Embraer S.A. (NYSE:ERJ) Q4 2022 Earnings Call Transcript

Embraer S.A. (NYSE:ERJ) Q4 2022 Earnings Call Transcript March 10, 2023

Operator: Good morning, ladies and gentlemen and welcome to the Audio Conference from Embraer’s Financial Results for the Fourth Quarter of 2022 and Full-Year of 2022. Thank you for standing by. 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 conditions, political, and business conditions in Brazil and in other markets, where the company is present.

The words believes, may, will, estimates, continues and participates, intends, expects and 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 those 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. It’s important to mention that all numbers are presented in U.S. dollars as it is our functional currency. Participants on today’s conference call are Francisco Gomes Neto, President and CEO; Antonio Carlos Garcia, Chief Financial Officer; Leonardo Shinohara, Director of Investor Relations.

And in the Q&A session, we will also participate Arjan Meijer, Commercial Aviation, CEO; Michael Amalfitano, Executive Aviation, CEO; and Service & Support, CEO. I would like now to turn the conference over to Francisco, who will proceed with the first remarks. Please go ahead, sir.

Francisco Gomes Neto: Good morning everyone. Thank you all for joining our fourth quarter and 2022 full-year results conference call. 2022 will be remembered for overcoming several challenges worldwide, such as the Ukraine war, the rising of global inflation, in supply chain constraints. Despite that, we managed the strategic plan to deliver our goals, which was only possible due to teamwork, focus, and discipline. Another main factor in succeeding our plan was the continued focus on business efficiency, which demanded several mitigation measures throughout the year. In 2022, aircraft delivery grew 12.7% and reached the mark of 159 commercial and executive aircraft. We also increased revenue to 4.5 billion. Adjusted EBIT and EBITDA margins exceeded the guidance given to the market, reaching 6% and 10%.

Moreover, the free cash flow generation grew well above estimates. The total backlog returned to the pre-pandemic level reaching 17.5 billion. This Active Aviation presented an outstanding performance in 2022, and in Commercial Aviation, we had several campaigns underway. Later on, I will talk more about the 2022 highlights of each business unit. On the next slide, we will see some important steps in our journey towards a more sustainable aviation. The was consolidated with two concept aircraft models for 19 to 36 with hybrid electric and hydrogen electric propulsion. Together with Pratt & Whitney, we have successfully tested an E195-E2 using 100% sustainable aviation fuel. As part of the reducing emission goals in our operations, we anticipate the use of 100% renewable energy in Brazil by 2024.

In addition, we signed an agreement with Raízen from the Shell/Cosan Group to assess the production of sustainable aviation fuels in Brazil, which may contribute to lower emissions across the sector. In the social pillar, we are increasing the hiring of underrepresented groups in our entry level programs, as well as the number of women in senior leadership as part of our goals. Furthermore, we were honored to receive the great place to work certification in several countries where we operate. For us, it is an important recognition to celebrate. On the next slide, we will see some highlights of last year’s business units. In Commercial Aviation, we delivered 57 aircraft, 19% above the previous year. The delivery of the first E195-E2 jets to Canadian border lines market the beginning of the E2 operation in North America.

Porter has also placed a new order for 20 jets in addition to the existing 30 firm orders. Another important sale was a E2 jets to Azura, a U.S. Leasing Company. In addition, the Chinese Civil Aviation Authority granted certification for our E-190-E2, opening doors for the E2 family in the relevant Chinese market. Business aviation presented excellent results for another year with a 102 aircraft delivery, a strong demand in the entire product portfolio, and a sustainable sales level. The Phenom 300 became the world’s best-selling light jets for the eleventh consecutive year. In defense, the geopolitical scenario continues to influence several countries to invest in renewing the armored forces capabilities. The selection of the C-390 Millennium as the only aircraft that meets the requirements of the Ministry of Defense of the was our years highlight.

With a 5 C-390 acquisition forecast. Moreover, we announced the partnership with L3Harris to develop in an Agile Tanker, a refueling option to meet the United States Air Force needs. Our servicing support business continues to evolve positively. In Commercial Aviation, growth was based on pool program contract renewals, as well as new clients, and in Business Aviation, new clients in the Executive Care program. The Service & Support backlog grew 8%, compared to 2021. Finally, in 2022, we took an important step to consolidate our operations in the Urban Air Mobility, a great business opportunity in the coming years. We completed the EVE spin-off by listing the company on the New York Stock Exchange, ending the year with potential orders for over 2,700 vehicles valued at 8.3 billion.

Photo by Artturi Jalli on Unsplash

Now, I hand it over to Antonio to give further details on the financial results and return at the end. Thank you.

Antonio Carlos Garcia: Thanks Francisco, and good morning, everyone. 2022 was a great year for us. The entire Embraer one team worked at very hard all the way to the last minute of December to successfully overcome many external challenges we faced during the year. As a result, I’m proud to share our 2022 financial results with you today. Deliveries, we increased the number of aircraft delivered by 12.7%, compared with 2021, even with significant supply chain constraints. It’s important to note that Q4 deliveries were concentrated around 50% of all deliveries in 2022 with an abnormal seasonality. Embraer delivered 8 jets in the fourth quarter, of which 30 commercial jets and 50 as active jets thereof 33 light jets and 17 mid-sized jets.

In 2022, we produced 61 commercial jets, but delivered 57 with 4 jets post January 2023. Therefore, we’ve slightly missed the guidance. For Executive Aviation, we delivered 102 jets reaching the guidance. Deliveries are gaining traction and we are optimistic on our 2023 deliveries guidance. Firm order backlog ended fourth quarter 2022 at $17.5 billion, 500 million more versus Q4 2021. This is one of the highest quarter backlog since the beginning of the pandemic or 800 million more versus Q4 2019, driven by solid sales activities in Executive Aviation and Service & Support. Net revenues reached around in the quarter, 44% of the whole year revenue, approximately , compared to Q4 2021, most driven by higher revenues and Commercial Executives and Service & Support, partially offset by lower revenues in Defense & Security.

Revenues reached 4.5 billion in the year, approximately 343 million more, compared to 2021 or a growth of 8% delivering the guidance with revenue well-balanced by business unit. Moving to adjusted EBITDA, but before that, I want to report on gross margin. Q4 2022 reported consolidated gross margin of 19.1%, higher than 15% reported in Q4 2021, due to volume and mix 2%, enterprise efficiencies 1.6% and one-time actions 0.4%. In Q4, 2022, adjusted EBIT were 166 million adjusted EBITDA margin of 8.3% or 400 basis points above Q4 to 2021, even with some negative impacts from provision and SG&A expenses. In Q4 2022, adjusted EBITDA were 228 million, yielding adjusted EBITDA margin of 11.5% or 323 basis points above Q4 2021. For the year, in 2022, reported consolidated gross margin of 20.1%, higher than 15.7 reported in 2021, due to volume increase 1%, enterprise efficiencies 2%, one-time effects 1.4%.

In 2022, adjusted EBIT were 270 million, yielding adjusted EBIT margin of 6% or 200 basis points above 2021. Even with some negative impacts from provisions and SG&A minus 2% and surpassing our guidance. In 2022, adjusted EBITDA were 459 million, yielding adjusted EBITDA margin of 10.1% or 147 basis points above 2021, and also surpassing our guidance. SG&A and investments. SG&A rose 18%, driven by higher sales campaign and market activities compared to 2021 is still impacted by COVID as well commercial concessions and inflation. Investments. In 2022, Embraer invested a total of $176 million in product development and research, mainly in product development, for example, E2 family, P2F, Executive Aviation, and turboprop products. We invested 66 million CapEx, mainly for Service & Support expansion.

Free cash flow without EVE in Q4 2022 was positive in $584 million, due to a strong concentration of delivery during this quarter. Free cash flow without EVE in 2022 was positive in 540 million due to the outstanding results and sales performance from Executive Aviation and very strict control over working capital. Adjusted net results in Q4 2022 was a profit of 43 million 2.2% of adjusted net profit margin. Adjusted net results in 2022 was a profit of 39 million or 0.8% of adjusted net profit margin, trading positively from enterprise efficiency and less interest expenses. Liquidity in the top left of the chart, we finished the quarter with a net debt-to-EBIT without EVE of 950 million or $457 million less than 2021 in-line with our liability management strategy.

We reduced gross debt around $824 million, compared to 2021, with a significant reduction in net financial expenses on cash flow, 35 million savings in 2022. It’s important to highlight that our net debt EBITDA ratio decreased 3.9x in 2021 to 2.1x in 2022. This is 1.8x decline in just one-year. The company ended 2022, we faced stronger liquidity of 3.1 billion, including revolving credit facility, due to the outstanding free cash flow and the working capital management. On the debt side, we reprofiled 300 million of debt from 2024 to 2027 and the maturities of our debt give us a comfortable situation on amortization until 2024. We continue to work on increasing duration and improving the financial metrics, at the same time monitoring for a market window to reprofile our 2025 and future maturities.

Rating. It’s important to highlight that Moody’s affirmed in February 2023, Embraer’s rating at Ba2 and raised the outlook for all ratings from negative to stable. Standard & Poor’s upgrade in February 2023 from BB to BBB+ on solid cash flow. We are one notch below the investment grade level and hope to get back the IG level soon. Moving to 2023 guidance. I will now give you through the €“ our outlook for 2023 start with deliveries. For Commercial Aviation, we forecast 65 to 70 aircrafts, is still limited by supply chain constraints, an increase of at least 14% then delivered in 2022. For Executive Aviation, we forecast 120 to 130 jets, an increase of at least 18% more jets than delivery in 2022. For revenues, between 5.2 billion to 5.7 billion, at least 700 million increase or double-digit growth of around 15% compared what was achieved in 2022.

For EBIT. Adjusted EBIT margin of 6.4% to 7.4%. EBITDA margin from . In regards to free cash flow, with the revenue growth, we do have some challenges on working capital. Therefore, free cash flow guidance is 150 million or better. As the year progress, we will keep you up to date accordingly, the same we did in the last years. With that, I conclude my presentation and hand it back to Francisco for his final remarks. Thank you very much.

Francisco Gomes Neto: Thank you, Antonio. In my closing remarks, I’d like to comment on this and following years. First of all, the 2022 financial results show that we are making consistent progress in our journey of shifting the company towards a sustainable growth. As we have said, since 2020, the 2021 and 2022 years would be dedicated to the business recovery after two simultaneous crisis, the pandemic and the end of the Boeing deal. And the focus will be on growth from 2023. We can now state we had fulfilled what was promised. The business turnaround was completed in 2022, and we are ready to start a new growth phase, capturing the company’s full potential in the coming years. We still face supply chain challenges this year, but we are optimistic about the company’s future in terms of revenue growth and profitability.

Regarding revenue growth, several ongoing sales campaigns are progressing very well in Commercial, Business Aviation, and Defense area. The aircraft slots on the production line for deliveries in 2023 and 2024 are practically fueled for Commercial Aviation and Executive jets. The service area will continue to grow generating better margins, and we are confident in the improvement of defense results. The organizational changes announced at the beginning of the year with the creation of new Vice President for Global Procurement and Strategy and Innovation also play a relevant role in accelerating growth. We will give even more focus to the procurement area directly impacting efficiency and value generation. In the case of innovation, we will strengthen the integration of these projects in our longer-term strategy, opening new growth opportunities.

For this reason, adding our recognized execution capacity to ongoing sales campaigns and innovation projects, we are very confident in Embraer’s sustainable growth. And finally, my thanks to the Embraer team, which overcame all of last year’s challenges with outstanding commitment and dedication, always focusing on quality and safety. And thanks for the support of our customers and partners and our shareholders for their trust in our company.

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Q&A Session

Operator: Thank you. Our first question comes from Ronald Epstein from Bank of America. Please, Mr. Ronald, you microphone is open.

Ronald Epstein: Yes. Can you hear me, okay?

Francisco Gomes Neto: Yes, we can, Ron. Go ahead.

Ronald Epstein: Great. Great. Thank you. So, maybe just a couple of quick questions. How should we think about Embraer in the Chinese market? Typically, right, aircraft don’t get certified in a market unless deliveries are imminent. So, how should we think about that?

Francisco Gomes Neto: Since we have Arjan here with us, Arjan, can you jump in and answer this cross question?

Arjan Meijer: Absolutely, Francisco. Thank you, Ron, for the question. I think the great news in 2022 was that the 190-E2 was certified. We’ve been in the process to add the 195-E2 that. We strongly believe that the 190 and the 195 combination in China is a very strong addition to the local portfolio of the ARJ21, which falls slightly below our segment and the 919, which is the narrow-body, the Chinese industry with will bring to the market. It’s a gap where there are no Chinese products. The 190 had an incredible performance and is very useful for the higher level approach . And the 195-E2 obviously, is a great complement to the narrowbody China. We believe a great vehicle to help the Chinese connect the many airports that are being created in China that need a very efficient aircraft. So, we’re very busy about the Chinese market, and we’re working with airlines and our team. We have a team in Beijing at the moment to see if we can campaign over the line.

Ronald Epstein: Got it. And if I could follow on to that question. Given all the tension now between the U.S. and China and kind of what that means for Boeing. Does that been an opportunity for you guys? I mean, I don’t know how you can answer that, but if you could give it a shot.

Arjan Meijer: Well, obviously, with our segment, we are in the lower segment than narrowbodies than Boeing. But we do believe that with the Brazilian product, we had a very interesting alternative to the Chinese airlines. So, I think the moment is key. China wants to really connect the country and the domestic market. And I think getting an aircraft that is €“ that can complement either a MAX or neo and obviously, on the short-term will be more neos. The 195-E2 is able to deliver economics that are very close on a per seat basis to A320. So, we believe that independent of what’s happened to Boeing, it is a great addition to that market.

Ronald Epstein: Great. And then maybe just one last one on commercial. How should we think about new product development in commercial, right? I mean the turboprop was halted, if that’s right. So, where to now? I mean, Embraer has always been very innovative when it comes to new products, and how should we think about that?

Arjan Meijer: Yes, that’s a great question, Ron. The turboprop is on a slowdown at the moment. We have not disbanded the project, if you will, but we need to have more in-depth conversation with the system supply. So, that’s definitely a product where we believe there could be a market. On the slightly longer-term, the Energia platform is really something that we’re spending a lot of time on. We had our first Advisory Board at the end of 2022 to really understand what the feasibility is of smaller aircraft with a much more sustainable footprint than the bigger aircraft. So, a lot of focus on the long-term sustainability agenda and the road map I have for Commercial Aviation. We believe the E2 has a great footprint in terms of CO2.