Release Date: November 08, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Embraer SA (ERJ, Financial) increased its adjusted EBIT margin guidance to 9.5% and free cash flow generation to $300 million or higher for 2024.
- Revenues increased by more than 32% year-over-year in Q3, driven by strong performance in Executive Aviation and Defense & Security, both up more than 65%.
- The firm order backlog reached $22.7 billion in Q3, supported by a robust book-to-bill ratio higher than 2:1.
- Fitch Ratings upgraded Embraer's rating from BB+ to BBB- with a stable outlook, marking investment grade status by two out of three leading US rating agencies.
- Executive Aviation achieved its best third quarter in terms of revenues and deliveries, with a 65% year-on-year revenue increase in Q3.
Negative Points
- Commercial Aviation guidance was reduced from 72-80 jets to 70-73 aircraft due to supply chain problems.
- The adjusted EBIT margin for Commercial Aviation declined to minus 5% in Q3 due to supply chain delays and unfavorable product and customer mix.
- Supply chain challenges persist, particularly with engines and structural components, affecting delivery schedules.
- Despite improvements, the adjusted EBIT margin for Defense & Security declined from 15.6% in Q3 '23 to 7.2% in Q3 '24.
- The company faces significant supply chain delays, mainly in the E2 assembly line, impacting production and delivery timelines.
Q & A Highlights
Q: Regarding the commercial aircraft guidance, is the revision due to worsening supply chain issues or just a course adjustment? Are there other factors like mix or operational issues affecting this?
A: Francisco Gomes Neto, President and CEO: The delay is solely due to supply chain issues, particularly with engines and structural parts. There are no other factors like mix or labor affecting this.
Q: Can you provide insights on the weaker margins in Commercial Aviation and the sustainability of strong margins in Executive Aviation?
A: Antonio Carlos Garcia, CFO: The weaker margins in Commercial Aviation are due to a mix of more E2s instead of E1s and an unfavorable customer mix. We expect margins to improve in Q4. For Executive Aviation, while Q3 margins were strong, we anticipate lower-teens margins in Q4 and beyond.
Q: Could you elaborate on the recent defense orders from the Czech Republic and their financial implications?
A: Antonio Carlos Garcia, CFO: The contract includes both defense and service components, contributing to our cash flow guidance. We expect strong down payments, which could further improve our free cash flow.
Q: With the high level of in-house Aerostructure work, do you see opportunities to increase this through M&A or other means?
A: Antonio Carlos Garcia, CFO: We are highly verticalized in Aerostructure. While we conduct make-or-buy analyses, we do not see M&A as a current alternative. In-sourcing additional parts is possible, but not a primary focus.
Q: How do you plan to allocate new product investments given the current financial performance across divisions?
A: Francisco Gomes Neto, CEO: We benefit from having diverse business units. While Executive Aviation is performing well, Commercial Aviation faces challenges. We see potential in E2s with new customers and expect Commercial Aviation to improve, supported by strong Services & Support contributions.
Q: Can you provide more details on the supply chain issues, particularly with engines and structural components?
A: Francisco Gomes Neto, CEO: We face delays in receiving engines and structural parts, impacting aircraft assembly and delivery. While output is improving, timing remains an issue. We are enhancing planning to mitigate surprises and expect continued improvement next year.
Q: How do you view the competitive environment given supply chain issues? Are you gaining new orders or better pricing opportunities?
A: Francisco Gomes Neto, CEO: We are optimistic about new orders and are essentially sold out until 2026. We are actively pursuing campaigns for over 200 aircraft and expect to fill production slots through the decade.
Q: What is the total investment needed for Eve up to certification and delivery start?
A: Antonio Carlos Garcia, CFO: The total investment needed is around $600 million, and we have sufficient cash to run the company for the next three years.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
