Embraer SA Q1 FY2024 earnings call

Management Statement and Operational Highlights

• Operational Performance in Q1: Despite seasonality, total deliveries revenue margins were higher than same period in 2023 and cash consumption was better than a year ago. Focus on business and financial efficiency to achieve full year guidance despite supply chain constraints.
• Deliveries: Executive Aviation delivered 18 jets in Q1, up 125% y-o-y; Commercial Aviation delivered 7 aircrafts, flat y-o-y; Defense had no C-390 deliveries. Implemented production leveling plan to mitigate business seasonality.
• Backlog: Strong total backlog of $21.1 billion at end of Q1, up 13% q-o-q. Commercial Aviation backlog over 308 aircrafts valued at $11.1 billion; Executive Aviation backlog $4.6 billion; Service & Support backlog stable at $3.1 billion; Defense & Security backlog decreased marginally by 4% q-o-q to $2.4 billion.
• Revenues: Top-line reached almost $900 million in Q1, a 25% growth rate. Service & Support represented around 41% revenue, followed by Executive close to 27%, Commercial Aviation 22%, and Defense 9%.
• Adjusted EBITDA and EBIT: Generated $47 million in adjusted EBITDA in Q1 with a 5.2% margin. Adjusted EBIT was $7 million for an adjusted EBIT margin of 0.8%. Reported EBIT was negative $1 million for a negative 0.4% margin.
• Cash Consumption: Excluding EVE, adjusted free cash flow consumption was $346 million in Q1, $53 million better than Q1 2023. Q1 cash consumption due to increase in inventories, but cash should revert as deliveries take place.
• Liability Management: Reduced gross debt by $276 million in Q1 2024 and by $754 million versus a year ago to a total of $2.6 billion. Net debt declined by $384 million y-o-y to $1 billion in Q1 2024.

Segment Performance

• Executive Aviation: Delivered 18 jets in Q1, an increase of 125% versus a year ago, with the highest Q1 level in the last eight years. Light jet segment was 83% higher year-over-year with 11 Phenom delivered, while medium jets had seven freighters delivered. Revenue contribution close to 27%.
• Commercial Aviation: Deliveries were flat at seven aircrafts in Q1 compared to the same quarter of 2023, with four E1s and three E2 aircrafts. Revenue contribution around 22%.
• Service & Support: Revenue grew 12% compared to the same period last year with solid double-digit profitability. Represented around 41% revenue in Q1. Business backlog maintained at historical $3.1 billion record with a 10% plus EBIT margin.
• Defense & Security: No C-390 deliveries in Q1 2024 and 2023. Reported lower year-over-year revenues because of supply chain delays and business seasonality. Revenue contribution around 9%.

Guidance

• 2024 Cash Generation: Has firm or $220 million or higher guidance for the cash generation in 2024.
• Commercial Aviation: Plans deliveries between 72 and 80 aircrafts in 2024. Expect to grow production of commercial jets in 2025 to be close back to pre-pandemic levels, leading to better profitability performance in the years ahead.
• Executive Aviation: Expect growth in 2024 and even more important growth in 2025 and years ahead due to investments in plants to increase production capacity.

Risks

• Supply Chain Issues: Still have challenges in specific components with volume and on-time delivery, affecting production and potentially deliveries. Specific components for defense, like those for the C-390, have issues with receiving parts in Q1.
• Defense Revenue Impact: Supply chain delays and business seasonality led to lower year-over-year revenues in Defense & Security, impacting margins.
• Service & Support Bad Debt: Provisions for bad debt in Service & Support due to a concentration of overdue payments from a bunch of customers, though half is expected to revert next quarter.

Q: Could you provide more detail on whether supply issues impacting the defense business overlap with the commercial division?

A: Yes, there are improvements in supply chain but still challenges in specific components. Specific components for defense, like those for the C-390, have different parts or suppliers, and there was a concentration of less receiving parts for defense in Q1, but nothing concerning for the fiscal year.

Q: Could you elaborate a little bit on the sale campaigns for the 200 aircraft mentioned both E1a and E2s, including geographic dispersion and if it's related to lack of supply from Boeing and Airbus?

A: Had campaigns in all regions. It's a combination of factors. For E2s, it's a perfect solution to complement operations of bigger narrow-body. The fact that production is available from 2026 onwards can help airlines add capacity sooner. The arbitration timing with Boeing is expected to end no later than the middle of this year.

Q: Can you talk a little bit more just about supply chain in general and where you are seeing constraints still both on commercial and in defense?

A: See improvements in average supply chain but still have challenges in specific products in terms of volume and on-time delivery. Suppliers still have difficulties delivering parts on-time, affecting production. Expect improvements in 2025 and years ahead.

Q: How are you thinking about product development and new products?

A: Focusing on selling and delivering current existing portfolio of products. Don't have concrete plans to develop or launch an aerobody or other aircraft in the next few years.

Q: Could you give updates on the negotiations with Mahindra regarding the sale of C-390 to the Indian Air Force and comment on bad debt provisions in Service & Support?

A: Had a visit from Mahindra's CEO, and they believe they have a good partnership with Mahindra. Regarding bad debt provisions, $3 million was built up in Q1 due to a little higher concentration of overdue payments from a bunch of customers, applied via accounting methodology, and half is expected to revert next quarter.

Q: Do you guys have any updates regarding the conversion of the orders from Netherlands, Austria, Czech Republic and the size of ongoing orders not incorporated to backlog yet?

A: Have high expectation to sign important contracts in defense this year. Working on various campaigns for A-29 Super Tucanos and C-390, and very optimistic about sales in defense this year.

Q: How can Commercial Aviation margins stabilize in the future with positive drivers?

A: Commercial Aviation was able to sustain margins in the mid-teens in the past. Feel confident margins will continue to improve towards that direction in the next few years.

Q: What prevents customers from committing to more firm orders for E2s despite it being an attractive aircraft?

A: There was a wave of customers buying bigger aircraft, but now see more opportunities for small narrow-body like E2s. E2 can fly up to 6 hours, is efficient and quiet, perfect for exploring routes and higher flight frequencies. Interest in this segment is growing.

Q: What unit growth are you planning for based on the demand backlog in Commercial and how does production plan look?

A: 2024 Commercial Aviation deliveries between 72 and 80 aircrafts. Expect to grow production of commercial jets in 2025 to be close back to pre-pandemic levels, leading to better profitability performance.

Q: Have you had resolution of supply chain issues in Executives such that the year can be more level loaded as you go through the year or is there upside to the full year range?

A: Had difficulties last year with suppliers, but have approved investments in plants to increase production capacity in Brazil and the U.S. Expect growth in 2024 and even more important growth in 2025 and years ahead due to these investments.

Q: How do you rate the chances of Embraer to win E2 orders from U.S. customers?

A: Extremely happy with American Airlines order. Porter Airlines is flying E2s in the U.S., and there are opportunities in the U.S. market for E2s as it can fill the gap between regional jets and big narrow-bodies.

Q: Do you have updates on the initial agreement with Richard Schuurman for the conversion of E1s jets in China?

A: No updated to share at this point.

Q: Could you update us on the sales campaigns in Asia, especially in India and China?

A: Asia is a big potential for E2s. Inaugurated first full flight simulator of E2s in Singapore, helping pursue opportunities in the region. Working on sales campaigns in many countries in Asia-Pacific, with over 300 E2s flying in the region already.

Q: Can you give details on the arbitration proceeding with Boeing and when you expect it to be over?

A: The process is in final phase, expected to end no later than the first half of 2024.