Embraer-Empresa Brasileira de Aeronautica Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

Key Takeaways

  • Q2 revenues rose 15% year-over-year, driven by Defense & Security (+100%), Commercial Aviation and Service & Support (~20% each), with H1 revenues up 19%.
  • Operating efficiency gains lifted Q2 operating margin by 160 bps to 9.3%, and adjusted EBITDA margin reached 12.7%.
  • Firm order backlog hit a 7-year high of $21.1 billion with a book-to-bill above 2.2, bolstered by new E2 jets and military aircraft orders.
  • Persistent supply‐chain challenges continue to strain production and inventory, despite enhanced local sourcing and digital tool initiatives.
  • Management reiterated full-year 2024 guidance for deliveries, revenue and EBIT growth, expecting to meet targets despite risks.
AI Generated. May Contain Errors.
Earnings Conference Call
Embraer-Empresa Brasileira de Aeronautica Q2 2024
00:00 / 00:00

There are 15 speakers on the call.

Operator

My name is Guy Paiva, and I'm the Head of Investor Relations for Embraer. I want to welcome you to our Q2 of 2024 earnings conference call. The numbers in this presentation contain non GAAP financial information to facilitate investors to reconcile Ibe's financial information in GAAP standards to Embraer's IFRS. We remind you that EVE's results were discussed at EVE's conference call last Tuesday, August 6. It is important to mention that our numbers are presented in U.

Operator

S. Dollars as it is our functional currency. This conference call may include statements about future events based on Embraer's expectations and financial market trends. Such statements are subject to uncertainties that may cause actual results to differ from those expressed or implied in this conference call. Except in accordance with applicable rules, the company assumes no obligation to publicly update any forward looking statements.

Operator

For detailed financial information, the company encourages reviewing publications filed by the company with the Brazilian Comisao de Valores de Mouvilliadis or CVM. At this time, all participants are in listen only mode. We will give instructions later on for participation in the 2 question and answer sessions. As a reminder, this conference is being recorded. Participants on today's conference calls are Francisco Gomez Neto, President and CEO of Embraer Antonio Carlos Garcia, Chief Financial Officer Luis Harrison, Corporate Communications Director and myself.

Operator

This conference call will have 3 parts. In the first part, top management will present the company's Q2 results. In the second part, we will host a Q and A session only for investors. And last but definitely not least, we will host a Q and A session only for the press. It is my pleasure to now turn the conference call to our President and CEO, Francisco Gomez.

Operator

Please go ahead, Francisco.

Speaker 1

Thank you, Eugene. Good morning and good afternoon to all. Welcome to Embraer's 2nd quarter 2024 results conference call. Embraer revenues in Q2 increased more than 15% year over year, mainly helped by Defense and Security, up more than 100%, but also by Commercial Aviation and Service and Support, up around 20%. In the first half of twenty twenty four, overall company revenues increased 19% compared to the same period in 2023.

Speaker 1

The highlight was Defense and Security with an increase of about 50%, followed by Executive Aviation with 24%, Service and Support with 16% and Commercial Aviation with 12%. Our efforts to improve efficiency and profitability led to a 1.6% gain to 9.3% in our operating margin during Q2. The gain in the first half of the year was even bigger and totaled 2.7%. It is important to mention that we reiterate all lines of our 2024 operational and financial guidance after considering the opportunities and risks for the company in the second half of twenty twenty four. Our commercial activity in 2024 continues to be strong in all business units, and we see solid demand in the company's main markets.

Speaker 1

Our firm order backlog reached to $21,100,000,000 which is the highest level over the past 7 years and supported by a solid year to date book to bill ratio in excess of 2.2:one. In Commercial Aviation, Mexicano de Abbation ordered 10 E190 E2s and 10 E195 E2s with deliveries scheduled to start in the Q2 2025. This is another evidence of the strong ability of our E2Jet family to operate in several markets and to provide airlines with a viable option to increase their capacity quickly. Defense, the recent signing of the contract for 69,000,000 aircraft by the Netherlands and Austria at Feinburofair, coupled with the order for 6 Super Tucano aircraft by Paraguay, underpins our positive perspective for the business unit. In Executive Aviation, we continue to capitalize on the good sales momentum in both fleet and retail markets with solid demand across our product portfolio.

Speaker 1

In Service and Support, the division continued to be one of the main drivers of growth for the company with higher revenues and profitability through a combination of operational and financial excellence, customer experience and innovative solutions. We continue to face supply chain challenges. This year, we reinforced our supply chain organization by localizing more people closer to our most critical suppliers. And we introduced digital tools and artificial intelligence to help us further improve the efficiency of our supply chain management. I will now move on to operational results by business units in the next few slides.

Speaker 1

In Commercial Aviation, the backlog in the first half 'twenty four rose ZAR3.3 billion or plus 40% year over year and reached CNY11.3 billion with a book to bill ratio above 4:one during the period. Deliveries and revenues almost tripled sequentially in Q2 and reached 19 aircraft and 554,000,000.

Speaker 2

The

Speaker 1

year on year growth rates were also solid in double digit territory. Adjusted EBIT margin for Commercial in Q2 declined 1% year on year from 5 point 3% to 4.3%, mainly because of product mix. And as Active Aviation, we recorded the strongest 1st semester in terms of revenues and deliveries for the division over the past 10 8 years with 575,000,000 45 aircraft. The backlog for the division registered an increase of RMB 300,000,000 in Q2 and ended the period at RMB 4,600,000,000 or 8% higher year over year, supported by a strong 1.5:one book to bill ratio in the first half of twenty twenty four. The adjusted EBIT margin for executives improved 2.5% from 8.8% in the Q2 'twenty three to 11.3% in the Q2 'twenty four, helped by higher productivity and despite lower production volumes.

Speaker 1

In Defense and Security, revenues in Q2 increased 2.3x year on year or more than RMB 100,000,000. The adjusted EBIT margin also improved to minus 0.5% in the Q2 of 'twenty four from minus 4.1 percent in the same period of 2023. The delivery of the second C290 Millennium to the Portuguese Air Force was an important highlight for Defense and Security in the quarter. The first aircraft entered into service at Beja Air Base in October 2023. In Service and Support, revenue grew 20% in Q2 compared to the same period of last year with solid mid to high teens profitability and a gain of 1.3% in the adjusted EBIT margin.

Speaker 1

The business unit maintained its historical $3,100,000,000 record backlog reached in Q4 'twenty three. Another important achievement for our Service and Support division was the first flight of the E190 freighter, a passenger to full cargo conversion, which received the certification by the National Civil Aviation Agency of Brazil, ANAC, in July 2024. Last but not least, EV, our EV toll business, which had order important in wireless tons in the Q2 'twenty four. The company has now already selected and contracted most of the component suppliers, completed its first full scale UV drop prototype assembly in celebrating its rollout in our Gavion Pei Short plan last month. EVA also completed a new equity financial round of $96,000,000 from multiple investors.

Speaker 1

The monies will help support the continued development and manufacturing of its EV toll. Embraer remains confident in EV's business outlook as its majority and controlling shareholder with an 83% equity stake. I will now hand it over to Antonio to give you further details about the financial results, and then I will be back with closing remarks.

Speaker 3

Thank you, Francisco. Good morning and good afternoon to everyone. I'd like to highlight we had another solid quarter in Q2. Our financial results improved both quarter over quarter and year over year. For instance, revenues for the period were 16% higher than a year ago, and our EBIT margin was 160 basis points higher.

Speaker 3

Our focus in Q2 continued to be on business and financial efficiencies. We are fully committed to reach our full year guidance despite all the ongoing supply chain constraints we continue to deal with, which had also negative impact on our year to date cash flow. It is important to mention we still see double digit growth for aircraft deliveries revenue and EBIT in 2024 2025, notwithstanding the operational channels. Slide 10 delivers. Commercial Aviation delivered 19 aircrafts in Q2 for an increase of 12% versus a year ago and almost 3x higher than in Q1.

Speaker 3

Meanwhile, Executive Aviation delivered 27 jets in Q2 compared to 30 aircrafts in the same quarter of 2023. However, if we look sequentially, the numbers of deliveries grew 50% from Q1 to Q2. In defense, we delivered CNY1 million to the Portuguese Air Force in Q2 compared to 1 KC-three ninety to the Brazilian Air Force 1 year ago. It is important to mention the aircraft is not included in our delivery guidance for 2024. We continue to work steadfastly to accomplish our production plan and to reach our 2024 guidance of between 125 and 135 executive jets and 7280 commercial aircrafts.

Speaker 3

We are also on track to deliver 4 C390,000,000 aircrafts scheduled for the year. Slide 11, please. The company registered a 7 year high total backlog of $21,100,000,000 in Q2, which was marginally higher quarter over quarter and 22% higher than a year ago. The backlog for commercial aviation continued to move higher. It totaled more than 300 A380 aircrafts in Q2, and it was valued at $11,300,000,000 or $200,000,000 higher than last quarter and $3,300,000,000 above Q2 'twenty three.

Speaker 3

Meanwhile, the backlog for Executive Aviation was a solid and resilient $4,600,000,000 during the period, flat quarter on quarter but up 300 meter year on year. Last but not least, the backlog for service and support finished relatively stable at $3,100,000,000 in Q2, while for defense and security, it decreased marginally by 10% to $2,100,000,000 Looking forward, our backlog for defense should increase by more than 50% in Q3 with the new contracts if we factor in the export contracts recently announced for C30090,000,000 and Super Tucano's. Moving on to revenues. Our top line reached almost BRL1.5 billion in Q2 or BRL200 1,000,000 higher year over year for 16% growth rate. If you look at the pie chart on the right, we can see a more balanced revenue mix.

Speaker 3

For instance, commercial aviation represented around 37% of total revenue, followed by service and support close to 27%, executive aviation with 23% and defense at around 13%. For the first half of the year, we recorded BRL2.4 billion in revenue or almost 40% of the midpoint of the 2024 guidance. Next Slide 12, EBITDA. We generated BRL190 1,000,000 in adjusted EBITDA in Q2 'twenty four with a 12.7 percent margin compared to $149,000,000 second quarter 'twenty 3, driven by strong operating results when compared to the same period last year. One related note, the Brazilian foreign exchange rate has been very volatile in the first half 'twenty four, and its recent depreciation should provide some tailwind in the second half of the year.

Speaker 3

We generated BRL237,000,000 in adjusted EBITDA with 9.9 percent margin in the first half of twenty twenty four versus BRL159,000,000 with a 7.9% margin in the prior year period for a dollar amount almost 50% higher annually. Meanwhile, adjusted EBIT was $139,000,000 with a 9.3% adjusted margin. However, there were onetime items in the quarter, which propped up the adjusted EBIT margin by circa 2.50 basis points. Reported EBIT for the quarter was $128,000,000 with an 8.6% margin. Both figures were materially better than their Q2 'twenty three comps supported by better efficiency, lower SG and A costs, especially in Executive Aviation and Service and Support.

Speaker 3

Looking at the right chart, we can see Executive Aviation and Service and Support generated more than 75% of the company wide EBIT during the quarter, while commercial aviation turned balanced 25% and defense practically broke even in accordance with the percentage of completion accounting methods. On the Slide 13, in Q2, if you exclude EVE, we had an adjusted free cash flow consumption of 2 $15,000,000 due to networking capital needs for higher aircraft delivered in the second half of the year. This cash should be recovered as much deliveries take place over the next couple of quarters. Moving to investments. Again, without EVE, we spent $29,000,000 in research and development during the quarter, BRL47 1,000,000 CapEx and net BRL11 1,000,000 in the pool programs for spare parts for a total of BRL107 1,000,000 dollars compared to $104,000,000 a year ago.

Speaker 3

Our capital allocation continues to be focused on segments with higher returns with projects such as expansion for our production capacity in Executive Aviation and Service and Support. To finalize, our adjusted net income was positive $80,000,000 for the quarter, supported by a 5 point 4% adjusted margin or $22,000,000 higher than a year ago. Slide 14, going to our liability management plan. In Q2 2024, our gross debt without EIF was relatively stable at $2,600,000,000 during the period, but we still managed to reduce it by circa $880,000,000 when compared to a year ago. Meanwhile, our net debt declined by BRL152 1,000,000 year on year and reached BRL1.3 billion during the quarter.

Speaker 3

Our net debt to EBITDA leverage ratio increased 0.2 turns sequentially to 2 times, as shown in the top right corner. This margin increase is explained by the seasonality of the cash consumption in preparation for higher deliveries in the second half of the year. We also announced earlier this week an extension for the next 5 years of our revolving credit facility and an increase of each size from $650,000,000 to 1,000,000,000 dollars which will be reflected in our Q3 liquidity position. With that, I conclude my presentation and hand it back to Francisco for his final remarks. Thanks for your attention.

Speaker 1

Thank you, Antonio. The progress recorded in Q2 'twenty four demonstrates we are on track to achieve all the results embedded in our 2024 guidance. More importantly, we will continue to work hard to deliver even better results in the coming quarters of the year, especially in Q3. Our company remains very well positioned for the future with a 7 year high backlog of 21,100,000,000 dollars a strong 2.2:one book to bill in the first half of the year, a steady progress in our operational and financial indicators as well as a solid strategic plan. It's important to mention that we will include in our Q3 backlog for defense the contracts for 9 C3 19,000,000,000 signed with the Netherlands and Austria and 6 Super Tucanos ordered by Paraguay during the recent 5boro Air Show in England.

Speaker 1

I would also like to give a special welcome to Mexicana de Aviacion as a new operator of our E2 family, expanding the E2 presence in North America. We believe our recognized global Judge family will help the airline generate great operational and financial results with a strong commitment to sustainability and aviation efficiency. And to finish, I'd like to thank you all again for your interest and confidence in our company. We see bright and clear skies ahead for our company, and we will continue to work hard and embrace the foundation of our culture that is safety first and quality always. Let's now move to the Q and A session of the call.

Speaker 4

We'll now start the question and answer session. The first part of the Q and A session will be exclusively for Equity Research Analysts and Investors. The second part of the Q and A will be only for the press. We highlight again this conference call is being conducted in English with translation to Portuguese. Please, let me say a short announcement for Portuguese speakers.

Speaker 5

This conference is being conducted in Portuguese in English. To listen to the translation, please select the language of your choice.

Speaker 4

The first question comes from Christine Diwag with Morgan Stanley. Please go ahead. Hi, good morning, Francisco, Antonio and Guy. And thank you for the results for today. I guess my question is on the supply chain.

Speaker 4

You maintained your 2024 full year delivery guide for commercial aerospace. We're seeing some of the other manufacturers like Airbus lower their outlook for the year because of supply chain. Can you give more color regarding your confidence that you're able to meet these deliveries? What you're seeing in the supply chain and maybe a little more color also on your approach in providing guidance, How conservative is the range that you gave for delivery for 2024? Thank you.

Speaker 1

Your question? Well, as I mentioned in the opening, we are this year reinforcing our supply chain team. We are locating more people closer to the most critical suppliers to support them. We are having more senior management meetings with our suppliers, the critical ones, to make sure that we follow-up the delivery of the parts we need for a year. We are implementing new digital tools and also artificial intelligence to help us to be ahead of the problems.

Speaker 1

It would have been, Cristina, very proactive with our suppliers in trying to be even closer to them to help them. I was in a very positive approach as the embroidery style. So again, we see challenges. But we at this point of time, we are confident that we'll be able to deliver the guidance for the year.

Speaker 4

The next question comes from Victor Mizusaki with Bradesco De Be. Please go ahead.

Speaker 6

Hi. Congrats for the quarter. I have two questions here. The first one, why don't we take a look on EBITDA margin of like 12% in the second quarter? I mean, this was something that this ramp up to margins was something that we were actually expecting for the second half.

Speaker 6

So my first question here is, is there any chance that maybe Embraer will be revised guidance upwards in the second half or maybe we're talking about the high end of your guidance? And the second one, we have seen a lot of news flow in Brazil about maybe LATAM and GOL potentially place orders for the jets. So my question is if you can give any color on these negotiations and what's your view for the regional aviation market?

Speaker 2

Antonio,

Speaker 5

this is Antonio. Thank you for your comments and questions. I will address the first question and Francisco will take the second one. With regards to margins,

Speaker 2

About the EBITDA margin, for sure, the Q2, we have some tailwind that's onetime effects. We are confident on the our guidance, if it's in the mid or the high end of the guidance, we need more one quarter to be more precise. But everything that we are seeing right now shows that today we are more closer to the high end of the guidance than the lower end. That's from the BTDA side. And I will hand over to Francis for a lot of issues.

Speaker 1

Thank you, Victor, for the questions. At this point, we are talking to a lot of customers about E2 opportunities. I don't have anything concrete about Brazilian customers to share with you. But what I can say is that we see a great opportunity to increase the A2 presence in Brazil as we are very confident that 8 jets are a perfect fit for the Brazilian market and can help the airlines, not only Brazil, but everywhere to add the capacity quickly to their fleets.

Speaker 4

The next question comes from Marcelo Motta with JPMorgan.

Speaker 7

Hi, everyone. Thanks for taking the question. I'll keep to just one question. I mean, can you comment a little bit about the defense revenues outlook for second half? I know it is percentage of completion.

Speaker 7

You still have, if I'm not mistaken, another 3 cases to be delivered this year and the revenues have a very good increase both on a quarter over quarter and year over year basis. So can we expect the defense revenues to continue to accelerate throughout the second half? And I mean, could the driver be also the Super Tucano's order, which probably could be delivered in the short term since the production is a little bit more simple? And what are the other components of the defense revenue that could also increase and accelerate? So the full year revenues for defense could be maybe closer to $600,000,000 $700,000,000 Thank you.

Speaker 2

Thanks, Marcelo. It's Antonio speaking here.

Speaker 3

And thanks for answering already your question.

Speaker 2

We do see defense around $600,000,000 this year. With the deliveries for the C390, we are confident to deliver 4 this year. I would say next week, we are going to deliver the second one. I would say we are confident from that. And the order for the Super Tucano is coming to the right time and the right point because big portion of the aircraft, they are ready.

Speaker 2

Now inventory means it's going to go on top for the 2nd quarter, the super Tucano for Paraguay. That's if put all together, we do see defense here around $600,000,000 for this year.

Speaker 1

Welcome.

Speaker 4

The next question comes from Lucas Barbosa with Santander. Please go ahead.

Speaker 8

Hi, good morning, Francisco Antonio, Guy. Thank you very much for taking my question and congratulations for the results. I just wanted to know if you can provide more color on the one time items that affected EBIT margin by around 2 50 basis points. So if you can provide just some details, if it's just one item, if it's more than one item, what's the nature of it? That would be very helpful.

Speaker 8

Thank you very much.

Operator

Hi, Lucas, good morning and thanks for the question. There are a few items that impacted the quarter, but I would say by far the biggest one were tax credits that helped us improve the margins by about 2 50 basis points. So if you exclude that, the margin will be closer to 7% or slightly under than that.

Speaker 8

Perfect. Thank you very much. Have a great day.

Speaker 4

The next question comes from Ron Epstein with Bank of America.

Speaker 9

Hey, good morning, guys. Maybe if you could circle back on we had a question about interest from airlines in Brazil, but maybe more broadly, after Farm Bureau stepping away from that, can you maybe give more characterization, a little color on what you're hearing from customers, how sales campaigns are going? To be honest, I was expecting to hear a little bit more in terms of orders for commercial airplanes at Farm Bureau. Where do we stand on that? And what's the outlook for maybe the rest of the year into next year?

Speaker 1

Thank you, Ram. Francisco speaking. Thanks for the question. I mean, we had a good start this year. If you look at the glass half pool, we had a good start this year with orders in Commercial Aviation with American Airlines and Mexicana.

Speaker 1

And we are working in a lot of sales campaigns, I mean, in all basically all the regions in the world. So we expect we are confident that we will bring good news soon about new orders, and we have a good expectation for Q3 and the rest of the year as well. So again, we have we believe we have a very good chance to fuel our production loss for the years ahead in line with our strategic plan.

Speaker 4

The next question comes from the view Q and A chat, and it's from Stephen Trent with Citibank. Many thanks, gentlemen. Can you provide some color on what you're seeing in the competitive environment for Business Jets? Is it possible that lower interest rates could support small and mid cabin sales? Thank you.

Speaker 1

Thank you, Steve, for the question. Actually, we still see strong interest in our Business Jet product portfolio. So we are selling all the 4 models very well, in line with our expectations. And yes, we are now our challenge is, to be honest with you, in the business jet is more to ramp up production levels and deliveries than the sales. I think the sales continue to be strong, as I said.

Speaker 1

We are very optimistic about the not only sales, but the deliveries and the growth of our Business Jet business in the next years.

Speaker 4

The next question comes from Noah Poponak with Goldman Sachs. Please go ahead.

Speaker 10

Hey, good morning, everyone. Can you hear me? Yes. Okay, great. On the margins, the reiteration of the 6.5% to 7.5% for the full year adjusted operating margin, Just want to clarify if that's including or excluding the items you listed as kind of one time for 2Q?

Speaker 10

And maybe put a different way, I guess, to be at the midpoint or the high end of that for the full year, the margins would have to be down year over year in the back half. Do you expect margins down year over year in the back half?

Speaker 2

Thanks, Nuan, for the nice questions. Antoni speaking here for sure. If you take the one time and add it on top of the guidance, for sure, we could be even higher. But assuming that we are in this volatile situation with supply chain, we prefer to not raise the guidance today, but today, we are at the high end. And we are not planning to reduce margins for the coming quarters and the opposite.

Speaker 2

But what we try to avoid with the math we did is that you've taken a 9% margin from Q3, Q2 and move forward for the next quarter. It's going to be a little bit higher lower, but not in the magnitude that we are going to be even below previous year means, in a nutshell, yes, we are closer to the high end. And if you are able to get all aircrafts out of the door, probably have a chance for upside. Then we want to do this probably are going to review the guidance already in Q3 when we announced the closing for Q3. But let's see.

Speaker 2

It depends on several facts.

Speaker 10

Okay. That makes sense. That's helpful. And Antonio, I guess, I feel like I have a sense for what the progression of the commercial margin could be from here. Executive has been kind of just solid for a while now, services reasonably straightforward.

Speaker 10

I guess the defense margin has been pretty volatile through the quarters, used to be kind of high single digits on an annual basis, it's now mid single digits. I guess as you ramp KC-three ninety with different customers and the mix is changing, I guess how should we be what should we be expecting for the kind of medium term defense margin?

Speaker 2

Thanks for the question, Noah. We are, I would say, in an inflection point right now, and the defense margin means the magnitude of the local contracts is being, I would say, well filled right now with new contracts for export. And we do see this year something like mid digits margin for this year, but moving, I would say, very fast for higher even lower teens for the next year. That's more or less the projection you see based on the new contracts that we are just signing right now. Today, if you see year to date, it has been very highly impacted by still the Brazilian contract here.

Speaker 2

With this move from local contracts to export, we do see this projection from mid single digit lowers higher single digit

Speaker 3

or lower teens. That's more

Speaker 2

or less how do we see defense right now with on top of it with revenue growth, both together.

Speaker 10

Okay, great. Thank you.

Speaker 2

Thank you.

Speaker 4

The next question comes from Gabriel Resenge with Itau BBA. Please go ahead.

Speaker 8

Hi, good morning, Francisco, Antonio and Guy, and congrats on the results. I would like to make to touch on one point regarding the commercial division and whether do you think that will be fair for us to assume that given the ongoing supply chain crisis across the globe in the industry, prices in this industry could benefit the commercial division? What should maybe translate into even higher margins for the Commercial division in the future? Thanks.

Speaker 1

Gabriel, thanks. Francisco speaking. Thanks for the question. I mean, our Commercial division has been despite the low volumes in the past year, has been profitable. And you see that even the results of this Q2 was very positive for the commercial division.

Speaker 1

And we see opportunities to improve even further with the volumes growing. And we are also working internally in the other P and L drivers like the prices and especially in cost reduction programs. So again, we do believe that the margins of the commercial division will continue to be positive, right, and let's say, mid or single digits in the for this year and the next years as well.

Speaker 4

The next question comes from Lucas Laghi with Cissepe Investimentos. Please go ahead. The next question comes from Lucas Laghi with Sispe Invictus. Please

Speaker 2

go ahead.

Speaker 11

Hi, everyone. Can you hear me now?

Speaker 1

Yes. Yes, we can.

Speaker 11

Francisco Antonio, Guy. My question is a follow-up on the commercial division profitability standpoint. But I mean, we noted this slight decline year over year on margins due to the higher mix of H2s. I mean, my question is, I mean, aside from the effects of operating leverage as deliveries should accelerate in these upcoming years, I mean, are we already seeing the orders that you added to your backlog in the past year implying room for gross margins to improve or a further contribution margin improvement should come as a result from incremental new orders in this next year. So basically a matter of mix and how should we think of the E2's margins going forward, taking into consideration what you already have added to your backlog and what you expect to add in these upcoming years?

Speaker 11

Thank you very much.

Speaker 2

[SPEAKER CARLOS ALBERTO PEREIRA DE OLIVEIRA:] Thanks, Lucas, for the nice question. The margin that we have generated today is based on the backlog that the first sales campaign for D2. If you take quarter or Auzu, it's more or less the margin that we are delivering today. For sure, the future backlog is accretive for a mid single digit at least today. And please do not forget to have also a boost in deal 1 for the future.

Speaker 2

But we needed to exercise the new contracts. If you take the mix today, they are more or less the first contracts for D2. That's why the margin is more tough, more tight. But if you take Mexican, it's much better margin than we are exercising with the customer this year. But we need to wait the coming years in order to, I would say, regain traction.

Speaker 2

Nevertheless, you follow our numbers. We are able to report positive margin even with not the full capacity occupied. That's why we did see between operational levers and new contracts a good way to improve the market, but not this year. This year is highly dependent on the 2 with the main customer that has at least a lower margin. But we are confident for the future.

Speaker 4

The next question comes from Alberto Valerio with UBS. Please go ahead.

Speaker 12

Hi. Good morning, Antonio and Francisco. Thank you for taking my questions. I have 2 here on our side. First one about pricing in the commercial aviation.

Speaker 12

We heard from competitors that there is some low price aircraft going out of the inventory. And sooner we should have a higher price aircraft going out from the inventory. I would like to see if in Embraer we have the same situation. And secondly, on the Executive Aviation, that margin come great year over year despite what we see a worse mix with less pretors on the delivery side. If you could provide more color on this one also, it would be very helpful, and congrats on the results.

Speaker 2

Alberto, Antonio speaking. Good morning. First, I hope you revised your numbers because we do believe that we are not growing too much this year, but I'm sure we are going to get. In regards to the margin side, again, it's a combination of facts for commercial aviation, okay? I would say the on the mix for executive aviation, growing Praetor brings a lot of dollars, but I'd say incremental margin should lead this unit to be above 2 digit VAT margin this year.

Speaker 2

We are already more or less close to that. I would say the operator brings much more dollars. That's why cremator margin should help. Sometimes the percentage wise is a little bit different when you see females against operators. But dollar wise, we do see a nice boost for the margin for this year, for the years to come.

Speaker 12

Okay. I will revise for sure our numbers, Antonio. Thank you very much.

Speaker 2

We love to listen that, Alberto.

Speaker 4

The next question comes from the phone number ending 5,135.

Speaker 13

Hey, good morning guys. You have Lou Raffetto from Wolfe Research.

Speaker 2

Hello.

Speaker 13

Maybe just on services, you had a good quarter on the top line, good quarter on margins. Just how should we think about that business, sort of for the remainder of the year? Growth stepped up pretty nicely in the quarter. Are we at sort of a sustainable level here around $400,000,000 And same on the margin, 17%, should we think about that as sort of a run rate or did any one time benefits help the quarter there?

Speaker 2

Thanks for the nice questions. Toni speaking here. I would say we are at the in the range of mid teens margin for the service and support. With expansion activities right now, I would say, I would continue to see for this year the mid teens because we are putting more revenue and margin for the engineering model we have in Portugal. That's why and the ramp up of this production does not help or contribute too much for the margin.

Speaker 2

That's why I would say we are confident in the mid teens and on time effect was for service, not a big contributor, to be honest.

Speaker 13

Great. Thank you very much.

Speaker 2

Thank you.

Speaker 4

The next question comes from Noah Poponak with Goldman Sachs. Please go ahead.

Speaker 10

Antonio, can you just spend another minute on the cash flow? I know that your cash flow is always seasonally weighted to the back half and you've had this you've had a working capital build in the first half before. It looks pretty sizable in the first half of twenty twenty four even though the deliveries are up a little bit year over year revenues up year over year. So maybe if you could just walk us through that, how confident are you in hitting the $220,000,000 for the year? And can you grow free cash flow next year versus this year?

Speaker 2

Thanks, Noah, for the nice question. By the way, cash is one thing that we discuss every single day in this company here, which is that's why we launched the production level in order to be more, I would say, not suffer too much from Q1 to Q3 during the year is going to, I would say, help more next year than this year. I'd say the trend for the cash flow, we are today confident in the $220,000,000 or better. But unfortunately, it's going to happen just in Q4. This turn between negative to positive for several reasons.

Speaker 2

The more or less 20% growth on top line this year and also for next year is more or less also double digit growth that we are foreseeing. And if you go to our factories today, you see new people and parts for 2025 already. We already produced 25 parts in several parts of our company. It's pushing, putting a lot of pressure on the cash flow. And also, the progress payment for the new contracts is going to happen, especially in the second half of the year.

Speaker 2

I would say, combine those effects lead us for the start situation, Q1, Q2 and Q3, and hopefully, to become positive as we did last year in Q4. However, we are not happy with this situation and we do have and we are discussing this week very strong how to, I would say, harmonize our cash generation. And in regards to generating more cash next year, Noah, you know our entire fee and minimum turn EBITDA 50% into cash, I would say. We are a little bit behind this year because of the higher growth that we continue to face for the company, which is nice, but puts a lot of pressure on the cash flow, I'd say. In a nutshell, we are still confident with the cash this year and for sure a lot of chances to improve cash flow next year.

Speaker 2

If you are able to level in the production, then it's going to be even better. And you guys are not getting scared to see negative cash consumption 3 quarters and a very strong positive in Q4. I will hope that's more or less what we are looking for.

Speaker 10

Okay. That's helpful. Thank you so much.

Speaker 2

Thank you. Thank you all

Speaker 4

very much. This concludes the question and answer session for Equity Research Analysts and Investors. Now we will start the Q and A session dedicated to the press. First, we will answer questions in English, then we will answer questions in Portuguese. We will also answer questions sent via the platform chat.

Speaker 4

Please let me see a short announcement for Portuguese speakers. The first question is from the Q and A chat and is from Joanna Beatty. Do you expect the C390 program to be profitable by the end of 2024? And how have you managed to increase the EBITDA so much on Executive?

Speaker 1

Well, Johanna, thanks for the question. I think the plan is yes, for our difference in security to be profitable this year already and including the C290 and other products. And as active, I mean, we are seeing a very good performance in terms of margin and results, and this should continue with the sales, production deliveries growing in the next years.

Speaker 3

And for

Speaker 2

Executive Aviation, we do have a nice mix of products, I'd say, Fino and Praetors, where we were able to keep the price disciplined, which is showing also in the financial results. That's more or less without services, by the way. That's the combination of facts we do see in Executive Aviation.

Speaker 4

Thank you. The next question is written as well from the Q and A chat and is from Richard Sherman. Hello. I have already asked many questions in Farm Bureau, but I have one follow-up from that. You announced the E2 Feet or E2 Feet enhanced takeoff system.

Speaker 4

It isn't clear if this system has already been certified. If not, when do you expect this to be available?

Speaker 1

Richard, that's a very good question, and thank you for your interest. And about this feature, the certification is expected to happen by the Q4 next year 2025.

Speaker 4

The next question is written as well from Woodrow Bellamy. 1 of the technologies that Airbus, Boeing and other OEMs highlighted at Farm Bureau was their use of new digital design tools to improve time to market for new aircraft technologies and components. Is Embraer using any new digital design tools to improve its manufacturing

Speaker 1

We have been using the one example I can give it to you is the MES, the manufacturing excellence system that we use in our manufacturing process. That is a digital 3 d tool and that helps us a lot, I mean, to improve our efficiency, productivity and quality in our manufacturing process. And we are developing other systems as well that we expect to be implemented in the next years.

Speaker 4

Thank you all very much. This concludes the question and answer session in English for the press. Please press the Interpretation button on the platform and then select English.

Speaker 14

Q and A session in Portuguese. We ask the journalists to please press the raise hand button and whenever your name is announced, just open your mic and ask your question. We will also answer written questions that are sent through the chat box of the platform. If you need assistance, please ask through the Q and A button on the platform. In order for everyone to have the chance to participate.

Speaker 14

Please proceed to one question at a time. First question is from Christian Favreau at Alora Economico. Please, Christian. Hello, everyone. Can you hear me?

Speaker 14

Yes, Christian. Very well then. Yes, guys. Thank you. Congratulations for the results.

Speaker 14

I do have a question, but let me give you a follow-up here, Antonio. Let me see if I got it right. You said that the perspective is to have a 15% backlog on the Q3. Just to make sure what I got the percentage right, 15%. And I wanted to ask about Latin.

Speaker 14

Yesterday, Jean Cartier has confirmed at the Latin conference call that they are considering lower size aircraft. And they said that Embraer is competing with the A 2020. So they are probably considering the middle cap. And so I'd like to know about what your perspective with the A to 20? Are you with a good competitive edge?

Speaker 14

And how has this conversation evolved? Because there is some time that you mentioned, Francisco, that LATAM has been engaged in conversations to procure with you. But do you have any good perspectives with regards to that?

Speaker 5

I can take the first question. It's actually a 50% increase in Q3. That's for the defense backlog. You will see agreements from Netherlands, Austria from C390 and then Paraguay with Super Tucano Aircraft. That accounts for more than 50% increase in the defense backlog.

Speaker 5

And for LATAM, I'll hand it over to Francisco to answer that. Thank you, Christian, for your question. Like I said before, we've been in conversation with different customers about business opportunities for E2. And of course, there is competition. There is competition in the market with A 2020.

Speaker 5

But for us, we think Itu is more of an efficient aircraft with lower operational costs and lower maintenance costs. Itu is a perfect fit. It's tailor made to markets such as the Brazilian market. If you look at the operations of Azul Airlines or Scoot, KLM in Europe, So we do think E2 is quite a competitive product. And again, it is tailor made to better connect cities, medium to small sized cities, which is what Brazil needs and other countries also do, but more specifically, specifically Brazil.

Speaker 5

So, we're excited about these opportunities. We got no concrete news to share with you, but let's wait and see how this process is evolved. Thank you very much. Please hold while we collect questions. Next question from Jesse Nascimento from Portal Vale 360 News.

Speaker 5

You may now proceed. Hello. Francisco, congratulations on the results. We are located at the Vale do Paraiba region and we are following up closely on Embraer's numbers. The question goes to Antonio.

Speaker 5

And then another question to you, Mr. Francisco. As we looked at the numbers yesterday, we saw that Empire stocks reached 38.13. But numbers were different in late July. And in October, on October 30, 2020, stocks were worth BRL6.03, Considering the results that are now sharing with us, how much can we expect stocks to go up or the market value since the pandemic, how much will that increase?

Speaker 5

And then the question to Francisco is the following. That Embraer is negotiating to sell 300 commercial aircrafts. How is that going? Can that happen by the end of this year? Thank you very much.

Speaker 5

Thank you for your question. I remember 2020 Embraer stocks. Well, Embraer as a company was worth BRL3 billion and it's worth now BRL30 billion roughly. So we're talking about a 10 times increase. The false temper was quite hard, but we were in touch with many banks already.

Speaker 5

There were many investors who were feeling uncertain about it. We think these numbers should get back on track in the following weeks or so. So what's been going on with the company's valuation is reflected again in the gain in trust, in our sustainable growth as a company. I still believe there is a lot of room for growth. I think we grew by 10 times.

Speaker 5

Since early 2023 to date, our stocks have grown more than 60%, which makes us really happy. But I think we got a long way to go and grow based on what we're doing in terms of trust, foreseeability and in terms of delivering what we promise, always, of course, focusing on safety and security. So we're very excited about growth. But if we consider how ambitious we are, there is a lot that will still happen. I can add to that.

Speaker 5

If you think of the company's valuation during the pandemic, that's a very low bar. But what makes us excited is that even if we consider stock prices before the pandemic in mid 2019 and compare that to now, we can safely say that we are 100% above that. So that's a good way to compare stock prices. And

Speaker 1

then, the second

Speaker 5

question, it's true we've got 300 aircrafts sold. This is round number, but we expect these campaigns provide results in the short term, meaning 2024

Speaker 4

2025. Next

Speaker 5

question by Leda Alvin from Bloomberg News. You may now proceed. Hello, good morning. Thank you for this opportunity. Thank you and congratulations on the results.

Speaker 5

I wanted to ask you about a specific point that you mentioned during the media day a few months ago about the defense sector. It was mentioned that Embraer is working to penetrate the U. S. Market with their defense aircrafts exploring even opportunities of mergers and acquisitions. I wanted to learn from you.

Speaker 5

Has there been any update on that note, any initiative for the U. S. Market, especially in the defense sector? How do you see these opportunities for merge and acquisitions? Hi, Leila.

Speaker 5

This is Francisco. It's great to hear from you again. Thank you for your question. C390 is doing well in different regions of the world. We talked about new agreements with the Netherlands and Austria.

Speaker 5

We are now at an advanced stage in negotiations with Czech and we expect this to come to fruition by then this year. We're also in touch with South Korea. In Asia, we're also making great strides with our program. And of course, the American market is the largest defense market in the globe. So they are a target market for us.

Speaker 5

And we believe that our aircraft C390 would be suitable product and important to help the U. S. Air Force increase their productivity in this multi mission military aircraft sector. So at this point, we're just doing our research in the U. S.

Speaker 5

We're strengthening our team in the market so that we can define what the next steps will be hoping to fast track our penetration in the market. That's where we stand as of now. This concludes our Q and A session.

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