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

So please let me say a short announcement for Portuguese speakers. [Foreign Language] My name is Guilherme Paiva, and I'm the Head of Investor Relations for Embraer. I want to welcome you to our First Quarter of 2024 Earnings Conference Call. The numbers in this presentation contain non-GAAP financial information to facilitate investors to reconcile Eve's financial information in GAAP standards to Embraer's IFRS. We remind you that Eve's results will be discussed at our Eve's conference call today at 9:30 AM New York time. It is important to mention that all numbers are presented in U.S. dollars as it is our functional currency. This conference call may include statements about future events based on Embraer's expectations and financial market trends. Such statements are subject to uncertainties that may cause actual results to differ from those expressed or implied in this conference call. Except in accordance with the applicable rules, the company assumes no obligation to publicly update any forward-looking statements. For detailed financial information, the company encourages revealing publications filed by the company with the Brazilian Comissao de Valores Mobiliarios or CVM. [Operator Instructions] As a reminder, this conference call is being recorded. Participants on today's conference call are Francisco Gomes Neto, President and CEO of Embraer; Antonio Carlos Garcia, Chief Financial Officer; Luiz Herrisson, Corporate Communications Director and myself. This conference call will have 3 parts. In the first part, top management will present the company's Q1 results. In the second part, we will host a Q&A session only for investors and last but definitely not least, we will host a Q&A session only for the press. It is my pleasure to now turn the conference call to our President and CEO, Francisco Gomes. Please go ahead, Francisco.

Good morning and good afternoon to all. Thank you, and welcome to Embraer's first quarter 2024 results conference call. Our commercial activity in 2024 continues to be strong in all business units as we see solid demand in the company's main markets. Historically, Q1 is seasonally our weakest quarter. However, in 2024, our revenues were up 25% compared to a year ago, and our deliveries increased 67% helped by our Production Leveling initiatives. Speaking of Production Leveling, we expect further improvement as the year progresses and more importantly, in 2025. These operational changes should help the company to increase efficiency, productivity and post better financial results next year and years ahead. Our backlog reached $21.1 billion, which is the highest level over the past 7 years. In Commercial Aviation, American Airlines placed an order in March of 90 E175s with 43 additional purchase rights. The news demonstrated the still strong potential of this aircraft model in the U.S. market. Speaking of potential, we currently have concrete sales campaigns for more than 200 aircraft across the world for both our E1 and E2 jet families and also more concrete sales opportunities for our Defense aircraft. We also kept the good momentum in Executive Aviation with strong sales across all our aircraft. We recorded the highest Q1 in terms of sales, deliveries and revenues for the division over the past 80 years. Services & Support continued to be a pillar of profitability in one of our main growth drivers. Its revenues increased 12% in Q1 '24 compared to a year ago. The strong financial results of the company allowed us to reduce our gross debt without if by additional $276 million during the quarter, a total reduction of $754 million over the past year. Consequently, our gross debt-to-EBITDA ratio is now below 5 turns. It is important to mention that when we consider all the risks and opportunities for the company, we feel comfortable and reiterate our 2024 operational and financial guidance. I will now present the operational results by business units in the next few slides. In Commercial Aviation, the backlog rose $2.3 billion or plus 26% quarter-over-quarter and reached $11.1 billion with a book-to-bill ratio above 1 for the whole year. The American Airlines order reinforces the capability of our E175 model and more importantly, the partnership between both companies. Embraer, a leasing company as Evora delivered the second E195-E2 to Royal Jordanian, the first E2 operator in the Middle East. In Executive Aviation, the backlog registered a sequential increase of $300 million and ended Q1 with $4.6 billion or plus 7% quarter-over-quarter and a strong 2:1 book-to-bill for the quarter. We recorded our first set of firm orders from NetJets, whose deliveries will begin in 2025. In total, NetJets has purchased rights for 250 aircraft over the next 14 years. In the Defense & Security, we hosted the first Embraer Defense Day in the U.S. with a C-390 Millennium and A-29 Super Tucano. The event included a diverse guest list of government authorities, military officials, prospects and partners. In early 2024, Embraer and Mahindra signed a MoU to jointly pursue the sale of the C-390 Millennium to the Indian Air Force. The first Hungarian C-390 successfully completed its maiden flight. The aircraft continues to receive international recognition on the back of its remarkable operational performance and capabilities. We should note, the division reported lower year-over-year revenues because of supply chain delays and business seasonality. In Services & Support, revenue grew 12% compared to the same period last year with solid double-digit profitability. The business unit backlog maintaining the historical $3.1 billion record reached in Q4 '23, with a 10% plus EBIT margin. Another important step for our Services division was the induction of the first Pratt & Whitney GTF 1100 Engine in OGMA, our MRO in Portugal. The ramp-up should last 4 years, and we expect revenues to reach close to $500 million in 2028. Last but not least, Eve, our eVTOL business is on track to achieve important milestones in 2024. We have already selected now more than 90% of its component suppliers, and we successfully concluded a Urban Air Traffic Management Trial. The company is on track to accomplish the next development steps, first prototype assembly conclusion, initial tests and the definition of -- in certification basis. We also began the definition of our eVTOL factory configuration. All in, we estimate Eve should have a total cash consumption between $130 million and $170 million in 2024. I will now hand it over to Antonio, our CFO, to give you further details about the financial results, and then I will be back with closing remarks.

Thank you, Francisco. Good morning and good afternoon to everyone. I would like to highlight our operational performance in Q1 despite the historical seasonality. Total delivers revenue margins were higher than the same period in 2023, and the company's cash consumption was better than a year ago. Our focus in Q1 was on business and financial efficiency. We want to lay down important stepping stones to put us in a comfortable position to achieve our full year guidance even with the ongoing supply chain constraints, we continue to deal with. Let's now move to slide 9 in the presentation. Deliveries; Executive Aviation delivered 18 jets in Q1 for an increase of 125% versus a year ago and the highest Q1 level of the last 8 years. The Light Jets segment was 83% higher year-over-year with 11 Phenoms delivered, while the Medium Jets were more than triple during the period with 7 Praetors delivered. Meanwhile, Commercial Aviation deliveries were flat at 7 aircraft in Q1 compared to the same quarter of 2023 with 4 E1s and 3 E2 aircraft. In Defense, we should note there were no [ C-390 ] deliveries in the first quarter of '24 and '23. We continue to work steadfastly to accomplish our production plan and reach the milestones in our Defense & Security programs, which includes forcing C-390 Millennium deliveries scheduled for the year. It is important to mention the company has developed and is currently implementing a production level in plan to mitigate the business seasonality. The plan should help the company to deliver less volatile financial results throughout the year in the near- to medium-term future. Slide 10, please. The company registered a strong total backlog of $21.1 billion at the end of Q1 for an increase of 13% quarter-over-quarter and the highest number recorded over the past 7 years. Looking forward, our current backlog is accretive to our financial projections. The backlog for commercial aviation reached more than 380 aircrafts in Q1, and it is valued at $11.1 billion or $2.3 billion higher than the last quarter. Meanwhile, Executive Aviation ended with a solid $4.6 billion backlog or 7% higher quarter-over-quarter, helped by the inclusion of the first Praetor 500 Firm orders from NetJet. We should note NetJet's past order 246 options not included in the current backlog. The backlog for Services & Support finished stable at $3.1 billion in Q1. While for Defense & Security, it decreased marginally by 4% quarter-over-quarter to $2.4 billion. Again, we should there are 11 C-390 aircraft in 3 tender offers; one, whose contracts haven't been signed yet and this included in our backlog. Moving on to revenues; our top line reached almost $900 million Q1 or $180 million higher year-over-year for a 25% growth rate. If you look at the right chart, Service & Support represented around 41% revenue in Q1, followed by Executive 27%, Commercial Aviation 22%, and Defense at around 9%. Next slide; we generated $47 million in adjusted EBITDA in Q1 with a 5.2% margin, driven by higher aircrafts delivered compared to the same period of last year and better consolidated gross margin. Meanwhile, adjusted EBITDA was $7 million for an adjusted EBIT margin of 0.8%. Reported EBIT for the quarter was negative $4 million or a negative 0.4% margin. Both figures were better than the first quarter '23, supported by higher volumes, better mix, especially in Executive and Services & Support. Looking on the right chart, we can see Executive Aviation and Services & Support generated positive EBIT during the quarter, while Commercial and Defense presented negative results because our limited volume supply chain delays and more aircrafts in the early stage of assembly. Slide 12, please. In Q1, if we exclude Eve, we had an adjusted free cash flow consumption of $346 million or $53 million better in Q1 '23, driven by customer advanced payments. The Q1 cash consumption is basically due to the increase in inventories to support higher deliveries in the upcoming quarters. This cash should be reverted as more deliveries take place throughout the year. And we affirm our $220 million or higher guidance for the cash generation 2024. Moving to investment and again, without Eve, $47 million were allocated to research and development, $28 million to CapEx and a net of $15 million to the Pool Program in Q1 for a $90 million total compared to $82 million a year ago. We highlight our capital allocation continues to be focused on segments with higher returns, with projects such as expansion of our production capacity and Executive Aviation and Services & Support. Our adjusted net income was negative $13 million for the quarter on a negative 1.4% adjusted margin. Historically, the first quarter of the year is the weakest because of the business seasonality. The positive reported net income is driven by the mark-to-market valuation of the Eve warrants around $30 million. Next slide, going to our liability management plan -- in first quarter '24, we reduced our gross debt without Eve by $276 million, all in during the quarter and by a more sizable $754 million versus a year ago to a total of $2.6 billion. In addition, our net debt declined by $384 million year-over-year to a total of $1 billion in first quarter '24. However, on a sequential basis, our net-debt-to-EBITDA leverage ratio increased 0.4x to 1.8x as shown in the top right corner. This variance is expanded by the seasonality of the business. Our almost $2.4 billion liquidity position allowed us to cover our debt obligation beyond 2030 and leave us in a very contractable position. With that, I conclude my presentation, and I hand it back to Francisco for his final remarks. Thank you very much.

Thank you, Antonio. The Q1 '24 was another step in the right direction, supported by both external factors like some marginal improvements in our supply chain and internal ones like our Production Leveling initiatives. Speaking of Production Leveling, we recently hosted a conference with our main suppliers to strengthen our partnership and operational plans for '24 and years ahead. We remain optimistic that supply chain disruption should continue to diminish and improve our ability to deliver more aircraft in the next few years. To finish, I would like to thank you all again for your interest and confidence in our company and a very special shootout to our friends in Dallas. We are very grateful for their partnership interest. We continue to focus on operational and business efficiency in 2024, having as foundation of our culture, safety first and quality always. Let's now move into the Q&A session of the call.

[Operator Instructions] [Foreign Language] [Operator Instructions] The first question comes from Cai Von Rumohr with TD Cowen.

It's Gabriel Rezende from Itau actually. So one question from our side here. You have just comment regarding the supply chain issues in the Defense business, and they are expecting these issues to improve along the year. But I was just wondering whether the supply issues that impacted the Defense business, the specific components that impacted your performance in the division, have some overlap with the Commercial division as well. So if you could provide a little bit more detail on that, it would be great.

Hi Gabriel. Francisco speaking here. Yes, I mean, as I said, we see improvements in the supply chain from -- we saw from '22 to '23, from '23 to '24, but still with challenges in specific components that some are meeting our production in the year and also because of the delays, they are delivering the parts, but not on time to help us with the production. And then we have to make adjustments in our production schedule that affects our productivity and, in some case, putting risk deliveries as well. But we made our plan for this year based on the plans that we discussed a lot with the suppliers. So again, we are confident that we'll deliver the aircraft we announced in the guidance in this year regarding [ to other ] aircrafts.

Francisco, just to complete, Gabriel, for the Defense, especially, there is, I would say, not an overlap in regards to the specific parts for the C-390 -- there are different parts or in some cases, suppliers. And we just have, I would say, a concentration in Q1 with less receiving parts for Defense and also the mix of contracts will cause less revenue and impact our margins, especially in Q1, but there is nothing that concerns us for this fiscal year.

The next question comes from Myles Walton with Wolfe.

Francisco, could you elaborate a little bit on the sales campaigns for the 200 aircraft you mentioned, both E1s and E2s. And I guess a couple of questions, if you could give us some color on; one is the geographic dispersion of those campaigns. And the other is, in the case of the E2s, are these customers looking to fulfill capacity needs that aren't being satisfied by Boeing and Airbus? Do you see that sort of opening emerging or are these more expansion of customers that you would have otherwise anticipated even if Boeing and Airbus had capacity?

Thanks, Myles, for the questions. We had campaigns in all the regions. I will be clear with you. I mean all the regions, South America, North America, Europe and Asia-Pacific. With the good opportunities, I can't disclose details of ongoing campaigns. But as I said, it's more than 200 potential sales. And this is a combination of different factors. amid E2 as we have said, it's a perfect solution to complement the operations of bigger narrowbodies. So we see now today is the first flight of our customers goods in Singapore that they are going to use the E2s to open new routes and to increase the frequency of flights. And we see that in many different regions as well. So again, we are very -- it's not easy, but we are very optimistic with the potential sales of E2s in 2024. What else Myles, you asked, please will you repeat?

Francisco, just more, are you seeing these campaigns build demand because of the lack of supply offered by Boeing and Airbus or is that not a major factor in how these campaigns are playing out?

Okay. Again, as I said, it's a combination of factors. And for sure, I mean, the fact that we have -- slots, production slots available right from 2026 onwards. This is -- can help the airlines to add capacity sooner to the [ air fleet ].

Yes. That's where I was going. It's surprising you still have that availability given the absence of supply over barrels. Just one quick follow-up, if I could. The arbitration timing with Boeing, is that still on track for this quarter?

Thank you, Myles. Yes, we expect this to end in the first half of this year. So we should be close, but it's not in our hands. It's a decision of the tribunal in New York, but we expect this to end no later than the mid of this year.

The next question comes from Cai Von Rumohr with TD Cowen. Please go ahead. Cai, your microphone seems to be unmute. If you could please unmute on your end? The next question comes from Ron Epstein with Bank of America.

A couple of quick questions. Can you talk a little bit more just about supply chain in general and where you are seeing constraints still both on Commercial and in Defense?

Well, Rob, as we said before, we see improvements in average in our supply chain, but still with some challenges in the -- with specific products in terms of volume and also -- on-time delivery. We have a lot of suppliers improving, but still suppliers with difficult to deliver the parts we need on time. And this, again, this bring to us more difficult in our production. As you know, we are working this Production Leveling initiatives that we want to better distribute the production and deliveries throughout the year. So we will still have difficult in 2024, and we expect -- but again, in line with our plans to deliver the guidance, and we expect even more improvements in 2025 in years ahead from our supply chain for both sides, Commercial and Defense.

Got it. Got it. And then maybe one more follow-on, if I can. Just can you guys speak broadly to how you're thinking about product development and new products?

Sure. Well, I mean, Ron, we fully understand all the excitement caused by recent media speculations. I mean it highlights the level -- the high level of market confidence in our company, right, because of the achievements, driven by engineering excellence, our enterprise efficiency and our customer-centric philosophy. And we are -- of course, we are always looking at future options in our business. But however, as I said before we have -- we are now in our harvest season. So we are focusing on selling and on delivering the current -- the existing portfolio of products that is very modern and competitive. So we don't have a concrete plans to develop or launch a narrowbody or other aircraft in the next few years.

The next question comes from Victor Mizusaki with Bradesco BBI.

I have 2 questions here. The first one, apparently, some guys from Mahindra were recently -- Embraer in Brazil. So I don't know if you can give us some update on the negotiations. And second, when we take a look on the press release, there's a comment about the provisions for bad debt in Services & Support. So maybe you can comment a little bit if it's kind of a specific situation or there's something more to come in the second quarter.

All right. Victor, I start with the question one, and then Antonio will help us with the question 2. Yes, we did have a very exciting visit last week to our facilities in Brazil of the Mahindra CEO and 2 other members of this team, where we had opportunity to better know each other and talk about the next steps on this MOU process in India to sell from 40 to up to 80 C-390 to the Indian Air Force. So we believe we have a good partnership with them, and we do our best to convince the customer that our products is the best one for the Indian Air Force. Antonio, you can help us with the second.

So very simple here, we just built up $3 million in Q1 for the bad debt provisions -- just Q1 was a little -- a bit -- higher concentration overdue payments, and it's not one specific customer. It's a bunch of customers. We just apply the accounting methodology. I do not see it being a trend for the future. And probably half of it is going to be a revert next quarter [indiscernible] not concern us right now.

The next question comes from Marcelo Motta with J.P. Morgan.

Hi, everyone. It's regarding the Defense, I mean, do you guys have any updates regarding the conversion of the orders from Netherlands, Austria, Czech Republic? I mean, you guys also mentioned on the deliveries and backlog reported from the first quarter, there are ongoing orders from EMEA, Asia-Pacific that are not incorporated to backlog yet? Could you please give us more color on maybe the size, potential size of these orders or maybe expectations for Defense backlog for the coming quarters or year-end?

Marcelo, thanks for the question. Yes, we have high expectations to sign important contracts in Defense during this year. There was -- you know already that we have been selected in the past 2 years. We expect to sign during this year. And in parallel, we are working in the -- in other new campaigns either for the A-29 Super Tucano and the [ C-390s ]. We also expect 2024 to be a good year in terms of sales, not only in Commercial, but in Defense as well and taking the opportunity in the Executive Aviation, we take a very good momentum in sales as well. So again, this year, we are very optimistic in terms of sales in all of our business.

The next question comes from Stephen Trent. Mr. Trent, your microphone seems to be muted.

Hello, I'm sorry, can you hear me?

Yes. Yes, we can Steve.

I'm sorry about that. I also had a sort of a follow-up on the Defense side. I know that Brazil's Air Force and Sweden have a solid relationship with the Gripen fighter and other cooperation. And I was wondering if you might just give us some high-level color about how Embraer might be working with Gripen and what opportunities you could see from the new technology?

Thank you, Stephen, for the questions. Well, we do have a partnership with Saab to help them to sell Gripen, not only in Brazil, but outside Brazil. And they do help us to sell the C-390s. So we have been working together. And Sweden is one of our potential markets that we have been working on. So -- but we don't have any other information than that. And regarding sales of Gripen, this is better you ask Saab directly.