Good morning, ladies and gentlemen, and welcome to the audio conference call that reviews Embraer's third quarter 2019 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 to participate will be given at the time. If you should require assistance during the call, please press the star key followed by zero. As a reminder, this conference is being recorded and webcasted at ri.embraer.com.br. This conference call includes forward-looking statements or statements about events or circumstances which have not occurred. Embraer has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance.
These forward-looking statements are subject to risks, uncertainties, and assumptions, including, among other things, general economic, political, and business conditions in Brazil and in other markets where the company's present. The words believe, may, will, estimate, continues, anticipate, 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 of today conference call are Mr. Francisco Gomes Neto, President and CEO, Mr. Nelson Salgado, Executive Vice President, Finance and Investor Relations, and Mr. Eduardo Couto, Director of Investor Relations. I would like now to turn the conference over to Mr. Nelson Salgado.
Please go ahead, sir.
Good morning, everyone. Thanks for joining the call. We start our presentation with the commercial aviation highlights at slide four. Embraer delivered 17 jets in the third quarter and 54 year-to-date. Among those, we highlight the delivery of the first E195-E2 to be operated by Azul Airlines. In the third quarter, Edelweiss Air, a Swiss airline, also received its first E190-E2 jet. It is important to mention that the E2 program is doing very well. The entry into service of the E2 jet since last year has been a big success. As far as services and support, Azul and Horizon Air signed service and support programs for their E1 fleets. Embraer also achieved 100% E-Jet operator enrollment in Asia Pacific for its pool programs. That includes 60 aircraft and a total of six different airlines. Moving to slide five, we show the executive jet highlights.
Embraer delivered 27 executive jets, 15 light and 12 large, in the third quarter, leading to 63 airplanes year-to-date. During the third quarter, we delivered seven Praetor 600s, including the first Praetor 600 jet assembled in Florida. As far as sales, Embraer had the highest year-to-date sales in executive jets in the last five years. With the Praetor 600 as a big success and the best super-midsize jet in the market. Interest from customers is very high, and we had the announcement at NBAA of a $1.4 billion deal with Flexjet for the Praetor jets and the Phenom 300. A deal that can get to the delivery of around 64 jets. Flexjet also became the Praetor fleet launch customer, with first delivery scheduled for first quarter 2019.
Finally, in terms of the Praetor program development, the Praetor 500 received triple certification from ANAC, FAA, and EASA, outperforming on key performance metrics such as speed and range. Moving to slide six, with defense and security business. Which continues its transition from KC-390 product development phase to serial production, with a special highlight to the entry into service of the KC-390 with Brazilian Air Force. First aircraft was delivered to Brazilian Air Force in September, and the second is expected to be delivered by year-end. The KC-390 also successfully performed a very important air-to-air refueling test with Brazilian Air Force during the first quarter of 2019 and continues to move the certification of critical military missions. Also very important to mention is that Portugal became the KC-390 first export customer. With a firm order for five KC-390 and related services.
This contract will amount to approximately $1 billion and will be included in our backlog in the fourth quarter. Talking about other defense platforms, we have sold nine Super Tucanos to two undisclosed customers, and the Brazilian Air Force received the fourth Legacy 500 aircraft modified for airport inspection operations. With that, we conclude our business highlights and move to the financial results. We start with the firm order backlog at slide eight. Embraer backlog reached $60.2 billion in the third quarter 2019, which is almost $3 billion above what we had one year ago. New orders for executive jets have been the main highlight in the backlog this year. On the defense side, the recent KC-390 order from Portugal will be added to the backlog in the fourth quarter. Next slide nine, we present aircraft deliveries. Starting with commercial aviation.
We delivered 17 jets in the third quarter, at two jets more than what we delivered in the same period of last year. Year to date, we have delivered 54 jets. We maintain our guidance of 85-95 deliveries in 2019, implying a strong fourth quarter in terms of deliveries. On executive jets, we delivered 27 jets in the third quarter, three more than what we delivered in the same period of 2018. A special highlight here to the 12 deliveries of large jets against seven in the third quarter of 2018. From these 12 aircraft, we have five Praetor 600 aircraft. We also reiterate our guidance of 90-110 deliveries in 2019 in executive aviation, also implying strong deliveries in the fourth quarter. Next slide we present net revenues. We reached revenues of $1.176 billion in the third quarter, slightly above 2018.
Year to date, we achieved $3.378 billion in revenues. These revenues are broken by commercial aviation, $408 million, executive aviation, $363 million, defense, $164. In the defense revenue, we had to account for a loss associated with the KC-390 development program of around $34 million. Services, $238 million. We reiterate our guidance of revenues from $5.3 billion-$5.7 billion in 2019. Moving to slide 11, we present SG&A. Our SG&A expenses totaled $108 million, broken by 37 in G&A and 71 in selling expenses. We continue to reduce SG&A expenses despite the preparation for the separation of the commercial aviation business. At slide 12, we show operating results. Embraer third quarter EBIT was negative in $21 million, implying a negative margin of 1.8%.
Important to mention that our EBIT included BRL 66 million in separation costs related to the commercial aviation carve-out year to date, and BRL 35 million in the third quarter alone. Excluding commercial aviation, EBIT of the businesses that will remain at Embraer was 2.6% in the third quarter, and breakeven year to date, mostly driven by better margins at executive aviation. Our margins per business in the third quarter were negative 11% at commercial aviation, driven by carve-out costs and the E2 ramp-up. Positive 6% in executive jets with the beginning of the Praetor 600 deliveries. Negative 4% in defense, as I mentioned, impacted by one-off charges of BRL 34 million in the KC-390. Positive 7% at services and support, also partially impacted by carve-out costs. Moving to EBITDA at slide 13. Embraer's EBITDA was also impacted by the carve-out costs.
EBITDA reached BRL 18 million, third quarter equivalent to a margin of 1.5%. EBITDA year to date is BRL 160 million, with 3.4% margin. We present net income. Embraer reported a net loss in the third quarter of BRL 48 million, implying a negative margin of 4.1%. Our earnings have been negatively impacted by the combination of carve-out costs, same impact as we had in the EBIT and EBITDA, and higher financial leverage that will move as we close the deal as together with the debt that will move to the Boeing commercial aviations. Moving to investments. We reached third at BRL 314 million year to date, broken by BRL 33 billion in research, BRL 137 in development, and BRL 94 in CapEx. Our major investments this year are related to the E2 program development. Cash flow at slide 16.
Embraer had a free cash flow consumption of BRL 257 million in the third quarter 2019, and BRL 921 million year-to-date. We expect to recover a big amount of our cash usage in the fourth quarter, with meaningful free cash flow generation driven by aircraft deliveries on both executive and commercial that will have a strong fourth quarter. Given that, we anticipate a negative free cash flow in the range of BRL 100 million-BRL 300 million for the full year of 2019. This negative free cash flow already includes all the separation costs. As a result of the free cash flow consumption, we show our indebtedness profile at slide 17. Our average debt maturity is 4.9 years, and Embraer ended the third quarter with a cash position of BRL 2.2 billion and a total debt position of BRL 3.5 billion, implying a net debt of BRL 1.3 billion.
Moving now to slide 9, we bring some information about the status of Embraer and Boeing partnership. As it was widely published in the press, the European Union has recently announced an extension of its decision deadline regarding the partnerships until at least March 2020. Despite that, the carve-out of the company commercial aviation business is starting as planned at the end of 2019. As we close 2019, we will start implementing the carve-out of our commercial aviation business. It will be separated into another company. It's very important to make clear that commercial aviation business will continue to operate normally 100% under Embraer management until the closing of the operation. We now expect the transaction to be consummated shortly after all regulatory approvals are obtained. We move to our guidance.
Given the cash consumption observed in the third quarter, the review of short and mid-term business plan, considering the new closing timeline of the transaction expected to occur in at least March 2020, we updated our 2019 and 2020 guidance. For 2019, Embraer reaffirmed deliveries of 85-95 E-Jets, 90-110 executive jets, 2 KC-390s, now expects the delivery of 5 Super Tucanos. Embraer also reaffirms expectations for revenues of BRL 5.3 billion-BRL 5.7 billion and break-even EBIT margin. While removing the estimates, which were dependent upon closing of the transaction at the end of 2019. We will also introduce 2019 free cash flow guidance of a cash consumption from BRL 100 million-BRL 300 million in 2019, including here again, all separation costs. For 2020 guidance at slide 22, this guidance includes only the expected results of executive defense and related services.
That is the scope that will be retained by Embraer after closing. Embraer reaffirms consolidated revenues of BRL 2.5 billion-BRL 2.8 billion, EBIT margin of 2%-5%, and break-even free cash flow in 2020. Given Embraer's expected 2019 cash consumption, combined with the anticipation of the closing of the Embraer-Boeing partnership to March or April 2020, and the potential financial impact of these delays, Embraer now expects a special dividend of between BRL 1.3 billion and BRL 1.6 billion to be paid after closing of the transaction in 2020. With that, I conclude my presentation, I would like to pass to our CEO, Francisco Gomes, for his closing remarks.
Thanks, Nelson. Good morning to all analysts and investors connected with this call. After six months as the head of Embraer, I'd like to share my impressions with the market. First, we have a great team. I am really impressed by the commitment and hard work of our team in the carve-out process to separate the commercial aviation business into a new company. Of course, the carve-out has affected our results in 2019. We are confident that after the conclusion of this partnership with Boeing, Embraer will be much stronger. Second, while we continue to manage our whole business in the ordinary course, we have been extensively working in recent months on a business plan of the new Embraer. Important actions have already been taken.
We will present it to the market at the right time, but I am 100% convinced of the huge value we have in Executive Defense and Services. With a lot of focus on sales of the great new products we have, discipline in cost control and cash generation, I believe that our biggest opportunity today is to improve these three businesses. No other initiative would create more value to our shareholders than this. That is the reason my management team is deeply engaged reviewing the business plan for Executive Defense and Services. We also continue with focus on the innovation initiatives that will contribute with the future growth of the company. Finally, we recently announced important changes as Nelson Salgado, our current CFO, will now move to Operations to increase the alignment of Operations team with the financial targets we have.
We also announced that Antonio Garcia is our new CFO starting on January 1st, 2020. Antonio comes from T hyssenkrupp and brings a lot of experience in cost control, profitability turnaround, and cash generation. I believe we are building the right leadership at Embraer to take the necessary steps that will bring enormous results to our investors in the coming years. With that, we conclude our presentation and would like to open for questions.
Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question, please press the star key followed by one. If at any time you would like to remove yourself from the questioning queue, press star two. Our first question comes from Cai von Rumohr, Cowen and Company.
Hi, this is Jeff Molinari on for Cai. Good morning, thank you for taking my questions. The first question I have is on the Boeing-Embraer JV. This week, it was reported that the EU stopped the clock to review the proposed JV. Is this latest development contemplated in your expectation for a decision in March? Will that be delayed substantially? I have a couple follow-ups.
Well, thanks, Jeff. No, we do not see that there's any additional delay. Actually, when the European Commission decided to move the process to Phase II, they defined the deadline that would be around mid-March, and they requested additional information from the two companies. We are working very hard to deliver this information as soon as possible. The European Commission stopped the clock until they receive this additional information. We do not see this as any change in the normal course of this process and don't expect this to mean a big delay.
Okay. Thank you. If I can, another follow-up. The delay caused a decrease in the special dividend range, but you didn't quantify what the impact is on separation costs. Can you talk a little bit about what the expectation is for those costs in 2019 and 2020, or collectively, however you want to frame it? Thank you.
The separation costs will amount to something bigger than $100 million, close to $100 million in 2019. There may be something left for 2020. We don't expect that to be significant.
Is there an amount in your free cash flow guidance that you're assuming? For the free cash flow guidance, BRL 100 million-BRL 300 million outflow. What are your assumptions of separation costs within that?
For the same, that guidance includes already the separation costs in the order of BRL 100 million, as I mentioned to you.
Okay. I'll get back in line. Thank you, guys.
Our next question comes from Myles Walton, UBS.
Good morning, everyone. This is Lou Fiddler on for Myles.
Hi. Good morning.
Just wanted to sort of follow up on that. What was the driver to the change in the dividend? Was it, I think previously one point six, now it's one point three to one point six. Is there a change in the amount of leakage you guys expect from the deal as well?
No. That was driven mainly by the cash flow consumption in 2019, and also by the delay, the change of the payment from early 2020 to around March. In the light of the cash consumption, we thought it would be better to change the guidance for the dividends.
Okay. Thank you. Follow-up, I think now you're saying there's, I think, five Super Tucanos. I guess I thought previously, were you expecting a few more than that this year?
No. Five of them were postponed to the beginning of 2020.
Okay, great. Thank you very much.
As a reminder, if you would like to pose a question, please press star one. Our next question comes from William Astro, Global Capital.
My question is about business orders. I'm wondering if you could provide a little bit of description on how that went for Q3.
Sorry, you're asking about business jet orders?
Yes, correct.
Yeah. Business jet orders, as we mentioned in the call, were at the highest level in the first nine months of the year from the last five years. It's been a very good result. Within those orders, we had this $1.4 billion orders from Flexjet, which is very important as Flexjet becomes the large customer of the Praetor 500. It was a very good year so far to business jet sales.
Thank you. Just a quick follow-up. Are you able to discuss backlogs for Q3 for business jets specifically?
Well, as a consequence of the sales, backlog is at its highest for executive aviation as well. I don't have here the figure for executive aviation backlog, but it is the highest ever also.
Okay, thank you.
Excuse me. Our next question comes from Cai von Rumohr, Cowen and Company.
Hi, thanks for the follow-up, guys. What is your new expectation for net cash position, if the deal were to close in March timeframe? Thank you.
Well, Cai, this depends on exactly when the deal closes. As you know, as we move by during the year, in our industry, it's normal to have cash consumption in the first months of the year because of the seasonality. The amount of liquid cash, the net cash that we will have at closing will depend on the moment the closing happens. When the closing was planned to happen coincidentally with the year-end, where we have normally our best cash position, it was one situation. With the closing moving closer to end of third quarter, mid-year, it's difficult to predict the net cash. It will depend on the operational performance and cash consumption of the first months of the year.
Okay, that makes sense. How is the separation activity progressing? You said you're on track for internally separating by fiscal year-end. What still needs to be done between now and the next month and a half?
Look, you know this is a complex problem. We have many projects going on to be able to do that separation. Right now, we are at closing the integrated test for the separation of the ERP system, which is one of the biggest tasks that we have to do. With that, we consider that most of the activities are finished, right? Our plan was to have finished most of the significant activities by the beginning of December, and that is very much on track. What we will do now as we close 2019, we will enter a blackout period because we have to shut down the current system so that we start the operation as two different separate companies. We expect to take the first two to three weeks of January in that process.
When we come back from that, we will already operate as two separate companies. The company that will, in the future, become a Boeing Commercial and Embraer, with the commercial business carved out. As I mentioned in the presentation, from this point until the closing, Embraer will continue to operate commercial aviation as we've always done. The only difference is that now internally it will be from a separate company, but same management, same leadership.
Understood. Thank you.
Our next question comes from George Lorenko, Morgan Stanley.
Hi. This is actually Josh Milburn from Morgan Stanley. I wanted to ask if you could give a little more color on the issue of your commercial profitability in the third quarter. In addition to the issue of separation costs, you mentioned that it was affected by ramp-up of the E2. Could you talk a little more about that effect and how you see that effect evolving into the fourth quarter and into 2020? I realize, of course, that if all goes as planned, you won't be managing the commercial business as of next year. I thought you'd still have some perspective.
Okay. Results of commercial aviation in the quarter, they were negatively affected by the separation costs. According to the methodology that was defined, the commercial aviation business includes almost all of the separation costs, together with some parts of the services business that is also moving with the commercial aviation. That explains a part of the results that we had in the quarter, and this is a transitory effect. We don't expect to have, as I mentioned, big separation costs moving into 2020. The other part of the result explanation relates to a mix of margins in the E175-E1, sorry, that we are delivering this year, and costs above expectations in the E190 and E195-E2s. We are working with the learning curve of these products. We are reducing costs first, but it is affecting the results as we start ramping up these two new products.
Okay, on the E175 issue that you mentioned, could you elaborate a little bit on that? Is that because it's the special configuration version of that aircraft, which we had understood in the past had a lower selling price?
Yeah, that's right. The configuration and the fact that this was associated with big orders, right? This drives these margins down.
Okay. Thank you very much for that explanation.
Our next question comes from Gabriel Rezende from Bradesco BBI.
Hi. Thank you for taking my questions. Actually, I have two questions. Follow-up on Josh's questions regarding margins. Can you affirm that the impact on margins came more from the E2 than the E175? Another question, if you could provide any detail regarding the profitability of the Praetor, it'd be great. Thank you.
Well, as I mentioned, there were three components to the commercial aviation margin. The E175-E1, the E190 and E195-E2s are ramping up the learning curve, and the carve-out costs, which, as I mentioned, are impacting almost totally the commercial aviation.
The margin on the Praetor, was that-
Oh, okay, the margin on the Praetors. Well, we had, in the quarter, a 6% positive EBIT in executive aviation with the delivery of the initial Praetor 600. We are not disclosing individual margins for products, but definitely the Praetors have a part to play in these better margins in executive aviation.
Okay, thanks. That's great.
Excuse me. As a reminder, if you would like to pose a question, please press star one. Our next question comes from Leonardo Francin, CTM Investimentos.
Hi, this is Leonardo from CTM Investimentos. I would like to ask you guys, what are your main peers doing in terms of prices in order to achieve the cost and performance of the Praetor business jets?
Sorry, I did not understand the first part of the question. What is it?
What are your main peers doing in terms of prices to achieve the cost and performance of the new Praetor jets? I mean, are they giving more discounts to achieve the Praetor price?
No. We believe very strongly that with the Praetor 600, we found a sweet spot in terms of positioning. Products that have a similar performance have much higher prices, so it is very difficult to have price reductions that would get these products to compete with the Praetor 600. We do not feel that this kind of reaction will cause us a big problem in the Praetor 600.
Thanks. Can you say something about the business jets used market? Is it getting better?
It is going well. No special points here.
Thanks.
Excuse me. This concludes today's question and answer session. That does conclude Embraer's audio conference for today. Thank you very much for your participation.