Embraer SA (ERJ) 2022 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Audio Conference Call from Embraer First Quarter 2022 Financial 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, which have not occurred. Embraer has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance. These forward-looking statements are subject to risks, uncertainties and inceptions, 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 obligation 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 are discussed on this conference call may not occur. The company's actual results could differ substantially from those anticipated in the forward-looking statements.

It is important to mention that all numbers are presented in U.S. dollar as is our functional currency. Participants on today's conference call are Mr. Francisco Gomes Neto, President and CEO; Mr. Antonio Carlos Garcia, Chief Financial Officer and Procurement; and Mr. Leonardo Shinohara, Director of Investor Relations.

I would now like to turn the conference over to Mr. Gomes Neto, who will proceed the first remarks of our first quarter 2022. Please go ahead, sir.

Good morning, and thank you all for joining our first quarter 2022 results call today. I hope that all of you are well and safe, and I thank you for your interest in our company. The first quarter results continue to show that our planned execution and company turnaround remains underway, and our focus to drive innovation and enterprise efficiency are key pillars to our growth strategy.

As you will see later in Antonio's presentation, we are maintaining our guidance for the year, and our numbers show that even with a shutdown of our operations during the month of January to integrate the commercial revision systems, we were able to deliver solid results.

Before we go into more financial details on the first quarter, I'd like to give you some quick highlights of our key actions. First, on innovation. Eve's closing is expected in May. The listing at the New York Stock Exchange will accelerate and bring innovation to the new renewable air mobility ecosystem. Speaking about our innovation pipeline, we have several ongoing projects such as zero or low carbon emission and airframe efficiency.

Second, enterprise efficiency. We're continuing to work with great focus and discipline on improving efficiency in all business units in our administrative areas and operations, applying lean principles and continuous improvement culture to several processes. Our financial performance continues to trend up with the best free cash flow in a first quarter since 2010.

As mentioned previously, we are maintaining our guidance for the year, even with a challenging supply chain due to the war in Ukraine and shortages of products worldwide. On the next slide, we will talk about growth and see more details of business units highlights in the quarter.

In Commercial Aviation, we have several ongoing campaigns, mainly due to steadily rebound of domestic flights in the U.S.A. and Europe. The oil price increase also reinforces the relevance of the E2 family as the most efficient narrow-body in fuel consumption. Executive Aviation keeps up the good momentum with sales orders exceeding prior year levels and backlog increased above 12% in Q1 '22 versus Q4 '21.

On Defense, we have seen an increased interest in C-390 Millennium and A-29 Super Tucano from several countries recently. We expect an acceleration in sales campaigns for these products. Services and support has grown above pre-pandemic levels with a growing backlog and positive gross margin versus last year.

Deliveries of aircraft in the first quarter were slightly below expectations, mainly due to approximately 30-day shutdown, which I have commented earlier on.

I will now hand it over to Antonio to give further details on the financial results, and I will return in the end. Thank you.

Thanks Francisco, and good morning, everyone. Let's give some highlights of the first quarter 2022 financial results. By the way, a quarter with 60 days activity for the third quarter.

Let's get started on Slide 5. First of all, we are reaffirming all aspects of our 2022 financial and delivery guidance with no material variation. The brand delivered 14 jets in the first quarter, of which 6 commercial aircraft and 8 executive jets. 6 light jets and 2 mid-sized jets, all of this according to our schedule.

Deliveries in the quarter were negatively impacted by almost 1 month shutdown in January 2022 due to the Commercial Aviation system and legal integration. Third order backlog ended the first quarter 2022 at $17.3 billion, plus $300 million versus Q4 2021. This is the highest quarter backlog since the second quarter 2018, driven by solid sales activity. On the revenue side, revenue reached $601 million in the quarter down 26% compared to the first quarter '21, with almost 1 month production shutdown in January.

In contrast, reported consolidated gross margin of 20% was higher than the 9.5% reported in the first quarter of 2021, mainly due to the better performance in all business units.

On Slide 6, adjusted EBIT and EBITDA. Even with the less 26% revenue and higher SG&A compared to the first quarter of 2021, adjusted EBIT and EBITDA margin were $27 million negative and $13.2 million positive, respectively, building adjusted EBIT margin of minus 4.5% and adjusted EBITDA margin of positive 2.2%. Adjusted EBIT Q1 2022 also includes nonrecurring expenses like commercial aviation integration process, arbitration process and others of $17 million.

If we exclude all of extraordinary effects, adjusted EBIT margin would have been minus $1.7 million or minus $10 million for us. And EBITDA margin of 5% or $30 million positive. Complementing our strategy to mitigate exchange risks through the cash flow hedging, we recognized credit of $800,000 related to payroll expenses in the first quarter 2022. At least, we do see a limited FX impact for this fiscal year in our results between Brazilian reals and U.S. dollar basis.

Moving to Slide 7, let's start with G&A. -- as a whole continues to trend favorably over the past years. Quarterly SG&A reached $95 million, or an increase of $15 million compared to the first quarter '21 figures. Due to more activity on the sales side, campaigns impacting expenses as well the uptick corporate and administrative expenses driven by inflation. It's important to say that we remain highly focused on SG&A efficiency.

On investments, in Q1 2022, Embraer invested a total of $39 million in product development and research mainly related to E2 commercial jet program, and $9 million CapEx. It's important to mention, we continue to invest in our future with highly disciplined CapEx allocation.

Another good news. Let's go to Slide #8. Starting with adjusted free cash flow. In regards to our free cash flow, the company continued highly focused to improve the cash steering process. Free cash flow in first quarter 2022 was a usage of $68 million, representing a significant improvement compared to the $227 million negative in the first quarter of 2021, consistent with working optimization measures and enterprise efficiency.

Working capital had a positive impact in the company overall cash performance even considering the seasonality of the business, delivering its best first quarter cash since 2010. The main highlights were optimize inventory management and higher advanced payments from customers compared with the fourth quarter of 2021.

On the adjusted net results, was a loss of $79 million, although negative, we do see net results trending up, driven by revenue growth in the last quarters. Fixed cost leverage, reduction in interest costs due to our liability management activities and the full tax efficiency that we get back from the legal integration of Commercial Aviation. All of these effects together, will provide an additional positive impact in earnings for this fiscal year.

So let's move it to Slide #9, liquidity. The company finished the quarter with a total debt of $3.5 billion or $500 million less than Q4 2021, in line with our strategy, and net debt of $1.5 billion.

Embraer continues to deleverage the balance sheet, reducing systematically the gross debt and improve the credit metrics, and we do expect to reduce the interest expenses with that. It's important to highlight that our net-debt-to-EBITDA ratio is around 3.7x in first quarter of 2022, and we really remain focused on generating cash and reducing our debt levels.

With that, I conclude my presentation and hand over back to Francisco for his final remarks. Thank you very much.

Thanks, Antonio. To close, I'd like to briefly highlight our Urban Air Mobility, Eve. The Listing at the New York Stock Exchange and closing is expected for the next month in May, with total investments of about $500 million, which includes spec and strategic investors. Eve has a strategic support from Embraer with access to infrastructure, extensive aircraft certification and manufacturing experience.

And already established global network of services and support of lead engineers as major differentiators from other projects. Finally, we have strategic partners such as SkyWest, Republic Airways, BAE systems, Rolls Royce, Azorra, Acciona, Falko and Thales, who know very well our capabilities.

Thank you to our great team for their focus and passion for creating innovation and executing our strategic advantage. And thank you for your interest and confidence in our company.

(Operator Instructions) Our first question comes from Myles Walton, UBS.

This is Lou Raffetto on for Myles. Can you hear me?

Yes, we can.

All right. Great. I just wanted to check on free cash flow, you guys mentioned was the best in over 10 years. How do we think about that the rest of the year? It seems like a very strong start. Is there anything else that you guys see over the next couple of quarters before your seasonally strong fourth quarter?

Thanks for the questions. Antonio speaking here. I think it's a great question. We have a good start for sure. And that's why when we said the guidance, we said $50 million plus or better. And what -- we do see a positive trend, yes. We don't know the magnitude of how much we are talking about to be better, but we should be more precise in the second quarter. But for sure, that trend is highly positive with the good start.

Okay. Great. And then the other expense line, obviously, there's a lot going on in there. You took out the $9 million of Eve expense. There's this other $17 million in there. How do we think about that line the rest of the year?

Yes. For Eve, everything we are showing in our numbers, we just have the portion of Embraer and Eve. We hope and we expect and we are going to do it with the listing in the New York Stock Exchange, then the product become a different dynamic in our results because we are going to -- on the Eve, yes we need to capitalize those expenses most part of it. And then we are going also to update our guidance including Eve, which is from one side is going to boost the cash flow, but it's also going to impact a little bit the EBIT side.

So as soon we close the transaction, then we are going to revise also the guidance. But we do not see a discontinuation. But we do not have also in our numbers today, Eve embedded only the $9 million that we are seeing at adjusted EBIT with the adjustments because the company is still operating and we are going to revise it in Q2.

Okay. And I guess when I think of those other nonrecurring costs, you said that had arbitration as well as the reintegration. So I would guess the reintegration costs go away and that sort of nonrecurring will continue, but at a lower rate than the $17 million?

Yes. Probably, yes. We, for sure, starting Q2 onwards, we do not have much more cost for the integration then we're still keeping with the arbitration costs that we are not adjusting. We will see the magnitude of the number that should be more or less on this level, a little bit less from the coming quarters, okay? And please, when you do your math, adjust your calculation. This number, we are not adjusting because of confidentiality, but you have more or less the magnitude than there is, in my opinion, this $17 million that we are seeing right now should be more or less in this range for the coming quarters. We do not see exceed on this cost, maybe a little bit reduction..

Our next question comes from Mariana Perez Mora, Bank of America.

Can you please discuss how sustainable are these margins on per like segments? And how they compare to your targeted margins like, call it, like 3 to 5 years from now?

Yes, Maria. We -- I would say the margins we are seeing per segment for sure. We should see in the long term. We are still away from, I would say, Executive and Service, we are more or less in the level we do see for the future. But we do have -- still have to improve in Defense and Commercial here to the same level of the others. It's more or less in a long-term perspective, what we are seeing right now. We are in the recovery mode for the Commercial Aviation. And we still have something to do in Defense.

And most probably, Defense is going to recover faster because we are going to see significant improvements start from 2023 onwards. Commercial Aviation is going to take a little bit more time in order to the new company starts showing up better, I would say, gross margin performance as we have with the old contracts. That's more or less in a nutshell where I see right now all business units come to this level in the midterm.

Can you discuss what's the customers' interest, how your conversations are going? And how last this demand? And then also, what are you seeing in the Services side?

Could you please repeat your questions. There was some noise in the line, and we're not able to...

Sure. So one Executives, could you please give us some color on the demand going forward? How your conversations with customers are going on? And how sustainable do you think is this like really strong demand for Executives that we are seeing so far?

Sure. Well, I think the sales -- our sales in Q1 is showing us that the demand continues is strong. We sold 35 aircraft in Q1. I mean the highest in the past almost 6 years. We had -- only in 2016, Q1, we saw the 36 aircraft in that quarter. So it's a good sign for us. We -- yes, we believe we are going to have some changes in the future, but we believe in a soft landing in the market. And we are seeing a lot of our first-time buyers in this segment and the interest in the small and medium-sized jets, exactly where we have our portfolio of products. So again, we are still confident that this market will continue to be strong during the next 2 or 3 years at least.

And then last one from me on defense. You mentioned foreign interest and strong international interest. Could you please give us some color or like try to quantify that interest?

Mariana, we do not disclosure the volumes, especially in that segment. But what we can see is that, yes, we are having a lot of customers, I mean, coming to us and asking for deliveries opportunities in short and medium term. And which was a change that we believe was because of the situation in Europe between Russia and Ukraine. So again, good opportunities for us for our products, the C-390 Millennium and the A-29 Super Tucano in short and medium term.

Our next question comes from Lucas Barbosa, Santander.

I have actually a follow-up from the question on the Defense side and actually adding to that -- the discussion on Commercial Aviation as well. You mentioned in the presentation that in Commercial Aviation, you have some key active campaigns in progress. And then also, you mentioned in the presentation, the increased interest for the C-390 and for the Super Tucano. Could you just comment a little bit of when you would expect new orders to come out? So would you expect more orders to be announced over the second half of this year? Or is it something that maybe will take place in 2023? So any color you could give on the timing that you would expect new orders to come out. That would be very helpful.

Thank you, Lucas. Well, for the Commercial Aviation, we expect new awards during this year. And the Defense and mix between 2022 and 2023.

Our next question comes from Stephen Trent, Citi.

When I think about the order activity or the order potential on the Commercial Aviation side, do you have any high-level view with respect to where we could see the order activity come from a geographic perspective? Are you guys seeing anything in, for example, a potential scope clause adjustment in the U.S.? Or are you seeing maybe somewhat better order potential coming from emerging markets?

Thanks for the question. Well, specifically in the Commercial Aviation, we -- I mentioned that we are working in several sales campaigns that we believe are because of the domestic air travel recover. And also some decisions on fleet renewal to new-generation aircraft, especially where our product, our E2 family is well positioned because of the efficiency compared to all the aircraft. Also, we launched a project to convert any passenger jets into freighters that we believe will -- the idea is to export a good opportunity as the global air cargo is growing up to 12% this year versus 2019.

So -- and then there is a strong demand for E-Jets freighters as the market wants now to receive the goods, I mean in the next day or even the same day. So that we see good opportunities for our E-Jet freighters. And last, I mean, the scope clause, we don't see any changes in the short term in the next, I don't know, at least the 5, 6 years. So we -- which is a good opportunity for us to continue selling our E1 family, E175 ones.

Okay. Very helpful. I missed the first 2 or 3 minutes of the call. So sorry, that was a repeat of what you said earlier.

Our next question comes from Noah Poponak, Goldman Sachs.

What's your expectation for book-to-bill for the year at Commercial?

Our expectation is to keep the same level we saw last year of 2:1.

Okay. Good to know. What is in the full year revenue guidance for the Defense segment at this point?

Antonio speaking here. We do have, for Defense, around $600 million. That's pretty weak this year for Defense.

Okay. And then I guess maybe could you speak a little bit to your thinking on the medium- to long-term growth rate in that business from here. I mean, it's been quite choppy for a while from this lower level of revenue. What's your -- how are you seeing that play out?

Noah, Francisco speaking. Yes, we see a tough year this year for Defense, as Antonio said. So we are working on several initiatives to improve the performance of that unit already in 2023. And the new market environment will help us a lot, not only in 2023, but in the years ahead with the high -- with the highest interest in the in the C-390 Millennium, that is a product with a very high value added. So we expect it to reach soon to be back to $1 billion in revenues in our Defense unit.

Okay. Great. And then on free cash, can you maybe just speak a little bit to the -- your expectation of the sequencing through the year just given the working capital in the first quarter. The working capital change in the first quarter is different than it's been in the first quarter for a while here. So it sounds like the shape of the year is fairly different than it's been.

Yes. Thanks for the questions, Antonio speaking here. And thanks also for recognize our efforts. As I try to speak to the market, we are growing revenue, but we are improving the working capital at the same time. And the trend is to become positive in next quarters to come, right? We do not have a spike on the negative side to go again. We have the cash steering process we control on a daily basis. And that's why we are quite confident that the quarters to come will be positive and to a point that we probably are going to revise our cash guidance in Q2 because we said $50 million or better. Now we are evaluating how better we could be.

Our next question comes from Myles Walton, UBS.

Just wanted to go back to, I think, it was Mariana's question on the gross margin. So I know 2 years ago, when you separated out Commercial, your gross margins jumped that quarter because of how you were accounting for, I think, pay. Is that sort of going on again this first quarter? Is that driving any of the gross margin increase?

Yes. We do have an impact around the 2% because of the obsolescence in January. So that is what count. But we do believe we could stay in this level for the quarters to come.

Our next question comes from Josh Milberg of Morgan Stanley.

Just wanted to ask if you could update us on the turboprop project. Just touching on how your discussions with both customers and potential strategic investors have evolved. And just on that topic, I think you had previously mentioned having costs of around $50 million related to development of the project this year. I just wanted to see if that was still your expectation.

Thank you, Josh, for the question. The turboprop project is moving very well. We are now in the phase to define a supplier for this aircraft. We are doing tests already, I mean, with the concept. So it's moving very well. we expect to be ready to make a final decision on the business case by the end of the year, beginning of 2023.

And no, the investments, we are keeping the investments for this year. So we will not stop the development activities during this year. And we are working in parallel on how to fund this program since we approved the business case by again, end of this year, Q1 next year.

And no deviation of currency in that estimate, Josh.

(Operator Instructions) This concludes today question-and-answer session. That does conclude the Embraer's audio conference for today. Thank you very much for your participation. Have a good day.