Embraer S.A. (NYSE:ERJ) Q3 2023 Earnings Call Transcript
Embraer S.A. (NYSE:ERJ) Q3 2023 Earnings Call Transcript November 6, 2023
Embraer S.A. beats earnings expectations. Reported EPS is $0.18, expectations were $0.14.
Operator: Good morning, ladies and gentlemen. And welcome to the Audio Conference Call for Embraer’s Financial Results for the Third Quarter of 2023. Thank you for standing by. The numbers of this presentation contain non-GAAP financial information to facilitate investors to reconcile Eve’s financial information in GAAP standard to Embraer’s IFRS. We remind that Eve’s results will be discussed on Eve’s conference. It is important to mention that all numbers are presented in U.S. dollar as it is our functional currency. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions to participate will be given at the time. As a reminder, this conference is being recorded.
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 assumptions including, among other things, general economic, political and business conditions in Brazil and in other markets where the company is present. The words, believes, may, will, estimates, continues, anticipates, intends, expects and similar words are intended to identify forward-looking statements. Embraer undertakes no obligations to update publicly revise any forward-looking statements because of new information, future events and 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 calls are Francisco Gomes Neto, President and CEO; Antonio Carlos Garcia, Chief Financial Officer; and Leonardo Shinohara, Director of Investor Relations. I would like now to turn the conference over to Francisco, who will proceed with the first remarks. Please go ahead.
Francisco Gomes Neto: Good morning and thank you all for joining our third quarter 2023 results conference call today. Firm order backlog ended at $17.8 billion, a $500 million increase versus the second quarter, with 42 commercial aircraft sold by September. This quarter was marked by an excellent sales momentum and double-digit revenue growth in all business units. EBIT and free cash flow are in line with our expectations. We concluded our Reliability Management process, placing Embraer in an excellent cash position with the extension of our debt maturity with no relevant disembursement until mid-2027. On the other hand, we are still facing some challenges in our supply chain and Embraer has been diligently working with its suppliers to mitigate these issues.
Our operational and financial guidance for the year remain unchanged. On the next slides, we present the highlights of our business units. Commercial Aviation delivered a total of 39 aircraft during 2023, of which 21 are E2, 3 times more in the same period in 2022. Commercial Aviation backlog rose to $8.6 billion compared to the second quarter 2023, with a book-to-bill of 1:1, highlighting sales stability and deliveries this year. It is also important to mention that there are many ongoing sales campaigns. In the U.S. market, we had several firm orders coming from main customers of E175-E1 jets. This is an important highlight because it shows that the pilot shortage situation is improving in the U.S. Another important deal was with Luxembourg-based airline, Luxair.
The E195-E2 aircraft will complement Luxair’s narrowbody fleet. In Executive Aviation, revenue increased 25% year-over-year and EBITDA margin improved 2.1%. The business unit delivered 28 jets, representing an increase of five aircraft compared to Q3 2022. The business continues its outstanding performance, with sustained demand across its entire product portfolio and a strong customer acceptance in both retail and fleet markets. Backlog grew 10% year-over-year, reaching $4.3 billion in a book-to-bill of 1.5:1. In Defense, Austria and Czech Republic announced the selection of the C-390 Millennium as their tactical military transport aircraft. Last year, Netherlands had also announced the selection of the C-390, which consolidates the multi-mission platform as a preferred solution in NATO countries.
These potential contracts represent a new phase for Defense and a significant growth potential for our backlog. In October, the first Portuguese Air Force KC-390 has entered into service. This is the first KC-390 to enter into service outside Brazil. Also in October, we celebrated with the Brazilian Air Force the KC-390 milestone of 10,000 flight hours, attesting the aircraft’s remarkable performance and its versatility and capacity in different areas of operation. Finally, the year-to-date EBITDA margin in Defense is 7.2%. In the quarter margin, improvement occurred with the contract adjustments for the KC-390 and the physical progress of the program. We emphasize that these adjustments were punctual, and for the next quarter, we expect business margin to normalize.
In Service and Support, our revenue has increased by 24% year-over-year to $366 million. We recorded a consistent double-digit EBITDA margin year-to-date. Another highlight was the backlog increase of $2.8 billion in the quarter, the highest value ever recorded in this business unit. Embraer Service and Support has reinforced its role as one of the main drivers of growth for the next years. I will now hand it over to Antonio to give you further details on the financial results and we’ll be back with closing remarks.
Antonio Carlos Garcia: Thank you, Francisco, and good morning, everyone. Indeed, we have an excellent quarter with financial and operational indicators aligned with our projections for 2023. Moving to slide seven, we have good news about deliveries. In the third quarter, Embraer delivered 43 jets, 15 Commercial and 28 Executive, representing an increase of 30% compared to the same period last year and 33% higher year-to-date. The highlight is Commercial Aviation, representing a robust growth with deliveries rising from 10 to 15, an increase of 50% on year-over-year basis. In Executive Aviation, deliveries also increased in the quarter, 19 light and nine mid-sized jets, 22% higher than third quarter 2022. We have a challenge ahead of us in Q4 deliveries, but as we already demonstrated last year, we are prepared for this.
As a result, we are confirming the delivery outlook in our Commercial and Executive business for 2023. In slide eight, backlog, our firm order backlog ended the quarter at $17.8 billion, the highest backlog in one year. The quality of orders in our backlog is accurate with Embraer’s profitability expectation. In Commercial Aviation, total backlog increased from 271 aircraft to 291 aircraft quarter-over-quarter. In Executive Aviation, we see a resilient backlog with annual book-to-bill of 1.5:1, one of the highest in the industry currently. The business continues to experience a strong growth with a solid demand for the entire portfolio. Service and Support backlog reached its record, reflecting the extension and increase in the Pool parts per contracts.
As a result of our excellent performance, we ended the quarter with approximately 1.3 billion of net revenue, 38% higher year-over-year. Revenue year-to-date exceeded $3 billion, which represents a figure of 29% higher year-over-year. We had an increase in revenue in all of our business units, which shows Embraer potential for a sustainable growth. In slide nine, the third quarter, we had an excellent performance in terms of adjusted EBIT and EBITDA with $100 million and $149 million, respectively. Adjusted EBIT and EBITDA margins of 7.8% and 11.6%, respectively, also shows a strong growth, mainly due to the higher revenue in all business units and stable cost base. We are reaffirming our adjusted EBIT and EBITDA margin projections for 2023.
In slide 10, we had the free cash flow generation, excluding Eve of $44 million in the third quarter, significantly higher year-over-year with a stable working capital. These upward trends indicate a substantial positive cash generation for the next quarter, in line with higher deliveries, so we are very confident that we will reach the free cash flow guidance of $150 million or more. Moving to investment, $45 million were allocated to R&D and $30 million to CapEx, resulting in $75 million invested in the third quarter. Capital allocation is focused on the segments with higher returns, with prior search expansion of our production capacity in Executive Aviation and Service and Support. Some words about EVE, the program has reached the necessary milestones to begin capitalizing its product development costs on IFRS rules.
Adjusted net results were $33 million, an increase of 34% compared to third quarter 2022. Reported net income was positively impacted by non-cash mark-to-market of Eve warrants of $24 million on an adjusted net margin of 2.6%, remaining stable compared to the third quarter 2022. In slide 11, in this slide, we are pleased to show the results of our liability management plan. We reduced our debts in $632 million compared to the second quarter 2023. We increased the average debt maturity to 4.8 years, leaving Embraer in a comfortable position where liquidity of $2.4 billion with Eve allow us to cover all obligations until 2030. In the quarter, our net debt, excluding Eve, is $1,357 million, as shown in the top center of this slide. This is a slight lower than last quarter due to the better cash generation.
Our leverage ratio shown in the top right corner is 2.5 times, a significant improvement compared to 4.8 times in the same period of last year. It’s important to highlight that the positive results of our business unit allowed us to successfully execute our liability management plan. We are taking all necessary steps to recover the investment rate status. With that, I conclude my presentation and hand it back to Francisco for his final remarks. Thanks for your attention.
Francisco Gomes Neto: Thanks, Antonio. The Q3 results were very satisfactory and met our expectations. Our products are experiencing a very favorable moment in the market, with several important campaigns ongoing and aircraft slots on the production lines practically filled until 2025. We know we have a challenge ahead in terms of deliveries. Therefore, we can expect an intense Q4, mainly due to supply chain constraints. In line with our guidance, we expect 20% revenue growth this year compared to last year. We are confident that this is the harvesting time for everything we have done in recent years and that we are on the right path to a sustainable growth with even more robust financial results in this and future years. Thanks again for your interest and confidence in our company.
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