Q3 2022 Embraer SA Earnings Call
We should stay in the upper range of the guidance for a bit and they beat that with some upside potential if all delivers happens as planets.
Quarterly G&A expenses reach at $41 million with no significant changes compared to the second quarter 'twenty to selling expenses reach at six to 7 million due to higher volumes of campaigns all segments promising in defense and commercial aviation.
Investments in the third quarter <unk> invested a total of $41 million in product development and research mainly due to development for example, Youtube family Executive aviation and other products.
And we invested 40 million capex, mainly for the service and support the expansion.
Moving to slide eight starting with adjusted free cash flow.
Free cash flow in the third quarter was negative.
$109 million this easily to expand due to the higher working capital needs for the higher deliveries in the fourth quarter 2022.
Free cash flow year to date is negative $86 million is lighting, rather than nine months consolidated basis.
Therefore regarding to the free cash flow, we continue highly focus on their cash flow discipline, and we decided to increase our.
Our free cash flow guidance.
From 50 million to 150 million or better in 2022.
On the right side. The adjusted net result was a <unk> 20.
$24 million adjusted trending positive from an efficiency and less interest expenses year to date, and we are more or less growth to zero.
In slide number nine we are extremely happy with the develop our strong liquidity profile.
The company reduced the quieter finished with total debt of $3 1 billion or.
808 million less year to date in line with our liability management strategy to reduce gross debt and interest expenses. They couldnt scared off our debt give us comfortable situation on the amortization for the next two years. If you see we do have $37 million.
Residual value to pay in 2020 to 244 in 'twenty three Moreover.
310, we had before 2024 has been a red reef.
Our refinance.
Being postponed to 2027 means we do have three years in.
Comfortable situation to overcome any kind of recession or volatility in the market and we continue to work on increasing duration and improving the financial metrics.
To ensure the company liquidity Embraer will be 10 in October 2020 to our revolving credit facility in line <unk> in the amount of $650 million.
And the renewal of the current rules with the National Bank in Brazil, with additional three years maturity.
From $300 million.
We thank all of our banking partners for the support store delivery of overcrowded 14.
To finish my presentation moving to slide number 10.
About <unk>.
Accounting restatement for the second quarter 'twenty, two noncash adjustments.
He shoots warranties to Satish and spec ing vessel during the IPO.
In September we reviewed its accounts for <unk> are warranted.
That were issued and became an <unk> at the closing my.
Based on such a review <unk> expect to recognize the following noncash expenses associated with the issuance of such awards for the second quarter.
Warranties.
The revised accounting treatment is to measure the warrants have a fair value.
Based on their premises, we recognize a noncash impact of 76 million in net results of which $142 million in other operating expenses and $67 million or fair value of financial income.
Second listing expenses, we recognized a noncash expense of 136 million other operating expenses as a leasing expenses.
All values were no but was previously book and the equity now.
Are recognizing the profit and loss before impact the equity of the company transaction costs <unk> assess it it's direct and incremental costs and concluded that the amounts to be reclassified this $15 million.
In equity to other operating expenses.
With that I conclude my presentation Beth.
France is through their final words, thank you very much.
Thanks, Antonio to close I would like to make some comments on the year end and near future.
At the end of the year, we still beat challenging with a concentration of deliveries in the fourth quarter.
But we haven't known this since the beginning of the year and the company's focus has been on mitigating certain issue in.
We are prepared to delivery.
Already full year results.
Regarding the coming years before a better perspective in terms of revenues and profitability growth.
Aircraft is what's the production line for deliveries in 2023, and 'twenty 'twenty four are almost completely fields.
For both commercial aviation and is active jets.
And as I said before we are working many active campaigns, we have good chance of new orders for the years ahead in all business units.
On top of that considering the new campaigns under negotiation.
<unk> focus and discipline to increase enterprise efficiency and innovation projects. We are very confident about the near term future of Embraer and.
In closing I'm very pleased to announce that Embraer has been awarded with a great place to work certification in several countries that we operate.
We celebrate these recognition and continue to believe that engaged and passionate people achieve the greatest results and nurture a happy and healthy working environment.
Our people are what make us fly.
As stated in our values and we will continue to work to deliver the best value to them through our clients shareholders and society.
You for your interest and confidence in our company.
Thank you we will now start the question and answer session and we will ask who are users in making questions at any time press star nine in your phone or press raise hand on the platform. When your name is analysis Brexit star six on your phone or active.
<unk> microphone on the platform and start your question.
To give everyone a chance to participate we request you ask just one question Berke you wait while we pull for questions.
Our first questions come from Marcelo Motta from JP Morgan.
Please Marcello you May proceed.
Hi, everyone. Good morning. Thank you for taking the question is more of a strategic question regarding <unk> I mean, when you look at the company.
Market cap has been growing since its listing today's worth more than than the state that embraer holder in the company. So even though there are several lockup agreements just wondering how employers think about ease in the long term. It maybe it could be a company that you could monetize auto feature an all too true strength even more.
Your cash position. So how do you guys see the current moment for even on how you see yourselves in a position and even the long term. Thank you.
While our Marcellus Francisco speaking.
Antonio will once it together this question to you.
<unk> seen desktop.
We continue to be very excited with this project we have more we have no more than 200 engineers working dedicated to their to.
The easy development, so that that is moving is moving well.
We do believe that <unk> will be worse.
Great movement November here.
Tim is offer innovation to help.
Our growth.
In the long term so again about the future of if we are confident that it was a very positive movement by both the finance I'll leave this with our with Antonio.
To answer to you.
Marcello we for sure we have today, 90% them.
If the.
Shareholder over once the warrants exercised their warrants as we are going to get half a billion dollars.
The cash flow and probably are going to dilute a little bit which is our edge.
A way to monetize but at least we all are locked up for the next three years. There is no the short term.
Anything that we think are part of the warrants that could provide us more cash flow than we have today, but the next three years nothing's going to happen.
Perfect. Thank you very much for instance container colonoscopy.
Marcel just to complement this.
We are also finalizing the studies for the industrialization.
With a global network of production energy. So we are moving.
We are moving.
According to our plan.
We will have the EEV inking a servicing by 2026.
Our next question.
Gums throne.
A number that begins with one.
656 from New York You were allowed to talk please press star nine to activate your microphone.
Yes, I think Thats me Cai von <unk> from Cowen. So you said that you know youre pretty much filled for 'twenty three and 'twenty. Four can you give us any helpful color in terms of where those deliveries might be for.
<unk> and business Jets.
Yeah.
Well I mean, we are we oh, thanks for the question, Brian So Francisco speaking.
We are skewing in the middle of our planning process.
For for the next five years, including 223, but what I can tell you that we see are two digits two digit growth.
Embraer and <unk>.
Basically all business units.
The grow two digits.
And 'twenty two 'twenty three.
According to our view at this point of time. So we are very we are very positive.
<unk> the years ahead.
Okay.
Thank you.
Okay.
Our next question comes from Myles Walton from Wolfe Research. Please smiles jhirmack phones open.
Thank you good morning, Francisco Antonio I was wondering Antonio could we talk about the cash flow for a moment the fourth quarter implied cash flow I think is just under $250 million.
And if you look back the last five years or so you generate in the fourth quarter earnings are anywhere between 400 $700 million free cash flow.
And obviously youre looking for a very large delivery numbers. So.
Why only $250 million of implied fourth quarter guide.
Good morning, Myles Thanks for question.
We put 150 or better because hey.
Hey, guys. So we added the I would say the finery speed for the year.
Just five yards to the Dutch law with lump as in is it something happened in the deliveries then we are going to Miss big portion of the cash flow you're right.
If you completed the guidance said, whereas your future days being much higher than $150 million.
In order to not I would say.
Give you a.
False information prefer to stay in the 150 million it doesn't matter to get to the aircrafts out of the Darden property as though it should be much better in Europe hotelier relative comparison with the previous year, but at least to date.
Assuming the risk you have in front that says we are a little bit cautious to give out higher numbers, but a lot of upside potential here right.
Okay.
One other one on cash flow.
You make adjustments for the income statement and the balance sheet for eve, but I haven't seen an adjustment for cash flow for <unk>.
Can you provide them, yes, absolutely might've was just accounting adjustment with no catch adjustments. It was just pure accounting issue for example, warranties we needed to.
Jos Antonio I'm, not speaking to the restatement I am just sorry ongoing operations I haven't seen an adjustment for how much eve is burning.
It's just a million for each worker through more than it was in Q3 okay.
<unk> sorry 16.
I am sorry, six zero or sick one thing we've seen 166 years.
Thank you.
One for Francisco with their certification of the <unk> in China, and Francisco should we expect.
A significant change in the order dynamics out of China that haven't really been active in the last couple of years.
My House I have here a special guest with me I am I here. So I brought him because I knew this question would come so please.
Thank you Francisco good morning, Myles Thanks for the question.
Well first of all are very pleased we got the certification over the line very recently.
We are.
Actively working in the Chinese market.
So that is progressing.
What I will say is that the reason why we're so pleased with the E. Two the 190, which is certified now 195 E. Two which you will certify next.
Those are all very nicely between the ALJ 'twenty, one at which you see smaller Chinese Jeff product and the 909, which is a narrow body. So we feel that the E. Two complements the Chinese production line very well. So we have we have a.
Very good.
<unk> hopes for the Chinese market.
Yeah.
Okay very good thank you.
Thank you.
Okay.
Yeah.
Our next question comes from telephone and a number that starts with 190 175. Please.
Lisa just breast are 92 star.
It started on microphone.
Hi, This is Elizabeth Grenfell on Ferrite and can you hear me.
Yep, we can get for Canada.
Okay great.
I think you spoke to the days of weaknesses in the supply chain and there's downside risk to.
Yeah delivery forecast for the year.
You speak to what you're seeing in the supply chain, where there's specific weakness and how how much downside risk you see definitely a deliberate guy.
Hi, Elizabeth Thanks for the question.
Well we are released.
Still suffering with the supply chain this year a lot.
Especially with the engine <unk> and interiors and what we're getting Pos, but rita with it with that.
A lot of delays and then there are we have a.
We have to we have to try to change a lot our production schedule during the past months to accommodate the production with the delays we see this still the situation is still growing especially the each of the first half of next year, I mean, I mean, improving but still with a lot of delays.
And we see that the delays be reduced during the second half of next year, but there is still no not that in normal situations. I think this situation will normalize completely the only 2024, but again we are prepared to.
So with our production plan to deliver with this situation in 2024.
So the downside risks to delivery versus what you originally expected for this year.
Yeah.
Yes, Lisa when we placed the guidance you see commercial aviation 60 to 70 or 100 210, we read foreseen begin of the year this constrained and charter within supply chain.
That's why as I measure my speech, we are seeing our subsidy in the lower end of the guidance six due to a 100.
If I would call a risk three to four aircrafts each business unit and no more than that for this year.
For next year, we should have a let's say a robust too.
Leads for commercially.
Even with this such a restriction, but I would say if you asked me today, we're at the lower end of our events. It means we lost 10 aircrafts in commercially last 10 aircrafts senior executives and we may have additional risk between four to five aircraft each businesses.
But we continue to apply to the last day of the year.
All aircrafts on the Assembly line.
We finished you'll get the missing parts and delivery to those customers.
Okay, Great and then one more question if I could please on the defense side could you speak to that.
The percentage of completion recognition revenue recognition on the <unk> hundred thousand nine program, what what was.
What was the impact there attributable to.
The comparison with previous year, we had a gap of something around $60 million, we were not able to sell any <unk>.
8 billion Tonight. This year, that's why Les <unk> was a strong one.
We have a lot of revenue out of the Super Tucano. The 2009. This year, we we were not able to perform into sales we do have.
Aircrafts in the inventory, but we were not able to recognize as our revenue for the amusing contracts. However, we do see a nice flotation front of us for the <unk> 29 for the coming months, we are going to announce for sure and some base, but does not go into April of this year. Unfortunately.
Okay, great. Thank you very much.
Sure.
Our next question comes also via phone and the number of starts with zero Zero 56, please for Istar to activate your microphone.
Hi, guys. This is starting to mature from Atlas can you hear me well.
Yep.
Thanks for taking my questions.
A couple of questions one regarding service and support.
That's been a business that performed very well during the year.
Very high margins with tier your expectation regarding marsh <unk> by next year for this business and the other one is I think a follow up regarding deliveries you mentioned that you continue to see.
So blending issues for next year and they have for the next of the year.
So well.
The main reason that you are testing.
Reaffirming the guidance regarding deliveries or when do you expect some more downside on commercial and executive Jets can you provide more color on that point. Thank you.
This is <unk> speaking here good morning, So a sectional support you are.
Two two digits.
Margins this year.
I'd say, we continue to perform very well in the service and support and we should keep the same level for the year circa, especially 2023 and we are also growing in the services and supports.
Our fleet fleets is growing we need to procure those services that's why.
Continues to drive the surprise efficient and make sure that we continue to write the framework.
Prior to this nice margin Sir.
He got to deliveries.
Uh huh.
Our FERC cast today for our scheduled delivery schedule is.
<unk> continues to be on the.
On the guidance replace two to begin of the year.
And for next year, we are ready to adapt.
The charters, but however, there is a red the traditional growth for next year and our position there at <unk>.
I would say even with the supply chain constraints.
Some of the situations improving but not.
And the speed, we would like to see them now is concentrated just fuel suppliers before it was almost all of them to David Joseph field surplus. This year will continue to be in the lower end of the guidance.
We are going to fight towards the end of the year every day counts.
And next year, we are ready to adapt and Francisco you may want to comment.
Yes, Jeff just to a quick.
Quick quick comment that you.
You mentioned this year, we even with the tougher situation with the supply chain. We continue we will continue to affirm affirming that we will be within the guidance. This is the reason of this is because we were more conservative at the beginning of the year announcing the guidance. So we announced a range that we knew that.
We would face difficulties this year with the supply chain.
No.
When you see at the beginning of the year. So that's why we the only difficult to we still believe he will be in this lower end of the range of the guidance, we gave it to the marketing and beginning of the year.
Okay. Thank you so much.
A quick follow up regarding the free cash flow.
And in terms are you expecting some improvement on the working capital side regarding this excess free cash flow are you expecting any liability management in the near term.
No not really effect.
If you take into account that we're going to hit us in Q4.
Almost 40% of the whole year revenue is going to be done in Q4, we are going to release a lot of the basis. That's the main reason of the free cash flow and there is no special measures in Q4, new order to.
Improve our free cash flow guidance, just to get a read of those aircrafts out of the door is the only reason.
Hi.
Okay perfect. Thank you.
Our next question comes from Federal Fontana from Bradesco BVI place Mr. Pedro.
Good morning. Thank you for taking my question Congrats on <unk>.
If you could provide us some color on the ongoing.
Pilot shortage in the U S and how we stage impacting our commercial campaigns and when you expect these situations. So.
Thank you.
Okay, Oh, yeah, and over two I admire and to talk about this issue in the U S.
Thank you Pedro for that question.
<unk>.
Yes, the pilot shortage in the U S is.
Is affecting the <unk> deliveries and so we think it's going to be.
Less than we've seen in the previous years in 'twenty, three and 'twenty four.
We do believe that that will.
Correct itself towards the end of 'twenty three somewhere in the 24.
So we'll have to see how that develops Fortunately what I will add is that we see a lot of traction at the moment on the <unk> side.
So you've seen some deals close over the last couple of months and.
We see a very good appetite from airlines on that site. So we believe that the mix of the E. One E. Twos together is going to stay healthy going forward.
We believe that <unk> over time, we will start to pick up again towards 'twenty four 'twenty five.
Very clear thank you.
Okay.
Once again to ask a question. Please press the star six on your phone or raise hand on your zoom platform wait while pool for questions.
This concludes todays question and answer section that does concludes <unk> audio conference for today. Thank you very much for participation.
Have a wonderful day.
Hello.
Thanks Lee.