Embraer S.A. (NYSE:ERJ) Q2 2023 Earnings Call Transcript

Embraer S.A. (NYSE:ERJ) Q2 2023 Earnings Call Transcript August 14, 2023

Embraer S.A. beats earnings expectations. Reported EPS is $0.32, expectations were $0.12.

Unidentified Company Representative: Good morning, ladies and gentlemen. And welcome to the Audio Conference from Embraer’s Financial Results for the Second 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 and GAAP standards to Embraer IFRS. We remind you that EVve results were discussed in Eve’s teleconference. It’s important to mention that all numbers are presented in US dollars as it is our functional currency. At this time, all participants are in listen only mode. Later we will conduct a question-and-answer session and instructions to participate will be given at that time. Should you require assistance during the conference, please use the Q&A button on the platform.

As a reminder, this conference is being recorded and webcasted at ri.embraer.com.br. This conference call includes forward-looking statements or statements about events or circumstances which have not occurred. Embraer has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance. These forward-looking statements are subject to risks, uncertainties and assumptions including, among other things, general economic, political and business conditions in Brazil and in other markets where the company is present. The words believes, may, will, estimates, continues, anticipates, intends, expects and similar words are intended to identify forward-looking statements.

Embraer undertakes no obligation to update publicly or revise any forward-looking statements because of new information, future events or other factors. In light of 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.

Francisco Gomes Neto: Good morning. And thank you all for joining our second quarter 2023 results call today. Aircraft deliveries reached 47 jets in the quarter, a strong increase of 47% compared to the second quarter last year. Revenue grew significantly, 57% in Commercial and 42% in Executive. Even with the higher deliveries, backlog remains stable at $17.3 billion with strong sales performance in Executive Aviation. We have been able to reduce and extend the duration of our debts. Our operational and financial guidance for the year remain unchanged. On the next slides, highlights of our business units. In Commercial Aviation, we reported a strong revenue growth of 57%, as mentioned before, and an EBIT increase of 70% compared to the same quarter last year.

Adjusted EBIT margin increased from 4.9% to 5.3% on a year-on-year basis. We announced recently new operators in Asia, Scoot from Singapore, SKS from Malaysia and Royal Jordanian in the Middle East. In Europe, the new order from Binter, totaling now 16 E2 jets. In the US market, American Airlines announced a [firm] order of seven new E175-E1 jets. This is an important highlight as it shows that pilot shortage situation is improving in the US, with new orders for E175-E1s an important segment for Embraer. We also have additional firm sales of $700 million from undisclosed customers in the beginning of the third quarter. Executive Aviation continues with a strong book-to-bill of 2:1. Adjusted EBIT margin at 8.8% compared to 9.5% in the same period last year.

We announced this quarter a very relevant deal with NetJets of up to 250 Praetor 500 jet options, along with a comprehensive services and support agreement valued at $5 billion. Our portfolio is very well positioned with a backlog growing quarter-over-quarter with a resilient price discipline. On Defense, the delay of new contracts and revenue recognition are impacting margins. Adjusted EBIT margin dropped from 16.9% to minus 4.1%. We expect it to recover in the coming quarters. We have several sales campaigns gaining momentum and we hope to make announcements in the second half of the year. On Services & Support, our year-to-date revenue has increased by 13% to $666 million. Our EBIT margin increased from 12.5% to 15.7% compared to the same quarter last year.

We signed a letter of agreement with the Chinese Lanzhou Aviation Group for the conversion of 20 jets to freighters. This is an important movement of Embraer returning to the Chinese market. On the next slide, some updates about Eve’s numbers and my response. We have announced the first production facility in Taubaté and also a joint venture with the Japanese Nidec, world’s leading electric motor manufacturer, to develop electric propulsion systems for the aerospace sector. [It’s] backlog is now totaling 2,850 letter of intents valued at $8.6 billion, the highest in the industry. The company has 28 eVTOL customers in 14 different countries. Our Vice President of Services & Support, Johann Bordais, was named as the new CEO of Ev eto lead the next phase of the company.

I will now hand it over to Antonio to give further details on the financial results, and we will be back with closing remarks.

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Antonio Carlos Garcia: Thank you, Francisco, and good morning, everyone. We had another solid quarter with nearly all metrics moving higher when compared to the first quarter of this year and the second quarter of last year. Slide 8, now on to deliveries. Embraer delivered 47 jets in the second quarter, 17 in Commercial and 30 in Executive. This is up 47% compared to the second quarter of last year and more than 3 times the delivered from the first quarter of this year. Hence, we are very pleased to announce in our Commercial segment deliveries of E2s continue to grow. We had seven E2 deliveries in the quarter, up 40% compared to the first quarter and up more than 100% compared to the second quarter of last year. E2 demand continues to grow worldwide.

Deliveries in Executive continues to increase as well with 30 delivers in Q2. It was the highest second quarter in the last seven years. As a result, we are confirming the delivery outlook in our Commercial and Executive business. Slide 9, our third quarter backlog ended the quarter at $17.3 billion consistent with the last three quarters. In Executive, strong demand continues for Embraer Phenoms and Praetors aircraft as the year-to-date book-to-bill ended the second quarter at 2:1. This stability in our backlog is accretive to the guidance growth and profitability, giving us a steady and reliable stream of cash flow that strengthens our balance sheet. Moving to revenue. We ended the second quarter with approximately $1.3 billion of net revenue, $273 million or 27% above the same period last year.

Year-to-date, revenues are above $1.2 billion with all four business units posting higher first half revenue in 2023 compared to the 2022, with over 60% of the revenue to be realized in the second half of this year as the entire company commits to deliver more aircrafts and services to our customers. Slide 10. Second quarter adjusted EBIT was $100 million and adjusted EBITDA was $149 million, both better than the second quarter of 2022. Adjusted EBIT and EBITDA margins were a few basis points lower than the second quarter of last year due to the nonrecurrence of several onetime benefits we had in early 2022. We are reaffirming our adjusted EBITDA and EBITDA margin guidance for this year. In Slide 11, free cash flow excluding Eve was minus $11 million in the second quarter, basically breakeven.

As a reminder, last year we had a cash inflow from a divestment in Europe, which benefit our free cash flow in the second quarter of 2022. This year, we already forecasted working capital usage to build up inventory needed to meet our production requirements for the remainder of the year. We will recover this outflow in the second half of the year with higher aircraft deliveries. Our outlook remains unchanged with free cash flow at $150 million or better. Moving to investments. We funded $56 million of research and development and invested $25 million in CapEx for an investment total of $80 million in the second quarter, similar to the last quarter. The majority of this went to fund the development of our passenger to freighter conversion initiatives and invest in capacity expansion of our Services & Support business units.

On net results, our adjusted net results were $58 million, $12 million better than the second quarter of last year, $147 million better than the first quarter. It’s important to highlight that reported net results were negatively impacted by noncash mark-to-market [difference] in the amount of $53 million. Our adjusted net margin was 4.5% equal to the second quarter of last year. Slide 12. As seen on this slide, I’m happy to share with you the $500 million plus cash tender of our corporate [bonds]. This cash tender was to reprofile our debt, strengthening our balance sheet and reduce our overall liabilities. As previously announced, we recently placed $750 million seven year bonds in July 2023 and used the proceeds to increase our duration from three to five years.

The positive impact on this [liability] management plan can be seen in the chart at the bottom of the slide, our $2.3 billion liquidity position with Eve strengthened by our reprofiled liabilities. And combined with future cash flow, we allowed us to cover our debt maturity obligation well past 2028. Our net debt [excluding] Eve at the end of the second quarter was $1.459 billion, as shown at the top [center] of the slide. This is up slightly from the first quarter due to the increase of working capital previously mentioned. Our leverage ratio showed to the upper right is at 3 times, a decrease from 4.7 times in the same period one year ago. It’s important to point out the positive results from our business unit is what allowed us to execute our liability management plan.

Embraer is now very well positioned to move forward in the years ahead. 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 Q2 results showed [Technical Difficulty] that we are making consistent progress in our journey to improve the financial performance to deliver sustainable growth in the near future. There are several ongoing sales campaigns, especially in Defense and Commercial Aviation, and we are confident to share announcements in the coming quarters, combined with even better results in line with our guidance for the year. On top of that, the aircraft [slots] on the production line for deliveries in 2024 and 2025 are practically filled for Commercial Aviation and Executive Jets, which will result in a sustained increase in our revenue and profitability. Thanks again for your interest and confidence in our company.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Kristine Liwag from Morgan Stanley.

Kristine Liwag: So in terms of your sales campaign, you talked about some of these active orders that could potentially come through this year. From your conversations with your airline customers, what have been the key sticking points that prevent some of these campaigns into converting into firm orders?

Francisco Gomes Neto: Well, I think it is — no, this is a good momentum for the E2s now, I mean, to complement the operation in different airlines, to complement the bigger aircraft. So we do believe the E2s are a perfect fit for them in order to offer high frequency of fights with very attractive cost benefits. And as I said in my opening, we are working many different campaigns in different regions for — especially for the E2s, so we expect to make some announcements in this second half of the year. But there’s nothing against the aircraft on the opposite. I think it’s a natural sequence for the airlines now to go to this regional aviation.

Operator: Our next question comes from Myles Walton from Wolfe Research.

Myles Walton: I was hoping you could maybe touch on the defense outlook? You’ve mentioned it’s as a result of contract delays that are causing reduced sales and profitability. I think you had previously talked about $600 million in sales for the year. Is that still achievable? And then also, the delays that are happening, are they specifically KC-390, Super Tucano, perhaps something you could add in terms of color?

Antonio Carlos Garcia: Myles, the issue in Defense is we have, first, what — we have a heavy impact in Q2, it was a material delay, especially for the KC. Assuming that we were not able to book as revenue on the percentage of completion, 4.1%. What we are seeing delay right now with the Super Tucano, we have some — a [red finish] in the event, to just wait the new orders to ship those aircraft this year. And I would say, the level of $600 million revenue, we heavily discussed last week and we are confirming it’s doable and achievable to introduce two effects, the new order that’s coming for the Super Tucano, which is a fast track because the aircraft they are ready and also the increase of production for KC in the second half of the year.

And the margin, again, the revenue in Q2 was pretty low and we have adjustments in some basis of the contracts and with minor effect. But assuming that the revenue was too low, we have this impact. But I would say, in our expectation, we confirmed the revenue above $600 million and [fighting] for EBIT margin higher single digit for this fiscal year. And moving ahead, we are quite confident that Defense is going to add much more value in this company here.

Myles Walton: And just a clarification or in addition to Kristine’s question. Francisco, do you expect book-to-bill to be above 1 or well above 1 for ’23 or below 1?

Francisco Gomes Neto: Well, we expect at least 1:1, but with the potential to be higher than that.

Operator: Our next question comes from Ron Epstein from Bank of America.

Ron Epstein: Maybe one question and a super quick follow-up. What do you expect the normalized volume of E2s to be when we’re kind of back to a normal state? Because it seems like we’re still in this tail of recovery from COVID, and it was very disruptive for the mainline airlines and kind of like hyper disruptive for the regionals. But kind of once everything sorts itself out and we’re back to sort of a normal cadence, what do you expect annual deliveries to be, is it 100 airplanes a year, 120, 140? I mean, kind of what’s something we can think about as sort of reasonable normal target?