Embraer SA (ERJ) 2020 Q3 法說會逐字稿

(technical difficulty) Or we recently launched Sino 300 in (inaudible), which was designed for medical evacuation. Finally, on the diversification, innovation and partnerships front, we are going to expand our operations. This year, we have already announced investments in cybersecurity with the acquisition of Tempest. The [Frag ATE] project with the Brazilian Navy, and more recently, the creation of EV, a company dedicated to the development of the human and mobility ecosystem and EVLTO, Electric Vertical Landing and Takeoff aircraft.

With this front, we are developing projects to expand our service offerings for aircraft from other manufacturers. And we are discussing potential strategic partnerships amid at opening new markets and developing new products such as the turboprop.

It's important to note this in addition to managing well-structured projects, the plan focused on the process of execution and on the constant monitoring of the evolution of all initiatives.

We are aware of the challenges we have ahead. Especially in Commercial Aviation in 2021, but we are very confident in the future of Embraer. We know what must be done. We know how the [TAM] should be carried out, and we have an immensely competent and aligned team that will develop the necessary initiatives to make the company grow profitably in the coming years.

With that, I have concluded my comments, and I would like to give the floor to our CFO, Antonio Garcia. Over to you, Antonio. Thank you all.

Thanks, Francisco. Good morning, everyone. It's really a great pleasure to talk to all of you. Now moving to the Commercial Aviation highlights on Slide 7. During the third quarter, we delivered 7 E-Jets, representing a sequential improvement compared to the first and second quarters that we will accelerate even more in the fourth quarter.

Among our third quarter deliveries, we had 5, 175s for United airlines, highlighting our continuous leadership in U.S. regional jet market.

As another example of our continuous improvement, have already delivered more plans in October than in the entire third quarter of 2020. As far as new operators, all airlines from Australia received 14 pre-owned E190s and Bamboo Airways from Vietnam, we start-up operation with 2 E195.

We are still not in the point where we can give guidance on expected deliveries or financial performance due to the COVID-19 uncertainties. But we would like to point out that we remain cautiously optimistic for the future as we have seen a gradual rebound in domestic flight activities in several markets around the world, including United States.

Looking Commercial Aviation in 2021, the uncertainty around the COVID pandemic are still our biggest concern for next year. The fleet of 175 in operations continue to improve with 93% in service as of end of September, outpacing our competitors in the market.

I'm also proud to say that we had 0 cancellation of commercial jet orders since beginning of the COVID pandemic. The active debts on Slide 8. We had a strong delivery pickup during the third quarter with 21 delivers. This brought the total executive debts delivered so far in 2020 to 43 aircraft.

We expect fourth quarter to remain strong forever, and deliveries should continue to increase compared to the previous quarter. As a result of higher deliveries, improved mix and measures taking to be more cost efficient, the executive debt segment posted positive operating margins in the third quarter and year-to-date.

Marking, the continuous turnaround of our profitability on this segment despite the COVID-19 pandemic. Also, as mentioned in the last call, we launched the Phenom 300 Med during the third quarter, which is a unique mid rack solution that's also available for hetero pits on existing Phenom 300s. In terms of new technology, Embraer continues to disrupt the media segment with praetors, HEPA Filters, now being standard while lavatory electrical doors and synthetic vision system were both certified during the quarter.

Finally, we would like to highlight the continued recovery during the third quarter, in particular with respect of the fractional and charter operation, with the smaller and medium jets. Among fractional images activities was down only 13%. Year-over-year, comparing to the media debts down to 18% and larger jets 33%.

Among charters, if (inaudible) jet activities was almost flat versus last year. While the medium and larger debt class were down 5% to 70%, respectively.

As you can see, the MAX where (inaudible) is positioning with the Phenoms praetor are recovering faster.

Moving to Slide 9, we showed the highlights for defense and security. We regarded the C-390 Millennial program. We are currently 6 C390 in various stage of production for future deliveries to Brazil and Portugal. And we expect to deliver 1 more aircraft to the Brazil Air Force still this year.

The program also received the 2020 Grand (inaudible) awards for defense from the aviation week, which selects the best aircraft program, black horse, commercial executive defense around the world. Another highlight during the quarter was the Super Tucano as Embraer was able to deliver 10 planes to international customers.

With the reopening of global borders, we were able to deliver Super Tucanos to Nigeria, Chile and the Philippines.

Finally, the first grip and E1 arrived in Brazil to start its flight test company, which is a major milestone in the Brazilian jet fighter program with Saab.

Embraer, we all also play a leading role in the execution of the program in Brazil. And we'll be responsible for the systems development, integration, flight testing and final sale and deliver of the aircraft to the Brazilian Air Force.

Now turning to Services & Support on Slide 10. We are proud to say that Embraer, once again, was ranked first in pro-pilot's corporate aircraft process support survey in 2020, underlining our commitment to customers to provide the best after sales support possible.

Our services and support team also completed the 7 conversion of a Legacy 450 to Praetor 500 since this service became available early this year. We were also able to get the certification in the third quarter of the first E-Jets modified for cargo transportation in cabins, offering our customer a solution to better utilize their fleets in the environment of lower passenger traffic caused by the COVID-19 pandemic. Further in Servicing, we are pleased to see that the KC-390 Millennial has been showing excellent reliability in the Humanitarian missions in Brazil and abroad.

Moving on to our financial results on Slide 12. Our backlog finished third quarter at $15.1 billion, representing several years of revenue for Embraer.

It is important to highlight again that despite some deferrals, we didn't have any cancellation in Commercial Aviation. And we expect some new sales to potentially lead for a backlog expansion in the upcoming quarters, depending on the impacts of a second COVID wave in certain regions.

On Slide 13, we show revenues and deliveries. We can clearly see an improvement in the third quarter relative to what we had in the first and half of the year and the impacts of COVID on the industry start to reduce with a higher commercial and executive jets delivered in the quarter.

As I mentioned earlier, we expect an even better fourth quarter compared to the third quarter. We also had a strong revenue improvement in Defense & Security, following the reopening of international borders to allow for the deliveries of Super Tucanos.

Our Services & Support business, despite a year-over-year decline due to the COVID-19 has also increased double digits sequentially from the second quarter with transportation improved activities across the commercial jets in the defense markets.

Next, on Slide 14, Embraer highlights its continued cost control and selling and unrestrictive expenses.

The reduction of SG&A reflects our ongoing efficiency structure actions, as already mentioned earlier in this presentation combined, of course, lower marketing expenses coming from the COVID-19 restructuring. It is important to mention that selling expenses includes higher bad debt provisions compared to last year, mostly related to our Services & Support receivables. Excluding the bad debt provision, SG&A expenses on a year-to-date basis in 2020 are a 30% lower than the same period of 2019.

On Slide 15, we show our operating results. Embraer reported adjusted EBIT of a loss of $45 million in the third quarter with a margin of minus 6%. The adjusted EBIT in the third quarter excluded a positive impact of $7 million from special items, including $54 million in charge related to our restructuring announced in September and $30 million in additional bad debt provision, offset by $75 million deposits new reveres of noncash impairments charged in Executive and Commercial Aviation.

Breaking our third quarter margin by business, Executive Jets was positive 2%; Services & Support, 4% positive; Defense & Security breakeven, similar to previous quarter.

Commercial Aviation was response for the negative operating results due to the low deliveries and the cost impacts.

So Slide 16 shows our adjusted EBITDA, which was a loss of $80 million and also excluded the special items already mentioned in the previous slide. Adjusted EBIT margin was minus 1%. The combination of better volumes and cost cut initiatives have already started to appear in the third quarter. And we expect this trend to accelerate in the fourth quarter of the year.

Moving to next on Slide 17, with earnings. Embraer adjusted net income reached a loss of $148 million in the third quarter. Our earnings have been negatively impacted by the lower operating results as well as higher financial expenses and noncash FX losses, similar to the operating numbers. Net income also reached a bottom in the second quarter and has started to rebound, and we expect better bottom line performance in the fourth quarter of this year, driven by higher deliveries.

Next slide, Slide 18. We show Embraer's total investment over the last few quarters. The company has launched several initiatives to cut investment, including CapEx as well research and development. This reflects our actions to preserve the cash. It also highlights in rare updated portfolio with a state-of-art products in Commercial Aviation, Executive Jets, Defensin & Security.

Embraer has invested a lot in the last 5 years, bringing new programs and products to the market. And now we expect that upcoming years to show lower investments.

Total investment during the third quarter reached $45 million and $134 million year-to-date, which is less than half of our investment level of 2019.

Moving to Slide 19. Our free cash flow was a usage of $567 million in the third quarter. This free cash flow usage was negatively impacted by approximately $250 million, including 3 major items: first, one-off charge of around $70 million related to the restructuring and severance cost package of our Red headcount reduction in beginning of September; second, around $100 million in short-term customer finance that will be normalized now in the fourth quarter; and third, another $80 million related to 3 plants that skipped from the end of the third quarter to the fourth quarter.

Excluding that, our cash consumption in the third quarter of this year will be very close to the third quarter of 2019.

Giving expectation for higher deliveries in the fourth quarter, we had positive impact on our working capital as well as our cost reduction initiatives. We are confident that our free cash flow will be much better in the first quarter of the year, and we should be at least cash breakeven in the second half of 2020.

Finally, on Slide 20, we highlight our strong cash position. Our liquidity increased during the third quarter with a total cash position of $2.2 billion, which is a similar cash level that would have prior to COVID pandemic. I'm also happy to announce that we completed a series of liability management initiatives. New loans with privacy and public banks as well new bond issuance of $750 million, maturing in 2028. And as repurchase of $250 million of outstanding in 2022 and '23 bonds.

It's important to highlight that our new 2020 rate bonds is unsecured and had a market demand above $3 billion, showing the confidence of a divestor in long-term of Embraer.

With that, I conclude my presentation and we can open for questions. Thank you very much.

(Operator Instructions)

Our first question comes from Robert Spingarn, Credit Suisse.

Just a couple of different things. First, what gives you confidence in the outlook at commercial and executive jets for you to reverse these impairments at this time, what improving trends are you seeing? And does that include increased interest in ordering aircraft?

Rob, it's Antonio speaking. Good question. On the reversal of impairments, assuming that we revise it in a quarterly basis. It was highly driven by the exchange rate. The devaluation of the Brazilian real, we do have a lot of cost in reals, which means we didn't change volumes. We just changed the exchange rate of the margins, which accounts for the impairment reversal, adjusted. So we didn't change the baseline.

I see. Are you seeing any evidence of something you've talked about in the past and that we saw after 9/11. Are you seeing actual down gauging at your customers from the commercial narrow-bodies to the E-Jets? And is this a trend that is gaining some traction?

Well, Francisco speaking. Thanks for the question. We believe the domestic regional month will rebound the first as it happened in the past, as I mentioned. And the airlines, we look for more versatile, flexible and more economical suite and we do believe that our E-Jets are very well positioned in that direction. So that's why we believe we have a good chance as soon as the market pickup.

Okay. And then my last question is about your inventories, either in commercial, actually in any of the segments, but do you have white tails in inventory? And if so, can you quantify?

With regards to today, current situation, we have leased a few. We are sold out in the small jet in the Executive Aviation. And the mid-side jet, we still have 3 or 4 to be sold this quarter against minimum and also for the Commercial Aviation, we have no white tails for this timing. We do have only the carryover inventory that we are due to the postponement of deliveries to 2021. But that is not a big amount. What you do see in our(inaudible), we are going to run more or less 40% of our revenue in the fourth quarter. We think we are going to strongly go down with our (inaudible) in Q4 due to the higher deliveries in Q4.

But again, no big white tails on the inventory.

Comment, Antonio to complement its due here. So as you said, we basically have no positions available. That's the reason we are so confident on the fourth quarter and on the recovery towards the end.

Our next question comes from Myles Walton, UBS.

Maybe, Antonio, on the cash performance here in the third quarter, you laid out some of the onetime items. I think the commentary last quarter was you could have been closer to breakeven even for free cash flow here in the third quarter. So I'm just curious, what changed? What is pushed out to the right?

And I guess following on Rob's question, why couldn't those continue to push out to the right, realizing you haven't had any cancellations, but it seems like deferrals are more likely than not.

Yes, we -- Myles, thanks for the question, again. We -- the previous call, we mentioned that we are seeing, and we see good chance to become, I would say, free cash flow breakeven the second semester second half of the year. And we are still continuing to believe. As you could see, we have a cash burn in Q3 from $567 million. And we have scheme of some aircraft deliveries to Q4. We have also the several payments that had the impact in Q3, will be much less in Q4, and we have a huge amount of deliveries in Q4. We are still confident, and we are seeing progressive improvement in our free cash flow and also cash collection plays a role and also the other measures that we are taking.

Let's say, we are still confident that we will be closer to breakeven in the second semester. But again, if you ask about my expectation, the third quarter, we could be -- we could have been better, $250 million.

But again, having these onetime effects shifting this effect for Q4.

Okay. At one point, my, sorry, it's do here. We had some plans that really skip it to the fourth quarter. But as Antonio highlighted in the call, we already delivered more planes in October than the whole third quarter. So I think that shows that we are very confident on to revert that now in the fourth quarter. And I would say all the levers for fourth quarter are confirmed. So we are not seeing risks or delays as we had.

We had some plans that moved from third to Q -- from Q3 to Q4, but now they are all confirmed. Okay. So maybe an additional information, Myles, Super Tucanos deliveries September and we delivered, but we are going to book as a revenue and cash now in Q4, which will also help it with equation around the $80 million. That is not prior for Q3 results. Again, many issues working happen in Q3, but you should see the rebound in Q4.

Okay. And Francisco, maybe I can ask you, as you're repositioning the business and you want to get, obviously, the commercial business, in particular, to profit or cash breakeven at worst. What is the size, what's the deliveries or the size of the commercial business that you're sizing the cost structure too and the workforce, too?

2

Good question, Myles. We are we have been discussing this a lot in our plans for the following years. I mean, we still see 2021 as a very challenging year. I would say not much higher than we see in this year. But we are working in various fronts to adjust the cost structure of the company to deliver a much better performance in 2021, we would say is not much higher than 2020. So -- and the main reason for that is the Commercial Aviation. You see that for 2021 will be still a challenging year for Commercial Aviation. We are preparing for that in that scenario, but we seek an opportunity to grow I mean from 2022 onwards.

Do you think 2021 could be breakeven for Commercial Aviation?

No, Commercial Aviation will still suffer in 2021, but we can -- the other unit, we'll have a much better performance next year.

And we are seeing this fiscal year. By the way, we are seeing this year. Now because of Myles, we have the -- we are likely to have a broader portfolio, and we are seeing a good performance in industrial markets for executives and Defense & Equipment sells, which is more or less tried to compensate the drop in the commercial aviation in reversal margins and results. But you're going to see the same picture in 2021.

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

This is Mariana Perez Mora on for Ron today. My first question will be, could you please give us some color on the short-term capital finance cash headwind you have this quarter? And not only the color on the quarter, but also how -- why are you confident that this is going to recover going into next year -- into next quarter?

Yes. That was really a short-term timing delay. So we don't do customer finance, and we have a very short-term finance that we are transferring to the final finance agent. And so there is no risk of not reverting that. So we don't do customer time. And it's already on -- and it is at confirmed ITP in Brazil, your takeout in everything (inaudible).

Okay. And then in general, because I understand competitive reasons, you cannot see like particular details, but has cash profitability compared to like pre-pandemic cash profitability after delivery?

Are you talking about Commercial or the whole business?

Commercial, particularly?

We are improving, right? We suffer with the lower deliveries, especially in the first half. Third quarter already started to show improvement, but the big improvement will come now in the fourth quarter. As we mentioned, in October, already better than the whole third quarter. And we're going to have much more delivers and that will drive a big improvement in cash profitability coming from working capital reduction and also the cost adjustments that we did that Francisco and Antonio highlighted.

And if I may, the last one, you highlighted improvement in business operations, have you seen some like pickup in demand already?

Well, you mean demand for 2021 or for the following years?

Yes. How are your sales campaigns coming in? If you have seen any pickup from -- for like business jet demand? What's booked to deal there?

Okay. Well, I mean, Executive Aviation is showing a good reaction. We are, for example, in our Phenom family, we are sold out for 2020. We are selling aircraft for 2021, the Phenom. So it's moving well The difference in security, we are working in different campaigns as well. And also in the Commercial Aviation, we are working different campaigns. So hope, this second wave of COVID will not being a negative impact. On the opposite, if we announce a new vaccine, this will help a lot and the rebound of the the regional and domestic flights that will help us to boost our sales in the Commercial Aviation as well.

Our next question comes from Cai von Rumohr, Cowen.

So maybe you could comment on the mix of your business. You've done very well, very well with the 300 and the 100. Basically very, very poorly in terms of deliveries of the Legacies and the Praetors. Why you have that sort of extreme mix and should we expect a big pickup in those larger planes in the fourth quarter and going into next year?

Thanks for the question. I mean I see if I understand your question, but the Phenom 300 is our debt seller. I mean the most sold aircraft in its category for the past 80 years, I would say. I mean, we are improving our sales for the Praetors. The 600 now out of the 500.

And we have specific programs, specific initiatives in our strategic plan '21, '25 to improve the competitiveness of the Phenom 100 and Praetor 500. And with those plans, we expect to capture additional market share in the 4 years for all the families because we do believe we have a great family with the 2 Phenoms, 100, 300 and the 2 Praetors, the 500 and 600.

Just to add Francisco now, we have only 2 Praetors in the third quarter right and 19 Phenom. So we expect a much better performance in terms of the Praetors now for the fourth quarter.

Correct. (inaudible)

Got it. That was essentially the question. And then going forward, because if we look at this year and last year, basically, the third quarter, very weak for generally weak for the larger bizjets. Do you expect a more level of even spread of the large bizjets because the Phenom is clearly doing well, but the large ones, where the product looks attractive, doesn't seem to be doing quite as well.

Can you hear us, Cai?

Yes, perfectly. I don't know what that was.

Yes, there was some background noise -- just allow me to answer. I just -- Cai, it's a good question, for sure. If you see the sharp tie, I showed the mid-sized guess, they are not doing well compared with the small jets. That's why we are sold out in the Phenom 100 and 300, and we still have some open position for the last quarter. But I'd say, we do have company for all of them. These are going to sell in another quarter. But let's say, we have talked about 5 to 6 aircrafts on the Praetors and on the others, we are sold out, and you saw the deliveries we have year-to-date 43, and we are seeing for the whole year is mid-80s for the total 2020 is actually delivered, which shows that last quarter would be hot anyway for us, but for sure, at the mid-side jets we are suffering more and also the large jets compared with these small jets.

Great. And the last question is, your gross margins have come down. What should we think about where your gross margins? What is the incremental gross margin we should think, obviously, you have different businesses? But overall, if commercial and bizjet get better, what kind of incremental margins should they yield?

It's my point of view a normalized basis because we do not have the better mix for the fiscal year, and you see above 50% in the long run, 50% to 60% in the first year.

And also, we have a lot of initiatives to help us to reduce the cost of goods sold of the aircraft as well to reduce the production cycles of the aircraft, and this will also help us, besides the mix that point also help us to increase the gross margin of our products.

And one important point, we were impacted by the items this year in our gross margin, with the adjustments we are doing in our workforce is not going to to happen next year, even in Q4. September was already -- if you asked me today, September was already positive in (inaudible) and cash flow. Just in the month of September. Because the idleness is being reduced and should be come to end in Q4, which is an impact on our gross margin this fiscal year.

Our next question comes from Noah Poponak, Goldman Sachs.

In Commercial Aviation, you've mentioned that you haven't really had any cancellations. But you've -- there's clearly been a decent amount of deferral activity with the lower deliveries. Can you speak to where are your customers deferring to? It sounds like if you're saying 2021 deliveries will be somewhere in the zone of similar to 2020, are they deferring to 2022? Or are they deferring even further? And are they giving you new plans that you feel are relatively firm? Or are they just still kind of throwing their hands up in the air and are still very uncertain as to when they're going to want the airplanes?

Thanks for the question, Noah. The majority of the deferral was between 2020 -- from 2022 onwards, especially the the local airline in Brazil (inaudible), which is impacted as higher here. And we do see, as Francisco mentioned, 2020 more or less in the same level of this year and picking up starting 2022 to I would say, mid-70s. And again, there are highest amount of deferred start in 2022, '22, '24. And again, there is no additional postponements or deferrals. We may see maybe that if the environment change, the second wave of COVID, it is not going to impact we may see even customers have to anticipate something. But today, flight stable everything we discuss between March and April remains different. Also the deliveries of this year, everything we discussed which was agreed between March and April. And since then, there is no change, very stable.

If I may just add that on to here. Noah. It's in part, say that the situation is very fluid, right, given everything going on with COVID. But the first moment, maybe some customers, they put a big deferral but as the situation starts to get better, they start to operate again. We are the whole time talking to the customers and discussing when exactly they are going to take the pencil. As Antonio mentioned, there could be anticipations, right, to the initial deferral that they put, so the situation could really change depending on how COVID goes, especially next year.

And just to allow me to complete, we are set the company for this new normal, I would say, in a lower basis in order that we are able to capture more when we get an improvement and a recovery in volumes. We are not running the company by hope. It's really feet on the ground and be conservative in the balance for next year.

Yes. And Noah, I mean, just also helping my colleagues here, I mean, this year, we have to face a combination of 2 bad things, right? We had the drop in our revenues because of the COVID impact but combined with costs much higher than normal because of the carve-out of the Commercial Aviation. But we have done our homework. We have adjusted the workforce, and we have put in place a lot of initiatives to reduce costs, to reduce inventories that will help us to deliver a much better financial performance in 2021, even if we say it's not much higher than 2020.

Okay. Great. That's -- I appreciate all that detail on Commercial. Maybe kind of same cushion on executive. I mean, obviously, it's fluid, it can change. But for now, would you speak to where you're planning production levels for total executive units, 2021, 2022?

So for the 2021, 2022, we are still evaluating the scenario, we even changed our SNLP process last month. And we do see something around 90 aircraft.

But again, still for it, but we see more or less a good level of 90 aircraft.

Okay. And then just last one on Defense. The quarterly revenues have been very volatile. I know you had the delivery restrictions, but it seems like it's been volatile, even excluding that. When does the defense business, I guess, just get back on to a more smooth trajectory quarter-over-quarter? And maybe just kind of walk us back through some of the bigger programmatic moving pieces that can drive growth or not in that segment on a multiyear basis?

Go ahead, Antonio. Go ahead.

It's for sure, there are always a the same thing (inaudible) also in the budget of each government that's buying aircraft's for (inaudible) and the COVID do have some restructuring. But I would say what we are seeing in defense, we are somewhere stable on the Super Tucano deliveries and also -- and the KC-390 volumes that we are operating for this year and also for next year. But we are still missing additional sales for the C-390 Millennium that we are right now discussing some additional campaigns. But if you ask me what could boost the situation is really additional sales campaign for the Q2 in the '19?

Should we be thinking about defense revenues 3 to 5 years out as meaningfully higher or something relatively similar to the current level?

No, absolutely higher. We have a good perspective on defense for the following years. We are working campaigns for C-390 Millennium, as Antonio mentioned. We also have business with the Brazilian Navy, Brazil Army. We have announced an acquisition of a cyber security company business. We see opportunity in that field as well. So we have a good perspective for the different -- for the following 5 years.

Our next question comes from Augusto Ensiki, HSBC.

Just a quick question. And most in your financials that your -- your financial -- sorry, your financial expense increased sharply. Is that related to the paydown of the -- some of the -- some of your debt as well as the issuance of the new debt? And what would be a more normal level, if not the one this quarter?

Yes. Thanks, Augusto. Yes, you're right, there are some additional costs related to the new debt that we raised in the third quarter. We also had some impacts from basically noncash FX losses, which is noncash. And we also had an RVG provision. So that affected our financial expenses. I would say the normal level will be more something around $50 million per quarter. That would be our net financial expenses per quarter. (inaudible).

Our next question comes from Paul (inaudible), Lumi sales.

A loan maturity in the fourth quarter. I'm curious how you are planning on handling that?

Sorry, what was the question?

Is the loan maturity in the fourth quarter -- just curious how to handle that?

Yes. As I mentioned, basically, we had a very short-term customer finance that was already solved and transferred to the finance agent. So there is no -- nothing material, okay? It had an impact when you look the picture of the end of the quarter, but it was already sold.

So there's no $600 million maturity in the fourth quarter?

No. No, no, no. We have in the fourth quarter is -- it's around $100 million, $150 million.

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.