Embraer SA (ERJ) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's second quarter 2017 results.

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 that have not occurred.

Embraer has based these forward-looking statements largely on its current expectations and projections about the future events and financial trends affecting the business and its future financial performance.

These forward-looking statements are subject to risk and uncertainties and assumptions, including among other things, general economic and political and business conditions in Brazil and other markets where the company is present.

The words believe, may, well, estimate, 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 risk and uncertainties, the forward-looking statement 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. Paulo Cesar de Souza e Silva, President and CEO; Mr. José Filippo, Chief Financial Officer and IRO; and [Eduard] Couto, Director of Investor Relations.

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

Please go ahead, sir.

Thank you, and welcome, and thanks for joining Embraer's second quarter 2017 earning results.

We're going to go to the presentation, and I'll pass it to Paulo Cesar to make some comments.

And then we'll be following the Q&A section.

So starting the presentation in Page 3 regarding the highlights, and we start with the corporate highlights.

In June, Embraer attended the Paris Air Show with its largest presence ever.

We showed at the airshow with the units for each of our business the E195 E-2, KC-390 and the Legacy 450.

The E-2 195 and the KC-390 not only showed at the static but also did flight demos.

Also in corporate highlights, Embraer was awarded by -- the most innovative company in Brazil for the second consecutive year.

Moving to next page, Page 4, in terms of highlights for Commercial Aviation.

We delivered 35 E-Jets in the second quarter, a growth of 35% when compared to 2016.

As far as commercial activity, we announced 51 commitments at the Paris Air Show, being 18 firm orders and 33 purchase rights.

In terms of firm orders, there's still 22 planes in the year-to-date.

Finalizing Commercial Aviation highlights.

Regarding the E2 development, we advanced with 5 prototypes: 1 for 195 and 4 prototypes of 190, which now reached over 1,000 flight hours test and more than 3,000 ground test hours.

Next page, Page 5 highlights for Executive Jet.

We delivered 24 Executive Jets in the second quarter, being 16 light and 8 large aircraft.

And those deliveries included the delivery of the Embraer Executive Jet number 1,100 to NetJets customer.

An important milestone of our manufacturing in the U.S. was the first flight of the first Legacy 500 assembled in Melbourne.

This plane will be delivered to a corporate flight department in Florida this year.

And regarding commercial activity, we secured an order of 3 Legacy 650E to Air Hamburg.

Next page, Page 6, highlights for Defense & Security.

Starting with the formations of the launch -- successful launch of the Brazilian Satellite, which happened in May.

And in terms of deliveries of Super Tucanos, we had our final delivery of the U.S. Air Force of 6 Super Tucanos commissioned to Lebanon.

In relation to the KC-390 program, we continued to advance the schedule with 2 prototypes with more than 1,200 flight hours.

We are confident on the commercial success of the KC-390.

At the Paris Air Show, we had more than 60 delegations visiting the plane.

And after that, we performed the demo tour visiting places in Europe, Asia, Middle East and Africa.

In terms of commercial opportunity in Defense, we will participate in the U.S. Air Force capability assessment for light attack platforms of the Super Tucano, which can be potentially a new program.

Also, our subsidiary, Savis/Bradar, established a partnership with Thales for air traffic control radar solution.

So with that, we conclude the corporate highlights, and we now move into the financial results.

Starting on Page 8, our firm backlog.

We reached the total of $18.5 billion at the end of June.

We have -- this amount reflects the strong deliveries of commercial aviation in the second quarter.

In terms of sales activity in 2017, we are positive with the campaigns of the KC-390 with a book-to-bill above 1 in Executive Jets.

And for Commercial Aviation, we expect to reach a book-to-bill of 1 this year.

Next page, Page 9, as far as deliveries.

Starting with Commercial Aviation.

We delivered a total of 35 aircraft in the second quarter and 53 year-to-date.

We are maintaining our estimate of the range of 97 to 102 aircraft for 2017.

In terms of Executive Jet deliveries, we had a total of 24 deliveries in the second quarter, broken by 16 light and 8 large planes.

In the year, we already delivered 39 aircraft, being 27 light jets and 12 large jets.

Also for executive jets, we're maintaining our guidance of 105 to 135 aircraft in a year, being 70 to 80 light jets and 35 to 45 large jets.

Next page, Page 10, we show our net revenues.

We reached $1.77 billion in the second quarter, which is a growth of 30% when compared to last year.

Our 3 segments of business reported growth from last year with revenues reaching $1.09 billion for Commercial Aviation, $340 million for Executive Jets and $335 million for Defense.

For all businesses units, we are performing our expectations for the year.

Next page.

As far as SG&A expenses, we reported a total of $125 million in the second quarter, broken by $40 million in G&A expenses and $85 million in selling expenses.

The reduction of total SG&A expenses when compared to last year reflect our focus on cost control.

Next page.

Page 12, regarding operating results.

Excluding nonrecurring items listed in the highlighted box, our adjusted EBIT reached $165 million in the second quarter with 9.3% margin reflecting the level of deliveries of Commercial Aviation.

For the 6 months of 2017, we had a total of $196 million with 7% margin.

The 9.3% operating margin in the second quarter can be broken by positive 15.1% in Commercial Aviation, positive 3.5% in Defense and negative 2.7% in Executive Jets.

We are maintaining our guidance range for 2017 of $450 million to $550 million with margins from 8% to 9%.

In Page 13, the adjusted EBITDA.

We reported a total of $245 million in adjusted EBITDA for the second quarter with 13.9% margin.

For the 6 months of 2017, the total adjusted EBITDA was $349 million with 12.5% margin.

For the full year of 2017, we are maintaining our guidance of the range of $770 million to $890 million and margins between 13.5% to 14.5%.

In Page 14, adjusted net income excluding extraordinary items, which includes primarily deferred income tax, reached a total of $123 million in the second quarter 2017 with 6.9% net margin.

The total of 2017 year-to-date reached $146 million with 5.2% margin for adjusted net income.

The next page, Page 15, in terms of investments.

For the year of -- for 2017 year-to-date, we had a total of $244 million, being $18 million for research, $148 million for development and $78 million for capital spending.

For full year, we are estimating the total investments of $650 million.

Next page, Page 16, adjusted cash flow.

We had the positive cash generation of $220 million in the second quarter due to the positive results combined with improvement in working capital requirements mainly related to the reduction of inventories.

Our estimates for 2017 is maintain of a consumption of $150 million on beta.

Next page, finalizing the presentation before turning to Paulo.

Our debt at the end of June was $4.2 billion with cash of $3.5 billion.

We turn into a net debt of $662 million better than the previous quarter.

Regarding our debt profile, the average terms of debt reached 6.2 years with 93% maturity after 12 months.

With that, we conclude the presentation.

And I turn you to Paulo's comments before we go into the Q&A section.

Thank you, Filippo.

Good morning to all.

So thank you for joining us this morning for the -- on the call.

Few comments I'd like to make.

I believe, as you can see, so we had a very strong quarter.

We continue to see improvements on our costs, so this is a result of the 200 -- of the mission 200 that we implemented last year.

And more so, we are seeing the benefits of this program.

I'd like to make a few comments on the business units.

On Executive Aviation, I believe, where we are seeing some improvements.

Of course, the market is still under big pressure.

However, we have seen some signs of improvements on the used markets.

There are some stability in prices, no further deceleration in general in the value of the aircraft.

For us here at Embraer, we had the good improvement in cash operation, generation of cash for the business jet unit.

So it's more stable as well.

And the strategy that we adopted for a few quarters already of having more discipline in terms of price and emphasizing more value in our business is started to generating improved margins.

So we can see a lot of that.

Probably in the next quarters, this will be even more evident.

So we will see even more in the next quarters.

On the Commercial Aviation, we had a soft first half in 2017.

A few orders were announced.

We are seeing very strong sales activity.

I'm very confident that we can make big progress in the second half of this year.

As you can see, the margin in Commercial Aviation is quite good.

And we continue to see us in Commercial Aviation the continuation of the E2 program on time, on budget.

And then we continue to be very bullish that the first delivery will indeed happen in the first half of next year in 2018.

On Defense, the KC-390 program also continues to move very well.

I'll make some comments on the Paris Air Show.

But after the Paris Air Show, the KC-390 went for a demo tour.

We covered 18 countries in Europe, Africa, Asia and Oceania.

We had 52 landings in 18 different countries, and we covered 50,000 nautical miles in 40 days.

So you can appreciate that the KC-390 is already a mature, ripe product, not yet certified, right.

It's in the process of the certification, however, showing already signs of a very good maturity for an aircraft like this one.

So 40 days, 50,000 nautical miles flight program without any problem, completely flawless.

So we are very happy and satisfied with the performance of the KC-390.

We are starting the discussions with the government of Portugal to negotiate the contract.

The Ministers Council approved this transaction.

So Embraer in Portugal now, so we have 90 days to negotiate the contract.

And last but not least, a few comments on the Paris Air Show.

For those who were there, I think you could see our very strong presence, one of the best ever show -- airshow for Embraer.

So we brought 2 new programs, a few under certification, the final stage, the E2 and the KC-390.

The Legacy 450 already [fits fives].

So I believe Embraer has shown its force and its important presence in the 3 units, showing that Embraer is prepared for the future with the state-of-the-art, very up-to-date aircraft that we will complete going forward there as we start to deliver the E2 and the KC-390.

So with that, I believe we can move to the questions, please.

(Operator Instructions) Our first question comes from the line of Myles Walton of Deutsche Bank.

I was hoping you could talk a bit about your activities.

You're sounding incrementally positive as it relates to the Commercial Aviation business.

Obviously, you had about 20 orders in the first half.

But 80 implied orders to get to your 1x book-to-bill seems like a pretty high hurdle, but you can probably -- you sound pretty darn bullish.

So can you talk either specifically or about relative geographic areas of strength that you're seeing that could come and close deals that quickly?

Well, it's a little bit spread out.

We have North America.

We have Europe.

We have Asia.

I wouldn't like to go to the details at this stage.

I feel very bullish on the key things that we are involved.

Of course, it's not a guarantee that we will close them.

But with our experience in these markets, I feel very good that we have very good opportunity here to do 1:1 in terms of book-to-bill.

Is that E1 or E2?

Obviously, the E1 is where you need to cover a lot of ground for next year in terms of production.

But are you seeing the E2 traction now that you're getting closer to first -- in terms of service or...

Yes, that's the beauty of what we are seeing.

It's a combination of E1, E2s.

It's a combination of the smaller aircraft and also the bigger one.

So it's really a mix.

So this is -- it is quite positive.

Okay, and just one other one.

Filippo, on cash flow, you're in a pretty good position relative to your full year guidance.

You're usually not in quite this good a position halfway through the year.

Is there actually upside pressure to your full year targeted guidance?

Or any other -- or how are you feeling relative to the greater than $150 million burn?

Yes, Myles.

I think that you're right.

I think we had a very good second quarter.

The accumulated year is also something that, probably in the past, we never saw that situation.

It is a combination that I think that mostly you have to remember that we had some contributions from suppliers in the beginning of the year.

But the good working capital improvement I think helped.

I believe that, really, at this point, we don't have a position to review that in terms of how we see because we see a lot of the investments have been made, especially in the E2 program at the second half of the year.

But the $150 million on beta, I think we have some space to get improvement there.

But again, it's too early to commit with that.

But I understand we are well positioned to really put in place a strategy to benefit in terms of cash generation this year.

Our next question comes from the line of Pete Skibitski of Drexel Hamilton.

Just to go further on both those themes.

I thought last quarter, you talked about your 2018 expectations for commercial deliveries.

They run 85 to 90 aircraft.

Is that no longer the case?

And whatever your expectation is, how many of those slots are filled?

And how many will be E2s would you expect?

Yes, Pete.

We still have the -- we're working -- still working on 2018 and the following years.

As you know, 2018, we start the very transition of the current model to the new one when the 190 in -- that will be entering to service.

So I feel that this is important for us to not -- to review at this point, so we still face some challenges.

We -- I think sales campaigns are on the way.

Like Paulo mentioned, we are positive the way we see, it's a little bit different dynamics.

We see more spread in geographic, those activities.

But we feel confident that we can, this year, to have your number about the book-to-bill of 1. That's what we're working these days.

But we still have, of course, challenges because of the transition that we have next year.

Okay, okay.

And can I -- I don't know how sensitive this is, but can I ask about Iran?

I mean, I see Airbus and Boeing have locked in commercial deals with Iran.

Embraer has not.

It was kind of in the press, but then there's also some reports out there that maybe Brazil is not willing to finance any deals with Iran.

I was wondering if you could validate any of that and give us a sense of -- is Iran completely off the table or not?

Well, of course, Iran is a very important country (inaudible).

We've had very good opportunity there for the manufacturers, and we see this market as an excellent opportunity also for the -- our segment.

We continue to work with the OFAC office.

So of course, as you know, Airbus and Boeing has gotten their approval.

In general, it takes 9 to 11 month, as I understand, to go through the process.

So we are still within this period.

So we are expecting that OFAC will approve our request after they have approved more recently the Boeing and the [Bombardier.] So lastly, so there is no news as of yet.

We continue to be engaged with opportunities.

But of course, we have to wait for the clearance of the OFAC office to move forward.

And Pete, just adding.

We don't think it's an issue of financing.

I think the Brazilian government is ready to support all the exporters that can sell its products to Iran.

So it's more a question like what is said about the clearance from OFAC.

Okay.

Okay, that' very helpful.

And my last question, I feel like I've hit on this theme every quarter in terms of the slope of the potential improvement in free cash flow over the next few years as E2 development winds down.

Is it -- are you confident -- is that development spending going to come down pretty linearly over the next few years as you -- as E2 enters service?

And does it -- does the visibility seem pretty good that free cash flow can then become pretty nicely positive over the next few years?

Yes, and we still work with the same projection.

However, just to make sure that we have the entrance of service in saving.

We started with 190, then we have it at 195 in 2019 and then to 175 in 2021.

So we still have investments to be made in these programs.

I would say that, by 2020, definitely, it's going to go down because we end up most of the development of the major pieces of this project.

But that's exactly the way we used to be.

I think we're on track on that and on schedule.

Our next question comes from the line of Cai Von Rumohr of Cowen and Company.

So what is your lead time on E1s for delivery in 2018?

I mean, I assume you still have slots to sell.

When do you have to sell them?

Or -- and if you don't, because I assume you do 15 to 20 E2s, you're really kind of locked in to doing under 100 planes.

Well, we -- as Filippo mentioned, so we are still work for 2018, so we don't have yet the final, final numbers.

We have lead time of about 9 month that we can work, give or take.

So it's not a fixed number of months but depending on the type of aircraft we can go a little bit more aggressive.

So we feel good that we still have right time this year to close more deals and take the commitment to deliver this aircraft next year.

Got it.

Can you give us -- you mentioned the pickup in demand.

And really, if we go back to earlier in the year, there was not a lot of interest.

What's changed?

It's always the dynamics of the market in general, right.

So you have airlines that they have an EBIT to upgrade the fleets, replace old aircraft.

So we have others that are start-ups like in Asia -- big Asia.

So you have airlines that want to replace smaller and smaller jets.

So it's a combination, and there's not only one reason.

I think it depends on the region, depends on the type of the airline and the needs of the airlines.

And can you refresh our memory in terms of your rough margin targets for the 3 businesses for the full year?

Yes, Cai.

We don't give guidance for margin for a specific business unit.

But in some color on this, I think the Commercial Aviation like in low double digits in terms of the Commercial Aviation and Defense, maybe mid-single digit is what could be an information for you.

And for biz jet, also mid-single digit?

Yes, yes.

And you'd mentioned, Filippo, that next year you have the transition to the E2.

So I assume if deliveries are flattish to down, there's more pressure on commercial.

Can you just talk directionally about what should we look?

I would assume, for example, that the executive jets would be considerably stronger because you would be building closer to the delivery rate and the market might be stronger.

But any color you could offer would be great.

Yes, again, I think it's too early for us to give the guidance for next year.

But as you've been saying, related to next year, maybe we should think about, of course, if the lower level of delivery is expected for Commercial Aviation with historical average, I think we can be more like in the high single digits.

But it's -- I think it's not the moment now to anticipate how Executive Jets will work.

But we believe that with some sentiment about positives of the market that we can have some improvements.

And that can partially if not improve our goal set there.

I will believe that Executive Jets definitely is going to be a better year next year compared to the previous one and that could help to be in that level.

So that's basically what I -- we're looking to say at this point.

But some time, we -- closer to the end of the year, we'll be releasing more specific information about next year's expectation.

Our next question comes from the line of [Alberto Valero] of Citibank.

Today, I listened from one of your competitors that the CSeries to be -- can be used for longer and thinner roads, roads that are not big enough for Boeing and Airbus and to launch for the service by original jets.

Are we seeing the same feature for E2?

Yes.

I think the E2 -- 195-E2 has a -- we have announced in Paris an extended the range.

We're going up to 2,600 nautical miles.

So this is enough to cover maybe 98% of the narrowbody mission worldwide.

So I think we are in very good shape in this regard and with excellent economics and very appealing operational cost.

So we are definitely very bullish.

Okay.

And had Embraer and Boeing just keep on switching charters regarding what seemed to be a common complaint about CSeries pricing?

We -- as we announced already back in December of last year, so we asked the Brazilian government to go to the WTO and challenge the Canadian programs and help us to support our case against Bombardier.

We are always looking to have a level playing field in both -- in development and financing of aircraft.

Financing of aircraft, we already dealt with that many years ago among all the manufacturers.

And we have a program that is being worked very well.

But regarding developments, so we are not happy at all with the situation and that we have to be sure that everybody will be operating at in 11 playing fields.

So the Brazilian government is supporting Embraer, and we are supporting the Brazilian government, of course, in this action.

And hopefully, this will pay great benefits going forward.

Our next question comes from the line of Pedro Bruno of Santander.

My question is on the defense margin for the rest of the year because we saw a very low -- a highly negative margin the first quarter because of the satellite delay, which happened in the second quarter now.

And we saw a quite big improvement in revenues but not so much in margins.

The mid-single digit that was mentioned for the year implies close to 15% margin for the second half of the year in the Defense.

Is that what we should be expecting?

And what would trigger that since the satellite program has been launched on the second quarter?

Yes, Pedro.

Of course, the launch of the satellite that was captured in the second quarter helped the result of Defense in this quarter.

We still have to deal with some costs associated to the KC-290 development program, although it's in the end of the development phase, and that sometimes can impact.

I believe that we should look in an annual basis the Defense result.

That will be more easy for us to -- it inspired us to do some deliveries of Super Tucanos expected for this year that can impact that.

We still think that the target for the mid-single that I just mentioned, I think it's the best guess for the year.

I think we're still confident that, that should be the result for 2017 in Defense.

(Operator Instructions) Our next question comes from the line of Carlos Louro of JPMorgan.

I have one question regarding the studies for the potential cost reductions going forward.

I'd just like to know if you could provide a little bit more detail on this and whether such cost reductions could help smooth out results for 2018.

Carlos, we -- last year, we announced the plan of cost reduction, specifically a program what we call the mission 200, which is primarily focused on the overhead and headcount reduction toward voluntary dismissal plan and also some expenses reduction in travel and other general expenses.

We get there, the program of the reduction of headcount already -- was already concluded in the first quarter of this year.

And the other expense is already adjusted.

And then all the leaders of the company have their budget adjusted for this new standard.

I think that opportunities of cost reduction, we still have.

I don't think we're going to have like a step like we announced before of our mission 200 plan about opportunities may have.

And the focus on continuing to improve may be more like slowly, but that's still on.

You have to take into account as well that the company has this activity for the year that we have to deliver aircraft.

We have to manufacture and produce aircraft.

So it's important that we have a certain level of the support for that to happen.

So cost reduction is still associated to debt.

But we understand, we've got a level which has efficiency now and that we have a lower level of expenses.

And again, I don't believe there's going to be a dramatic drop in the future.

But we still will be able now I think to build a structure to benefit from the dilution of those costs as we have opportunities for revenue growth.

That's basically how we see this.

But we continue to see opportunities.

Our efficiency is a permanent program that we have and -- that will be capturing whatever opportunity we may have in terms of cost reduction and efficiency.

And our next question comes from the line of Pete Skibitski of Drexel Hamilton.

Yes, just a follow-up.

I want to ask another question kind of qualitatively about 2018.

It sounds like commercial deliveries will be down in '18.

Is it fair to think that Defense revenue will be down in '18 as well just on less satellite revenue?

And maybe you haven't ramped fully on the KC-390 yet.

But that in '19 and beyond, you kind of start to ramp on the KC-390 and that's maybe kind of a multiyear growth story for you at that point?

No, I don't think so, Pete.

I think we don't have the numbers yet for the Commercial Aviation.

As what Filippo already indicated.

For the KC -- for the Defense, we are expecting good activity for the KC-390 and maybe for the Super Tucano as well so the 2 main products of the unit.

We are seeing very strong activities on the KC-390, a lot of interest.

In the Paris Air Show, we received the visit of 65 delegations.

And these worldwide tour now -- almost worldwide tour also has been showing that the KC-390 has a tremendous acceptance in the market.

So we are quite very bullish on the discussions that are going on now.

And on the business jet, as I said, we might have a better year next year than this year.

So I believe we have reached the bottom now in the business jets, and we are counting on improvement step-by-step.

It's not a big improvement, but we may see a better year in '19 than in '17 for business aviation as well.

And I'm showing no further questions at this time.

I'd like to hand the call back over to Mr. José Filippo for any closing remarks.

Okay, thank you.

And in my name and Paulo and all the team here, I'd like to thank you again for participating in this.

And as usual, we -- our IR team is open and ready for you to access whatever you need for additional information.

So thank you very much, and have a nice day.

This concludes today's question-and-answer session.

That does conclude Embraer's audio conference for today.

Thank you very much for your participation.

Have a good day.