Good morning, ladies and gentlemen, and welcome to the audio conference call for Embraer's third quarter of 2022 financial results. Thank you for standing by. We remind that EVE's results will be discussed on EVE teleconference. At this time, all participants are in listen only mode. Later, we will conduct a question and answer section, and instructions to participate will be given at that time. Should you require assistance during the conference, please use the Q&A button on the platform. As a reminder, this conference is being recorded and webcasted at ri.embraer.com.br. This conference call includes forward-looking statements or statements about events or circumstances which have not occurred. Embraer has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance.
These forward-looking statements are subject to risks, uncertainties, and assumptions, including, among other things, general economic, political, and business conditions in Brazil and in other markets where the company 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 obligation to update publicly or revise any forward-looking statements because of new information, future events or other factors. In light of those risks and uncertainties, the forward-looking events and circumstances discussed on this conference call might not occur. The company's actual results could differ substantially from those anticipated in the forward-looking statements. It's important to mention that all numbers are presented in U.S. dollars as it is our financial currency.
Participants on today's conference call are Mr. Francisco Gomes Neto, President and CEO, Mr. Antonio Carlos Garcia, Chief Financial Officer and Procurement, and Mr. Leonardo Shinohara, Director of Investor Relations. I would like now to turn the conference over to Mr. Gomes Neto, who will proceed with the first remarks. Please go ahead, sir.
Good morning, and thank you all for joining our third quarter 2022 results call today. Mainly due to our continuous focus on efficiency, we were able to deliver better margins even with the supply chain constraints. Our firm order backlog is one of the highest since the beginning of the pandemic. It is important to highlight that we, the whole company, have concentrated our focus on year-end aircraft deliveries. There are comprehensive initiatives in place, and they are progressing well to mitigate the production challenges, always keeping a strong focus on safety and quality. Regarding growth, several campaigns are advancing well, both in commercial aviation, mainly the E2 family and in defense, including the C-390 and A-29 Super Tucano. In this quarter, as we will see on the next slide, we have already reached new regions and operators for E2.
Having said that, we maintain our confidence in our guidance for the year, and we are pleased to share that our free cash flow will increase to $150 million or better. On the next slide, we will see more details of business unit highlights in the quarter. In commercial aviation, we announced a firm order of 20 E195-E2 from Porter Airlines, now totaling 50 orders and 50 options. We also announced the expansion of our presence to the Middle East with a new operator, SalamAir, which ordered 6 E195-E2. On the freighters project, P2F, we signed a firm order for up to 10 aircraft with NAC. More recently, we received a great and promising news. The Civil Aviation Administration of China granted certification for our E190-E2, opening the door to a relevant market for the E2 family.
Considering the nine-month period, the gross margin in our commercial aviation improved to 10% from 3.2% in the previous year. Our executive aviation keeps up the good momentum with fantastic performance. We delivered 23 jets in Q3 2022, 10% higher than the same quarter last year, and the gross margin was 20.6% in the last nine months, compared to 16.3% in the previous year. On defense, the conflicting environment continues to influence countries around the world to revise plans and update their capabilities and readiness. During the quarter, we were pleased to announce a partnership with L3Harris Technologies to expand the capabilities of the KC-390 Millennium as a jet-powered Agile Tanker, addressing the U.S. Air Force's operational requirements.
More recently, we signed some MOUs with Korea Aerospace Industries for future collaboration in the KC-390 program. Finally, we reached a final agreement with the Brazilian Air Force on the KC-390 contract, preserving the company's cash flow and ensuring the economic and financial viability of the project. The Services & Support business continues to positively evolve with a growing backlog and positive gross margin, which reached 29.9% in the nine-month period versus 26.4% in 2021. I will now hand it over to Antonio to give further details on the financial results, and I will return in the end. Thank you.
Thanks, Francisco, and good morning, everyone. We delivered reasonable results in the third quarter, reinforced our confidence in our financial performance for the year-end, highly focused on enterprise efficiency. As a remark, our guidance does not include EVE numbers. Moreover, the final numbers also include the account adjustment performed by EVE in the second quarter. Moving to slide five, aircraft deliveries. Embraer delivered 33 jets in the third quarter, of which 10 commercial jet aircraft and 23 executive jets. Year to date, we have delivered 27 commercial and 52 executive jets. We all know the supply chain constraints, which is impacting Embraer in moving big portion of the deliveries to Q4. Deliveries are in a good pace, and we have no concern from the street about deliveries for the whole year. We have affirmed all aspects of our 2022 revenue and delivery guidance.
Despite the challenging supply scenario, we should stay in the lower end of the delivery guidance for both commercial and executive jets, with some minor risk on the downside. Firm order backlog ended third quarter 2022 at $17.8 billion, up $1 billion versus the same period last year. This is one of the highest quarters since the beginning of the pandemic, driven by solid sales activities in executive aviation and Services & Support. Revenue reached $929 million in the quarter, down $30 million compared with the same period, third quarter 2021, mostly driven by lower revenue in Defense and Security, partially offset by the other business unit. The revenue breakdown evenly spread through the business unit have helped to contribute to the consolidated gross margin. Moving to slide six, let's talk about adjusted EBIT and EBITDA.
Before that, just to report, in the first nine months of 2022, Embraer reported consolidated gross margin of 20.9%, than 16% reported in the same period of 2021. Due to the enterprise efficiency as a whole, 1% mix, 1% one-time effect, and 2% margin improvements driven by enterprise efficiency, even with lower volumes that we delivered in the first nine months. Adjusted EBIT and EBITDA were $50 million and $93 million respectively, yielding an adjusted EBIT margin of 5.4% and adjusted EBITDA margin of 10%. Adjusted EBIT in the third quarter 2022 also includes extraordinary items. If we exclude all extraordinary items, adjusted EBIT margin would have been around 6.8% or $63 million in the third quarter 2022.
Adjusted EBITDA margin would be around 11.4% in the third quarter 2022. In regards to our guidance for EBIT and EBITDA, we should stay in the upper range of the guidance for EBIT and EBITDA with some upside potential if all deliveries happen as planned. Quarterly G&A expenses reached $41 million, with no significant changes compared to the second quarter 2022. Selling expenses reached $67 million due to higher volumes of campaigns in all segments, prominently in defense and commercial aviation. Investments. In the third quarter, Embraer invested a total of $41 million in product development and research, mainly due to development, for example, E2 family, executive aviation and other products. We invested $14 million CapEx mainly for the Services & Support expansion. Moving to slide eight. Starting with adjusted free cash flow.
Free cash flow in the third quarter was -$109 million. This is largely due to the higher working capital needs for the higher deliveries in the fourth quarter 2022. Free cash flow year to date is -$86 million, slightly better than nine months consolidated basis. Therefore, regarding the free cash flow, we continue highly focused on the cash flow discipline, and we decided to increase our free cash flow guidance from $50 million to $150 million or better in 2022. On the right side, the adjusted net results was a profit of $24 million adjusted, trending positive from efficiency and less interest expenses. Year to date, we are more or less close to zero. Slide number nine. We are extremely happy with the development of our strong liquidity profile.
The company reduced the quarter, finished with a total debt of $3.1 billion or $808 million less year -to -date, in line with our liability management strategy to reduce gross debt and interest expenses. The current schedule of our debt give us comfortable situation on our monetization for the next two years. If you see, we do have $37 million residual value to pay in 2022, $244 million in 2023. Moreover, the $310 million we have for 2024 has been already refinance, being postponed to 2027. Means we do have three years in a comfortable situation to overcome any kind of recession or volatility in the market, and we continue to work on increasing duration and improving the financial metrics.
To ensure the company liquidity, Embraer obtained in October 2022 a revolving credit facility line, RCF, in the amount of $650 million, and the renewal of the current loans with the BNDES with additional two years maturity from $300 million. We thank all of our banking partners for the support toward the revolving credit facility. To finish my presentation, moving to the slide number 10, to talk about EVE accounting restatement for the second quarter 2022, no cash adjustment. EVE issued warrants to strategic and SPAC investor during the IPO. In September, we reviewed its accounting for a set of warrants that were issued and became exercisable at the close in May. Based on such a review, Embraer expects to recognize the following non-cash expenses associated with the issuance of such warrants for the second quarter.
The revised accounting treatment is to measure the warranties at the fair value. Based on this premise, we recognize a non-cash impact of $76 million in net results, of which $142 million in other operating expenses and $67 million are fair value financial income. Second, listing expenses. We recognize a non-cash expense of $136 million in other operating expenses as a listing expenses. All values were non-cash, but were previously booked in the equity. Now we are recognizing the profit and loss before impact the equity of the company. Transaction costs. Embraer assessed its direct and incremental costs and concluded that the amount to be reclassified is $15 million in equity to other operating expenses. With that, I conclude my presentation. Pass Francisco for the final words. Thank you very much.
Thanks, Antonio. To close, I would like to make some comments on the year-end and near future. The end of the year will still be challenging with a concentration of deliveries in the fourth quarter. We have known this since the beginning of the year, and the company's focus has been on mitigating such issue, and we are prepared to delivering solid full year results. Regarding the coming years, we foresee a better perspective in terms of revenues and profitability growth. The aircraft slots, the production line for deliveries in 2023 and 2024 are almost completely filled for both commercial aviation and executive jets. As I said before, we are working in many active campaigns with good chances of new orders for the years ahead in all business units.
On top of that, considering the new campaigns under negotiation, the continuous focus and discipline to increase enterprise efficiency and innovation projects, we are very confident about the midterm future of Embraer. In closing, I'm very pleased to announce that Embraer has been awarded with the Great Place to Work certification in several countries we operate. We celebrate this recognition and continue to believe that engaged and passionate people achieve the greatest results and nurture a happy and healthy work environment. Our people are what make us fly, as stated in our values, and we will continue to work to delivering the best value to them, to our clients, shareholders, and society. Thank you for your interest and confidence in our company.
Thank you. We'll now start the question and answer session, and we'll ask who are interested in making questions. At any time, press star nine in your phone or press Raise Hand on the platform. When your name is announced, press star six on your phone or activate your microphone on the platform and start your question. To give everyone a chance to participate, we request you ask just one question per queue. Wait while we poll for questions. Our first questions come from Marcelo Motta from JP Morgan. Please, Marcelo, you may proceed.
Hi, everyone. Good morning. Thank you for taking the question. I mean, it's more of a strategic question regarding Eve. I mean, when we look at the company, you know, the market cap, you know, has been, you know, growing since its listing. Today it's worth more than the stake that Embraer holds on the company. Even though, you know, there are several lockup agreements, just wondering how Embraer think about EVE in the long term, if maybe it could be a company that you can monetize part of it, you know, to strengthen even more your cash position. How do you guys see the current moment for Eve, and how you see yourselves holding a position in EVE in the long term? Thank you.
Hi, Marcelo. Francisco speaking. Hi, Antonio. We will answer together this question to you. I start saying that we continue to be very excited with this project. We have now more than 200 engineers working, dedicated to the EVE development. That is moving. It's moving well. We do believe that EVE was a great movement of Embraer, you know, in terms of innovation to help our growth in the long term. Again, about the future of Eve, we are confident that it was a very positive movement. About the finance, I'll leave this with Antonio to answer to you.
Marcelo, we for sure have today 90%. If the shareholder who wants the warrants, if they exercise the warrants, we are going to get half a billion dollars in the cash flow and probably are going to dilute a little bit, which is already a way to monetize. At least we all are locked up for the next two years. There is no short-term anything that we could think apart from the warrants that could provide us more cash flow than we have today. The next three years, nothing's going to happen.
Perfect. Thank you very much, Francisco, Antonio. Have a nice day.
Marcelo, just to complement this, we are also finalizing the studies for the industrialization of EVE with a global network of production and logistics. We are moving according to our plan to have the EVE entering service by 2026.
Our next question comes from a number that begins with 1656 from New York. You are allowed to talk. Please press star nine to activate your microphone.
Yes. I think that's me. Cai von Rumohr from Cowen. You said that, you know, you've pretty much filled for 2023 and 2024. Can you give us any helpful color in terms of where those deliveries might be for commercial and business jets?
Well, I mean, we are. Thanks for the question, Cai. Francisco speaking. We are still in the middle of our planning process for the next five years, including 2023. What I can tell you that we see two-digit growth of Embraer. Basically all business units should grow two-digit in 2023, according to our view at this point of time. We are very positive about the years ahead.
Thank you.
Our next question comes from Myles Walton from Wolfe Research. Please, Myles, your microphone is open.
Thank you. Good morning, Francisco, Antonio. I was wondering, Antonio, could we talk about the cash flow for a moment? The fourth quarter implied cash flow, I think, is just under $250 million. If you look back the last five years or so, you generate in the fourth quarter, I mean, anywhere between $400 million and $700 million free cash flow. Obviously you're looking for a very large delivery number. Why only $250 million of implied fourth quarter cash flow?
Morning, Myles. Thanks for your question. We put 150 or better because in regards to we are in the, I would say, the final sprint for the year, just five yards to the touchdown with one pass. If something happen in the deliveries, then we are going to miss big portion of the cash flow. You are right. If you complete the guidance, as you are seeing today, it's been much higher than $150 million. In order to not, I would say, give you a false information, prefer to say the $150 million. It's just a matter to get the aircrafts out of the door, then probably it's going to be much better. You are totally right if comparison with previous year.
At least today, assuming the risk you have in front of us, we are a little bit cautious to give you higher numbers. A lot of upside potential. You are right.
Okay. One other one on cash flow. You make adjustments for the income statement and the balance sheet for EVE, but I haven't seen an adjustment for cash flow for EVE.
Can you provide them?
Yes, absolutely. Myles, it was just accounting adjustment with no cash adjustments. It was just pure accounting issue. For example, warranties we needed to
Yeah, sorry, Antonio, I'm not speaking to the restatement.
Oh, sorry.
I'm just talking about the ongoing operations. I haven't seen an adjustment for how much EVE is burning.
It's just $1 million for each quarter. It's no more than that. Was in Q3.
Okay.
Sixteen.
Sorry, $16 million.
I'm sorry, 60 or 616?
$16 million.
16.
16.
Thank you. One for Francisco. With the certification of the E2 in China, Francisco, should we expect a significant change in the order dynamics out of China that haven't really been active in the last couple of years?
Myles, I have here a special guest with me, Arjan Meijer. I brought him because I knew this question would come. Arjan, please.
Yeah.
Thank you, Francisco. Good morning, Myles. Thanks for the question. Well, first of all, we're very pleased we got the certification over the line very recently. We are actively working in the Chinese market, so that is progressing. What I will say is that the reason why we're so pleased with the E2 is we believe the 190 , which is certified now, and the 195- E2, which we will certify next, those fall very nicely between the ARJ 21, which is the smaller Chinese jet product, and the C919 , which is the narrow body. We feel that the E2 complements the Chinese production line very well. We have very good hopes for the Chinese market.
Okay. Very good. Thank you.
Yep.
Thank you.
Our next question comes from telephone, from the number that starts with 19175. Please, sir, just press star nine to start your microphone.
Hi, this is Elizabeth Grenfell. I'm for Ron. Can you hear me?
Yep, we can hear you.
Yes, we can.
Okay, great. No worry. You know, I think you spoke to those weaknesses in the supply chain, and there's downside risk to your delivery forecast for the year. Could you speak to what you're seeing in the supply chain, where are those specific weaknesses, and how much downside risk you do see to the full year delivery guide?
Hi. Hi, Elizabeth. Thanks for the question. Well, we are really still suffering with the supply chain this year a lot, especially with engines, avionics and interiors. We are getting parts, but with a lot of delays. We had to try to change a lot our production schedule during the past month to accommodate, you know, the production with the delays. We see this, the situation still going, especially into the first half of next year. I mean, improving, but still with a lot of delays. We see that delays being reduced during the second half of next year, but it's still not at the normal situation.
I think this situation will normalize completely only 2024. Again, we are prepared to, you know, with our production plan, to live with this situation in 2024.
The downside risk to deliveries versus where you originally expected for this year is what?
Yeah, Elizabeth, when we place the guidance, if you see commercial aviation 60-70, 100-110, we were foreseeing beginning of the year, this constraint and shortage in supply chain. That's why, as I mentioned in my speech, we find ourselves today in the lower end of the guidance, 60-100. If I would call a risk, three-four aircraft, each business unit, no more than that for this year. For next year, we should have a, I would say, a growth of two digits for commercial executive, even with such restriction. I would say, if you ask me today, we are at the lower end of our guidance. It means we lost 10 aircraft in commercial.
We lost 10 aircraft in executive, and we may have additional risk between four-five aircraft, each business unit. We continue to fight to the last day of the year. All aircraft on the assembly lines to be finished, to get their missing parts and deliver to those customers.
Okay, great. One more question, if I could please, on the defense side. Could you speak to the percentage of completion recognition, revenue recognition on the A-29 program? What was the impact there attributable to?
Compared with the previous year, we have a gap of something around $60 million. We were not able to sell any A-29 this year. That's why last year was a strong one. We have a lot of revenue out of the Super Tucanos, the A-29. This year, we were not able to perform any sales. We do have aircrafts in inventory, but we were not able to recognize as a revenue for the missing contracts. However, we do see a nice potential in front of us for the A-29. For the coming months, we are going to announce for sure some campaigns, but it's not going to influence this year, unfortunately.
Okay, great. Thank you very much.
Thank you.
Our next question comes also via phone, and the number starts with 00-56. Please press star nine to activate your microphone.
Hi, guys. This is Florencia Mayorga from MetLife. Can you hear me well?
Yep.
Thanks for taking my questions. I have a couple of questions. One's regarding Services & Support, which has been a business that performed very well during the year, with very high margins. What's your expectation regarding margins by next year for this business? The other one is, I think a follow-up regarding deliveries. You mentioned that you continue to see supply chain issues for next year and perhaps for the rest of this year. Why is the main reason that you are still reaffirming the guidance regarding deliveries? Or when do you expect some more downside on commercial, on executive jets? Can you provide more color on that point? Thank you.
This is Antonio Carlos Garcia speaking here. Good morning. Services & Support, we are on the two digits EBITDA margin this year. I would say we continue to perform very well on the Services & Support, and we should keep the same level for the years to come, especially 2023. We are also growing in the Services & Support because our fleet is growing and we need to fulfill those services. That's why we continue to drive the enterprise efficiency and make sure that we continue to ride this nice margin. Second, regarding deliveries. Our forecast today for our scheduled delivery schedule continues to be on the guidance we placed since beginning of the year.
For next year we are adopting the shortage, but however, there is already the two-digit growth for next year. All positions there are in buckets. I would say even with the supply chain constraints, we have some. The situation is improving, but not in the speed we would like to see. Now it's concentrated in just a few suppliers. Before it was almost all of them. Today, it's just a few suppliers. This year will continue to be in the lower end of the guidance. We are going to fight to the end of the year. Every day counts. Next year we are adopting. Francisco, you may want to comment.
Yeah, just to a quick comment that you mentioned this year, we even with the tougher situation with the supply chain, we continue affirming that we'll be within the guidance. This, the reason for this is because we were more conservative in the beginning of the year announcing the guidance. We announced a range that we knew that we would face difficulties this year with the supply chain. We knew since the beginning of the year. That's why, with all the difficulties, we still believe we will be in this lower end of the range of the guidance that we gave to the market in beginning of the year.
Okay. Thank you so much. I just a quick follow-up regarding the free cash flow. In terms, are you expecting some improvement on the working capital side? Regarding this excess free cash flow, are you expecting any liability management in the near term?
No, not really. In fact, if you take into account that we are going to have in Q4 almost 40% of the whole year revenue is going to be done in Q4, we are going to release a lot of inventory. That's the main reason of the free cash flow. There is no special measures in Q4 in order to improve our free cash flow guidance. Just to get rid of those aircraft out of the door is the only reason.
Okay. Perfect. Thank you.
Our next question comes from Pedro Fontana from Bradesco BBI. Please, Mr. Pedro, the microphone is yours.
Hi, good morning. Thank you for taking my question. Congrats on results. If you could provide us some color on the ongoing pilot shortage in the U.S. and how is this impacting your commercial campaigns, and when do you expect this situation to improve? Thank you.
Okay. Now here I hand over to Arjan Meijer to talk about this issue in the U.S.
Thank you, Pedro, for that question. Yes, the pilot shortage in the U.S. is affecting the E1 deliveries. We think it's going to be less than we've seen in the previous years in 2023 and 2024. We do believe that will correct itself towards the end of 2023, somewhere in 2024. We'll have to see how that develops. Fortunately, what I will add is that we see a lot of traction at the moment on the E2 side. We have seen some deals close over the last couple of months. We see a very good appetite from airlines on that side. We believe that the mix of the E1 and E2s together is going to stay healthy going forward.
We believe the E1s over time will start to pick up again towards 2024, 2025.
Very clear. Thank you.
Once again, to ask a question, please press star six on your phone or raise hand on your Zoom platform. Wait while we poll for questions. This concludes today's question and answer section. That does conclude Embraer audio conference for today. Thank you very much for your participation, and have a wonderful day.
Não precisa ligar.