Embraer S.A. (EMBJ3) Earnings Call Transcript & Summary

My name is Gui Paiva, and I'm the Head of Investor Relations and M&A for Embraer. I want to welcome you to our fourth quarter and 2024 full year earnings conference call. The numbers in this presentation contain non-GAAP financial information to help investors reconcile EVE's financial information in GAAP standards to Embraer's IFRS. We remind you, EVE's results will be discussed at the company's conference call in March. It is important to mention that all numbers are presented in U.S. 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 Comissao de Valores Mobiliarios or CVM. [Operator Instructions] As a reminder, this conference is being recorded. Participants on today's conference call are Francisco Gomes Neto, President and CEO of Embraer; Antonio Carlos Garcia, Chief Financial Officer; Luis Harrison, Corporate Communications Director; and myself. This conference call will have 3 parts. In the first part, top management will present the company's Q4 and 2024 full year results. In the second part, we will host a Q&A session only for investors. And last but definitely not least, in the third part, we will host a dedicated 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.

Thank you, Gui, and good morning and good afternoon to all. Welcome to the Embraer's Q4 2024 Results Conference Call. Before I start my presentation about 2024, I'm pleased to share with you that ANA, All Nippon Airlines purchased 15 E190-E2 jets this week, plus options for additional 5 aircraft. This is the first sale of our E2 family in Japan, and this E190-E2 aircraft will join the other 47 E1 jets, which have been successfully operating in the country since 2009. Now I'll come back to 2024. 2024 was a historic year for Embraer with remarkable results that show the company's successful growth path. We reached or exceeded our modified and original 2024 guidance for both financial and operational indicators, showing our capacity to face the challenges still present in the supply chain. We achieved record revenue of $6.4 billion, our highest level in our history. Our focus on sales resulted in all-time backlog record of $26.3 billion. We have made further progress in financial deleveraging, and our net debt is now close to 0. Embraer now has the accounting conditions to start paying dividends, subject to approval by its shareholders. For this year, we are committed to sustainable growth, and our 2025 guidance reflects the same successful formula of the past few years, double-digit growth. Talking about sales, we had a remarkable year with positive highlights in all areas and an impressive company-wide 2.2 book-to-bill ratio. We announced our largest order in Executive Aviation, a $7 billion contract with 182 firm orders and 30 options from Flexjet. The Phenom 300 remained the most delivered light jet for the 13th consecutive year and the most delivered twin-engine jet for the 5th consecutive year. The division finished 2024 with a record $7.4 billion backlog and an industry-leading 2.7 book-to-bill ratio. Defense & Security ended the year with the best sales performance in its history. In 2024, Austria, Czech Republic, the Netherlands and an undisclosed client acquired 13 KC-390s. Sweden and Slovakia also selected the aircraft. The A-29 Super Tucano also did very well and received 29 new orders from Paraguay, Portugal, Uruguay and 2 undisclosed clients. The backlog rose to $4.2 billion with a record share, more than 60% from global clients. The business unit recorded a superb 3.3 book-to-bill ratio. In Commercial Aviation, we announced a firm contract with American Airlines for 90 E175 aircraft plus 43 options. In our E2 jet family, we signed contracts with Luxair, Mexicana, Virgin Australia, 30 aircraft and welcomed LOT Polish with 3 aircraft via lessors. The division finished the year with a $10.2 billion backlog and a strong 1.6 book-to-bill ratio. Service & Support also showed solid growth, expanding its own MRO centers in the U.S. and announcing new long-term contracts with Flexjet and several commercial airlines. The division backlog rose to $4.6 billion, a new all-time high, supported by long-term contracts, and the business unit finished the period with a solid 1.9 book-to-bill ratio. The business unit also started inducting engines for repair in our new Pratt & Whitney GTF engines operation at OGMA Portugal. Supply chain is still an important issue, but we are working very hard to address its related challenges. In 2024, we focused on strategic initiatives to better balance production in 2025 and over the coming years, ensuring more linearity. We have also improved collaboration with our suppliers, reinforced the supply chain area structure, digitized processes and invested in AI tools to anticipate potential issues to monitor and managing activities in real time. I will now move on the operational results by segment over the next few slides. In Commercial Aviation, revenues increased 20% in 2024. The adjusted EBIT for the full year was $55 million or 182% higher than in 2023, supported by a 2.5% EBIT margin driven by customer mix and operating leverage. In Executive Aviation, revenues expanded 25% in 2024. The division adjusted EBIT reached $205 million or 62% higher than in 2023, helped by an 11.7% EBIT margin because of operating leverage. In Defense & Security, top line grew 40% in 2024. The adjusted EBIT was $45 million or 57% higher than in 2023, supported by a 6.2% EBIT margin because of KC-390 customer mix and higher A-29 volumes. Moving now to Service & Support. Revenues increased 15% in 2024. The adjusted EBIT reached $270 million or 25% higher than in 2023, driven by a 16.5% EBIT margin, supported by higher volumes in the division. Finally, EVE continues to make progress with its eVTOL development and testing phase. In 2024, Eve achieved important program milestones as the final assembly of its first full-scale prototype, which is currently being evaluated during the ground testing campaign and is scheduled to make the first flight in 2025. I will now hand it over to Antonio to give you further details about the financial results, and then I will be back with closing remarks.

Thank you. Good morning, and good afternoon to everyone. The remarkable results Francisco just presented are also reflected in our financial numbers, which show sustainable and solid growth in all key Q4 indicators. Let's now move to Slide 11 and start with deliveries. Embraer delivered 75 aircrafts in the last quarter, equal to the number in the same period of the previous year. Meanwhile, the company delivered a total of 206 aircraft in 2024, including 3 KC-390 Millennium, a 14% increase compared to 181 aircraft in 2023. Executive Aviation delivered 44 jets in Q4 and a total of 130 for the year, at the midpoint of the original guidance for 2024 and a 14-year high. The mid and super mid category represent half of the segment deliveries during the quarter, supported by the solid trust forward of our operator family. It is important to highlight the progress observed in the company's production level initiatives. We managed to reduce the share of Q4 deliveries in the year by 10 points 2024 versus 2023. Meanwhile, Commercial Aviation delivered 31 aircrafts in the last quarter of 2024 and 73 in the year at the ceiling of our revised estimates of 70 to 73 and still within the original estimates of 72 to 80 for the period. For the year, our E2 family represented 65% of deliveries and we won the balance of 35%. In Slide 12, as already mentioned by Francisco, our backlog expanded more than 40% year-on-year in Q4. Giving more details, the backlog for Executive Aviation increased 70% year-on-year, supported by the contract with Flexjet. The backlog for Services & Support soared more than 65%, while for Defense & Security increased 50%, supported by new orders from KC-390 Millennium and A-29 Super Tucano. The backlog for Commercial Aviation increased a solid 15% year-on-year. Moving on to revenues. We had a 17% increase year-on-year in Q4 to more than $ 2.3 billion. Our top line of $6.4 billion in 2024 reached the high end of our guidance and an increase more than 20% when compared to 2023. All business performed well throughout the year, especially Defense & Security and Executive Aviation, whose revenues increased 40% and 25% year-on-year, respectively. Together, these 2 segments represent more than 40% of the company's total revenue in 2024. Next slide, please. We generated $328 million in adjusted EBITDA in Q4 with a 14% margin and $922 million in the year. I remind you there is the Boeing arbitration impact of $150 million in the results of the year. That increased the margins around 230 basis points from 12.1% to 14.4%. Moving to the next slide. Adjusted EBITD for the quarter was $265 million with an 11.5% margin. For the year, we generated $708 million with an 11.1% margin, surpassing the upper end of our previously revised up 10% guidance for 2024. If you look at the results for the year ex-Boeing agreement, the EBIT margin improved 210 basis points year-on-year from 6.6% to 8.7%, supported by high profitability in all business units driven by efficiency and operating leverage. On to Slide 15 now, please. In Q4, we generated $996 million in adjusted free cash flow because of higher numbers of aircraft deliveries and strong performance in sales, including significant advanced customer payments in Defense, which is going to negatively impact 2025. For 2024, we generated $676 million in adjusted free cash flow and still strong $540 million without Boeing, helped by significant Defense prepayments compared to $318 million in 2023. We did better than our $300 million or more guidance because of the improvement in our working capital. Moving to investments, without Eve we spent $64 million in research and development during the quarter, $56 million CapEx and a net of $10 million in the pool program for a total of $130 million in Q4 compared to $142 million a year ago. On a yearly basis, Embraer stand-alone invested a total of $428 million in 2024 compared to $440 million in 2023. Our capital allocation continues to be geared towards segments with higher returns such as Executive Aviation, Services & Support, mainly in U.S. We continue to see our CapEx run rate at close to $400 million per year in the near future. Slide 16, our adjusted net income was positive $173 million for the quarter, supported by a 7.5% adjusted margin. Meanwhile, we ended the year with $462 million in adjusted net income for an adjusted margin of 7.2%. If you exclude Boeing agreement, our adjusted net income was $363 million for a 5.7% margin compared to $80 million and 1.5% margin a year ago. Slide 17, please. I would like to start highlighting the top right corner of this slide. Embraer finished 2024 with a net debt position without Eve of only $111 million and 0.1x net debt-to-EBITDA ratio, compared to $781 million and 1.4x at the end of 2023 for a significant year-on-year decrease. Last year, I mentioned we were taking all necessary steps to recover investment-grade stuff. I'm happy to announce in 2024, we became investment-grade by all 3 main rating agencies, and we see room for additional potential improvements in our ratings in 2025 and 2026. As part of our liability management plan, we are focused on generating cash, extending the duration and reduce the cost of our debt. Last month, we successfully issued a new bond of $650 million set to mature in 2035. This issuance is intended to be leverage neutral as we plan to retire $522 million in debt set to mature in 2027 and $150 million in '28. As a result of this transaction, our debt duration for 2024 has increased from 3.8 years to over 6.5 years, which will be effective in the first quarter of 2025. And to conclude my presentation, let me go over the details of our 2025 guidance. In terms of operation, we forecast Commercial Aviation should deliver between 77 and 85 aircrafts. For an increase of 10% year-on-year, use the midpoint of the range. Meanwhile, for Executive Aviation, we forecast 145 to 155 jets for an increase of 15% year-on-year. If we move to financials, we estimate top line to settle between $7 billion to $7.5 billion with the midpoint of the range 13% higher than what we generated last year. We forecast EBIT margin between 7.5% and 8.3% for the year, which would imply around $575 million at the midpoint of the range and 10% higher than adjusted $520 million EBIT ex-Boeing and ex positive items generated in 2024. Finally, if you move to free cash flow generation, we estimate $200 million or higher for the year. Remember, our goal is to convert 50% of our EBITDA and free cash flow. It is important to highlight, it's difficult to predict the dynamic and timing of prepayments, mainly in Defense business. For instance, we received a sizable pre-downpayment in Q4, which had originally expected for 2025. Thus, if we look 2024 and 2025 together, we should generate $875 million or more in free cash flow, which is 50% of circa $1.75 billion implied EBITDA by our 2024 actors and our 2025 guidance. We will update or reiterate our 2025 guidance on a quarterly basis as the year goes by. With that, I conclude my presentation and hand it back to Francisco for his final remarks. Thank you very much.

Thank you, Antonio. First, I'd like to express my sincere appreciation and thank you to our partners, suppliers and our more than 20,000 people that are part of our Embraer family for your trust last year. Your continued support is a critical part of our success and growth. For 2025, we remain committed to our ongoing effort to manage our business with efficiency, financial discipline, innovation in all areas of the company and strengthening our supply chain management. And of course, we will maintain our steady focus on sales to achieve even better results in all business units in 2025 and years ahead. To finish, we expect 2025 to be even better than 2024. Embraer has shown it is stronger than ever, well positioned for sustainable growth and ready to capture its full potential in the coming years. We continue to work hard, always embracing the foundation of our culture, safety first and quality always. Let's now move to the Q&A section of the call.

[Operator Instructions] 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. [Foreign Language] [Operator Instructions] the first question comes from Victor Mizusaki with Bradesco BBI.

Congrats for the quarter. I have a quick question here about the guidance for 2025. This EBIT margin guidance of 7.5% to 8.3%. If you think about this 8.3%, is this, let's say, kind of conservative or maybe we are talking about the company assume that the delivers -- commercial delivers maybe if you think about the clients that we get the plan this year, maybe they put some pressure on margins in 2025. But then this means that by 2026, we see a big margin improvement. So any color you can give on EBIT margin guidance would be very helpful.

We know better than I know here a lot of volatility regards to exchange rate, in regards to inflation this and this, and this. In our math internally here, our recurring EBIT without Boeing, without tax credit and other good guys we have in 2024 is 7.6%. That's why the guidance between 7.5% to 8.3% in our view, is showing already at the midpoint, a 10% increase in value. And if you reach the top line, probably is going to be better. But at least today, we -- we are not -- the guidance we have follows the operational side. Please do not forget we have Defense revenue Services & Support that we do not show the guidance. I would say, is a combination of facts, okay? What is important, we were able to compensate the positive help we have from arbitration this, and this, and this in our numbers. And I would say, mixed feeling for the time being. Guilherme, you want to complement anything?

No, Antonio, I think you highlighted the main points.

The next question comes from Daniel Gasparete with Itaú BBA.

I apologize for the issues here with the microphone. So my question I would -- firstly, I would just like to confirm what Antonio just said. He said that the recurring EBIT margin of 2024 when adjust for BAE and also for the credits was 7.6%, that was the first question just to confirm that. And the second one would be regarding Commercial Aviation, just to get a view of how you guys are seeing the evolution of the backlog in terms of pricing? We are seeing a better pricing environment for the market right now, and what is your expectation for 2025, please?

Daniel, and thanks for the question. Just to clarify then, there were some extraordinary items in 2024, right, the Boeing settlement was one of them. We have tax credits and we also had some extraordinary suppliers credits that helped us in the results in 2024. So as Antonio mentioned, if you look at what we believe to be the recurring EBITs for 2024, the margin was at 7.6%. And I'll pass it to Antonio so he can comment on the second part of the question.

Daniel, thanks for your question. So first of all, we are happy and you guys talk to us more or less every month about the famous margin of Commercial Aviation. And we always said we are on the way to meet single digit and moving forward to the 5% to 6% in mid-term, I would say, having already 2.5 is a nice improvement compared with previous year, that's one point, that show already that our backlog is somehow improving and we are, I would say, we were able to capture some potential leverage. I would say, the new orders we are getting is accurate even for a mid-single digit in mid-term, I would say. We have some tough campaigns, yes, but I would say on average our new backlog is accurate even for a mid-single digit and I don't know, Francis, if you want to comment about the momentum you are facing on Commercial Aviation right now, and it's important for the audience here.

Absolutely. Thank you. Thanks for the question, Daniel. We had a good year in terms of sales, as I said before, in Commercial Aviation. E1, no, the big order from American Airlines, 90 plus 43 jets and also E2. I think considering the market in 2024, we did very well. We saw the 30 new E2s opening new customers and placed another 3 E195 at LOT Polish and we have several campaigns ongoing. And Daniel we are -- I would say -- and this year we just announced an ANA decision for 15 plus 5 E190-E2. So we are very optimistic with the Commercial Aviation sales in 2025.

The next question comes from Lucas Marquiori with BTG Pactual.

Yes, let me just go back to this EBIT margin topic because I think this is kind of important, right? And when we think about, I mean, the mix for 2025, we are assuming probably Commercial Aviation still running below historical averages and most likely diluting somehow the growth from Executive and Services & Support. Maybe this is somehow implicit on your margin for 2025. It would be nice at least to have some color on what are your maybe best thoughts on margins for each segment? If you guys could, of course, right? That would be helpful, guys.

Lucas, thanks for your question. Now you know why we are not taking part in our conference, and I hope you like that we were not taking part by seeing the results, I'd say. The margin profile for next year, you have our release, there is more or less in the same line for 2025. You have the release, you could read. We were even tick better in Services & Support in 2024, that's normalized a little bit for this year. For 2025, Commercial, the same, Defense is more growth, and then Executive in the same level, say is really reflects quantities without what you just said to Daniel here from Itaú, the recurring margin without the good guys we have last year. I would say it's accurate even with our backlog, with our operations. It can look a little bit, I would say, modest for you guys, but let's wait until the year goes by that we do have a lot of volatility in the market. That's why we prefer to not disappoint you at the end of the year.

The next question comes from Noah Poponak with Goldman Sachs.

Can you hear me?

Yes, Noah.

I wanted to ask about the Flexjet order and if you could help me better understand how much of that is incremental to existing deliveries versus how much of that was already in your delivery stream in Executive?

Noah, thanks for the question. All the order is incremental. It's a fresh order for us that went to our backlog and show how sustainable has been our Executive business. So again, 100% of the order is incremental.

It's from 2026, 2013 deliveries, it's more or less, Guilherme, between 30 to 40 aircrafts a year.

Okay, that's helpful, appreciate that. And then I just also want to ask about cash flow guidance. Can you maybe just walk through why free cash flow would be down a good bit from the last few years where your conversion from net income or EBITDA has been pretty strong?

Thanks for the question, I was prepared to answer you. And by the way, my comment in the speech was direct to you because we always discuss about 50% EBITDA conversion. And if you sum up 2024, 2025, we are there, 50% of the implied EBITDA that we are turning into cash. What we are facing is a lot of seasonality, especially that we are growing in all business units, but mainly in Defense is really hard to predict when you get a new order, the dynamic of the deal if you get a nice PDP or not. I would say, on average, we are there on the 50%, but we have ups and downs. You saw 2024 around $700 million. And I would say, when we do the math here for this year, calculating progress payments more or less at the same level, we need more working capital for -- deliver more $1 billion revenue. That's why I would say, sounds modest, but beginning of the year, let's see how the sales campaign evolves during this year. Probably we have, as always, upside. That's why we always guide 200 plus. And by the way, last year, we changed the guidance in Q3 also going up. And that's more or less the dynamic we have in the cash flow today.

The next question comes from the telephone number ending 6840.

It's Myles Walton from Wolfe Research. Francisco, could you speak to some of the supply chain constraints that are still governing how quickly you can grow, perhaps by segment, if you could? And then also just to clarify that Precision Cast Parts' fire for fasteners. Just want to make sure that you don't have any idiosyncratic exposure to them?

Thanks for the question, Myles. And it is true that supply chain has been one of the big issues we have had in the past years. But we have done a lot to improve our internal process and our relationship, the way we support, we identify, we anticipate critical issues in the way we support our suppliers to come with us and deliver the price we need. The first, what we did was to prepare a production plan that in our view is very realistic, considering all the limitations and risk we have. Honestly speaking, we could deliver even more aircraft, Commercial, Executive and even Defense in 2025. But we decided to be a little more conservative, taking into consideration the limitation in the supply chain. And the bottlenecks, it's interesting. The bottlenecks moves from one critical supplier to another. But we are -- we believe we are very well prepared in 2025 to bring the parts we need. And this is in combination with this initiatives we put in place already back in 2023 that we call production leveling or production linearity. And the idea is to better distribute the production and deliveries throughout the year, which will be healthier for our efficiency, productivity and cash generation. This is actually with what we are doing. We are even closer to our suppliers. We are applying, I mean, digital in the [IA] tools to monitor the risks of our supply chain and put in place initiatives as rescue teams, lean teams to help our suppliers to eliminate the bottlenecks in machine or quality or efficiency. This is what we are doing. And we expect another difficult year, but we are prepared to face the challenges, Myles.

And just to clarify, anything specific on Precision Cast Parts fasteners? And then Francisco, is it fair to think then that the success you've had in the quarterly seasonality of deliveries, you can do as good or even better going forward?

Yes, exactly. We have, as I said, the bottleneck moves from one supplier or one sub-supplier to another every year. And this is one of the risks we are managing. But we do believe that our production and delivery plan for this year is realistic.

The next question comes from Marcelo Motta with JPMorgan.

A question regarding the top line. I mean we know the numbers from Executive and also the Commercial based on the delivery. So I just want to see if you guys can comment about what is the outlook for Service and Defense. Defense, given that is the percentage of completion on the KC? Can you tell us how many aircraft you will have in production this year? If this number could accelerate if some orders are confirmed or not? Just to understand what are the upside risks in terms of Defense, especially on Services and on Defense?

Thanks for the question. I mean, in Defense, we delivered 3 C-390s last year, and we have 5 of them running through our line and accounted at the POC methodology. And our objective is to be close to 10 aircrafts by 2030. So we're going to see a gradual increase in the next few years towards that level. I think that's -- if you just forecasted a linear increase towards the 10 birds by the end of the decade, I think you're going to be, hope, right on spot.

And on Services & Support, OGMA ramp-up, anything different than that double-digit growth that the company has been commenting?

No. I mean we continue to see the GTF engine shop ramping up to about $250 million in 2026. And the full ramp of $500 million top line in 2028. We continue to kind of try to get more high-value-added work to the shop in the next few years. So there is some upside there if we're able to kind of obtain those contracts. But the rest of the business continues to do well with the Embraer-related business growing close to double digits and the agnostic part more towards us low to mid-single digits.

And Marcelo, just to complement, we reached the high end in 2024. And I guess the high end for our guidance in 2025, we know is I think better than what you guys are thinking, assuming what Francisco said, we could even could deliver more than what we put in the guidance there. I would say we are, I would say, at least today, very committed and also positive to reach also the high end of our top line. Let's see how the year evolves, a lot of volatility, but I would say, we are equipped to the high end.

The next question comes from the telephone number ending 7519.

Can you hear me okay?

Yes. We can hear you, Steve.

Great. Steve Trent from Citi. Most of my questions have been answered, and I will stick to your request for just one question. I was curious when kind of a follow-up on Myles' question earlier. When you look at the supply chain, you guys have done great job with doing a lot of the stuff in-house. But is there any sort of pain points -- specific pain point of the supply chain that you think is really going to take a while to clean up for the whole industry? And is this maybe the engine side? Or is there something else that's specific area that's really stubborn in terms of the sector trying to fix?

Absolutely, Francisco speaking. Well, even with engines, we have seen some improvements, but still have specific engines that are hurting our production schedule. But also structural suppliers and fasteners are becoming a big challenge for us in 2025 as the OEMs continue to ramping up their production, pressuring the supply chain. But again, we have some -- as I said before, some bottlenecks we are working on, but we made our production plan and guidance based on the limitations we see from the market.

The next question comes from Lucas Esteves.

Well, congratulations again for outstanding result. Just a quick question here. Does your guided volumes for 2025 imply any change in product mix to justify those margins?

Yes. Okay. Lucas, thanks for the question. I think the product mix is not changing too much for 2025. We are seeing growth in all the products we have, either business jets, commercial jets and Defense. Defense, we have more Super Tucanos. That's true, which will help us in terms of results. But the other products, we see growth in almost all of them in 2025.

For Commercial Aviation, do you foresee any change in E2s and E1 mix?

We see a little more E1s in 2025 because of the new contracts we closed last year. I think this is the change we see with more E1s in 2025.

Lucas, just be careful. Our old contracts and new contracts, not only new contracts, okay, that we still have to deliver [E1s]. And I would say, the main change is the Super Tucano in my opinion, that we have almost nothing in the last few years, I'd say, that's going to change a little bit the profile for Defense.

The Tucanos should boost profitability, right, Antonio?

That's more or less what we hope, Lucas.

The next question comes from Lucas Laghi with XP Investments.

Congratulations on the results. I have some follow-up questions on profitability. Just getting some more color on the Executive division and Defense division. On the Executive division, we saw profitability of 10% EBIT margin. Just wanted to know and if you could give us more details if already reflects the structural mix profile following the strong order activity with fleet operators that we saw throughout 2024. And in the Defense division, on the other hand, we saw a very strong profitability level in 4Q. Just trying to understand what was the main driver for this profitability improvement. And how much of it should be recurring considering your profitability guidance for 2025?

Lucas, nice to talk to you. By the way, we start to talk to there. I'm going to answer in regards to the Executive Aviation. And for sure, when you see Q3, Q4 '23, we report 16%, and in Q4, 10%. Even that the division itself has performed, I would say, much better in regards to the year. And it's basically very simple. In Q3, we have a huge concentration of deliveries in Q4 that this year, we were able to soften a little bit, especially Executive Aviation because of the production level means we are going to see even this year, much more balanced results for Executive Aviation because of it. That's why I would say, the main difference on Executive Aviation. And also the -- we have also some positive guys also in Q4 '23 that also helped this equation here. And the same for Defense, we -- assuming that we have [indiscernible] we closed some contracts in Q4 that we were able to, I would say, monetize some where we have in the inventory. That's also, I would say, push the results positive in Q3, but I would say, I would prefer to see Defense on a yearly basis. We just went from 5.5% in '23, up to 6.2% in 2024 is more or less what we are telling to the Street. And you know this, Defense is moving for mid-single digit on the way to higher single digit or lower teens, but it's more or less the process we are today, and we are going to see it in 2025 as well.

The next question comes from Alberto Valerio with UBS.

Congrats for the outstanding 2024 results. My question is regarding 2025. I have 2 on my side. To try to meet the free cash flow on the guidance. Do you guys consider how much book-to-bill it's close to 1? And my second one, it's about maximum capacity on your plans. I was having in mind that Executive Jets was about 144, 150. I would like to know if this maximum capacity is correct or if you already have this capacity that you deliver for this year or if you need to do any additional CapEx to increase the capacity for the business jets this year? And just as a recap, I have here a maximum capacity of 120 commercials, 144 and 150 business jets, and 10 KCs for 1 year. Congrats again for the year.

Alberto, thanks for the question. So let's split it. Francisco will address the capacity of the company. Let me start with the free cash flow. Just to recap what Antonio mentioned before, I mean we -- our goal is to convert about 50% of EBITDA into free cash flow in the medium to long run. We have very strong PDPs in Defense in the fourth quarter of '24 that help us generate more than $600 million in free cash flow last year. And obviously, there will be a payback in '25 because of that. So when we kind of look at the 2 years combined, what we delivered last year will be implied by our guidance. We think we are very close to that 50% conversion of EBITDA. And now let me pass it to Francisco, so he can go over the operational side.

Just to complete the first, Alberto, it's a pleasure to talk to you. And you are realizing our backlog is moving up, up, up. And there is always a point that we should be careful and our, I would say, our premises for 2025 is a book-to-bill 1:1 in order to keep, I would say, the substance we have in our growth in 2024 does not mean that we are not continuing to grow. You see here, again, a nice growth for 2025, and we could also foresee the same for 2026. And capacity I'm going to pass to Francisco.

Thank you, Gui. Thank you, Antonio, and thank you, Alberto, for the question. Actually, Alberto, we are ramping up production in all the divisions, right? I mean, business, Commercial, and Defense and also Support and Service well. And we are increasing our capacity, so production capacity year after year in line with our backlog. But as I said before, we are very diligent about our financial discipline to approve investments. So before we approve investments to increase capacity, we look carefully at the opportunities we have to increase productivity, to work with suppliers in order to make sure that the investments will have a good return for us in the following years. But yes, we still have capacity to grow in all the units. I mean Commercial Aviation, this year, the guidance goes up to 85 jets. We expect to go -- to be at the 3 digits in the next 2 or 3 years and increasing up to 120 or even more, if the investments justify the return. The same is valid for business jets. We are growing this year. We have plans to -- we are investing in new painting booth in new flight preparation area, production area to increase the production in '25 and the years ahead, but always one eye on the fish and other eye on the cat, right? I mean the investment has to prove its return. And the same for Defense and Services & Support. So again, we announced the last year, $77 million investments in expanding our MRO service in Dallas because we see a very good return in that project. So that's why we are doing.

Next question comes from Ronald Epstein.

Can you hear me okay?

Yes, we can hear you. We are missing you, Ron.

So just a couple of questions. Maybe turn one of the questions around a little bit. How long do you think you can harvest for before you need to make an investment in a new platform, either in business, aviation or commercial?

Well, Ron, I was expecting your question, honestly. It actually is a very good one. Ron, I mean, the answer remains the same. We are making a lot of studies in those fronts, Commercial and Executives. And besides that, what we are doing, we are focused on delivering the results in our plan from now to 2030 to make sure we will have a very healthy cash generation to support a potential next move. And also, we are investing a lot in new technologies. I think this year is one of the highest investments we are making in new technologies to guarantee our technology readiness for -- in case we decide to go in a new program. But until 2030, we have -- we will focus a lot on the products we have, and we have a great plan. You saw great results in '24. We are growing now almost 20%, 18% in '25, and we have a plan to grow -- to be a company beyond $10 billion at the end of this decade without Eve. And we are investing a lot in Eve to develop this new aircraft. So with Eve we will be even higher. So again, this is our plan considering the existing and potential new products, Ron.

Just to complement, to add to your comments, Francisco, we are -- I would say, we like the harvest that's becoming a sustainable growth view. In this case and if you see we are -- I would say, the E2 is very brand new, KC is brand new. Now we are continuing to harvest the Super Tucanos that's not new. And also, we are even, I would say, put ourselves to make some improvements in our E1 platform in order to extend the lifetime of the aircraft, and we are doing that and also run some improvements in the Executive Aviation platform. I would say, combination of everything, and let's see what the future reserves to us. But even with the current portfolio, we are doing improvements as well.

And then, Antonio, if we think about the outlook for 2025, if you can answer this, you might not be able to, which is okay. How much conservatism is built into it?

It's a great question, I would say. If you ask me today, I like the high end of our guidance for EBIT. I like that. But I would say, let's wait a little bit how the year will evolve, Ron, because it's a lot of volatility. We never know about tax impacted this and this and this. It's quite volatile. But I would say, we know each other already for a long time, and we always try to hit the guidance, and that's our commitment here. And we hope that will continue to, I would say, surprise you in a positive way.

Antonio, if you allow me to complement this. I will not say conservative, but I would say, realistic. In the past year, since 2021, we have been delivering on our promise to the market. We have been able to eliminate the hockey stick effect, effect from our lives. So I mean the hockey stick effect you know, right? The first years are bad, but the future will be bright. So we have been delivering our promise year after year. And this is what we want to do. We want to show again to the market that we will deliver our promise. And our promise has been ambitious year after year. We see double-digit growth year after year from $6.4 billion last year to almost between $7 billion to $7.5 billion this year. And as I said, have a plan to be beyond the $10 billion until the end of the decade. So again, we see this a win-win situation for us and for our investors as well. So again, not conservative but realistic.

Got you. And then maybe one last one, if I can. On the KC-390, given the changing transatlantic relationship with the U.S., have you seen any pickup in demand for the airplane out of NATO?

Well, I mean, KC is a great product developed on the right time, right, for that platform up to 26 tons. We believe we have the best product in the market. And we are seeing this, 60% of our orders now is coming from global clients. And we are working in a lot of new campaigns, campaigns in Europe, campaigns in Asia, campaigns in South America. And of course, North America is our maybe masterpiece, right? I mean it's the biggest defense budget in the world and we do believe the KC will help USAF to increase substantially the productivity with this kind of aircraft. And with the volume -- the potential volumes, this is going to be a product made in U.S. So we see this a great opportunity for us in line with the U.S. expectation of the new government, right?

The next question comes from Victor Mizusaki with Bradesco BBI.

Just a quick one here. I mean, the company reported a very good quarter, right, with robust cash flow generation. We're talking about net debt of only $111 million. And when you take a look on your audit financial statements in BR GAAP, Embraer could zero the accumulated net losses and now we are talking about earnings reserve. So my question here is a follow-up on this question about the harvest period. So when Embraer expects to start or resume the dividend distribution? And if is there any kind of plan to set a kind of dividend policy?

Thanks for the question, Victor. We exhausted the accumulated losses accounting-wise in Q3 means, we are qualified to start to pay in Q4 for sure, has to be approved by the Board and has to be approved by the shareholders' meeting. That's going to happen end of April, okay? And we have already our dividend policy, which says, we pay the [indiscernible] 25% of net profit of the year and the rest will convert the investment in working capital reserves. That's more or less what is our institute. And there is at least today, no big movement in this corner here. The only issue that the market does not know how we pay dividend because the last one was in 2018. And now we are, I would say, getting familiar even ourselves, yes, to come back to this activity. That's the only reason, but we have in our [institute] this policy, we paid what is basically said by the [indiscernible].

This concludes the question-and-answer session for equity research analysts and investors. Now we will start the Q&A session dedicated to the press. First, we will answer questions in English, and then we will answer questions in Portuguese. We will also answer questions sent via the platform chat. Please let me say a short announcement for Portuguese speakers. [Foreign Language] [Operator Instructions] The first question comes from Charles Alcock with AIN Media Group. Which regions of the world do you expect to see the strongest growth in demand for Executive Jets? Are you concerned about access to the U.S. market if tariffs are introduced?

Well, Charles, thanks for the question. The first part, I mean, U.S. represents more than 60% of our market for business jets. So it's natural that we expect this market to continue growing. But we are also selling business jet in other markets as well. South America was a great market in terms of sales last year, Europe and even sales we had to other regions like Middle East and Asia. But I do believe that the main market will continue to be for many years, U.S. The second part, I didn't get the second part of your question. Could you repeat, please?

Sure. Just a second. Are you concerned about the access to the U.S. market if tariffs are introduced?

Well, I mean, we cannot anticipate movements or decision made by the U.S. government. But at this point of time, we do not anticipate any big issue as Embraer has very well-balanced trade with the U.S. We have a production plant in the U.S. We have more than 2,500 employees in the U.S. We have been in the U.S. for 45 years. Our aircraft carry a lot of very high U.S. content in terms of equipment. Our E175-E1 is basically the only option for regional aviation in the U.S. So anyway, because of this long-term collaboration, of the U.S., we see that this is a win-win business, and we believe that the situation should not change. But anyway, if something changes, we'll see what we do. But at this point of time, we do not anticipate any issue or difficulties to introduce our products in the U.S. as because we have a good basis there. And as I said before, the KC-390 is a potential product to be assembled in the country.

The second question is also from Charles Alcock and he's asking, how much has Embraer invested in Eve? Does Eve need to raise further funding to complete development of the E2 aircraft?

Thanks for the question. We already invested something like $300 million, if I'm not wrong at Eve. And I would say we have equity and debt or credit lines with the bankers to go to the certification at least today. But if you see any possibility for a new investor, we have new investors coming who want also to take part, I would say, maybe it can happen. It's not -- we are not closing our eyes for that. I would say, I do not see a risk for the project today. There's much more interest from the street today than even before. It's more or less the momentum we are seeing for Eve right now.

The next question comes from Andreas Schulz with [Aviation]. He's an Aviation Journalist. Why E175-E2s are not reaching cruise level in the markets? The issue of E175-E2s remains close associated with the ongoing U.S. mainline scope clause discussion with the pilot unions. Are there no other international markets around to place the aircraft for the smaller 76-seater segment?

Thanks for the question. But the answer for the question number one is your question number 2. The E175 is very simple. We are postponing because we don't see signs of changing in the scope cost and the E175-E2 despite being much more efficient than the first generation, his weight is not compliant with the scope cost. That's why we decided to postpone another 4 years. But on the other hand, we are investing in improving our E175-E1s with new seats, with new luggage beings, with new connectivity, and we are occupying that market for regional aviation with the E175-E1s.

Not the only U.S., Francis.

Not only U.S., and we could have opportunities to sell E175-E2s in other markets. But the main market, the main target market for that aircraft is U.S. So it does not make sense for us to develop a product for small volumes market and leaving behind the high-volume market. And as Antonio said, yes, we are selling E1s in a much small volume, but in other market -- other markets as well.

The next question comes from Richard Schulman as a freelance aviation reporter. Can you specify where your priorities are in your R&D spending? What specific technologies/aircraft technologies are you studying right now?

Richard, thank you for your question. In order to optimize our investments in new technologies, we have defined -- we call 7 innovation verticals. And among them, I can say, I can tell you, for example, autonomous flight. I can tell you alternative propulsion system. I can tell you airframe competitiveness. I can tell you a -- passenger experience. I mean, and many others. I mean, Industry 4.0, artificial intelligence, cybersecurity. So then we are -- with those 7 verticals, we are -- on those 7 verticals, we are concentrating our investments to be prepared to develop new products. And some of them are being applied already in existing products, like the eVTOL, for example, right? eVTOL is 100% electric vehicle. So it's a good example of alternative propulsion systems that can be used in new products as well. So again, this is why where we are putting our money in terms of new technologies.

The second question is also from Richard Schulman and he's asking, Airbus said it is delaying the launch of it's hydrogen aircraft by 5 to 10 years because of delays in the hydrogen ecosystem. What's your view on this?

Well, in Embraer, I mean, in line with this investment in new technologies, Embraer has developed or has been working in 2 new aircraft concepts we call Energia Family. One is hybrid electric, a small one, up to 19 seats. And the other one is hydrogen hybrid. But we also see these technologies being mature in 15 years -- 10 to 15 years from now. And the hydrogen is even more complex because it's not just the aircraft, but the infrastructure in the airports as well. So again, we see this -- we are working on that to acquire knowledge, technology, but we don't see entry into service in the short term. This should be also 10, 15 years or more from now.

The next question is from [Carl] Schwartz. How much more money is needed for E2 ascertain certification in the U.S.?

Thanks for the question. We -- the way to go is around $400 million, around for the certification including also industrialization.

[Operator Instructions] This conclude the question-and-answer session in English for the press. [Operator Instructions] [Foreign Language] [Interpreted] First question is from Nelson [indiscernible] from [indiscernible] What is the sales percentage target for Defense & Security in total at Embraer? The historical average used to be 20%.

[Interpreted] Nelson, thank you for the question. Well, the historical target in the past, if you look back a few years, it used to be about 15% at Embraer. But now our projection for the next few years is to grow considerably, and Defense will keep up with that growth. There's been plenty of sales of KCs, Super Tucano as well as other products in defense. We don't really have a percentage target or share for each one. But I would imagine that it will tend to remain at the 15%, which is the historical share in Defense. It should grow with the other divisions in the company.

[Interpreted] The next question is also from Nelson [indiscernible]. He says, what are the prospects for Atech, a subsidiary of the Defense division? It currently makes radars and naval contractors of the nuclear submarine and the Tamandaré ship.

[Interpreted] Wow, Nelson, you're very well informed when it comes to defense. Well, our focus on financial discipline, efficiency and innovation also goes to our subsidiaries. Atech is 100% Embraer. Atech has been showing considerable improvement in its performance, both in terms of growth and revenue. Last year, Atech delivered an EBITDA of 18%, which is fantastic performance, and it's been growing. So we have high hopes for new businesses, including Vector, which is the new Atech product to support the eVTOLs operation.

[Interpreted] The next question is from Pablo Diaz. Any advances on the LOI E195-E2 from AerolÃneas Argentinas. Would you prefer -- do you think that will become a firm order after the change in the government?

[Interpreted] Well, thank you for your question. Before the government change, we had made considerable progress in our negotiations to replace the old E1s by E2s in AerolÃneas Argentinas. Now with the change in government product, that process has been interrupted, and we're waiting. We believe E2 to be the best solution to replace E1s in other markets as well as that of Argentina. So right now, we're just waiting.

[Operator Instructions] [Interpreted] The next question is from Carlos [indiscernible] from [Erwin ]. First of all, Congratulations on Embraer's results. I have a question. Can you hear me okay?

Yes, please go ahead, Carlos.

[Interpreted] Great. You announced a material fact about freezing the E2 aircraft. I'd like to hear about the certification. Considering that 4 years from now, you're going to resume that project. Does Embraer have a specific date for its certification? And also considering the question about the U.S., do you have any prospects of the 190 or 195-E2 for that market as well?

[Interpreted] About E1 -- E175-E2, it has already flown. We have had a test flight with that aircraft. We're just delaying the conclusion of the development because the U.S. market is still closed for that market due to the scope clause because the E175-E2 does not meet the scope clause. That's the only reason why. Once we realize that there will be a change to the scope clause that will become more flexible, then we will resume that project. And we believe certification could take place in a short period of time, a few years only because the aircraft is practically ready. So we just need to conclude some developments, some of which are quite important, but -- we don't really have a deadline. We don't have a set date to tell you how long after we resume the project the aircraft will be certified. There's something else I think you can support me with the answer. What is it?

[Interpreted] I asked about your prospects to sell 190 and 175-E2, which have already been certified to be sold in the U.S.

[Interpreted] Okay. We have great prospects, Carlos. We're already working on it. We're not allowed to disclose it yet, but we are working with some American Airlines and showing them the benefits of having an aircraft the size of E195, especially E2 for regional flights and the [indiscernible] the large ones. So -- we're moving forward in convincing them, and we hope that in the next 2 years, we should have some good news coming from North America for our E2s.

[Interpreted] Thank you. This concludes the Q&A session and Embraer's conference for today. Thank you very much for joining us, and have a great day. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]