Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Embraer S.A. (NYSE:ERJ)
Q2 2019 Earnings Call
Aug 14, 2019, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's Second Quarter 2019 Results. Thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions to participate will be given at that time. [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 assumptions, 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, estimate, 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 discussed in 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 call are Mr. Francisco Gomes Neto, President and CEO, Mr. Nelson Salgado, Executive Vice President, Finance and Investor Relations and Mr. Eduardo Couto Director of Investor Relations.

I would now like to turn the conference over to Mr. Nelson Salgado. Please go ahead, sir.

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

Good morning, everyone, and thanks for joining Embraer's second quarter 2019 conference call. We start with the operational highlights at Page 4 with commercial aviation. Embraer delivered 26 E-jets in the second quarter and 37 year-to-date. As far as sales activity, Embraer signed up to 78 aircraft commitments during the Paris Air Show, including United Airlines for up to 39 E175, including 23 orders.

Fuji Dream Airlines ordered two E175s to add to Embraer's fleet and Binter signed an order for two additional E195-E2s. KLM Cityhopper signed an intention to purchase up to 35 E195-E2s, which [Indecipherable] included in our backlog yet. After the air show, SkyWest also signed a firm order for seven E175 E-Jets. In terms of new programs, the 195-E2 that were certified in the first part of the year will have its first delivery to Azul Airlines in the third quarter of 2019. And Azul, in preparation for starting the operation of the aircraft, signed a contract for a long-term Flight Hour Pool Program with Embraer. The 195-E2 began also its global demo tour in Asia.

Moving to Executive Jets at Slide 5. Embraer delivered 25 executive jets, 19 light and six large in the second quarter of 2019 and 36 year-to-date. This volume is around 20% above the same period of 2018. As far as the new products, the Praetor 600 and the Praetor 500, the Praetor 600 received triple-certification from ANAC, FAA and EASA with the first delivery to an European customer already happened in the second quarter of 2019. The Praetor 500, it was just announced yesterday received ANAC certification, outperforming on key performance metrics such as range and speed.

In terms of new sales, Embraer had expressive backlog increase due to the new sales of Praetor jets and related services. We are very happy with the market response to the new Praetors. Finally, our Bossa Nova interior won the award for the Best Interior Design at the 2019 International

Yacht & Aviation Awards.

Next slide, Slide 6, we show the highlights for Defense & Security starting with the KC-390. The program continued its flight test program with focus on the military missions looking forward to the first delivery to the Brazilian Air Force that is scheduled to happen in 2019. Embraer also announced the first export customer for the KC-390. The Portuguese government announced a firm order for five KC-390 and related services. That was a very important achievement introducing the KC-390 in the European market and reinforcing the program success. Still, regarding new projects, Embraer and ELTA systems from Israel signed a strategic agreement to introduce the Praetor 600 AEW (Airborne Early Warning). We believe there is a potential for these products and Embraer wants to explore it with the partnership.

Finally, our subsidiary Atech successfully completed the delivery of new aircraft traffic management center in India. And the contractual discussions with the Brazilian Navy for the supply of four ships of Tamandare class continued to move as expected.

Now, we move to the financial results, starting with the backlog at Slide 8. We continue our backlog recovery and reached $16.9 billion by the end of second quarter 2019. This recent increase was driven by demand for our new executive jets, Praetor 500 and 600 and the continued success of the Phenom family. It is important to say that the recent KC-390 order from Portugal is not included in our backlog yet.

Next, in Slide 9, we show aircraft deliveries. On commercial, we delivered 26 planes in the second quarter and 37 year-to-date. This is below last year, but in line with our expectations and we reiterate our guidance of 85 to 95 E-Jet deliveries this year. On executive jets, we had a better first half compared to last year, with 25 deliveries in the second quarter and 36 in the first half of the year. We maintained also our confidence to deliver 90 to 110 E-Jets this year as we are better sold than last year and has been seeing stronger demand for our planes.

Moving to Slide 10, net revenues. We reported second quarter revenues of $1.379 billion, broken by Commercial Aviation, $631 million, Executive Jets, $297 million, Defense & Security, $196 million and Services & Support, $255 million. The total in the first half of the year amounts to $2.2 billion. With the exception of Commercial Aviation, where we had the lower deliveries, we presented good revenue expansion, especially on the Executive Jets and Defense.

In Slide 11, SG&A expenses. We reported a total of SG&A at $119 million, with G&A expenses amounting to $46 million and selling expenses to $73 million. Our SG&A expenses this year has been affected by the activity related to the separation of Commercial Aviation business.

Moving to the operating results at Slide 12. We reported second quarter EBIT of $27 million, with 1.9% EBIT margin. The first half EBIT was $11 million, implying 0.5% margin. The operating results are in line with our guidance of break-even margin for the year. It's important to highlight that the separation costs associated to the Boeing transaction are all included affecting the EBIT. Year-to-date, we had separation costs of around $30 million. Breaking our 2019 EBIT margin by business. We had Services 12%, Commercial 2.7%, Executives around zero and Defense minus 7%.

Moving to Slide 15, we show our EBITDA. The same impact that we explained for the EBIT also applies here for the EBITDA. We reported in the second quarter $67 million EBITDA, with 40.9% margin. Year-to-date, EBITDA is $98 million, with 4.4% margin.

In Slide 14, we present our earnings. Embraer reported a net loss of $14 million in the second quarter, reaching the margin of negative 1%. Again here, our earnings have been impacted by the low operating results, and also higher financial expenses, given our increased leverage.

As far as investments in Slide 15, we reported total investment year-to-date of $200 million, broken by research $21 million, development $127 million, and $52 million in CapEx. Our investments this year remain concentrated on the E2 program as we entered into service with 195-E2 and continue the development of the 175-E2.

At Slide 16, we show our free cash flow. Embraer reported a positive free cash flow of $2 million at the second quarter and a free cash flow consumption of $664 million year-to-date. As we have been saying, we expect a positive cash flow generation in the second half of the year, because of the higher deliveries, especially in the fourth quarter.

Finally, at Slide 17, we show our indebtedness profile. We ended the second quarter with a total cash position of $2.8 billion and our total debt position of $3.57 billion, implying a net debt of $1.090 billion. Our debt maturity remains comfortable with an average of 5.1 years.

With that, I conclude the presentation and I will pass to our new CEO, Francisco Gomes, for closing remarks before we open for Q&A. Francisco, please go ahead.

Francisco Gomes Neto -- President & Chief Executive Officer

Thank you, Nelson and good morning, everyone from my side as well. It is a great pleasure to become a part of this highly skilled team in the year that Embraer is celebrating its 50th anniversary of challenges and achievements. In my first three months at Embraer, I have visited all of our sites around the world and I am greatly impressed with the levels of engagement, ethics and teamwork that our Embraer team shares.

I am convinced that Embraer is very well positioned for a promising future through the combination of a state-of-the-art products, continuous progress in becoming a more efficient company, the continuous support of our customers and the confirmation of the strategic partnership with Boeing. We continue to work on several fronts to ensure that the strategic partnership between Embraer and Boeing is successfully concluded in all of our employees, regardless of whether they will remain with Embraer or eventually work in Boeing Brasil commercial, are full engaged with necessary processes to complete this important transaction.

After what I have experienced in Embraer in these initial months, I am convinced that the company will return to its growth path with our team working in aligned manner with ethics, unity and oriented by results, we believe Embraer will recover and even surpass its current market value. Our Executive, Defense & Services businesses are stronger than ever after a long period of investment and combined with the maturity of innovative programs to bring value for our shareholders. I have no doubt that working hard will build a strong, solid and sustainable future for Embraer in the next decades.

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

So, thank you very much. Operator, now we move to the Q&A session.

Questions and Answers:

Operator

Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Cai von Rumohr, Cowen and Company.

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

Kai, can you hear us?

Jeff Molinari -- Cowen and Company -- Analyst

Hi. Yes. This is Jeff on for Kai. Can you hear me?

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

Yes. Very clear.

Jeff Molinari -- Cowen and Company -- Analyst

Okay. Good morning and welcome aboard, Francisco. Thank you for taking my questions. I'd like to ask about the Boeing partnership, specifically, how the separation activity progressing and what is the current view on major milestones they can cause?

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

Thank you, Jeff. With the conclusion of the deal, we have two big fronts. One relates to the work with the regulatory authorities of several jurisdictions so that we will get approval. We are doing well on this front. We are not talking about specific regions, but we are moving according to what we've planned. The other big front is associated with all the facts that we have to do to separate the commercialization meetings. And here and most of the activities are associated with the duplication of the ELTA systems, the separation of the people that will go to either companies. The separation of infrastructure that we will need in 2020 after the separation, for example, we will move a lot of people from the main site Embraer today [Indecipherable], which is the existing site to Eugenio de Melo. That will be the main site of Embraer [Indecipherable]. So for that, we need to accommodate people there. We are also moving the final assembly line of the Praetor jets to Gaviao Peixoto, because today it is done at Sao Jose dos Campos. So many different activities but we are confident that we are moving ahead as planned the fighter to transition by the end of the year.

Jeff Molinari -- Cowen and Company -- Analyst

Okay. Thank you. That's helpful. And is there any update on the actual costs whether -- for the tax and the separation costs? I think it was previously supposed to be $1.2 billion combined or thereabouts.

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

It's correct. So, now we're not changing that number, that's what we're expecting. Related to the separation activities themselves, which will add up to the first part of the year, $30 million, that we mentioned that are impacting our EBIT.

Jeff Molinari -- Cowen and Company -- Analyst

Understood. And then one more question if I can on a different subject here. On Executive Jets, it looks like the book-to-bill was quite strong, but it's difficult to tell exactly what it was although it looks like it was above one. What was the book-to-bill in the quarter and any color on what geographies were strongest? What type of buyers are most active? Thank you.

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

[Indecipherable] had a strong book-to-bill Executive Aviation. As we mentioned, the certification of the Praetor aircraft and first delivery of the Praetor 600 in Europe and the new -- the first delivery of the Praetor 500 already coming. I think these are having a very big response from the market. Our book-to-bill was actually around 1.5, but we are not able yet to provide details of where these both came from.

Operator

The next question comes from Myles Walton, UBS.

Myles Walton -- UBS -- Analyst

Thanks. Good morning. Welcome, Francisco. I was hoping maybe you could start around the cash flow of the business and kind of what your expectation is for free cash flow for the year and/or maybe where you think the balance sheet is on a pro forma basis, following the deal closing, if there's any adjustment?

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

So, we are working toward the outlook that we gave in the beginning of the year regarding 2019, which to pay $1.6 billion in mandatory dividends to shareholders and start the Embraer with a net cash position around $1 billion. For this year, 2020, we expect the free cash flow to be very pleasing -- sorry, 2020, for next year, we expect cash flow to be break-even and as we reported in January, we project the revenues of $2.5 billion to $2.8 billion and EBIT margin from 2% to 5%.

Myles Walton -- UBS -- Analyst

And so, Nelson, I'm sorry, did you say that the free cash flow was for 2019? I understand the cash position. I just wonder, is this year a free cash flow break-even or you'll be able to recover what's been consumed in the first half?

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

Yes. Generally, the second half is much stronger than the first. That's typical in our cycle. Both Executive and Commercial, they have -- and Defense, they have a stronger second part of the year in terms of cash generation. And we expect that the results for the first quarter especially will be recovered. And with that, we remain in line with our guiding for paying $1.6 billion dividend and starting the year Embraer with around $1 billion net cash position. We did not give guidance to 2019.

Myles Walton -- UBS -- Analyst

And then in terms of the delivery of the KC-390 to the Brazilian Air Force, one of the milestones ahead, are there -- is there any required further testing or is it purely paperwork at this point just in terms of getting that delivery?

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

Actually, the first thing you see that we delivered to the Brazilian Air Force was the aircraft that we presented in the Paris Air Show. And as soon as it came back from the Paris Air Show, the delivery process for the Brazilian Air Force started. This is the first delivery of a brand new type to its first customer. So, it's the process that takes long. So -- because there are lots of things that have to be verified by the customer and we expect that the delivery will happen in the third quarter of 2019.

Myles Walton -- UBS -- Analyst

All right. Very good. Thanks so much.

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

Thank you.

Operator

Our next question comes from Ronald Epstein, Bank of America Merrill Lynch.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Hi, good morning, guys. This is Kristine Liwag calling in for Ron.

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

Hi, Kristine.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Hi. My first question is on Commercial Aviation. Can you walk us through the moving pieces in margin for that aircraft? In your press release, you mentioned that there are weakness because of shift in mix. So, can you discuss what's driving the margins lower for that segment?

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

We, for some time anticipated that this is transitional year, when spots went in E190-E2 delivery or the E2 deliveries. And then first of traffic data, we've shown we have our worst margin, right? So I think this as you grow the number of the E2 in the mix, that tends to drive margins down.

We are also delivering aircraft we at best in the US, the E175. In contracts where we knew also that we would have our worst margins than we had previously in the segment. So, basically, what is affecting the margin? So, it's a bit of higher cost on the E2 relatively to what we expect to be in the future because of the learning curve and more site margins because of sale prices for E175.

Francisco Gomes Neto -- President & Chief Executive Officer

Well, one important thing, Kristine, it's a good year if I may add [Phonetic]. It's important to say that the margins we mentioned about Commercial, they include the separation costs there. So if you remove the separation costs, the margins in Commercial would be like 3 percentage points better. So, it's actually besides what Nelson mentioned that we're going to have [Indecipherable] that the decline is also related to the separation costs.

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

Yes, at the EBIT level, I'm expecting more than the gross margins.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

That's really helpful. And when you think about the learning curve on the E2, at what unit delivery do you expect incremental E2 margins to be closer to parity to what your legacy E-Jet margins were?

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

That's difficult to say. We work very hard every day to try to anticipate the reduction of cost. But I would not take the risk of say any specific amount of aircraft, right? But it's very normal. There is generally in the learning curves, in the first 15, 20 aircraft, we have a faster reduction. And then lower reduction up to 150, 200 aircraft. So that's more or less the profile that we look now.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Great. And in Executive Aviation, can you discuss the demand environment and also the pricing? Are you starting to see pricing improve in Executive?

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

Well, the market is better, generally speaking, not spectacularly, but it is better. All the implication in Executive Aviation, we mentioned that. So you have a more positive environment coming from that. And with the introduction of the Praetors, we differentiated our offer in the segment even more. It's a much bigger range than any other competing aircraft [Indecipherable] from the Praetor 500 and also the Praetor 600. And we expect that this positioning will allow us to practice better pricing as we've been looking and valuing really the offer that we are providing in the market.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Great. And lastly for me, if I could squeeze one more, for the Boeing deal, are there termination costs if the deal doesn't close?

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

There are. I don't know the details here, but depending on the reason for a potential [Indecipherable]. It's important to emphasize that this is a scenario we don't even consider. We are working very hard to get the regulator's approval in all regions of the world. And internally, it's very hard to make all the activities that we have to make and complete before the separation starting in the end of the year.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Thank you very much.

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

Thank you.

Operator

The next question comes from Josh Milberg, Morgan Stanley.

Josh Milberg -- Morgan Stanley -- Analyst

Hey, good morning. Francisco, Nelson, I do thank you guys for the call. My first question is a follow up on the question about your cash flow. In the first quarter call, you had highlighted the $100 million of delayed payments from the Brazilian government and that apparently did not reverse in the second quarter. So I just wanted to see if you could give us a little bit of a better understanding on what chassis for anticipating a normalization in the second half of this year. That's the first doubt.

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

Yes. We -- the budget problems that the Brazilian government has been facing, they are affecting our results. But we have great confidence that the Brazilian Air Force will manage to sort that out before the end of the year.

Josh Milberg -- Morgan Stanley -- Analyst

Okay. That's helpful. And then my second question is on the KC. We recognize that the sales to Portugal did represent a big milestone for you guys, but we had thought that deliveries might have started a little earlier. Could you guys comment on that timing, and on what penalties could apply if a future Portuguese government decided to cancel or delay the orders? And then if we also think about other potential KC orders from abroad, do you think that 2023 is a reasonable assumption for the earliest when those other orders might start delivering?

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

No. And I'm not sure I understood the question completely. Let's go part by part. Regarding the contract with Portugal, it is indeed a very important milestone because it's the first export customer from the product. And this is always a very important achievement for this product. The time for the delivery of the first aircraft is more driven by the need to develop the latest version of the aircraft. So there is some product development associated to this contract, which will delay the first -- not delay but it will make that delivery will not happen before 2023 and with this, the order deliveries happen at 2027.

In parallel to those deliveries, we knew we have already [Indecipherable] of around two aircraft per year by the Brazilian Air Force, right. So, that's the delivery turn for the KC. I think the fix that they are releasing is that there is this product development so that we have an aircraft that is ready to operate in the open -- in that environment, which by the way, is very good because we really, really have opportunities to look for customers in all that have the same needs after that.

Josh Milberg -- Morgan Stanley -- Analyst

Okay. That was the exact explanation that I was looking for. Just a better understanding of what was behind the 2023 timing. But the other doubt I had raised was if you could just comment, and maybe this is something that you don't disclose but what the contract with the Portugal government, stipulates with respect to eventual decisions to either cancel or delay the order?

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

Every contract has provisions if obligations are not fulfilled by either party. But again, we are not contemplating that. We have very strong contract. We have everything in line to have the project development that we have to be ready and the first delivery in 2023.

Josh Milberg -- Morgan Stanley -- Analyst

Okay. Thank you very much.

Operator

[Operator Instructions] The next question comes from Gabriel Cavalcante, CTM Investments.

Gabriel Cavalcante -- CTM Investments -- Analyst

Good morning, guys. Thank you for taking my question. And just about the dividend, we know that in the United States dividends are taxed differently from what they are in Brazil. I just want to know if there is any type of initiative coming from Embraer maybe working with somebody else to maybe put a different situation for the American investors that are receiving this dividend. And it's just about if they're going to be taxed the same way they're taxed on regular dividend or there's something that are going to help these investors to get taxed differently. Thank you.

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

No. There is no different treatment from any investor. We will pay the dividend to everyone the same way.

Gabriel Cavalcante -- CTM Investments -- Analyst

Okay. Thank you.

Operator

This concludes today's question-and-answer session. Sorry. The next question comes from [Indecipherable]. [Operator Closing Remarks]

Duration: 37 minutes

Call participants:

Nelson Krahenbuhl Salgado -- Vice President of Strategy, Institutional Relations & Interim Executive VP of Finance & IR

Francisco Gomes Neto -- President & Chief Executive Officer

Jeff Molinari -- Cowen and Company -- Analyst

Myles Walton -- UBS -- Analyst

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Josh Milberg -- Morgan Stanley -- Analyst

Gabriel Cavalcante -- CTM Investments -- Analyst

More ERJ analysis

All earnings call transcripts

AlphaStreet Logo