Embraer SA Q3 FY2023 earnings call

Management Statement and Operational Highlights

• Firm order backlog ended at $17.8 billion, a $500 million increase from Q2 2023, with 42 commercial aircraft sold by September.
• Q3 marked excellent sales momentum and double-digit revenue growth in all business units. EBIT and free cash flow in line with expectations.
• Concluded Reliability Management process, extending debt maturity with no relevant disbursement until mid-2027, but still facing supply chain challenges.
• Commercial Aviation delivered 39 aircraft in 2023, backlog $8.6 billion. Executive Aviation revenue up 25% YOY, EBITDA margin up 2.1%. Defense had new selections for C-390, and Service and Support saw revenue growth and backlog increase.
• Third quarter adjusted EBIT $100 million, EBITDA $149 million, margins 7.8% and 11.6% respectively. Free cash flow excluding Eve $44 million in Q3, confident of reaching $150 million or more.
• $45 million allocated to R&D and $30 million to CapEx in Q3. EVE program reached milestones to capitalize product development costs on IFRS rules.

Segment Performance

• Commercial Aviation: Delivered 39 aircraft in 2023, with 21 being E2 (3 times more than same period 2022). Backlog rose to $8.6 billion, with a book-to-bill of 1:1. Revenue grew double-digit.
• Executive Aviation: Revenue increased 25% year-over-year, EBITDA margin improved 2.1%. Delivered 28 jets (5 more than Q3 2022). Backlog grew 10% YOY to $4.3 billion with a book-to-bill of 1.5:1.
• Defense: Selected by Austria, Czech Republic, and Netherlands for C-390 Millennium. First Portuguese Air Force KC-390 entered service, and Brazilian Air Force KC-390 reached 10,000 flight hours. Year-to-date EBITDA margin 7.2%.
• Service and Support: Revenue increased 24% YOY to $366 million. Backlog increased $2.8 billion, the highest in the business unit.

Guidance

• Expect 20% revenue growth in 2023 compared to 2022.
• Free cash flow guidance of $150 million or more, confident of reaching this as deliveries increase.
• Adjusted EBIT and EBITDA margin projections for 2023 remain unchanged.
• Confident in delivery outlook for Commercial and Executive Aviation in 2023, with supply chain challenges but working to mitigate.

Risks

• Supply chain challenges impacting deliveries.
• General economic, political, and business conditions in Brazil and other markets where Embraer operates.
• Pratt & Whitney GTF engine issues, though E2s are less impacted and OGMA is preparing for MRO opportunities.

Question and Answer

Q: Just on demand in Commercial, it’s been a few quarters now that you’ve been discussing pretty heavy campaigning activity, but it’s also been a few quarters in a row where the actual signed orders have been relatively tepid. Is there something holding those discussions back or making them take longer than expected or is it really sort of more normal course of order? And I guess, what do you think can happen before year end versus maybe what orders look like in 2024?

A: Francisco Gomes Neto says it’s taken a little longer than expected, but they expect to close some deals still in Q4 2023 and see a book-to-bill above 1:1 by year end.

Q: Just on demand in Commercial, it’s been a few quarters now that you’ve been discussing pretty heavy campaigning activity, but it’s also been a few quarters in a row where the actual signed orders have been relatively tepid. Is there something holding those discussions back or making them take longer than expected or is it really sort of more normal course of order? And I guess, what do you think can happen before year end versus maybe what orders look like in 2024?

A: Francisco Gomes Neto says it’s taken a little longer than expected, but they expect to close some deals still in Q4 2023 and see a book-to-bill above 1:1 by year end.

Q: Maybe talk a little bit about the order mix. It looks like you did particularly well on the 175. The margins were pretty good, even though there were fewer 175s. I know the mix has favored the 175 as much more profitable. Can you discuss first, what the outlook is for 175 orders as a percent of the total going forward? What the mix is likely to be next year, 175 versus E2 and how the E2 is doing in terms of profitability?

A: Francisco Gomes Neto says they expect a 60%-40% mix of E2s to E1s going forward, with E2s growing as expected and E2s having better profitability.

Q: When should we expect the orders? How big would you expect the orders to be? And what should we look for in terms of delivery prognosis going forward?

A: Francisco Gomes Neto says they expect to close contracts with Austria, Czech Republic, and Netherlands by early 2024, with deliveries starting 2–3 years after signing, and expect at least 11 aircraft from those countries plus 3 from South Korea.

Q: Are you seeing any relief or possible relief in terms of scope clauses in the U.S., as you mentioned, several campaigns going forward?

A: Francisco Gomes Neto says they don’t see immediate relief in scope clauses, but the E175-E1 is still the workhorse in U.S. regional aviation and pilot shortages are improving, opening opportunities for sales.

Q: If you’re seeing any relief or possible relief in terms of scope clauses in the U.S., as you mentioned, several campaigns going forward?

A: Francisco Gomes Neto says they don’t see immediate relief in scope clauses, but the E175-E1 is still the workhorse in U.S. regional aviation and pilot shortages are improving, opening opportunities for sales.

Q: The GTF issue and the accelerated inspection and replacement on their powdered metal. Can you comment as it relates to effects you’re seeing on your E2 fleet or you expect on your E2 fleet? And then also, with respect to OGMA, what’s the kind of revenue opportunity from the OGMA MRO opportunity for the GTF?

A: Francisco Gomes Neto says E2s are less impacted by GTF issues due to later entry into the market and lighter configuration, and OGMA is preparing for MRO work related to GTF engines, expecting revenue growth starting in 2024.

Q: The stabilization of the business after COVID-19 and after the breakup with Boeing, too. I mean, it’s very clear that the company is now in a harvest period. So with the balance sheet in a pretty strong place, there’s no significant maturities in the next few years, how do we think about capital deployment priorities for 2024 and beyond?

A: Francisco Gomes Neto says they are in a harvest period, focusing on improving financial performance, with potential for dividends in 2025 onwards and investment in new technologies like eVTOL and disruptive propulsion systems.

Q: Is there any more color you can give us on that and how you’re thinking campaigns will could go through the end of this year, maybe in the next year? And what that translates into a weekend, like -- what’s like a normalized delivery rate for the E-Jets?

A: Francisco Gomes Neto says they are working on campaigns in various regions, expect to introduce E2s in the U.S., and are optimistic about deliveries, expecting above 8 units in 2024 and 100 units in 2025 and beyond.

Q: A question regarding next year the supply chain remain challenging, but you mentioned that you can increase the level of deliveries on the Commercial. So just wondering what will you see in terms of the Executive, the Defense? I mean, do you think it could be growing again double-digit rate on topline?

A: Francisco Gomes Neto says they expect double-digit growth in all business units next year, working to improve production distribution and mitigate supply chain challenges.

Q: I was wondering if you could give us an update on how the partnership with L3Harris for the Agile Tanker is developing. And the second question, you mentioned in a previous question about the countries that are selecting this C-390. But if you could comment a bit on the on the potential talks with the Indian Government a few months back, if you could give us a bit more detail on that.

A: Francisco Gomes Neto says partnership with L3Harris for Agile Tanker is moving, and they are working with India to select a partner for localizing C-390 production to meet Indian Air Force specifications.

Q: The GTF services business that you’re going to layer in. Remind me how large that gets on an annual run rate basis once it’s at its run rate level? And then also, what does the margin look like on that work?

A: Antonio Carlos Garcia says OGMA could see revenue around $500 million annually in the long run, with high single-digit margins starting in 2024 as repairs ramp up.

Q: I think last quarter you had guided to the Defense segment having $600 million of revenue this year. Is that large of a fourth quarter still the plan?

A: Antonio Carlos Garcia says they expect Defense revenue around $600 million this year, with a sales campaign potentially closing by year end impacting the fourth quarter.