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

Good morning, ladies and gentlemen, and welcome to the Embraer conference call partnership Embraer-Boeing. 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's 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 may not occur. The company's actual results could differ substantially from those anticipated in the forward-looking statements. Participants on today's conference call are Mr. Francisco Gomes Neto, President and CEO; Mr. Antonio Carlos Garcia, Executive Vice President, Finance and Investor Relations; and Mr. Eduardo Couto, Director of Investor Relations. I would like now turn the conference over to Mr. Francisco Gomes Neto. Please go ahead, sir.

Good morning to all analysts and investors connected to our call today, and thank you for joining on such a short notice. My name is Francisco Gomes Neto, and I am the President and CEO of Embraer. We are hosting this call following a release published by Embraer regarding the most recent development of the partnership between Embraer and Boeing, which we have been working on since 2017. Just giving some background on the transaction. After a long period of negotiations in 2018, the contracts were finally signed between Embraer and Boeing on January 24, 2019, in detail the partnership between both companies. After that, the transaction was recommended to move forward by our Board of Directors supported by government authorities and approved by the substantial majority of our shareholders in 2019. As you see, this transaction has involved a long, costly and complex process and Embraer has been working nonstop day and night to conclude it. On April 8, we notified Boeing regarding Embraer's intention to extend for 6 months the Master Transaction Agreement for the closing of the transaction, which was only subject to the approval by the European Commission. On April 25, to our disappointment, we received the notes from Boeing communicating its decision to terminate the agreement. Embraer strongly believes that Boeing has wrongfully terminated the agreement to avoid its commitments to close the transaction and pay Embraer the $4.2 billion purchase price. Embraer believes it is in full compliance with its obligations under the agreement. And as we have said, we will pursue all remedies against Boeing for the damages incurred by Embraer as a result of Boeing's wrongful termination and violation of the contract. Now before I turn to Antonio, our CFO, who will give an update of our financials and initiatives we are taking to preserve liquidity, I just want to talk about Embraer's Commercial Aviation business. Our Commercial Aviation business remains strong. We are leaders in the regional jet market, and we believe regional jets will lead the rebound in the aviation industry in the upcoming quarters as airlines will resume their operations through regional and domestic routes, which are our key markets. Our U.S. exposure in the short-term deliveries is another advantage, as the United States is a region where the airlines are more advanced in terms of restructuring, rescue packages and restarting operations. Our deliveries are also primarily concentrated in the replacement of all the aircraft rather than growth. And with the return of the airlines, we expect those deliveries to resume immediately. I also want to call attention to our state-of-the-art and complete aircraft portfolio, with the E2 family and the massive leadership of the E175 in the U.S. This flexibility to produce at the same line, E1 and E2 jets is another big advantage for us. Of course, our industry will have to address the challenges of COVID-19 and current economic conditions. But finally, I would like to reinforce that Embraer has a great future ahead and we will continue to be a proudly Brazilian company competing in the global aerospace industry, as we have been doing with great success in the last 50 years. As we proudly say in Embraer, We Live for the Challenge. Now please, Antonio, go ahead.

Thank you, Francisco. I will detail now our liquidity and initiatives we are doing to preserve cash. We are working 24x7 at Embraer to preserve cash and address liquidity market environment to steer the company based on cash preservation and stringent cost control. I'm the leader of the cash management team, and we are having daily meetings to assess the impacts of COVID-19 in each one of our businesses. Just to give details of our work. We are taking a deep look at the 4 key areas of the company, people's health, cash inflow, cash outflow and financial liquidity. In terms of cash inflows, we will be managing sales, revenues, receivables and others to guarantee we will maximize the potential cash inflows and create specific action plans throughout the company to maximize aircraft deliveries, receivables collection and potential new outcomes. As far as cash outflows, we have several initiatives that includes: negotiation with suppliers on payment terms; inventory management to adjust short-term production plans to the latest delivery schedule; direct label engineering and SG&A adjustment, include an agreement with all of our units that covers furloughs, reduced hours and salary cuts. We currently have around 10% of our workforce in furloughs and have cut our leadership and Board size by 25%. Include all of these initiatives, we have, at this point, identified approximately $1 billion in potential cash savings for 2020, which will help us to offset the impact of lower deliveries and to preserve cash. Our third pillar is the financial liquidity of Embraer, and we ended 2019 with a cash position of $2.8 billion and raised another loan of 600 million in March. Despite solid liquidity, we'll have a frequent discussion to assess our cash balance, revisit the pace and size of our investments, reduce the working capital needs and maintaining open dialogue to ensure sales finance availability and look into additional financial lines. Our liquidity position is solid, with very little debt obligations due until 2022. Embraer has additional credit facilities under discussion up to $1 billion with the Brazilian and international banks. The actions we are taking now will help Embraer to preserve cash this year, and assure that Embraer recruits remain strong. Now we open for Q&A. Operator, please go ahead.

[Operator Instructions] Our first question comes from Josh Milberg, Morgan Stanley.

My first question relates to your indication that you'll pursue remedies against Boeing for the damages. I was just wondering if you could comment on whether there is already a legal proceeding or arbitration process underway. And what the nature -- and if so, what the nature of that process is?

Thanks, Josh, for the question.

That's my first question.

Okay. Thanks for the question, Josh. Yes, there is an arbitrage process in place, but I cannot give you more details at this point of time.

Okay. Fair enough. And do you have an updated estimate on what your total deal separation costs add up to at this point, considering both OpEx and CapEx?

No, not yet. We don't have this number yet. We just can say that we are talking about substantial costs.

Okay. Understood. And then if I just -- if I might just squeeze in one more. Could you talk about what the deal conditions are that Boeing alleges you failed to meet? Is that something you can address?

No. Josh, what I can tell you is that Embraer believes it is in full compliance with its obligations under the agreement, and Boeing has wrongfully terminated the MTA to avoid closing the transaction and pay up the $4.2 billion purchase price.

Okay. I imagine you're not at a point where you can really give much detail on the specific points that Boeing is making and the specific conditions that it's indicating you have not satisfied.

Yes. We are working on that, Josh. So we don't have more information yet to give you.

Our next question comes from Myles Walton, UBS.

Francisco, I wonder if you could comment the original rationale for the deal to tie up with Boeing was to basically add more scale to your existing Commercial Aviation business to compete with others who are also increasing their own scale, whether the C Series with Airbus or MRJ and Bombardier eventual transaction. I'm just curious, as you look at the landscape today in your Commercial Aviation business, would you now consider looking for other partners for that same means and end?

Well, I mean, yes, this JV would be a win-win situation for both companies. But I mean, we are leaders in the regional jet market, and we believe regional jets will lead the rebound in the aviation industry as airlines will resume their operations through regional and domestic routes, which are our key markets. So our U.S. exposure is another advantage. The United States is a region where the airlines are more advanced in the rescue packages and restarting operations. So we understand that the competitive scenario has become more difficult, but we have a great product portfolio, and we are ready for move on with our Commercial Aviation.

Just to allow me to complete a little bit. It's important to mention we -- we have not yet faced any cancellation in regards to the Commercial Aviation, just deferrals, which shows a little bit that we still have our strength in the market.

If I may add as well, Myles, just to say that we don't comment specific speculations about potential new partnerships. We don't -- we cannot comment on that, okay?

Maybe another way to ask it a little bit is you've done a significant amount of work to separate the Commercial Aviation business from Embraer as it was preparing for this joint venture. Do you anticipate reintegrating that? Or for the meantime leaving it outside as almost a separate organization?

It's too soon. We are going to analyze all the situation, and we will inform the market as soon as we have made some decision on that.

Okay. Okay. And then maybe just a clarification, Antonio Carlos, you mentioned $1 billion in cash savings for 2020 as a result of your inflow-outflow exercise. Can you just maybe give us color of what you anticipate for cash burn for 2020 is? And then maybe the size of the damages you think are done because of this deal cancellation?

Myles, the guidance is still suspended, right? We are working very hard to have a new guidance as soon as possible, As Antonio mentioned, we have already identified this $1 billion in potential savings for outflows. But in terms of the cash inflow impact, we still need a little bit more time. And as soon as we have a new guidance, we're going to publish to the market. Antonio?

Just to comment a little bit, we -- Embraer is not only the Commercial Aviation. For sure, we have impacts in the Commercial Aviation. As I mentioned, the latest call we did for the 2019 figures. But we have a minor impact on the executive aviation in -- also in Defense and the respective services. I would say, it's nice to be present in different types of segments.

Our next question comes from Robert Spingarn, Crédit Suisse.

I think you said that you couldn't talk about potential other partnerships. But do you see Embraer as offering a value proposition that would be attractive in a partnership format with others?

Absolutely. But we want to do our homework first, and we'll need some time to do that and then we think about the next strategic step for our Commercial Aviation.

Okay. And then just going back to your comment on the E-Jet leading the recovery. While there clearly was a trend toward downgauging after 9/11 and another might be expected now, you did come into this crisis with a fair number of E-Jets parked. Prior, at least end of February, there were already 300 parked. So we have to absorb a fair amount of stored aircraft first, wouldn't you say, before you can get back to increased production because of leading the recovery?

Well, I mean, this year, you -- would be a tough year. And next year probably would be worse than we expected before. But we do believe this recover of the market, starting with the regional jets, will benefit Embraer for sure. We'll be analyzing our production plans within the next 2 weeks.

Okay. And then can you give us some understanding -- not asking for guidance here, but the environment in terms of corporate aircraft and bizjets, how you expect that market to be impacted by this situation?

Robert, basically, we're expecting business jet to have very little impact. I think Antonio is on mute. Antonio?

Yes. I was on mute. Continue then.

I was just saying that we're expecting business jet to have very little impact. We continue to deliver planes. We continue to produce the planes. We didn't shut down our facility in Florida. So a couple of days ago, we deliver another plane. We continue to sell. So we remain, I would say, optimistic on the business jet market. We are not seeing meaningful impact from COVID on business jets, okay? We -- we're upbeat on the jets -- and even Defense, we -- the programs we have with the Brazilian government, they continue to go ahead. So as active in Defense, we are feeling good, and we are addressing the potential impact on Commercial.

On the bizjet side, so you haven't had any customer behavior changes, deferrals, cancellations, anything like that?

We face until now just one single cancellation during this year, and we have really a small amount of deferrals for next year. Really, I would say, very small amount.

Okay. There are some who believe this will actually increase demand for the bizjet because of the health risk of flying with other people and the greater privacy on the bizjet. Do you agree with that? Because I've always found that the bizjet market tracks corporate profitability, that is the strongest driver. And of course, corporate profitability is going to be under pressure for some time. So net-net, are you saying there's no effect or it's positive or it's negative over the next 2 years?

I would say for the business jet... Go ahead, Francisco.

Well, yes, we have some opinion, and we had a great year in the business jet in 2019. We were prepared to have another great year in 2020. But because of the COVID, we have some impact. But as Antonio maybe said, I mean minor impacts in terms of -- in the business jet with some deferrals for the second semester and some for next year. But we do believe that the business jet will recover in 2021, and it will be a great help for Embraer

Our next question comes from Ron Epstein, Bank of America.

So what's the path forward here, right? I mean I guess a couple of questions. One, are you really all that surprised given the situation Boeing got themselves into and the need for government support and so on and so forth? I mean this couldn't have been that big a surprise that they tried to do what they did or did what they did. And then two, what is the path forward? I mean, Myles suggested maybe you have another suitor. But I mean, how do you view the company as just an independent stand-alone airplane company?

Well, thanks for the question. We were surprised and disappointed with the Boeing decision. And as I said before, I mean I believe Boeing has wrongfully terminated this MTA. And the reason is to avoid closing the transaction and pay out this $4.2 billion. And well, second, we are -- now we are really considering what will be the best strategy for our Commercial Aviation. We believe we do have great products. And as I said before, I think the rebound of the market will be another opportunity for regional jets. So we are going now to deep dive in the plan to review our currency structure and currency strategy for the Commercial Aviation.

How much redundancy is there now in personnel? After all the separation activities that happened -- have happened, is there 10%, 20% overlap in personnel? How do we think about that? And as a follow-on to that, to become one company again, is it simply just moving people from one campus to another campus? I mean just very high level, how do we think about the reintegration of the two business units? How disruptive is that?

Well, this is another work we have to do. Our focus is to go through this -- described is to preserve our cash after this decision from Boeing. We are going to -- we have in place a lot of programs now to overcome this difficulty. And we'll do more studies and analysis about personnel and how can we proceed with the current situation we have.

Okay. And then maybe just one last final question, and I'll hand it on to somebody else. When you think about the action with Boeing, I mean are you going to pursue it in Brazilian jurisdiction, in an international jurisdiction? Sorry, just to repeat that because my phone might have been unclear. With the action against Boeing, are you going to pursue that in an international jurisdiction, international court or in the Brazilian court? And I mean, how would you -- how long do you expect it to take? I mean these international disagreements can be years and years to close.

I understand your question, but at this point of time, the only information we can give you is that there is an arbitrage process in place, and we cannot give you more details. Sorry.

Our next question comes from Cai von Rumohr, Cowen.

Yes. So what happened -- I mean, both of these proposed JVs, Commercial and KC-390, looked like they had significant strategic advantages for both parties. Where are you with the KC-390? Is that JV dead? Is it on life support? Is it alive? What's the status?

Well, the JV for the KC-390 was part of the transaction. As Boeing decided to terminate the deal, we understand this includes the KC-390 JV.

Okay. And then obviously, you're upset with the outcome and your limits to arbitrage. But as I look at the landscape, there are no other obvious partners who would have brought the advantages that Boeing would have. Is there any chance that this transaction could be resurrected under somewhat different terms?

I don't believe that. Boeing has decided to terminate the MTA.

Okay. And then in terms of cash, you exited the year with $2.3 billion. You basically had a financing of $600 million in March, another $1 billion of potential. So that brings us to $3.9 billion. How much cash do you need on hand to run the business?

We believe to run this company without -- to be able to absorb the turbulence, we always need it to be around above $2 billion. That's more or less our internal number here. That's -- and again, we do have liquidity available, and we should also see more [ levers just ] in regards to additional help if it's necessary.

Sorry, Cai, I was just going to say that, if I may add, we -- our working capital for the whole business, it range from $500 million to $700 million throughout the year. So if this cash around $3 billion, we are super strong to go through the working capital needs throughout the year, so we don't see any liquidity issue on Embraer right now.

Thank you. This concludes today's question-and-answer session. That does conclude Embraer's audio conference call for today. Thank you for your participation. Have a good day, and thank you for using Chorus Call.