Embraer SA Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Financials: Reiterated 2024 revenue guidance with a midpoint of $6.2 billion. Adjusted EBIT margin interval increased to 9.5%, and free cash flow generation to $300 million or higher.
• Operational: Firm order backlog reached $22.7 billion in Q3, supported by a book-to-bill ratio higher than 2:1. Delivered 57 aircraft in Q3, 128 YTD. Addressed supply chain challenges with initiatives like reinforcing supply chain organization, digital tools, and AI.
• Business Units:
  • Commercial Aviation: Received order of 8 E190-E2s from Virgin Australia, first delivery of 3 E195-E2s to LOT Polish Airlines.
  • Executive Aviation: Had strong revenues and deliveries, with adjusted EBIT margin improving YTD.
  • Defense & Security: Had deliveries of C-390 Millennium to Hungary and Brazil, new orders from Netherlands, Austria, Paraguay, Uruguay.
  • Services & Support: Expanded MRO footprint with $70 million investment in Fort Worth, Texas.
• Eve eVTOL: Unveiled full-scale prototype, moving forward with battery installation and lifter production for first flight in early 2025. Completed $236 million secured loan.

Segment Performance

• Commercial Aviation: Revenues increased 11.4% year-over-year in Q3, and 12% in the first 9 months of 2024. The adjusted EBIT margin declined in Q3 due to supply chain delays, product and customer mix, but is expected to improve in Q4 2024 and beyond. Revenue contribution: Not explicitly stated as a percentage but is a segment.
• Executive Aviation: Revenues expanded 65% year-over-year in Q3, with revenues for the current year at $1.1 billion, circa 40% higher than the same period in the previous year. The business unit achieved the best third quarter in first 9 months in terms of revenues and deliveries in its history. Adjusted EBITDA margin improved from 10.7% in Q3 '23 to 16.3% in Q3 '24. Revenue contribution: 32% of company's revenue.
• Defense & Security: Revenues increased 65% year-over-year in Q3 and 56% in the first 9 months of 2024. Highlights include deliveries of C-390 Millennium to Hungary and Brazil, signing of orders with the Netherlands, Austria, Paraguay, and Uruguay. Revenue contribution: 13% of total revenue.
• Services & Support: Revenue grew 16% year-over-year in Q3 and 16% in the first 9 months of 2024. The adjusted EBIT margin recorded a solid 3.9 percentage point gain. Announced a $70 million investment in a new MRO center in Fort Worth, Texas. Revenue contribution: 28% of company's revenue (declined 5 percentage points from prior year).

Guidance

• Financial: Reiterated 2024 revenue guidance of $6.2 billion midpoint. Adjusted EBIT margin interval increased to 9.5%, free cash flow generation to $300 million or higher.
• Commercial Aviation: Guidance reduced from 72-80 jets to 70-73 aircraft due to supply chain problems.
• Executive Aviation: Reiterated delivery guidance of 125 to 135 jets in 2024.

Risks

• Supply Chain: Still facing challenges, particularly with specific components like engines and structural parts.

Question and Answer

Q: About the commercial aircraft guidance revision, was it due to supply chain getting worse or a course adjustment?

A: Francisco Gomes Neto: This delay has to do with the supply chain only. Specific components like engines and structural parts are challenging, no other reasons.

Q: Thoughts on margins, especially Commercial Aviation's weaker margin and Executive Aviation's sustainable margins?

A: Antonio Carlos Garcia: Commercial Aviation had a mix of E2 vs E1 and customer mix issues, expecting lower single-digit margin this year and mid-single digit moving forward. Executive Aviation expected lower-teens margin in Q4 and beyond.

Q: Thoughts on defense orders from Czech Republic and margin implications?

A: Antonio Carlos Garcia: It's a big amount, but includes service piece, and free cash flow guidance may have upside if contracts are fully realized.

Q: Opportunity for M&A in aerostructure in-house work?

A: Antonio Carlos Garcia: Not seeing M&A as an alternative for in-sourcing aerostructure parts currently.

Q: New product investment and where to put next dollar of investment?

A: Francisco Gomes Neto: Different businesses perform differently, services have good contribution, E2s have good prospective, and initiatives in place to improve Commercial Aviation's performance.

Q: Competitive environment and supply chain impact on new orders?

A: Francisco Gomes Neto: Supply chain improving on average but still challenging with specific components, optimistic about new orders with 200+ campaigns ongoing.

Q: Boeing deal tax and 2025 deliveries for KC?

A: Guilherme Paiva: Tax on $150 million Boeing monies is 43%, and expecting 2-digit growth in deliveries for all business units in 2025.

Q: Services & Support revenue expansion and margins?

A: Antonio Carlos Garcia: Revenue expanding, ramp-up of OGMA engine MRO is 40% complete, margin accretive with accumulated YTD results.

Q: Supply chain issues details and improvement expectation?

A: Francisco Gomes Neto: Issues with engines and structural parts, improving on average but not at needed pace for 2024, expecting better next year.

Q: U.S. marketing and election impact?

A: Francisco Gomes Neto: No big risk, Embraer has long-term connection with U.S., 3,000 employees, $3B assets, and U.S. content in aircraft, so no negative impact.

Q: KC-390 sales campaign?

A: Francisco Gomes Neto: Optimistic, 11 new orders in 2024, ongoing campaigns in Europe and Asia.

Q: FNAC fund impact?

A: Francisco Gomes Neto: Positive, supports airlines, Embraer's aircraft fits connectivity strategy, but not directly involved in fund process.

Q: Boeing crisis and Super Tucanos sales, U.S. defense market impact?

A: Francisco Gomes Neto: Following own strategy, strong partnership with U.S., Super Tucanos have growth potential, and no negative impact from U.S. elections on defense market.