Embraer S.A. (NYSE:ERJ) Q3 2024 Earnings Call Transcript

Embraer S.A. (NYSE:ERJ) Q3 2024 Earnings Call Transcript November 8, 2024

Embraer S.A. beats earnings expectations. Reported EPS is $1.2, expectations were $0.6.

Guilherme Paiva: Good morning, ladies and gentlemen, and thanks for standing by. This conference call will be conducted in English, but please let me say a short announcement for Portuguese speakers. [Foreign Language] My name is Gui Paiva and I’m the Head of Investor Relations and M&A for Embraer. I want to welcome you to our third quarter of 2024 earnings conference call. The numbers in this presentation contain non-GAAP financial information to facilitate investors to reconcile EVE’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 Monday on November 4. It is important to mention that all numbers are presented in the U.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 the applicable rules, the company assumes no obligation to publicly update any forward-looking statements. For detailed financial information, the company encourages reviewing publications filed by the company with the Brazilian Comissao de Valores Mobiliarios or CVM. [Operator Instructions] As a reminder, this conference is being recorded. Participants on today’s conference call are Francisco Gomes Neto, President and CEO of Embraer; Antonio Carlos Garcia, Chief Financial Officer; Luis Harrison, Corporate Communications Director and myself.

This conference call will have three parts. In the first part, top management will present the company’s Q3 results. In the second part, we will host a Q&A session only for investors. And last but definitely not least, we will host a Q&A session only for the press. It is my pleasure to now turn the conference call to our President and CEO, Francisco Gomes. Please go ahead, Francisco.

Francisco Gomes Neto: Thank you, Gui. Good morning, and good afternoon to all. Welcome to Embraer’s third quarter 2024 results conference call. Today, we updated our 2024 guidance to reflect both opportunities and risks for our operations. In financials, we reiterate our $6.2 billion midpoint of the range of revenue guidance for the full calendar year. We are happy to increase our adjusted EBIT margin interval to 9.5% and our free cash flow generation to $300 million or higher. In operations, we reiterate our 125 to 135 delivery guidance for Executive Aviation in 2024. However, we reduced our Commercial Aviation guidance from 72 to 80 jets to 70 to 73 aircraft because of supply chain problems. In Q3, Embraer revenues increased more than 32% year-over-year, helped by Executive Aviation and Defense & Security, both up more than 65%.

However, the top line for Services & Support and Commercial Aviation were also up by double-digits during the period, 16% and 11%, respectively. In the first 9 months of 2024, overall company revenues increased 24% compared to the same period in 2023. The highlight was Defense & Security with an increase of 56%, followed by Executive Aviation with 41%, Services & Support with 16% and Commercial Aviation with 12%. Our continuous efforts to improve efficiency and profitability led our adjusted operating margin to improve to 17.6% during Q3. Even if we exclude for the $150 million from the Boeing arbitration agreement, our adjusted operating margin was up to 8.7% in the quarter. If we look at the year-to-date period, our adjusted operating margin improved year-on-year to 10.8%.

Even if we exclude the Boeing-related monies, our adjusted operating margin expanded year-on-year to 7.2% during the first 9 months of the year. Our firm order backlog reached $22.7 billion in Q3, supported by a robust year-to-date book-to-bill ratio higher than 2:1. In late September, Fitch Ratings upgraded Embraer rating from BB+ to BBB- with a stable outlook. I’m happy to announce that our company is rated investment grade by 2 out of the 3 leading U.S. rating agencies. Our rating with Moody’s remains one notch below investment grade, but now with a positive outlook. We delivered for a total of 57 aircraft in this third quarter or 33% higher year-on-year. So far, the total number for 2024 currently stands at 128 aircraft or 22% higher than the same period for 2023.

We also delivered 2 C-390 Millennium in Defense during the quarter and a total of 3 tactical cargo planes for the first 9 months of the year. We still face several supply chain challenges. This year, we reinforced our supply chain organization by enforcing our team capability, introducing digital tools and artificial intelligence and expanding our presence with more employees closer to our most critical suppliers. All these initiatives aim to address the ongoing obstacles and help us to further improve the efficiency of our global supply chain capacity management. I will now move on to the operational results highlights by business units in the next few slides. In Commercial Aviation, we highlighted the order of 8 E190-E2s to Virgin Australia.

This order reflects the strong ability of our E2 jet family to operate in several markets and provides a viable option to complement the airline’s larger narrow-bodies and to replace its smaller long-serving aircraft. We also did the first delivery of 3 E195-E2s to LOT Polish Airlines leased through Azorra. LOT became the first operator of our brand-new at that time E-Jet family E-170s, more than 20 years ago. Revenues increased 11.4% year-on-year during the quarter. The adjusted EBIT margin for the quarter declined from 0 to minus 5% year-on-year because of supply chain delays, product and customer mix. In the 9 months of 2024, the adjusted EBIT margin was minus 2.3% compared to minus 1.3% in the 9 months of 2023. We currently are in campaigns for more than 200 commercial aircraft in different continents.

We expect the profitability of our Commercial Aviation division to improve in Q4 2024 and beyond despite the strong competition in the segment. In Executive Aviation, the top-line expanded 65% year-on-year in Q3, supported by higher volumes and product mix. Revenues for the current year are now at $1.1 billion or circa 40% higher than the same period in the previous one. The business unit achieved the best third quarter in first 9 months in terms of revenues and deliveries in its history, demonstrating growing performance, good sales momentum and sustainable demand across our business jets portfolio. The adjusted EBITDA margin for Executive improved from 10.7% in Q3 ’23 to 16.3% in Q3 ’24, helped by more aircraft deliveries. The adjusted EBIT margin for the first 9 months of the year moved up from 4.0% in ’23 to 12.5% in ’24.

In Defense & Security, there were 3 main highlights during the quarter. First, the deliveries of the first C-390 Millennium to Hungary, and the seventh one to the Brazilian Air Force. Second, the signing of the order for 9 units from the Netherlands and Austria and third, the brand-new orders for 6 to 12 A-29 Super Tucanos from Paraguay and Uruguay. The recent signed orders underpinned the $1.5 billion increase in the company’s backlog in Q3. Revenues for the division increased 65% year-on-year in Q3 and 56% year-on-year in the 9 months of 2024. Turning to profitability. The adjusted EBIT margin declined from 15.6% in Q3 ’23 to 7.2% in Q3 ’24, because of product and customer mix and supply chain delays as well. For the year, the adjusted EBIT margin was 0.8% in the first 9 months of 2024 compared to 7.2% in the same period of 2023.

In Service & Support, the division continued to be one of the main drivers of profitable growth for the company with higher revenues and profitability. Revenue grew 16% year-on-year during the quarter, while the adjusted EBIT margin recorded a solid 3.9 percentage point gain. For the year, the adjusted EBIT margin increased to 16.2% in 2024 compared to 14.6% in 2023. The business unit announced a $70 million investment in a new MRO center in Fort Worth, Texas, which aims to expand our maintenance service network to support the growing customers’ fleet of E-Jets in North America. Finally, Eve, our eVTOL business continues to progress in its development process. The company unveiled its full-scale prototype in July. And it is now moving forward with the battery installation and lifter production to get ready for its first flight in early 2025.

Eve also completed an additional $236 million secured loan, which will help to support the development and industrialization of its eVTOL. Embraer remains confident in Eve’s business outlook as its majority shareholder with an 83% equity stake. We expect our eVTOL certification by ANAC in Brazil and FAA in the U.S. in 2027. 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.

Antonio Carlos Garcia : Thank you, Francisco. Good morning and good afternoon to everyone. I’m very happy to highlight another set of solid financial results in Q3. Let’s now move to Slide 10 in the presentation and start with deliveries. The highlight of the quarter was Executive Aviation, which delivered 22 light jets and 19 medium jets. The total 41 jets for the quarter was an impressive 46% increase year-on-year and the first material positive results from our production leveling plan, which goals is to have a more stable production pace throughout the year despite supply chain delays. Meanwhile, Commercial Aviation deliveries increased 6% versus a year ago. In this quarter, our E2 family represented 75% of total deliveries and our E1 jet family, the balance 25%.

It is important to mention our Commercial Aviation division is facing significant supply chain delays, mainly in the E2 assembly line. In Defense, we are pleased to have delivered 2 C-390 Millennium aircrafts to Brazil and Hungary. The global fleet in operation now totals 10 aircrafts among Brazil, Portugal and Hungary. It is important to remind you, C-390, are not included in our 2024 deliveries guidance. Slide 11, please. The company continues to break records. The $22.7 billion accretive and solid backlog in Q3 is almost 10% higher quarter-on-quarter and more than 25% higher year-on-year with growth in all divisions. The highlight for the quarter goes to Defense & Security, whose $3.6 billion backlog increased almost 70% quarter-on-quarter and year-on-year and reflect the new contracts for 9 C-390 Millennium and Super Tucanos.

Service & Support also moved up 12%, supported by the new contracts in Defense and Commercial Aviation. The backlog for Commercial Aviation with 374 aircraft firm orders and Executive Aviation with a record pace of business jet delivered during the quarter declined slightly. Moving on to revenues. The strong pace of deliveries led our top-line to reach almost $1.7 billion in Q3 or 13% higher quarter-on-quarter and 32% higher year-on-year. On a year-to-date basis, our revenues have now topped $4.1 billion or 24% higher or close to $800 million more than $3.3 billion recorded in the same period of 2023. The total 9 months’ revenue represents about 65% of the midpoint of our 2024 guidance of $6 billion to $6.4 billion. If we look at the pie chart on the right, we can see Executive Aviation with 32% of the company’s revenue, higher almost 7 percentage points year-on-year, driven by the increase in deliveries.

Meanwhile, Defense contributed with 13% of total revenue versus 10% a year ago. In the opposite side, Commercial Aviation declined 5 percentage points to 28% of company revenues in third quarter ’24 compared with the same quarter last year. And Service & Support lead 3% year-on-year. Next slide, please. On EBITDA and EBIT, we continue to capture the benefits of diligent cost and expense control and the efficiency program. We generated $357 million in adjusted EBITDA in third quarter ’24 with a 21.1% margin. Meanwhile, the adjusted EBIT in the quarter was $298 million for a 17.6% margin. However, there was an important $150 million contribution from the Boeing agreement, which propped up both margin by circa 900 basis points for the period. If we look at the results for the quarter, ex-Boeing agreement; the EBITDA margin improved 60 basis points year-on-year from 11.6% to 12.2%, while EBIT margin improved almost 100 basis points from 7.8% to 8.7%, supported by higher profitability in Executive Aviation and Service & Support.

On to Slide 13 now, please. In Q3, if we exclude Eve, we generated $241 million in adjusted free cash flow, because of the higher numbers of aircraft deliveries and advanced customer payments. Year-to-date, our free cash flow was negative $320 million. However, it should turn to positive by year-end because of the historical concentration of deliveries in Commercial Aviation and down payments in defense programs during the last quarter of the year. Moving to investment. And again, without Eve, we spent $42 million in research and development during the quarter, $59 million in CapEx and net $10 million in pool programs, for a total of $111 million compared to $103 million a year ago. Our capital allocation continues to be focused on segments with higher returns as follows: Executive Aviation, $90 million to increase our production capacity in line with our recent backlog growth.

Service & Support, $90 million in our subsidiary, OGMA for the maintenance service for Pratt & Whitney engines. Service & Support, $70 million to expand our MRO footprint to service Commercial Aviation clients in North America. Our adjusted net income was positive $221 million for the quarter supported a 13.1% adjusted margin. If we exclude the Boeing agreement, our adjusted net income was $122 million for a 7.2% margin compared to $33 million and 2.6% margin a year ago. In Slide 14, going to our liability management plan. In third quarter ’24, we continued our initiatives to extend the duration, reduced the cost of our debt. Our cash flow position, including our revolver credit facility in U.S. was basically equivalent to our gross debt balance in Q3.

Therefore, we have a very solid cash balance and no relevant debt to be paid back during the next 2.5 years. The company has materially deleveraged its balance sheet over the past 3 years. And we are happy to highlight our net debt-to-EBITDA leverage ratio declined to 1.3x in Q3 ’24, as shown in the top right corner of the slide. I want to mention our circa $700 million EBITDA ex-Boeing agreement over the past 12 months, which is now almost 25% higher than the $560 million generated in 2023. The liability and cash management strategy is strongly contributed to the credit rating upgrades by Fitch from BB+ to BBB- with a stable outlook in late September. Consequently, both Standard & Poor’s and Fitch currently rate the company as an investment-grade company.

In a nutshell, we remain focused on generating cash, reducing our debt levels, lowering the cost of our debt and improving our credit metrics. Last but not least, let’s talk about our guidance. We presented our updated 2024 guidance on Slide 15. We update the guidance focusing on company’s efficiency and considering the overall performance of all business units. From a financial perspective, we still feel very comfortable with our current $6 billion to $6.4 billion revenue estimate for the full year. This is a benefit of having different business units where the strength of Service and Defense helps to offset some missing deliveries in Commercial Aviation, for example. More importantly, the company has been able to operate more efficient than expected with cost control that can be seen by SG&A expenses, for example.

Thus, we have revised upwards our adjusted EBIT margin by 250 basis points from our previous 6.5% to 7.5% range to our new 9 to 10 percentage point estimate. We highlighted the Boeing agreement money circa 125% net without taxes or with taxes and final office accounted for of 250 basis points change. Meanwhile, the one tax credit benefit mentioned in the Q2 earnings release accounted for a balance of 50 basis points. Therefore, the company was able to maintain its margin guidance stable after the adjustment for these extraordinary events despite all reduction of 5 aircraft deliveries in Commercial Aviation segment for the year. In Commercial Aviation, we moved the delivery guidance down from 72-80 aircraft to 70-73 deliveries to reflect our most updated accurate estimate considering the risk from supply chain constraints.

Our 2024 guidance for free cash flow generation increased from $220 million or higher to now $300 million or higher, the changes reflect monies from Boeing agreement, the loss of around 5 previously mentioned aircrafts in Commercial Aviation guidance and the forecasted down payments from recently signed defense contracts. From an operational perspective, we feel comfortable to reiterate our $125 million to $135 million guidance for Executive Aviation, despite the ongoing supply chain challenges we face on a daily basis. We continue to work steadfastly to accomplish our production plan with safety and quality and to reach our new 2024 financial operational guidance. We are also on track to deliver for C-390 Millennium scheduled for this year.

Looking forward, it’s important to mention we still see double-digit growth for aircraft deliveries, revenue and EBIT in 2025 and beyond, notwithstanding the current operational challenges. With that, I conclude my presentation and hand it back to Francis for his final remarks. Thank you very much for your attention.

Francisco Gomes Neto: Thank you, Antonio. We delivered another solid quarter for our shareholders despite all the challenges we continue to face in our supply chain. I am especially proud of the hard work of our almost 20,000 employees, whose contributions helped us reiterate our 2024 revenue guidance and even better revise upwards our adjusted EBITDA margin and free cash flow estimates for the year. Aussie Aussie, Oi Oi Oi. I would like to give a warm welcome to Virgin Australia as a new operator of our E2 family and the first in Oceania. We believe the world’s most fuel-efficient single-aisle aircraft will offer outstanding comfort, the lowest noise emissions and fuel burn in its class and higher performance to complement the fleet of one of the largest Australian airlines.

The joint purchase for 9 C-390 Millennium by the Netherlands and Austria will allow both nations as well as current and future operators to cooperate with other NATO nations. They should benefit from synergies in areas like training, logistics and future growth of the platform. We welcome the 2 newest members of the growing group of the most efficient and modern military tactical transport aircraft. Our company remains very well positioned for the future, especially with a 9-year high $22.7 billion backlog and the steady progress seen in our operational and financial indicators underpinned by our solid strategy plan. To finish, I’d like to thank you all again for your interest and confidence in our company. We are optimistic about year-end results and very confident about our future.

We continue working hard and embracing the foundation of our culture that is safety first and quality always. Let’s now move to the Q&A session of the call.

Q&A Session

Operator: [Operator Instructions] The first part of the Q&A session will be exclusively for equity research analysts and investors. The second part of the Q&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. [Foreign Language] [Operator Instructions] Our first question comes from Andre Ferreira with Bradesco BBI.

Andre Ferreira : Congrats on the results. Just one quick one here. About the commercial aircraft guidance, I guess the revision is, of course, related to the ongoing supply chain issues. But does it mean that the supply chain got worse? Or is it just more of a course adjustment? And just a follow-up on this, is it more so the supply chain issues? Or maybe did the lower guidance have a component of mix or just operational issues related to bunched up deliveries for the latter half of the year?

Francisco Gomes Neto: Andre, Francisco speaking. Thank you for your question. Again, this delay has to do with the supply chain only. In average, we have seen improvements in the supply chain. But we still were still facing challenging with a specific group of components, mainly engines and structural parts. And there’s no other reason, no reason of mix or labor or other topics. It’s basically due to supply chain and basically with the E2 aircraft.

Operator: The next question comes from Lucas Marquiori with BTG Pactual.

Lucas Marquiori : I just want to hear your thoughts on margins actually. So if you could give us any color on why — I mean the weaker margin on Commercial. I know, I mean, probably volumes. But if there’s anything else there, any comments on if this should kind of ramp up better for next year? And also on Executive Aviation, if you guys think this high very strong margins on Executive Aviation, if you guys think this is sustainable for Q4, maybe ’25 as well? I mean any color on that would be helpful, guys.

Antonio Carlos Garcia : Thank you, Lucas for the question. Antonio speaking here. In regards to Commercial Aviation, we have a combination of effects in Q3. It is a mix of more E2s instead E1s, first point. And also the customer mix, which is not favorable for the margin results and is basically highly concentrated in Q3. A part of the, I would say, lower volume that should be offset in Q4. I would say, our expectation continues to be for this year, lower single-digit margin for Commercial Aviation and move forward mid-single digit. The case does not change. It’s just really a bad quarter in regards to a specific performance and customer. For Executive Aviation, yes, we have some good guys in the quarter and a lot of output that we need also to see in this case. I would say, I do not see 16% happening in Q4, but lower-teens margin is going to be our pace for Q4 and the years beyond.

Operator: The next question comes from Marcelo Motta with JPMorgan.

Marcelo Garaldi : It’s regarding the recent defense orders from Czech Republic. If we look at the document that was published by the government from Czech Republic, I mean, they talked about a contract that has a high value. I mean, we are talking about potentially being over $400 million. So just trying to understand here if this is related to services of the — if the aircraft that they are buying, they have a much higher average price and potentially higher margin than the rest? And also they comment about a very strong down payment for this order, so any color that you can give us on that front that will be very helpful.

Antonio Carlos Garcia : Thanks Marcelo. Antonio speaking here. I would say it’s true what is written there, but it’s not as it was mentioned. I would say it’s a big amount of money, but it’s not only Defense. It’s also going to the service piece that we are going to put in the backlog in Q4. I would say, as long as you get the money on our bank account. That’s why when we set the new guidance for cash flow, $300 million or better is because of it. We do not have already received it. If you receive everything that was written in the contract, then probably have still an upside on the free cash flow guidance.

Operator: The next question comes from the cell phone number ending with 7519 with Citibank.

Steve Trent : Steve Trent from Citi. Just a very quick question. I recall that on the commercial aerospace side, you guys roughly did 2/3 or thereabouts of your Aerostructure work in-house, which seems considerably higher than your competitors in a good way. Do you see any opportunity at all M&A or otherwise to tick that number up a little bit? Or do you think on a long-term basis, 2/3 is a good level when you look at where we are in the cycle?

Antonio Carlos Garcia : I would say we are, I would say, highly verticalized on our Aerostructure business. For sure, it’s also a piece that is really under severe pressure outside our company here. I would say we always do make our buy analysis. But we are not — we do not see M&A as an alternative for us on this regard. If you could in-source additional parts, it is okay. But I would say it’s not something that we are putting a lot of energy right now to look for that.

Operator: The next question comes from Myles Walton with Wolfe.

Myles Walton : So I wanted to go to new product investment, if I could. And in the context of the financials that you’re putting up, it looks like Executive is sort of lights out in terms of your performance over the near term and over the medium term. And similarly, you’re having struggles financially in the Commercial side with relatively captive markets in the 175 and obviously competitive markets in the E2. Does that inform where you’re going to put the next dollar of investment? And if you can’t make profit in 6 years in Commercial Aviation, there’s a lot of speculation that you’d go further and deeper into that market. But the financials, at least looking backward, would tell me that’s probably not a good idea. Does that resonate with you, Francisco?

Francisco Gomes Neto: Myles thanks for the question. I think this is the beauty of having different business, right? I mean, in one period, one business is good, other one is not as good and another period is the opposite. I think the period we are living now we are seeing a very good performance with our Executive Aviation or business aviation and not as good as in Commercial. But remember that our most profitable area is services. And in services, almost 40% of the services revenue comes from commercial jets. On the other hand, yes, we see good perspective for the E1s, still E1s for the next 10 years. But the E2s, if you look at the — from what is happening in the market, since 2023, we added 5 new customers for the E2s. Customers as, for example, Scoot in Singapore, showcasing our aircraft in Asia Pacific, Royal Jordanian doing the same in the Middle East, Luxair and LOT Polish — I mean, in Europe, LOT Polish is considering to replace the almost their entire fleet.

Mexicana in Mexico, I mean, joining Porter. So we see good prospective for the E2s as well in the future. And then we will see the Commercial Aviation coming back to good performance as well, as Antonio said, to middle digit in terms of EBIT, but with a very strong contribution for our Services & Support performance as well.

Antonio Carlos Garcia : And Myles, just to complete the answer here. What we are capturing the new backlog or new contracts for Commercial Aviation. We have a different margin profile than we have with the old contracts. We are in this, I would say, migration right now from old backlog contracts to new ones. I would say that’s why we are confident to the mid-single digit margin in the midterm, I would say, in the next 2 years. That’s our trip right now that we are foreseeing. And again, a big part of it is already embedded in our backlog.

Myles Walton : Just one clarification, you mentioned fourth quarter Commercial Aviation margins would get better. Are they going to be positive in the fourth quarter?

Antonio Carlos Garcia : Yes, absolutely. We see for the whole year a lower-single digit margin between 2% to 3%. That’s more or less what you see today. And the mix for Q4 delivery is much more favorable. That’s more or less confirming what I just told to you right now. There’s, some new contracts we have in our backlog that’s accretive for a much better margin, a part of the operations that we do have more volumes in Q4.

Francisco Gomes Neto: And also, Myles, if you look at the past years, the Commercial Aviation with all the difficulties have delivered positive results. That same we expect for this year and years ahead.

Operator: The next question comes from Lucas Laghi with XP Inc.

Lucas Laghi : Antonio, you mentioned the 3 points of non-recurring items in the adjusted guidance for EBIT margin this year. That would imply an adjusted level of 6% to 7%, right, on a recurring basis. I mean now that we’re heading into the end of the year and looking more closely monitoring what 2025 will look like, I mean, is this 6% to 7% range a good reference to have in mind for next year’s profitability as a starting point? I mean, not trying to have a number not to have a figure. But I mean, you mentioned the profitability improvement expectations for Commercial in the upcoming quarters. I mean, what should we have in mind as profitability drivers for the next years for the other divisions as well? I mean, trying to compare what should we expect in 2025 onwards compared to the 6% to 7% range reference that we would imply for this year’s profitability on a recurring basis.

Antonio Carlos Garcia : Thank you, Lucas. Antonio speaking here. I hope you changed your report getting out from the neutral to the positive. For sure, the margin we are seeing right now is far below our ambition in this group here. What you should see for the future, then, I will ask Gui to expand about this year. If you see our backlog, we are growing in all divisions on the Defense, Services and Executive faster than Commercial Aviation. We do see these 3 business units and lower teens margin in the coming years. That’s accretive already for a higher number. And with the improvement on the Commercial Aviation, we do see, I would say, the overall company margin moving up to a higher-single digit or even closer to a lower double digit. That’s the future. For the current one, I just want to Gui to explain you about the non-recurring items that we just reported today.

Guilherme Paiva: Lucas thanks for the call. So if you look at our guidance, we increased by 250 basis points, both the low and the high end versus where we were before. The move is fully explained by the BA monies that we received and also the onetime tax credits that we reported in Q2. So as Antonio mentioned in his previous speech, despite lowering our guidance for Commercial Aviation by on average 5 aircraft, we were still able to achieve the operating margin that we had set forth in the beginning of the year. And looking forward, as we have operating leverage in the company, as we continue to grow our production, we would expect the margin in the next couple of years to continue to improve.

Francisco Gomes Neto: And Lucas, if allow me to complement what my colleagues just said. We have very well structured initiatives in place, such as price discipline in new sales, cost reduction initiative, production lead time reduction, expense and investment control, production linearity. So all those initiatives combined with what Gui just said about deliveries growth, this will result in better financial performance. So this is why we are saying that we expect to improve our performance in other business, including Commercial Aviation as well.

Operator: The next question comes from Daniel Gasparete with Itau.

Daniel Gasparete : The first question would be related to the competitive environment. We are talking about supply chain issues. So I wanted to get your view on how the whole supply chain issue on the market has been translating to better opportunities for you guys to gain new orders or price at better margins. Just to get a sense, if the clients are moving out for perhaps your competitors moving to Embraer to E2 or to E1 given the supply chain issues on the competitors. And secondly, if you allow me, Francisco mentioned about the beauty of having a diversified portfolio, right? You have Executive right now doing very well and Commercial ramping up. So I just wanted to get Francisco’s view on when he expects Executive to turn or if it’s not on the horizon at all?

Francisco Gomes Neto: Daniel, so let’s start with the supply chain. As I said before, we see in average supply chain is improving, but the aggressive growth of all OEMs is pressurizing the supply chain, right? So again, they are improving average, but we are still struggling with specific components. So what we have done? We have put in place a new organization in our supply chain area. I mean, with more people working very closely to our most critical suppliers. We are implementing a new digital platform to improve the speed and accuracy, the relationship with our suppliers. We are implementing also new platforms to help us to manage better the forecasting in the parts in our organization. Again, we are doing a lot of things to make our supply chain management globally more robust.

We have also put in place a team to manage the global chain capacity. So to make sure that we are monitoring not only the Tier 1 but Tier 2 and Tier 3 of our suppliers to make sure that you have a capacity to fulfill with our demands in the future. So again, we expect to grow, as Antonio said, double-digit again in next year. We have been growing a lot in the past 3 years. But with this better structure and with our experience we have accumulated with the relationship and the performance of our suppliers, we believe our plan for next year will be even more robust than it was for this year. And number two, you mentioned about the executive jets. I do not expect executive jets going backwards. I mean, we see the market for us normalizing but at high levels.

We do see growth in our executive jets sales and deliveries for the following years.

Daniel Gasparete : If you allow me just a follow-up here, just to better understand the first part of your answer. Would you say that your level of conversion in terms of the bids that you guys compete has been increasing given this whole supply chain issue on the market, affecting your competitors? Or would you say it will be the same, just trying to separate things here.

Francisco Gomes Neto: I don’t know if I understood your question. Could you repeat what do we mean by conversion?

Daniel Gasparete : If in the bids that you are competing against competitors, if you are seeing that the level of conversion — if you’re winning more contracts or not regarding Commercial Aviation given the whole supply chain?

Francisco Gomes Neto: We are very — actually very optimistic with the potential new orders. We are basically sold out until 2026. We have available slots from 2027 onwards. But we are in campaigns for more than 200 aircraft. So we are very optimistic to fill our production slots for until the end of the decade for all the units. I mean, Commercial Aviation is active in defense. So we are in a very positive moment at this point of time in terms of sales opportunities to fill our production slots, as I said before, in the following years.

Operator: The next question comes from Alberto Valerio with UBS.

Alberto Valerio : I have 2 on my side that’s left for me. It’s about the Boeing deal. If you could provide us what would be the tax on this $150 million and the cash out of it? And the second one, looking for 2025, can we consider these deliveries of KCs per quarter — 2 per quarter for next year, 80, maybe for the entire year for next year? And also, I remember that you guys were trying to make better seasonality on deliveries for commercial and business jets. It looks like business jet worked very well, commercial not yet. But how can you look at that for the next year?

Guilherme Paiva: Alberto, thanks for the question. On the Boeing monies, as Brazilian corporate, we have to pay fully the 43%, which includes PIS/COFINS and income tax in Brazil. So at the EBIT level, we recorded the full $150 million. And for the bottom line, we do expect to pay according to the legislation initially 34% of income tax. But we have to kind of obviously look at all the tax credits and the possibilities that we have at year-end when we do our accounting for the full year. Let me pass it to Francisco to go over the KC.

Francisco Gomes Neto: KC, yes, Alberto, we are planning to grow the production deliveries of KC in 2025 as well as for the other business units. So we actually — we are going to see growth, important growth, 2-digit growth in all the 4 business units we have, Commercial, Executive, Defense and Support & Services.

Alberto Valerio: About the seasonality, can we consider that Commercial will also have a better seasonality next year?

Antonio Carlos Garcia : Well, Commercial, we are still dealing with the limitation in terms of supply chain to grow. We could grow further in Commercial and even the business jet. But we are making a very robust and realistic plan according to our experience with the supply chain. But even then, we are planning to grow 2 digits in all the business units. And so especially Commercial, as I said before, we are working in a lot of campaigns with more than 200 aircraft. And we expect to see results within the next 6 to 8 months.

Operator: The next question comes from Victor Mizusaki with Bradesco.

Victor Mizusaki : Congrats for the quarter. I have just one question here. When we take a look at Services & Support revenues and I mean, when I take a look at first quarter, second quarter and third quarter and then we compare third quarter with the first, we’re talking about a big expansion of like $60 million, right? So my question here is if we can assume that this is basically the ramp-up of OGMA expansion. And I mean, if — let’s say that I mean, we are talking about like $60 million per quarter of additional revenues, then we are talking about annualized revenues of like $240 million. So my guess here is that, I mean, the ramp-up is moving faster than expected. And now we’re talking about like 50% of potential revenues from this expansion. So my question here is, if this analysis makes sense and that’s why margins in this division, is also moving up.

Antonio Carlos Garcia : Thanks Victor. Antonio speaking. Thanks for the nice question here. We are going — on the revenue side for Service & Support, you are going — you already realized we are up on the revenue side. I would say the ramp-up on the OGMA operator for the MRO for the engines is just 40% out of it. On the other side, we are continues to growing with the new contract. That’s why I would say we do see a pick in revenue for this year. And the margin is going to, I would say, be accretive in what we are showing here on the accumulated 9 months. That’s why your math is a little bit better. Your math is really fits. And please do not forget ramp up for the MRO facility. This year is more causing losses than wins because we have a pre-operational cost. But at the end, to answer your question, I do see something like $100 million more for the year on Service & Support with the margin we have accumulated year-to-date.

Operator: This concludes the question-and-answer session for equity research analysts and investors. Now, we will start the Q&A session dedicated to the press. First, we will answer questions in English and then we will answer questions in Portuguese. We will also answer questions sent via the platform chat. Please let me say a short announcement for Portuguese speakers. [Foreign Language] [Operator Instructions] The first question comes from J. Hemmerdinger.

Jon Hemmerdinger: Jon Hemmerdinger from FlightGlobal. Francisco, can you expand more on the supply chain issues? You mentioned engines and you mentioned some structural components. How bad is the issue still? How many engines are you short? What’s your expectation for improvement on the problem next year? And what about components, what types of components are in short supply? When is this going to get significantly better? Do you have anything more you can add?

Francisco Gomes Neto: Thanks for the questions. About specific about engines, we have to recognize that we are increasing the demand for engines a lot this year comparing to last year. So the problem is that we are not getting the engines on time to be able to finalize the assembling of our aircraft and delivery the aircraft to the customer. That’s the issue. But the output in terms of quantity is improving from last year to this year. And we expect to continue to improve for next year. The problem is the timing. This is why we are still struggling with the deliveries and are reducing our guidance in terms of aircraft for commercial aviation. But we are also having issue with other parts, structural parts, interior parts that have been also a bottleneck for us to finalizing the aircraft on time according to our plan.

But we are now improving our planning criteria for next year in order to avoid this kind of, I’d say, last minute surprise. But again, I mean, we recognize that we are increasing the demand, but it’s not only us but all the industry which put more pressure on the supplier, right? But things are improving, but not — let’s say, not at the pace we need for this year. I hope I answered your question.

Operator: The next question comes from Cristian Favaro with Valor.

Cristian Favaro: My question would be a really straightforward one regarding the U.S. marketing. I mean they have a new President now and everyone in the market is trying to understand the possible effect on every industry. And my goal is, I mean, do you see any risk in terms of sales to the U.S. or policies that might affect the business for Embraer in the region? I mean, Brazilian President Lula is a really huge promoter in terms of spreading Embraer abroad. And he is not actually an ally of Trump. So what’s your perspective on it?

Francisco Gomes Neto: Thanks for the question, Cristian. Well, at this point of time, we don’t see any big risk or big impact for Embraer. Let me remind you that Embraer has been in the U.S. for more than 45 years. We have in the U.S., almost 3,000 high-qualified employees. We have in the U.S. almost $3 billion in assets. We have production plants in the U.S. We have a very important content in our aircraft of U.S. products, U.S. equipments. So again, every aircraft we sell, we are helping the U.S. economy as well. So again, because of this partnership, this connection, long-term connection with the U.S., we don’t believe that Embraer will suffer with this change. This is our view at this point of time to make this very clear.

Operator: This concludes the question-and-answer session in English for the press. [Operator Instructions] [Foreign Language] The first question is from Joao Sorima from O Globo.

Joao Sorima: Congratulations on the results. Can you talk about your sales campaign for KC-390?

Francisco Gomes Neto: We are quite optimistic. We’re very excited about the prospective for KC-390. This year, we have already announced 11 new orders, Netherlands, Austria and recently, Czech Republic. And there are many other campaigns that are ongoing as we speak. This is a best-in-class aircraft for the segment. It’s been quite well welcomed, especially in Europe and Asia. Last year, we sold to South Korea. So yes, we’re very optimistic with our sales and the growth we’re seeing for this aircraft for the next years.

Operator: Next question from Cristian Favaro from Valor Economico.

Cristian Favaro: Now since we’re speaking Portuguese now, I’m going to ask another question. Can you please give us some color on FNAC? We talked about this fund. We were waiting for news on that regard. How does that reflect on you? Is there an upside for the future? Can that help the company in any way? Can we increase the number of orders per part for airlines in Brazil?

Francisco Gomes Neto: Well, Cristian, you can actually ask as many questions as you want, okay? Be our guest. Now, we see this quite positively. FNAC is advancing quite well. And it’s a fund that is now available to support airlines. I think we need healthy airlines. We need the market to grow. We are seeing the market grow. But we’re surely going to need to have stronger airlines, who will need more aircraft. Now since the government is to improve connectivity, not only between large cities, but also small cities. We understand that our aircraft is a perfect fit for such strategy. Our aircraft is of the ideal size. It’s quite efficient. And we are confident that airlines are going to see that. Azul already does. And we expect other airlines to see the same. So we’re quite positive, not only with the FNAC fund, but also considering that we’re going to have new airports soon enough and the current government is trying to better connect smaller cities in the country.

Cristian Favaro: Follow-up question. Do you know when this is actually going to be seen as money for the market? When airlines are actually going to have access to this fund? Any estimates on that?

Francisco Gomes Neto: Not really because Embraer is not directly involved with that. We just follow up the news because it is of our interest, but we’re not directly involved with the process. So I can’t really answer that question.

Operator: Next question was sent via chat by Ricardo Meier. When we look at the slide of operators for KC-390 showed flags from Morocco, the UAE and Chile. Are they potential customers, Ricardo Meier from the AIRWAY website.

Francisco Gomes Neto: Ricardo, these countries are interested in those aircrafts. We’re looking closely into some of them, not to all of them. But yes, I think these countries are interested in these products, nothing more than that. In the Middle East, we’ve been in touch with some countries trying to tap into some sales opportunities. But for other countries, like I said before, I think they could be interested potentially in our products, which is quite positive.

Operator: Next question by Jesse Nascimento from Vale 360 News.

Jesse Nascimento: Here’s my question. I wanted to hear your take on the Boeing crisis. They are laying off many employees, including people from Sao Jose dos Campos office. How are you going to make the most out of this opportunity? How are you going to sell more Super Tucanos aircraft since Embraer has been expanding their operations on the commercial market? Now, since you touched on the American market, you mentioned the U.S. elections and Trump coming into office. How can that impact defense market since you want to expand to the U.S.?

Francisco Gomes Neto: Jesse thank you for your question. On the Boeing issue, we do follow-up the news. But we have our own strategy and we’ve been following that strategy with great discipline. And that’s what’s bringing about these great results we can now see. And that’s what we’re going to continue doing, creating our own strategy and just deploying that and of course, watching out for what’s happening around us. On the U.S. note, like I said before, we have a long-lasting partnership with the U.S. for more than 4 decades, not only in terms of Commercial Aviation, but also in terms of business aviation. Great part of that happens in the U.S. We’ve got 2,000 aircraft flying in the U.S. and defense is, of course, a great potential market for our KC-390 aircraft for the future.

And we’ve been working on that to be able to introduce this aircraft in the U.S. Considering this long-lasting partnership and considering what we bring to the market in terms of products and equipment, we don’t think there will be any negative impact. Much to the contrary, we think this partnership will become even stronger with the U.S.

Operator: This concludes the conference call. Just one second, apparently, we do have a question. We have one last question in English from [Carl Schwartz]. What will be the total investment needed on Eve up to certification and delivery start?

Antonio Carlos Garcia : It’s around $600 million total today and we have cash to run the company for the next 3 years.

Operator: This concludes the Q&A session and Embraer’s earnings call. Thank you very much for your participation. I hope you all have a great day.