Good morning, ladies and gentlemen, and welcome to the audio conference call that will review AMER's 3rd Quarter 2020 Results. Thank you for standing by. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions As a reminder, this conference is being recorded and webcasted atri.embria.com.br. This conference call includes forward looking statements or statements about events or circumstances which have not occurred.
Embraer has based these forward looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance. These forward looking statements are subject to risks, uncertainties and assumptions, including, among other things, general economic, political and business conditions in Brazil and other markets where the company is present. The words believes, may, will, estimates, continues, anticipates, intends, expects and similar words are intended to identify forward looking statements. Embraer undertakes no obligations to update, publicly or revise any forward looking statements because of new information, future events or other factors. In light of these risks and uncertainties, the forward looking events and circumstances discussed on this conference call 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 Mr. Francisco Gomez Neto, President and CEO Mr. Antonio Carlos Garcia, Chief Financial Officer and Procurement and Mr. Eduardo Colto, Director of Investor Relations.
I would like now turn the conference over to Mr. Francisco Gomez Neto. Please go ahead, sir.
Good morning, everyone. Thank you very much for participating in this conference call. I am Francisco Gomez Neto, President and CEO of Embraer. Before giving the floor to Antonio Garcia, our CFO, I would like to make some initial comments. With the recent growth in the number of COVID-nineteen cases in different parts of the world, notably in Europe and in the United States, we remain focused on the health and safety of our people, assessing the situation on a daily basis at each of our units around the globe.
Regarding finance, our focus in the short term remains on preserving cash through the execution of a series of measures implemented over the past few months, which I have already discussed with you during our past earnings calls. In parallel, we are preparing the ground for a much better financial performance in 2021 and grow in the following years. Today, I'd like to take a few minutes to focus on some of our priorities, namely a lean organization in recapture synergies and business plan update. Next slide please. Regarding our lean organization in recapture synergies pillars, we have made every effort to maintain the know how and competitive advantage brought by our remarkable people.
But in view of the new market reality, it has become essential to review our workforce. And in the last quarter, we made a significant adjustment to our structure. We analyzed the structures and teams of each area within the company with the goals of creating a leaner and more agile organization and eliminating the duplications generated by the commercial aviation carve outs. We have already recovered synergies with the reintegration of commercial aviation and the associated services and support and at the same time, we have retained all the skills necessary to return to growth in the coming years. A simpler and leaner organization has been prepared for properly implementing our 20 1, 2025 strategic plan, a theme that I will address on the next slide.
While we are dedicated to managing the impacts generated by the crisis in the short term over the past few months, we have also focused on updating our business and growth plan. We believe that the period between now 2025 can be divided into 3 phases. This year is dedicated to crisis response. Starting next year, we expect that the market will start to recover with variations depending on the specific business areas and markets. And from 2022 onwards, our projects will mature and allow us to grow profitably.
Regarding Embraer 2,125 strategic plan, we have reviewed the details over the past few months in response to the new market scenario, including the impacts generated by the pandemic, the end of the agreement with Boeing and the reintegration of commercial aviation. This was a collaborative effort involving dozens of company leaders. We focused on the plan's effectiveness and we know it is realistic. The goals are challenging but doable and we will execute with focus, governance and discipline. The plan has 2 main objectives: to increase revenue and to improve profitability.
To achieve these two objectives, we defined 3 lines of action: Number 1, initiatives aimed at efficiency gains Number 2, actions to increase sales of our current product portfolio and number 3, a combination of business diversification projects, innovation and strategic partnerships. In total, the plan comprises 18 projects that will bring more agility and intelligence to the processes and reinforce alignment across the company. Just to give you a little more visibility, the first front which is related to efficient gains entails the creation of a world class purchasing organization reporting to the CFO and focusing in a very structured way on intelligent cost reduction. At the same time, we are incorporating more intelligence into the processes within the material planning and logistics area, focusing on increasing inventory return to reduce substantially working capital. In operations, the projects aim to reduce aircraft production cycles, which will allow us to have more competitive products and reduce working capital as well.
Regarding the second front dedicated to the growth of portfolio sales, we will intensify the sales efforts of our products. We benefit from new and competitive products in every segment in which we operate. Additionally, we will focus on adapting and converting aircraft for specific segments, such as converting ejets to carry cargo in the passenger cabin or the recently launched Pheno 300 Med which was designed for medical evacuation. Finally, on the diversification, innovation and partnerships front, we are going to expand our operations. This year, we have already announced investments in cybersecurity with the acquisition of Tempest, the Frigate project with the Brazilian Navy and more recently the creation of Eevi, a company dedicated to the development of the urban air mobility ecosystem and eVTOL, electric vertical landing and takeoff aircraft.
With this front, we are also developing projects to expand our service offerings for aircraft from other manufacturers and we are discussing potential strategic partnerships aimed at opening new markets and developing new products such as the turboprop. It's important to note that in addition to managing where we structured projects, the plan focused on the process of execution and on the constant monitoring of the evolution of all initiatives. We are aware of the challenges we have ahead, especially in commercial aviation in 2021, but we are very confident in the future of Embraer. We know what must be done. We know how the plan should be carried out and we have an immensely competent and aligned team that will develop the necessary initiatives to make the company grow profitably in the coming years.
With that, I have concluded my comments and I would like to give the floor to our CFO, Antonio Garcia. Over to you, Antonio. Thank you all.
Thanks, Francisco. Good morning, everyone. It's really a great pleasure to talk to all of you. Now moving to the commercial aviation highlights on Slide 7. During the Q3, we delivered 7 ejets, representing a sequential improvement compared to the 1st and second quarters that will accelerate even more in the Q4.
Among our 3rd quarter deliveries, we had 5 175s for United Airlines, highlighting our continuous leadership in U. S. Regional jet market. As another example of our continuous improvement, we have already delivered more plants in October than in the entirely Q3 of 2020. As far as new operators, Alliance Airlines from Australia received 14 pre owned E190s and Bamboo Airways from Vietnam started operation with 2 E195.
We are still not in the point where we can give guidance on expected deliveries or financial performance due to the COVID-nineteen uncertainties. But we would like to point out that we remain cautiously optimistic for the future as we have seen a gradual rebound in domestic flight activities in several markets around the world, including United States. Looking at commercial aviation in 2021, the uncertainties around the COVID pandemic are still our biggest concern for next year. The fleet of 175,000,000 operations continue to improve with 93% in service as of end of September, outpacing our competitors in the market. I'm also proud to say that we had zero cancellation of commercial jet orders since beginning of the COVID pandemic.
In Executive Jets, on Slide 8, we had a strong delivery pickup during the Q3 with 21 deliveries. This brought a total executive jets delivered so far in 2020 to 43 aircrafts. We expect the 4th quarter to remain strong for Embraer and deliveries should continue to increase compared to the previous quarter. As a result of higher deliveries, improved mix and measures taken to be more cost efficient, the Executive Debt segment posted positive operating margins in the Q3 year to date, marking the continuous turnaround of our profitability on this segment despite the COVID-nineteen pandemic. Also as mentioned in the last call, we launched the Phenom 300 MET during the Q3, which is a unique midwax solution that's also available for hetero on existing Phenom 300s.
In terms of new technology, Embraer continues to disrupt the media segment with Praetors. HIPAA filters, now being standard while laboratory electrical doors and synthetic vision system were both certified during the quarter. Finally, we would like to highlight the continued recovery during the 3rd quarter, in particular with respect to the fractional and charter operation with smaller and medium jets. Among fractional small jets activities, was down only 13%. Year over year compared to the medium jets down to 18% and larger jets 33%.
Among charters, small jack activities was almost flat versus last year, while the medium and larger jet class were down 5% to 70%, respectively. As you can see, the marks where rebar is positioned with the finance operators are recovering faster. Moving to Slide 9, we show the highlights for defense and security. Regarding the C390 billion new program, there are currently 6 C390 in various stage of production for future deliveries to Brazil and Portugal. And we expect to deliver 1 more aircraft to the Brazilian Air Force still this year.
The program also received the 2020 Grand Laurent Award for Defense from the Aviation Week, which selects the best aircraft programs across commercial, executive, defense around the world. Another highlight during the quarter was the Super Tucano as Embraer was able to deliver 10 plants to international customers. With the reopening of global borders, we were able to deliver Super Tucanos to Nigeria, Chile and the Philippines. Finally, the 1st Gripen E arrived in Brazil to start its flight test campaign, which is a major milestone in the Brazilian jet fighter program with Saab. Embraer will also play a leading role in the execution of the program in Brazil, and we will be responsible for the systems development, integration, flight testing and final assembly and deliver of the aircraft to the Brazilian Air Force.
Now turning to service and support on Slide 10. We are proud to say that Embraer once again was ranked 1st in Pro Pilots Corporate Aircraft Product Support Survey in 2020, underlining our commitment to customers to provide the best after sales support possible. Our service and support team also completed the 7th conversion of a legacy 450 to appraiser 500 since this service became available early this year. We were also able to get a certification in the Q3 of the first e jet modified for cargo transportation in cabins, offering our customer a solution to better utilize their fleets in the environment of lower passenger traffic caused by the COVID-nineteen pandemic. Further in servicing, we are pleased to see that the KC-three ninety Millennium has been showing excellent reliability in the humanitarian missions in Brazil and abroad.
Moving on to our financial results on Slide 12. Our backlog finished 3rd quarter at $15,100,000,000 representing several years of revenue for Embraer. It is important to highlight again that despite some deferrals, we didn't have any cancellation in commercial aviation, and we expect some new sales to potentially lead for a backlog expansion in the upcoming quarters depending on the impacts of a second COVID wave in certain regions. On Slide 13, we show revenues and deliveries. We can clearly see an improvement in the 3rd quarter relative to what we had in the first half of the year and the impacts of COVID on the industry start to reduce.
With higher commercial and executive jets delivered in the quarter. As I mentioned earlier, we expect an even better Q4 compared to the Q3. We also had a strong revenue improvement in defense and security following the reopening of international borders to allow for the deliveries of super Tucano. Our service and support business, despite a year over year decline due to the COVID-nineteen, has also increased double digits sequentially from the 2nd quarter with a potential improved activities across the commercial executive and defense markets. Next on Slide 14, Embraer highlights its continued cost control in selling and administrative expenses.
The reduction of SG and A reflects our ongoing efficiency and restructuring actions, as already mentioned earlier in this presentation, combined, of course, lower marketing expenses coming from the COVID-nineteen restriction. It is important to mention that said expenses include higher bad debt provisions compared to last year, mostly related to our service and support receivables. Excluding the bad debt provision, SG and A expenses on a year to date basis in 2020 are 30% lower than the same period of 2019. On Slide 15, we show our operating results. Embraer reported adjusted BIT of a loss of $45,000,000 in the 3rd quarter with a margin of minus 6%.
The adjusted VAT in the 3rd quarter excluded a positive impact of EUR 7,000,000 from special items, including EUR 54,000,000 in charge related to our restructuring announced in September and EUR 30,000,000 in additional bad debt provision, offset by EUR 75,000,000 positive in reverse of non cash impairment charges in executive and commercial aviation. Breaking our 3rd quarter margin by business, executive debt was positive 2%, service and support 4% positive, defense and security breakeven similar to previous quarter. Commercial Aviation was responsible for the negative operating results due to the low deliveries and the COVID impacts. So Slide 16 shows our adjusted EBITDA, which was a loss of $80,000,000 and also excluded the special items already mentioned in the previous slide. Adjusted VAT margin was minus 1%.
The combination of better volumes and cost cutting initiatives have already started to appear in the Q3, and we expect this trend to accelerate in the Q4 of the year. Moving to next Slide 70 with earnings. Embraer adjusted net income reached a loss of 100 and $48,000,000 in the 3rd quarter. Our earnings have been negatively impacted by the lower operating results as well as higher financial expenses and no cash FX losses, similar to the operating numbers. Net income also reached a bottom in the 2nd quarter and has started to rebound and we expect better borderline performance in the Q4 of this year driven by higher deliveries.
Next slide, Slide 18. We show Embraer's total investment over the last few quarters. The company has launched several initiatives to cut investment, including CapEx as well research and development. This reflects our actions to preserve cash. It also highlights Embraer's updated portfolio with state of art products in commercial aviation, executive jets, defense and security.
Embraer has invested a lot in the last 5 years, bringing new programs and products to the market, and now we expect the upcoming years to show lower investment. Total investment during the Q3 reached EUR 45,000,000 EUR 134,000,000 year to date, which is less than half of our investment level of 2019. Moving to Slide 19. Our free cash flow was a usage of $567,000,000 in the 3rd quarter. This free cash flow usage was negatively impacted by approximately EUR 250,000,000 including 3 major items.
First, one off charge of around EUR 70,000,000 related to the restructuring and severance costs package of our headcount reduction in beginning of September. Second, around EUR 100,000,000 in short term customer finance that will be normalized now in the 4th quarter and third, another EUR 80,000,000 related to 3 plants that skipped from the end of the third quarter to the 4th quarter. Excluding that, our cash consumption in the Q3 of this year will be very close to the Q3 of 2019, giving expectation for higher deliveries in the 4th quarter we saw positive impact in our working capital as well as our cost reduction initiatives. We are confident that our free cash flow will be much better in the Q1 of the year, and we should be at least cash breakeven in the second half of twenty twenty. Finally, on Slide 20, we highlight our strong cash position.
Our liquidity increased during the Q3 with a total cash position of $2,200,000,000 which is a similar cash level that would have prior to COVID pandemic. I'm also happy to announce that we complete a series of liability management initiatives, new loans with private and public banks as well new bonds insurance of $750,000,000 maturing in 2028 and has repurchase of EUR 250,000,000 of outstanding 20222023 bonds. It's important to highlight that our new 2028 bonds is unsecured and had a market demand above EUR 3,000,000,000, showing the confidence of a divestiture in long term of Embraer. With that, I conclude my presentation and we can open for questions. Thank you very much.
Thank you. We will now begin the question and answer session. Our first question comes from Robert Spingarn, Credit Suisse.
Hi, good morning.
Hi, Roger. Hi.
Just a couple of different things. First, what gives you confidence in the outlook at commercial and executive jets for you to reverse these impairments at this time? What improving trends are you seeing? And does that include increased interest in ordering aircraft?
Rod, it's Antony speaking. Good question. The reverse of impairments, assuming that we revised it in a quarterly basis, it was highly driven by the exchange rate. The devaluation of the Brazilian reais, we do have a lot of cost in reais, which means we didn't change volumes. We just changed the exchange rate to improve the margins, which accounts for the impairment reversal.
Just that we didn't change the baseline.
I see. Are you seeing any evidence of something you've talked about in the past and that we saw after 9eleven? Are you seeing actual down gauging at your customers from the commercial narrow bodies to the E Jets? And is this a trend that is gaining some traction?
Rob, Francisco speaking. Thanks for the question. We believe the domestic regional market will rebound 1st as it happened in the past, as you mentioned. And the airlines will look for more versatile, flexible and more economical fleet. And we do believe that our regions are very well positioned in that direction.
So that's why we believe we have a good chance as soon as the market pick up. Okay.
And then my last question is about your inventories either in commercial, actually in any of the segments, but do you have white tails in inventory? And if so, can you quantify?
So in regards to today, current situation, we have really a few. We are sold out in the small jets in the active aviation. And the mid side jets, we still have 3 or 4 to be sold this quarter, again, minimum. And also for the commercial aviation, We have no white tails for this time being. We do have only the carryover inventory that we are due to the postponement of deliveries to 2021, but it's not a big amount.
What you do see in our inventory, we are going to run more or less 40% of our revenue in the Q1, which means we are going to strongly go down with our event in Q4 due to the higher deliveries in Q4. But again, no big white tails on inventory.
Thank you for your comment, Antonio, on the Q4 and on the recover towards the year end.
Okay. Thank you all. Thank you.
Welcome. Welcome.
Our next question comes from Myles Walton, UBS.
Maybe Antonio, on the cash performance here in the Q3, you laid out some of the one time items. But I think the commentary last quarter was you could have been closer to breakeven even for free cash flow here in the Q3. So I'm just curious, what changed? What is pushed out to the right? And I guess following on Rob's question, why couldn't those continue to push out to the right realizing you haven't had any cancellations, but it seems like deferrals more likely than not.
Magnus, thanks for the question. Again, we in the previous calls, we mentioned that we are seeing and we see good chance to become, I would say, free cash flow breakeven the second semester or second half of the year. And we are still continuing to believe, as you could see, we have a cash burn in Q3 from $567,000,000 And we had skip of some aircraft delivery to Q4. We have also the severance payments that will have hardly impact in Q3. We will be much less in Q4, and we have the huge amount of deliveries in Q4.
We are still confident and we are seeing progressing the improvement of our free cash flow and also cash collection plays a role and also the other measures that we are taking, I'd say we are still confident that we will be closer to breakeven in the 2nd semester. But again, if you ask about my expectation, the Q3, we could be we could have been better BRL 250,000,000. But again, have this onetime effect, shifting this effect for Q4.
Okay. Just one point, Maio, sorry to do here. We had some planes that really skipped to the Q4. But as Antonio highlighted in the call, we already delivered more planes in October than the whole Q3. So I think that shows that we are very confident on to revert that now in the Q4.
And I would say all the deliveries for Q4 are confirmed, so we are not seeing risks or delays as we had. We had some planes that moved from Q3 to Q4, but now they are all conformance, okay?
Maybe an additional information, Mario. The Super Tucano we delivered in September and we delivered, but we are going to book as a revenue and cash in now in Q4, which also helps in this equation, around the EUR 80,000,000 that is not part of the Q3 results. Again, many issues working happened in Q3, but we should see the rebound in Q4.
Okay. And Francisco, maybe I can ask you, as you're repositioning the business and you want to get obviously the commercial business in particular to profit or cash breakeven at worst, What is the size what's the deliveries or the size of the commercial business that you're sizing the cost structure to and the workforce to?
Good question, Myles. We are we have been discussing this a lot in our plan for the following years. I mean, we still see that 2021 is a very challenging year. I mean, we'd say it's not much higher than we see in this year, but we are working in various fronts to adjust the cost structure of the company to deliver a much better performance in 2021, even with sales not much higher than 2020. So and the main reason for that is the commercial aviation.
We see that the 2021 will be still a challenging year for commercial aviation. We are preparing for that, in that scenario, but we see an opportunity to grow, I mean, from 2022 onwards.
Do you think 2021 could be breakeven for commercial aviation?
No. Commercial aviation, we are still suffering 2021, but we can the other units, we will have a much better performance next year.
As we are seeing this fiscal year. By the way, we are seeing this year, not because of our miles, we have the we are lucky to have a broader portfolio, and we are seeing a good performance in regards to margin for Executives and defense and security and services, which is more or less try to compensate the drop in the commercial aviation in regards to margins and results. But you're going to see the same picture in 2021.
Our next question comes from Ron Epstein, Bank of America.
Good morning, everyone. This is Mariana Perezmora on for Ron today. Hi. So my first question will be, could you please give us some color on the short term customer finance cash headwinds you have this quarter? And not only the color on the quarter, but also how and why are you confident that this is going to recover going into next year into next quarter?
Yes, that was really a short term timing delay. So we don't do customer finance and we had a very short term finance that we are transferring to the final finance agent. And so there is no risk of not reverting that. So we don't do customer finance.
And it's a red fulfillment for the ECA in Brazil, the takeout is everything you said.
Okay. And then in general, because I understand for competitive reasons, you cannot give like particular details, but how is cash profitability compared to like pre pandemic cash profitability upon delivery?
Are you talking about commercial or the whole business?
Commercial particularly.
We are improving, right? We suffer with the lower delivers, especially in the first half. 3rd quarter already started to show improvement, but the big improvement will come now in the Q4. As we mentioned, October already better than the whole third quarter, and we're going to have much more deliveries, and that will drive a big improvement in cash profitability coming from working capital reduction and also the cost adjustments that we did that Francisco Antonio highlighted.
Thank you. And if I may, the last one. You highlighted improvement in business operations. Have you seen some like pickup in demand already?
Well, you mean demand for 2021 or for the following years?
Yes. How are your sales campaigns coming in? If you have seen any pickup from for like business jet demand, what's book to bill there?
Okay. Well, I mean, as active aviation is showing a good reaction. We are, for example, in our phenom family, we are sold out for 2020. We are selling aircrafts for 2021, the phenoms. I mean, so it's moving well.
The defense and security, we are working in different campaigns as well. Also in the commercial aviation, we are working different campaigns. So hope this second wave of COVID will not bring a negative impact. On the opposite, if they announce a new vaccine, this will help a lot. I mean, the rebound of the regional and domestic flights that will help us to boost our sales in the commercial aviation as well.
Our next question comes from Cai von Rumohr, Cowen.
Thank you very much. So maybe you could comment on the mix of your biz jets. You've done very well with the 300 and the 100 and basically very, very poorly in terms of deliveries of the Legacies and the Praetors. Why you have that sort of extreme mix? And should we expect a big pickup in those larger planes in the Q4 and going into next year?
Kai, thanks for the question. I mean, let's see if I understand your I'd say. I mean, but we are improving our sales for the operators, the 600 now, also the 500. And we have specific programs, specific initiatives in our strategic plan 2021, 2025 to improve the competitiveness of the FIN100 and the Praetor 500. And with those plans, we expect to capture additional market share in the 4 years for all the family because we do believe we have a great family with the 2FINOS, 100, 300 and the 2 Praetors, the 50600.
Just to add, Francisco, now on the we had only 2 Praetors in the Q3, right, and 19 phenoms. So we expect a much better performance in terms of the operators now for the Q4.
Correct. Thank you, Eduardo.
Got it. That was essentially the question. And then going forward, because if we look at this year and last year, basically the Q3, very weak for generally weak for the larger biz jets. Do you expect a more level even spread of the large biz jets because the phenom is clearly doing well, but the large ones where the product looks attractive doesn't seem to be doing quite as well.
Kai, it's a good question for sure. We if you see the chart I showed, the midsized guests, they are not doing well compared with the small guests. That's why we are sold out in the Sino, 100 and 300. And we still have some open position for the last quarter, but I would say we do have companies for all of them. We are going to serve with another question, but I would say we are talking about 5 to 6 aircrafts on the Praetor family.
The others, we are sold out and you saw the deliveries we have year to date, 43. And we are seeing for the whole year mid-80s for the total 2020 in regards to deliveries, which shows that less quarters will be hot anyway for us. But for sure, the midsize jets, they are suffering more and also the large jets compared with the small jets.
Great. And the last question is your gross margins have come down. What should we think about where your gross margins what are the is the incremental gross margin we should think? Obviously, you have different businesses. But overall, if commercial and bizjet get better, what kind of incremental margins should they yield?
It's my point of view normalized base because we do not have the better mix until now For the fiscal year, I do see above 15% in the long run, 15% to 16%, let's say, for the 1st year.
And also, Kai, we have a lot of initiatives to help us to reduce the cost of goods sold of the aircraft as well to reduce the production cycles of the aircrafts. And this will also help us besides the mix that Antonio mentioned, will also help us to increase the gross margin of our products.
Yes. And one important point, we were impacted by the idleness this year in our gross margin, which the adjustments we are doing in our workforce is not going to happen next year. Even in Q4, September was already if you ask me today, September was already positive EBITDA gains and cash flow, just in the month of September because the evidence is being reduced and should be come to an end in Q4, which is highly impact our gross margin this fiscal year.
Our next question comes from Noah Poponak, Goldman Sachs.
Hey, good morning, everyone.
Hello, Noah.
Hi, Noah.
In Commercial Aviation, you've mentioned that you haven't really had many cancellations, but there's clearly been a decent amount of deferral activity with the lower deliveries. Can you speak to where are your customers deferring to? It sounds like you're saying 2021 deliveries will be somewhere in the zone of similar to 2020. Are they deferring to 2022 or are they deferring even further? And are they giving you new plans that you feel are relatively firm?
Or are they just still kind of throwing their hands up in the air and are still very uncertain as to when they're going to want the airplanes?
Thanks for the question, Noam. The majority of the deferral was between 2020 from 2022 onwards, especially the local airline in Brazil, here in Azul, which has impacting us heavily here. And we do see, as Francisco mentioned, 2021 more or less in the same level of this year and picking up starting 2022 to, I would say, mid-70s. And again, the highest amount of deferral start in 2022, 'twenty two and 'twenty four. And again, there is no additional postponements or deferrals.
We may see maybe that if the environment change, the second wave of COVID is not going to impact, we may see even customer ask to anticipate something. But today's white state, everything we discussed between March and April remains the same. Also, the deliveries of this year, everything we discussed, which was agreed between March April. And since then, there is no change, very stable.
If I may just add, Antonio, it's Edo here. No, it's important to say that the situation is very fluid, right, given everything that's going on with COVID. But at the first moment, maybe some customers, they put a big deferral. But as the situation starts to get better, they start to operate again. We are the whole time talking to the customers and discussing when exactly they are going to take the pen.
So as Antonio mentioned, there could be anticipations right to the initial defer that they put. So the situation could really change depending on how COVID goes, especially next year.
But again, just to allow me to compete. We are set, the company, for this new normal, I would say, in a lower base, in the order that we are able to capture more when you get an improvement and then recovering the volumes. We are not running the company, but I hope it's really fit on the ground and be conservative in the volumes for next year.
Yes. And Noah, I mean, just also helping my colleagues here, I mean, this year, we had to face a combination of 2 bad things, right? We had the drop in our revenues because of the COVID impact, but combined with costs much higher than normal because of the carve out of the commercial aviation. But we have done our homework. We have adjusted the workforce, and we have put in place a lot of initiatives to reduce costs, to reduce inventories that will help us to deliver a much better financial performance in 2021, even we say it's not much higher than 2020.
Okay, great. That's I appreciate all that detail on commercial. Maybe kind of same question on executive. I mean, obviously, it's fluid, it can change. But for now, would you speak to where you're planning production levels for total executive units, 2021, 2022?
So for the 2021, 2022, we are still evaluating scenario. We even changed our S and OP process last month, and we do see something around 90 aircrafts. But again, still fluid, but you see more or less a good level of 90 aircrafts.
Okay. And then just last one on defense. The quarterly revenues have been very volatile. I know you had the delivery restrictions, but it seems like it's been volatile even excluding that. When does the defense business, I guess, just get back onto a more smooth trajectory quarter over quarter?
And maybe just kind of walk us back through some of the bigger programmatic moving pieces that can drive growth or not in that segment on a multiyear basis? So
Well, I mean
go ahead, Antonio. Go ahead.
No, for sure, there always the defenses hanging also in the budget of each government that buying aircraft for us. And the COVID, we do have some restriction. But I would say, what we are seeing in defense, we are somewhere stable in the Super Tucano deliveries and also in the KC-three ninety volumes that we are operating for this year and also for next year. What we are still missing is additional sales for the C319,000,000 that we are right now discussing some additional campaigns. But if you ask me what could boost the situation, it's really additional sales campaign for the SUI-twenty 19.
Should we be thinking about defense revenues 3 to 5 years out as meaningfully higher or something relatively similar to the current level?
No, absolutely higher. We have a good perspective in defense for the following years. We are working campaigns for the C390 Millennium, as Antonio mentioned. We also have business with the Brazilian Navy, Brazilian Army. We have announced an acquisition of a cybersecurity company, Tempest.
We see opportunities in that field as well. So we have a good perspective for the defense for the following 5 years.
Our next question comes from Augusto Enzicchi, HSBC.
Just a quick Just a quick question. It looks in your financials that your financial expense increased sharply. Is that related to the pay down of the some of the some of your debt as well as the issuance of the new debt? And what would be a more normal level, if not the one this quarter? Thank you.
Yes, thanks, Augusto. Yes, you're right. There are some additional costs related to the new debt that we raised in the Q3. We also had some impacts from basically non cash FX losses, which is non cash. And we also had an RVG provision.
So that affected our financial expenses. I would say the normal level would be more something around BRL50 1,000,000 per quarter. That would be our net financial expenses per quarter.
Including the new debt.
Thank you
very much.
Thank you.
Our next question comes from Paul Athol, LumiSales. Please proceed.
Hi. Thanks for taking the call and taking the question. There's a loan maturity in the Q4. I'm curious how you are planning on handling that?
Sorry, what was the question?
The loan maturity in the Q4, I am just curious how what are the plans to handle that?
Yes. As I mentioned, basically, now we had a very short term customer finance that was already sold and transferred to the finance agent. So there is no nothing material, okay? It had an impact when you look the picture of the end of the quarter, but it was already sold.
So there is no $600,000,000 maturity in the 4th quarter?
No. No, no, no. We have in the 4th quarter is it's around BRL 100,000,000 BRL 150,000,000.
All right. Thank you.
Thank you. This concludes today's question and answer session.