Nelson Salgado - VP, Strategy, Institutional Relations & Interim Executive VP, Finance and IR Paulo Cesar de Souza e Silva - CEO & President.

Audrey Preston - Crédit Suisse Joshua Milberg - Morgan Stanley Kristine Liwag - Bank of America Merrill Lynch Cai Von Rumohr - Cowen and Company Augusto Ensiki - HSBC Noah Poponak - Goldman Sachs Group.

Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's Third Quarter of 2018 Results. Thank you for standing by. [Operator Instructions]. As a reminder, this conference is being recorded and webcasted at ri.embraer.com.br.

This conference call includes forward-looking statements or statements about events or circumstances which have not occurred. Embraer has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance.

These forward-looking statements are subject to risks, uncertainties and assumptions, including, among other things, general economic, political and business conditions in Brazil and in other markets where the company is present.

The words believe, may, will, estimates, continues, anticipates, intends, expects and other similar words are intended to identify forward-looking statements. Embraer undertakes no obligations to update publicly or revise any forward-looking statements because of new information, future events or other factors.

In light of these risks and uncertainties, the forward-looking events and circumstances discussed on this conference call might not occur. The company's actual results could differ substantially from those anticipated in a forward-looking statement. Participants on today's conference call are Mr. Paulo Cesar de Souza e Silva, President and CEO; Mr.

Nelson Salgado, Executive Vice President, Finance and Investor Relations; and Mr. Eduardo Couto, Director of Investor Relations. I would like now to turn the conference over to Mr. Nelson Salgado. Please go ahead, sir..

$29 million in research, $75 million and development and $54 million in CapEx. It is important to note that we haven't exceeded USD 120 million net borrowing contribution from suppliers.

If we consider that the gross amount of invest - development investment would account to $200 million and the total to $283 million, we expect to end 2018 below our current guidance of $550 million. All programs are on-track despite the lower investments. Next, Slide 16, free cash flow.

Embraer reported negative free cash flow of $166 million at the third quarter and minus $549 million year-to-date. The negative free cash flow year-to-date is mostly driven by higher inventories as we prepare for higher deliveries in the fourth quarter.

With those higher deliveries, we expect to revert a very good portion of the negative free cash flow, but we expect to be at the lower end of our guidance regarding cash flow, which is around minus consumption of $100 million this year. Finally, at Slide 17, we show Embraer's indebtedness.

We ended the third quarter with a cash position of $3.14 billion and a debt position of $4.02 billion, implying a net debt of $881 million, which again have been delivered or completed. For fourth quarter deliveries, we expect this position to go back to what it was in the beginning of the year.

In terms of average debt maturity, we remain at a comfortable level of 5.5 years. With that, we conclude our presentation and are available now for questions. Thank you..

[Operator Instructions]. Our first question comes from Robert Spingarn with Crédit Suisse..

This is Audrey Preston on for Rob Spingarn. And I just had a couple of questions. So going back to Slide 15 with your investments. Even incorporating the supplier contributions, it still looks like you're tracking below where you were expecting for the full year.

So could you elaborate on some of your planned investment opportunities in Q4? And is there any reason why the investments are tracking below expectations?.

[Technical Difficulty] change in scope. Oh, sorry. So coming back to investments. As I said, we will be below the guidance with investments this year without any difference in the product development target. That is happening mainly because we are being more efficient in our investments with regards from our efficiency program.

But - so we will be below the level of investment, but with the current development programs without any change..

Great. And then if we can just take a closer look at the SkyWest orders as well.

So now that you've taken them out of backlog, but there's still no change to the terms and conditions, what is the time line on the orders? And when can we expect to maybe see them go back in backlog? And when can we expect a little bit more certainty around those orders as well?.

Well, as I mentioned, we are working very hard to convert the announcements we made in the Farnborough Airshow in different orders. But we cannot really commit to a date when this is going to happen. We expect it to be as soon as possible. Regarding the SkyWest order, as we mentioned, it is connected to the change in scope clauses in the U.S.

regarding the E175-E2. And we are not seeing, at this moment, any priority in the airlines in changing scope clauses. However, Embraer has an 85% market share in that segment, with our current E175-E1. So the fact that the scope clauses may change later does not imply any harm to us.

On the contrary, we will remain with a very good market share in this segment because the E175-E1 is by far the best product from the segment..

Our next question comes from Josh Milberg with Morgan Stanley..

My first question is if you could give us some additional perspective on the improvement of your Executive and Defense profitability in the quarter, and also the sustainability of the better numbers? You mentioned your focus on price.

And on the Executive side, we were wondering if price was the main driver of the better margin and what, if any, other factors helped? Obviously, better, better revenues and better fixed cost dilution helped you. That's my first question..

Okay, thank you. I think in Executive Aviation, we've announced many months ago that we were implementing a program to turn around the business, with a big focus on value rather than competing exhaustively for market share. I think what we are seeing now is a result of that effort.

We have been able to maintain prices that are good for our strategy to still deliver more value to the customers. We invested also in cost reduction in both material and impairment cost for our production processes as well. So outside that, the results we have seen so far are the results of these efforts that we've been consistently implementing.

As per the sustainability, everything that we are doing is for those results to be sustainable over the long term. We, as I said before, would go on investing in new product development. We just launched two new products, which we think will again deliver superior performance and we will develop a pleasant life. Regarding Defense business.

We had, during the year, been impacted by losses in the KC-390 program development.

As I explained here earlier in those presentations, the way the revenue and the margins of the program are accounted for mean that whenever we had something that does not go as planned, we had to recognize an accounting loss, right? And this year, in the second quarter, we had to recognize $927 million loss because of the loss of the first prototype.

And with that, we had to replan the program. And we do not expect to have further problems we're going to have. If we manage to stick to the new schedule, we think that those margins that you see now are sustainable.

But again, product development of very innovative and high-technology program is something that we know in this industry that you cannot say 100% for sure we're not going to have problems. But if those problems do not happen, we will sustain this kind of result.

Important also to note that as we change phase in this problem from product development to see the production, right, our defense business will surely enter a totally new phase because during the last few years of having positive development on the KC, those uncertainties they bring from the activity to the result.

As we enter into fewer production and delivery, those will go over the initial ramp-up phase. We should see Defense business with much better and sustainable result..

Okay, that's very helpful. And a related question, and it's a question that ties into your point about cost reduction and their sustainability. I think that you guys have talked in recent months about being able to rightsize Executive and Defense with the Boeing transaction.

And I was just wondering, with the work that you've done advancing the deals these last several months, if you have a better idea now of maybe what the magnitude of the opportunity could be to sort of rightsize the businesses as a by-product of the transaction..

Yes. Although the decision for the deals are going on, the manager of the company is not taking those into account. So actually, everything that we are doing in Executive Aviation and Defense is just regular cost of business. We are just managing the company, looking at the way it is today and all the results that we are seeing from this.

There is nothing here that accounts for any benefit that could come from the deal..

Our next question comes from Ronald Epstein with Bank of America..

This is Kristine Liwag calling in for Ron. So my question is the time line about your deal with Boeing. If you already have government approval from the current administration, why not complete the deal now? And even if the new administration seems supportive of the deal, it seems like postponing the timeline adds unnecessary risks..

Good morning. This is Paulo. So thanks for your question. We are still in the final stage with Boeing to finalize that details. And as soon as we materialize this final agreement, we'll bring the deal to be approved or appreciated by the government in the current administration.

It is already public information that the current administration will share our requests with the new government, with the team that will be a transition to the new government.

And after that - so when we have the go-ahead from both, from the current government and the transition team, so we will call for a general assembly, which still is our expectation that will occur any time in December. So it's difficult to say now which day of December, but our expectation is that this will happen in December.

And after that, upon approval of our shareholders, we'll have the antitrust steps which, will bring us into 2019, more likely the second half of 2019, for the closing of the transaction..

And if I recall, when you guys first communicated the timeline, the expectation was that you only needed approval of the current administration.

So did something change that you now need new administration? Can you talk about other factors that may have come in, in the past few months?.

Well, I think, basically, regarding the administration, it is being fed now by the current government that they would like to share our request, this transaction, with the new administration. So that was not 100% clear a month ago. But now it's been very clear, so that Mr.

Temer would like to share our request for the approval of this deal with the new administration..

That's very helpful. And switching to Executive Aviation.

How many firm orders and letters of intent did you receive for the Praetor family at NBAA?.

We do not disclose that information..

There has been a lot of....

There has been a lot of interest in the new products at the airshow, and there's a lot of activities. But we do not disclose the amount of orders we receive..

Our next question comes from Cai Von Rumohr with Cowen..

So could you give us some color in terms of where the commercial deliveries may be next year? What part is sold-out today, I mean, in terms of how many deliveries you have for 2019? And then maybe comment on the impact of sort of this, the Boeing JV? Has - the fact that you're negotiating for one has had people completing orders.

Has it been a plus or are people waiting until it's completed to really finalize and place their orders..

Yes. Regarding the last part of your question, no, we are not seeing any difference because of the deal with Boeing. So we continue to operate business as usual, so we are closing deals. We have made an announcement in Farnborough. We are now working to help this contract to stand firm until end of this year.

And that's going well in this regard, so we will have a very good year this year. Book-to-bill probably above one, more likely above one and it's regardless of the negotiations that are going on with Boeing.

Your other question was, sorry, the first part?.

Was - how many orders do you have for 2019 right now. I mean, obviously, we expect more..

It's early to say, right? It's early to say because we still have a few months to go until we can have a clear view. But I could anticipate more or less the same level that we will see in 2018..

And the last question would be, I believe your biz jet book-to-bill was a little bit below one.

Could you give us some color on biz jet demand? Is that a function of stronger pricing? And what do you see for book-to-bill in the fourth quarter?.

Book-to-bill will be around one, a little bit changes here. And as I mentioned before, we have been seeing steady growth in prices, which are starting to show up in our P&L, right? And we expect that trend to continue in the next months..

If I can add a little bit amount of information on this topic. So the launch of the Praetor 600 and the Praetor 500 at the NBAA was very successful. So we are seeing a great interest in these aircraft. I believe the position of these aircraft is [indiscernible] what the competitors are offering.

So the clients are telling us that this will be a very demanded aircraft. So we are very bullish. So I think it's fair here to anticipate that we may have a good year for new sales because of these two new products. So the price point is excellent.

Residues of the aircraft are great, so the range and the performance, so we believe that it will be a very successful aircraft. So having said that, 2019 may be a better year than 2019 - the end of 2018 in terms of sales..

Our next question comes from Myles Walton with UBS..

This is actually Luther Feather [ph] on for Myles.

So I just want to make sure the Commercial Aviation margins again, what were those in the quarter?.

1% EBIT margin in the quarter..

Okay.

And so do we think that this is the bottom? Or do we - is there more pressure going into 2019, I guess, as the next aircraft begins to ramp up?.

Well, I think, as I mentioned, the margin in the quarter is impacted by relatively lower deliveries than we expect. And we expect the deliveries go to up to normal levels, the margins will recover..

Okay. And how do you guys see - going into the fourth quarter, the gross margins were positive, and they were good in the quarter.

Any way you guys can break those out as well?.

We have around 15% gross margin in Commercial; Executive Jets, 17.5%; Defense, around 14%; Service & Support, around 29%..

The next question comes from Augusto Ensiki with HSBC..

Regarding the E2.

Now that you guys have been producing it for most of this year, has there been any challenges or difficulties in the ramp-up of the E2 production? And then when you think about that going into next year, what kind of mix can we expect for E1 versus E2 delivery?.

Well, we have had no problems with the ramp-up of the E190s or the E2s. And so everything is moving smoothly. And we have not disclosed so far the mix for next year. And we will do that later on in next year guidance..

If I can just add and go back to the first information Nelson gave about - on the highlights. So it's - the schedule reliability of the E190-E2s are really great. So we've seen 98.5% schedule liability for a new program, so this is fantastic in others. So we delivered the first E190-E2 in April.

I believe they're always flying quite a lot with this aircraft. Mini-cycles, so it's not flying in the hours, but also mini-cycles. So the aircraft is really growing and delivering very well. So I think it is a point to be noted..

Our next question comes from Noah Poponak with Goldman Sachs..

So I mean, I guess, are you still expecting eventual scope clause change that allows you to sell and fly the E2-175 in the U.S? Or should we be looking more look at the legacy-aircraft-type backlog there?.

Well, Noah, as we said before, we do not see any movement right now on priorities from the airlines to change scope clause. But for us, that is a comfortable situation. The E175-E1 remain with the market share around 85% in that market. So if the scope does not change, we will remain selling the 175-E1s.

If it does change in the near future, we will have the 175-E2 ready. There's nothing we can say at the moment beyond that..

Okay.

And is 2019 sold-out at the current production level, the 85 to 95 you're expecting for 2018? Or there are still some spots open?.

No, the Commercial Aviation, as I mentioned, we have seen very good orders this year. And a part of this order will be for the next year. So I think we are very comfortable with the level, more or less, the same level that we will deliver this year for next year, so maybe even a small upside..

Okay.

When does Republic start to take deliveries of their recent order?.

Republic, if I'm not mistaken, we have to confirm this to you, but I believe it's 2020..

Okay. Got it.

And then final question, at the total company adjusted segment operating margin, are you expecting that to expand, stay the same, contract, 2019 versus 2018?.

It's still a bit too early to talk about margin in 2019. We will give that guidance when the time comes..

[Operator Instructions]. This concludes today's question-and-answer session. And that does conclude Embraer's teleconference for today. Thank you very much for your participation, and have a good day..