Embraer Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2023

There are 12 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the audio conference call for Embraer's Financial Results for the 3rd quarter of 2023. Thank you for standing by. The numbers of this presentation contained non GAAP financial information to facilitate investors to reconcile IRVE's financial information in GAAP standard to Embraer's IFRS. We remind that Yves' results will be discussed on Yves' conference. It is important to mention that all numbers are presented in U.

Operator

S. Dollar as it is our functional currency. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions to participate will be given at that time.

Operator

As a reminder, this conference is being recorded. Quarter. 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 two 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.

Operator

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 and other factors. In light of these risks and uncertainties, the forward looking events and circumstances as discussed on this conference call might not occur. The company's actual results could differ substantially from those anticipated in the forward looking statements. Participants on today's conference call are Francisco Gomes Neto, President and CEO, Antonio Carlos Garcia, Chief Financial Officer and Leonardo Shinohara, Director of Investor Relations.

Operator

Quarter. I would like now to turn the conference over to Francisco, who will proceed with the first remarks. Please go ahead.

Speaker 1

Quarter. Good morning and thank you all for joining our Q3 2023 results conference call today. Quarter. Firm order backlog ended at €17,800,000,000 a €500,000,000 increase versus the Q2, with 42 commercial aircraft sold by September. This quarter was marked by an excellent sales momentum and double digit revenue growth in all business units.

Speaker 1

EBIT and free cash flow are in line with our expectations. We concluded our reliability management process, quarter. We will place Embraer in an excellent cash position, with the extension of our debt maturity, with no relevant disbursement until mid-twenty 27. On the other hand, we are still facing some challenges in our supply chain, and Embraer has been diligently working with its suppliers to mitigate these issues. Quarter.

Speaker 1

Our operational and financial guidance for the year remain unchanged. On the next slides, we present the highlights of our business units. Commercial Aviation delivered a total of 39 aircraft during 2023, of which 21 RE2, 3 times more in the same period in 2022. Quarter. Commercial Aviation backlog rose to $8,600,000,000 compared to the Q2 2023, with a book to bill of 1 to 1, highlighting sales stability in deliveries this year.

Speaker 1

It is also important to mention that there are many ongoing sales campaigns. In the U. S. Market, We had several firm orders coming from main customers of E175E1 Jets. This is an important highlight because it shows that the pilot shortage situation is improving in the US.

Speaker 1

Another important deal was with Luxembourg based airline, Luxair. The E-185E2 aircraft will complement Luxair's narrow body fleet. In Executive Aviation, revenue increased 25% year over year and EBIT margin improved 2.1%. The business unit delivered 28 jets, representing An increase of 5 aircraft comparing to Q3 2022. The business continues its outstanding performance, quarter.

Speaker 1

With sustained demand across its entire product portfolio and a strong customer acceptance quarter in both retail and fleet markets. Backlog grew 10% year over year, Reaching $4,300,000,000 and a book to bill of 1.5:one. In defense, Austria and Czech Republic announced the selection of the C29 Millennium at their tactical military transport aircraft. Quarter. Last year, Netherlands had also announced the selection of the C390, which consolidates The multi mission platform as a preferred solution in NATO countries.

Speaker 1

These potential contracts In October, the first Portuguese Air Force KC-three ninety has entered into service. This is the 1st KC-three ninety to enter into service outside Brazil. Also in October, we celebrated With the Brazilian Air Force, the KC-thirty 9 milestone of 10,000 flight hours. Attesting The aircraft's remarkable performance and its versatility and capacity in different areas of operation. Quarter.

Speaker 1

Finally, the year to date EBIT margin defense is 7.2 percent, and the quarter margin improvement occurred We took contract adjustments for the KC-three ninety and the physical progress of the program. Quarter. We emphasize that these adjustments were punctual and for the next quarter we expect business margin to normalize. In Service and Support, our revenue has increased by 24% year over year to 366,000,000 We recorded a consistent double digit EBIT margin year to date. Quarter.

Speaker 1

Another highlight was the backlog increase of €2,800,000,000 in the quarter, the highest value ever quarter recorded in this business unit. Embraer Service and Support has reinforced its role as one of the main drivers of growth for the next years. I will now hand it over to Antonio to give you further details on the financial results. Quarter. And we'll be back with closing remarks.

Speaker 2

Thank you, Francisco, and good morning, everyone. Indeed, quarter. We had an excellent quarter, with financial and operational indicators aligned with our projections for 2023. Quarter. Moving to slide 7, we have good news about deliveries.

Speaker 2

In the 3rd quarter, quarter. Embraer delivered 43 jets, 15 commercial and 28 as active, representing an increase of 30% compared to the same period last year and 33% higher year to date. The highlight is Commercial Aviation, represents a robust growth with deliveries rising from 10% to 15%, an increase of 50% on year over year basis. In Executive Aviation, deliveries also increased in the quarter. 19 light and 9 midsized jets, 22% higher than 30 quarter 22.

Speaker 2

Quarter. We have a challenge ahead of us in Q4 deliveries. But as we already demonstrated last year, quarter, we are prepared for this. As a result, we are confirming the delivery outlook in our commercial and executive business quarter. Slide 8, backlog ended quarter at $17,800,000,000 the highest backlog in 1 year.

Speaker 2

The quality of orders in our backlog is accretive quarter with Embraer's profitability expectation. In Commercial Aviation, total backlog increased from 2 71 aircrafts to 291 aircrafts quarter over quarter. In Executive Aviation, quarter. We see a resilient backlog with an annual book to bill of 1.5:one, quarter, one of the highest in the industry currently. The business continues to experience a strong growth, quarter with a solid demand for the entire portfolio.

Speaker 2

Service and Support backlog reached its record, reflecting the extension and increase and the PulpArts contracts. As a result of our excellent performance, we ended the quarter with approximately 1,300,000,000 of net revenue, 38% higher year over year. Revenue year to date exceeded $3,000,000,000 which represents a figure of 29% higher year over year. We had an increase in revenue in all of our business units, which shows Embraer's potential for sustainable growth. In slide 9, quarter.

Speaker 2

The Q3, we had an excellent performance in terms of adjusted EBIT and EBITDA, with $100,000,000 $149,000,000 respectively. Adjusted EBIT and EBITDA margins of 7.8 percent and 11.6%, respectively, also shows strong growth, mainly due to the higher revenue in all business units and stable cost base. We are reaffirming our adjusted EBIT and EBITDA margin projections quarter. Slide 10. We had a free cash flow generation, excluding IF quarter of $44,000,000 in the Q3, significantly higher year over year, with stable working capital.

Speaker 2

Quarter. These upward trends indicate a substantial positive cash generation for the next quarter, in line with higher deliveries, quarter. So we are very confident that we will reach the free cash flow guidance of $150,000,000 or more. Quarter. Moving to investments, dollars 45,000,000 were allocated to R and D and $30,000,000 to CapEx, quarter, resulting in $75,000,000 invested in the Q3.

Speaker 2

Capital allocation is focused on the segments quarter with higher returns, with product search expansion of our production capacity in Executive Aviation and Service and Support. Quarter. Some words about EVE. The program has reached the necessary milestones to begin capitalizing its product development costs on IFRS rules. Adjusted net results were 33,000,000 quarter, an increase of 34% compared to Q3 2022.

Speaker 2

Reported net income was positively impacted quarter by non cash mark to market of EVE warrants of $24,000,000 on an quarter. Adjusted net margin of 2.6 percent remaining stable compared to the Q3 2022. Quarter. Slide 11. In this slide, we are pleased to show the results of our liability management plan.

Speaker 2

Quarter. We reduced our debt to $632,000,000 compared to the Q2 2023. We increased the average quarter. Debt matured to 4.8 years, leaving Embraer in a comfortable position, where liquidity of $2,400,000,000 with Yves, allow us to cover all obligations until 2030. Quarter.

Speaker 2

In the quarter, our net debt, excluding EVE, is $1,357,000,000 quarter, as shown in the top center of the slide. This is a slide lower than last quarter due to the better cash generation. Quarter. Our leverage ratio, shown in the top right corner, is 2.5 times, a significant improvement compared to 4.8 times in the same period of last year. It is important to highlight that the positive results of our business unit allowed us to successfully execute our liability management plan.

Speaker 2

Fiscal year 2020. We are taking all necessary steps to recover the investment grade status. Quarter. With that, I conclude my presentation and hand it back to Francis for his final remarks. Thanks for your attention.

Speaker 1

Thanks Antonio. The Q3 results were very satisfactory and met our expectations. Our products are experiencing a very favorable moment in the market, with several important campaigns ongoing and aircraft slots on the production lines practically filled until 2025. Quarter. We know we have a challenge ahead in terms of deliveries.

Speaker 1

Therefore, we can expect an intense Q4, quarter, mainly due to supply chain constraints. In line with our guidance, we expect 20% revenue growth this year compared to last year. We are confident that this is the harvesting time for everything we have done in recent years, and that we are on the right path to a sustainable growth with even more robust financial results in this and future years. Quarter. Thanks again for your interest and confidence in our Company.

Operator

We will now start the question and answer session. We ask who is interested in asking questions at any time press star 1. Way to be called and when your name is announced, make sure your microphone is on and start your question. To remove your questions from the queue, press star 2. Participants connected through the webcast platform may post their questions via chat in the question bar.

Operator

If you wish to make your questions by voice, you have the option to connect by phone or open your audio pressing the button below the video and slide screen.

Speaker 3

Our first question comes from Noeep Poponak, Goldman Sachs. Please proceed.

Speaker 4

Hey, good morning, everyone. Just on demand in commercial, It's been a few quarters now that you've been discussing pretty heavy campaigning activity, But it's also been a few quarters in a row where the actual signed orders have been relatively tepid. Is there something holding those discussions back or making them take longer than expected? Or is it Really sort of more normal course of order. And I guess, what do you think can happen before year end versus Maybe what our orders look like in 2024?

Speaker 1

Hi, Lora. Francisco speaking. Thanks for the question. Actually, yes, it takes a little longer than we expected, but We were working many sales campaigns. So we expect to close some deals still in Q4 this year and see a book to bill, no, above 1 to 1.

Speaker 1

So it's 1 to 1 in the Q3, but we expect to be above 1 to 1 until the end of the year.

Speaker 4

Okay. And just as a follow-up, the margin in this segment Has been somewhat volatile, I guess, quarter to quarter and below where you want it to be longer term. How should we think about how that margin progresses into next year? Does Pricing in the backlog improve enough quickly enough for that margin to have a decent amount of expansion next year? Or is the margin you've talked about that segment getting to longer term, is that further out than next year?

Speaker 2

Antonio speaking here. Thanks for the question. In regards to the BIT margin for the segment, we do see this year a lower single digit. Moving to the next year, a little bit better, I would say, still lower single digit, but something like 3% to 4%. What you see in long term, what we are promising to the market without services mid single digit margin for the long term.

Speaker 2

That's more or less what we are seeing right now, highly driven by the direction of fixed costs. And I would say the price point is not moving up as we would expect because we are very active in the 2 campaigns, I'd say, which has much more pressure on the price points. But I would say normalized mid single digit for the long term.

Speaker 4

Quarter. Okay. Thanks so much. I appreciate it.

Speaker 2

Thank you.

Speaker 3

Our next question comes from Kevan Brummer, TD. Please proceed.

Speaker 5

Thank you very much and good results. Quarter. So maybe talk a little bit about the order mix. It looks like you did particularly well on the 175. The margins were pretty good even though there were fewer 175.

Speaker 5

I know the mix has favored the 175 is much more profitable. Can you discuss first what the outlook is for 175 orders as a percent of the total going forward? What The mix is likely to be next year 175 versus E2 and how the E2 is doing in terms of profitability. [SPEAKER CANDIDO

Speaker 1

BOTELHO BRACHER:] Hello, Kai. Well, I mean, The participation of Itau is growing as we expected. So we For the final years, we expect to be sixty-forty, 60% E2s and still 40% E1s, quarter, which we believe is a healthy mix for the commercial aviation considering the margins as you mentioned before.

Speaker 5

Okay. And then, you've done well in terms of KC-three ninety selections. When should we expect the orders? How big would you expect the orders to be? And what should we look for in terms of delivery prognosis going forward?

Speaker 1

Well, I mean, quarter. We saw the announcement of Netherlands in 2022 for 5 cases and more recently From Austria and Czech Republic. So as Austria, I mean, also announced that they want to Join Netherlands in the same contract. We expect to close those contracts by Beginning of 2024. And they are they will be very important.

Speaker 1

It's a very important moment for our defense business. With those contracts, we will be able to more than double the backlog of defense, which will be very important for the performance of The business unit and we are still working in other campaigns. We are expecting a decision from South Korea No, still for this year in a bid we are participating. So and many other campaigns as well. So We believe it is a good moment for defense.

Speaker 5

When you said you have 5 for the Netherlands, how many would that total be when Austria joins and when Czech joins? Any sense in terms of the size of the South Korean order and what's the expected build in terms of deliveries?

Speaker 1

If you combine Netherlands, Austria and Czech Republic, we are talking about at least 11 aircraft And 3 from South Korea.

Speaker 4

Okay.

Speaker 5

And how does that delivery build?

Speaker 1

Well, the deliveries will start in 24, 30 months from the signing of the contract more or less. That means 2025 onwards.

Speaker 5

Okay. Excellent. Thank you very much.

Speaker 1

Thank you for the questions.

Speaker 2

Thanks, Guy.

Speaker 3

Our next question comes from Myles Walton, Wolfe Research.

Speaker 6

Thanks. Good morning. Maybe just to follow-up on Cai's last question. Francisco, when you're at a cadence of, I guess, 3 per year, 4 per year on the KC-three ninety, what's the anticipated margin profile of defense?

Speaker 1

Well, I mean, defense will be Higher single digit, closer to 2 digits with those contracts.

Speaker 6

Okay, okay, good. I was hoping you could maybe dig a little bit deeper on the supply chain into 4Q. Are you seeing the same challenges on the commercial side as you are on the executive side? Or are they different in nature? Are some of them large structures or some of them engines or some of them small piece parts.

Speaker 6

I'm just trying to understand if you're facing the exact same problem on both sides or if they're pretty unique.

Speaker 1

So, first of all, I think it's important to mention that we have seen improvements in the supply chain from 2022 to 2023 With many suppliers, but we still have challenges, as you mentioned. So they are not necessarily the same. When we talk about the engines, yes, we have a challenge in both sides, But other components are not the same. But we believe that even with the challenges, I mean, We'll be at the lower end of our guidance in terms of deliveries this year, Maers.

Speaker 6

Okay. Okay. And then one last one. The GTF issue and the accelerated inspection and replacement on their powdered metal. Can you comment as it relates to effects you're seeing on your E2 fleet or you expect on your E2 fleet?

Speaker 6

And then also with respect to AGMA, What's the kind of revenue opportunity from the AGMA MRO opportunity for the GTF?

Speaker 1

Absolutely. Well, first, I mean, there is no inspection planned for GTF E2 this year, 2023. Pratt Whittingey announced recently that the Ito's will be less impacted because the aircraft And also the aircraft is lighter than the other models. So this puts the E2 It is not they are not immune of the issues, but put it is in a better situation in terms of performance for our customers. And the product is still working in this inspection inspection schedule for the E tools related to the powder metal issue.

Speaker 1

The other question was?

Speaker 6

Agba and your opportunity

Speaker 1

of the

Speaker 6

revenue side.

Speaker 1

Agba is moving very fast. I mean, in preparation for the SOP of the GTF engines that is planned for April 2024 and that is a very important contract for OGMA that will help OGMA to triple its revenues in the next 2 or 3 years.

Speaker 6

Very good. Thanks, Francisco.

Speaker 2

You're welcome. You're welcome.

Speaker 3

Quarter. Our next question comes from Felipe Nielson, Citi. Please proceed.

Speaker 7

Hi, guys. Good morning. Thanks for taking my question and congrats on the results. I have 2 on my side. The first one, quarter.

Speaker 7

If you're seeing any relief or possible relief in terms of scope clauses in the U. S, as you mentioned several campaign going forward? And the second one is, how do you expect to close the free cash flow gap to reach the 2023 guidance that you gave. Like I saw that you still have cash burn for 9 months quarter. And you maintained your guidance of free cash flow generation of €150,000,000 So Just wanted to hear your thoughts, how do you expect to get there?

Speaker 7

Thanks.

Speaker 1

Philippe, thanks for the question. First, related to the scope clause, we don't see Any movements to change the no, for the relaxation of the scope clause? But to be honest, we don't see really an impact for Embraer. So I mean, Our E175 E1 is the workhorse of regional aviation in the U. S.

Speaker 1

And now with improvements, we are seeing the pilot situation. This will open the door for more sales of the EU 1751s in the U. S. In parallel, we are working with the main lines in the U. S.

Speaker 1

To convince them to introduce the E-two, the EU-ninety five E-two to passengers in order to explore new routes in a very attractive cost benefit with the E195 It is. So related to the margin, I ask Antonio to help here.

Speaker 2

Cash flow. Cash flow, yes. Felipe, good morning. Philippe, the cash flow, to be honest, is the I would say, where we do see much more potential to be to have some upside than downside. For sure, if you ask me today, you are negative.

Speaker 2

But assuming that the 40% of the whole business is going to be done in Q4, We are going to deliver more than EUR 2,000,000,000 in revenue and get the cash inflow and some of Those parts, we are even not able to pay in advance. That's why we do see more concentration on cash inflow in Q4 and less cash outflows, combined with the reduction of the inventories. That's more or less where we do see the cash flow going and we also have M and A that we just closed, was announced last Friday It's also cash inflow of €45,000,000 which helps this equation to be, I would say, highly positive for the year.

Speaker 7

Thanks very much guys.

Speaker 3

Our next question comes from Christian Luebz, Morgan Stanley.

Speaker 8

Hey, good morning, Antonio and good morning,

Speaker 7

Francisco. Quarter.

Speaker 1

Good morning, Chris.

Speaker 8

4Q 'twenty three, 4Q is historically seasonally strong for deliveries. So first, How is the supply chain executing for you to feel confident that you could deliver on your expected customer deliveries in 4Q. And also looking at the midpoint of your 2023 EBIT margin guide for the year, 4Q would have to be around 9.6% in EBIT. So based on execution of what you've seen so far and availability of parts, How confident are you at meeting this? Okay.

Speaker 1

Cristina, I'll start with the deliveries in Q4, Antonio will complement with the EBIT. I mean, we are we have been working very, Very closely to our suppliers in order to mitigate the issues. We are getting the bonds, But we are getting some parts late. So this puts pressure on our production process, Not only production process, but the delivery process as well, right? As no, I mean, Moving to the right, more to the December, and that's a more difficult month.

Speaker 1

But we are still confident that we We'll be at the lower end of our guidance in terms of delivery and even more confident that we'll deliver the financial results in the guidance for the year. So, Antonio?

Speaker 2

So, Christian, good morning. Antonio speaking here. Thanks for the question. In regards to the BIT We do maths every single day. But one important point here, we are going to deliver if you reach the low end of the guidance for the Executive Aviation.

Speaker 2

We are going to deliver more than 50 aircrafts. And it's there where we do see the highest BIT coming together with the services side. And I would say, that's more or less what the margin should bring us. We are seeing today the BIT and EBITDA margin in the midyear end of the guidance, to be more precise.

Speaker 8

Thank you. And then also taking a step back, Francisco and Antonio, the stabilization of the business After COVID-nineteen and after the breakup with Boeing too, I mean, it's very clear that the company is now in a harvest period. So with the balance sheet in a pretty strong place with no significant maturities in the next few years, How do we think about capital deployment priorities for 2024 and beyond? So are you thinking of potentially another new Airplane launch or is this a period where shareholders could get incremental return either through dividends or buybacks, how do you think about those priorities? And maybe that's a more appropriate question for your Investor Day, but I thought I'll just

Speaker 1

Thanks, Cristina. Good question. So That allows me to bring you even more information about that. Well, we after everything we have done in the past years in terms of structuring. The company put in place initiatives to foster sales also to improve efficiency and foster innovation in the organization.

Speaker 1

We believe now we are in our harvest season, right, as the market is growing and then we will enjoy this growth and improve our operational and financial performance. So combined with that, We have a very modern and competitive portfolio of products in all the business units we act on. So the Itu family, the Finnos, the Praetor, the C390, so that we are enjoying a very good momentum in terms of sales For all those segments. So what we want to do is, Is to focus especially in 2024 and 2025 to focus on improving further our financial performance. We expect to start to pay dividends in 2025 onwards.

Speaker 1

So and then in parallel, we are investing on developing new technologies to be prepared by 2025 to decide what we're going to do going forward. So but remember that we are investing On the EBITDA, to develop the EBITDA together with Yves, we are also investing, as I said, in new technologies To prepare the study of future airplanes and also in the Energia family to explore disruptive propulsion systems as you know, electric, hybrid, electric and hydrogen hybrid. This is more or less our strategy going forward. Again, focus on further improving the financial performance in 2024, 2025. I mean, continuing, I mean, selling the current portfolio of products and continue investing on new technologies and innovation to prepare new projects in the future.

Speaker 8

Great. Thank you for the color and looking forward to seeing you guys in New York in 2 weeks.

Speaker 1

Yes. Same from our side. See you there.

Speaker 3

Our next question comes from Ron Epstein, Bank of America.

Speaker 9

Hey, good morning guys.

Speaker 4

We've covered a lot on

Speaker 9

the call so far, but Maybe if we just kind of go back, I think it was Noah who asked a question about campaigns. If we can dig down a little bit deeper on that, is Any more color you can give us on that? And how you're thinking campaigns could go Through the end of this year, maybe into next year. And what that translates What's like a normalized delivery rate for the E Jets? When we think about building our models when we go out a couple of years, What should we think that the company can get to on eJETs from here?

Speaker 1

Hi, Ron. Thanks again for your question. I mean, In terms of campaigns for commercial aviation, we as I said before, We are working in many different campaigns, big names in different regions, Europe, Asia Pacific. Also we are starting to offer the E2s in the U. S.

Speaker 1

As well. I think it's becoming more and more clear that the E195E2 is not only regional jet As the E175, E175, E1s, right? I mean, it's a bigger airplane That can help a lot the airlines to operate very profitably In routes with less passengers, as for example Azul is doing in Brazil, as KLM is doing And in Europe and Scoot and SKS, they have the same plans for Asia. So we And we believe that more and more the airlines are understanding this. And we see Lot of good opportunities for the E2s, I mean, going forward in the market.

Speaker 1

So in terms of deliveries, Rom, we have We still have a limitation with the engines, but we are confident that we combining E2s and E1s, We will be at above 8 units in 2024 In reaching 100 units in 2025 years ahead. So again, If you go above 100 units, 110 units, we'll be basically back to the levels, pre pandemic levels, But with a different mix, now we have much more E tools that is more expensive. So in terms of revenues, We will see a revenue will see a much higher revenue than in the past with the same quintet of delivered aircraft. So This is more like the situation, as to your question. I mean, we are optimistic with the campaigns we are working on.

Speaker 1

We are optimistic with the opportunity to introduce the E2s in the U. S. As well. By the way, I mean, very soon, Very soon, we will see the E195 E2s from quarter flying to big cities in the Los Angeles, San Francisco, New York, Boston, Orlando, Miami and this will be a great showcase of our aircraft. We believe people will love to fly in a very efficient aircraft without middle seats And this will open up opportunities for that aircraft in North America.

Speaker 1

And finalizing my comments, with improvement in the pilot shortage, This also open opportunities for renewing, for the company to renew the fleet of the E ones, Which, no, has more better margins, it can help us with the performance of our commercial aviation.

Speaker 9

And then going forward, are there opportunities to upgrade the E2 platform itself without having to do a new aircraft? I mean, it's It's a relatively new airplane anyway. Are there other ways to upgrade it that you could play with the engine or do other aerodynamic tweaks to the airplane To get more out of the platform.

Speaker 1

Well, we are we're continuing to invest and improve the competitiveness of the Itus. I mean, with improvements in the aircraft, Yes. Also, we are converting the E190 E1s into freighters. So the first one has already The door installed and it looks very nice. So we believe it's a good opportunity for us To introduce this cargo to help the commercial aviation as well.

Speaker 1

So again, these are things we are doing. And We believe that going above 80 units next year and above 100 units from 2025 onwards, It will help a lot to improve the financial performance of commercial aviation as well. And the service will come. It will grow because of that as well, right, more aircraft, More service as well.

Speaker 9

Great. Thank you very much.

Speaker 1

Thank you, Ron.

Speaker 3

Quarter. Our next question comes from Marcelo Motta, JPMorgan.

Speaker 10

Hi, everyone. Good morning. It's a question regarding next year. The supply chain remain challenging, but you mentioned that you can increase the level of deliveries on the commercial. So just wondering what will you see in terms of the executive, the defense?

Speaker 10

I mean, do you think you could be growing again double digit rate on top line? What will be the outlook for the different lines of business of the company? Thank you.

Speaker 1

Marcelo, thank you. I mean, yes, I mean, next year will Still be challenged in the supply chain and with specific parts, but again improving From 2023 situation. So we are growing. I mean, we are planning to grow double digits in all business units we have. So we are growing this year 23% compared to 22%.

Speaker 1

We are growing more than 20% And we expect to keep the same path, I mean, going to 2024 and also keeping important growth in the years ahead. So and again, we are working very closely with our supply, Our supply chain with our suppliers and to make sure that we will have the parts we need for to support this growth. Quarter. Also what we want to do in 2024 is to improve the distribution of the production deliveries Throughout the year, we have initiative we call production leveling that I know We want to avoid this concentration of production in the second half of the year and see A better distribution throughout the year. It's still challenging in the Q1 next year, but we are working very hard Since now in order to improve our production deliveries in 2024.

Speaker 3

Our next question comes from Andres Ferreira, Bradesco BBI.

Speaker 11

Hi, good morning. Thank you for taking my question. I have two questions. The first, I was wondering if you could give us an update on how the partnership with L3 Harris for the Agile tanker is developing. And the second question, you mentioned in And a previous question about the countries that are selecting this C390.

Speaker 11

But if you could comment a bit on the potential talks with the Indian government a few months back. If you could give us a more a bit more detail on that. Thank you.

Speaker 1

Thank you, Andre. Well, I mean, partnership with LS3 Harris is moving. We see the C-thirty nine a great solution for the U. S. Air Force.

Speaker 1

And the first opportunity we found was the tanker, we call agile tanker. And this is what this partnership with Elite 3 Heroes is for, right, to work with the U. S. Air Force to offer the C-29 as an agile tanker. But we want also to offer The city tonight for the missions, right?

Speaker 1

I mean, so we are reinforcing our team in the U. S. As well. We recently announced Elite 3 and support the potential future sales of C3-nine in that country that is the biggest defense market in the world. So the C39, again, other countries, I mean, we are very happy with the announcement of Netherlands 2022 More recently, Austria and Czech Republic, I mean, that makes the Street United the preferred solution for this multi mission platform for the NATO countries.

Speaker 1

So we expect to close those contracts During the first half of twenty twenty four, in India, we are working in India now to select a partner That would be our partner to localize the production, the assembly of the C390 to be compliant With the specification of this India Air Force, they want to buy between 40 to 8 multi mission aircraft and we do believe that the ship United is the best solution for them. We want to be prepared to compete and for that we need to select a partner. This is where we are in terms of India specifically for the C319.

Speaker 11

Thank you.

Speaker 9

Thank you.

Speaker 3

Thank you. Our next question comes from Noah Poponak, Goldman Sachs.

Speaker 4

Hey, guys. The GTF Services business that you're going to layer in, Remind me how large that gets on an annual run rate basis once it's at its run rate level? And then also what does the margin look like on that work?

Speaker 2

I know it's Antonio speaking. I would say when the priorities mature, we are foreseeing a revenue size of $500,000,000 for the our company in Portugal. If was the right question To answer you, we need to see in terms of size, something like $500,000,000 Not next year, next year will be around EUR 50,000,000 something like that, but the longer around EUR 500,000,000.

Speaker 1

Total company. Total company. That

Speaker 4

starts when will that first start to hit your financials, late next year?

Speaker 2

We started to already the repairs in April next year.

Speaker 1

Yes, we have a ramp up curve, But we will see some growth in AGMOS revenue already in 2024 as Antonio said. But 2025, we believe Ogma will be closer to $500,000,000 in terms of revenue And growing in the years ahead as well.

Speaker 10

Okay.

Speaker 2

That's a bit positive collateral effect for the GTF issues. Address.

Speaker 4

And how does the margin on that revenue compare to the existing services segment margin?

Speaker 2

It's higher single digit, Noah.

Speaker 4

High single digit?

Speaker 2

Yes, the same we have with other OEMs like the rules for example.

Speaker 4

Okay. And Antonio, I think last quarter you had Guided to the defense segment having $600,000,000 of revenue this year. Is that large of a 4th quarter still the plan?

Speaker 2

That's more or less what we are expecting for sure. We need one campaign to be able to fulfill, I would say, Maybe we are going to lose €100,000,000 maybe, but it does not jeopardize our ABIT margin. But we are just hanging one sales campaign that we hope to be close to end of this year because we do have some aircrafts and inventory, Especially for the Super Tucano. That's more or less what I'm referring to.

Speaker 4

Okay. And then I guess, does the defense segment now just have is it likely to have a pretty significant ramp up through the year in each year going forward? Or should I be thinking about the back half of this year being kind of the run rate Moving forward or and then I guess you have maybe have some airplanes slipping into next year, I guess. How do you think next year Compares to this year in defense revenue.

Speaker 2

Next year around EUR 7.50 billion then moving onwards to EUR 1,000,000,000 On the longer range. Okay. With all of these new orders, for sure. No, we do have a, I would say, potential backlog of more than EUR 2,000,000,000 with this contract that has been already announced. We needed to conclude them in order to put in the backlog, then we could Having much more visibility in regards to the split between 2024, 2025 and 26.

Speaker 2

But I would say in the longer run, we do see defense around $1,000,000,000 revenue and higher single digit BIT margin.

Speaker 4

Okay. All right. Thanks a lot. Appreciate it.

Speaker 2

Thank you. Thanks, Noah.

Speaker 3

Quarter. Thank you. We have a new question comes from Kai Van Grumor, GB Cohen.

Speaker 7

Please proceed.

Speaker 5

Thanks so much. This will be quick. So this is the Q1 and the last couple. I haven't heard any talk about selling E2s to China. How do things look there?

Speaker 1

Okay. Thanks for the question. Well, by the way, our team, commercial Tim, he is in China now. We will have tomorrow a special event To talk about regional aviation in China, to explore the connectivity and so on. So this is another movement Of Embraer in China to show how effective could be the introduction of for the regional aviation complementing the local aircraft.

Speaker 1

We are still working with local airlines for the introduction of E2s and also for potential partnerships. So this is what I can tell you at this point of time.

Speaker 5

Thank you.

Speaker 2

Thanks, Kai.

Speaker 1

Thank you.

Speaker 3

Thank you. Quarter. This concludes today's question and answer session. That does conclude Embraer's audio conference for today.

Speaker 5

Quarter.

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Earnings Conference Call
Embraer Q3 2023
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