Embraer - Q2 2024
August 8, 2024
Transcript
Guilherme Paiva (Head of Investor Relations)
My name is Gui Paiva, and I'm the Head of Investor Relations for Embraer. I want to welcome you to our second quarter of 2024 earnings conference call. The numbers in this presentation contain non-GAAP financial information to facilitate investors to reconcile Eve's financial information in GAAP standards to Embraer's IFRS. We remind you that Eve's results were discussed at Eve's conference call last Tuesday, August 6. It is important to mention that all numbers are presented in US dollars, as it is our functional currency. This conference call may include statements about future events based on Embraer's expectations and financial market trends. Such statements are subject to uncertainties that may cause actual results to differ from those expressed or implied in this conference call. Except in accordance with the applicable rules, the company assumes no obligation to publicly update any forward-looking statements.
For detailed financial information, the company encourages reviewing publications filed by the company with the Brazilian Comissão de Valores Mobiliários or CVM. At this time, all participants are in listen-only mode. We'll give instructions later on for participation in the two question and answer sessions. As a reminder, this conference is being recorded. Participants on today's conference calls are Francisco Gomes Neto, President and CEO of Embraer, Antonio Carlos Garcia, Chief Financial Officer, Luiz Harrison, Corporate Communications Director, and myself. This conference call will have three parts. In the first part, top management will present the company's Q2 results. In the second part, we will host a Q&A session only for investors. And last, but definitely not least, we will host a Q&A session only for the press. It is my pleasure to now turn the conference call to our President and CEO, Francisco Gomes. Please go ahead, Francisco.
Francisco Gomes Neto (CEO)
Thank you again. Good morning and good afternoon to all. Welcome to Embraer's second quarter 2024 results conference call. Embraer revenues in Q2 increased more than 15% year-over-year, mainly helped by defense and security, up more than 100%, but also by commercial aviation and service and support, up around 20%. The first half of 2024, overall company revenues increased 19% compared to the same period in 2023. The highlight was defense and security, with an increase of about 50%, followed by executive aviation with 24%, service and support with 16%, and commercial aviation with 12%. Our efforts to improve efficiency and profitability led to a 1.6% gain, to 9.3% in our operating margin during Q2.
The gain in the first half of the year was even bigger, and totaled 2.7%. It is important to mention that we reiterate all lines of our 2024 operational and financial guidance after considering the opportunities and risks for the company in the second half of 2024. Our commercial activity in 2024 continues to be strong in all business units, and we see solid demand in the company's main markets. Our firm order backlog reached $21.1 billion, which is the highest level over the past 7 years, and supported by a solid year-to-date book-to-bill ratio in excess of 2.2 to 1. In commercial aviation, Mexicana de Aviación ordered 10 E190-E2s and 10 E195-E2s, with deliveries scheduled to start in the second quarter 2025.
This is another evidence of the strong ability of our E2 jet family to operate in several markets and to provide airlines with a viable option to increase their capacity quickly. Defense, the recent signing of the contract for 90 C-390 Millennium aircraft by the Netherlands and Austria at Farnborough Airshow, coupled with the order for 6 Super Tucano aircraft by Paraguay, underpins our positive perspective for the business unit. In executive aviation, we continue to capitalize on the good sales momentum in both fleet and retail markets, with solid demand across our product portfolio. In service and support, the division continued to be one of the main drivers of growth for the company, with higher revenues and profitability through a combination of operational and financial excellence, customer experience, and innovative solutions. We continue to face supply chain challenges.
This year, we reinforced our supply chain organization by localizing more people closer to our most critical suppliers, and we introduced digital tools and artificial intelligence to help us further improve the efficiency of our supply chain management. I will now move on to operational results by business units in the next few slides. In commercial aviation, the backlog in the first half 2024 rose $3.3 billion, or +40% year-over-year, and reached $11.3 billion, with a book-to-bill ratio above 4-to-1 during the period. Deliveries and revenues almost tripled sequentially in Q2 and reached 19 aircraft and $554 million. The year-on-year growth rates were also solid in double-digit territory. Adjusted EBIT margin for commercial in Q2 declined 1% year-on-year, from 5.3% to 4.3%, mainly because of product mix.
In executive aviation, we recorded the strongest first semester in terms of revenues and deliveries for the division over the past 10 and 8 years, with $575 million and 45 aircraft. The backlog for the division registered an increase of $300 million in Q2, and ended the period at $4.6 billion or 8% higher year-over-year, supported by a strong 1.5-to-1 book-to-bill ratio in the first half of 2024. The adjusted EBIT margin for executive improved 2.5% from 8.8% in the second quarter 2023 to 11.3% in the second quarter 2024, helped by higher productivity and despite lower production volumes. In defense and security, revenues in Q2 increased 2.3 times year-over-year, or more than $100 million.
The adjusted EBIT margin also improved to -0.5% in the second quarter of 2024, from -4.1% in the same period of 2023. The delivery of the second C-390 Millennium to the Portuguese Air Force was an important highlight for defense and security in the quarter. The first aircraft entered into service at Beja Airbase in October 2023. In service and support, revenue grew 20% in Q2 compared to the same period of last year, with solid medium to high teens profitability and a gain of 1.3% in the adjusted EBIT margin. The business unit maintained its historical $3.1 billion record backlog reached in Q4 2023.
Another important achievement for our service and support division was the first flight of the E190 Praetors, a passenger-to-full cargo conversion, which received the certification by the National Civil Aviation Agency of Brazil, ANAC, in July 2024. Last but not least, Eve, our eVTOL business, reached other important milestones in the second quarter 2024. The company has now already selected and contracted most of the component suppliers, completed its first full-scale eVTOL prototype assembly, and celebrated its roll-out in our Gavião Peixoto plant last month. Eve also completed a new equity financial round of $96 million from multiple investors. The monies will help support the continued development and manufacturing of its eVTOL. Embraer remains confident in Eve's business outlook as its majority and controlling shareholder, with an 83% equity stake.
I will now hand it over to Antonio to give you further details about the financial results, and then I'll be back with closing remarks.
Antonio Carlos Garcia (CFO)
Thank you, Francisco. Good morning, and good afternoon to everyone. I'd like to highlight we had another solid quarter in Q2, where our financial results improved both quarter-over-quarter and year-over-year. For instance, revenues for the period were 16% higher than a year ago, and our EBIT margin was 60 basis points higher. Our focus in Q2 continued to be on business and financial efficiencies. We are fully committed to reach our full-year guidance, despite all the ongoing supply chain constraints we continue to deal with, which had also a negative impact on our year-to-date cash flow. It is important to mention, we still see double-digit growth for aircraft deliveries, revenue and EBIT in 2024 and 2025, notwithstanding the operational challenges. Slide 10, deliveries.
Commercial aviation delivered 19 aircraft in Q2, for an increase of 12% versus a year ago, and almost 3 times higher than in Q1. Meanwhile, executive aviation delivered 27 jets in Q2, compared to 30 aircraft in the same quarter of 2023. However, if we look sequentially, the numbers of deliveries grew 50% from Q1 to Q2. In defense, we delivered one C-390 Millennium to the Portuguese Air Force in Q2, compared to one KC-390 to the Brazilian Air Force one year ago. It is important to mention, the aircraft is not included in our delivery guidance for 2024. We continue to work steadfastly to accomplish our production plan, and to reach our 2024 guidance of between 125 and 135 executive jets, and 72 and 80 commercial aircraft.
We are also on track to deliver 4 C-390 Millennium aircraft scheduled for the year. Slide 11, please. The company registered a 7-year high total backlog of $21.1 billion in Q2, which was marginally higher quarter-over-quarter, and 22% higher than a year ago. The backlog for commercial aviation continued to move higher. It's total more than 380 aircraft in Q2, and it was valued at $11.3 billion or $200 million higher than last quarter, and $3.3 billion above second quarter 2023. Meanwhile, the backlog for executive aviation was a solid and resilient $4.66 billion during the period, flat quarter-over-quarter, but up $300 million year-on-year.
Last but not least, the backlog for service and support finished relatively stable at $3.1 billion in Q2, while for defense and security, it decreased marginally by 10% to $2.1 billion. Looking forward, our backlog for defense should increase by more than 50% in Q3 with the new contracts, if we factor in the export contracts recently announced for C-390 Millennium and Super Tucanos. Moving on to revenues. Our top line reached almost $1.5 billion in Q2, or $200 million higher year-over-year for 16% growth rate. If you look at the pie chart on the right, we can see a more balanced revenue mix.
For instance, commercial aviation represented around 37% of total revenue, followed by service and support, close to 27%, executive aviation with 23%, and defense at around 13%. For the first half of the year, we recorded $2.4 billion in revenue, or almost 40% of the midpoint of the 2024 guidance. Next slide, 12, EBITDA. We generated $190 million in adjusted EBITDA second quarter 2024, with a 12.7% margin compared to $149 million second quarter 2023, driven by strong operating results when compared to the same period last year. One related note, the Brazilian foreign exchange rate has been very volatile in the first half 2024, and its recent depreciation should provide some tailwind in the second half of the year.
We generated $237 million in adjusted EBITDA, with 9.9% margin in the first half of 2024, versus $159 million, with a 7.9% margin in the prior year period, for a dollar amount, almost 50% higher annually. Meanwhile, adjusted EBIT was $139 million, with a 9.3% adjusted margin. However, there were one-time items in the quarter which propped up the adjusted EBIT margin by circa 250 basis points. Reported EBIT for the quarter was $128 million, with an 8.6% margin. Both figures were materially better than their second quarter 2023 comps, supported by better efficiency, lower SG&A costs, especially in executive aviation and service and support.
Look in the right chart, we can see executive aviation and service and support generated more than 75% of the company-wide EBIT during the quarter, while commercial aviation turned balanced 25%, and defense practically broke even in accordance with the percentage of completion accounting methods. On the slide 13, in Q2, if you exclude if, we had an adjusted free cash flow consumption of $215 million, due to networking capital needs for higher aircraft delivery in the second half of the year. This cash should be recovered as much deliveries take place over the next couple of quarters....
Moving to investments, again, without Eve, we spent $29 million in research and development during the quarter, $47 million CapEx, and net $11 million in the pool programs for spare parts, for a total of $107 million, compared to $104 million a year ago. Our capital allocation continues to be focused on segments with higher returns, with projects such as expansion for our production capacity in executive aviation and service and support. To finalize, our adjusted net income was positive $80 million for the quarter, supported by a 5.4% adjusted margin, or $22 million higher than a year ago. Slide 14, going to our liability management plan.
In second quarter 2024, our gross debt without Eve was relatively stable at $2.6 billion during the period, but we still managed to reduce it by circa $880 million when compared to a year ago. Meanwhile, our net debt declined by $152 million year-on-year and reached $1.3 billion during the quarter. Our net debt to EBITDA leverage ratio increased 0.2 turns sequentially to 2x, as shown in the top right corner. This measured increase is explained by the seasonality of the cash consumption in preparation for higher deliveries in the second half of the year.
We also announced earlier this week an extension for the next five years of our revolving credit facility and an increase of each size from $650 million to $1 billion, which will be reflected in our Q3 liquidity position. With that, I conclude my presentation and hand it back to Francisco for his final remarks. Thanks for your attention.
Francisco Gomes Neto (CEO)
Thank you, Antonio. The progress recorded in the Q2 2024 demonstrates we are on track to achieve all the results embedded in our 2024 guidance. More importantly, we will continue to work hard to deliver even better results in the coming quarters of the year, especially in Q3. Our company remains very well positioned for the future, with a seven-year high backlog of $21.1 billion, a strong 2.2-to-1 book-to-bill in the first half of the year, a steady progress in our operational and financial indicators, as well as a solid strategic plan. It's important to mention that we will include in our Q3 backlog for defense, the contracts for nine C-390 Millennium, signed with the Netherlands and Austria, and six Super Tucanos, ordered by Paraguay during the recent Farnborough Airshow in England.
I would also like to give a special welcome to Mexicana de Aviación as a new operator of our E2 family, expanding the E2 presence in North America. We believe our recognized E-Jet family will help the airline generate great operational and financial results, with a strong commitment to sustainability and aviation efficiency. To finish, I'd like to thank you all again for your interest and confidence in our company. We see bright and clear skies ahead for our company, and we will continue to work hard and embrace the foundation of our culture, that is safety first and quality always. Let's now move to the Q&A session of the call.
Operator (participant)
We'll now start the question and answer session. The first part of the Q&A session will be exclusively for equity research analysts and investors. The second part of the Q&A will be only for the press. We highlight again, this conference call is being conducted in English with translation to Portuguese. Please, let me say a short announcement for Portuguese speakers. This conference is being conducted in English. To listen to the translation, please select the language of your choice. We request participants interested in asking questions to press star then nine in the phone at any time, or press the Raise A Hand button on the platform. When your name is announced, please press star then six on the phone, or make sure your microphone is on and start your question. We'll also answer questions sent via the platform chat.
If you need assistance, please use the Q&A button on the platform. To give everyone a chance to participate, we request to ask just one question per call. Please hold while we collect questions. The first question comes from Kristine Liwag with Morgan Stanley. Please go ahead.
Kristine Liwag (Analyst)
Hi, good morning, Francisco, Antonio, and Gui, and thank you for the results for today. I guess my question is on the supply chain. You know, you maintained your 2024 full year delivery guide, for commercial aerospace. We're seeing, some of the other manufacturers, like Airbus, lower their outlook for the year because of supply chain. Can you give more color regarding, your confidence that you're able to meet these deliveries, what you're seeing in the supply chain, and maybe a little more color also on your approach in providing guidance, like how conservative is the range that you gave for delivery for 2024? Thank you.
Francisco Gomes Neto (CEO)
Your question, well, as I mentioned in the opening, we are this year, you know, reinforcing our supply chain team. We are locating more people closer to the most critical suppliers to support them. We are having more senior management meetings with our suppliers, the critical ones, to make sure that we follow up the delivery of the parts we need for a year. We are implementing new digital tools and also artificial intelligence to help us, you know, to be ahead of the problems. We have been, Christine, very, very proactive with our suppliers in trying to be even closer to them to help them, always in a very positive approach as is the, you know, Embraer style.
So again, we see challenges, but at this point of time, we are confident that we'll be able to deliver the guidance for the year.
Kristine Liwag (Analyst)
Great, thank you.
Francisco Gomes Neto (CEO)
Christine?
Operator (participant)
The next question comes from Victor Mizusaki with Bradesco BBI. Please go ahead.
Victor Mizusaki (Analyst)
Hi, congrats for the quarter. I have two questions here. The first one, when we take a look on the margin of like 12% in the second quarter, I mean, this was something that ... These strong margins was something that we were actually expecting for the second half. So my first question here is, is there any chance that maybe Embraer will revise guidance upwards in the second half? Or maybe we'll talk about the high end of your guidance. And the second one, we have seen a lot of news flow in Brazil about maybe LATAM and GOL potentially place orders for the E-Jets. So my question is, if you can give any color on these negotiations, and what's your view for the regional aviation market?
Thank you.
Francisco Gomes Neto (CEO)
Good morning, Victor. This is Antonio. Thank you for your comments and questions. I will address the first question, and Francisco will take the second one. With regards to margins—sorry for speaking Portuguese. About the BTG margin, for sure, the Q2, we have some tailwind that's one-time effects. We are confident on the our guidance. If it's in the mid or the high end of the guidance, we need more one quarter to be more precise, but everything that we are seeing right now shows that today we are more closer to the high end of the guidance than the lower end. That's from the BTG side, and I will hand over to Francisco for LATAM issues. Thank you, Victor, for the questions.
You know, at this point, we are talking to a lot of customers about E2 opportunities. I don't have anything concrete about Brazilian customers to share with you, but what I can say is that we see a great opportunity to increase the E2 presence in Brazil, as we are very, you know, we are confident that E-Jets are a perfect fit for the Brazilian market and can help, you know, the airlines, not only Brazil, but everywhere, to add the capacity quickly to their fleets.
Victor Mizusaki (Analyst)
Thank you.
Operator (participant)
The next question comes from Marcelo Motta with J.P. Morgan. Please go ahead.
Marcelo Motta (Analyst)
Hi, everyone, and thanks for taking the question. I'll keep to just one question. I mean, can you comment a little bit about the defense revenues outlook for second half? You know, I know it is percentage of completion. You still have, if I'm not mistaken, another 3 KCs to be delivered this year, and the revenues have a very good increase, both on a quarter-over-quarter and year-over-year basis. So, can we expect the defense revenues to continue to accelerate throughout the second half? And, I mean, could the driver be also the Super Tucanos order, which, you know, probably could be delivered in the short term since the production is a little bit more simple?
What are the other components of the defense revenues that could, you know, also increase and accelerate so the full year revenues for defense, you know, could be, you know, maybe closer to $600 million-$700 million? Thank you.
Francisco Gomes Neto (CEO)
Thanks, Marcelo. It's Antonio speaking here, and thanks for answer already your, your question. The we do see defense around $600 million this year. With the deliveries for the C-390, we are confident to deliver 4 this year. I would say, next year, next week we are going to deliver the second one, and I would say we are confident on that. And the order for the Super Tucano is come to the right time and the right point, because big portion of the aircraft, they are ready. Now, inventory means it's going to go on top for the second quarter, the Super Tucanos for Paraguay. That's if put all together, we do see defense here around $600 million for this year.
Noah Poponak (Analyst)
Perfect. Thank you very much.
Francisco Gomes Neto (CEO)
Welcome.
Operator (participant)
The next question comes from Lucas Barbosa with Santander. Please go ahead.
Lucas Barbosa (Analyst)
Hi, good morning. Francisco, Antonio, Gui. Thank you very much for taking my question, and congratulations for the results. I just wanted to know if you can provide more color on the one-time items that affected EBIT margin by around 250 basis points. So if you can provide just some details, if it's just one item, if it's more than one item, what's the nature of it? That would be very helpful. Thank you very much.
Francisco Gomes Neto (CEO)
Hi, Lucas. Good morning, and thanks for the question. There are a few items that impacted the quarter, but I would say by far the biggest one were tax credits that helped us improve the margins by about 250 basis points. So if you exclude that, the margin will be closer to 7% or slightly under than that.
Lucas Barbosa (Analyst)
Perfect. Thank you very much. Have a great day.
Francisco Gomes Neto (CEO)
Sure.
Operator (participant)
The next question comes from Ron Epstein with Bank of America. Please go ahead.
Ronald Epstein (Analyst)
Hey, good, good morning, guys. Maybe if you could circle back on, we had a question about, interest from airlines in Brazil, but maybe more broadly, after Farnborough, stepping away from that, can you maybe give more characterization, a little color around what you're hearing from customers, how sales campaigns are going? You know, to be honest, I was expecting to hear a little bit more in terms of orders for commercial airplanes at, at Farnborough. Where do we stand on that, and, you know, what's the outlook for maybe, you know, the rest of the year into next year?
Francisco Gomes Neto (CEO)
Oh, thank you, Ron. Francisco speaking. Thanks for the question. I mean, we had a good start this year. If you look at the glass half full, we had a good start this year with orders in commercial aviation with American Airlines and Mexicana. And we are working, you know, in a lot of sales campaigns. I mean, basically all the regions in the world. So we expect, we are confident that we will bring good news soon about the new orders, and we have a good expectation for Q3 and the rest of the year as well.
So again, we have a very good chance to fill our production slots for the years ahead, in line with our strategic plan.
Ronald Epstein (Analyst)
Great. Thank you.
Operator (participant)
The next question comes from the View Q&A chat, and it's from Steven Trent with Citibank. Many thanks, gentlemen. Can you provide some color on what you're seeing in the competitive environment for business jets? Is it possible that lower interest rates could support small and mid-cabin sales? Thank you.
Francisco Gomes Neto (CEO)
Thank you, Steve, for the question. Actually, we still see a strong interest in our business jet product portfolio. So we are selling, you know, all the four models very well, in line with our expectations. Our challenge is, to be honest with you, in the business jet is more to ramp up production levels and deliveries than the sales. I think the sales continue to be strong, as I said. We are very optimistic about not only sales, but the deliveries and growth of our business jet business in the next years.
Operator (participant)
Thank you. The next question comes from Noah Poponak with Goldman Sachs. Please go ahead.
Noah Poponak (Analyst)
Hey, good morning, everyone. Can you hear me?
Francisco Gomes Neto (CEO)
Yes.
Noah Poponak (Analyst)
Okay, great. On the margins, the reiteration of the 6.5%-7.5% for the full year adjusted operating margin, just want to clarify if that's including or excluding the items you listed as kind of one time for 2Q? And, you know, maybe put a different way, I guess, you know, to be at the midpoint or the high end of that for the full year, the margins would have to be down year-over-year in the back half. Do you expect margins down year-over-year in the back half?
Antonio Carlos Garcia (CFO)
Thanks, Noah, for the nice questions. Antonio speaking here. For sure, if you take the one time and add it on top of the guidance, for sure we could be even higher. But assuming that we are in this volatile situation supply chain, we prefer to not raise the guidance today, but today we are at the high end and we are not planning to reduce margins for the coming quarters and the opposite. But what we try to avoid with the math we did is that you're taking a 9% margin from, from Q3, Q2, and move forward for the next quarter. It's going to be a little bit higher, lower, but not in the magnitude that we are going to be even below previous years, means in a nutshell....
Yes, we are closer to the high end, and if you are able to get all aircraft out of the door, probably have a chance for upside. Then we want to do this, probably are going to review the guidance already in Q3 when we announce the closing for Q3. But let's see, depends on several facts.
Noah Poponak (Analyst)
Okay, that makes sense. That's helpful. And Antonio, I guess, you know, I feel like I have a sense for what the progression of the commercial margin could be from here. You know, executive has been kind of just solid for a while now. Services, reasonably straightforward. I guess the defense margin, you know, has been pretty volatile through the quarters. Used to be kind of high single digits on an annual basis. It's now mid-single digits. I guess as you ramp KC-390 with, you know, different customers and the mix is changing, I guess, how should we be? Well, what should we be expecting for the kind of medium-term progression in that defense margin?
Antonio Carlos Garcia (CFO)
Thanks for the question, Noah. We are, I would say, in an inflection point right now when the defense margin means the magnitude of the local contracts is being, I would say, well filled now, right now with a new contract for export, and we do see this year something like mid-single digits margin for this year, but moving, I would say, very fast for higher or even lower teens for the next year. That's more or less the projection you see, based on the new contract that we are just signing right now. Today, if you see year to date, it has been very highly impacted by still the Brazilian contract here. With this move from local contracts to export, we do see this projection from mid-single digit to lower—higher single digit or lower teens.
That's more or less how we see defense right now, with -- on top of it, with revenue growth, both together.
Noah Poponak (Analyst)
Okay, great. Thank you.
Antonio Carlos Garcia (CFO)
Thank you.
Operator (participant)
The next question comes from Gabriel Rezende with Itaú BBA. Please go ahead.
Gabriel Rezende (Analyst)
Hi, good morning, Francisco, Antonio, and Gui, and congrats on the results. I would like to touch on one point regarding the commercial division, and whether you think that would be fair for us to assume that given the ongoing supply chain crisis across the globe in the industry, prices in this industry could benefit the commercial division, what should maybe translate into even higher margins for the commercial division in the future? Thanks.
Francisco Gomes Neto (CEO)
Well, Gabriel, thank you. Francisco speaking. Thanks for the question. I mean, our commercial division has been, despite the low volumes in the past year, has been profitable. And you see even the results of this Q2 was very positive for the commercial division. And we see opportunities to improve even further with the, you know, with the volumes growing, and we are also working internally in, you know, in the other P&L drivers like, you know, the prices and, and especially, you know, in cost reduction programs. So again, we do believe that the margins of the commercial division will continue to be positive, right? And let's say middle single digits for this year and the next years as well.
Gabriel Rezende (Analyst)
That's very clear. Thank you.
Francisco Gomes Neto (CEO)
Thank you.
Operator (participant)
The next question comes from Lucas Laghi with XP Investimentos. Please go ahead.
Antonio Carlos Garcia (CFO)
Hi, everyone. Can you hear me now?
Operator (participant)
Yes.
Francisco Gomes Neto (CEO)
Yes, we can.
Gabriel Rezende (Analyst)
Great. Thank you. Good morning, Francisco, Antonio, Gui. My question is a follow-up on the commercial division profitability standpoint, but, I mean, we noted this slight decline in year-on-year margins due to the higher mix of E2s. I mean, my question is, I mean, aside from the effects of operating leverage, as deliveries should accelerate in these upcoming years, I mean, are we already seeing the orders that you added to your backlog in the past year implying room for growth margins to improve, or a further contribution margin improvement should come as a result from incremental new orders in this next year?
So basically, a matter of mix, and how should we think of the E2's margins going forward, taking into consideration what you already have added to your backlog and what you expect to add in these upcoming years? Thank you very much.
Francisco Gomes Neto (CEO)
Thanks, Lucas, for the nice question. The margin that we are generating today is based on the backlog that the first sales campaign for D2. If you take or Azul is more or less the margin that we are delivering today. For sure, the future backlogs is accurately for a mid-single digits, at least today. And please do not forget to have also a boost in D1 for the future, but we needed to exercise the new contracts. If you take the mix today, they are more or less, the-
Antonio Carlos Garcia (CFO)
First contracts for E2, that's why the margin is more tough, more tight. But if you take Mexicana, it's much better margin than we are exercising with the customer this year, but we need to wait the coming years in order to, I would say, regain traction. Nevertheless, you know, you follow our numbers. We are able to report positive margin even with not the full capacity occupied. That's why we decide between operational levers and new contracts, a good way to improve the margin, but not this year. This year is highly dependent on E2, with the main customer that has at least a lower margin. But we are confident for the future.
Noah Poponak (Analyst)
Perfect. That's clear. Thank you, Antonio.
Antonio Carlos Garcia (CFO)
Thank you.
Operator (participant)
The next question comes from Alberto Valerio with UBS. Please go ahead.
Alberto Valerio (Analyst)
Hi, good morning, Antonio and Francisco. Thank you for taking my questions. I have two here on our side. First one about pricing in the commercial aviation. We heard from competitors that there is some low price aircraft going out of the inventory, and sooner we should have a higher price aircraft going out from the inventory. I would like to see if in Embraer we have the same situation. And secondly, on the executive aviation, that margin come great year-over-year, despite what we see a worse mix with less Praetors on the delivery side. If you could provide more color on this one, also be very helpful. And congrats on the results.
Antonio Carlos Garcia (CFO)
Alberto, Antonio speaking here. Good morning. First, I hope you revise your numbers, because we do believe that we are not growing too much this year, but I'm sure we are going to do it. In regards to the margin side, again, is a combination of facts for commercial aviation, okay? I'd say on the mix for executive aviation, growing freighter brings a lot of dollars, but I'd say incremental margin should lead this, the unit to be above two-digit EBIT margin this year. We are already more or less close to that. I'd say the freighter brings much more dollars. That's why incremental margin should help.
Sometimes the percentage-wise is a little bit different when you see Phenoms against freighters, but dollar-wise, we do see a nice boost for the margin for this year, for the years to come.
Alberto Valerio (Analyst)
Okay, I'll revise for sure our numbers, Antonio. Thank you very much.
Antonio Carlos Garcia (CFO)
Thank you. We love to hear that, Alberto.
Operator (participant)
Thank you. The next question comes from the phone number ending 5135. Please go ahead.
Antonio Carlos Garcia (CFO)
Okay.
Lou Raffetto (Analyst)
Hey, good morning, guys. You have Lou Raffetto from Wolfe Research.
Antonio Carlos Garcia (CFO)
Uh, hello.
Lou Raffetto (Analyst)
Maybe just on services, you had a good quarter on the top line, good quarter on margins. Just how should we think about that business, you know, services the remainder of the year? Growth stepped up, you know, pretty nicely in the quarter. Are we at sort of a sustainable level here, around $400 million? And, you know, same on the margin, 17%. Should we think about that as sort of a run rate, or what did any one-time benefits help the quarter there?
Antonio Carlos Garcia (CFO)
Thanks for the nice question. Antonio speaking here. I would say we are already in the range of mid-teens margin for the service and support. With expansion activities right now, I would say I would continue to see for this year at the mid-teens, because we are putting more revenue and margin for the engineering MRO we have in Portugal. That's why, and the ramp up of this production does not help or contributes too much for the margin. That's why I would say we are confident in the mid-teens and one-time effect to us for service, not a big contributor, to be honest.
Lou Raffetto (Analyst)
Great. Thank you very much.
Antonio Carlos Garcia (CFO)
Thank you.
Operator (participant)
The next question comes from Noah Poponak with Goldman Sachs. Please go ahead.
Noah Poponak (Analyst)
Antonio, can you just spend another minute on the cash flow? You know, I know that your cash flow is always seasonally weighted to the back half, and you've had a working capital build in the first half before. It looks pretty sizable in the first half of 2024, even though the deliveries are up a little bit year-over-year. Revenue's up year-over-year. So maybe if you could just walk us through that. How confident are you in hitting the $220 million for the year? And can you grow free cash flow next year versus this year?
Antonio Carlos Garcia (CFO)
Thanks, Noah, for the nice question. By the way, cash is one thing that we discuss every single day in this company here, which is... That's why we launched the production level, in order to be more, I would say, not suffer too much from Q1 to Q3 during the year. It's going to, I would say, help more next year than this year. I would say the trend for the cash flow; we are today confident in $220 or better, but unfortunately, it's going to happen just in Q4. This journey between negative to positive for several reasons. The more or less 20% growth on top line this year and also for next year is more or less also double-digit growth that we are foreseeing.
And if you go to our factories today, you see new people and parts for 2025 already. We already produced 25 parts in several parts of our company. It's pushing, putting a lot of pressure on the cash flow, and also the progress payment for the new contracts is going to happen, especially in the second half of the year. I would say, combine those effects, lead us for the start situation, Q1, Q2, and Q3, and hopefully to become positive as we did last year in Q4. However, we are not happy with this situation, and we do have, and we are discussing this week very very strong, how to, I would say, harmonize our cash generation.
In regards to generate more cash next year, Noah, you know, our target here, minimum turn EBITDA 50% into cash. I would say, we are a little bit behind this year because of the higher growth that you continue to face for the company, which is nice, but puts a lot of pressure on the cash flow, I'd say. In a nutshell, we are still confident with the cash this year, and for sure, a lot of chances to improve cash flow next year. If you are able to level in the production, then it's going to be even better, and you guys are not getting scared to see negative cash consumption, three quarters and a very strong positive in Q4. I will hope. That's more or less what we are looking for.
Speaker 14
Okay, that's helpful. Thank you so much.
Antonio Carlos Garcia (CFO)
Thank you.
Operator (participant)
Thank you all very much. This concludes the question and answer session for equity research analysts and equity investors. Now, we will start the Q&A session dedicated to the press. First, we will answer questions in English, and then we'll answer questions in Portuguese. We will also answer questions sent via the platform chat. Please let me say a short announcement for Portuguese speakers. This conference is being conducted in Portuguese. To listen to the audio in English, press interpretation button to select English. To press the raise a hand button on the platform. When your name is announced, please make sure your microphone is on and start your question. If you need assistance, please use the Q&A button on the platform. To give everyone a chance to participate, we request to ask just one question. Please hold while we collect the questions.
The first question is from the Q&A chat, and it's from Joanna Bailey. Do you expect the C-390 program to be profitable by the end of 2024? And how have you managed to increase the EBITDA so much on executive?
Antonio Carlos Garcia (CFO)
Well, Joanna, thanks for the question. I think, you know, the plan is, yes, for our defense and security to be profitable this year already, and including the C-390 and other products. And the executive, I mean, we are seeing a very good performance in terms of margin and results, and this should continue with the sales, production, deliveries growing in the next years. And for executive aviation, we do have a nice mix of products, I would say, Phenom and Praetors, where we were able to keep the price discipline, which is showing also in the financial results. That's more or less... Without services, by the way, that's the combination of facts we do see in executive aviation.
Operator (participant)
Thank you. The next question is written as well from the Q&A chat, and it's from Richard Truman. Hello, I have already asked many questions in Farnborough, but I have one follow-up from that. You announced the E2 FT, or E2 FT, enhanced takeoff system. It isn't clear if this system has already been certified. If not, when do you expect this to be available? Obrigado.
Antonio Carlos Garcia (CFO)
Richard, that's a very good question, and thank you for your interest. About this feature, the certification is expected to happen by Q4 next year, 2025.
Operator (participant)
Thank you. Please hold while we collect questions. The next question is written as well from Woodrow Bellamy.
One of the technologies that Airbus, Boeing, and other OEMs highlighted at Farnborough was their use of new digital design tools to improve time to market for new aircraft technologies and components. Is Embraer using any new digital design tools to improve its manufacturing and production efficiency, and could you give some examples?
Francisco Gomes Neto (CEO)
We have been using the one example I can give it to you is the MES, the Manufacturing Excellence System, that we use in our manufacturing process. That is a digital 3D tool, and that help us a lot, you know, I mean, to improve our efficiency, productivity, and quality in our manufacturing process. And we are developing other systems as well, that we expect to be implemented in the next years.
Thank you very much. Please hold while we collect questions. Thank you all very much. This concludes the question and answer session in English for the press. This Q&A section is now being conducted in Portuguese. To switch to English, please press the interpretation button on the platform and then select English. Start with the Q&A session in Portuguese. We ask the journalists to please press the Raise Hand button, and whenever your name is announced, just open your mic and ask your question. We will also answer written questions that are sent through the chat box of the platform. If you need assistance, please ask through the Q&A button on the platform. In order for everyone to have the chance to participate, please restrain to one question at a time. First question is from Christian Fávaro at Valor Econômico. Please, Christian. Hello, everyone.
Can you hear me? Yes. Yes, Christian. Very well then. Yes, guys. Thank you. Congratulations for the results. I do have a question, but let me give you a follow-up here, Antonio. Let me see if I got it right. You said that the perspective is to have a 15% backlog on the Q3. Just to make sure, when I got the percentage right, 15%, and I wanted to ask about LATAM. Yesterday, Jerome Cadier has confirmed that the LATAM conference call, that they are, you know, considering lower size aircraft, and they said that Embraer is competing with the A220. So they're, they are probably, you know, considering the, you know, middle cabin. So, I'd like to know about what your perspective with the A220, are you with a good competitive edge?
How is this conversation evolving? Because there is some time that you mentioned, Francisco, that LATAM and GOL has been engaged in conversations to procure with you, but do you have any good perspectives with regards to that?
I can take the first question. Actually, a 50% increase in Q3. That's for the defense backlog. You will see agreements from Netherlands, Austria from C-390, and then Paraguay with Super Tucano aircraft. That accounts for more than 50% increase in the defense backlog. And for LATAM, I'll hand it over to Francisco to answer that. Thank you, Christian, for your question. Like I said before, we've been in conversation with different customers about business opportunities for E2. And of course, there's competition. There's competition in the market with A220, but for us, we think E2 is more of an efficient aircraft with lower operational costs and lower maintenance costs. E2 is a perfect fit. It's tailor-made to markets such as the Brazilian market. If you look at the operations of Azul Airlines or Scoot, KLM in Europe.
We do think E2 is quite a competitive product, and again, it is tailor-made to better connect cities, medium to small-sized cities, which is what Brazil needs, and other countries also do, but more specifically, Brazil. We're excited about these opportunities. We got no concrete news to share with you, but let's wait and see how these processes evolve.
Thank you very much. Please hold while we collect questions.
Next question from Jesse Nascimento from Portal Vale 360 News.
You may now proceed.
Speaker 15
... Tudo bem, gente? Vocês me ouvem?
Francisco Gomes Neto (CEO)
Hello. Can you hear me okay?
Speaker 15
Sim, perfeitamente. Bom dia.
Francisco Gomes Neto (CEO)
Ah, we can, yes. Good morning.
Speaker 15
Parabéns aí pelo resultado.
Francisco Gomes Neto (CEO)
Hi, Francisco. Congratulations on the results. We are located at the Vale do Paraíba region, and we're following up closely on Embraer's numbers. The question goes to Antonio, and then another question to you, Mr. Francisco.
Speaker 15
Eu vendo ontem os números aqui do mercado financeiro-
Francisco Gomes Neto (CEO)
Antonio, as we looked at the numbers yesterday, we saw that Embraer stocks reached BRL 38.13.
Speaker 15
No fim de julho. É, e a gente via-
Francisco Gomes Neto (CEO)
The numbers were different in late July, and in October, on October 30, 2020, stocks were worth 6.03 BRL. Considering the results that are now sharing with us-
Speaker 15
Quanto de aumento de valor de mercado-
Francisco Gomes Neto (CEO)
How much can we expect stocks to go up? Or the market value for- since the pandemic, how much will that increase? And then the question to Francisco is the following:
Speaker 15
Disse, né, segundo os portais de notícias especializadas-
Francisco Gomes Neto (CEO)
According to news portals specialized in aviation, in the UK trade show, they mentioned that Embraer is negotiating to sell 300 commercial aircraft.
Speaker 15
Em que pé anda isso? Se isso pode acontecer ainda esse ano-
Francisco Gomes Neto (CEO)
How is that going? Can that happen by the end of this year? Thank you very much.
Speaker 15
Bom, deixa eu começar. Obrigado pela pergunta.
Francisco Gomes Neto (CEO)
Thank you for your question.
Speaker 15
Olha, eu vou ter que... Eu lembro que quando, em 2000-
Francisco Gomes Neto (CEO)
You know, I remember-
Speaker 15
Em 2020, a Embraer valia-
Francisco Gomes Neto (CEO)
In 2020, Embraer stocks... Well, Embraer, as a company, was worth BRL 3 billion, and it's worth now BRL 30 billion, roughly. So we're talking about a 10 times increase.
Speaker 15
A pandemia de mau humor que aconteceu na sexta-feira e na segunda-
Francisco Gomes Neto (CEO)
On Friday and on Monday-
Speaker 15
A gente até conversou com vários bancos, se o momento meio de-
Francisco Gomes Neto (CEO)
People's temper was quite hard, but, you know, we were in touch with many banks already. There were many investors who were feeling uncertain about it. We think these numbers should get back on track in the following weeks or so. So what's been going on with the company's valuation is reflected, again, in the gain in trust, in our sustainable growth as a company. I still believe there is a lot of room for growth.
Speaker 15
A gente deve ter aumentado umas 10 vezes-
Francisco Gomes Neto (CEO)
You know, I think we grew by 10 times. Since early 2023 to date, our stocks have grown more than 60%, which makes us really happy. But I think we got a long way to go and grow based on what we're doing in terms of trust, foreseeability, and in terms of delivering what we promise. Always, of course, focusing on safety and security. So we're very excited about growth, but if we consider how ambitious we are, there is a lot that will still happen. I can add to that, if you think of the company's valuation during the pandemic, you know, that's a very low bar. But what makes us excited is that even if we consider stock prices before the pandemic, you know, in mid-2019, and compare that to now, we can safely say that we are 100% above that.
That's a good way to compare stock prices. Then, on the second question, it's true, we've got 300 aircraft to be sold. This is round number, but we expect these campaigns provide results in the short term, meaning 2024 and 2025.
Speaker 15
Obrigada.
Francisco Gomes Neto (CEO)
Thank you.
Speaker 15
A próxima pergunta vem de Leda Alvim-
Francisco Gomes Neto (CEO)
Next question by Leda Alvim-
Bloomberg News
From Bloomberg News. You may now proceed.
Leda Alvim (Press)
Oi, bom dia.
Francisco Gomes Neto (CEO)
Hello, good morning.
Leda Alvim (Press)
Thank you for this opportunity. Thank you and congratulations on the results. I wanted to ask you about a specific point that you mentioned during the media day, a few months ago, about the defense sector. It was mentioned that Embraer is working to penetrate the U.S. market with their defense aircraft, exploring even opportunities of mergers and acquisitions. I wanted to learn from you, has there been any update on that note, any initiative for the U.S. market, especially in the defense sector? How do you see these opportunities for merge and acquisitions?
Francisco Gomes Neto (CEO)
Hi, Leda, this is Francisco. It's great to hear from you again. Thank you for your question. C-390 is doing well in different regions of the world. We talked about new agreements with the Netherlands and Austria. We are now at an advanced stage in negotiations with Czech, and we expect this to come to fruition by the end of this year. We're also in touch with South Korea. In Asia, we're also making great strides with our program, and of course, the American market is the largest defense market in the globe, so they are a target market for us. And we believe that our aircraft, C-390, would be suitable product and important to help the US Air Force increase their productivity in this multi-mission military aircraft sector. So at this point, we're just doing our research in the US.
We're strengthening our team in the market so that we can define what the next steps will be, hoping to fast-track our penetration in the market. That's where we stand as of now.
Leda Alvim (Press)
Muito obrigada.
Francisco Gomes Neto (CEO)
Thank you.
Speaker 15
Muito obrigada.
Francisco Gomes Neto (CEO)
Thank you very much.
This concludes our Q&A session. This concludes Embraer's earnings call. Thank you very much for attending the session, and have a great day.