ERJ - Embraer S.A. (ERJ) Q3 2023 Earnings Call Transcript
2023-11-06 12:01:05 ET
Embraer S.A. (ERJ)
Q3 2023 Earnings Conference Call
November 6, 2023, 8:00 AM ET
Company Participants
Francisco Gomes Neto - President and CEO
Antonio Carlos Garcia - Chief Financial Officer
Leonardo Shinohara - Director, Investor Relations
Conference Call Participants
Noah Poponak - Goldman Sachs
Cai Von Rumohr - TD
Myles Walton - Wolfe Research
Filipe Nielsen - Citi
Kristine Liwag - Morgan Stanley
Ron Epstein - Bank of America
Marcelo Motta - JPMorgan
Andre Ferreira - Bradesco BBI
Presentation
Operator
Good morning, ladies and gentlemen. And welcome to the Audio Conference Call for Embraer’s Financial Results for the Third Quarter of 2023. Thank you for standing by.
The numbers of this presentation contain non-GAAP financial information to facilitate investors to reconcile Eve’s financial information in GAAP standard to Embraer’s IFRS. We remind that Eve’s results will be discussed on Eve’s conference. It is important to mention that all numbers are presented in U.S. dollar as it is our functional currency.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions to participate will be given at the time. As a reminder, this conference is being recorded.
This conference call includes forward-looking statements or statements about events or circumstances which have not occurred. Embraer has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance.
These forward-looking statements are subject to risks, uncertainties and assumptions including, among other things, general economic, political and business conditions in Brazil and in other markets where the company is present.
The words, believes, may, will, estimates, continues, anticipates, intends, expects and similar words are intended to identify forward-looking statements. Embraer undertakes no obligations to update publicly revise any forward-looking statements because of new information, future events and other factors.
In light of these risks and uncertainties, the forward-looking events and circumstances discussed on this conference call might not occur. The company’s actual results could differ substantially from those anticipated in the forward-looking statements.
Participants on today’s conference calls are Francisco Gomes Neto, President and CEO; Antonio Carlos Garcia, Chief Financial Officer; and Leonardo Shinohara, Director of Investor Relations.
I would like now to turn the conference over to Francisco, who will proceed with the first remarks. Please go ahead.
Francisco Gomes Neto
Good morning and thank you all for joining our third quarter 2023 results conference call today. Firm order backlog ended at $17.8 billion, a $500 million increase versus the second quarter, with 42 commercial aircraft sold by September. This quarter was marked by an excellent sales momentum and double-digit revenue growth in all business units. EBIT and free cash flow are in line with our expectations.
We concluded our Reliability Management process, placing Embraer in an excellent cash position with the extension of our debt maturity with no relevant disembursement until mid-2027.
On the other hand, we are still facing some challenges in our supply chain and Embraer has been diligently working with its suppliers to mitigate these issues. Our operational and financial guidance for the year remain unchanged.
On the next slides, we present the highlights of our business units. Commercial Aviation delivered a total of 39 aircraft during 2023, of which 21 are E2, 3 times more in the same period in 2022.
Commercial Aviation backlog rose to $8.6 billion compared to the second quarter 2023, with a book-to-bill of 1:1, highlighting sales stability and deliveries this year. It is also important to mention that there are many ongoing sales campaigns.
In the U.S. market, we had several firm orders coming from main customers of E175-E1 jets. This is an important highlight because it shows that the pilot shortage situation is improving in the U.S.
Another important deal was with Luxembourg-based airline, Luxair. The E195-E2 aircraft will complement Luxair’s narrowbody fleet.
In Executive Aviation, revenue increased 25% year-over-year and EBITDA margin improved 2.1%. The business unit delivered 28 jets, representing an increase of five aircraft compared to Q3 2022.
The business continues its outstanding performance, with sustained demand across its entire product portfolio and a strong customer acceptance in both retail and fleet markets. Backlog grew 10% year-over-year, reaching $4.3 billion in a book-to-bill of 1.5:1.
In Defense, Austria and Czech Republic announced the selection of the C-390 Millennium as their tactical military transport aircraft. Last year, Netherlands had also announced the selection of the C-390, which consolidates the multi-mission platform as a preferred solution in NATO countries. These potential contracts represent a new phase for Defense and a significant growth potential for our backlog.
In October, the first Portuguese Air Force KC-390 has entered into service. This is the first KC-390 to enter into service outside Brazil.
Also in October, we celebrated with the Brazilian Air Force the KC-390 milestone of 10,000 flight hours, attesting the aircraft’s remarkable performance and its versatility and capacity in different areas of operation.
Finally, the year-to-date EBITDA margin in Defense is 7.2%. In the quarter margin, improvement occurred with the contract adjustments for the KC-390 and the physical progress of the program. We emphasize that these adjustments were punctual, and for the next quarter, we expect business margin to normalize.
In Service and Support, our revenue has increased by 24% year-over-year to $366 million. We recorded a consistent double-digit EBITDA margin year-to-date. Another highlight was the backlog increase of $2.8 billion in the quarter, the highest value ever recorded in this business unit. Embraer Service and Support has reinforced its role as one of the main drivers of growth for the next years.
I will now hand it over to Antonio to give you further details on the financial results and we’ll be back with closing remarks.
Antonio Carlos Garcia
Thank you, Francisco, and good morning, everyone. Indeed, we have an excellent quarter with financial and operational indicators aligned with our projections for 2023. Moving to slide seven, we have good news about deliveries. In the third quarter, Embraer delivered 43 jets, 15 Commercial and 28 Executive, representing an increase of 30% compared to the same period last year and 33% higher year-to-date.
The highlight is Commercial Aviation, representing a robust growth with deliveries rising from 10 to 15, an increase of 50% on year-over-year basis. In Executive Aviation, deliveries also increased in the quarter, 19 light and nine mid-sized jets, 22% higher than third quarter 2022.
We have a challenge ahead of us in Q4 deliveries, but as we already demonstrated last year, we are prepared for this. As a result, we are confirming the delivery outlook in our Commercial and Executive business for 2023.
In slide eight, backlog, our firm order backlog ended the quarter at $17.8 billion, the highest backlog in one year. The quality of orders in our backlog is accurate with Embraer’s profitability expectation.
In Commercial Aviation, total backlog increased from 271 aircraft to 291 aircraft quarter-over-quarter. In Executive Aviation, we see a resilient backlog with annual book-to-bill of 1.5:1, one of the highest in the industry currently. The business continues to experience a strong growth with a solid demand for the entire portfolio.
Service and Support backlog reached its record, reflecting the extension and increase in the Pool parts per contracts. As a result of our excellent performance, we ended the quarter with approximately 1.3 billion of net revenue, 38% higher year-over-year. Revenue year-to-date exceeded $3 billion, which represents a figure of 29% higher year-over-year. We had an increase in revenue in all of our business units, which shows Embraer potential for a sustainable growth.
In slide nine, the third quarter, we had an excellent performance in terms of adjusted EBIT and EBITDA with $100 million and $149 million, respectively. Adjusted EBIT and EBITDA margins of 7.8% and 11.6%, respectively, also shows a strong growth, mainly due to the higher revenue in all business units and stable cost base. We are reaffirming our adjusted EBIT and EBITDA margin projections for 2023.
In slide 10, we had the free cash flow generation, excluding Eve of $44 million in the third quarter, significantly higher year-over-year with a stable working capital. These upward trends indicate a substantial positive cash generation for the next quarter, in line with higher deliveries, so we are very confident that we will reach the free cash flow guidance of $150 million or more.
Moving to investment, $45 million were allocated to R&D and $30 million to CapEx, resulting in $75 million invested in the third quarter. Capital allocation is focused on the segments with higher returns, with prior search expansion of our production capacity in Executive Aviation and Service and Support.
Some words about EVE, the program has reached the necessary milestones to begin capitalizing its product development costs on IFRS rules.
Adjusted net results were $33 million, an increase of 34% compared to third quarter 2022. Reported net income was positively impacted by non-cash mark-to-market of Eve warrants of $24 million on an adjusted net margin of 2.6%, remaining stable compared to the third quarter 2022.
In slide 11, in this slide, we are pleased to show the results of our liability management plan. We reduced our debts in $632 million compared to the second quarter 2023. We increased the average debt maturity to 4.8 years, leaving Embraer in a comfortable position where liquidity of $2.4 billion with Eve allow us to cover all obligations until 2030.
In the quarter, our net debt, excluding Eve, is $1,357 million, as shown in the top center of this slide. This is a slight lower than last quarter due to the better cash generation. Our leverage ratio shown in the top right corner is 2.5 times, a significant improvement compared to 4.8 times in the same period of last year.
It’s important to highlight that the positive results of our business unit allowed us to successfully execute our liability management plan. We are taking all necessary steps to recover the investment rate status.
With that, I conclude my presentation and hand it back to Francisco for his final remarks. Thanks for your attention.
Francisco Gomes Neto
Thanks, Antonio. The Q3 results were very satisfactory and met our expectations. Our products are experiencing a very favorable moment in the market, with several important campaigns ongoing and aircraft slots on the production lines practically filled until 2025. We know we have a challenge ahead in terms of deliveries. Therefore, we can expect an intense Q4, mainly due to supply chain constraints.
In line with our guidance, we expect 20% revenue growth this year compared to last year. We are confident that this is the harvesting time for everything we have done in recent years and that we are on the right path to a sustainable growth with even more robust financial results in this and future years.
Thanks again for your interest and confidence in our company.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Noah Poponak, Goldman Sachs. Please proceed.
Noah Poponak
Hey. Good morning, everyone.
Francisco Gomes Neto
Good morning, Noah.
Noah Poponak
Just on demand in Commercial, it’s been a few quarters now that you’ve been discussing pretty heavy campaigning activity, but it’s also been a few quarters in a row where the actual signed orders have been relatively tepid. Is there something holding those discussions back or making them take longer than expected or is it really sort of more normal course of order? And I guess, what do you think can happen before year end versus maybe what orders look like in 2024?
Francisco Gomes Neto
Hi, Noah. Francisco speaking. Thanks for the question. Well, actually, yes, it’s taken a little longer than we expected, but we were working many -- in many sales campaigns, so we expect to close some deals still in Q4 this year and see a book-to-bill above 1:1. So it’s 1:1 in the Q3, but we expect to be above 1:1 until the end of the year.
Noah Poponak
Okay. And just as a follow up, the margin in this segment has been somewhat volatile, I guess, quarter-to-quarter and below where you want it to be longer term. How should we think about how that margin progresses into next year? Does pricing in the backlog improve enough -- quickly enough for that margin to have a decent amount of expansion next year or is the margin you’ve talked about that segment getting to longer term, is that further out than next year?
Antonio Carlos Garcia
Noah, Antonio speaking here. Thanks for the question. In regards to the EBIT margin for the segments, we do see this year a lower single-digit. And moving to the next year, a little bit better, I would say, it’s still lower single digit, but something like 3% to 4%. What do you see in long-term? What we are promising to the market without services, a mid-single-digit margin for the long-term. That’s more or less what we are seeing right now.
Highly driven by the regression of fixed costs, and I would say the price point is not moving up as we would expect, because we are very active in the two campaigns, I will say, which has much more pressure on the price point. But I would say, normalize mid-single-digit for the long-term.
Noah Poponak
Okay. Thanks so much. I appreciate it.
Antonio Carlos Garcia
Thank you.
Operator
Our next question comes from Cai Von Rumohr, TD. Please proceed.
Cai Von Rumohr
Thank you very much, and good results. So maybe talk a little bit about the order mix. It looks like you did particularly well on the 175. The margins were pretty good, even though there were fewer 175s. I know the mix has favored the 175 as much more profitable. Can you discuss first, what the outlook is for 175 orders as a percent of the total going forward? What the mix is likely to be next year, 175 versus E2 and how the E2 is doing in terms of profitability?
Francisco Gomes Neto
Okay. Well, I mean, the participation of E2 is growing as we expected. So we -- for the following years, we expect to be 60%-40%, 60% E2s and still 40% E1s, which we believe is a healthy mix for the Commercial Aviation, considering the margins, as you mentioned before.
Cai Von Rumohr
Okay. And then, you’ve done well in terms of KC-390 selections. When should we expect the orders? How big would you expect the orders to be? And what should we look for in terms of delivery prognosis going forward?
Francisco Gomes Neto
Oh! Well, I mean, we saw the announcement of Netherlands in 2022 for five cases and more recently from Austria and Czech Republic. So, as Austria, I mean, I was announced that they want to join Netherlands in this in the same contract. We expect to close those contracts by beginning of 2024.
And they are -- they’ll be very important. It’s a very important moment for our Defense business. With those contracts, we’ll be able to more than double the backlog of Defense, which will be very important for the performance of the business unit.
And we are still working in other campaigns. We are expecting a decision from South Korea. No, for -- still for this year, in a bit, we are participating. So and many other campaigns as well. So we believe it is a good moment for Defense.
Cai Von Rumohr
When you said you have five from the Netherlands, how many would that total be when Austria joins and when Czech joins? Any sense in terms of the size of the South Korean order and what’s the expected build in terms of deliveries?
Francisco Gomes Neto
Well, if you combine Netherlands, Austria, and Czech Republic, we are talking about at least 11 aircraft and three from South Korea.
Cai Von Rumohr
Okay. And how does that delivery build?
Francisco Gomes Neto
Well, the deliveries will start in 24 months, 30 months from the signing of the contract, more or less. That means 2025 onwards.
Cai Von Rumohr
Okay. Excellent. Thank you very much.
Francisco Gomes Neto
No. Thank you for the questions.
Antonio Carlos Garcia
Thanks, Cai.
Operator
Our next question comes from Myles Walton, Wolfe Research.
Myles Walton
Thanks. Good morning. Maybe to just follow up on Cai’s last question. Francisco, when you’re at a cadence of, I guess, three per year, four per year on the KC-390, what’s the anticipated margin profile of Defense?
Francisco Gomes Neto
Well, I mean, the Defense will be higher single-digit closer to two digits with those contracts.
Myles Walton
Okay. Okay. Good. I was hoping you could maybe dig a little bit deeper on the supply chain into 4Q. Are you seeing the same challenges on the Commercial side, as you are on the Executive side or are they different in nature? Are some of them large structures or some of them engines or some of them small piece parts? I’m just trying to understand if you’re facing the exact same problem on both sides or if they’re pretty unique.
Francisco Gomes Neto
Well, first of all, I think, it’s important to mention that, we have seen improvements in the supply chain from 2022 to 2023, with many suppliers. But we still have challenges, as you mentioned. So they are not necessarily the same. When we talk about the engines, yes, we have a challenge on both sides. But all the components are not the same. But I mean, we believe that even with the challenges, I mean, we will be at the lower end of our guidance in terms of deliveries this year, Myles.
Myles Walton
Okay. Okay. And then one last one. The GTF issue and the accelerated inspection and replacement on their powdered metal. Can you comment as it relates to effects you’re seeing on your E2 fleet or you expect on your E2 fleet? And then also, with respect to OGMA, what’s the kind of revenue opportunity from the OGMA MRO opportunity for the GTF?
Francisco Gomes Neto
No. Absolutely. Well, first, I mean, there’s no inspection planned for GTF E2 this year, 2023. Pratt & Whitney announced recently that the E2s will be less impacted, because the aircraft arrived later in the market with a more mature configuration of the engines and also the aircraft is lighter than the other models.
So this puts the E2 in a -- E2 is not -- they’re not immune of the issues, but they put the E2s in a, I’d say, in a better situation in terms of performance for our customers. And the process is still working in this inspection schedule for the E2s related to the powdered metal issue. The other question was? OGMA and your opportunity of the revenues.
Francisco Gomes Neto
Yes. Okay. OGMA is moving very fast. I mean, in preparation for the SOP of the GTF engines that is planned for April 2024 and that is a very important contract for OGMA that will help OGMA to triple its revenues in the next two years or three years.
Myles Walton
Very good. Thanks, Francisco.
Antonio Carlos Garcia
Thanks, Myles.
Francisco Gomes Neto
You’re welcome.
Operator
Our next question comes from Filipe Nielsen, Citi. Please proceed.
Filipe Nielsen
Hi, guys. Good morning. Thanks for taking my question. Congrats on the results. I have two on my side. The first one, if you’re seeing any relief or possible relief in terms of scope clauses in the U.S., as you mentioned, several campaigns going forward. And the second one is, how do you expect to close the free cash flow gap to reach the 2023 guidance that you gave? I saw that you still have cash burn for nine months and you maintain your guidance of free cash flow generation of $150 million. So just wanted to hear your thoughts, how do you expect to get there? Thanks.
Francisco Gomes Neto
Filipe, thanks for the question. First, related to the scope clause, we don’t see any movements to change the, no, to -- for the relaxation of the scope clause. But to be honest, we don’t see really an impact for Embraer. So, I mean, our E175-E1 is the workhorse of regional aviation in the U.S., and now with improvements, we are seeing the pilot situation. This will open the door for more sales of the E175-E1s in the U.S.
In parallel, we are working with the mainlines in the U.S. to convince them to introduce the E2s, the E195-E2s, to complement the big narrowbodies in order to offer higher frequency of flights to passengers in order to explore new routes in a very attractive cost benefit with the E195-E2s. So, related to the margin, now I ask Antonio to help here.
Antonio Carlos Garcia
Cash flow.
Francisco Gomes Neto
Cash flow, yes.
Antonio Carlos Garcia
Filipe, good morning. Filipe, the cash flow, to be honest, is the, I would say, where we do see much more potential to be, to have some upsides than downsides. For sure, if you ask me today, we are negative, but assuming that 40% of the whole business is going to be done in Q4, we are going to deliver more than $2 billion in revenue and get the cash inflow and some of those parts, you are even not able to pay in advance.
That’s why we do see a con -- more concentration on cash inflow in Q4 and less cash outflows, combined with the reduction of inventories. That’s more or less where we do see the cash flow going and we also have M&A that we just closed, was announced last Friday, with also a cash inflow of $45 million, which helps this equation to be, I would say, highly positive for the year.
Filipe Nielsen
Thanks very much, guys.
Operator
Our next question comes from Kristine Liwag, Morgan Stanley.
Kristine Liwag
Hey. Good morning, Antonio. Good morning, Francisco.
Antonio Carlos Garcia
Good morning.
Francisco Gomes Neto
Good morning, Kris.
Kristine Liwag
4Q 2023 -- 4Q is historically seasonally strong for deliveries. So first, how is the supply chain executing for you to feel confident that you could deliver on your expected customer deliveries in 4Q? And also, looking at the midpoint of your 2023 EBIT margin guide for the year, 4Q would have to be around 9.6% in EBIT. So based on execution of what you’ve seen so far and availability of parts, how confident are you at meeting this?
Francisco Gomes Neto
Okay. Kristine, I’ll start with the deliveries in Q4. Then Antonio will complement with the EBIT. I mean, we are -- we have been working very, very closely to our suppliers in order to mitigate the issues. We are getting the parts, but we are getting some parts late. So this puts pressure on our production process, not only production process, but the delivery process as well, right?
As you know me, moving to the right, more to the December and that’s a more difficult month. But we are still confident that we will be at the lower end of our guidance in terms of delivery and even more confident that we will deliver the financial results in the guides for the year. So, Antonio?
Antonio Carlos Garcia
So, Kristine, good morning. Antonio speaking here. Thanks for the question. In regards to the EBIT side, we do maps every single day, but one important point here, we are going to deliver, if you reach the low end of the guidance for the Executive Aviation, we are going to deliver more than 50 aircraft. And is there where we do see the highest EBIT come in together with the Service side? I would say, that’s more or less what the margin should bring us. We are seeing today the EBIT and the EBITDA margin to mid-range of the guidance, to be more precise.
Kristine Liwag
Thank you. And then also taking a step back, Francisco and Antonio, the stabilization of the business after COVID-19 and after the breakup with Boeing, too. I mean, it’s very clear that the company is now in a harvest period. So with the balance sheet in a pretty strong place, there’s no significant maturities in the next few years, how do we think about capital deployment priorities for 2024 and beyond? So are you thinking of potentially another new airplane launch or is this a period where shareholders could get incremental return either through dividends or buybacks? How do you think about those priorities? And maybe that’s a more appropriate question for your Investor Day, but I thought, I’ll just start off with that.
Francisco Gomes Neto
Thanks, Kristine. Good question. So that allows me to bring you even more information about that. Well, we -- after everything we have done in the past years in terms of restructuring the company, putting in place initiatives to foster sales, also to improve efficiency and foster innovation in the organization, we believe now we are in our harvest season, right, as the market is growing and then we will enjoy this growth and improve our operational and financial performance.
So, combined with that, we have a very modern and competitive portfolio of products, the business units we act on, so the E2 family, the Phenoms, the Praetors, the C-390, so that we are enjoying a very good momentum in terms of sales for all those segments.
So what we want to do is to focus, especially in 2024 and 2025, to focus on improving further our financial performance. We expect to start to pay dividends in 2025 onwards. So -- and then, I don’t know, in parallel, we are investing on developing new technologies to be prepared by 2025 to decide what we’re going to do going forward.
So, but remember that we are investing on the eVTOL, to develop the eVTOL, together with Eve. We are also investing, as I said, new technologies to prepare the studies of our future airplanes and also in the Energia family to explore disruptive propulsion systems, as you know, electric -- hybrid electric and hydrogen and hybrid. This is more or less our strategy going forward.
Again, focus on further improving the financial performance in 2024, 2025. I mean, continuing -- I mean, selling the current portfolio of products and continuing investing on new technologies and innovation to prepare new projects in the future.
Kristine Liwag
Great. Thank you for the call and looking forward to seeing you guys in New York in two weeks.
Francisco Gomes Neto
Yeah. Same from our side. See you there.
Operator
Our next question comes from Ron Epstein, Bank of America.
Ron Epstein
Hey. Good morning, guys. We’ve covered a lot on the call so far, but maybe if we just kind of go back, I think, it was Noah who asked a question about campaigns. If we can dig down a little bit deeper on that. Is there any more color you can give us on that and how you’re thinking campaigns will could go through the end of this year, maybe in the next year? And what that translates into a weekend, like -- what’s like a normalized delivery rate for the E-Jets? When we think about building our models when we go out a couple of years, what should we think that the company can get to on E-Jets from here?
Francisco Gomes Neto
Yeah. Hi, Ron. Again, thanks. Thanks again for a question. I mean, in terms of campaigns for Commercial Aviation, we -- as I said before, we are working in many different campaigns, big names in different regions, in Europe, Asia-Pacific. Also we are starting to offer the E2s in the U.S. as well. I think, it’s becoming more and more clear that the E195-E2, it’s not only regional jet as the E175-E1s, right? I mean, it’s a bigger airplane that can help a lot the airlines to operate very profitably in routes with less passengers.
As, for example, Azul is doing in Brazil, SKLM is doing in, in Europe and the Scoot and SKS, they have the same plans for Asia. So we -- and we believe that more and more the airlines are understanding this and we see a lot of good opportunities for the E2s, I mean, going forward in the market.
So in terms of deliveries, Ron, we have -- we still have a limitation with the engines, but we are confident that we combine E2s and E1s, we will be at above eight units in 2024 and reaching 100 units in 2025 in years ahead.
So again, if you go above 100 units, 100 units, 110 units, we’ll be basically back to the levels, pre-pandemic levels, but with a different mix. Now we have much more E2s that, it’s more expensive. So in terms of revenues, we’ll see a revenue, we’ll see a much higher revenue than in the past with the same quantity of delivered aircraft.
So this is more of the situation, answer your question. I mean, we are optimistic with the campaigns. We are working on. We are optimistic with the opportunity to introduce the E2s in the U.S. as well.
By the way, I mean, very soon the -- we’ll see the E195-E2s from Porter flying to big cities in the U.S., Los Angeles, San Francisco, New York, Boston, Orlando, Miami and this will be a great showcase of our aircraft that we believe people will love to fly in a very efficient aircraft without middle seats and this will open opportunities for that aircraft in North America.
And finalize my comments, with the -- with improvement in the pilot shortage is also open opportunities for renewing -- for the company to renew the fleet of the E1s, which now has more better margins. It can help us with the performance of our Commercial Aviation.
Ron Epstein
And then going forward, are there opportunities to upgrade the E2 platform itself without having to do a new aircraft? I mean, it’s a relatively new airplane anyway. Are there ways to upgrade it that you could play with the engine or do other aerodynamic tweaks to the airplane to get more out of the platform?
Francisco Gomes Neto
Well, we are -- we continue to invest in the improved competitiveness of the E2s. I mean, with improvements in the aircraft, we are also -- we are converting the E190-E1s into freighters. So the first one has already a -- the door installed and it looks very nice. So we believe it’s a good opportunity for us to introduce this cargo to help the Commercial Aviation as well.
So again, these are things we are doing and we believe that going, I mean, above eight units next year and above 100 units from 2025 onwards, this will help a lot to improve the financial performance of Commercial Aviation as well. And the service will come, it will grow because of that as well, right? More aircraft, more service as well.
Ron Epstein
Great. Thank you very much.
Antonio Carlos Garcia
Thank you.
Francisco Gomes Neto
Thank you, Ron.
Operator
Our next question comes from Marcelo Motta, JPMorgan.
Marcelo Motta
Hi, everyone. Good morning. It’s a question regarding next year the supply chain remain challenging, but you mentioned that you can increase the level of deliveries on the Commercial. So just wondering what will you see in terms of the Executive, the Defense? I mean, do you think it could be growing again double-digit rate on topline? What will be the outlook for the different lines of business of the company? Thank you.
Francisco Gomes Neto
Marcelo, thank you. I mean, yes, I mean, next year will still be challenged in the supply chain and with specific parts, but again, improving from 2023 situation. So we are growing. I mean, we are planning to grow double digits in all business units we have. So we are growing this year, 2023 compared to 2022, we are growing more than 20% and we expect to keep the same path, I mean, going to 2024 and also keeping important growth in the years ahead.
So, and again, we are working very closely with our supply chain, with our suppliers and to make sure that we will have the parts we need for -- to support this growth. Also, what we want to do in 2024 is to improve the distribution of the production deliveries throughout the year. We have initiative we call production leveling that I know that we want to avoid this concentration of production in the second half of the year and see a better distribution throughout the year. It’s still challenging in the Q1 next year, but we are working very hard since now in order to improve our production deliveries in 2024.
Marcelo Motta
Perfect. Super clear. Thank you.
Operator
Our next question comes from Andre Ferreira, Bradesco BBI.
Andre Ferreira
Hi. Good morning. Thank you for taking my question. I have two questions. The first, I was wondering if you could give us an update on how the partnership with L3Harris for the Agile Tanker is developing. And the second question, you mentioned in a previous question about the countries that are selecting this C-390. But if you could comment a bit on the on the potential talks with the Indian Government a few months back, if you could give us a bit more detail on that. Thank you.
Francisco Gomes Neto
Thank you, Andre. Well, I mean, partnership with L3Harris is moving. We see the C-390 a great solution for the U.S. Air Force. And the first opportunity we found was the tanker, we call Agile Tanker and this is what this partnership with L3Harris is for, right, to work with the U.S. Air Force to offer the C-390 as an Agile Tanker.
But we want also to offer the C-390 for the missions, right? I mean, so we are reinforcing our team in the U.S. as well. We recently announced it, a new Vice President of Sales for the U.S. to support L3 and support the potential future sales of C-390 in that country that is the biggest Defense market in the world.
So the C-390, again, other countries, I mean, we are very happy with the announcement of Netherlands 2022 and now more recently, Austria and Czech Republic. I mean, that makes the C-390 the preferred solution for this multi-mission platform for the NATO countries. So we expect to close those contracts during the first half of 2024.
In India, we are working in India now to select a partner, that would be our partner to localize the production, the assembly of the C-390 to be compliant with the specification of this India Air Force. They want to buy between 40 to eight multi-mission aircraft and we do believe that the C-390 is the best solution for them. We want to be prepared to compete, and for that, we need to select a partner. This is where we are in terms of India, specifically for the C-390.
Andre Ferreira
Yeah. Thank you.
Antonio Carlos Garcia
Thank you.
Operator
Thank you. Our next question comes from Noah Poponak, Goldman Sachs.
Noah Poponak
Hey, guys. The GTF services business that you’re going to layer in. Remind me how large that gets on an annual run rate basis once it’s at its run rate level? And then also, what does the margin look like on that work?
Antonio Carlos Garcia
Hi, Noah. It’s Antonio speaking. I would say, when the priorities mature, we are first seeing a revenue size of $0.5 billion for the -- our company in Portugal. If it was the right question to answer you, we do see in terms of size, something like $0.5 billion. Not next year. Next year, it will be around $50, something like that. But the longer run, $500 million.
Francisco Gomes Neto
Total company.
Antonio Carlos Garcia
Total company. Yeah.
Noah Poponak
That is…
Francisco Gomes Neto
20…
Noah Poponak
When will that first start to hit your financials, like, late next year?
Antonio Carlos Garcia
We started to already do repairs in April next year.
Francisco Gomes Neto
Yeah. We have a ramp up curve, but we will see some growth in OGMA’s revenue already in 2024, as Antonio said. But 2025, we believe OGMA will be closer to $500 million in terms of revenue and growing…
Noah Poponak
Okay.
Francisco Gomes Neto
… in the years ahead as well.
Antonio Carlos Garcia
Okay. That’s a bit of a positive collateral effect for the GTF issues.
Noah Poponak
Okay. And how does the margin on that revenue compare to the existing Services segment margin?
Antonio Carlos Garcia
It’s higher single digits.
Noah Poponak
High single digits?
Antonio Carlos Garcia
Yes. Yeah. The same we have with other OEMs like Ruili, for example.
Noah Poponak
Okay. And Antonio, I think last quarter you had guided to the Defense segment having $600 million of revenue this year. Is that large of a fourth quarter still the plan?
Antonio Carlos Garcia
That’s more or less what we are expecting for sure. We need one campaign to be able to fulfill, say, maybe we are going to lose $100 million, maybe, but it does not jeopardize our EBIT margin. We are just hanging one sales campaign that we hope to be close to end of this year, because we do have some aircrafts and inventory, especially for the Super Tucanos. That’s more or less what I’m referring to.
Noah Poponak
Okay. And then, I guess, does the Defense segment now just have -- is it likely to have a pretty significant ramp up through the year in each year going forward or should I be thinking about the back half of this year being kind of the run rate moving forward? And then, I guess, you have -- maybe have some airplanes slipping into next year, I guess. How do you think next year compares to this year in Defense revenue?
Antonio Carlos Garcia
Next year around $750 million then moving onwards to $1 billion on the long range.
Noah Poponak
Okay.
Antonio Carlos Garcia
With all of these new orders for sure. No. We do have, I would say, a potential backlog of more than $2 billion with this contract that has been already announced. We needed to conclude them in order to put in the backlog, then we could have much more visibility in regards to the split between 2024, 2025 and 2026. But I would say in the long run, we do see Defense around $1 billion revenue and higher single-digit EBIT market.
Noah Poponak
Okay. All right. Thanks a lot. Appreciate it.
Antonio Carlos Garcia
Thank you.
Francisco Gomes Neto
Thanks, Noah.
Operator
Thank you. We have a new question comes from Cai von Rumohr, TD Cowen. Please proceed.
Cai von Rumohr
Thanks so much. This will be quick. So this is the first quarter in the last couple, I haven’t heard any talk about selling E2s to China. How do things look there?
Francisco Gomes Neto
Okay. Thanks for the question. Well, by the way, our team -- Commercial team is in China now. We will have tomorrow a special event to talk about regional aviation in China to explore the connectivity and so on. So this is another movement of Embraer in China to show how effective could be the introduction of E2s for the regional aviation, complementing the local aircraft. We are still working with local airlines for the introduction of E2s and also for potential partnerships. So this is what I can tell you at this point of time.
Cai von Rumohr
Thank you.
Antonio Carlos Garcia
Thanks, Cai.
Francisco Gomes Neto
Thank you.
Operator
Thank you. This concludes today’s question-and-answer session. That does conclude Embraer’s audio conference for today. Thank you very much for your participation. Have a good day.
For further details see:
Embraer S.A. (ERJ) Q3 2023 Earnings Call Transcript