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

Good morning, ladies and gentlemen, and thanks for standing by. As a reminder, this conference is being recorded. It's broadcast is intended exclusively for the participants of this event and may not be reproduced or retransmitted without the expressed authorization of Embraer. This conference call will be conducted in English. 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, M&A and the venture capital for Embraer. Welcome to Embraer's Second Quarter 2026 Earnings Conference Call. The number in this presentation contain non-GAAP financial information to help investors reconcile If's financial information in GAAP standards to Embraers IFRS. We remind you Eve's results were already discussed at the company's conference call last week. Before we begin, a legal notice to everyone. This presentation may contain forward-looking statements which involve risks and uncertainties as detailed in the disclaimer available in the slides and in the documents filed with the Brazilian Securities Commission, CVM. [Operator Instructions]. Participants on today's conference call are Francisco Gomes Neto, President and CEO of Embraer. Felipe Santana de Lima, Chief Financial Officer; Tais Morais, Corporate Communications Director and myself. This conference call consists of 3 parts. First, we will present the results for the second quarter of 2026. Second, we will host a Q&A session exclusively for investors. And finally, we will hold a dedicated Q&A session for the press. It is my pleasure to now turn the conference call to our President and CEO, Francisco Gomes Neto. Please go ahead, Francisco.

Thank you, Gui. Good morning, and good afternoon, everyone. It is a pleasure to be with you today to discuss Embraer's second quarter 2016 results. We delivered the strongest second quarter revenue in our history. We achieved our highest second quarter deliveries in the past 16 years and reached a new all-time high backlog for the seventh consecutive quarter. We continue to see strong performance across all our business units, driven by our focus on sales execution, efficiency, operational discipline and production ramp up. Simply put, we continue executing the fundamentals exceptionally well. These results further strengthen our confidence in the outlook for our businesses and have led us to raise our 2026 guidance also supported by favorable effects. Let me now turn to the key highlights of the quarter. In Commercial Aviation, Azura placed an order for 15 E195-E2 aircraft while maintaining 15 purchasing rights. During the quarter, the E2 program surpassed the milestone of 500 firm orders. In Exactive Aviation, we achieved a record second quarter revenues and deliveries supported by strong market demand. We also received a triple certification for the rate of 500 in Prato 600E. In Defense & Security, the UAE ordered 10 C390 aircraft with options for an additional 10 units. This marks the platform's first selection in the Middle East in the largest international order for the C392date. In service and support, we continue to expand our recurring revenue base through new contracts, including support for Jazz Aviation, E175 fleet and a new maintenance agreement with the Brazilian Air Force covering its KC-390 fleet. During the quarter, we delivered 65 aircraft, 20 commercial jets and 45 executive jets. Total company deliveries increased by nearly 7% year-over-year, with commercial aviation growing 5% and executive aviation growing 18% and -- in Commercial Aviation, we delivered 30 aircraft in the first half of the year, representing 36% of the midpoint of our full year guidance, 1 percentage point above the 5-year average. In Executive Aviation, we delivered 74 aircraft in the first half, representing 45% of the midpoint of our full year guidance and an impressive 11% point above the 5-year average. Our company-wide backlog reached BRL 34.5 billion, an increase of 16% year-over-year and another all-time record for Embraer. Commercial Aviation backlog grew year-over-year, supported by a 1.8 book-to-bill ratio over the last 12 months. Defence and Security backlog increased 42% with a strong 2.6 book-to-bill ratio, as active Aviation backlog grew 5% year-over-year, while service and support increased 12%, with both segments maintaining book-to-bill ratios above 1 -- in addition, we hold approximately $21 billion in options, which could expand our backlog to more than BRL 55 billion over time if exercise. I would also like to provide a brief update on is continued progress. The flight test campaign is advancing according to plan. Following the successful completion of Rover flights, the team is now moving into transition flights an important next step on the path toward certification. With that, I will now hand the call over to Felipe, who will walk you through our financial results. Felipe, the floor is yours.

Thank you, Francis. Good morning, and good afternoon, everyone. Let me start with the results by business unit. All comparisons are year-over-year unless otherwise noted. Starting with Commercial Aviation, revenues increased 8 percentage to $625 million, driven by higher volumes. Adjusted EBIT totaled $80 million with a positive 2.9% of margin -- the year-over-year decline was primarily due to customer mix. As active Aviation, revenues increased at 32 percentage to $725 million, supported by higher volumes and product mix. Adjusted EBIT reached $170 million with a positive 23.4% of margin. These results include strong operating performance and the effects of U.S. import tariffs and the extraordinary tax credit, excluding both effects, adjusted EBIT margin would have been 16.1%. In Defense Security revenues increased 38 percentage, reaching $304 million. Adjusted EBIT was $36 million with a positive 11.9% of margin, supported by stronger KC-390 revenue recognition and operating leverage. In serving support revenues increased at 24% to $565 million, driven by higher volumes. Adjusted EBIT totaled $106 million with a positive 18.7% of margin. These results include U.S. import tariffs and an extraordinary tax credit. Excluding both items, adjusted EBIT margin would have been 17.6 percentage. At the consolidated level, net revenues increased 23 percentage to $2.2 billion in the second quarter. From a business mix perspective, Executive Aviation represented 32 percentage of revenues. Commercial Aviation service more than 25% each and defense 14%. In the first half, revenues reached $3.7 billion, representing 44 percentage of the midpoint of our full year guidance. Adjusted EBITDA was $356 million with a positive 15.9 percentage of margin, while adjusted EBIT totaled $297 million with a positive percentage of margin. During the quarter, the company recorded approximately $8 million of U.S. import tariffs and an extraordinary tax credit of $68 million. excluding both effects, adjusted EBIT margin would have been 10.6 percentage of margin. In the first half, adjusted EBIT margin reached 10.6 percentage or is higher than the 5-year average. Adjusted free cash flow, excluding IV was $401 million in the quarter. This reflects stronger operating results sales-related pre-down payments and extraordinary tax credit. Investment totaled BRL 121 million during the quarter, including $42 million in CapEx 24 million intangible additions, $18 million in the pool program and EUR 36 million in research. Research expenses, including engineering service to current projects as well as other developments technowledge for future progress. Adjusted net income was $29 million in the last quarter. Adjusted net income margin was positive 9.8 percentage, up 1.1 points, mainly due to operating performance and lower net financial expenses, which were partially offset by higher taxes. Earnings per ADS now stands at $2.5 on a last 12-month basis. Net debt to adjusted EBITDA, excluding improved to 0.2x in the quarter from 0.7x a year ago through our liability management initiatives. Average debt maturity increased to 9.3 years and its average cost declined to 5.1 percentage. During the quarter, we declared BRL 200 million in interest on equity. This corresponds to BRL 0.28 per share or approximately $0.022 per. Based on the share price at the quarter end, this represents a dividend yield of approximately 0.34 percentage. From an operational standpoint, we are maintaining our delivery guidance and changes at 80 to 85 aircraft in commercial aviation and 160 to 170 aircraft in executive aviation. On the financial side, revenue guidance remains unchanged at $8.2 billion to $8.5 billion. However, we are increasing our adjusted EBIT margin guidance to between $10 million to $10.6 million. At the midpoint, this represents an increase of approximately $110 million or 130 basis points, reflecting this staggering tax credit, lower U.S. tariffs and a better business outlook. We're also increasing our adjusted free cash flow guidance to $400 million or higher, reflecting strong operational performance, progress in our production level initiatives and the strong first half cash generation. With that, I will hand it back to Francisco for his closing remarks. Thank you.

Thank you, Felipe. The second quarter of 2026 reinforced our confidence in Embraer's strategic positioning and our ability to consistently execute. We have also started the third quarter with strong momentum, including the announcement of 28 additional 2 orders and welcomed Colombia as the newest KC390 customer. Colombia became the 13th country worldwide to select the KC390, further expanding the aircraft's global footprint. We were also pleased to introduce the new EV addition of our best-selling Finom300s. Strong demand across our businesses continues to support our growth trajectory. Our performance reflects the discipline focus, commitment and energy of our people across the organization. The dedication enables us to deliver stronger results today while continuing to invest in the technologies that will drive our future growth. Behind these achievements are the values that guide everything we do, safety first and quality always. With that, we are now ready to take your questions.

[Operator Instructions]We remind you again that this conference is being recorded. Its broadcast is intended exclusively for the participants of this event and may not be reproduced or retransmitted without the express authorization of Embraer. We also highlight that this conference call is being conducted in English with translation to Portuguese. [Operator Instructions]. The first part of the Q&A session will be exclusively for equity research analysts and investors. The second part of the Q&A will be only for the press. The first question comes from Kristine Liwag with Morgan Stanley.

I wanted to ask about margins. Margins were clear standout in the quarter. Can you talk about more and provide more detail about what drove operating leverage in Executive Aviation and defense. Was there anything that was onetime in the quarter? Basically, how should we think about this as being structural change in your cost structure versus quarter specific. And any update regarding your grow efficiency strategy would be really helpful so that we can better understand your margin trajectory from here?

Q2 was really strong for us as active valuation. We have done a lot of progress in our production leveling initiatives in the last 2 years, and we almost -- we're close to where we want to be. That has definitely helped the results. In the quarter, when you look at active, obviously, we have also the impact of a tax credit and the tariff payments and that helped the results on a net basis for the division for around $54 million at the EBIT level.

Great. And then you think about what would be structural change in your cost structure versus and thinking about the broader growth efficiency plan in the next few years? Maybe it's a little too early to look out a few years. but it seems like you're achieving some of your margin targets much earlier than expected. So I just wanted to see if there's more upside from here.

No, I was just going to highlight 1 of the things that you're very passionate about Francisco, which is lean operations and the fact that we do Kaizens and we do [ Embraer ] we do efficiency projects on a day-to-day basis. It's not there's not a silver bullet, Kritine. This is like an ongoing effort by thousands and thousands of people that do this on a regular basis, but I'll pass it to Francisco because it's 1 of his most passionate topics.

Okay. Thank you, but you did answer the question. But Kristine, it is true what Gui just said. So we have seen our executive gas production I mean, progressing very well with the leveling -- the production level initiatives. So this year, we still have some issues to be fixed with a few suppliers that are still delivering parts late. I mean forcing us to know to move the aircraft late in the line, but improving it's improving. So we expect that in 2027, we will see a much much better performance in terms of production leveling, which will help us to see a higher productivity and higher efficiency of our lines.

The next question comes from Marcelo Motta with JPMorgan.

I would like to hear more about this $4 million improvement in business outlook that you mentioned as one of the reasons to improve the adjusted EBIT margin guidance. So just wondering here if this is related to a specific segment, if this is like also a cash gain, if it's more on the accounting. So anything that you could comment about the upside and downside risk for this $4 million to $4 million to be lower or higher? That would be very interesting.

Felipe here. Thank you for your question. So this $4 million is really connected with what he mentioned and Francis, right, on enterprise efficiency where we focus in all business units. So this $4 million is spread out among all the business units. Of course, that we see that more on the Exec aviation mainly because of the production lively and all the efforts that we are doing. But here is recurring the way that we see this $4 million, improving from all the segments that we have.

The next question comes from Lucas Marquiori with BTG.

I just wanted to clarify this, let's say, 1 effects on the Q, of course, because of our attention, the tax credits, right? I mean, if you could just kind of give us some color on what's the nature of it. And if this was like a cash impact already in the Q. I'm assuming it is, but just to confirm the numbers, right? And if you guys can can give us at least some more color on what's the nature of it. And if it's -- if there's any other kind of a reversal coming in the second back of the year as well?

So this impact we have both, right? We have both on cash and also right? Most of it is refund of the tariffs that we impact the company last year in the first quarter and the second quarter of this year. So this what we had done, we still have some pending amount to receive on cash, but everything was already recognized on the EBIT margin of the company. And going forward, we don't going to have any more direct tariffs to the company, but we're also going to have indirect tariffs to the company impacting especially even support around $12 million on early basis.

The next question comes from Louis Raffetto with Wolfe Research.

I think you just actually answered the question I had, whether that $60 million was the tariff refund or not. It seems like it is. So just to be clear, the $12 million that you still have indirect, so basically expect $6 million in the back half primarily in services.

Yes. That's it too.

Okay. And are we done with going through the tariff cost within the -- from sort of the backlog or from inventory, excuse me.

Yes, we are.

Okay. And then maybe just -- I know you mentioned the 28 orders. Just can you expand on any additional pipeline opportunities as your skyline opportunities?

Yes. Francisco speaking. Thanks for the question. Yes, we are happy with this last announcement we did in Farnborough with is 28 orders. And yes, we are working in other campaigns, but they are still need to do some work to cross the finish line. But yes, we are positive with more sales of our products until the end of the year.

The next question comes from Alberto Valerio with UBS.

I have 2 on my side. The first one, really strong margins on executive jets. You mentioned the Kaizen model of Embraer and so forth. But can you consider that is any different mix for this quarter for looking forward? We used to have 12% margins on jet coming ex tariffs should we consider for the future of something between -- or do you think it's more toward to the 16? And my second one on backlog. I think you guys are very comfortable for the guidance of long-term for the commercial with 1.6, if I'm not mistaken. -- time is why we have the book to be off this year, with the more than 2x, 2.6%, the defense and 1.1 for the business. The business jet it's 1 that I'm talking about to see if you you guys are comfortable with the long term. It's the only 1 that the book to view it's a little bit below the long-term goals.

On Executive Aviation, I guess, we continue to see a gradual improvement in our operations. despite having a product and client mix, which has provided a little bit of headwinds. And that is just a testament to the efficiency gains that the company has been able to generate to offset the slight headwinds that I alluded to. When you look through the rest of the company, we continue to be really optimistic. We have seen defense margins continue to improve on a steadily basis. And you obviously saw the order that we were able to obtain from the UAE in Q2, and we do expect the success of the KC platform to continue in the next few years. We have continued to expand the backlog in services household, which provide us with a steady stream of value for the company and we have continued to work, and we should continue to see improvements in the second half and most importantly, in the next few years for the profitability that we have in our commercial aviation as well. Right now, with record backlog for the company, we are able to produce at the target levels that we have for 2030, which is going to be our capacity. So we remain very about the outlook for the company in the next few years.

The next question is from Lucas Barbosa with Santander.

Congratulations on the results. So my question is on Commercial Aviation. This quarter, the margin saw a slight drop due to client mix. I wanted to understand what are the expectations in terms of customer mix and margins for the second half 2026 or 2026 as a whole? In other words, could we see a year-over-year expansion in margins for second half or for 2026 as a whole? Or should we see this drop that we saw in second quarter persisting throughout the year?

Thank you for your question. Felipe here. When we look right to the results of the second quarter of commercial aviation, as we mentioned, we had an impact right of customer mix and driven by legacy contracts. When you look right for the full year of commercial aviation should be in line from what it was last year, right? So we're going to see some improvements going forward on EBIT and also customer mix on commercial aviation.

Perfect. Super clear.

The next question comes from Lucas Laghi with XP.

I have a follow-up question on profitability. But I mean, we saw this very strong performance on exactly, but also in services, I mean, almost 18% of recurring EBIT margin in the Services division. My question is -- I mean, how to think of the structurally levels for services going forward? I guess that this performance was slightly above what we saw as a reference conversations with market participants. So I mean it's interesting that gross margin decline and EBIT margin increased. So I'm not sure about the effect of operating leverage that you still have to capture going forward and you could also comment on the nature and the profile of the revenues this quarter, I think the different components that you have in services and how to think of this going forward, you should see some more upside or downside considering this 18% return level of the size in second quarter going forward.

Felipe here, thank you for your question. As we mentioned, right, we not just to efficiency on the business unit at aircraft, but also on certain support. So when we look to the 17%, almost 18% of margin on service support on the second quarter really believe that should be the way that we could do for the next quarters. right, especially mainly because of the scale that we have and also all these new deals that we've been signing on pool agreements and everything with the customers on commercial aviation and also on defense and executive is also helping us to see better margins going forward on certain support. And of course, we do have a right as well that is also improving, especially on the GTF engines. So also for the coming years, we're going to see better margins coming also from Okume.

And Felipe, if you allow me to complement your explanation, we have been pushing for efficiency gains in the entire organization. mean to make sure that we have the right cost structure, the right expenditure to support the business, the right level of investment and productivity gains, continuous productivity gains. So this is for us to enjoy the growth we are planning for the future, improving more than proportional the profitability. So that's why we are doing this very strongly in the entire organization, then we should see the profitability growing more than the revenues in the coming years.

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

Can you speak about your investment in brief? How are you thinking about that? Is that something that should be 100% part of Embraer? Or is that something that should be cut loaf? When you think about the engineering cost of that, should those engineers be deployed on something else? Or sort of seems like you're half way in, halfway out. Like how are you thinking about that?

Francisco here. Thank you very much for your question. I mean we are very confident about the Eves contribution to the Embraer growth, especially beyond 2030 to complement our growth strategy at the beginning of the next decade. We are now -- we had more than 60 flights, vertical flights. We had also -- we completed recently our first partial transition to horizontal flight. So we have, yes, hundreds of engineers supporting it, but we expect to certify entry into service of the EBITDA by the end of 2028. But in parallel, we are working to improve current products, and also supporting new sales of KC390. So new sales mean new configurations that requires a lot of engineering support and also invest in new technologies, I mean, to support a new cycle of products. And as I have mentioned, we continue evaluating emerging technologies and product opportunities to support a long-term growth strategy. This can be commercial aviation, executive aviation or even defense.

Got it. Got it. And then have you seen any impact and give me if you already answered this, I might have missed it. Any impact on sales campaigns from what's been going on in the Middle East?

Well, in defense, yes, -- we -- because of the geopolitical situation, we have seen countries accelerating sales ain banks, so you saw the recent announcement after the UA, we announced Colombia recently. I mean you saw the great sales mentioning a potential deal through Portugal of KC390. And we are working on other campaigns as well that I cannot disclose at this point of time. So yes, Ron, the geopolitical situation is helping the defense business. I think not only for us, for the market, but yes, Embraer is benefiting because we have a great product that transport and military aircraft segment.