Embraer SA (ERJ) 2015 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's third-quarter 2015 results.

Thank you for standing by.

This conference call is being held during the Embraer Day in New York with the presence of investors and market analysts.

At this time, the Company will present its third-quarter 2015 results.

Afterwards we will conduct a question-and-answer session and instructions to participate will be given at that time.

(Operator Instructions) As a reminder, this conference is being recorded and webcasted at www.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 or 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 believe, may, will, estimates, continues, anticipates, 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 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 call are Mr. Frederico Curado, President and CEO; Mr. Jose Filippo, Chief Financial Officer and IRO; and Mr. Eduardo Couto, Director of Investor Relations.

I would now like to turn the conference over to Mr. Jose Filippo.

Please go ahead, sir.

Thank you and good afternoon.

Thanks for joining the Embraer third-quarter 2015 earnings results.

As we normally do, we will go with the presentation, and then we will be open for questions.

So starting in page 3 with the corporate highlights, we were listed for the fifth -- for the sixth consecutive year on the Dow Jones Sustainability Index.

Important for us that very much in terms of sustainability initiatives.

Also, regarding management excellence, we received magna cum laude recognition from the Brazilian National Quality Foundation, which is equivalent to the Malcolm Baldrige quality award.

And also in relation to people management, we receive important recognitions in Brazil and Latin America.

Next page, page 4, in terms of highlights for commercial aviation, we had the delivery of 21 E-Jets in the third quarter of 2015.

We have now accumulated 68 aircraft delivered this year.

And also we were able to record 20 new firm orders, accounting now for 146 to date.

In these 20 orders we like to break this highlighting SkyWest order of 18 175s that will fly for United Airlines and also two undisclosed orders for 190s.

Also in terms of orders, the highlight of the firm orders for 19 E175 also from SkyWest that will fly for Delta Airlines.

This was announced after the closing of the quarter in October 2015.

Confirming the good commercial performance, we achieved the ratio of book-to-bill above 2 over the first nine months of 2015.

And in finalizing these highlights, in relation to the development of the E2 program, it was initiated, the final assembling of the first E190-E2 prototype.

This was showed to the market last week actually.

Next page, going to page 5: the highlights of commercial -- of executive jet business.

We had a delivery of 30 executive jets in the third quarter broken by 21 lights and 9 large aircraft.

We account now for 57 light and 18 large year to date.

In relation to the Phenom program, we had in the third quarter the delivery of the 300th 300.

It's an important milestone in this program.

Also, as far as the Legacy 500 and 450 program, important information related to the certification of the Legacy 500 in Mexico and China and also the Legacy 450 in Brazil, USA, and Europe.

In relation to the quality and customer perception, we also ranked by important magazines.

At this time we show here the first place in the global executive jet industry ranking by the Professional Pilot magazine.

Next page, page 6, now the highlights of defense and security business.

We start with the information that contract with the Gripen program became effective.

We actually have currently a group of engineers already in Sweden preparing for this program starting now.

And also, regarding the KC-390 program, we had the resumption of the flight test campaign with a second flight that actually happened yesterday.

In relation to the LAS program, we had the delivery of two aircraft in the third quarter of 2015 to the U.S. Air Force.

And I will -- actually to date we have 12 already delivered, which includes two additional ones that happen after the end of the quarter.

Now next page, regarding the financial results of the third quarter.

On page 8, we start with the backlog.

We reported a firm backlog of $22.8 billion at the end of September, basically line with the figures of the previous quarter.

Next page, page 9, in relation to deliveries.

Already mentioned, but just to emphasize it here, starting with the commercialization aviation on the left: 21 aircraft delivered in the third quarter, 68 to date, actually to the end of the third quarter.

And in relation to executive jet aviation, we had 30 delivered, broken by 21 lights and 9 large in the quarter, and accumulated figures of 75 deliveries, broken by 57 lights and 18 large.

With that, we take the opportunity to confirm our outlook for the year, which is in the range of 95 to 100 E-Jets in the commercial aviation and 35 to 40 executive large jets and 80 to 90 executive light jets.

Next page, in terms of our net revenues by segment, starting from the top right.

Commercial aviation reported revenues of $688 million in the third quarter with a total of $2.23 billion as of September.

Going down the bottom right, defense and security with a total of $182 million in the third quarter with accumulated in the three quarters of $0.61 billion this year.

Continuing with the executive jet business, total $402 million in the third quarter, accumulated $0.97 billion in the year.

The consolidated figures, moving to next page; we have in reals and in US dollars.

Total reported of almost $1.3 billion in the third quarter, accumulated of $3.8 billion in the year.

With that, we also take the opportunity to reiterate our guidance range of net revenues from $5.8 billion to $6.3 billion in 2015.

Next page.

As far as SG&A, we had a total of $121 million in the third quarter, broken by $43 million in G&A expenses and $78 million for selling expenses.

Those figures are the lowest when we compare to the previous quarter 2015 and they represent 9.4% of revenues in the third quarter compared to 12.2% in the third quarter of last year.

We would like to confirm our commitment with cost control and reduction.

Next page, now page 13.

As far as EBIT, we reported operating profit of $84 million in the third quarter.

Accumulated of $266 million in 2015.

Operating margins were 6.6% in the quarter and 6.9% accumulated in the year.

Next page.

In terms of EBITDA, we had a total of $158 million in the third quarter.

Accumulated $485 million margin in the third quarter, achieved 12.3% with accumulated of 12.6% in the year until September.

Next page.

In terms of net results, we had a net loss of $110 million in the third quarter.

Accumulated loss of $43 million in 2015.

The main reason for this figure was the negative impact of the deferred income tax in the third quarter of $181 million.

Without this effect, we would be reporting a net profit of $71 million in the quarter and this negative impact is -- reflects a non-cash effect which results from the income tax on the Brazilian local currency gains on the non-cash asset items.

Basically, as you can see, we have 28% devaluation of the Brazilian real against the dollar in the quarter, and that returned to the Brazilian real's gain on those non-cash items, which we had to record on deferred income taxes a non-cash income tax.

That's the way you have to record in terms of the Brazilian tax law.

Non-currency items, they refer to typically fixed assets, intangible assets, and inventories.

Next page.

In terms of cash flow, we had a cash consumption of $115 million in the third quarter: a positive operating cash generation of $70 million, offset by $76 million of CapEx and $110 million of development, both primarily related to the E2 program development.

And as of September 15, the free cash flow accumulated was $482 million negative, but considering our expectations for the fourth quarter, we reiterate our estimate of the negative $100 million or better in terms of cash duration in the full year 2015.

Next page, page 17.

In terms of investments, we had a total investment of $334 million as of the end of the third quarter, broken by $27 million in research, $165 million -- $164 million for development and $143 million for CapEx.

The figures for the year are tracking below guidance, mainly due to the weaker Brazilian real currency.

Next page, page 18 and finalizing the presentation.

Regarding our cash and debt position, we achieved a total net debt of $644 million at the end of the third quarter, which we expect to be reduced by the end of the fourth quarter.

Our cash position in the end of the quarter was $2.75 billion and a total debt of $3.39 billion.

In terms of our debt profile, it is in -- it has an average terms of 6.5 years and 91% maturing in the long term after 12 months.

Okay, with that we finalize the presentation and we now open for the Q&A session.

Thank you.

Thank you.

Darryl Genovesi, UBS.

Thanks for the time.

Filippo, on the adjusted net income number that you provided, when you are just backing out the deferred tax impact it's actually above the pretax income, so I guess that would imply a tax gain in the quarter.

Is that a cash gain and is that something that's sustainable for some reason?

Basically, like I mentioned, this is -- we have to take all the assets, the non-monetary assets and they are referred in dollar terms.

So when we take the Brazilian real we have a gain, a non-cash gain and we have to record the income tax of that gain.

This is a non-cash, so deferred.

And the assumption is that those inventory will turn into final goods and sometime this will be sold and then the profit will come, so that's why.

Actually it's in anticipation of that.

But this is not a cash item.

It's just like a non-current income tax.

I don't know if that's exactly --.

I guess what I'm saying is the adjusted number that you provide, the $71.5 million, compares to $59 million pretax on the income statement in your release.

And so I guess I'm just trying to reconcile why the adjusted number is higher than the -- why the adjusted net income number is higher than the unadjusted profit before tax number.

What we did is only the adjustments for the deferred tax.

It's just like a calculation to help you to see without that effect -- which we have the current income tax which was as we recorded it, but just a piece related to the deferred piece actually, no?

Okay.

Then also, can you quantify the adjustment at the defense business?

Can you repeat there?

Sure.

You had -- in your press release you talked about a cost base revision for certain contracts in the defense and security segment due to the negative impact of foreign exchange variation.

Can you quantify that?

Yes, it was $30 million in the third quarter; accumulated $90 million in the year.

That is the effect.

Again, it's the same effect of the currency which we have to reset the contract and we make this adjustment every quarter when we have the valuation.

Normally -- we used to do this every quarter, but when we had the valuation like we had recently, in recent quarters, this effect is higher.

So for the third quarter it was $30 million and we had to accumulate in the three quarters of $90 million.

Great, thanks very much.

Josh Myerberg, Morgan Stanley.

Good afternoon, everyone, and thanks very much for the call.

I had a couple questions on the commercial division.

The first one is just if you could update us on how you are seeing the 2016 outlook for deliveries and for mix.

Also, just how is your visibility on next year?

And with the firm backlog as it stands, is it reasonable to expect that we could have a similar level of deliveries next year?

I don't know what you can say; maybe that's not something you're ready to comment on.

Sure, glad to answer.

No, we are totally sold out, of course, for 2015 so always some customer finance things to be finished, but we do not see any risk at this stage for the guidance that we have provided.

It looks really, really solid.

Same thing probably for next year.

I think, as we mentioned in the last quarter, we felt comfortable -- we feel increasingly comfortable with at least maintaining the current level of production revenues in that market.

Of course, we can give you more color early next year.

But we are -- with these recent sales, last year, 2014 was a very strong year in sales and 2015 again.

So that really gives us, let's say, a very comfortable position in the years ahead.

Okay, that's great.

And the other thing is just with respect to your residual value guarantees and whether the level of provisioning we saw in the third quarter is what we could expect going forward.

And also just if there's anything else relevant to highlight on that particular issue.

That's an important question, thank you.

Recently there has been a revision by all the appraisers in the whole industry, and in general, there is a reduction of expected values over time of commercial airplanes in general.

So it is possible that we have an impairment in the fourth quarter.

We estimate that this phase something in the range of $30 million, so that's something which is possible.

And that would be -- if that is confirmed, will be a downside risk to our guidance, but that's still to be confirmed.

Okay, great.

Appreciate that.

I would like to put on hold the questions remote please, to give a chance for people inside here to ask a question.

Could you touch on the margins by segment, Eduardo?

And also in terms of the non-recurring FX charges in defense of about $90 million year-to-date, obviously presuming those don't recur into next year, what is the outlook for defense from here?

Are we kind of bouncing around the bottom in a breakeven situation and are you able to maintain the cost to keep it there?

Yes, just to give the EBIT margin breakdown by business, we had third-quarter commercial aviation 12%; business jets around 5%; and defense and security negative 11%.

So the consolidated margin was 6.6%.

The defense -- as I said, this impact of the exchange rate are negative there.

We have to do this every quarter.

This is not the first time we do in this year because we saw that the currency in Brazil has been losing, especially with the higher rates.

But if that stays stable in the fourth quarter we shouldn't see this in the next quarter.

This is too much exposed to this effect, so this is basically the reason why the defense business had negative margin.

If I may add, Miles, to go out to your question completely, that business was hit by two major, let's say, trucks.

They were ran over two major trucks this year.

Were impacted by the currency 50%; that's specifically the Brazilian-denominated revenues, a 50% devaluation in the year, 28% alone in the last quarter.

So that goes from the top line and of course everything downwards.

But also financial promise with our main customer in defense, which is the Brazilian government, which they have cash issues that have impacted our cash flow and also our revenue.

So 2015, I think a good way to look at what happened is an adjustment.

I think we are now at a different level.

There is a step function downwards as part of the size of the programs, the KC-390; as we have already divulged it's being delayed by a year.

They had some other programs also that have been in a lull adapted to the new reality of the ability of the government to pay us on time.

We are not planning to fund those programs on our own, so we prefer to adjust it to the capacity, the real capacity [that cause them to pay it].

So it's a year of transition.

I think as (inaudible) will go into more details in his presentation, but I think he did a great job in rapidly adjusting the business to the new reality.

What I expect for next year in defense is something of a similar level, as far as activity.

Maybe some upside; there is an increasing activity in exports, but certainly a return to profitability.

Hopefully, to the levels where we were before.

So that's kind of a macro vision.

By the way, if I may add, just anticipating maybe a question about the KC-390, I heard some questions about, well, why did it take so long between the first and the second flight?

And the answer is that that coincided with this whole commercial discussion about the new pace of the program, so strategically what we decided was to do two things.

One, to go and do all the ground vibration tests on the airplane, the JVTs, and another was to have full layup of the airplane through the state-of-the-art of our engineering design.

So that will significantly increase the efficiency of our flight test campaign.

So from now on we're going to see these airplanes flying much, much more than the last several months.

It looks like the fourth quarter is going to be a really strong cash flow quarter for you to hit your guidance.

Can you talk about the puts and takes there?

Is it lower development expense because of the real or are you expecting cash advances?

Or are there just other puts and takes that are going to lead to a really strong quarter year over year?

The strong quarter, of course, typically the seasonality of the business brings this fourth quarter as a strong quarter.

But we got investments; that's correct, your point.

We had early this year contributions from a partner that reduced some of this.

We don't expect to see that mostly now in the end of the year.

Also, engineering was the major piece of investment until then.

Now we enter in the phase of more certification and other tests that brings more like dollar-denominated costs, so we expect to see this increasing but at enough probably to meet the levels that we expected before.

I think we end up the year with a better position in terms of cash consumption without attracting any of the schedule of the program.

The program is on schedule completely as expected and going forward that's how we expect.

I think, to your point, we will see a reduction in inventories, so that is going to help the cash and the activity of course, all the income from the deliveries.

It's going to be twofold: more deliveries, cash inflow, and reduction in inventories.

I think that's a major contribution for the cash flow in the fourth quarter.

Derek Spronck, RBC.

Have you changed your hedging policy at all?

No, no, we do hedge.

All the balance sheet is hedged all the time.

Our cash flow hedging position, the policy is established that we do this every year, so we are now in the process of contracting the 2016 hedging for the cash flow position.

So we didn't change our hedging position.

If the real stays at current levels, would the defense division going forward on a quarterly basis then be producing positive gross margins?

Yes, it tends to be positive because most of the effect was the adjustment on the currency.

As we have the program stabilized in terms of currency impact, it tends to be profitable and returning margins definitely.

And just one more quickly.

Your reduction in SG&A, could you break that out between how much of it was FX-related versus cost controls that you have implemented?

I don't think we have this number available at this point.

We can make some conclusion and inform it you later.

One thing that you can say now is that -- and we control that by currency, the piece in reals, and we are below budget in both currencies.

So we are also being leaner in reals.

It is not 100% currency; that much you can see.

Do you have specific cost-reduction programs that you are implementing?

You bet, yes.

Thank you, Jose.

This year you got caught short because of the big decline in the real in terms of your cost collar.

I think it's around BRL3.40.

Can you tell us kind of preliminarily what kind of a range or cost on the cost collar of the FX you would anticipate for next year?

Or at least your approach to that issue?

If we stay at this level of the currency -- maybe I should say it a different way.

Keep on the 25% of the costs associated to the real denominated, so this is the benefit that we have.

Part of this benefit, of course, goes into the deferred asset which is development of the program and the part to go into the cost.

But you have to take into account that to benefit from that this cost has to go through the inventory and then when you deliver it then we capture.

There's a delay about two or three months to have a full capture of this effect.

But going forward, maybe we should think that the currency shouldn't be increasing that much.

We expect to see this more stable.

What we saw this year was more a volatile approach from the currency.

We still continue to benefit because you're not increasing the costs, so we're keeping -- retaining this in dollar terms the piece of the real costs that we have.

That if I may add, Filippo, you're asking about the hedge, the labor cost; if we already have a zero cost collar in place for next year.

We do.

We're starting to do and what we've been doing so far is we have a cap of above BRL6 and the floor about BRL3.5, BRL3.4, BRL3.5.

That is what we're working on.

Terrific, thank you.

Steve Trent, Citi.

Two questions for me, if I may.

I noticed in the quarter, if you look at current and noncurrent receivables, in 3Q there was a small sequential decline versus 2Q, which I thought was intriguing.

And when you're thinking of that number, is there any sense you can give us as to whether the flow from the Brazilian government was in line with their expectations or below or above or receivables turnover was much stronger in a particular area than you had anticipated?

Yes, we mean -- as Fred mentioned, we already reviewed that contract, especially the main customer, which was something that led us to increase this accounts receivables.

We currently are experiencing a balanced situation.

Well, these expenses are the same what we -- revenues are related to the payments so we keep seeing that.

The variation is primarily due to some exchange variation effect on some part that is local currency, but basically we are continuing to receive what we have been expensing.

Got it, thank you.

Just one other general question.

When you look at your campaigns for commercial aircraft and other people or other companies are showing up in these RFPs, what are you seeing in the competitive environment?

More of Mitsubishi, less of other competitors?

If you could give us a sense as to what that looks like.

Sure, Steve, be glad to.

If we separate in two different markets (inaudible) in a region peer like 75 seats are market typically regional feeder markets and the mainline markets.

So currently in every campaign that we have we have ourselves, we see Mitsubishi, and we see, of course, Bombardier there.

We have been successful in -- especially after the enhancements to our E175, which we introduced last year, we have been successful in seizing all the opportunities, almost all the opportunities which are there.

So I think on that front we feel very comfortable.

And on the mainline side, 190, 195, we have less of a concentrated demand, but there are several companies out there.

We just mentioned two undisclosed orders which are not the United States.

If I may add one, let's say, one possible positive prospect, of course this is something which is a ways from being a reality, but can happen, is major airlines in the US discuss with their pilots and possibly flying 100-seaters at mainline levels.

So if that happens, of course that's a plus to everything that we are doing.

Between the E2, the E1, the E2, which is on time by the way, absolutely on time; you saw the picture.

(inaudible) will go into details.

We feel that we are covering from the 70 to 136 markets pretty well and comfortable that we keep being the dominating player there.

Okay, very helpful.

Thank you.

Let's take Turon's questions here and so we will be ready for the -- to cut this part of the event and continue the presentations.

Thank you.

I guess my question is on next year on the commercial aviation segment.

Obviously you have the skyline pretty much filled up for the year, so you know where the pricing is going to be and the real is going to be a tailwind here as well.

Is it fair to assume we are going to see a decent increase in margins next year for the commercial aviation segment?

It's possible.

We will see where the currency stay.

Of course, let's say it stays at level four, that's a tailwind for us.

So everything we are doing should keep -- maybe if we go back probably two years ago when we said that we were seeing at that time that the mix of aircraft, 190s, 195s versus 175s, which historically tends to have a lower margin, we saw the mix changing significantly over the next several years.

But we thought we could have resilience in holding, maybe not the exact same margins but kind of a low double-digit margins.

I think we have demonstrated that in the last 18, 24 months.

So this is pretty much the story.

Yes, the exchange rate helps in that as (inaudible) also have larger contracts, same configuration.

That helps.

More scale you dilute more fixed costs, so it's a good momentum in that sense.

So there's nothing in the pricing that should be extremely worrisome should there?

No, there is pricing pressure.

We've seen pricing pressure.

There's one competitor in particular who has been very, very aggressive in both commercial and executive jet segments.

And of course, to say that this is really irrelevant, not true.

It is relevant; you have to react to that.

And we have maybe felt that a little bit -- we are feeling that a little bit more in the executive jet segment.

On the commercial we have been able to sustain a certain -- the value of the [ERB] products really differentiates itself and help us to sustain a healthier price and therefore margin.

But on the cost side it is a relentless effort.

Thank you.

That does conclude Embraer's audio conference for today.

Thank you very much for your participation.

Have a good day.