Good morning, ladies and gentlemen, and welcome to the audio conference call where we review Embraer's 3rd Quarter of 2018 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 that time. As a reminder, this conference is being recorded and webcasted atri.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 is present. The words believe, may, will, estimate, continue, anticipate, intend, expects and other similar words are intended to identify forward looking statements.
Embraer undertakes no obligation 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 may 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. Paulo Seger de Sosa y Silva, President and CEO Mr.
Nelson Salgado, Executive Vice President, Finance and Investor Relations and Mr. Eduardo Coto, Director of Investor Relations. Would like now to turn the conference over to Mr. Nelson Calgado. Please go ahead, sir.
Good morning, everyone. Thanks for joining our call. We start on Slide 4 with the commercial aviation highlights. Andrias delivered 15 new jets in the 3rd quarter 57 year to date. We anticipate a strong 4th quarter in terms of deliveries and expect to reach the middle of our guidance range from 85% to 95%.
I would like also to mention that a few E Jet deliveries improved from 3rd quarter to 4th quarter without any impact to the full year results. Another highlight is the entry into service performance of the year 'nineteen too at rigor for Norway. With 98.5% scheduled reliability and 99.5% completion rates, These are exceptional results for the entry into service of a new aircraft with a new customer. As far as sales activity, Thunder Air signed a same order contract for 12.90 E2s with direct airways from Switzerland. Another European customer, Binta Canaria from Spain, acquired 2.95 E2s.
We want to highlight that we have seen solid sales activity and we expect to close 2018 with a book to bill around 9.5. Finally, in terms of product development, the E195 EQ program is on track for certification in the first half of 2019. Next slide, Slide 5, we present highlights of the Executive Aviation Business. In terms of deliveries, Air Air delivered 24 executive jets in the Q3 and 55 year to date. Similar to previous years, we expect higher deliveries at the 4th quarter, but we believe we should be closer to the low end of our guidance at 105 points.
It's important to mention that we have been focused on price and profitability, because rather than volumes and market share. In the quarter, our legacy 4500 family reached a milestone of 100 deliveries, including the 50 leg of 454 to the Canadian operator Airspeed. In terms of new models, Indore has been made with the NGAA Airshow with the launch of the Praetor 50600. The models are the most disruptive and technologically advanced jet in the midsize and super midsize segments with unprecedented range in the segment, 2,250 nautical miles for the Praetor 500 and 2,900 nautical miles for the Praetor 600. They have the best in class cabin altitude, superior cabin design and ultra quiet interiors, as well as full flybar wires with active turbulence reduction and best in flight cable connectivity.
The purpose are part of our value strategy to improve profitability using superior products. Moving to the second security highlights on Slide 6. We start with the KC-three ninety. The KC-three ninety has achieved an important milestone and received a substitution from the Brazilian Civil Aviation Authority, AMAC. And the first delivery to the Brazilian Air Force remains scheduled for the first half of 2019.
Also, the KC-three ninety regarding the KC-three ninety, aircraft number 3 successfully performed its first flight and aircraft 4 to 8 are already under assembly for delivery to the Brazilian Air Force. As far as other programs, the Brazilian Air Force's Special Flight Inspection Week received its 3rd Light 5 100 for the IX program. The Embraer was shortlisted in the Brazilian Navy Corvette Class program to provide the combat management and system integration. And first, Andrea received the initial request for proposal for the Light Attack Aircraft Program, the OAX Program of the U. S.
Air Force. Moving now to the financial results. We start at Slide 8 with the same order backlog. Our backlog reached RMB 14.6 1,000,000,000 at the end of the 3rd quarter. The backlog was negatively impacted by 2 factors.
1st, we made an order from SkyWest for 100 and 75 E2s from the backlog. This order remains effective and STRICT is committed with the M75(2). But during the contract's conditionality terms related to scope growth change, Embraer decided to adapt a conservative approach in line with the latest IFRS rules and removed the order from the backlog. The second fact was that we removed the 24 jets for JetBlue given the recent fleet renewal decision from the company. It is important to say that Embraer is working to finalize the important deals that were announced during the refinery air flow.
And we are confident, as I said before, to finish 2018 with a book to bill around a 50 to 1.5. And with that, we expect to recover the backlog. Moving to Slide 9, we show FX deliveries. International Aviation delivered, as previously said, 15 jets, 57 in the year. We expect a strong 4th quarter and anticipate to reach the middle of our guidance range from 85 to 95 jets.
In Executive Jets, we delivered 24 aircraft in the Q3 of 2018, 17 light and 7 large, with 65 year to date. This year, again, we will follow historical seasonality with higher division over the 4th quarter. However, we expect to end 2018 closer to the lower end of our guidance at 100 and 5 deliveries. Next slide represents net revenues. Consolidated revenues reached $1,152,000,000 which were broken by Commercial Aviation, dollars 382,000,000 Executive Jet, dollars 312,000,000 Defense and Securities, BRL 223,000,000 Services and Support, BRL 232,000,000.
As far as consolidated revenues, we had a relatively lower level, primarily because of commercial aviation deliveries. I mentioned before that a few assets we did from 4th quarter, and we expect to recover that in the Q4 and during the year. We maintain our full guidance for $5,400,000,000 to $5,900,000,000 in revenue year over year, broken by commercial from $2,200,000 to $2,450,000,000 Executive, dollars 1.35 to 1.5 dollars In the executive, we will be closer to the lower end of the guidance and defense from dollars 800,000,000 to and services and support from $900,000,000 to $1,000,000,000 Moving to Slide 11, SG and A expenses. SG and A expenses reached $118,000,000 in the 3rd quarter, with G and A at 44,000,000 dollars below the same period of 2017 and selling expenses at $74,000,000 above the same period of last year. That was due to the air show that this year took place in July, Q3, and last year took place in June, Q2.
Anderex remains focused on reducing SG and A expenses to our efficiency program. Next Slide 12, adjusted EBIT. We reported EBIT of $44,000,000 with 2.9 percent margin in the 3rd quarter. Our year to date EBIT reached $181,000,000 with 5.2 margin. Looking at 3rd quarter margins per business.
Commercial aviation was 1.1%. Here, we had the effect of relatively lower deliveries and a bit of mix as well. Effective jets, 4.1 percent Defense, 2.4 percent Services and Support, 10.7%. We reiterate our 2018 EBIT guidance of $217,000,000 to $255,000,000 with margin from 5% to 6%. Next slide is in Slide 13.
We present adjusted EBITDA. Embraer reported EBITDA of $105,000,000 in the quarter and 9,100,000 Net to date EBITDA was $266,000,000 with an EBITDA margin of 10.8%. Similar to EBIT, we reiterate our EBITDA guidance of $540,000,000 to $650,000,000 with 10% to 11% margin. Moving to Slide 14, we highlight adjusted net income. Embraer reported a net loss of BRL 29,000,000 at the 3rd quarter.
The net loss is driven first by lower operating results, which we expect to recover in the 4th quarter and higher financial expenses. Regarding financial expenses, we had a $20,000,000 increase in the quarter due first the $10,000,000 in digital value guarantee recognition, which we expect to be half that in the next quarters and $10,000,000 from market to market 2019 hedge operations. We had to mark to market the 2019 hedge operations. And what happened here was that there was a big volatility of the real against the dollar in this last quarter. That led to the recognition of accounting losses that we expect to revert in the future as we have a more stable effect.
Moving to investments at Slide 15. The net investment reached $158,000,000 year to date, broken by 29,000,000 in research, dollars 75,000,000 in development and dollars 54,000,000 in TUKA. It is important to note that we have received $120,000,000 in contribution from suppliers. If we consider that the gross amount of investment investment would account to $200,000,000 and the total to $283,000,000 We expect to end 2018 below our current guidance of $550,000,000 All programs are on track despite the lower investments. Next, Slide 16, free cash flow.
Embraer reported negative free cash flow of 100 and $66,000,000 at the 3rd quarter and minus 549 year to date. The negative free cash flow year to date is mostly driven by higher inventories as we prepare for higher deliveries in the 4th quarter. With those higher deliveries, we expect to revert a very good portion of the negative free cash flow, But we expect to be at the lower end of our guidance regarding cash flow, which is around minus consumption of $100,000,000 this year. Finally, at Slide 17, we show Embraer's indebtedness. We ended the Q3 with a cash position of US3.14 billion dollars and a debt position of US4.2 billion dollars implying a net debt of US881 million dollars which again, as we delivered or completed 4th quarter deliveries, we expect this position to go back to what we told in the beginning of the year.
In terms of average debt maturity, we remain at a comfortable level of 5.5 years. With that, we conclude the presentation and are available now for questions. Thank you.
Ladies and gentlemen, we will now begin the question and answer Our first question comes from Robert Spingarn with Credit Suisse.
Hi. This is Audrey Preston on for Rob Spingarn. And I just had a couple of questions. So going back to Slide 15 with your investments, even incorporating the supplier contributions, it still looks like you're tracking below where you were expecting for the full year. So could you elaborate on some of your planned investment opportunities in Q4?
And is there any reason why the investments are tracking below expectations? Thank you.
So coming back to investments. We as I said, we will be below the guidance in the rest of this year without any difference in the product development target. That is happening mainly because we are being more efficient in our investment, which we got from our efficiency program. But so we will be below the level of investment, but with the current relative importance without any change.
Great. Thank you. And then if we can just take a closer look at the SkyWest orders as well. So now that you've taken them out of backlog, but there's still no change to the terms and conditions, What is the timeline on these orders? And when could we expect to maybe see them go back in backlog?
And when could we expect a little bit more certainty around those orders as well? Thank you.
Well, as I mentioned, we are working very hard to convert the announcement we made in the fiber assets into full audit. But we cannot really commit to a date when this is going to happen. We expect it to be as soon as possible. Regarding the SkyWest order, as we mentioned, it is connected to the change in scope clauses in the U. S.
Regarding the 175 E2. And we are not seeing at this moment any priority in the airlines in changing scope clauses. However, Embraer has an 85 percent market share in that segment, which are currently €75,000,000 So the fact that the scope clauses may change later does not imply any harm to us. On the contrary, we will remain with a very good market share in this segment because the €175,000,000 is by far the best product from the segment.
Great. Thank you.
Our next question comes from Josh Newberg with Morgan Stanley.
Good morning, everybody, and thank you for the call. My first question is if you could give us some additional perspective on the improvement of your executive and defense profitability in the quarter and also the sustainability of the better numbers. You mentioned your focus on price. And on the executive side, we were wondering if price was the main driver of the better margin and what, if any, other factors helped? Obviously, better revenues and better fixed cost dilution helped you?
That's my first question.
Okay. Thank you. I think in executive regulation, we've announced it many months ago that we were implementing a program to turn around the business with a big focus on value rather than competing excessively for market share. I think what we are seeing now is a result of that effort. We have been able to maintain prices that are good for our products, which we think deliver more value to the customers.
We invested also in cost reduction either material and internal costs for our production processes in Europe. So I would say that what the results we are seeing we have seen so far are the results of these efforts that we've been consistently implementing. As per the sustainability, everything that we are doing is for those results to be sustainable over the long term. We, as I said before, we go on investing in new product development. We just launched 2 new products, which we think will again deliver superior performance and will develop a premium price.
Regarding defense business, we had during the year being impacted by losses in the K-twenty-twenty-twenty development. As I explained here earlier in other regards presentations, the way the revenues and margins of the program are accounted for, I mean that whenever we had something that did not go exploring, We had to recognize an accounting loss, right? And this year, in the Q2, we had to recognize 127 $1,000,000 loss because of the loss of the first prototype. And with that, we have to replan the program. And we do not expect to have further problems moving ahead.
If we manage to fit to the new schedule, we think that those margins that we're seeing now are sustainable. But again, product development of very innovative and high technology program is something that we know in this industry that you cannot say 100% for sure not going to have problems. But if those problems do not happen, we will sustain this kind of throughput. Important also to note that as you change things in this program from product development to senior production, right? Our business our defense business is going to enter a totally new phase because during the last few years of heavy product development on the KC, there's uncertainties that bring some volatility to the results.
As we enter into fuel production and deliveries, once we go over the initial ramp up phase, we should see defense business which are much better and sustainable results.
Okay. That's very helpful. And a related question
and it's
a question that ties into your point about cost reductions and their sustainability. I think that you guys have talked in recent months about being able to right size Executive and Defense with the Boeing transaction. And I was just wondering with the work that you've done advancing the deal these last several months, if you have a better idea now of maybe what the magnitude of the opportunity could be to sort of rightsize the businesses as a byproduct of the transaction?
Yes. Although the situation for the deal are going on, the manager of the company should not take those into account. So actually, everything that we are doing is active evaluation and defense is just regular cost of business. We are just managing the company, looking at the way it is today and all the results that we are seeing come from this. There is nothing here that accounts for any benefit that could come from the
deal. Our next question comes from Ronald Epstein with Bank of America.
America. This is Christine Liwag calling in for Ron. So my first question is the timeline about your deal with Boeing. If you already have government approval from the current administration, why not complete the deal now? And even if the new administration seems supportive of the deal, it seems like postponing the time line adds unnecessary risks.
Good morning. This is Paolo. So thanks for your question. We are still in the final stage with Boeing to finalize the last details. And as soon as we materialize this final agreement, we'll bring the deal to be approved or appreciated by the government the current administration.
It is already public information that the current administration will share our request to the new with the new government, with the team that will be a transition to the new government. And after that, so when we have the go ahead from both, so the current government and the transition team. So we will call for a general assembly, which still is our expectation that this will occur anytime in December. So it's difficult to say now each day of December, but our expectation is that this will happen in June December. And after that, upon approval of our shareholders, so we have the antitrust step, which will bring us into 2019 more likely the second half of twenty nineteen for the closing of the transaction.
And if I recall, when you guys first communicated the time line, the expectation was that you only needed approval of the current administration. So did something change, that you now need new administration? Can you talk about other factors that may have come in, in the past few months?
Well, I think basically, regarding the administration, it's being said now by the current government that they would like to share this our request for this transaction with the new administration. So that was not 100% clear a month ago, but now it's being very clear. So that Mr. Tender would like to share our request for this deal approval of this deal with the new administration.
That's very helpful. And switching to Executive Aviation, how many firm orders and letters of intent did you receive for the Prater family at NBAA?
We do not disclose that information. There has been a lot of interest in the new products at the air show, right? And there's a lot of activities that we will not disclose the amount of projects we receive.
Thank you very much.
Our next question comes from Cai von Rumohr with Cowen.
Thank you very much. And so could you give us some color in terms of where the commercial deliveries may be next year? What part is sold out today? I mean, in terms of how many deliveries you have for 2019? 19?
And then maybe comment on the impact of sort of this the Boeing JV has the fact that you're negotiating for 1 has had people completing orders. Has it been a plus? Or are people waiting until it's completed to really finalize and place their orders? Thank you.
Yes. Regarding the direct part of your question, now we are not seeing any difference because of the deal with Boeing. So we continue to operate business as usual. So we are closing deals. We have made very good announcements in fiber.
We are now working to have this contract for infirm until end of this year, and they're doing well in this regard. So we will have a very good year this year, book to bill probably above 1 more likely above 1. And disregardless, the negotiations that are going on with Boeing. Your other question was, sorry, the first part?
It
was how many orders do you have for 2019 right now? Mean, obviously, you expect more.
It's early to say, right? So it's early to say because we still have a few months to go until we can have a clear view. But I could I believe
I believe your bizjet book to bill was a little bit below 1. Could you give us some color on bizjet demand? Is that a function of stronger pricing? And what do you see for book to bill in the Q4? Thank you.
So book to bill will be around 1, a little bit changes here. And as I mentioned before, we have been seeing steady growth in prices, which are starting to show up in our P and L. We expect the trends to continue in the next month.
Let me add a little bit on the information on this topic. So the launch of the Praetor 603,500 the NABAA was very fruitful. So we are seeing great interest in these aircraft. I believe the provisioning of these aircraft is what the competitors are offering. So the clients are telling us that this will be a very demanded aircraft.
So we are very bullish. So I think it's fair here to anticipate that we may have a good year for new sales because of these 2 new products. So the price point is excellent. The attributes of the aircraft are great for the range and the performance. So we believe that it will be a very success for aircraft.
So having said that, 2019 may be a better year than 2019 than 2018 in terms of sales.
Thank you very much.
Our next question comes from Myles Walton with UBS.
Good morning. This is actually Lou Raffetto on for Myles. How are you?
Fine. How are you?
So I
just want
to make sure the commercial aviation margins again, what were those in the quarter?
1% of this margin in the quarter.
Okay. And so do we think that this is the bottom? Or do we is there more pressure going into 2019, I guess, as the next aircraft begins to ramp up?
Well, I think as I mentioned, the margin in the quarter was impacted by relatively lower deliveries than we expect. And we expect that the deliveries go to up to normal level, the margins will recover.
Okay. And how do you guys see going in the Q4? The gross margins were positive and they were good in the quarter. Any way you guys can break those out as well?
Yes. We
have around 15% gross margin in commercial, the rapid jets 17.5%. Defense around 14%, service and support around 29.
Okay, great. Thank you, guys.
The next question comes from Augusto Renfica with HSBC.
Hey, good morning guys. Thank you for taking the question. Regarding the E2, Navigena have been producing it for most of this year. Has there been any challenges or difficulties in the ramp up of the E2 production? And then when you think about that going into next year, what kind of mix can we expect for E1 versus E2 delivery?
Thank you.
Yes. We have not problems with the ramp up of the 90th or the issues. And so everything is moving quickly. And we are not disclosing so far the need for next year. And we will do that later on when we have the guidance.
So I can just add and go back to the one of the first information Nelson gave about on the highlights. So it's the scheduled reliability of the 192 is really great. So we are seeing 98.5% schedule liability for new products. So this is fantastic numbers. So we delivered the 1st 192 in April.
Videro is flying quite a lot in these aircrafts, many cycles, so not flying many hours, but also many cycles. So the aircraft is really going and delivering very well. So I think this is a point to be noted.
Our next question comes from Noah Poponak with Goldman Sachs.
Hey, good morning, everyone.
Good morning, Robert.
Hey. So I mean, I guess, are you still expecting eventual scope clause change that allows you to sell and fly the E2175 in the U. S? Or should we really be looking more at the legacy aircraft type backlog there?
Yes, Noah. As we said before, we do not see any movement right now on priorities from the airlines to change scope clause. But for us, that is a comfortable situation. The E-seventy 5E1 remains with a market share around 85% in that market. So if the scope does not change, we will remain selling the 75 new ones.
If it does change in the near future, we will have the 175 E2 for it. But there's nothing we can say at the moment beyond that.
Okay. And is 2019 sold out at the current production level, the 85% to 95% you're expecting for 2018? Are there still some spots open?
No. The commercial ratio, as I mentioned, we are seeing very good orders this year and a part of this order will be for the next year. So I think we are very comfortable with the level more or less the same level that we will deliver this year for next year. So maybe even more upside. Okay.
When does Republic start to take deliveries of their recent order?
Republic, if I'm not mistaken, I would have to confirm this to you, but I believe it's 2020.
Okay. Got it. And then final question, at the total company adjusted segment operating margin, are you expecting that to expand, stay the same, contract 2019 versus 2018?
Well, it's too early to talk about margins in 2019, we will give the guidance in time comes.
Okay. Thanks so much.
This concludes today's question and answer session. And that does conclude Envira's audio conference for today. Thank you very much for your participation and have a good day.