. Don't recall saying that. Maybe somebody did here in Embraer, but I really ask you to wait for a few more months when you get the number. And of course, we'll disclose it formally and it will be something more solid. But I that's where we are.
Okay. Great. Fair enough. And then just maybe switching to the defense business for a minute. The KC-three 90 program, we haven't talked much about that on the call yet.
How is that going? How is the development going? And 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 for 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. And 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. So 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 participation in the program. And the first flight also I think is a key element.
So we're able to show the aircraft. So I would anticipate some let's say more commercial activity more towards like end of next year into 2015, let's say a stronger pace in our marketing efforts in the aircraft.
Okay, great. And then maybe just one last question on that, an operational question. Where is San Jose Dos Campos now in terms of the final assembly cycle on 170 or 190? How many days are does it take now?
Maybe Lucerne can help me. I think it's seven or eight days. But let me just cross check it, John. I think we have the information here. Yes.
Yes. So my memory is still acceptable. Seven days is our cycle time for final assembly in our EJF 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.
Good morning, Steve.
Good morning, Freddie. 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're already paying a settlement?
Okay, Stephan. Yes, I can do this. Actually, this is not a settlement. This is just a provision that we made. And then we have to go back to the 1990s.
This is prior to privatization. There was some labor reduction preparing the company for privatization and some of the things entering some challenging process, and we are working on this. And the decision to make a provision is based on the opinion on the legal that support us on this that said that it will be good that we should do. So that's a provision, it's not a settlement. Still discussing and there's some so still waiting for that.
It's not a final settlement.
Okay, great. And just two other quick questions, if I may. And Aysere, congrats on the United order. 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 kind of a moderately lower implied list price with United I do Is on this just simple rounding? Or are you making an effort to adjust list?
Steve, sincere answer to your question is, I don't know. I have to check. Of course, as everybody else in the industry, we do see informed quantity of aircraft times list prices. So I don't know. I didn't even notice that.
So thank you for the input. We'll get if you agree, we'll get back to you. Not a problem, Freddy. Not a problem.
And just one last thing as you look at potential 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?
I think the wave of bankruptcies seems to be over. I mean, all majors, without exception, have gone through consolidation, gone through bankruptcy. All the aircraft that had to be returned under bankruptcy have been returned for the industry I'm talking about. So I and let's keep in mind that the bulk of the existing 50 seaters fleet was delivered between late 1990s first half of the 2000s. So if you take a typical twelve to fifteen year financing, it's we can see a gradual dilution substitution of those old aircraft by the new seventy, seventy five seaters being contracted right now.
So we now believe there will be, let's say, an organized way out of those aircraft, which we will seek whoever is holding those equities will seek secondary markets Africa, Latin America, Eastern Europe. So 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.
It's Amit Mehrotra here for 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?
Hi Amit. This is Luciano. Services was around $195,000,000 for total considering all the business units.
Okay. Okay. Thanks. And then just one follow-up on the EBIT margin in the quarter. Even if after adjusting for the nonrecurring items and the stimulus, it was still well below the full year target.
So 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, so yes, in line with what we mentioned previously, the stimulus should add up to about $100,000,000 for the year. Of course, you have to generate the revenues to start seeing that flow primarily in the COGS, right? So as we deliver more aircraft, we should see a step up in the benefits and that of course in addition to the operating leverage and growth in revenues, etcetera to meet the guidance should bring us more at par with the figures that we've indicated.
Okay. Thanks. And just one last one on the defense business. The KC-three 90, 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? Yes.
We don't typically break down revenues per contract. Let's say that the revenues in Brazil, taking all the contracts in Brazil, the KC-three 90 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 consider something in that ballpark, about 6070% of revenues to Brazilian market and KC-three 90 being, let's say, the major contract there, it won't be for the year, it means for the year. Some $450,000,000 Lucent is just adding some $450,000,000 for the year.
That is our expectation.
Okay. Great. Thanks so much.
Our next question comes from Daryl Genovese of UBS. Please go ahead.
Good morning, guys. Good morning. So 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. But 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 kind of high 20 ish percent kind of growth rates there and what you're actually seeing is sort of mid teens growth.
So I'm just wondering if you're really seeing that big of a pricing hit particularly at the top end?
Yes. Well, we are we're not seeing certainly we're not seeing a bump up in prices, but we're not seeing let's say a stronger pressure than we had before. Think it has at least flattened out and some more discipline in the production rates. So in a certain way, we kind of welcome what Selena mentioned about maybe reducing their Whitetail production. So that discipline will certainly bring a perspective of better margin to everybody.
But 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, but 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. And then I guess just the other question I had, just in terms of the stimulus, can you
just
give some color on sort of 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?
Yes. We expect we had in the first quarter $18,000,000 in this impact. So we keep what we indicated for the year about $100,000,000
Right. I guess I was asking more about 14,000,000
The 14,000,000 we're still some of this the payroll impact is for two years. So we're still keeping there. They may be renewed, we don't have that anything formal for that.
So would that I mean, would that take you to kind of the second quarter of twenty fourteen? Because I think you started to see the benefit initially in kind of the second quarter of twenty twelve.
No. What Philippe is trying to say is that this benefit, which actually is a tax is a change in tax is valid at least until the end of 2014. So we're going to see in 2014 what we will see in 2013 in that sense. Beyond 2014, that's what we do not have any firm indication yet.
Okay. Thank you.
Our next question comes from Chelsea Kamsko 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 second quarter or are set to definitely be delivered?
Pretty much so. Those are of course, they are point issues. Either have been delivered or will be delivered this quarter, if not all, but the majority of the aircraft. So we should see a step up in deliveries in both commercial and executive jets in the second quarter.
Okay. Thank you. Our next question is a follow-up from Pete Skibitski of Drexel Hamilton. Please go ahead.
Yes. Frederico, are you still on track to deliver the first legacy six fifty million from China in the fourth quarter? And was just wondering if you expect the economics of those six fifty to meaningfully differ from the Brazil delivered 650s?
Yes, we are on track. And actually, as a matter of fact, I was there just last week and the aircraft is already in the assembly line. And it will depend on the rate of production. So if we stay in the lower range of three or four aircraft a year, probably going to have probably a little bit less margin than what 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. Appreciate that. And then last one, can you talk about the delivery ramp on the legacy 500? I think you touched about on this earlier, but I stepped off on the call.
It sounds like you're on track to deliver the 500, I guess, the middle of twenty fourteen. I'm wondering should we think about kind of single digit deliveries next year? Or is there opportunity for more than that? Just looking for some color.
Yes. Well, I'll give you a very faint color. I cannot, of course, make much more precise comments on that yet. But probably, I'll say, low double digits. I mean, beyond 10 aircraft, I think, is probably we would be looking at least in a low double digit 10 plus, 12 whatever on 2014 and ramping up according to our backlog.
So it won't be just single digit.
Thanks very much. 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. So we don't expect to see fluctuations so far. But as you know, this is something that impacted the way you calculate because we have the dollar as our function of currency. And the tax rate is calculated based on the reais figures. So we don't nobody 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.
But you never really get to 25%. I mean, is a range of 15% to 20 I mean, give me a realistic range. If assume, obviously, that the FX is relatively stable from here on out.
Yes. That's the number that we should consider. There are some treatments sometimes that you go to the current income tax and the deferred income tax, but they all tend to put together in the 25% if you take a full year.
Hi. We did have years where we had extremely high tax ratio, totally artificial non cash. So it's I mean, I appreciate let's say, difficulty is the same as ours. We have the same trouble here giving projections to ourselves, to our Board. It's just this two different systems, one accounting, one to calculate tax based on reals.
It makes us virtually impossible for us to make a prediction. So I think I'm trying to give you the best guess that we have, but it 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 twenty thirteen?
Welcome back Steve. I think it's true right Rodrigo?
Yes. Yes. 2 per dollar for the full year. We're going for the flat for the year.
Great. Thanks. And I also didn't hear your response on for the first quarter, what was the level of service revenue you mentioned?
$195,000,000 approximately, dollars 200,000,000.
200,000,000 Perfect. Thanks very much.
Thank you.
This concludes today's question and answer session. I would like to invite Mr. Federico Carrado 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. Have a nice week.
That does conclude Embraer's audio conference call for today. Thank you very much.