Good afternoon, ladies and gentlemen, and welcome to the Audio Conference Call that will review Enbridge Third Quarter twenty thirteen Results. Thank you for standing by. This conference call is being held during the Enbridge Day in New York with the presence of investors and market analysts. At this time, the company will present its third quarter twenty thirteen results. Afterwards, 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 webcast at ri.embrayer.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, economical, 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 forward looking statements. Participants on today's conference call are Mr. Federico Quirado, President and CEO Mr.
Jose Felipeo and Chief Financial Officer and IRO Mr. Luciano Flores, Director of Investor Relations. I would now like to turn the conference over to Mr. Federico Quirado. Please go ahead, sir.
Good afternoon, people present here today and also people who are in the web. Pleasure to have you here. This was not our best quarter for sure. As we have indicated in our last call, we did not expect a stellar quarter, but we did lose something in the range of $150,000,000 in revenues related to deliveries, which will happen in the fourth quarter. And that, of course, deteriorated a little bit of our margins.
So at this stage, we remain looking at, as we also indicated in our last call, at the lower end of our guidance. Certainly, our challenge is it has increased in the fourth quarter, but that's what we are aiming at. So I will be back at the end of the presentation. Philippe will conduct the presentation, and we'll be back for Q and A. Thank you.
Hello? Okay. Thank you. Thanks, Fred. So we'll go through the presentation, and then we'll turn back to further questions.
So starting Page three, in the corporate highlights, we had starting with this important recognition being in the fourth consecutive year in the Downtown Sustainability Index, confirming our commitment to sustainability and our corporate governance standards of the company. Following with an important highlight on the financial operation in August and concluded in September, the company entered into an exchange of notes. We exchanged notes that matured in 2017 and 2020 to new notes that mature 2023. So we were able to have acceptance for about $500,000,000 So that means that we have in terms of our average terms of the debt an extension that we'll show in more detail later in this presentation. But it's important for the management of the profile of the debt of the company.
And in this page also we have we follow hereby the important for Embraer that received several recognitions from important institutions regarding people, finance and social environmental recognition by Great Place to Work, Capitala Berto, Renefac and also the Brazilian publication Medoides doginier. Okay. Next page, Page four, the highlights for commercial aviation. Starting with the delivery of 19 E Jet in the third quarter. So it's now nine sixty six in total deliveries since starting this program.
And it was included in this 2019, we delivered the number 1,000 e jet that was related to an aircraft to Republic Airlines,
which will be
operated on behalf of American Eagle. Also regarding customers and clients, we have this the announcement of KLM City Hopper that added six E190 jets to the fleet. This is not a new order because it was related to a lessor that was already included in our backlog. But we have two new customers, new orders related to Galavia Airways for two E195 and also Algui Air Service for one E195. Next page highlights for executive jets.
Delivery of 25 executive jets in the third quarter being broken by 21 light jets and four large jets. And an important milestone in this program, which is the first China assembled legacy six fifty that made its first completed its first maiden flight. Also, used to highlight here some recognitions and the confirmation of our ongoing focus on operational excellence. We're again awarded this is for the second consecutive year for AIM for honor in aviation, quality and product support. Some updates on the Lagos five hundred and four fifty program.
We're still on track on the program. Now the three prototypes of the Lagos 500 being completed at six fifty flight hours. And also in the Legos four fifty, we are still on track for the first prototype preparation. Another comment about this program is that Jack Chen was announced recently as the launch customer for the Legos 500 in China. And concluding the highlights for Executive Jets, we launched recently the Lineage 1000E, which is the version of the Lineage for the Itu program.
Next page, Page six, talking about the highlights of defense and security. Some regarding the modernization of the programs to Brazilian Armed Forces, we had two important milestones, which were the first delivery of the A1 fighter jet for Brazilian Air Force and the first flight of the AF-one of Brazilian Navy. Also in terms of investment in this segment, we recently announced the agreement to acquire the remaining portion of our partner Inatec. So we're now coming to direction of concluding this operation and being the owner of 100 of the capital of this company. This is not yet reflected in the third quarter financials because it was after the period.
Regarding the LAS program, we're still on track and on schedule. The Jacksonville facility being prepared and delivered expected to is scheduled to happen by mid-twenty fourteen. In the satellite program, we selected suppliers for the satellite and the launcher. And this next step is the conclusion execution of the contract signature. And finalizing the defense and security, the radar company, Orbisat, had its name changed to Bradar Industrea Sociedadje Nonoma.
And we got opportunity to announce also contracts in the amount of $22,000,000 for remote surveillance with Brazilian companies. Okay. With that, we conclude the highlights. And then Page seven, talking about the backlog, which was announced in mid October. So we had an increase from the previous figures to 17,800,000,000 Basically, what we the result as the shift for the ILFC order, which was initially as matter of intention for the E2, now became a firm order.
It's a 50 firm order and a plus 50 options. Next page, Page eight, in terms of aircraft delivery. From the left, we had the commercial jet delivery. So 19 aircraft in the third quarter accumulated 58 in the year. We had a couple of aircraft slipped into the fourth quarter.
And it's important that we started to deliver some of the E175 of the North American recent orders. In the right side chart, the executive deliveries, we had 25 aircraft deliveries in this third quarter, 21 light jets and four large jets, which accounts for accumulated in the year of 66 deliveries, 52 light orders deliveries and 14 large deliveries. So with this picture, we're still confirming that we expect to reach our guidance towards the lower end by the end of the year. Next page, Page nine, revenues by segment. So we had in the third quarter a total of $1,300,000,000 in revenues and accumulated of 3,900,000,000 for the full year so far to September.
When we look by segment, of course, as a consequence of deliveries, we had a reduction in the commercial executive compared to the previous quarters. Defense was also affected by the dollar in this quarter third quarter. And we have then for commercial aviation then million dollars in this third quarter accumulated $2,200,000,000 in executive $15,000,000 in the third quarter with a cumulative of $860,000,000 for the year. And defense stimulated the quarter to $267,000,000 with the year to date numbers of $828,000,000 Next page, page 10, the revenues in the total showing the Brazilian figures, real figures. So we had as the number that we just mentioned, the 1,300,000,000.0 for the quarter, BRL3.9 billion accumulated in dollars.
They reflected into the reais figures of BRL2.9 billion in the quarter and BRL8.3 billion in September to date. Next page, Page 11. We show the figures related to SG and A expenses and reflecting our continuous focus on expense control and reduction we had this quarter, the third quarter, a reduction compared to the previous quarter, a total of $163,000,000 compared to 175,000,000 in the second quarter, 7% less, broken by $112,000,000 in selling expenses and 51,000,000 in administrative and general expenses. So the total of the year, we had the $499,000,000 as the number accumulated to September. Page 12, income of operations.
So operating income, a result of $76,000,000 in the third quarter, accumulated $251,000,000 with a margin of 5.9 in the quarter and 6.4% accumulated. Primarily this reflects the number of aircraft delivery and the mix as we mentioned. And just finalizing recapping this here, the combination of the revenues that were missed with the fixed costs we had into a lower margin this year and especially in the third quarter. In Page 13, talking about the EBITDA. This is just reflecting the previous information.
So we had $156,000,000 in EBITDA in the third quarter and accumulated as of September of $460,000,000 with EBITDA margin of 12,100,000.0 in the quarter accumulated $11,700,000 up to September. The next page, net income, total of $53,000,000 in this third quarter, accumulated of 78,000,000 in the year, 4.1% margin. And what we see here is differently than we had in the previous quarter. We didn't have the effect of the dollar impacting the deferred income tax. So we were able to have a more normal situation in terms of income tax.
So we returned to this profit of BRL 53,000,000. The reais figures, 119,000,000, total accumulated of BRL170 million, which is important for the distribution of the results. Next page, Page 15, inventories, a total of $2,800,000,000 in September. This reflects, of course, the missed deliveries and the preparation of the company for the fourth quarter, which has some more activity in terms of deliveries. So we're coming to a $2,800,000,000 in terms of inventory and not something that we couldn't expect.
This is basically reflecting all the situations of the delivery concentration, especially in the fourth quarter. Next page, Page 16. We have the free cash flow information. So in the quarter, the lighter quarter is reflected in the operational cash generation. We could not compensate the investment level.
So we had this total of $102,000,000 of operating cash generation, but investments of $106,000,000 in PPE and $80,000,000 in intangible assets, returning to the net negative of $84,000,000 in this third quarter. In terms of PPE, most of the investments are associated to the defense program and also the Portugal plant in Evora and also the Solacaba MRO project. In terms of the intangible assets, they're mostly related to the E2 investments and also the Lagos 500,000,000 and $450,000,000 As you can recall, after we announced the official launch of the program of the E2 approved by the Board, it becomes more deferred now. It's not expensive. It's now all the investments related to the E2 go to the intangible assets and they are then deferred.
Page 17, in terms of investments, the year to date and outlook for 2013, a total of $389,000,000 as of September. It's good to recall that here that we are highlighting the CapEx related to contract programs, mainly the defense and security programs, which are not included in the CapEx outlook figures that we released. So we took the opportunity to highlight this for information in this chart. But so far, we have this the outlook of BRL $580,000,000 for the year, and we have so far the BRL $389,000,000 as of September. Page 18, in terms of our capital structure and related to investments and debt.
We had the company reported a net debt in this quarter, September, as a consequence of the quarter activities. What is important about the financial debt that we have a better profile in terms of the average maturity of the debt. We extended almost one year of this debt, especially because after this the liability management operation that
I mentioned in the beginning of
the presentation, where we concluded in September, we were able to extend about $05,000,000,000 from debt and will be maturing in 2019 in 2017 and 2020 to the first half of twenty twenty three. Also important that with this operation, also we had better profile in terms of short term and long term debt that we reduced our short term portion of the debt from 6% to 4% in the end of the quarter. Okay. With that, I finished the presentation of the financial numbers and turn back to Fred to open the questions.
Thank you. So I understand that the first question comes from will come from this audience. Is that right, Nadia? Okay. So please, we are at your disposal.
Mics over here, one, two, three.
And now we will open for questions starting with participants in the audience and followed by participants in the conference call.
I'm a little confused still about what impacted the gross margin this quarter. It was the worst in quite a while. I know you mentioned you had two deferrals, but was it all commercial? Was it across the segments? Was it price?
Was it mix? Could be very clear about what drove it down this quarter? It
was the impact was the business. We had for we have part of that from commercial. We have the margin of the operating margin of 7.8%. Then the effective business was negative 2.4%. This is operating, not gross.
Operating.
Question was about gross margin.
Let me conclude the operating and I'll give you the gross margin. So defense was 8.6% margin. So in terms of gross margin, point 1% in commercial, 16.2% in executive sorry,
sorry,
Okay, And 20.9% in defense. That the blended margin was 19.2%.
And I would just add on the commercial side, lost a couple of airplanes. So that's certainly I don't know how much of that being impacted, but certainly maybe one point right there maybe.
So which one of the three segments was down the most from say the first quarter? You had pretty low volume in the first quarter. First was commercial. Commercial was the most. Comes from
the first, yes,
commercial. Okay. And the executive also. If
I may add also just a little bit of color. If we at the product mix, think third quarter was, I would say, pretty unique when we think about the commercial aviation mix, right? We saw a pretty large number as it relates to the overall total of E Jets delivered going into the North American market. For instance, just for a little bit of color, if we look at fourth quarter, we certainly expect a much more balanced weighing back into the 385,000,000 platform. I think that's also an important element to consider in terms of the uniqueness, let's say, of this quarter in terms of the
gross margin of that segment.
Okay. I guess the implication I'm trying to figure out is that I know your 175 mix is going to go up next year of course. So should we think about year over year margins for 2014 maybe being down maybe more like 88.5% just on that powerful dynamic?
Well, I'm not ready to talk about actual guidance yet, but certainly will see a reduction in the margins of commercial business, but we're still remaining pretty healthy. It's probably the healthier healthiest margin collaborator in our three businesses. Of course, we do have I don't know maybe a two or three percentage points impact maybe 2.5 or something next year. And that of course we will make guidance in February. But it is planned to be even with a lower mix, I mean a mix of a lower size aircraft should be on the helping the average of the company.
So that's a healthy business even going forward even with a loaded U. S. Market no deliveries for U. S. Markets.
Okay. Thank you.
Yes. Miles and then have Joe here.
So Fred just to follow-up on that one. If you look to the implied margins for the fourth quarter, what you're kind of pointing toward is a pretty substantial growth year on year on virtually no revenue growth. Is that just you're trying to energize the workforce to pull off whatever they can? Or is there really some confidence that you can actually pull off an implied 13.5%, 14% EBIT margin in the fourth quarter?
Thanks. I think that's fair. It's a very fair question. If you do the math, you're going to arrive at something close to 13%, 14% EBIT to get the average depending on revenues. I think what will depend is fundamentally deliveries of larger cabin aircraft and executive jets.
The airline business looks pretty consistent with the guidance although the lower end but looks pretty consistent defense as well. And we have a very large challenge making sure that we deliver. I mean the airplanes are there's no industrial challenge. It's more I mean of course there are industrial challenges, but not the one that would make me concerned. It's really down to commercial risk, some customers without financing, some customers which are almost closing and things like this.
So I think the plan calls for the lower end of the guidance. Is there a risk? Yes. There is a downside risk there. But I don't think it's a substantial amount.
So at this stage, we have to stick to our plan which is to deliver those numbers. It will be a challenge for sure. We have done something pretty close to that last year and in previous years. Over $2,000,000,000 in the quarter and strong recovery of margins. So it's not that far for something we have already done in the past.
Just one other cleanup question. The other expense turned into other income this quarter. And I know in the press release you talked about it on a year on year basis and that's fine. But what happened sequentially that improves the other income line or other expense line that you can talk to?
But the comparison was that we had some canceling of some so we had the return from the canceling penalty.
So sequentially, that's the differential?
Yes.
Pierre, please.
Fred, just on the Executive Jet business with the negative margin in the quarter, what's really driving it? Is it all pricing? Because we know you have an aggressive competitor north of the border here. Is that the whole problem? Or that plus just the market in general?
Or are there manufacturing issues? Or if you could just walk us through sort of the issues and then what your plan is to bring that back into profitability?
Thank you, Joe. We there is a pricing pressure. I mean recently as everybody everyone knows, Sezen took an important decision not to engage into a market share fight once of course the Hawker jets are no longer into the market. So this mid to lower end side of the market is really now fundamentally down to seven Embraer. So I think both they are playing trying to hold pricing.
But I think the biggest competitor is not Cessna or we are to them. It's the inventory of used aircraft, which although it's not growing, but the asking price is coming down. So that's associated with a small increase or maybe no increase whatsoever for the leaders. So the market is still kind of flat or shrinking. It really creates not a very healthy environment for pricing.
Having said that Joe, we also had challenges on the cost side. And obviously with the strong investment program an even more important challenge on the cash flow side on that business. Next year as we certify the LEGIS 500, we should get some alleviation on the investment side. And I certainly speak and I think Ernie and Marco will talk about this in more details. We certainly expect a strong turnaround if you will as far as performance in this business.
So even in an environment where the market is not still booming and it's not coming back early I'm afraid, intend to have a strong recovery as far as our margins and our cash associated to that business as well.
And then on the commercial side, you cited that there were a few aircraft that slipped into Q4 from Q3. And then last quarter, I think, you noted that we're going to come in towards the lower end of the guidance for the year. Could you characterize I'm sure it's a host of different things, but is this predominantly finance customer financing that's an issue? Or is it manufacturing? Or is it just simply demand?
It's again, if we are talking about certainly less than a handful of airplanes And it's more like commercial risk other than it's not industrial for sure. It's really the ability of a customer to take delivery or not. That's fundamentally it's but it's not necessarily lack of financing. It's really more on the commercial side, fleet size that sort of.
And then free cash flow guidance for the year finally. You had said it's I think in the higher double digits, Jose. But at this point, you're going to say it's due it's basically whether we can get the deliveries out the door or not is going to determine whether you can achieve the guidance. Is that fair?
Yes. That's correct.
I don't think we ever said higher double digits have we? Double digits start with 10% right? Did we say higher? No, you're challenged. Noah, please.
Sorry, did you hear me?
Derek Spronck at RBC Capital Markets. With the JetBlue deferrals of the 190s, in particular the seven in 2015,
Do you think you'll be
able to backfill that with your current backlog or bring forward some
of those deferrals from your existing orders? I would say we expect to refill those lots with other orders, not to accelerate anything. We talk about 24 airplanes, which they do not impact at all our 13 or even twenty fourteen for that sort deliveries skyline. So twenty sixteen and twenty seventeen that's what we will find customers to fill those lots. So we I mean, we don't feel that uncomfortable.
It was not a big surprise to us. We don't feel that uncomfortable to deal with that situation. Sure, please.
Okay, here we go. With the S and G expense reductions, is that reoccurring? And do you see any other opportunity to take costs out of business? And if so, can you quantify that a little bit? Yes.
I
think that this is an ongoing problem. We expect to see more benefits from this. Of course, it's important to do to see that we have this is a dilution of the cost within the business. So we're working a lot in terms of our shared services platform and doing something common to the business to support the business, all the cleaning up, the back office activity being more effective in the way we do. So we still expect to see of course reductions going forward.
And if not the reduction itself, at least as we can expect some growth in terms of revenues that this can be like a dilution also in the cost. But the nominal cost should be reduced going forward. There's no we're not giving guidance necessary for that, but that's the trend.
Okay. Thanks.
Chris, before we get to Kai and Ron, Noah is there please?
On that last question with regard to the effort to backfill existing backlog, can you just update us on how exciting or not exciting current campaigning activity is maybe by geography or type of customer on the commercial side?
Maybe Ron Paul I think can elaborate a little bit better. But certainly, we see that the largest demand for the next few years coming from The United States, regional airlines replacements of older RJ50 seaters. And but there are opportunities for larger aircraft popping up here and there Latin America, potentially China. But I think Paulo can give you a little bit of better color to that. So again maybe advancing a little bit.
2014 looks very comfortable at this stage. And also we have a very good sentiment about twenty fifteen at this stage as well. I'd say a better sentiment about 2015 at this stage than what we had about twenty fourteen a year ago. So but I think later on Paulo may give you some better color.
Okay. And just one follow-up. On the mix issue within commercial going more towards 175,000,000 from 190,000,000 195,000,000 are there any numbers or quantification at all that you can put around how different that margin is from one aircraft to the other? Or how much pricing pressure there is in the orders you've won over the last twelve months versus prior?
I don't know if you have anything. I think order of magnitude, Paulo has been running his business in double digits operating margins. So, Tal, I would say what a small decrease next year, still in the high single digit arena more or less what you would expect. Of course, we're going to fine tune that and give you a better precise precision when we issue guidance. But it's like firm maybe lower double digit to high single digits.
It's probably an approximation. That's helpful. Thank you.
Is George Ferguson with Bloomberg Industries. Switching gears and going to defense, can you talk to us about the KC-three 90 and how you position that airplane between C-130s, A400M and the C-seventeen. So what you see as the opportunity for that airplane and how you position it in there? How does it stay competitive in there?
Okay. It's the KC-three 90 is actually a multi mission airplane. Not only a cargo aircraft, but also has a tanker capability, also has semi medevac capability operating on paved runways and operating in Antarctica. But let's say as size wise, it's very, very direct competitor to the C-130J. It's a 21, 23 ton aircraft.
Actually a little bit bigger than the C-130J. We sit between if you think about Airbus, we sit between the C295 and the A400M right in between. So we don't compete with either. We are quite larger than the C295 and we are way smaller than the A400M and we are much, much smaller than the C17. So it's really a it's a C130 market, different concept of course, a faster airplane.
It was a twin jet not a turboprop and obviously with the benefit of a clean sheet design. The way we market this we think about the marketing of this airplane just to talk about a couple of milestones which are important. We shall fly before the end of next year and intend to be in the market with an ability to deliver airplanes in 2016 on. So initially, of course, we have Brazil as a potential main customer, but we also have a few other countries which have industrial participation in the program and with which we do have LOIs for also for other aircraft. So hopefully next year, we will be able to execute the contract with the Brazilian Air Force for the serialization of the KC-three 90.
And from that, we will be able to negotiate with other customers. We see at least a 700 aircraft market, let's call it open markets. So there is a much larger number of C-130s there and the total market is much larger than that. But we understand that, of course, with LOGCAP margin and FMS and the whole U. S.
Let's say influence in defense equipment, there are some markets which are very, very unlikely that we'll be able to penetrate. So we see at least 700 airplanes in which we have a fair chance to compete for. And that's market share whichever market share we can take there 20, 30% that's certainly a good result for us. And just to finalize, we do have an agreement with Boeing Defense to market our KC-three 90 in a few of those markets in which we don't see a possibility for us to sell direct. So that may increase let's say the customer base of the KC-three 90.
Yes, Kai?
Yes. Fred in recent meetings you've talked of the above average potential for profitability of the legacy 500 and then the four fifty. With the delays you've had on the program with the costs you've seen with the difficult pricing we've had in the market, could you give us some color on how you see the profit potential of that program next year in M15?
Qualitatively, yes. We are about twelve to sixteen months late in the program as you know. So we should be in the market up to the end of the next half middle of next year. I'm sorry. And It is being probably the most the smoothest development that we have had or even better the smoothest certification and entering to production aircraft that we have designed.
So we do expect a relatively smooth ramp up. Next year, we're probably looking at maybe six or so 500 deliveries and ramping up of course in 2015, which is the year where the four fifty shall also enter into production. So 14 next year maybe six of the 515 ramp up and four fifty coming up, 16 we will see a more fully full benefit of having both in the market. This is an add on revenue for us, Kai, because we are not in that segment at all. So those two airplanes they do not take any share at all from our Phenom 300 or our legacy six fifty.
So that's going to be really a step function in terms of revenue for us, again becoming more meaningful towards 2015.
And pricing?
Pricing, as I said, are I think it's a very good question. There is a I think there is a question of market share versus pricing. We are not definitely that's not the way we do business, not a price war. So we've been trying to price our aircraft at the level at competitive levels, but level that bring reasonable potential for margins. So at this stage, we see that segment with and I think Mark will also talk about it's a segment which will grow in everybody's forecasts a little proportionally a little bit better than other segments.
So we should be able to have I don't know fifty, sixty airplanes a year. But that's something which of course we have fine tune as we go. And we think we're going to have sound and healthy price and margins. We do see a learning curve relatively fast with sorry with those aircraft. So yes, we still have about eight months to go or something in certification.
How many hours we have logged in the flight campaign? So over seven twenty hours in the flight test campaign. So we are on a good track for certification. The airplane has very good flying qualities. And I think as far as passenger appeal and customer appeal, it's we really believe it's going be the best in class and both will be winners as the Phenom 300 is already.
So You mentioned that next year you would get relief from development on the legacy 500 starting down. With the build in the E2, does the total development level of spending continue up? Or do we get any relief from the
Probably we will have because the legacy 700 will come down. The four fifty is still there. We and I think the E2 the 175 as we call will we just have a little bit next year, right? Most of that happened this year. So I think D2 will be the real demander of capital next year.
We don't have those numbers yet, but I'll say likely it's going to go up in total investments likely. Sorry? Quick question for I'll ask you from Ramos. For some time, everything here. Thank you.
And just a quick question on working capital management, so I guess for Jose. For a long time, working capital management at Embraer has been not great, right? Free cash flow has been bumpy. Are you doing any initiatives now to focus on working capital management and to try to improve it?
Yes, yes. I think that this is important that you mentioned. Of course, the increase in the inventories that we saw in the end of last quarter was probably followed was followed by an increase in suppliers as well. That's not made the same effect in terms of pressure of working capital. So it is something also here.
I think that Fred mentioned about also in terms of executive aviation, we're still working on better capacity to project that to avoid pressure from working capital. It's something also that we think we can have some benefits going forward in terms of working capital. This fund is still we had still demanding from working capital because of the type of the business, but we are working on trying to reduce this impact and we're identifying those points and trying to improve the way we manage that. Yes, that is correct.
Okay. And do you have a good sense from your seat when you look around Embraer that you kind of know where the cash is or where cash is being used? I mean is the enterprise reporting system fine tuned enough that you really do have a good idea of where you need to get the cash out of?
Yes. No, definitely yes. Absolutely. Think it's more like building up the consensus among the business of what impact does every each effect of each action does in terms of cash. It's a balance of like the economical impact and the financial impact, which is something that we're building very strongly among the organization.
If I may add, Ron, we I mean we have been in the business jets business for let's say twelve years, but more intensively for maybe ten years. And in this period, we have made a significant commitment of capital, which was generated mostly by the airline business, but more recently in the last maybe five years also by the defense business in not only further developments. So we went from nothing to phenome, the two legacies, are still under final certification, significant improvement in the legacy six fifty and the lineage, but also a significant investment in the customer support infrastructure. And typically that's a kind of a need to have to be in the business and the return on capital on those investments they are a little bit far in the future. So as a in a nutshell, that has been the big demand for investment.
As we now enter into the E2 investment, a lot of debt of the funds will come from the actual cash generation from its own from the online business itself. So a lot will come from there. But we do expect we must and we do expect that the business jet side of the house will start making much more relevant contribution for that cash. And defense is a pretty kind of a self sustained and a contributor of cash as well. We don't see at least we do have a fifteen year plan.
We don't see in this horizon knowing what we know now any need for raising capital new capital. We are managing our debt I think very in a very competent way extending term and keeping costs or even reducing costs a little bit. So absolutely cash is actually probably our number one point of attention even more than margins.
Thank you. Steve? Thanks and good afternoon, Freddie and gents. Thanks for the time. Steve Trent from Citi.
Just two questions from me, if I may. The first, you mentioned in 3Q the other income, the liquidated damages. Was there any particular geographic bias to where that came from? Or was it fairly small? And then the second question, I wasn't sure, but there seemed to be a little bit of action from some employees on your production floor, a small as work stoppage of some sort.
And I was wondering if you could give us a little color on what happened. Sure.
Thank you. The
liquidated NIM was $16,000,000 which is isolated just thing one customer. It's not something like systematically.
But any particular region of the one customer?
Yes.
Steve on labor side, what we have well, we have not had strike for as far as I can remember and we're not having any strike. So what we have is a very diligent union, which has the practice of blocking roads, literally blocking the road and forcing the employees off the buses. And so they so what they do they have to get off the bus and walk So they get late to work two hours. It's a very embarrassing thing. And so there's nobody stopped.
Everybody's working. And this issue is in Brazil the way this thing goes the two unions there is union for the companies also the federation of companies. So they are negotiating on our behalf with the unions. And this thing is still going on. So what we have done to our employees that we have readjusted all the wages back to September for the inflation of last year.
So I mean they are they feel protected. They feel fine. It's much more let's say as I said, an activist attitude from the unit than really an internal concern. It's certainly a disturbance, but not something which is the workforce is pretty much with us with the company.
Okay. Very helpful. Thank you, Kieran.
Thank you. It's Alicia Liifon with HSBC. My question is regarding, again, fourth quarter. Just wanted to understand, this is probably the first quarter where you're going to see the FX kicking in more or less. So started the depreciation of the real started in May.
So it's probably going to begin in October, November. How does that play out in terms of margins, especially for EBIT margins, first? And second, we're talking about in the low range of the guidance, maybe delivering 32 aircrafts in the fourth quarter. Is this feasible first? And what's going be the breakdown more or less between 175s and 190s?
Let me address the FX question. Yes, of course, this what happens that we have to take the FX when it comes, if you see experience variation. It goes has to go through the inventories before to then you're going to benefit in the
margins, if that's the question. What we
saw in second quarter, we had a more the devaluation was a little bit more than reduced in the third quarter actually. So we may see some of these impacts, most of them already in the cost out there, but some we still may see going forward in terms of the last quarter. But I don't think this will be the major impact in the margin.
To the share of deliveries in the last quarter, Paulo was telling me it's probably 50%, it's probably maybe even more 190%, maybe 6019540175%. Okay. Thank you. And yes, it's doable.
George Ferguson again from Bloomberg Research. So I'm not sure if you noticed today Boeing announced that they're going to increase seven thirty seven production to forty seven months starting in 2017, which ends up being pretty darn close to entry for E2. I'm wondering if
you could talk to us about
managing the risk that customers that couldn't get an airplane within five or six years would move would gauge down a bit to an E2. And now Boeing is opening up slots for those people potentially and perhaps making the 190, 195 E2 a bit harder for you to sell.
On one perspective, on one side, there is no direct competition between the 190. They are really smaller aircraft 50% in size smaller. So that's pretty much a very sizable difference. So whatever is done directly as a result of Boeing and Airbus moves does not have a direct impact in competition for us. Having said that, there is yes, if you consider the overall commercial airline business, there is that capacity the number of passengers to be flown.
So, of course, the more the higher the production rates of narrow body aircraft that puts a pressure on the whole industry. So in the sense that capacity is taken out, the passenger be also financing capacity. So the way we feel of course is that we are safely enough away from really competing with the seven thirty seven, which the majority of them will be -8s and -9s. So airplanes which start at 160 seats and go up to almost 200 seats, same with Airbus three twenty to two twenty one. So I think the business plan of the E2 was based on, I think, very solid, even maybe conservative assumptions.
Let's keep in mind we have 60 almost 70 customers around the world. We will have I don't know maybe 16,000, 18,000 airplanes in service when the E2 comes. So there's a very natural, let's say, customer base and follow on opportunity for the E2. And by the way, the airplanes will be extremely competitive. So they'll be able to have a 100 seater or 125 seater in the 195, 190, 195 with cost per seats very similar to larger aircraft.
So that makes a very compelling case for so cost per trip way lower and cost per seat very, very close. So that's one of the assets that the U2 family will have. So I don't think there's a we don't see a direct impact. I do not know about this production rate increase. I just it's a bit surprising that there are many that many because that probably is going to trigger a response in Toulouse.
So a lot of passengers have to be out there to fly all these aircraft. We are as I said, we are in a different segment much, much smaller, but I think also in a strong position in that segment, which is sub-one 120 seats. I think Noah has a question. No? Sorry.
Just a coffee? Okay. By the way guys, after finishing this, I think can still go for dessert before they take everything else. So as soon as we're done here, I encourage you to get some desserts.
Hi, Fred. It's Eduardo Morgan Stanley. My question is getting back on the defense business. There was a deceleration on the revenue growth in the third quarter. Is it because of the BRL depreciation?
Or what impact the defense business on third quarter?
Yes. Was just copper Foreign
exchange rate, exchange rate.
Yes, primarily the exchange rate exactly.
And looking forward should we see a slowdown in the growth given that the currency continues around to 20%
or so? We're seeing a double digit growth for next year probably in the defense in dollars. Keep in mind that we still have what fifty-fifty exports in Brazil. Yes.
It's 50% in dollars.
Yes, 50% of exports of dollar denominated and 50% reais, which of course helps the company to hedge to have a natural hedge also. Ron, sorry, there was a gentleman there, then Ron. And I think we are done.
Daryl Genovese with UBS. So just wondering, I think in the beginning of the year, you had said SG and A as a percentage of sales was going to come down. I think it was 12.3% last year to 10% or 11% this year. I know the SG and A line has come down on an absolute basis, but it
looks like it's kind of
just come down in line with sales. So just wondering if it doesn't look like you're going to get there this year, but does that imply that there's further for that to come down in 2014?
Yes. Again, we're not giving any at this point guidance for next year. But if you see this year, we had the SG and A in the second quarter about 11% of sales and now it's 12%, a little bit more than more because of the reduction on the revenues rather than its nominal cost. So I think we should expect this trend of reducing this to levels a little bit less than what we
We should not see a material increase in the fourth quarter and we will see a very significant increase in revenues. So the dilution will be I think important for the year. When look at the year, I think you'll see a better figure than what we have so far year to date.
Okay. And then just a cleanup question. Can you just give us what
the combined services revenues were for the quarter? So it was approximately $220,000,000 primarily half commercial and the rest between the other two businesses.
Thank you. Rob, I think you have the last question.
Yes. Okay. Thanks. One thing
we haven't talked about much is M and A. And particularly, Hawker Beachcraft seems to be backed out on the market. Is there anything you can mention about that or not? No, no. We're not interested in Beachcraft.
So we're not looking to that at all. I do not know I have no idea who let that gossip out. That's a gossip. We are not even looking to the numbers. So not an attractive proposition for us.
Thank you.
This concludes today's question and answer session. I would like to invite Mr. Federico Guerrero to proceed with his closing statements. Please go ahead, sir.
Just to thank everyone for attending. And as I said, there's desserts served outside the room. There's a ten minute break, so we'll be back in ten minutes. So we don't we're not late. Thank you.
That does conclude Embraer's audio conference for today. Thank you very much for your participation and have
a
good day.