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Good morning, ladies and gentlemen, and welcome to the audio conference call from Embraer's financial results for the first quarter of 2023. Thank you for standing by.
We remind that Eve's results will be discussed on Eve's conference. It's important to mention that all numbers are presented in U.S. dollars as it's our financial currency.
Additionally, the numbers in this presentation contain non-GAAP financial information to facilitate investors to reconcile Eve's financial information in GAAP standards to Embraer's IFRS.
[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 the 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 believes, may, will, estimates, 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 those risks and uncertainties, the forward-looking events and circumstances discussed on this conference call might not occur. The company actual results could differ substantially from those anticipated in the forward-looking statements.
Participants on today's conference call are Francisco Gomes Neto, President and CEO; Antonio Carlos Garcia, Chief Financial Officer; and Leonardo Shinohara, Director of Investor Relations.
I would like now to turn the conference over to Francisco who will proceed with the first remarks. Please go ahead, Francisco.
Good morning, and thank you all for joining our first quarter 2023 results call today.
We delivered Q1 results according to our expectation. Revenue increased by 19% versus Q1 2022 due to better commercial mix; strong growth in Defense, 56% year-on-year; in Service, 20% year-on-year. Constraints in the supply chain are still present, and we continue to act to mitigate these risks. We see some improvements this year. However, the scenario is still challenging.
Firm order backlog ended Q1 '23 at $17.4 billion, stable quarter-over-quarter, and driven by evolution in Executive and Services & Support. In the coming quarters, we foresee a better perspective in terms of deliveries, revenue and profitability growth.
We are working in many active sales campaigns with excellent chances of new orders for the years ahead in all business units, particularly Commercial and Defense. We continuously focus on enterprise efficiency in our operations and innovation through our subsidiary, Eve.
On the next slide, we will see ESG alignments and achievements. And after that, we will show more details of each business unit in the quarter. Regarding ESG, our sustainability report was launched last month and brings the environmental, social and governance indicators aligned by international standards, GRI and SASB. Our actions are on track, and this was reflected in the improvement of our performance in the CDP report and in the ESG rating agency, MSCI.
On the next slide, I confirm that Eve has the largest and most diversified backlog with 2,770 LOIs valued at $8.3 billion, the highest in the industry. On the next slides, I will discuss the main highlights of the business units.
In Commercial Aviation, we have above 200 aircraft under discussion in several campaigns covering all regions of the world. We announced the expansion of our presence in the Asian market with Scoot airlines adding 9 E190-E2 to its fleet and also Binter confirming its order of 10 E195-E2. Reported revenue growth of 17.5% year-on-year to $199 million due to one additional delivery in Q1, with more deliveries of E2 family which has a higher price.
Executive Aviation continues with a strong book-to-bill in a market going back to normal levels. Revenues were $87 million, 3% lower year-on-year, driven by mix compared to Q1 2022. Our portfolio keeps up with a strong demand and very well positioned with backlog growing quarter-over-quarter with resilient price discipline.
On Defense, we were very pleased to announce the MOU with Saab to expand the collaboration in several areas, including C-390 Millennium. The C-390 Millennium has been awarded the Final Type Certificate, reflecting its full operational capability, FOC, that the aircraft is capable to perform all the missions for which it was designed. Finally, revenue of $98 million, 56% higher year-on-year due to better C-390 revenue recognition in Q1 2023. Margins show improvement compared to last year.
On Services & Support, we announced an extension to the service and support agreement with Porter Airlines to include 20 E195-E2 jets to the firm order. With this extension, all 50 aircraft will be supported by the Pool Program for parts and heavy checks. Highlights also included the entry into service support for SalamAir and Endeavor. We announced a Phenom 300 full-flight simulator in Las Vegas in a joint venture with CAE Group.
During the first quarter, we received the first E190 to be converted into a freighter at a dedicated MRO facility for all passenger-to-freight conversions. Revenues of $326 million represent a year-on-year growth of 20%.
I will now hand it over to Antonio to give further details on the financial results, and we'll be back with closing remarks.
Thank you, Francisco, and good morning, everyone. Before we start with the slides, first quarter results was a solid quarter for us and within expectations. Historically, this quarter is our lowest in terms of deliveries and most other metrics. We met or exceeded our Q1 planned targets in terms of deliveries, revenue, operating profit and cash flow. Sales continue to be strong, and our backlog remains solid.
Moving to Slide #9. Embraer delivered 15 jets in the first quarter, 7 in Commercial and 8 in Executive. It is important to point out Commercial deliveries are ahead of last year with an improving mix of aircraft. Last year, we delivered 2 E2s in Q1. This year, we delivered 5 E2s. The E2 is our global aircraft, and both sales and deliveries continue to grow worldwide. In Executive, we delivered 8 business jets on plan and equal to last year.
Moving to Slide 10. Our firm order backlog ended the quarter at $17.4 billion, basically equal to both year-end 2022 and the end of the first quarter last year. As we deliver aircraft, our sales teams continue to win new aircraft orders and new service contracts at the same rate, so our backlog remains roughly the same. This stability in our backlog is a source of strength and provide us with steady cash flow to support and execute our strategic plan.
Moving to net revenue, we ended the first quarter with $717 million of net revenue, $116 million or 19% above the same period last year. The revenue increase is in line with our growth forecast for this year.
Slide 11. First quarter adjusted EBIT was minus $32 million and adjusted EBITDA was positive $10 million. Both are slightly below the first quarter of 2022, primarily driven by no recurrence of several onetime benefits we had last year. We fully expect our EBIT and EBITDA margins to increase as we leverage our fixed costs as deliveries grow in the remainder of the year. Slide 12. Free cash flow, excluding Eve, was minus $399 million in the first quarter. This includes cash outflows of over $450 million to build inventory to meet our production requirements for the remainder of the year. We will recover these outflows as we deliver aircraft, and we are affirming our full year guidance of $150 million or better in free cash flow.
Moving to investments. We funded $40 million of product development and research and development and invested $17 million CapEx for an investment total of $57 million in the first quarter. The majority of this went to fund the development of our passenger-to-freighter conversion initiative and invest in additional capacity expansion of our Services & Support unit.
Our net results were minus $89 million. Although negative, the first quarter historically is our weakest period. And with our positive delivery and EBIT margin guidance, we will certainly recover in the quarters ahead.
Slide 13. We finished the quarter with a net debt, excluding Eve, of $1.4 billion, as shown at the top center of the slide. This is up slightly from year-end due to the increased inventory related to cash outflows, as previously mentioned. Our leverage ratio, shown to the upper right, is at 3.1x, a slight increase from the prior quarter, but a decrease from 4.1x in the same period 1 year ago.
The bottom half of the chart shows we ended the quarter with $2.85 billion of liquidity. Our strong liquidity position, combined with future free cash flow, will allow us to cover our debt maturity well past 2027.
With that, I conclude my presentation and hand it back to Francisco for his final remarks. Thank you very much.
Thanks, Antonio. As mentioned, the first quarter reflects the industry seasonality, and we expect more sales activity and better results over the next quarters. There are several sales campaigns underway with excellent growth perspectives in 2024 and years ahead.
In the past few weeks, I have visited China and Portugal, and we are excited about new business opportunities, especially in commercial, aviation and defense. We expect to bring good news in the coming quarters. Having said that, we are totally committed to the execution of our plan and the guidance for the year.
Thanks again for your interest and confidence in our company.
[Operator Instructions] Our first question comes from Josh Milberg from Morgan Stanley.
You provided great color in the Portuguese call on the factors behind the Commercial and Executive gross margin pressure, so thank you very much for that. My question is on Defense and on your indication that the division's revenue this year could be between $600 million and $700 million, if I got -- if we got that right? And I was just hoping you could talk about what variables might move that up or down and also discuss how much visibility you already have on 2024 for Defense. And finally, comment on the status of the opportunity with the U.S. Air Force that you've highlighted in the past. That's my question.
Josh, it's Antonio speaking. Josh, as we -- and we -- I guess, we even discussed before, not that we -- we do see the recovery on Defense starting from 2023 onwards, basically driven by the KC-390. We do have other types of business awarded like radar, but I would say not in the magnitude of the recovery of the C-390. Last year, we were, I would say, in order to retain cash, we were keeping, buying less material than we are doing right now because now we have the contracts for Portugal, for Hungary, and we are even seeing positions for other types of order that we may receive.
I would say the visibility today shows that we are close to the $600 million. If you award the Portugal contract for Super Tucano, $700 million, higher single-digit EBIT margins, let's say positive cash flow.
And for the discussion about U.S. Air Force, I'm going to pass to Francisco.
Thank you, Antonio. Thank you, Josh. Well, I mean the partnership with L3Harris is moving well. We are working together to equip the C-390 with the special systems as the boom refueling system. And we are planning giving a demonstration of the C-390 this year in the U.S. So we're moving about. We are very excited about this opportunity.
And Josh, just to complete one point that I forgot to mention, we do see Defense in the range of $800 million for 2024, around, in regards to revenue.
Okay. That's great color, Francisco and Antonio. If I might just actually squeeze in one more. I don't think you addressed this on the Portuguese call. Just if you could talk about the revenue outlook you're seeing for Services & Support, both in '23 and '24. I know that in the past, you've highlighted OGMA's contract with Pratt & Whitney as a source of substantial upside.
Thanks, Josh, for the nice question. We do see this year the Services side around $1.4 billion revenue, and we do see for 2024 around $1.5 billion, at least.
Our next question comes from Marcelo Motta from JPMorgan.
I have a question regarding what do you guys foresee in terms of seasonality of deliveries during this year. I mean we all know that the first quarter is usually a little bit weaker. But when we think about second, third quarter and fourth quarter, I mean, should it be similar to last year? Or should it be a little bit better when we think about especially the second and third quarter?
Thanks, Marcelo, for the nice question. And we -- I need to tell you, we are looking forward to have a more stable distribution among the quarters. We are not foreseeing today a hot Q4 as we saw last year. It's well spread between Q2, Q3 and Q4. For sure, Q3 and Q4 is going to be slightly higher than Q2, but it's better distribution.
The same we are seeing for Q1 next year, that we do see a much higher Q1 compared with this Q1 in terms of deliveries. Let's say we are moving to the right direction, even face some issues with the suppliers, but it's more better divided than last year.
And Antonio, if you allow me to complement, we are bringing other challenges to the supply chain because we are increasing the production volume in both in the Commercial and Executive. So again, we were working to stabilize the supply chain, but now we bring higher volumes. That's why we'll see a better distribution of the deliveries throughout the year, but still with a concentration in the Q4 because of higher volumes in '23 comparing to '22.
Our next question comes from Cai von Rumohr from Cowen. [Operator Instructions]
Lou Raffetto from Wolfe Research. So I was not on the Portuguese call, so I was hoping maybe you could provide a little color on the Executive Aviation margins and commercial margins? Just deliveries were essentially flat year-over-year, but margins were significantly lower. So if we start there?
Yes, absolutely, Louis. As I mentioned in the Portuguese version, the Q1 last year was too good compared with this one. And I started -- we did have something like 5%, I would say, onetime effects in Q1 last year that we did not have in '23, point one. Then we have other types of costs like bringing new customer for Commercial Aviation. We have all this new material design, this and this and this and learning curve. We had more E2s than E1s if you compare in a quarterly year-over-year basis. Last year, we delivered 5 E1s and 2 E2s. This year is totally different, it's 75% E2s and E1s. That also does not help in the learning curve in this Q1.
I would say, for Executives, it's a bit different. We always -- we also have the good guide last year, something around 5%. Then you have carryover cost from the hottest Q4, [ amid the history ], to Q1, a little bit [ rework ]. And we also sold a trade aircraft last year that helps the margin for last year. And on top of it, we -- the mix was a little bit different. We sold -- we delivered Phenom 100 instead the Phenom 300. That also affect the gross margin.
And Lou, it's nothing that's concerning us for the whole year also for the guidance. We should expect Executive Aviation again with double-digit EBIT margin, gross margin above 20%. I would say, everything under control, but the seasonality really make our life difficult in this quarter.
All right. That's great color. And then just back over to Defense margins, so 5% EBIT in the quarter, pretty good. You talked about better commercial agreements. So are margins kind of stable here? Or should we expect some continued volatility? Any help from FX this quarter?
Remember when we met for the last time in Boston, we -- I mentioned to you that we were seeing an improvement in Defense. But we have today the EBIT for Q1 on the 5%. And our expectation to be on Defense, a higher single-digit margin for this year and continue to grow in revenue, I would say. As we said, we are fulfilling what we said some weeks ago in Boston.
All right. Great. And then just last one, again, I think you kind of covered this, but just to be certain. The spike in inventory to support the delivery ramp, last time you kind of saw this level, if we kind of ignore 2020, was back in 2019. You were going to deliver 80 to 90 commercial jets versus 60, 70 this year. So I think you maybe said that there was a little bit of inventory build for Defense, but I just wanted to make sure that we figure that one out.
I would say 2 or 3 effects, and I will ask Francisco also to comment, but we are growing 20% this year in [ medium ] and also 20% next year from this perspective. The inventory is really to make sure that we deliver the guidance in this year, but also preparing the field for a very hot and stronger next year.
Now I would say both combined and, I would say, and a bit unbalanced because of supplier delays, this and this and this. Just keep in mind, 2019, our revenue was $5.4 billion. It's more or less what we are guiding to the market. Let's say, eventually, it's not what we'd like to see, but I would say in line with the expectation for 2 years of fast growth 2023 and '24.
Francisco, if you want to...
No, I think that's the reason, Cai (sic) [ Lou ]. And we are now -- as we didn't have a high level of deliveries in Q1, then we are suffering with the cash, right? Because we are ramping up the production, bringing materials for the higher production '23. We are bringing materials for the beginning of 2024 for both Commercial and Executive. And now in Q1, we didn't have higher sales, so higher deliveries, but we expect this to improve from Q2 onwards. But that's the reason we have higher inventory levels.
Our next question comes via phone and the number ends with 7519, please. [Operator Instructions]
This is Steve Trent from Citi. I'm just -- and I will stick to your one question request. I'm just curious when we think about China, I know you mentioned visiting there, I'd just love to sort of get your take on the potential opportunity considering that in the domestic market there, there's a very limited opportunity for commercial aviation slots versus military. And you guys did have the Harbin joint venture in the past, which eventually got shut down. So I'm just curious what you think has changed this time around.
Thanks for your question. So we still have more than 80 aircraft flying in China in different airlines. So Embraer is really interested in coming back to China to expand our footprint there. So -- and we have been working very hard on that.
And we see as -- that the results of the bilateral meeting between Brazil and China governments is very positive because the joint declaration between both Presidents lays the foundation for a broader cooperation in the aerospace sector. And that declaration positions Embraer as a central player in this partnership. So we see now good perspectives to evolve our activities in China and an open door for a local cooperation and new sales of our commercial jets in that important market.
Great. I appreciate it. And if I may cheat and just have one quick follow-up, do you think that your collaboration with them might be somewhat limited considering that you guys do use a lot of U.S. technology?
Well, our aircraft uses a lot of U.S. equipments, right, the engine the avionics and many other equipments. So this is what we are working on with the same product that we have.
Our next question comes via phone also from the number that ends with 1327, please? [Operator Instructions]
So maybe give us a little bit more color, if you could, you mentioned discussions of 200 aircraft in Commercial and yet had some trouble closing it, but strong demand in the market. Maybe when we might see some closing, specifically at Paris, what the pricing environment is? And similarly, in Executive, you had a very good book-to-bill, but on very low deliveries. What is the demand tone there and the pricing there?
Well, I mean, regarding Executive, we were expecting this, I mean, low deliveries in the Q1. But the plan is still good and strong for the year. We are planning a growth of about 20% in the production and deliveries of Executive Jets. So we are on track, and we will get there this year.
Regarding the Commercial jets, yes, we have many campaigns ongoing. I joined Embraer in May 2019, in the year after we had the pandemic impact. But since then, this is the first time I see a lot of campaigns, sales campaigns, active sales campaigns in Commercial Aviation in many different areas of the globe.
So we are optimistic. We believe that we will bring good news in the next quarters about orders for Commercial jets and also for Defense products. So we have in both. You didn't ask about Defense, but in Defense, we are also working many active campaigns. So I think 2023 will be good in terms of new orders for Embraer.
Excellent. Actually, what I meant on business jets is you had a book-to-bill of 2.5, which is probably the best within the sector. Everybody had particularly weak deliveries in the first quarter. But what are you seeing in terms of on a go-forward basis? Is the demand as strong as it was? Is the pricing -- the net pricing after inflation still as good as it was? Or is it starting to slip?
Okay, understood. So again, the market is still good for us, not as strong as it was. Marketing is back to normal levels of growth of 1 digit. In our specific case, we see an important change in the mix. We are growing the production and deliveries and growing the mix of Praetors as well. So last year, the mix were -- the mix was about 35% Praetors and 65% Phenoms. And this year, we are almost 50-50 with a growth of about 20%.
This brings us some more comfortable -- comfort for the next years as well. And we have a very good discipline in terms of price, keeping and even improving the margin of our jets. Of course, the Praetors, they bring more margin, absolute margin in dollars, and we are also keeping the discipline in price. So our sales team is doing a very good job on that. I hope I answered your question now.
This concludes today's question-and-answer section and thus concludes Embraer audio conference. Thank you so much for your participation, and have a wonderful day.