Good afternoon, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's third quarter 2013 results. Thank you for standing by. This conference call is being held during the Embraer day in New York with the presence of investors and market analysts. At this time, the company will present its third quarter 2013 results. Afterwards, we will conduct a question and answer session. Instructions to participate will be given at that time. If you should require assistance during the call, please press the star key followed by one. 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 other markets where the company is present. The words believe, 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. Frederico Curado, President and CEO, Mr. José Filippo, Chief Financial Officer and IRO, Mr. Luciano Froes, Director of Investor Relations. I would now like to turn the conference over to Mr. Frederico Curado. Please go ahead, sir.
Good afternoon, people present here today, also people who are on the web. Pleasure to have you here. This was not our best quarter for sure. As we had indicated in our last call, we did not expect a stellar quarter, but we did lose something in the range of BRL 150 million in revenues, related to deliveries which will happen the fourth quarter. That, of course, deteriorated a little bit of our margins. 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 has increased, in the fourth quarter, but that's what we are aiming at. I will be back at the end of the presentation. Felipe will conduct the presentation, and he'll be back for Q&A. Thank you.
Hello? Okay. Thank you. Thanks, Fred. We'll go through the presentation, we'll turn back to further questions. Starting page three, in the corporate highlights, we have, starting with this important recognition being in the fourth consecutive year, in the Dow Jones Sustainability Index, confirming our commitment to sustainability and proper governance standards of the company. Following with an important highlight on the financial operation, in August and concluded in September, the company entering into an exchange of notes. We exchanged notes that matured in 2017 and 2020 to new notes, that mature 2023. We were able to have acceptance for about BRL 500 million. That means that we had, in terms of our average terms of the debt, an extension that we'll show in more detail later in this presentation.
It's important for the management of the profile of the debt of the company. In this page also, 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, Capital Aberto, ANEFAC, and also the Brazilian publication, As Melhores da Dinheiro. Next page four, the highlights for commercial aviation, starting with the delivery of 19 E-Jet in the third quarter. It's now at 966 in total deliveries since starting this program. It was included in this 19, the delivery number 1,000 E-Jet, that got related to an aircraft to Republic Airways, which will be operated on behalf of American Eagle. Also regarding customers and clients, we have the announcement of KLM Cityhopper 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. We have two new customers, new orders related to Belavia for two E195, and also, Aurigny Air Services for one E195. Next page, the highlights for executive jets. Delivery of 25 executive jets in the third quarter, being broken by 21 light jets and four large jets. An important milestone in this program, which is the first China-assembled Legacy 650 that completed its first maiden flight. Also, we used to highlight here some recognitions and the confirmation of our ongoing focus on operational excellence. We were again awarded. This is for the seventh consecutive year for AIN, for honor in aviation, in quality and product support. Some updates on the Legacy 500 and 450 program. We're still on track on the program.
Now the three prototypes of the Legacy 500 being completed, 650 flight hours. Also in the Legacy 450, we are still on track for the first prototype preparation. Another comment about this program is that Jackie Chan was announced recently as the launch customer for the Legacy 500 in China. Concluding the highlights for executive jets, we launched recently the Lineage 1000E, which is the version of the Lineage for the E2 program. Next page six, talking about the highlights of defense and security. Regarding the modernization of the programs to Brazilian Armed Forces, we had two important milestones, which were the first delivery of the A-1 fighter jet for Brazilian Air Force, and the first flight of the AF-1 of Brazilian Navy. In terms of investment in this segment, we recently announced the agreement to acquire the remaining portion of our partner, Atech.
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 schedule to happen by mid-2014. In the satellite program, we selected suppliers for the satellite and the launcher, this next step is the conclusion, execution of the contract signature. Finalizing the defense and security, the radar company, OrbiSat, had its name changed to Bradar Indústria S.A. We get opportunity to announce also a contract in the amount of $22 million for remote surveillance with Brazilian companies. With that, we conclude the highlights. Page seven, talking about the backlog, which was announced in mid-October.
We had an increase from the previous figures to $17.8 billion. Basically, the result as the shift for the ILFC order, which was initially as a letter of intention for the E-Jet E2, now became a firm order. It's a 50 firm order and a plus 50 options. Next page eight, in terms of aircraft delivery. From the left, we have the commercial jet delivery. 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 a cumulative in the year of 66 deliveries, 52 light deliveries, and 14 large deliveries.
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 nine, revenues by segment. We had in the third quarter the total of $1.3 billion in revenues, an accumulated of $3.9 billion 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 and executive compared to the previous quarters. Defense was also affected by the dollar in this third quarter. We have for commercial aviation, this $687 million in this third quarter, accumulated $2.2 billion. In executive, $315 million in the third quarter, with accumulated of $860 million for the year. Defense- Accumulated the quarter $267 million with the year-to-date numbers of $828 million. Next page 10.
The revenues in the total showing the Brazilian figures, BRL figures. We had, as the number that we just mentioned, the $1.3 billion for the quarter, $3.9 billion accumulated. They reflected into the BRL figures of BRL 2.9 billion in the quarter and BRL 8.3 billion in September today. Next page 11. We show the figures related to SG&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 million compared to $175 in the second quarter, 7% less, broken by $112 million in selling expenses and $51 million in administrative and general expenses. The total of the year, we had the $499 million as the number accumulated to September. In page 12, income of operations, operating income.
The result of $76 million in the third quarter, accumulated to $151 million 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. 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. We had $156 million in EBITDA in the third quarter and accumulated as of September of $460 million, with EBITDA margin of 12.1% in the quarter, accumulated 11.7% up to September. The next page, net income, total of $53 million in this third quarter, accumulated of $78 million in the year, 4.1% margin.
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, we were able to have a more normal situation in terms of income tax. We return to this profit of $53 million. The reais figures, BRL 119 million, total accumulated of BRL 170 million, which is important for the distribution of the results. Next page 15, inventories, a total of BRL 2.8 billion 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. We're coming to a BRL 2.8 billion 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 16.
We have the free cash flow information. In the quarter, of course, the lighter quarter is reflected in the operational cash generation. We could not compensate the investment level. We had this total of BRL 102 million of operating cash generation, but investments of BRL 106 million in PPE and BRL 80 million in intangible assets, returning to the net negative of BRL 84 million in this third quarter. In terms of PPE, most of the investments are associated to the defense program and also the Portugal plant in Évora, and also the (Solar-Powered MRO project). In terms of the intangible assets, they're mostly related to the E2 investments and also the Legacy 500 and 450. 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 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, the total of BRL 389 million 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 release. We took the opportunity to highlight this for information in this chart. So far, we have the outlook for BRL 580 million for the year, and we have so far the BRL 389 million as of September. Page 18, in terms of our capital structure and related to investments and debt. 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, and were able to extend about half a billion BRL from debt that will be maturing in 2017 and 2020, to the first half of 2023. Important that with this operation, also, we had a better profile in terms of short-term and long-term debt. We reduce our short-term portion of the debt from 6%-4% in the end of the quarter. Okay. With that, I finish the presentation of the financial numbers and turn back to Fred to open the questions. Thank you.
I understand that the first questions will come from this audience. Is that right, Nadia? Okay. Please, we are at your disposal. Mics over here, one, two, three.
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, was it all commercial? Was it across the segments? Was it price? Was it mix? Could you be very clear about what drove it down this quarter?
Kevin?
The impact was the business. Part was that from commercial. We have the operating margin of 7.8%. The Executive business was negative 2.4%.
This is operating, not gross.
Operating.
His question was about gross margin.
Let me conclude the operating, then I give you the gross margin.
Sure.
Defense was 8.6% margin. In terms of gross margin, 19.1% in Commercial, 16.2% in Executive. Sorry. 16%. Correct. 20.9% in Defense. The blended margin was 19.2%.
I would just add, on the commercial side, we lost a couple of airplanes. That certainly, I don't know how much it would have been impacted, certainly maybe one point right there, maybe.
Which one of the three segments was down the most from, say, the first quarter? You had pretty low volume in the first quarter.
Well, first was commercial.
Commercial was down the most?
Commercial. From the first, yes, commercial.
Okay.
Commercial and the executive also.
Yeah.
If I may add also just a little bit of color. If we look at the product mix, I think third quarter was, I would say, pretty unique when we think about the commercial aviation mix. 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 190/195 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 am trying to figure out is that I know your E175 mix is going to go up next year, of course. Should we think about year-over-year margins for 2014 maybe being down maybe more like 8%-8.5%, just on that powerful dynamic?
We are not ready to talk about actual guidance yet, but we certainly will see a reduction in the margins of commercial business, but we see it still remaining pretty healthy. It is probably the healthiest margin collaborator in our three businesses. Of course, it will have, I don't know, maybe a two or three percentage points impact, maybe two and a half or something next year. That, of course, we will make guidance in February. It is planned to be, even with a lower mix, a mix of a lower sized aircraft, should be helping the average of the company. That is a healthy business even going forward, even with a loaded U.S. market, deliveries for U.S. markets.
Okay. Thank you.
Yeah. Myles and then I have Joel here.
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-
Yeah
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, Myles. 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 annual revenues. I think what really depends 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. We have a very large challenge in making sure that we deliver. I mean, there's no industrial challenge. Of course, there are industrial challenges, but not 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. 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. 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 billion in the quarter and a strong recovery of margins. 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. I know in the press release you talked about it on a year-on-year basis, and that's fine, what happened sequentially that improved the other income line or other expense line that you can talk to?
The comparison was that we had some cancellation, we had the return from the cancellation penalty.
Canceling.
Canceling.
Sequentially, that's the differential?
Yeah.
Okay.
Here, please.
Fred, just on the executive jet business with the negative margin in the quarter. What's really driving it? Is it all pricing? 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? 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. There is a pricing pressure. Recently, as everyone knows, Cessna took an important decision not to engage into a market share fight once, of course, the Hawker Jets are no longer into the market. This mid to lower end side of the market, it's really now fundamentally down to Cessna and Embraer. I think both, they are trying to hold pricing. 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. That's associated with a small increase or maybe no increase whatsoever for the lease. 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 have 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 Legacy 500, we should get some alleviation on the investment side, and I certainly speak, and I think Ernie and Mark will talk about this in more details. We certainly expect a strong turnaround, if you will, as far as performance in this business. Even in an environment where the market is not still booming, it's not coming back early, I'm afraid. We tend to have a strong recovery as far as our margins and our cash associated to that business as well.
On the commercial side, you cited that there were a few aircraft that slipped into Q4 from Q3. 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 customer financing that's an issue, or is it manufacturing, or is it just simply demand?
Again, we are talking about certainly less than a handful of airplanes. It's more like commercial risk. It's not industrial, for sure. It's really the ability of a customer to take delivery or not. That's fundamentally it. It's not necessarily lack of financing. It's really, more on the commercial side.
Okay.
Fleet size, that sort of
Free cash flow guidance for the year, finally. You had said it's, I think in the higher double digits, José. At this point, you're going to say 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?
Yeah. That's correct.
Okay.
I don't think we ever said higher double digits, have we? Double digits starts with 10, right? Did we? Did we say higher? Okay. Do your challenge. Noah, please. Sorry, did anybody Yeah.
Thank you. Dennis Bock 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 2013 or even 2014, for that sort, deliveries, skyline. 2016 and 2017, that's where we'll find customers to fill those lots. We don't feel that uncomfortable. Was not a big surprise to us. Don't feel that uncomfortable to deal with that situation.
Sure, please. I don't know. Okay, here we go. With the SG&A expense reductions, is that reoccurring, and do you see any other opportunity to take costs out of the business? If so, can you quantify that a little bit?
Yeah. I think that this is an ongoing problem. We expect to see more benefits from this. Of course, it's important to see that this is a dilution of the cost within the business. We're working a lot in terms of building our shared services platform and doing something common to the business to support the business, all the cleaning up the back office activity, be more effective, in the way we do. 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 not going to be any guidance necessary for that, but that's the trend.
Okay, thanks.
Chris, before we get to Ryan, Ron Noah, Please.
On my 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?
P aulo, I think, can elaborate a little bit better. Certainly, we see the largest demands for the next few years coming from the U.S., regional airline replacement of older RJ50 seaters. There are opportunities for larger aircraft popping up here and there. Latin America, potentially China, I think Paulo can give you a little bit of better color to that. Again, maybe advancing a little bit, 2014 looks very comfortable at this stage, and also we have a very good sentiment about 2015 at this stage as well. I would say a better sentiment about 2015 at this stage than what we had about 2014 a year ago. I think later on, Paulo may give you some better color.
Okay. Just one follow-up, on the mix issue within commercial, going more towards 175 from 190, 195, 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 12 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. Paulo 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. It's like from maybe lower double digit to high single digit. It's probably an approximation.
That's helpful. Thank you.
George Ferguson.
Actually
George Ferguson with Bloomberg Industries. Switching gears and going to defense, can you talk to us about the KC-390 and how you position that airplane between C-130s, A400M, and the C-17, what you see is the opportunity for that airplane and how you position it in there. How does it stay competitive in there?
Okay. The KC-390 is actually a multi-mission airplane. It's not only a cargo aircraft, but also has a tanker capability, also has some medevac capability, operates in unpaved runways, and would operate in Antarctica. Let's say, size-wise, it's very direct competitor to the C-130J. It's a 21, 23-ton aircraft. Actually, a little bit bigger than a C-130J. If you think about Airbus, we sit between the C295 and the A400M, right in between. 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 C-17. It's a C-130 market. A different concept, of course. A faster airplane. It's a twin jet, not a turboprop, and obviously, with the benefit of a clean-sheet design.
The way we market this, we think about marketing this airplane, then 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. Initially, of course, we have Brazil as a potential main customer. We also have a few other countries which have investor participation in the program, and with which we do have LOIs also for other aircraft. Hopefully next year, we will be able to execute the contract with the Brazilian Air Force for the serialization of the KC-390. From that, we'll be able to negotiate with other customers. We see at least a 700 aircraft market. Let's call it open market.
There is a much larger number of C-130s there, and the total market's much larger than that. We understand that, of course, with Lockheed Martin and FMS and the whole U.S., let's say, influence in defense equipment, there are some markets which are very unlikely that we'll be able to penetrate. We see at least 700 airplanes in which we have a fair chance to compete for. That's market share. Whichever market share we can take there, 20%, 30%, that's certainly a good result for us. Just to finalize, we do have an agreement with Boeing Defense to market our KC-390 in a few of those markets in which we don't see a possibility for us to sell direct. That may increase the, let's say, the customer base of the KC-390. Yes, Cai.
Yes. Fred, in recent meetings, you've talked of the above-average potential for profitability of the Legacy 500 and then the Legacy 450. 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 and in 2015?
Qualitatively, yes. We are about 12 to 16 months late in the program, as you know. We should be in the market up to the end of the next half, middle of next year. I'm sorry. It is being probably the smoothest development that we have had, or even better, the smoothest certification and entering to production aircraft that we have designed. We do expect a relatively smooth ramp-up next year. We're probably looking at maybe six or so Legacy 500 delivered. Ramping up, of course, in 2015, which is the year where the Legacy 450 shall also enter into production. 2014, next year, maybe six of the Legacy 500. 2015, ramp-up, and Legacy 450 coming up. 2016, we will see a more full benefit of having both in the market. This is an add-on revenue for us, Cai, because we're not in that segment at all.
Those two aircraft, they do not take any share at all from our Phenom 300 or our Legacy 650. That's going to be really a step function in terms of revenue for us, again, becoming more meaningful towards 2015.
Pricing?
Pricing, as I said, I think it's a very good question. I think there is a question of market share versus pricing. Definitely, that's not the way we do business. Not a price war. We've been trying to price our aircraft at a competitive level, but a level that bring a reasonable potential for margins. At this stage, we see that segment with, and I think, Mark, we also talk about, it's a segment which will grow in everybody's forecasts proportionally a little bit better than other segments. We should be able to have, I don't know, 50, 60 airplanes a year. That's something which, of course, we have to fine-tune as we go. We think we're going to have sound and healthy price and margins. We do see a learning curve relatively fast with those two aircraft. Yeah.
We still have about eight months to go or something in certification. How many hours we have logged in the flight campaign? 700. Over 720 hours in the flight test campaign. We are on good track for certification. The airplane, it has very good flying qualities. I think as far as passenger appeal and customer appeal, we really believe it's going to be the best-in-class, and both will be winners, as the Phenom 300 is already.
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 in the program?
Probably. We will have, because the Legacy 500 will come down. The Legacy 450 is still there. I think the E2, the 175, what is it called? We just have a little bit next year. Most of that happened this year. I think the E2 will be the real demander of capital next year. We don't have those numbers yet, I'll say, likely it's going to go up, the total investments. Likely. Sorry.
Quick question for-
Sorry, to the front. For some time we can hear.
Thank you. Just a quick question on working capital management. I guess for José. For a long time, working capital management at Embraer has been not great. 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. I think that this is important that you mention. Of course, the increase in the inventories that we saw in the end of last quarter, was followed by an increase in suppliers, as well. It's the same effect in terms of pressure of working capital. There's something also here. I think that Fred mentioned about also, in terms of the executive aviation, we're still working on better capacity to project that, to avoid pressure from working capital, is something also that we think we can have some benefits going forward, in terms of working capital. This is something, still, we had a demanding from working capital because of the type of the business. 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. Do you have a good sense, from your seat when you look around Embraer, that you know where the cash is or where cash is being used? 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. Definitely yes.
Absolutely.
We have good control of this.
Okay.
I think it's more like building up a consensus among the business of what impact each effect of each action does in terms of cash. It's a balance of 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've been in the business jets business for, let's say, 12 years, but a little bit more intensively for maybe 10 years. In this period, we have made a significant commitment of capital, which was generated mostly by the airline business. More recently, in the last maybe five years, also by the defense business. In not only product developments, we went from nothing to Phenom, the two Legacys, which are still under final certification. Significant improvement in the Legacy 650 and the Lineage. Also, a significant investment in the customer support infrastructure. Typically, that's 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. In a nutshell, that has been the big demand for investment.
As we're now entering to the E2 investment, a lot of that, of the funds, will come from the actual cash generation from its own airline business itself. A lot will come from there. We must, and we do expect that the business side of the house will start making a much more relevant contribution for that cash. Defense is a pretty self-sustained and a contributor of cash as well. We do have a 15-year plan. We don't see, in this horizon, knowing what we know now, any need for raising new capital. We are managing our debt, I think, in a very competent way, extending term and keeping cost or even reducing cost a little bit. Absolutely, cash is actually probably our number one point of attention, even more than margins.
Thank you.
Okay.
Steve.
Thanks, and good afternoon, Freddy and Gent. Thanks for the time. Stephen 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? 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 smallish work stoppage of some sort, and I was wondering if you could give us a little color on what happened, please.
Sure. Thank you.
The liquidated damage was BRL 16 million, was just an isolated thing. One customer. It's not something like systematic, no.
Any particular reason why that one customer?
Yeah.
Steve, on the labor side, we have not had a strike for as far as I can remember.
We're not having any strikes. 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. 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. There's nobody stopped. Everybody's working. This issue, in Brazil, the way this thing goes, is the two unions. There is a union for the companies, also. The federation of companies, they are negotiating on our behalf with the unions. This thing is still going on. What we have done to our employees, that we have readjusted all the wages back to September for the inflation of last year. They feel protected. They feel fine.
It's much more, let's say, as I said, an activist attitude from the union than really an internal concern. It's certainly a disturbance, but not something. The workforce is pretty much with us, with the company.
Okay. Very helpful. Thank you.
Ladies and gentlemen on the phone lines, if you have a question at this time, please press star, then the number one key on your touch-tone telephone.
Yeah. You press star.
Thank you. It's Alexandre Falcão 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 effects kicking in, more or less. 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? Second, we're talking about the low range of the guidance, maybe delivering 32 aircraft in the fourth quarter. Is this feasible, first? What's going to be the breakdown, more or less, between E175s and E190s?
Let me address the effects question. Yes, of course, what happens is that we have to take the effects when it comes, if you see, experience a variation.
Right.
It has to go through the inventories before. You're going to benefit in the margins, if that's the question. What we saw in the second quarter, the devaluation was a little bit more than reduced in the third quarter, actually. We may see some of these impacts, most of them already in the quarter there. Some we still may see going forward in terms of the last quarter, but I don't think it will be the major impact in the margins. To the share of deliveries in the last quarter, Paulo was telling me it's probably 50/50, probably maybe even more 190s. I don't know, maybe 60% 190, 195, and 40% 175.
Okay. Thank you.
Yes, it's doable. Yeah.
George Ferguson again, from Bloomberg Research. I'm not sure if you noticed today, Boeing announced that they're going to increase the 737 production to 47 a month, 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 gauge down a bit to an E2. Now Boeing's opening up slots for those people potentially, and perhaps making the 190, 195 E2 a bit harder for you to sell.
On one perspective, in one side, there's no direct competition between the E190. They are really smaller aircraft, 50% in size more. That's pretty much a very sizable difference. 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. Of course, the higher the production rates of narrow-body aircraft, that puts a pressure on the whole industry. In the sense that capacity is taken out, be passenger, be also financing capacity. The way we feel, of course, is that we are safely enough away from really competing with the 737, which the majority of them will be dash eights and dash nines.
Airplanes which start at 160 seats and go up to almost 200 seats. Same with Airbus, 320, 321. No, 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. There's a very natural, let's say, customer base, and follow on opportunity for the E2.
By the way, the airplanes will be extremely competitive. You'll be able to have a 100-seater or 125-seater in the E190, E195 with cost per seats very similar to larger aircraft. That makes a very compelling case. Cost per trip, way lower, and cost per seat, very close. That's one of the assets that the E2 family will have. I don't think we don't see a direct impact. I did not know about this production rate increase. It's a bit surprising that there are that many, because that probably is going to trigger a response in Toulouse. A lot of passengers have to be out there to fly all these aircraft. As I said, we are in a different segment, much smaller, but I think, also in a strong position in that segment, which is sub-120 seats.
I think Noah has a question. No? Sorry. Just a coffee? Okay, cool. By the way, guys, after finishing this, I think you can still go for dessert before they take everything out. As soon as we're done here, I encourage you to get some dessert.
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 impacted the defense business on third quarter?
Yeah. Can you respond?
Yeah, it was just company-
Foreign exchange, right? Exchange rate.
Yeah, primarily the exchange rate. Exactly.
Looking forward, should we see a slowdown in the growth given that the currency continues around BRL 220 or so?
No, we'll see a double-digit growth for next year, probably, in the defense, in dollars. Keep in mind that we still have, what, 50/50 exports in Brazil. Yeah.
50% in dollars, 50%
50% exports, so dollar-denominated, and 50% realized. Of course, helps the company to hedge, to have a natural hedge also. Ron, sorry, there was a gentleman there, and then Ron. I think we're done.
Hi, Darryl Genovesi with UBS. Just wondering, I think in the beginning of the year, you had said SG&A, as a % 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&A line's come down on an absolute basis, but it looks like it's just come down in line with sales. Just wondering if, it doesn't look like you're going to get that this year, but does that imply that there's further for that to come down in 2014?
Yeah. Again, we're not giving any, at this point, guidance for next year. If you see this year, we had the SG&A in the second quarter about 11% of sales, and now it's 12%, a little bit more. More because of the reduction on the revenues rather than its nominal cost. I think we should expect this trend of reducing this to levels a little bit less than what we had.
We should not see a material increase in the fourth quarter. We will see a very significant increase in revenues. The dilution will be, I think, important for the year. When you look at the year, I think you'll see a better figure than what we have so far year-to-date.
Okay, just a cleanup question. Can you just give us what the combined services revenues were for the quarter?
It was approximately $220 million. Primarily, half commercial and the rest between the other two businesses.
Thank you.
Ron, I think you have the last question.
Yeah. Okay, thanks. One thing we haven't talked about much is M&A, particularly, Hawker Beechcraft seems to be back out on the market. Is there anything you can mention about that or not?
No. We're not interested in Beechcraft. 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're not even looking to the numbers. Not an attractive proposition for us.
Okay. Thank you.
Yeah.
This concludes today's question and answer session. I would like to invite Mr. Frederico Curado to proceed with his closing statements. Please go ahead, sir.
Just to thank everyone for attending. As I said, there's dessert served outside the room. There's a 10-minute break, we'll be back in 10 minutes, so 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.