Embraer S.A.
Q1 2019 Earnings Call Transcript

Published: 15 May 2019

[Operator:]

Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's First 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, estimates, continues, anticipates, intends, expects and similar words are intended to identify forward-looking statements. Embraer undertakes no obligations 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. 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 Salgado:]

Good morning, everyone. We start our presentation at Slide 4 talking about business unit highlights first on Commercial Aviation. We delivered 11 new jets in the first quarter 2019, including the first delivery of E175 jets in Africa to Mauritania Airlines. In terms of new E175 sales, the American Airlines SkyWest signed an additional front order for nine E175 jets, reaching an interesting mark of 158 orders since 2013. From this, 147 aircraft have already been delivered to SkyWest. Excited about E2 program, we have a very important result in the first quarter [indiscernible] not to what happened last year we deliver 90 E2 -- deliver 95 E2 was granted Triple Certification by ANAC, FAA and EASA with first delivery to our school from Brazil, U.S. and Europe. With the first delivery of the E195-E2 to Azul Airlines is expected to happen in the first quarter of 2019. And finally regarding E2 new sales, the Nigerian carrier Air Peace placed an order for up to 30 E195-E2 jets. And this was our first E2 order in Africa. Moving to Slide 5, highlights of Executive Aviation. We have delivered 11 Executive jets in the first quarter. And important to say, we sold more than $300 million in new jets during this period. This was our best first quarter results in terms of our sales in the last three years. Embraer was also very proud to deliver the 600th Phenom 300 aircraft, the only business jet to achieve this milestone in the last 10 years. This is a real proof of the huge success of the Phenom program and its ability to deliver superior performance technology and comfort to our customers. Finally, talking about our most recent launch, we announced in the first quarter that PRAETOR 600 was granted its type certificate by ANAC, the certification authority from Brazil. And thus became the only super-midsize business jets to be certified since 2014, very important to say that with the certification and the last flight tests, we are very happy to announce that the Phenom, the Praetor 600. So there should all mainly the line goes and including a range that goes beyond 4,000 nautical miles being able to make most of flights between London and New York, Sao Paulo and Miami, Dubai and London. Customers have already noticed the superior performance of the Phenom 600 and Praetor 600. And we're happy to announce that the Praetor sold out until May 2020, with first delivery referring now in the second quarter of 2019. Next slide is Slide 6, we move to Defense & Security. The KC-390 program continued its preparation for entry into service with the Brazilian Air Force in 2019. Flight test campaign exceeded 2,000 flight-hours with focus now on the military missions. The aircraft has successfully accomplished two important airdrop, gravity series of tests in Brazil and in the U.S. As far as new programs, the Consortium Águas Azuis formed by Thyssenkrupp, Embraer and Atech was chosen as a preferred supplier to use four new ships to the Brazilian Navy. And finally two A-29 Super Tucano aircraft were delivered to the Light Air Support Program (NYSE

[Operator:]

[Operator instructions] [Foreign Language] Our first question comes from Ronald Epstein of Bank of America Merrill Lynch.

[Unidentified Analyst:]

This is [indiscernible] on for Ron Epstein. With respect to the recent 737 MAX issues, has there been a change in Boeing's commitment to the Embraer partnership? Do you see this effecting the timing of the deal close?

[Nelson Salgado:]

No. There is no relation between this and the strategic partnership between Boeing and Embraer at all.

[Unidentified Analyst:]

And one more if I could. Volume was a little light in the quarter, but gross margin was solid. What's driving the better gross margins at these low volumes?

[Nelson Salgado:]

I did not understand the question please.

[Unidentified Analyst:]

Revenues were little light in the quarter, but gross margin was solid and strong in the quarter. Can you talk a little bit about what's driving the better gross margin?

[Nelson Salgado:]

That was driven why Services and Defense that’s have the good growth margin in the period.

[Operator:]

The next question comes from Cai von Rumohr, Cowen and Company.

[Cai von Rumohr:]

So Nelson, you had very good book-to-bill in your biz Jet business. Can you first give us a little bit of color of what product, what geographies are particularly strong? And secondly, given the very strong orders you had, how come the deliveries were as weak as they were?

[Nelson Salgado:]

So thank you Cai. The market in the U.S. remains the most important market for the new job deliveries. We have these 11 deliveries, which are normal for the quarter.

[Eduardo Couto:]

We’re still not delivering the greater.

[Nelson Salgado:]

And the sales, I believe, were mainly by the Praetor 600, which we only start to be delivered in the -- after June, but one that the first delivery, obviously, the Phenom 300 remains a strong player, right. And we remain focused by the next month. But I would say that the breakers are the big driver for the additional sales and delivering the longest stack by the end of the year.

[Eduardo Couto:]

If I may add Nelson, it's so do hear Cai, it's important to say that we're better sold this year on business jets than we were last year at the same time. So we are confident in our guidance of 90 to 110 deliveries and that is reflected in our amount of sales.

[Cai Von Rumohr:]

And last question, Commercial aircraft orders, what impact has expected Boeing JV venture had on demand for the product? Have you seen greater interest as result of that or maybe a delay until people see that the deal actually goes through? What impact has that had on you commercial orders?

[Nelson Salgado:]

I think the last part of last year, right, we saw since the air show, we announced mainly new orders. And with these new orders converted into contracts has the slow down a little bit that the interest in the market is very high. There are lots of companies going on. We cannot say for sure how much of this is really influenced by the announcement of the deal. But it is just market dynamics. But we can confirm that there are lots of companies going on, lot of interest in the product.

[Operator:]

Our next question comes from Augusto Ensiki, HSBC.

[Augusto Ensiki:]

Firstly, you mentioned about the Praetor 600 [Technical Difficulty] after May 2020. Could you tell us how many units approximately that represents? And secondly, and sorry if this is already discussed during the call, the onetime item regarding impairments in the quarter as well as the JV costs, transfer the quantify how much those were? Thank you.

[Nelson Salgado:]

At the Praetor 600 delivery has included have around 15 deliveries, right, and this lead to increase as we move to the next year. As we said, the first open position for deliveries around May next year. Can you repeat the second part of the question please?

[Augusto Ensiki:]

Sure. Thank you for that. The second question was regarding the imperilments on the E-Jet portfolio? And the separation costs that you have in the quarter, obviously, can give us exactly breakout how much each of those were separately?

[Nelson Salgado:]

Yes. We have some regular imperilments in the Commercial Aviation aircraft but nothing different from what we generally register at the end of the year. In the Aviation, [indiscernible] there is none.

[Augusto Ensiki:]

In terms of the separation announcing costs?

[Nelson Salgado:]

On separation costs, we had around $12 million required integration costs during this quarter

[Augusto Ensiki:]

Just one follow-up on the separation costs. I think you've previously mentioned -- you'd guided about $1.2 billion separation costs, including taxes. Is that estimate still hold? Or you said that there might be additional savings on that figure? Just give us an update.

[Nelson Salgado:]

We estimate two goals, but we're already working very hard to getting that number down.

[Operator:]

Our next question comes from [indiscernible], I’m sorry [indiscernible].

[Unidentified Analyst:]

Two questions here. The first one, I don’t know if it's possible, but I categorized [indiscernible] margins per division in the first quarter. And the second one, I just wanted to take a look into [indiscernible] on quarterly basis. We can see an increase. So I would like to understand how much it came from Commercial and how much came from Executive Aviation?

[Nelson Salgado:]

Regarding the first part of the question, we're not disclosing EBIT by business. But what we can tell you is that when we look at the results for the business that is being separated, be it Commercial Aviation and related services, that margin was approximately low, and the margin for Executive, Defense and related services was around 2.5 negative. Can you repeat the second part of your question.

[Unidentified Analyst:]

With regards to inventories, I mean, you can see an increase in the first quarter if you compare with Q4. So I would like to have a better sense, how much it related to Commercial Aviation and how much related to transact innovation.

[Nelson Salgado:]

You are asking about the increase in inventories during the first quarter? Is that your question?

[Unidentified Analyst:]

Yes.

[Nelson Salgado:]

Yes. I will say that 70% of stats is associated to Commercial Aviation to under less exact [indiscernible] which again normal at this point of two year, right?

[Operator:]

The next question comes from Turan Quettawala, Scotiabank.

[Turan Quettawala:]

I guess, I was wondering you mentioned that the used Jet sales were lower in the quarter over last. So can you just give us some reasons as to why that happened this year?

[Nelson Salgado:]

No. Sales in Commercial, I think were lower than the last part of last year like we announced contracts for many things that we had previously announced that the actual, right. And there were not as many announcements during this first quarter in Commercial Aviation although as I mentioned, we have lots of campaigns going on. But in Executive Aviation on the other hand, I think we had our best first quarter in sales for the last two years, which is mainly an impact of Praetor 600 and 500 coming to the market later this year.

[Turan Quettawala:]

Now talking about the used jet sales that you said were lower in the quarter, revenue from used jet sales and Executive Aviation?

[Nelson Salgado:]

We mentioned that in the press release, but it’s a small amount. So we didn’t have that mainly deliveries in the first quarter. So we also even fell that many used jets, but it's within our important. Important number is the new sale about business jet that was very solid in the first quarter as we mentioned about $300 million in these sales.

[Turan Quettawala:]

And I guess just last question here from me. I was little surprised to see the deal the SkyWest order, you have deliveries that are going this year. Can you give us a sense of how many open spots you have on Commercial Aviation for the year?

[Nelson Salgado:]

No. For the year all the positions are from -- I'm not open …

[Operator:]

Our next question comes from George Ferguson from Bloomberg.

[George Ferguson:]

Can you speak to how much the U.S scope clause negotiations could be slowing down orders for commercial jets? I know, it is underway right now with pilot negotiations and they're trying to take some of that scope clause. And I’m wondering if that is having effect on commercial jet sales.

[Nelson Salgado:]

We have a strong demand for our current season 25 [ph]. We're not seeing our business in terms of scope negotiation. But we think this is something positive for us because we have a very dominant product in the segment that has conquered more than 80% of market share in this segment. So we're not feeling really a lot of movement, but we think this is positive for us.

[Operator:]

The next question comes from [indiscernible]

[Unidentified Analyst:]

I was just wondering if you could clarify how much that you plan to transfer to the JV, and if that include the existing bond?

[Nelson Salgado:]

Yes. That includes all the bonds basically when we transfer all the bonds and increase a little amount in cash.

[Operator:]

Our next question comes from Gabriel [indiscernible], CPN Investments.

[Unidentified Analyst:]

I was just wondering if you guys could clarify a little bit more about the matter of the new KC-390 being produced in the United States?

[Nelson Salgado:]

I think the important point here is the partnership with Boeing for the KC-390, which is part of the strategic partnership that we hope to close by November of this year. The JV main objective is to open up new markets for the KC-390. The industrial footprint of the KC-390 will depend on the customers that acquire the aircraft that will be flown through the JV. We have a finance friendly here in Brazil, which if it is not necessarily the aircraft will be delivered regularly from the [indiscernible]. So the main objective, the partnership is not to send their aircraft outside of Brazil, is to sell more aircraft to markets in which we could not bet. This atomic point as these new sales demand that we have some industrial activity in the U.S., then we will consider and the JV will consider how to do that, but again it's not the main objective of the partnership.

[Operator:]

[Operator Instructions] This concludes today's question-and-answer session. I would like to turn the conference over to Mr. Nelson Salgado for his final remarks.

[Nelson Salgado:]

Thank you very much for your participation in our conference and the questions. Thank you.

[Operator:]

That does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day.