Embraer's (ERJ) CEO Paulo Cesar de Souza e Silva on Q2 2016 Results - Earnings Call Transcript

| About: Embraer S.A. (ERJ)

Embraer S.A. (NYSE:ERJ)

Q2 2016 Results Earnings Conference Call

July 29, 2016, 09:30 AM ET

Executives

Paulo Cesar de Souza e Silva - CEO

Jose Filippo - CFO and IRO

Eduardo Couto - Director, IR

Analysts

Myles Walton - Deutsche Bank

Cai Von Rumohr - Cowen and Company

Alexandre Falcao - HSBC

Derek Spronck - RBC Capital Markets

Pete Skibitski - Drexel Hamilton

Victor Mizusaki - Bradesco

Josh Milberg - Morgan Stanley

Operator

Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's Second Quarter 2016 Results. [Operator Instructions] 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 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 may 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. Paulo Cesar de Souza e Silva, President and CEO; Mr. Jose Filippo, Chief Financial Officer and IRO; Mr. Eduardo Couto, Director of Investor Relations.

I would like now like to hand the conference over to Mr. Jose Filippo. Please go ahead, sir.

Jose Filippo

Okay, thank you. And good morning, everybody and thanks for joining our conference of the second quarter financial results. I'm going to go as usual to the presentation, then I will pass to Paulo Silva for his remarks and after that we will be ready for the questions.

So starting the presentation in Page 3, with corporate highlights, early this month we participated in the 2016 Farnborough Airshow where we had a chance to review our E190-E2 and the KC-390 in the international market. Together with that, we were able to have the first time display of the Legacy 500 Super Tucano and Defense Systems in the same Airshow. In terms of commercial activity, we were able to announce the commitment for 25 E-Jets current generation and the E-2 version.

Next page, Page 4 regarding highlights for commercial aviation. We delivered 26 E-Jets in the second quarter 2016. Regarding new operators, TAP from Portugal became a new E-Jets operator. As far as order of activity we had several recent announcements. Japan Airlines order for an additional E-190, Nordic Aviation Capital order for 4 E190, Kalstar Aviation from Indonesia order for up to 10 E190-E2 and Arkia from Israel, letter of intent for up to 10 E195-E2. In relation to the E2 development of the program, we had the second prototype joined the flight test campaign and now we have over 50 hours of flight tasks.

In next page, Page 5, moving into the Executive Jets highlights. We had a delivery of 26 jets in the second quarter broken by 23 light jets and 3 large jets, which included the delivery of the first Phenom 100 to Etihad Flight College. In terms of commercial activity we announced that across from Mexico, had an order for 23 jets being 8 Legacy500, 8 Phenom 300 and 7 Phenom 100.

Also Airsprint order for up to 12 Legacy 450 and Air Hamburg the purchase agreement for an additional Legacy 650. Regarding production activity we started in our Melbourne facility the first assembly line of the Legacy 450/500.

Next page, Page 6, highlights of defense and security business. KC-390, three important information. First that the flight campaign reached over 400 hours with now two prototypes. Also that the KC-390, we were able to do a demo tour in Europe and Middle East after the Farnborough show.

And very important to the commercial phase of the program, Embraer and Boeing signed an agreement on global marketing and support for that product. An update on the LAS program for the U.S. Air Force, we delivered number 19 out of 20. And finalizing the highlights of defense in relation to other Embraer defense programs, Visiona advanced with the satellite task for the Brazilian client.

Next page and finalizing the highlights but before entering into financial results two important information. First, the update on the SEC and DOJ investigation and in Page 8, we have been reporting this matter since 2011 and in May 2016, we informed that we started negotiations with the authorities for a potential set up.

Now we are announcing that the negotiations have significantly progressed due to that we are recognizing the loss contingency charge of $200 million. It’s important to say that the final settlement is likely to include a deferred prosecution agreement and imposition of independent monitor. It’s also worth to mention that negotiations with the U.S. Authorities are ongoing and subject to change.

Next page, the second important update before the financial results is the 2016 outlook revision. On Page 10 and due to more difficult conditions in the business jet industry this year, we are reducing the expected deliveries by 10 aircraft for 2016. We now expect the range of 105 to 125 deliveries in Executive Jets broken by 70 to 80 Light Jets and 35 to 45 Large Jets, resulting in lower revenues to the range of 1.6 to $1.75 billion from 1.75 to $1.9 billion. We are also reducing the other revenues by $50 million.

In this page, we show the changes in our estimates but it is also important to highlight that the reduction on the margins EBIT and EBITDA and the lower free cash flow generation driven by higher inventory levels and lower profitability. We had the revision on the free cash flow generation for the year from negative 100 to negative 400 million. In next page, we will detail our new guidance.

So now in Page 11, we now expect total revenues in the range of 5.8 to $6.2 billion when we break this by business unit and commercial aviation there was no change deliveries in the range of 105 to 110 E-Jets and revenues from 3.45 to 3.65 billion, this would represent 59% of the revenues consolidated of Embraer 2016. In terms of Executive Jets as already adjusted deliveries from 70 to 80 Light Jets, 35 to 45 Large Jets and the net revenues in the range of 1.6 to $1.75 billion which would represent 28% of the revenues of the company.

In terms of Defense and Security, net revenues unchanged in the range of 0.7 to $0.75 billion. To sum up the total revenues other revenues of $50 million, representing 1% of the total revenues.

Continuing next page, Page 12,in terms of EBIT and EBITDA, the EBIT range from 405 to $500 million and margin from 7 to 8% and EBITDA from the range of 735 to $840 million with margin from 12.7 to 13.5%.In terms of free cash flow as already anticipated the expected use of less than $400 million. And finalizing the outlook for 2016,we are maintaining our total expected investments of $650 million broken by 50 million in research,325million in development and $275 million in CapEx.

Now we will move to the financial results for the second quarter 2015 year. I’m starting with Page 14 our firm backlog it was unchanged compared to the end of March into total of $21.9 billion. On Page 15, as far as, aircraft deliveries from the left we delivered 26 aircraft in commercial aviation to the total of 47 to-date June actually in the end of the second quarter, June 2016.

In the right side of the sheet, we have the delivery of 26 Executive Jets in the second quarter broken by 23 Light Jets and three Large Jets and accumulative of 35 Light Jets and 14 Large Jets in the year.

In the bottom of the page our outlook for 2016 already adjusted Executive Jets from 35 to 45 Large and 70 to 80 Light Jets and maintaining the E-Jets commercial from 105 to 110 deliveries.

Moving to next page, Page 16, we reported net revenues of 1.36 billion in the second quarter with a cumulative of 2.67 billion in 2016.

Next Slide, Slide 17, breaking revenues by segment, the top right commercial aviation reported $857 million in the second quarter accumulative of $1.67 billion in the year.

Going down, right down in terms of defense, the total of $210 million in the second quarter accumulative of $0.4 billion in the year. And moving down left, bottom left, the Executive Jets reported revenues of $293 million in the second quarter with accumulated in the semester of $0.69 billion.

Next Page, Page 18, regarding SG&A expenses, we had the total of $147 million in the second quarter, similar to the same period figures in the second quarter of 2015 accumulated $287 million in the year.

Next Page, Page 19, as far as operating results, we reported negative operating results of $137 million in the second quarter, but excluding $200 million provision the operating results would be positive in $73 million. The recurring EBIT margin was 5.3% in the second quarter broken by EBIT margin by business of 10.7% in commercial aviation, 2.4% in defense and negative 8.5% in business jets. Accumulated total EBIT margin was 5.9% in 2016.

In Page 20, regarding EBITDA, we had the recurring EBITDA of $162 million in the second quarter with EBIT margin of 11% in the quarter. In 2016, EBIT reached $320 million with a 12% margin without extraordinary charges of $200 million.

Page 21, we reported net loss of $99 million in the second quarter, which would be a positive $101 million excluding the $200 million provision. Accumulated in the year, we have the recurring $205 million with the charges reported $104 million as of June 2016.

In Page 22, in terms of investment, we had the total of $245 million in the year broken by $17 million research, $139 million in development and $89 million in CapEx. We are maintaining our estimate of $650 million for the full year investments.

In Page 23, as far as free cash flow we reported a negative free cash flow of $439 million in the second quarter and accumulated consumption of $655 million in 2016. The use of $200 million in operating activities was mainly through higher inventories. As we already indicated we are now estimating the consumption of no more than $400 million in 2016.

The next page I’m finalizing the presentation, our capital structure, the total debt of $3.7 billion with an average maturity of 5.7 years and as a consequence of the accumulated negative cash generation in the first half of the year we reported a net debt of $613 million in June.

And with that we finalize the presentation and before we start the Q&A section I would like to turn to Paulo Cesar for his remarks. Thank you.

Paulo Cesar de Souza e Silva

Thanks, Filippo. So, good morning. So thank you for joining in this call. So this is my first call as the CEO of Embraer and for me it’s an honor to take the leadership of this company. And I am very glad to assume this leadership in a moment that the company has a huge legacy coming from Frederico Curado the former CEO who took over in 2007 and started to make important investments in new products setting the tone for the future. So for those that who attended the Farnborough this year so you could see the materialization of what I’m saying.

So for the first time Embraer brought all the three business units with updated products. So we have there the KC-390, the 190 E2 and Legacy 500. So all brands new, aircraft brings new programs representing total investment of about $5.5 billion in the last years.

So we believe that – I believe that we are in a good position and excellent position to move forward and to maintain our position in the market. When we look at the performance of these especially the KC-390 and the E2, I will start by the KC-390 only around 100 hours after the flight test like campaign I started.

So these aircraft flew to Farnborough and have showed up very high level of maturity in this flight. After Farnborough the KC-390 went to visit few countries and it was also a spectacular right performance. So the same for the E2 so 50 hours after the first flight we brought the E2 to Farnborough and also with the excellent flights showing that both aircraft has a very level of maturity. So we are set to go to the market and be successful with these new programs. So the Legacy 500 also is being showing a lot of interest and is being considered already a bit better perhaps to write in the category.

And the E2 family had the most efficient aircraft in the segment from 70 to 130 seats. So the E2 also family have launched it this program a little bit over three years and we have accumulated so far almost the 300 firm orders and more than 670 orders when we add also options in LOI. So this is already a huge success in the market. So I’m sure that Embraer is set for a bright future.

There are good opportunities here for us to improve our margins. I believe that since we have now invested a lot in this program as I said, we have to concentrate now in our cost side in becoming more efficient and adjust the company in a way that we can deliver a better margin. So I am quite positive that there is a good room for that and this is where one of my focus will be exactly on this.

Talk about the market a little bit starting by biz jet market, I think it is a soft market. It is a soft market, the new guidance or revision for the guidance that we are making today is in line with what the market is doing right. So we're seeing the market in general reducing guidance by around 8% right. So we're doing the same.

We do not want to fight against the market. So we have to recognize that it is a soft market. So we will no longer fight for a market share. I believe that we have so sustain our business and make it sustainable business. So it's not segment by segment, but it's any in order to also make money and give return to our shareholders.

So this is what [Audio Gap] from the peak in 2008 of 1,200 aircraft. So it is a different market and we have to adjust to this new market.

On the commercial aviation, so we are very bullish as I said so they too going very well. So we are involved in many campaigns, a lot of interest in these aircraft and on that sense definitely so we have the KC-390 has a huge potential to boost the defense business. So the show up of the KC-390 is favorable.

The level of interest that this aircraft has attracted the agreement that we made with Boeing for marketing and after sales support for the KC-390 on a global basis, the efficiency of this aircraft, the flexibility of this aircraft, so I am sure that the KC-390 will be a huge success. So we're very bullish on the defense on the KC-390 going forward.

Last but not least, a word about our provision. I think it’s very important that we are getting to the end of this case. That’s important for us. So we will turn this page and with that so we’ll looking again to develop our business and to further develop like Embraer.

So with that I turn to you for your questions please.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Myles Walton. Your line is open. Please ask your question.

Myles Walton

Thanks, good morning. I was wondering if you could talk a bit about the cash flow guidance so $50 million of that looks like lower profitability, but the other $250 million of the negative revision to free cash flow, is that all inventory and similarly Filippo, what should we think about planning wise for '17 in terms of reversing that inventory?

Jose Filippo

Yes, Myles good morning. Actually it’s exactly what you mentioned. The use of the consumption of cash this year is pretty much related to the inventory. Production is already set in terms of supply chain for this year.

We try to make some possible adjustments, but we expect to end up with some higher level of inventories, which will be the higher, the most impact in the consumption this year and of course we expect to in this strategy to really discipline in terms the way we approach this market in terms of sales.

We expect to maybe what's possible next year without assuring the price and that definitely we can have an adjustment in terms of production for next year that we are using the inventory that we end up this year potentially that will be reverting part of that next year if possible. That’s how we assess this.

Myles Walton

But how much of a delivery cut next year, that's a pretty big implied delivery cut next year that would take place on business jets, if that's the case. So, I guess as a placeholder you're looking for business jets to be down 10% next year or more?

Jose Filippo

I think it’s too early to say the projection for next year is going to be done sometime soon in the future. However, I think that we’ve been working with the reduction. This reduction probably we plan to have pretty flat for next year that was not a continuous reduction, that’s not what we’re working on.

Myles Walton

Okay. And then can you comment Paulo, maybe on the Legacy 450, I don't think it's been delivered here in the first half. When does that start to pick back up in terms of deliveries and what's the obstacle?

Paulo Cesar de Souza e Silva

So we will start delivering the second half now. So it’s all good. So we’re in good shape to start the delivery of 450. So we're very bullish as you know in the 450, 500. So that’s a great products and I am sure that -- so the market will recognize the 450 as much as being recognized the 500 as being the two best light aircraft in the category.

Myles Walton

Okay. And last one, could you give the -- Eduardo, could you give that segment's margins or margin by segment for EBIT basis?

Eduardo Couto

Yes, Myles I can give you. For the second quarter Commercial was 10.7%, Defense 2.4% and Executive minus 8.5%.

Myles Walton

Okay. Thank you.

Operator

Thank you. Your next question comes from the line of Cai Von Rumohr. Your line is open. Please ask your question.

Cai Von Rumohr

Yes. Thank you very much. Could you maybe give us a little bit of by model? We're hearing from one of your competitors that you're bringing the price of the 500 down to compete with the latitude and that the 450 is really not selling well. Thanks.

Paulo Cesar de Souza e Silva

So Cai I believe that the pressures on the business jet unit are huge. As I mentioned so we’re seeing a soft market and our competitors have adopted a strategy that is to discount the price of their product.

So we're following this, of course that we have to be responsible and also give our answer to the market. However we hope that going forward now with more discipline in our side and not booking at market share only and also adjusting our cost, our internal cost especially in the unit. So we believe that we’ll be able to get back to the margins that we need to make this business sustainable.

Cai Von Rumohr

Just a quick follow-up, if you're going to carry some inventory over to next year, I assume it's business jets. What is the impact going to be of presumably having to discount to move some of that inventory and the adverse over head of kind of cutting production rate down even more?

And what can you do to kind of offset that to sustain the profitability or at least to minimize the profit downsize in biz jets. Thanks so much.

Paulo Cesar de Souza e Silva

So the carry over on the inventory on business jet units is already reflected in the guidance that we gave on cash flow on free cash flow this year coming from 100 to 400 negative. So it’s already there and next year we will adjust into production of the biz jet unit for the new level that we are going to let's say forecast for next year, but there will be a carry for next year.

Cai Von Rumohr

Thank you very much.

Operator

Thank you. Your next question comes from the line of Alexandre Falcao. Your line is open. Please ask your question. Alexandre Falcao your line is now open to ask your question. Please go ahead.

Alexandre Falcao

I'm sorry thank you. So, my question is really in defense, we are expecting because of the FX a bigger reversion on the sense. I just want to know, as you guys could walk us through what happened there and is this part of the reversion of all provisions -- or that we should not expect any bigger improvements in the margin that front? Thank you.

Paulo Cesar de Souza e Silva

Okay, Alexandre. I don’t think there is going to be a major impact in defense. There is of course as we already indicated last year, the exchange rate impact that contract of defense but as we have less to go in terms of the contract this effect tends to be lower.

However, of course we're seeing that those negative impacts that we had last year they are no longer happening and this is important to confirm that this impact is there.

So we saw a positive, I think the defense tends to be in a way that we already indicated to you recently in the mid single-digits, something that we could work of this year. So I don’t think there is going to be necessarily major impacts there but it’s going to be something positive of course but not in a big impact because of the stage of the development of the contracts that are affected by the exchange rates.

Alexandre Falcao

Okay. Perfect. Just want one more follow-up question on, commercial, just wanted to know where you are in terms of the gap between the E1 and E2, where do you see after this new orders, what do you see in terms of gap specifically for 2018 where we are right now and how much more you to need to show comfortable for the transition. Thank you.

Paulo Cesar de Souza e Silva

Well so we are in this regard we think we’re doing very well. So we have 2017 in very good shape and 2018, so step by step. So we are closing this gap. So we still have I would say about 35% maybe for 2018, but we're very much comfortable that we will also fulfill '18.

So we still have like two years until that and given the level of activity that we're seeing in the commercial side, so we have the comfort that is going to be okay. So beyond that it’s too early to say but these orders that we have recently announced of course it calls also for deliveries in 2018.

Alexandre Falcao

Okay. Perfect and just a follow up on that point, in terms of modeling, how much of the options, you guys usually model that are converted specifically for the E1.

Paulo Cesar de Souza e Silva

Well this is a tough question because of course the market is very dynamic so it depends on the movements of the markets but historically a ballpark number of a rate conversion is about 60%, this is more or less the number. So it’s not an exact number but as I said ballpark number.

Alexandre Falcao

Perfect. Thank you.

Operator

Thank you. Your next question comes from the line of Derek Spronck. Your line is open. Please ask your question.

Derek Spronck

Okay, thank you, good morning. As you round out the development of the two, it would seem like a natural progression for you to develop a Larger Cabin Business Aircraft. Is that still under consideration given the current environment in Business Aircraft and if not what are other areas or products that you find potentially interesting as future development program?

Paulo Cesar de Souza e Silva

So Derek a good question. So we don’t know yet whether or not we will be looking to a new business jet. I think we have to look at what we have done in the last years and monetize these investments before we can move forward and go into investment, heavy investment.

So as I said at the beginning, so I think we have excellent products now in the three business units and we have to make sure that we can consolidate these investments before we can plan for new investments in the future. Of course there would be new products in the future but at this moment now I think our focus must be in consolidating these investments.

Derek Spronck

Okay. And would you have a couple opportunities in the perhaps in maybe smaller programs or small investments that you're looking at?

Paulo Cesar de Souza e Silva

No big investments in this sense now. Of course everything place in right, I would say a product, but no big investments. So our focus also on distance is to grow more international, trying to diversify more the business in terms of geography and as mentioned before the KC-390 the recent aircraft and I am sure that we will go more and more international in the distance as well.

Derek Spronck

Okay, great. And then just quickly on the commercial side, can you comment on the pricing order environment and commercial and any update on potential scope class changes in the U.S. to a 100 seats. And then finally are you seeing any competition from the MRJ or the Super Jet picking up?

Paulo Cesar de Souza e Silva

MRJ, Superjet not really especially MRJ, right. So I think they are still late program. Superjet a little bit in Russia and in the countries surrounded Russia. Of course we have in Mexico but other than that, so we're not seeing too much Superjet in the market.

And as scope in the West, I think this is -- this will not happen any time soon. I think there is still a long way to go into this scope clause may change from 76 to 100 seats. Of course if this change we will be very well positioned. It seems that we have the most efficient aircraft right in the segment.

We continue to sell very well the 76 seat in the West and we continue to follow the opportunities in that market for the 100 seat plus in the major airlines. So there might be opportunities there that we have to be very close to it and that may happen maybe next year.

Derek Spronck

Okay. And are you seeing any signs of a little bit more rational pricing from your major competitor in the regional jet space?

Paulo Cesar de Souza e Silva

Well I think this is well known, right. So what our competitor strategy is right now in the market. So we are following this very closely. And we are -- I think we have already being very vocal regarding this point.

So we want to make sure that our competitor will not use government money from the tax payers in order to provide aircraft at the low cost right in the market. So I think this is very important to make this point. And every time that this -- we believe that this will happening, we’ll be vocal about that.

Derek Spronck

By the tax prayer, I appreciate that. Okay. Thanks guys. I appreciate that.

Operator

Thank you. And your next question comes from the line of Pete Skibitski. Your line is open. Please ask your question.

Pete Skibitski

Yes, good morning guys. And Paulo congratulations. Paulo can you talk about the commercial or environment [former] was really quiet and I apologize if this was asked, I got a call late, but how is the campaign environment in the second half of the year in deal, I seen some measure of some potential large ones in India and do you thinking to a one-time as book to bill in commercial orders this year.

Paulo Cesar de Souza e Silva

Yes. I have to be very careful of what I say here, because I don’t know if our competitors are on the line right. So it’s -- so I have to be careful, but anyway, so I think in February we have announced important orders so not very large number.

However, important orders in the sense of new airlines like to join the E2 program. E1, E2 program, the jets program and also repeating orders and going forward in the second half, so we are involved in many campaigns again so not individual large orders, but diversified airlines and the diversified regions of the world and this is very important to us. So we are not seeing any big, big, very big campaign out, but many light campaigns which brings important diversification to us.

Pete Skibitski

Got it, great, great. And then just one follow-up, on the $200 million contingency, again, I might have missed this, but can you give us a sense of the timing on the cash impact of that? Is the cash payment going to be a similar order of magnitude, or is it likely to be less and is that going to be kind of a 2017 event, can you give us any more color on that?

Paulo Cesar de Souza e Silva

Not yet. So this is a provision that we made now. We are still negotiating with a DOJ and as you see, and this is what we can inform now.

Pete Skibitski

Okay, okay, understood. Thanks guys.

Operator

Thank you. And your next question comes from the line of Victor Mizusaki. Your line is open, please ask your question.

Victor Mizusaki

All right. Thank you. I have two questions. The first one, I've taken a look on your guidance for business jet sales and cash flow generation for this year. If we assume that the production rate is unchanged, can you add basically 10 new business jets to your inventory with an average price of $30 million? Is this number correct? And the second question, can you give us an update on the negotiation with Republic Airways?

Paulo Cesar de Souza e Silva

Yes. I think that Victor in terms of calculation you made for the inventories of the business jet I think the number of aircraft is reasonable, even if the price seems to be little bit higher than there what we should expect. So maybe it’s above there but with a lower amount.

So regarding Republic, so I think to give an update, I believe Republic Chapter 11 is moving well, right in the sense of Republic being able to have a agreement with the major airlines and major suppliers. So Republic already reached an agreement with Delta United and now we're negotiating the final stages as far as understanding with America Airlines.

Regarding Embraer, so we are in deep dialog now for the 24 aircraft that we have to deliver next year. We are postponing nine aircraft from this year to next year as I already announced. And therefore, so next year we will have a more delivery.

So we basically will deliver next year approximately 20 aircraft in 2018. So it’s not yet 100% finalized, but this is the ballpark number so in this regard it’s going well. So we are in the final stage of negotiations with Republic.

Victor Mizusaki

Okay. But there are these nine aircraft that should be delivered this year. Is this number incorporated in your guidance, or this is something that maybe can change in the future?

Paulo Cesar de Souza e Silva

No. The guidance is kept the same. So we are not changing at all the guidance. So we will meet our guidance in the commercial days.

Eduardo Couto

Victor, its Eduardo here. Just to be clear as we ship some slots, we continue to see 105 to 110 deliveries this year even if we don’t deliver planes to Republic this year. So that’s the point.

Victor Mizusaki

Okay. Thank you.

Operator

Thank you. Your next question comes from the line of Josh Milberg. Your line is open, please ask your question.

Josh Milberg

Good morning everyone. Thanks for the call. You commented on the margin performance by division in the second quarter. I was just hoping you could give us a rough idea of what margin expectations are for the individual divisions, or what's embedded into your full year guidance in that respect, and maybe also what you see as the biggest risk to that guidance now?

Paulo Cesar de Souza e Silva

I think that we do revision on the guidance was basically driven by the executive jets. I think we are comfortable about the other business, the way we started and the initial guidance that was provided.

So as we said, commercial like low double digit. The defense in mid-single like I already mentioned, executive is what we already reviewed, so it’s going to be again probably a little bit less than originally. It will be like targeting the mid-single digit, but probably lower than that -- towards that.

Josh Milberg

Okay and what FX assumption are you working with now?

Jose Filippo

We work with the current situation which is still R$3.3 per dollar.

Josh Milberg

Okay, that's very helpful. And then just moving a little bit away from the result, I was just hoping you could revisit the whole issue of any discussions by the Brazilian government on either removing or mending some of the tax breaks you get either thinking about maybe the payroll, tax benefits in the late.

Jose Filippo

Of course there has been a lot of discussions on the tax, the Peso situation and the Brazilian Government is always lot of talk about tax then it is given or some type of thing. I don’t think that we have any specific benefit to that. I think they have been something that covers investments in technology for the whole industry, which tends to be kept. We don’t think there is a big risk of that to be changed.

So basically the adjustments that we already saw are the ones that we expect. We don’t see major changes going forward for those -- for that situation.

Josh Milberg

Okay. Thank you very much.

Operator

Thank you. We have no further questions. This concludes today’s question-and-answer session. That does conclude Embraer's audio conference for today. Thank you very much for your participation and have a good day.

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