Good morning, ladies and gentlemen, and welcome to the audio conference call from Embraer for Q1 2022 financial results. Thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct the question and answer session, and instructions to participate will be given at that time. If you should require assistance during the call, please press the star key followed by zero. 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 exceptions, 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, anticipate, intend, expect, and similar words are intended to identify forward-looking statements. Embraer undertakes an 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 on this conference call may not occur. The company's actual results could differ substantially from those anticipated in the forward-looking statements. It is important to mention that all numbers are presented in U.S. dollar, as is our functional currency. Participants on today's conference call are Mr. Francisco Gomes Neto, President and CEO, Mr. Antonio Carlos Garcia, Chief Financial Officer and Investor Relations, and Mr.
Leonardo Shinohara, Director of Investor Relations. I would now like to turn the conference over to Mr. Gomes Neto, who will provide the first remarks on our Q1 , 2022. Please go ahead, sir.
Good morning, and thank you all for joining our Q1 2022 results call today. I hope that all of you are well and safe, and I thank you for your interest in our company. The Q1 results continue to show that our planned execution and company turnaround remains underway, and our focus to drive innovation and enterprise efficiency are key pillars to our growth strategy. As you will see later in Antonio's presentation, we are maintaining our guidance for the year, and our numbers show that even with a shutdown of our operations during the month of January to reintegrate the commercial aviation systems, we were able to deliver solid results. Before we go into more financial details on the Q1 , I'd like to give you some quick highlights of our key actions. First, on innovation. Eve's closing is expected in May.
The listing at the New York Stock Exchange will accelerate and bring innovation to the new urban air mobility ecosystem. Speaking about our innovation pipeline, we have several ongoing projects, such as zero or low carbon emission and airframe efficiency. Second, enterprise efficiency. We continue to work with great focus and discipline on improving efficiency in all business units in our administrative areas and operations, applying lean principles and continuous improvement culture to several processes. Our financial performance continues to trend up with the best free cash flow in a Q1 since 2010. As mentioned previously, we are maintaining our guidance for the year, even with a challenging supply chain due to the war in Ukraine and shortages of products worldwide. On the next slide, we'll talk about growth and see more details of business units highlights in the quarter.
In commercial aviation, we have several ongoing campaigns, mainly due to a steady rebound of domestic flights in the USA and Europe. The oil price increase also reinforces the relevance of the E2 family as the most efficient narrow body in fuel consumption. Executive aviation keeps up the good momentum, with sales orders exceeding prior year levels and backlog increase above 12% in Q1 2022 versus Q4 2021. On defense, we have seen an increased interest in C-390 Millennium and the A-29, the Super Tucano, from several countries recently. We expect an acceleration in sales campaigns for these products. Services and support has grown above pre-pandemic levels with a growing backlog and positive gross margin versus last year. Deliveries of aircraft in the Q1 were slightly below expectations, mainly due to approximately 30-day shutdown, which I have commented earlier on.
I will now hand it over to Antonio to give further details on the financial results, and I will return in the end. Thank you.
Thanks, Francisco, and good morning, everyone. Let's give some highlights of the Q1 2022 financial results. By the way, a quarter with 60 days activity. For us, a short quarter. Let's get started on the slide 5. First of all, we are reaffirming all aspects of our 2022 financial and delivery guidance with no material variation. Embraer delivered 14 jets in the Q1 , of which six commercial aircraft and eight executive jets. six light jets and two mid-sized jets, all of this according to our schedule. Deliveries in the quarter were negatively impacted by almost one month shutdown in January 2022 due to the commercial aviation system and legal integration. Firm order backlog ended the Q1 2022 at $70.3 billion, +$300 million versus Q4 2021.
This is the highest quarterly backlog since Q2 2018, driven by solid sales activity. On the revenue side, revenue reached $601 million in the quarter, down 26% compared to the Q1 2021, with almost one month production shutdown in January. In contrast, reported consolidated gross margin of 20% was higher than the 9.5% reported in the first quarter of 2021. We do it with a better performance in all business units. On slide six, adjusted EBIT and EBITDA.
Even with 26% less revenue and higher SG&A compared to the Q1 of 2021, adjusted EBIT and EBITDA were -$27 million and $13.2 million, respectively, yielding an adjusted EBIT margin of -4.5% and adjusted EBITDA margin of +2.2%. Adjusted EBIT Q1 2022 also includes non-recurring expenses like commercial aviation integration process, arbitration process, and others of $70 million. If we exclude all of extraordinary effects, adjusted EBIT margin would have been -1.7% or -$10 million, and EBITDA margin of 5% or $30 million positive. Complementing our strategy to mitigate exchange risks through the cash flow hedging, we recognize credit of $800,000 related to payroll expenses in the Q1 2022.
At least we do see a limited FX impact for this fiscal year in our results between Brazilian reals and US dollar basis. Moving to slide 7. Let's start with SG&A. SG&A as a whole continues to trend favorably over the past years. Quarterly SG&A reached BRL 95 million, an increase of BRL 50 million compared to the Q1 2021 figures, due to more activity on the sales side, campaigns impacting expenses, as well the uptick corporate administrative expenses driven by inflation. It's important to say that we remain highly focused on SG&A efficiency. On investments in Q1 2022, Embraer invested a total of BRL 39 million in product development and research, mainly related to E2 commercial jet programs, and BRL 9 million CapEx. It's important to mention we continue to invest our future with highly disciplined CapEx allocation.
Another good news, let's go to slide number eigth, starting with adjusted free cash flow. In regards to free cash flow, the company continue highly focused to improve the cash generation process. Free cash flow in Q1 2022 was a usage of $68 million, representing a significant improvement compared to negative $227 million in the Q1 of 2021, consistent with working capital optimization measures and operational efficiency. Working capital had a positive impact in the company overall cash performance, even considering the seasonality of the business, delivering its best Q1 cash since 2010. The main highlights were optimized inventory management and higher advance payments from customers compared with the Q4 of 2021. The adjusted net result was a loss of $79 million.
Although negative, we do see net results trending up, driven by revenue growth in the next quarters, fixed cost leverage. Reduction in interest costs due to our liability management activities and the full tax efficiency that we get back from the legal reintegration of commercial aviation. All of these effects together will provide an additional positive impact on earnings for this fiscal year. Let's move to slide nine, liquidity. The company finished the quarter with a total debt of $3.5 billion or $500 million less than Q4 2021, in line with our strategy, a net debt of $1.5 billion. Embraer continues to deleverage the balance sheet, reducing systematically the gross debt and improve the credit metrics, and we do expect to reduce the interest expenses with that.
It's important to highlight that our net debt, the EBITDA ratio, is around 3.7 times in Q1 of 2022, and we will remain focused on generating cash and reducing our debt levels. With that, I conclude my presentation and hand over back to Francisco for his final remarks. Thank you very much.
Thanks, Antonio. To close, I'd like to briefly highlight our urban air mobility, Eve. The listing at the New York Stock Exchange and closing is expected for the next month in May, with total investments of about $500 million, which includes SPAC and strategic investors. Eve has strategic support from Embraer with access to infrastructure, extensive aircraft certification and manufacturing experience, and already established global network of services and support, intellectual property and engineers as major differentiators from other projects. Finally, we have strategic partners such as SkyWest, Republic Airways, BAE Systems, Rolls-Royce, Azorra, Acciona, Falko, and Thales, who know very well our capabilities. Thank you to our great team for their focus and passion for creating innovation and executing our strategic planning. Thank you for your interest and confidence in our company.
We will now start the question and answer session. We ask those who are interested in asking questions to at any time press star one, wait to be called, and when your name is announced, make sure your microphone is on and start your question. To give everyone a chance to participate, we request to ask just one question per call. Our first question comes from Myles Walton, UBS.
Hey, good morning. This is Lou Raffetto for Myles. Hello?
Hello, Lou.
How are you?
Can you hear me?
Yes, we can.
All right, great. I just wanted to check on you know, free cash flow, like you guys mentioned, was the best in, you know, over 10 years. How do we think about that the rest of the year? It seems like a very strong start. Is there anything else that you guys see over the next, you know, couple quarters before your, you know, seasonally strong Q4 ?
Well, thanks for the question. This is Antonio speaking here. Thanks. It's a great question. We have a good start for sure. That's why when we set the guidance, we set $50 million plus or better. We do see a positive trend, yes. We don't know the magnitude of how much we are talking about to be better, but we should be more precise in the Q2 . For sure, the trend is highly positive with a good start.
Okay, great. Thank you. The other expense line, obviously there's a lot going on in there. You took out the $9 million of Eve expense. There's, you know, this other $17 million in there. How do we think about that line, you know, the rest of the year?
Yeah, for Eve, everything we are showing our numbers, we just have the portion of Embraer and Eve. We hope and we expect, and we are going to do it in May with the listing in the New York Stock Exchange, then the price become a different dynamic in our results because we are going to, on the IFRS terms, to capitalize those expenses, most part of it. Then we are going also to update our guidance, including Eve, which is from one side is going to boost the cash flow, but it's also going to impact a little bit the EBIT side. As soon we close the transaction, then we are going to revise also the guidance.
We do not see a discontinuation, but we do not have also in our numbers today Eve embedded, only the $9 million that we are seeing as adjusted EBIT with the adjustments because the company still operate, and we are going to revise it in Q2.
Okay. I guess when I think of those other non-recurring costs, you know, you said that had arbitration as well as the reintegration. I would guess the reintegration costs go away and that, you know, that sort of non-recurring will continue but at a lower rate than the 17.
Yeah. Probably, yes. We for sure, starting Q2 onwards, we do not have much more cost for the reintegration than we still keeping with the arbitration costs that we are not adjusting.
We see the magnitude of the number that should be more or less on this level, a little bit less from the coming quarters, okay. Please, when you do your math, adjust your calculation this number. We are not adjusting because of confidentiality, but you have more or less the magnitude. There is, in my opinion, this $70 million that we are seeing right now should be more or less in this range for the coming quarters. We do not see exceed on this cost, maybe a little bit reduction.
Okay, great. Thank you very.
Welcome.
Our next question comes from Mariana Perez Mora, Bank of America.
Good morning, everyone.
Good morning. Good morning, Mariana.
Could you please discuss how sustainable are these margins per like segments, and how they compare to your targeted margins, like three to five years from now?
Yes, Mariana. I would say the margins we are seeing per segment, for sure, we should see in the long term. We are still away from, I would say, executive and services, we are more or less in the level we do see for the future, but we still have to improve in defense and commercial aviation to the same level of the others. It's more or less in a long-term perspective what we are seeing right now. We are in the recovery mode for the commercial aviation, and we still have something to do in defense. Most probably defense is going to recover faster because we are going to see significant improvements start from 2023 onwards.
Commercial aviation is going to take a little bit more time in order for the new companies to start showing better, I would say, gross margin performance as we have with the old contracts. That's more or less in a nutshell where I see right now all business units come to this level in the midterm.
Thank you.
Welcome.
Could you please discuss what's the customer's interest, how your conversations are going and how well is demand? What are you seeing in the services side?
Could you please repeat your questions? There was some noise in the line and we're not able to understand.
Sure. On executives, could you please give us some color on the demand going forward, how your conversations with customers are going on, and how sustainable do you think is this, like, really strong demand for executives that we're seeing so far?
Sure. Well, I think the sales, our sales in Q1 is showing us that the demand continues is strong. We sold 35 aircraft in Q1. I mean, the highest in the past almost six years. You know, we had only in 2016 Q1, we sold the 36 aircraft in that quarter. So it's a good sign for us. Yes, we believe we are going to have some changes in the future, but we believe in a soft landing in the market. We are seeing a lot of first-time buyers in this segment, and you know, interest in the small and medium size jets, exactly where we have our portfolio of products.
Again, we are still confident that this market will continue to be strong during the next two or three years, at least.
Thank you. Last one from me on defense. You mentioned foreign interest and strong international interest. Could you please give us some color on like, or try to quantify that interest?
Mariana, we do not disclose the volumes, especially in that segment. What we can see is that, yes, we are having a lot of customers, I mean, coming to us and asking for delivery opportunities in short and medium term. Which was a change that we believe was because of the situation in Europe between Russia and Ukraine. Again, good opportunities for us, for our products, you know, the C-390 Millennium and the A-29 Super Tucano in short and medium term.
Thank you very much.
Thank you, Mariana.
Our next question comes from Lucas Barbosa, Santander.
Good morning, Francisco. Good morning, Antonio. Thanks very much for the opportunity. I have actually a follow-up from the question on the defense side and actually adding to that, the discussion on commercial aviation as well. You mentioned in the presentation that in commercial aviation you have some key active campaigns in progress. Also you mentioned in the presentation the increased interest for the C-390 and for the Super Tucano. Could you just comment a little bit of when you would expect new orders to come out? So would you expect more orders to be announced over the second half this year or is it something that maybe will take place in 2023?
Any color you could give on the timing that you would expect new orders to come out, that would be very helpful. Thank you very much.
No, thank you, Lucas. Well, for the commercial aviation, we expect new orders during this year. In the defense, a mix between 2022 and 2023.
Perfect. Thank you very much.
You're welcome, Lucas.
Our next question comes from Stephen Trent, Citi.
Thank you, everybody, and good morning, and thank you for taking my question. When I think about the order activity or the order potential on the commercial aviation side, do you have any high-level view with respect to where we could see the order activity come from a geographic perspective? You know, are you guys seeing anything in, you know, for example, a potential scope clause adjustment in the U.S. or are you seeing, you know, maybe somewhat better order potential coming from the emerging markets? Thank you.
Thanks for the question. Well, specifically in the commercial aviation, we mentioned that we are working in several sales campaigns that we believe are because of the domestic air travel recovery. Also some, you know, decisions on fleet renewal to new-generation aircraft, especially where our product, our E2 family is well-positioned because of the efficiency compared to the older aircraft. Also, we launched a project to convert, I mean, passenger jets into freighters that we believe will. The idea is to explore a good opportunity as the global air cargo is growing, you know, up to 12% this year versus 2019.
there is a strong demand for E-Jets freighters as the market, you know, wants now to receive the goods, I mean, in the next day or even the same day. That we see the good opportunities for our E-Jets freighters. Unless, I mean, the scope clause, we don't see any changes in the short term, you know, in the next, I don't know, at least the 5-6 years. Which is a good opportunity for us to continue with selling our E1 family, E175-E1s.
Okay, very helpful. I missed the first two or three minutes of your call, so sorry if that was a repeat of what you said earlier, but thanks very much.
You're welcome.
Our next question comes from Noah Poponak, Goldman Sachs.
Hi, good morning, everyone.
Hello, Noah.
Hi. What's your expectation for book-to-bill for the year at commercial?
Our expectation is to keep the same level we saw last year of two to one.
Okay. Good to know. What is in the full year revenue guidance for the defense segment at this point?
Noah, Antonio speaking here. We do have for the defense around $600 million. It's very weak this year for defense.
Okay. You know, I guess maybe could you speak a little bit to, you know, your thinking on the medium to long-term growth rate in that business from here? I mean, it's been, you know, quite choppy for a while, from this lower level of revenue. How are you seeing that play out?
Well, Noah, Francisco speaking now. Yes, we see a tough year this year for defense, as Antonio said. We are working on several initiatives to improve the performance of that unit already in 2023. The new, you know, the new market environment will help us a lot, not only in 2023, but in the years ahead with the highest interest in the C-390 Millennium. That is a product with a very high value added. We expect it to reach soon to be back to $1 billion in revenues in our defense unit.
Okay. Great. Then on free cash, can you maybe just speak a little bit to your expectation of the sequencing through the year, just given, you know, the working capital in the Q1 ? The working capital change in the Q1 is, you know, different than it's been in the Q1 for a while here. That sounds like the shape of the year is fairly different than it's been.
By the way, Noah, thanks for the questions. Antonio speaking again. Thanks also for recognizing our efforts as I try to speak to the market. We are growing revenue, but we are improving the working capital at the same time. The trend is to become positive in the quarters to come, right. We do not have a spike on the negative side to go again. We have the cash steering process we control on a daily basis. That's why we are quite confident that the quarters to come will be positive and to a point that we probably are going to revise our cash guidance in Q2. Because we said $50 million or better. Now we are evaluating how better we could be.
Okay.
Yeah.
Excellent. Okay, great. Thanks so much. I appreciate it.
Thank you. Thank you.
Our next question comes from Myles Walton, UBS.
Hey, thanks for the follow-up. Just wanted to go back to, I think it's Maria's question on the gross margin. I know two years ago when you separated out commercial, your gross margins, you know, jumped that quarter because of how you were accounting for, I think, pay. Is that sort of going on again this Q1 ? Is that driving any of the gross margin increase?
Yeah. We do have an impact around the 2% and because of the obsolescence in January.
Okay. That is.
In regards to accounting.
Okay.
We do believe we could stay in this level for the quarters to come.
Okay. Thank you.
Our next question comes from Josh Milberg, Morgan Stanley.
Good morning, everyone. Thank you for the question. I just wanted to ask if you could up-
Good morning, Josh.
How are you? Just wanted to ask if you could update us on the turboprop project, just touching on how your discussions with both customers and potential strategic investors have evolved. Just on that topic, I think you had previously mentioned having costs of around $50 million related to development of the project this year, and just wanted to see if that was still your expectation. Thank you very much.
Thank you, Josh, for the question. The turboprop project is moving very well. We are now in the phase to define the supplier for this aircraft. We are doing tests already, I mean, with the concepts. So it's moving very well. We expect, you know, to be ready to make a final decision on the business case by the end of the year, beginning of 2023. You know, the investments, we are keeping the investments for this year, so we will not stop the development activities during this year. We are working in parallel on how to fund this program since we approved the business case by, you know, again, end of this year, Q1 next year.
Okay, that's great. Very helpful.
No deviation foreseen in the investment. No, Josh.
Understood. Perfect.
Thank you.
Remember that to ask a question, you may press star one. This concludes today's question and answer session. That does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day.