Jose Filippo - CFO and IRO Frederico Curado - President and CEO Luciano Froes - Director, IR

Cai von Rumohr - Cowen and Company Derek Spronck - RBC Capital Markets Myles Walton - Deutsche Bank Noah Poponak - Goldman Alexandre Falcao - HSBC Kevin Cavinta - Citigroup

At this time, the Company will present its fourth quarter 2014 results. Afterwards we will conduct a question-and-session and instructions to participate will be given at that time. [Operator Instructions] As a reminder, this conference in 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, estimate, 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 the 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. Frederico Curado, President and CEO; Mr. Jose Filippo, Chief Financial Officer and IRO; Mr. Luciano Froes and Mr. Eduardo Couto, Director of Investor Relations. I would now like to turn the conference over to Mr. Jose Filippo. Please go ahead, sir. Jose Filippo : Okay, thank you. Good afternoon for the ones that are here and good morning for the Americans who joined us. We're going to go through our presentation of the conference call and the conference call for the fourth quarter and 2014 results. But before I go into the presentation I'd like to take this opportunity to share with you some important announcements internally here. We're happy to announce that. It's a organization announcement, which Luciano Froes, that you know have been dealing with you for quite some time, I think three years now, he is assuming new responsibilities in the company. He is taking over the position of Marketing Director for Executive Jet Business. He is going to be moving to Florida. He is going to be based in Melbourne, where we're developing our excellent center for executive jet business, and starting next week Luciano will take out that responsibility. So we're very happy with that opportunity. It's a policy of the Company to really try to give opportunity especially for talents like Luciano. So we're very happy with that possibility. At the same time we're introducing Eduardo Couto, who is taking over the position of IR, new business development and mergers and acquisitions. Eduardo comes from Morgan Stanley. He used to be equity analyst. So he knows the dynamics of the market. So he knows the Company, He knows probably some of you. So we're happy as all to have this replacement. So we understand that we'll continue to high level people dealing with the market representing Embraer. So again, good luck Luciano. Hope -- of course he'll be available we know and welcome Eduardo. So we're starting to take this, I think the good opportunity that we have this event as we can announce this and do this transition. With that said, we'll start the presentation and we go to Page 3 for the ones that are remote. Recapping the 2014 and the fourth quarter highlights, in terms of the corporate highlights we had the celebration of the fourth-fifth anniversary of Embraer last October. We also remain committed with sustainability and we recognize by that with the fifth consecutive year in the downturn sustainability index as well with part of the ISE in Brazilian Stock Exchange. In terms of management process and best practice, we were awarded by the National Brazilian Quality Award, which is the PNQ [ph], very, very important recognition in the Brazilian industry, presented by the National Quality Foundation the FNQ [ph]. Also finalizing this page several other recognitions related to people management as ranked as best place to work in Brazil and abroad. Moving to next page, Page 4, in terms of the commercial business highlights, first in the fourth quarter, we had the delivery of 30 E-Jets in the last quarter, one of which was the E-Jet production number 1,100. It was delivered to Aeromexico last year. In terms of sales activity, we have the order for SkyWest for seven E-175, which represents actually an option conversion. And related to the E2 program development we had first metal cut of the E2 program. So we are in line with that development. Next page, Page 5 in still commercial business, now the highlights of the year. We had the delivery of 92 E-Jets in 2014. Also in terms of sales activity, we had 258 E-Jets sold in the year, concluding the only the E2 590 commitments. This includes orders, options and LOIs. And as a confirmation of the E-Jet program success, at the end of 2014 we had over 1,500 orders with customer base of 65 airlines in 45 countries. And with that we maintained our leadership in commercial jets in segment of 72 130 seats. Next page, moving on to executive jet business, in the fourth quarter we had the delivery of 52 executive jets, broken by 38 light and 14 large jets. In terms of sales, we have the conversion of 10 Phenom 300 options to firm order from net jets. And also an important milestone, in our legacy 500 program, we delivered the first three aircraft in the end of the year. The highlights of executive jets in next page for the year 2014, total delivery of 116 airplanes, 92 light and 24 large jets. Still in relation to the legacy 500 program, we had achieved certification in Brazil, in the U.S., in Europe and Australia. Another important achievement in the executive jet business was that for the second consecutive year the Phenom 300 was the most delivered executive jet in the market, 73 units. And as a result of our commitment to customer satisfaction, we are ranked as number one in AIN annual survey. Moving to next page, Page 8, in the highlights for defense and security business, fourth quarter we signed the firm order for the first 28 KC390 to the Brazilian Air Force regarding the Brazilian fighter program. We confirmed our participation with the signing of an MOU with SAAB for the development. And regarding the LAS program in the U.S., we remain on track and we delivered the first four aircraft to the U.S. Air Force. Next page, Page 9, defense and security for the year reached annual revenues of $1.5 billion, up more than 20% when compared to 2013. Also an important milestone of Embraer KC390 program was that last month we had the first flight of that product, and regarding the programs in our controlled subsidiaries we continue to advance on the SISFRON project through Savis. We had important contracts of supply of radars and equipment through Brazilian government on Bradar. The Brazilian satellite program was an important step which was the critical design review of the program. And finalizing the highlights on defense, we signed a contract to supply new aircraft management systems for Brazilian and Indian government. Next page, now we’re turning to the overview of the financial results and we can move to Page 11 starting with the backlog. We saw important growth on our backlog throughout the year of 2014, reaching in the end of the third quarter our all-time high level. In the end of the year we had almost $21 billion in backlog, which were broken by 65% on commercial aviation, 26% on defense and security and 9% is active aviation. Next page, in terms of aircraft delivery, deliveries in commercial aviation in the left side, we delivered 92 aircraft, in the lower end of the guidance range, of which the great majority were the 175 model. In terms of executive jet business, we surpassed our light jet guidance range with 92 delivery but had a reduction on the large jet deliveries with 24. We had a range of 25 to 30 in the large. Next page, in terms of revenue, net revenues as a result of those deliveries and the revenues with defense, we ended the year with almost $6.3 billion in terms of revenues within the guidance range of $6 billion to $6.5 billion. Next page, Page 14, the breakdown of the revenues was consistent with our expectation in the left side in terms of business. We saw a relative reduction in commercial aviation related to the growth of defense. The commercial aviation was -- from 2013 came from 53 to 50, where we saw defense growing from 19 to 23. Executive jet business almost remained the same in terms of 27 in the previous year to 26 now. When we see this revenues broken by region on the right side, the highlight for the American markets, especially because of the deliveries in the commercial aviation and the second participation of Brazil, which was more related to the defense activities. Next page, Page 15, we see the same information now broken in a quarterly view. As we mentioned we confirmed that we had more balanced year. Remember the last year we had a concentration in the last quarter. This year although we still see that the last quarter is the strongest, we saw more balanced revenues throughout the year. So we had like the $6.3 billion and the BRL14.9 billion in terms of net revenues. Page 16, in terms of SG&A, our ongoing focus on the cost control reflected reduction the ascending [ph] dollar and not only in dollar terms but also in the percentage of revenues. We saw in 2014 the total of $628 million compared to $665 million in 2013, and the percentage of revenues coming down from 11% to 10% in 2014. In terms of EBIT, operating results, Page 18, here we show, before we go into the details of this shot, just call the attention about the information that we have in 2013. You remember that we had this positive impact of the reverse of provisions from the American. As American recovered from the Chapter 11 position, we recovered positions that we had. So we are taking that information out here to have the fair comparison. So when see what we had in the year we’ll reach at $543 million in 2014 within the guidance range from 540 to 620. But in terms of margin we had 8.6%, a little below the guidance range and the main drivers of that were basically coming from the lower end of the deliveries and also the higher than expected mix of the E-jet deliveries in 175 concentration. The next page, Page 19, information broken by quarter, you see that actually the fourth quarter of 2014 was below the previous year, even excluding the non-recurring effect; again basically because of the mix in both commercial and executive jet business. Next page, EBITDA, Page 20; we had a total of $830 million with a 13.2% margin within our guidance range for the year. When we see next page the EBITDA broken by quarter, the same comments the previous one, in a quarterly basis increasing the last quarter but not as strong as we had in 2013. Next page, the net income. We had a total of $335 billion of net income and a margin of 5.3%. Just remember that this number is impacted by the deferred income tax which is impacted by the FX fluctuation. Next page, the net income broken by quarter, we see here that especially in the end in the last two quarters of the year, the lower amount was basically reflected by the effect that we just mentioned, the deferred income tax because of the dollar increase against the real. In Page 24, the earnings per ADS and payout. As a consequence of net [ph] income, the earnings per ADS was $1.82 and the payout was 27%, which complies with Brazilian corporate law and also reflects our anticipation that we'll be paying every quarter. Continuing next page, inventories, we end the year with the total of 2.4 billion, which was an increase compared to the previous year as we prepare for the 2015 deliveries. Going forward in terms of investment, we had a total of $430 million in 2014 broken by 47 in research, 230 development and 153 in CapEx. In terms of R&D, the depreciation of the real along with the good execution allowed us to end the year below our outlook, and as far as CapEx we manage also our cash disbursement trying to avoid pressure on cash. So we end up with the 430 as we give outlook of '15 at the beginning of the year. Going forward next page, free cash flow. As we previously announced early this year and revising our guidance, our cash flow was negative in $404 million as already indicated. Drivers of this figure, the main driver actually was the higher working capital requirements, mainly due to the accounts receivable increase, the inventories and also advance from customers. This was of course partially offset by the reduction in investments we just mentioned in the previous sheet. And finalizing the results before get into the outlook, our capital structure, debt profile remains in line with our business cycle needs. We have 5.4 years in terms of average terms and also only 4% of the debt maturing in the short term in the next 12 months. In relation to net debt position, as a result of the negative free cash flow generation we reported slight negative debt of $85 million in the end of the year. With that we conclude the financial results highlights and getting into the 2015 outlook. As we published in our earnings release, the outlook will be as follows. In page 30, the consolidated outlook, net revenues for the year from $6.1 billion to $6.6 billion; EBIT from $490 million to $560 million with margin from 8% to 8.5%; EBITDA from $730 million to $860 million with margin from 12% to 13%. In terms of free cash flow, we forecast that will be a use of no more than a $100 million. This number does not consider the recovery of accounts receivable impact that we experienced last year. Going forward next page by business unit, in terms of commercial aviation, we forecasted deliveries of between 95 to 100 E-Jets and net revenues from $3.2 billion to $3.4 billion. In executive jet business, deliveries from 80 to 90 light jets and 35 to 40 large jets, which will return to revenues in the range of $1.7 billion to $1.85 billion. In terms of defense, the guidance range for revenue is between $1.1 billion to $1.25 billion and to balance the total consolidated we showed before, we had the forecast for the $100 million for other businesses revenues. In last page finalizing part of the presentation, in terms of investment outlook, we forecast to invest $650 million in 2015, broken by $50 million in research, $300 million in development and another $300 million in CapEx. Primarily those investments will be related to these two development program. With that we finished the presentation. So now we are open for questions.

[Operator Instructions] Our first question comes from Cai von Rumohr from Cowen and Company. Your line is open. Please go ahead.

So your guide of 35 to 40 large jets I think is a little bit less than many of us were looking for. Could you give us some color there in terms of what that assumes about Legacy 500 and 450s, how they're doing, and what that implies for your other larger biz jets? Thanks.

This is Fred. Fundamentally we are a seeing relatively stable Legacy 650 and Lineage. We have a background noise here. I don’t know. So Legacy 650 and Lineage 1000 relatively stable activity and the addition being Legacy 500s. Probably we will have couple of deliveries of Legacy 450. Can you guys hear this background noise or it's just me?

It’s cutting in and out.

Okay. So the addition to our last year numbers, they are coming from the Legacy 500 and one could argue that we should be seeing larger numbers or larger numbers of Legacy 500s. So this is -- we really want to make sure that we have a smooth entry into service. We also have to acknowledge that the market, it's not booming in the sense that we have a very strong backlog yet, but it is building up nicely. And so it’s a combination of market demands, and a assuring a smooth entry into service.

And then, your margin in the fourth quarter looked a little bit lighter, given the very strong volume that you displayed. Could you comment? Were there any negative adjustments? And secondly, maybe give us some color in terms of where the margins for each of the business groups were, and maybe some trend as we go into 2015.

Okay. I think that in terms of the margin for the last quarter, we didn’t have any specific adjustment that could impact. It was more related to the margins of each business and the lower end of the guidance range for the -- and the mix that like we mentioned in terms of the commercial aviation and also the mix in the executive jet.

And Cai giving you a little more color, Luciano speaking here, the margins -- gross margins for commercial aviation and executives jets were right around the range of 18.5% - 19%, and defense and security was closer to 10%, and so for the quarter totaled around 17.5%.

Talk about the adjustment. Why it was so low, the adjustment for Defense.

And it’s important to mention that for Defense, as we’ve explained in the past, it’s best to look at an annual basis rather than a quarterly basis. There is a few factors that can influence that in terms of quarterly performance such as the stage and the programs in which we are, the composition of the revenue within that quarter from the various programs as well as potential FX variation. So we can see for example in the first quarter of this year as a reference, we had a bit of a deviated effect as well to the upside. So looking at an annual basis, the margin came in pretty much as expected for the defense and security segment and higher year-on-year.

This is Derek, RBC Capital Markets. The CapEx or the free cash flow guide of 2015, that doesn't include the recovery of accounts receivable. Is that correct?

It does not.

So technically that could be a lot higher. How confident are you that you would recover this year the Brazilian accounts receivable?

You mean regarding this fiscal year or previous year?

This fiscal, 2015.

Well, I think nobody in Brazil at this stage can say that we’re comfortable with any receivables, because of course situation is of public knowledge. Having said that, the KC-390 is a priority program for Brazil. It's is part of the pack which is that selected group of projects which have the highest priority in the government and it is above all a real need for Brazilian Air Force going forward. So taking all that into account and also taking into account that we are on time and on budget, below receivables we’re on budget, so we are performing, we have to believe that we’ll be one of the projects which probably we’ve had highest consideration as far as receivables. So we are in discussions with the customer, and particularly the Brazilian air force to make sure that we don’t incur and into an increasing account receivable as we go forward. That may or may not result in re-shelving of the program. Too early to tell. But we’re jot blindly going forward, although we are at this stage maintaining the rhythm of the programs.

One follow on, from a CapEx perspective, are your new programs falling relatively in line with your planned budget when you launched them? Are they tracking ahead, better? And where you see CapEx over the next few years trending?

Okay so that’s -- if I may, I'll split the answer the two. The P&G part of it has a strong content in reals. So we are tracking that in dollars and we are relatively okay; actually a little bit below budget. And we do have some tailwinds in that respect going forward. That’s a question which I am going to anticipate to answer probably some of you will ask. But we are referring to our planning the basis for this outlook is FX of 2.8. So if there is -- we do not know where the currency will stabilize but yes, there may be some headwind there. So in the most recent programs, in the Legacy 450 and Legacy 500 we are above budget, because we had, you may remember the delay in the program. So if you take the overall program since the launch in 2008 to the very end, there would be a little bit of an overshoot the budget. The E-2 -- the 175 plus -- the new 175 was actually below budget and the E-2 little bit better or lower than budgets. So I think the quality of our planning and control of costs is improving as we speak, and the 450 -- particularly our 450 piece is actually below budget as well. The CapEx side, talk about machines and tooling and the hardware side, which is mostly dominated in U.S. dollar, we are right there. The lower number that you saw in 2014 was much more a postponement of investments which did not impact the critical path of the programs rather than better performance. Probably there would be some improvement there as far as a lower cost, better negotiation, et cetera, but that’s mostly dollar denominated. So it’s really a question of management of the cash flow, obviously without impacting the critical path of the program. I hope I have answered it.

It’s Myles Walton of Deutsche Bank. I think Cai had asked about the margin trends into 15 and I'm not sure I got the margin trends by segment into 15. If you could do that? It does sound like you said 280 was your peg. So seems like there is some margin opportunity on the upside there, if the current FX rate held. So could you just give a little detail by segment, kind of what you're looking for, for margin trends, please?

Sure Myles, you didn’t get because we didn’t give them.

I am a little slow.

Yes, so thank you for gentle way of asking. But this year 2015 probably you will see a much more homogenous margin. So in this band of 8% to 8.5%, the business will probably vary maybe plus or minus 0.5% to 1% each extreme of the band. So as far as gross margins, just to give you, they’ll be between 18.5% and 20%. So we’re going to see margins and as far as operating margins, they will be something between 7% and 7.5% and 9%. So pretty much -- or 8.5% - 9%. So it will be a very homogenous going forward. That’s how we see. And the other question was?

It just sounds like number one FX where we spot it today would be a tailwind to your margin projection if you said 280?

If it stays at 29 [ph], it’s a headwind for defense business but a tailwind for the other two businesses. And it’s a tailwind for cash flow -- mainly for the cash flow because all of our P&G, which is very high you don’t see that in the P&L but you do see that in the cash flow.

And then just one other one. As you look to the mix in commercial aviation, is this the last, is this the worst of the mix? It looks like its maybe close to 80%, 75% seeders this year? Is this the peak of the worst?

Well, this is all relative because you have of course -- bigger aircraft tend to have higher prices but not necessarily. So it's hard to say its worst. I think it's fair to comment that we did not -- last year Paulo mentioned a year ago in New York, we were seeing a pressure on the pricing side and the mix, price is not only in the lower tag price, but also in the competition of about around 200 basis points, 2%. And so we're seeing a further pressure on pricing also, and of course that associated with the mix, gives us a little bit more complicated outcome. That's why you saw a -- call it tepid margins on -- for 2015. FX and of course even stronger push on the cost side, but there is that much you can do about cost. But that, we will try to of course to recover that. But there is clearly a pressure on the top line. Unidentified Analyst : Joe [ph] from Merrill Lynch. I have two quick questions first, see on the margin levels. I know that you said that it is better to look on an annual basis, but if you look specifically segment this quarter, margins were very different from what we've seen in the previous nine months. If you could please give us some details on why was that? And second question on backlog. If you could elaborate on what growth -- what could you expect for 2015, it would be great?

So, as far as the quarter, the main drivers here, commercial aviation certainly the mix. We saw -- specially compared with the fourth quarter of 2013, we saw higher concentration from the E-175 model. So that was I would say one of the main drivers. And in executive jets, we did not deliver as many of the large aircraft as we did in the prior year as a comp. So of course the mix composition there again was a little bit of an effect. And for defense and security, obviously it relates to the main programs that we have in the segment there. So, programs such as KC or India or some of the modernization programs. But again it's much more related to where we are in the stage of those programs than anything else.

As far as backlog or sales outlook, we don't provide any guidance specifically about sales outlook going forward. We are looking forward. Probably we'll achieve at least one to one -- book to bill ratio of one, probably higher than that in commercial aviation. So Paulo has some activity going on, which we hope to be successful not in the distant future. That offsets a little bit better pricing, let's say a headwind that I mentioned about. On business jets definitely we're trying to get a book to bill of at least one. We have to build up a stronger backlog in business aviation. So the industry is not there healthy enough. But as we have a better portfolio, we should and we work for to assure at least one to one book to bill ratio in the business aviation as well. Defense, it will depend a lot on exports. I think the situation on the -- our largest customer in defense which is a Brazilian government and I'm more -- frankly more concerned about managing the accounts receivable and making sure that we have our ongoing programs on time and on track and being properly paid, and there may be a new opportunities yes, but that's I don't think -- I think that's probably second in priority at this stage for the government and therefore for ourselves. Exports may be a nice surprise because we have now a second product to offer, not immediately but longer term, which is KC-390, along with the Super Tucano. So having products in our portfolio, that helps. So we may have some nice surprises in exports. Unidentified Analyst : [Indiscernible] from Scotia Bank. Fred, can you give us a bit of sense on the biz jet side, what kind of pricing assumptions are you using? Are you expecting some pricing improvement in 2015 when you provide your guidance for the year? And also do you have any Whitetail sort of build up at the end of the year in '14 here on the -- maybe on the Legacy side?

Pricing wise, Marco, when we close the call, and then we have the presentation, Marco can elaborate a little bit more, stability, is that a fair assumption, I think stability. But we're not seeing price relief as we expected. There is some -- the used aircraft market is not getting worse but it is not getting much better either, to sell new aircraft. So there is a strong competition out there and the demand is not that robust yet. So pricing is an issue going forward. But I don’t think that deteriorates further but Marco can elaborate a little bit more.

Are you getting any benefit from the Learjet at all or from the Lear 85?

Hard to say. The Phenom is doing quite well as you saw and the 500s, I think my friend to my side here we have a beautiful case to show, but I think we have to market the aircraft better. I had the chance to fly the aircraft yesterday personally and it is really a breakthrough. I don’t think we're getting the message across as efficiently as we could and should.

And just lastly on the Whitetail inventory, is there any Whitetail inventory?

Maybe a handful, I don’t know. I think Whitetail in the [indiscernible]. Yes, just so maybe just there is more amount. On the legacy side, our Phenom. I think Phenom 100s. The demo aircrafts -- so nothing material I think, but Marco again can maybe give a better a more precise answer.

It’s Noah Poponak from Goldman. Fred, I just wanted to make sure I understood what you were saying about pricing in commercial jets going forward. I understood you to be saying it should an incremental headwind for a few more years because you'll be layering in incrementally more airplanes that were -- that came out of fairly difficult or aggressive competitions and then presumably you would need to potentially change price a little bit in the final years before you’re bridging to E2. So that would also suggest pricing is an incremental headwind sort of the next three or four years. Is that fair or is that inaccurate?

I apologize. I don’t think I said that. So thank you for the question. The question is will it get worse, and I said it’s hard to say. It got orders already. So this outlook already reflects a worsened environment. So we get worse than that -- it’s hard to imagine that we can get much worse than that. But we are working. We’ll be working on the cost side to brace for impact, whichever is the scenario. But personal opinion today I don’t see it getting worse. I don’t. But we didn’t see that coming either a year ago. So…

Okay, and can you talk about what margins -- unit margins would look like in the first few years of E2 because typically a newer program can have lower margins for other reasons. But it also sounds like pricing is probably a lot better. So will margins be better worse or the same as you transition?

All we have at this stage is planned figures, and they look good in the sense that reasonably good pricing for launch orders and nothing tells us that our recurring cost and our learning curve would be worse than what we're predicting. So pretty much the same picture we saw before. The program is going nicely, as I said little a bit below budget, and I do attribute this harder price environment now to a combination of the issues. Of course as we get closer to the E2, the E1 becomes less and less attractive; and number two, the bulk of the demand is coming from the U.S. large orders; and number three there are competition very much starved for cash, which gets the whole equation more complicated. So it’s a combination of the issues. I think Paul is doing a really nice job in managing volume and margins and then pricing and margins. And again cost variable is a relentless effort on our side, and you saw the SG&A coming down and the debt will continue and of course as well as the recurring, the cargo side of it to the extent that we can.

Okay. And then just one other one on the cash flow statement, inventory was a source of cash I think for the second or third year in a row and you talked about that being because volume is going up, but volume is pretty flat across the business. Is there any way to do better on inventory going forward? And then can you also elaborate on why advances were a source of gain?

Okay. Let me switch to get less boring, just me speaking. Do you want to… Jose Filippo : Inventory I think was more the picture on the end. I think in average terms we’ve seen that it’s more likely at the end of the year -- just to have the calculation that we had this year. So I don’t expect -- we don’t expect to see inventories necessarily going down. But it’s been a working capital requirement this year. We mentioned about the advance for customers. Basically when you sell -- we had an amount of cash related to advance of customers that were not replaced by new sales, especially executive jet business. So that’s why it was a source of cost, because it reduced -- as we delivered we compensated in advance. So we didn’t generate the cash and we delivered or it was not replaced by new sales.

Maybe suggest I am taking to one or couple of more questions from the call. Then we can end the call and then turn back to audience here. Yes, one or two, I don’t how many people are in line. Then I again I feel I don’t know quite special [ph]. There are four questions on the call. So let’s take those four and close.

Thank you. (Operator Instructions) And your next question on the phone line comes from Alexandre Falcao from HSBC. Your line is now open. Please go ahead.

The line is really, really bad. So I'm not really sure that you actually answered this or not. So please forgive me if this is already answered. First, in what FX did you guys base your guidance for this year? That's the first question. And the second question is, can you run down on the defense programs, where you think -- which are the ones that should not be impacted by any budget cuts; what could be impacted, and I know that you're probably maintaining the same programs there. But if you could give us some granularity on what are the ones that are basically not going to be touched, and the ones that could be delayed would be perfect.

On FX, the reference of our planning outlook is 2.8 reals per dollar. And to your second question, we don’t know. What we do expect is that the KC-390 which is of course the most important program of our portfolio enjoys priority within the government and its part of the pack. So -- but at this stage we don’t. We’re talking to the customers and frankly I don’t think they know exactly how this whole things will unfold -- whole thing by meaning the fiscal adjustment that the government is trying to perform. So I think we feel good about the quality -- relatively quality of our program vis-a-vis the other investments of the Brazilian government. But it’s -- at this stage we’re maintaining our pace in the program but we are indeed in conversation with the air force to make sure that if there is a let’s say affirmative trend to reduce the [indiscernible] of the program we have to adapt and of course we will, but that’s premature at this stage to make any assumption to that regard.

Okay. And just a follow-up on that specifically on the KC, I'm assuming that you've already had your first flight. Development is basically done. We're talking about more or less -- at least in our calculations, a neighborhood of around $500 million that are needed to finish the project. And then you enter production. Is that really the case? Is this pretty much developed as you need something like that? And if there's a delay there, you're not going to be able to do your first delivery in 2016.

Well as far as what’s left to invest, I can’t comment on the physical terms. We have the whole flight test campaign ahead of us which -- it’s significant. I sincerely do not know and probably you should take this question offline. About this 500 I don’t know. I sincerely don’t know and we can address that offline later. But we had the flight test campaign and most of tooling is already there, but we’re talking about something in the range of 2000 hours and that’s a big deal; and the second prototype by the way also. So we’re building the second prototype. If there is -- the program is very-very tight. So we launched the program in 2008 and sad we would fly this aircraft by end of '14 and we were like 40 days late. So very tight and quite frankly our performance has been amazingly on time. So there is no lack in planning. So if there is delay -- if there is a reduction in the pace of development, there is absolute no way we can get this airplane certified by the end of 2016. So this is all part of the discussion.

Thank you. And you next question comes from Kevin Cavinta from Citigroup. Your line is now open. Please go ahead.

Yes. I'm also not really getting great quality on this side -- a lot of cutting out. But I guess one of the questions that we'd have, does your 2015 margin guidance assume any payroll tax with Integra export help getting eliminated? I don't know if anybody addressed that yet.

No, that’s actually a new question for everybody. And I think that’s about $20 million negative for us that those -- lead these changes, which as you may or may not know, Congress has sent back to the executive branch. So assuming it's going to be approved by Congress, that's going to be a minus trend to you, $20ish million negative first. And this is already incorporated in the guidance. So if it's not there we should have a better $20 million. It’s a relatively low impact either way.

And also could you maybe talk a little bit about what happened on the Tianjin Airlines order that you announced in July for jets and why it hasn't been carried in the backlog yet?

We're still waiting fundamentally for the final approvals of the Chinese government. We had -- Paulo may have more -- Paulo [indiscernible], just a second.

I'm sorry. You cut out.

Yes, there is nothing. It's fundamentally waiting on the approvals, or the customer is waiting on the final approvals of the Chinese government. There has been a recent state-to-state, a Brazil to China discussion or forum and this item was on the agenda and the Brazilian officials got the assurance from the Chinese officials that they should not be concerned, the order would be confirmed this year. So -- but we're fundamentally waiting and of course pushing the delivery dates as we wait. So we're not building Whitetails for changing [ph]. But we're confident that's going to happen.

And then finally, can you elaborate on any potential order activity from any of the U.S. carriers this year? Like SkyWest has a bunch of conditional orders, but it only confirmed seven? Or like Alaska Air? Do you see any others getting done? And what kind of activity do you see in Europe or Asia?

Yes, we expect to have something done for the U.S. We are engaged in a few campaigns and we're optimistic that we're going to capture some opportunities which are out there, probably not in the distant future, and there is also another order in Europe, which we are also optimistic that we can bag. So, Paulo has been very active so we have at least have several campaigns of course but more short term. We feel better about this one in the U.S. and this one in Europe.

Thank you, and does conclude today's Q&A session for today's conference. I'll turn the call back over to Jose Filippo for any further remarks.

Okay, so thanks the ones that joined through the conference. And so we're still available for further questions as we do to the IR team. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude Embraer's audio conference for today. Thank you very much for your participation and have a good day.