Good morning, ladies and gentlemen, and welcome to the audio conference call for Embraer's Q1 and 2021 full year financial 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 the 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 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, estimate, continues, anticipate, intend, expect, and similar words are intended to identify forward-looking statements. Embraer undertakes no obligations to update, publicize 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 might 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 US dollar as it 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 Procurement, and Mr.
Leonardo Shinohara, Director of Investor Relations. I would like now to turn the conference over to Mr. Gomes Neto, who will proceed with the first remarks of 2021 fourth quarter and 2021 full-year's results. Please go ahead, sir.
Good morning, and thank you all for joining our fourth quarter in 2021 results call today. I hope that all of you are well and safe, and I thank you for your interest in our company. Before starting this conference, I would like to express our solidarity with the Ukrainian people impacted by the war. What we have been following in real time causes huge consternation for all of us at Embraer. At this moment, our thoughts are with the families who have lost their loved ones, and we support everyone who is working directly for the immediate end of this conflict and the restoration of peace in the region. As you will see later in Antonio's presentation, our results for the quarter were in line with our guidance, while cash generation came above expectations.
The Q4 2021 results continue to show that our strategic planning is bringing tangible, positive results for the company. Before we go into more financial details on the fourth quarter, I'd like to recap our key strategic pillars. First, on growth. Our commercial aviation had a rebound, and we continue with a good momentum on our executive aviation. Our total backlog reached $17 billion on the back of 92 commercial jets sold, being 42 E1s and 50 E2s. The book-to-bill for executive aviation is two to one. Service and support was also a big focus, achieving about $2.5 billion in backlog. On defense and security, several sales campaigns are ongoing with a big driver on industrial cooperation and strategic partnerships for future business, especially with our C-390 Millennium.
Overall, the company total sales reached $6.6 billion in 2021, which also contributed to cash generation with advanced payments from clients. Second, enterprise efficiency. Our adjusted EBIT improved over $260 million in 2021 compared to 2020, considering 11% revenue increase. Higher adjusted EBIT in 2021 was driven mainly by the increase in efficiency from the Fit for Growth strategic plan initiatives. An example was 50% improvement on inventory turn in 2021. The footprint optimization with sale of Évora, Titusville, a small plant in Botucatu. The shutdown of our facilities in Bradley, Connecticut, and the spare parts distribution centers consolidation, both in Europe and in the U.S.A. Also, significant contributions from our world-class procurement, production lead time and COGS reduction projects.
More importantly, this pillar has resulted in a strong evolution on free cash flow and an overall improvement in financial metrics. Our financial net debt reduced by $300 million. Third, innovation. Innovation is part of our history and a major driver of growth for this company. An example of this is Eve and Zanite signing a partnership to explore the urban air mobility business. Other important investments on new segments are the Turboprop new generation and the E-Freighter. Future concepts under study like the Energia family are all projects we are very excited to talk about. Last but not least, I'd like to emphasize that we have a strong culture of safety, one team spirit and result orientation. In ESG, we have many new developments. We have objective targets for the environment.
We expect to reach carbon neutrality by 2040, with more efficiency and reduction on emissions as well. We hope to use more SAF, the sustainable aviation fuel, and 100% renewable energy in our scope 1 plus two. In scope 3, we hope to become net zero by 2050, developing new technologies, aircraft 100% SAF compatible and more airframe efficiency. In the social front, we also have clear targets. 50% diverse hires in all new entry-level employee programs, and 20% of women in senior leadership positions by 2025. Approval of more than 80% of students at Embraer high schools in public universities. Train 1,500 people from minority groups by 2025 on the Social Tech program, a new professional training in technology.
In governance, we have a robust ethics and compliance program, the highest international standards of governance, and very high safety standards. Products aligned with international requirements. I will now hand it over to Antonio Carlos Garcia to give further details on the financial results, and I will return at the end. Thank you.
Thank you, Francisco, and good morning, everyone. I'd like to start with the performance of our business unit. We had a great performance of our business unit despite still being in a recovery year from the pandemic. In commercial aviation, we delivered 16 jets in the fourth quarter and 48 jets in 2021, which is an increase 9% year-over-year. With the rebound of regional aviation, with 92 aircraft sold in 2021, of which 50 were E195-E2. We are seeing strong demand recovery, especially in domestic markets. The book-to-bill for commercial aviation is 2:1. Adjusted EBIT margin of 0.3% in Q4 and -1.7% in 2021. In executive aviation, we are excited with the performance and have delivered 39 jets in the fourth quarter, reaching 92 jets for the year.
A strong backlog continues across the entire portfolio. We had a historical quarterly and yearly sales with book-to-bill ratio in excess of two to one. Adjusted EBIT margin of 13.6% in Q4 2021 and 8% in 2021. Another great news is that the Phenom 300 has been the best-selling executive light jet in the last consecutive 10 years. Continue to our defense and security unit. We have finalized an agreement with the Brazilian Air Force, reducing total of KC-390 aircraft from 28 to 22, with deliveries until 2030. In Q4, we had a one-time adjustment as a result of this agreement, and had a backlog reduction of $526 million, and non-cash impact of $43 million on operational results. We are extremely happy with our cybersecurity business, Tempest.
Our cybersecurity company broke revenue records posting 40% growth compared to 2020 revenues. We had an adjusted EBIT margin of -29.7% in Q4 2021, 42 percentage points year-on-year. Even considering the Brazilian Air Force agreement adjustment, we had a yearly adjusted EBIT margin of 3.8% in 2021. In service and support, demand has reached pre-pandemic levels, and we have signed more than 795 new contracts for executive aviation, including inspections, aircraft enhancement, and special programs. Our backlog rose more than 20% in 2021 on a year-on-year basis. Adjusted EBIT margin of 16.7% in Q4 2021, 31 percentage points year-on-year, and a strong annual adjusted EBIT margin of 14.3% in 2021. Slide seven, moving to deliveries.
Overall, we had a more evenly spread pace of deliveries compared to 2020 because of the pandemic impact on demand. In the fourth quarter, we delivered 16 commercial jets and 39 executive jets for a total of 55 aircraft during the period. Even with some supplier constraints at the end of the year, we were able to fulfill our customer expectations. The 16 deliveries in commercial aviation represents 45% decline on a year-on-year basis, with an atypical deliveries amount in Q4 2020 due to the pandemic. Of the 16 deliveries, 12 were 175 and four E2s. We have started to see higher sales momentum for both E1 and E2 family of commercial aircraft, which is a positive news.
We have delivered in 2021, 48 aircraft, which is within our 2021 guidance of 45-50 aircraft. Executive aviation delivered 26 light jets and 13 larger jets for a total of 39 aircraft in the fourth quarter. The deliveries in Q4 represent a 10% decline year-on-year basis due to the same reasons as commercial aviation. Overall, we have delivered in 2021, 93 jets, which is also within our guidance of 90-95 aircraft in 2021. In slide eight, we start with our backlog. We ended the fourth quarter with a backlog of $17 billion, reaching its highest value since the second quarter of 2018. That is 18% increase with a $2.6 billion addition year-on-year.
Turning to net revenue, fourth quarter net revenue was $1.3 billion, down 41% year-on-year. This year-on-year decrease is due to the pandemic impact in 2020, which concentrated deliveries, enhanced revenues in the fourth quarter of 2020, versus a more normalized delivery flow spread out in the year for 2021. Net revenue in 2021 was $4.2 billion, up 11% from last year. We had a solid revenue growth as all business units posted higher revenue compared to 2020, except for Defense. In Commercial and Executive Aviation, we had better sales mix and more aircraft delivered in 2021. In Services and Support, we had an overall positive revenue contribution increasing for all segments.
Important to note that 92% of our total revenue comes from export, which shows our global outreach. Overall, we reached 2021 guidance with net revenue within the $4-$4.5 billion range. Moving on to adjusted EBIT and EBITDA, we are very encouraged by the continued improvement in margin performance for the company. For the fourth quarter, on a consolidated basis, our adjusted EBIT margin was 4.3% and our adjusted EBITDA margin was 8.2%, an increase of 0.1 percentage points and 0.3 percentage points on a year-on-year basis respectively.
On a yearly basis, adjusted EBIT margin was 4% and adjusted EBITDA at 8.6%, both well above last year and within our outlook range of 3%-4% for adjusted EBIT and 8.5%-9.5% for adjusted EBITDA for 2021. On a dollar basis, adjusted EBIT was $167 million compared to a loss of $101 million in 2020, and adjusted EBITDA was $363 million compared to $82 million in 2020. Our EBIT could have been better if we didn't not have additional costs that are treated at corporate level related to reintegration and ongoing arbitration costs. These improvements in EBIT and EBITDA are results of our Fit for Growth initiatives. Slide 10, look at SG&A. SG&A as a whole continues to trend favorably over the past years.
Yearly SG&A down $360 million or 23% decline compared to 2019 figures. Selling expenses were down from $256 billion to $230 million due to our focus on more cost-effective ways to reach our customers. General and administrative expenses were slight up from $143 million in 2020 to $153 million in 2021. It's important to note that we remain highly focused on SG&A efficiencies and apply lean principles to it. On investment, we have a more normalized level in 2021 with a 20% increase in combining both CapEx and R&D. We continue to optimize our capital allocation, including divestitures and program prioritization. Slide 11. I'd like first to highlight our remarkable cash flow recovery.
Adjusted free cash flow in 2021 was $292 billion. This is well above our $100 billion outlook. More efficient inventory management, better production planning, and stronger sales in Executive and Commercial Aviation, and the down payments associated with these sales have led to our positive cash flow for the year. Adjusted net result was a loss of $29 million or $0.24 per ADS. Although negative, net results is trending up, driven primarily by revenue growth. As our top line grows, our fixed cost leverage and financial leverage will improve, providing additional positive impact on earnings. Furthermore, the company is targeting a positive net results for 2022 onwards. This next slide shows our cash and cash equivalents position. We ended the year with $2.6 billion cash and cash equivalents.
Our total debt at the end of 2020 was $4 billion, with a net debt of $1.4 billion. We reduced $300 million debts in 2021. It's important to highlight that our net debt EBITDA ratio decreased from 5.6 times to 3.5 times in 2021. This is a 2.1 times decline in just two years. Our average debt maturity decreased to 3.7 years. We remain focused on generating cash, reduce our debt levels, and improve our credit metrics. With our recent bonds maturing in 2020 to 2023, buyback of $289 million. With that, our average debt maturity increase above four years. I will now guide you through our outlook for 2022 without Eve.
We have increased our range of deliveries for 2022 due to the uncertainties that we are seeing in recent events. We are working very closely with our suppliers to overcome the current challenging situation. For Commercial Aviation, we forecast 60-70 aircraft and for Executive, 100-110 jet deliveries. For revenue, we forecast $4.5 billion-$5 billion. For adjusted EBIT margin, 3.5%-4.5%. For adjusted EBITDA margin, 8%-9%. For free cash flow, we forecast $50 million or better. With that, I conclude my presentation and hand it back to Francisco for his final remark. Thank you very much.
Thanks, Antonio. The fourth quarter and year-end results reinforce our confidence in our strategy. Before we do a quick recap, I would like to briefly highlight about our urban air mobility, Eve. The listing at New York Stock Exchange and closing is expected for this second quarter, with total investments of about $500 million, which includes SPAC and strategic investors. The anticipated pro forma enterprise value is $2.4 billion. Eve has the 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, Falko, and Thales, who know very well our capabilities. I think it is also important to mention that the Russia-Ukraine conflict should not bring supply disruption in the midterm because we have worked on stocking some strategic items. Our 2022 guidance shows another positive free cash flow for the full year based on the good momentum of the company with a mix of recovery and growth, keeping our strong focus on the top line and higher profitability. We hope to deliver net profit in 2022. We also expect that our strategic projects generate free cash flow so they can finance their growth. On liability, we seek the best capital structure with liquidity in hands. Finally, our focus are our pillars of growth, efficiency, innovation, and ESG. Safety first, result-oriented culture, and one team spirit.
Thank you to our great team for their focus and passion on creating disruptive and sustainable technologies and executing our strategic planning. Thank you for your interest and confidence in our company.
Thank you. 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. 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.
Thanks. Good morning.
Hello, Myles.
On the guidance for 2022 that you could perhaps give a little bit more color by segment. In particular, given the margin pressure you had in 2021 in defense, I would have expected the margins to, at the midpoint, be better than 2021. Maybe if you can just give some color there.
Hello, Myles. Antunes speaking. Thanks for your question. Basically, what we are seeing regards to guidance for 2021, by the way, we know that you guys maybe don't like too much, and we don't like either, but we have effects in our numbers that's not helping us for 2022 as we would like to see. Basically what we are seeing regards to margin by segment is starting with Commercial Aviation, we closed 2021 with -1.7%, and we do see a black zero for 2022 with more volumes. We do have a little bit cost for the TP that we are spending money and not capitalizing, okay? That's why I do see a black zero here.
Executive, we will still continue at the highest single digit level for 2022 without services, okay? Defense, that's one issue that's concerning us right now. We closed 2021 with 3.8%, and we are going to suffer a little bit in 2022, and we do see a zero in 2022 because all budgets were cut, especially from the Brazilian government here, therefore, we are going to suffer in 2022. That's one of our headwinds we have in our guidance. Services and support, we do see, I would say constant margin the level we closed for 2021, 14%.
If you put all together, it's more than our guidance, but please take into account we do have costs on the corporate level, which more or less eating up 1.5%, more or less 1.5% margin with the integration of commercial aviation arbitration costs that we are not adjusted for you guys. But if you want to make an adjustment in your math, then you are going to see that we are right up in the range of 6% if the business we have as part of this extraordinary effect that is going to hit our numbers for 2022.
That's great color.
Okay.
Yeah. No, that was.
Yeah.
That was good color. On the OneEight Embraer costs, I think you implied something like $65 million in 2022. Does that go to zero in 2023? Are we done in 2022?
We cannot comment too much, but I would say we do expect to finish in 2023. It's always assuming that you cannot tell too much about the arbitration process. That's, I would say, the timeline should end up in 2023. That's our hope. I would say, let's see.
Okay. Thank you. I'll leave it to one question. Thanks again.
Thanks, Myles.
Our next question comes from Florencia Marchesan, MetLife.
Hi guys. Congratulations on the results. I have two questions. One is a follow-up regarding guidance, but more focused on free cash flow. If you can comment on working capital assumption on how you get the $50 million? And the other one is regarding ESG, particularly if you have any update on MSCI comments a couple of months ago that raised some flags on the name, if you have any answer from the agency or any comment on that? Thank you.
Florencia, I think Antonio can help you with the guidance, but I'd like you to repeat the question about ESG that I wasn't able to understand. We have Green here with us here to help, but I need to understand better your question.
Yes, we got here, Francisco, we're going to answer the question. Florencia, in regards to the cash flow, we do see our working capital stable in 2022. The free cash flow guidance you get is $50 million or better because it includes also the cashing out of the divestiture we are doing in Portugal. That should contribute with $150 million for 2022. It's important to mention, our outlook does not include any cash inflow from other businesses, okay? It's just the legacy business we have. Working capital fixed and the divestiture is going to help us in the free cash flow. Then MSCI, Leo is going to answer you.
Hi, Florencia. About MSCI, we actually just got a message stating that they have took everything in consideration, so we don't have any flagged items on MSCI. Our rating should reflect that. No more cluster bomb ammunition issues whatsoever.
Okay. Thank you.
Thank you.
Thank you.
Our next question comes from Josh Milberg, Morgan Stanley.
Good morning, Francisco and Antonio, and thank you guys very much for the detailed presentation. I also had a follow-up on the guidance and your indication that a breakeven EBIT margin could be a reasonable expectation for the commercial division this year. I was specifically just hoping that you could comment a little further on the mix pricing and other key variables driving that indication. I think on the Portuguese call today with respect to pricing, you suggested that you expect it to keep pace with inflation for your overall operations, but any additional color there would be great.
Okay. Let's start with the last question, Josh. Then I will ask Antonio to help with the guidance. Regarding the pricing, we have followed very closely the movements of price and costs to make sure that we are keeping a healthy situation for our margins. We will continue with our initiatives to reduce costs internally. You know, we have this COGS reduction project. We have the production, the aircraft production lead time reduction. We'll continue focus a lot on those initiatives. Of course, if we see an impact in one of our commodities that are higher or products we buy that are higher and we are able to compensate, then we have to pass on to the prices.
This is the way we are doing. We are monitoring very closely these movements in prices and costs from our suppliers and the prices to our customers and the internal costs as well. Antonio, would you like to clarify something about the guidance, please?
Yes, Josh, good morning. In regards to the mix, you know, for the commercial aviation, that's important to highlight, we do have more E1s in 2022 compared with 2021. It's more or less 50% more E1s, where we do have just 28 more E2s. It means we have a different mix, which impacts revenue because it have a lower ticket or lower average price for the E2s compared with E1s and also impact a bit the margins. In regards to the price increase deck, we do have in those platforms something like 2%-3%, I would say, normal condition escalation in our contracts with our suppliers and customers. That's more or less the premises we have to pass through as long as we are not able to offset.
However, there is a risk today in the market with hyperinflation war impacting commodity this and this and this that we are quantifying right now. At least no risk, but it could change next week or the next 10 days, we don't know. I would say for the commercial aviation, it's more E1s that bring the revenue a little bit down and E2s. On top of it, when I mention the margin, we are investing $50 million for the pre-develop of TP, which is also impacting the margin for 2022. If you validate the business case, you may capitalize it. For the time being, we are booking as a cost. It's more or less what you do see in the aviation coming to break even, and we hope throughout the year we are able to improve a bit.
Okay, great color, Antonio. Thank you, Francisco, as well.
Thank you.
Have a nice day.
Thank you. You too, Josh.
You too.
Our next question comes from Marcelo Motta, JPMorgan.
Hi, everyone. Just a follow-up on the guidance for 2022. I mean, just to understand, you always talk about, you know, adjusted margins, adjusted EBITDA, EBIT margin. It seems that this year you guys are commenting about a negative impact of 1.5 percentage points on these adjusted margin coming from reintegration costs, as well as arbitrage costs. However, I mean, I have the impression that every year you guys have been adjusting the margin for that. You know, I don't know if the guidance is including this 1.5 that is not really comparable to the margins that we were seeing the previous year. Just wanna make sure that they were getting this correct.
Marcelo, we never adjust the carve-out or carving costs. That's more or less what you're talking about. This is embedded, including this EBIT margin, and the same for the arbitration. It's in there. If you want to do the math without considering that, we would see Embraer in a better margin than what you are seeing today, but we are not adjusting these two costs. It's included.
Okay.
in our adjusted EBIT. Okay?
Do you think it's fair to say that most of those costs will happen during the first quarter?
No.
Okay.
For the integration, yes. For the arbitration costs, it will be spread out the whole year, more or less.
Exactly.
Perfect. Thank you very much.
Thank you.
Our next question comes from Matias Vammalle, BlueBay Asset.
Hi, thank you. Thank you very much. I just wanna double-check, which ties up with the margins, but also the deliveries. Given the impact or given the effect that we're seeing on higher commodity prices, how you think you can handle that? Again, I presume a fair bit of that is already factored in your expected deliveries and your margins, which are roughly flat to this year. If you can comment a little bit more on what you think the impact could be or how you would handle higher commodity prices and also some other challenges that other manufacturing companies are facing, such as semiconductor shortages. Thank you.
Well, Matias, thanks for the question. I mean, again, I think Antonio already clarified this point of cost and price, right? We are monitoring very closely this movement. We have internal programs to offset some price increase. But if the cost increase is above of what we are able to offset, then there's no alternative than to pass through the price. We have already some escalation established in our contracts, either with suppliers or clients and with customers. That is a kind of protection. If anything out of this, then we have to discuss how to offset, but we believe we are in a good position for the guidance. The guidance, you know, as Antonio said, I mean, it's considering the situation, right?
I mean, we believe we might have opportunities, but we prefer to have a commitment with you that we will deliver at the end of the year. Also, Antonio also mentioned that in the case of commercial aviation, we will have this $50 million impact because of initial costs of the turboprop. That if we approve the business case by the end of this year, beginning of next year, this will become investments. At this point of time, we are expensing as costs.
Our next question comes from Noah Poponak, Goldman Sachs.
Hey, good morning, everybody.
Hello, Noah.
Morning.
You know, it was a decent order year last year in commercial. It seems like there's a lot of replacement potential. You know, maybe you could just speak to how heavy the campaigning activity is, maybe where you expect orders to come in commercial in 2022. I guess, you know, how sold out, how much visibility do you have for the delivery profile beyond this year?
Well, I mean, for the deliveries this year, we are facing some difficulties with the supply chain, but we are working very hard to anticipate the issues and mitigate those risks, as we did last year. Last year, we did a good job. We also faced some issues with the supply chain, but we were able to deliver all the aircraft planned. Same way, we are going this year, you know, in order to mitigate issues and to deliver the aircraft. Regarding sales, I mean, we have a lot of sales campaigns ongoing in commercial aviation. Yes, we have to.
We have this potential impact of the war, the oil price increase, but also maybe some upsides because you know, maybe the domestic market will be less affected than the long flights, and we have the most efficient aircraft in the market. Maybe this will be an upside for our sales during this year.
Where do you think the adjusted EBITDA margin can go over time once you've recovered pre-pandemic commercial volumes?
No, we do see in the midterm the mid- to single-digit % margin. It's important to mention without services. Now if you include services, it'll be much higher. The same, we did 1.7%. If I would add the services side, it would be positive mid-single digits already in 2021. With only aircraft sales, we do see middle term, middle single-digit % margin.
Noah, just
In commercial
Giving you a more medium-term perspective, in our plan, we have the potential to double the revenues of the company in five years from now. We are pushing a lot for this internal programs to increase efficiency. This year, we have some growth we could see in the deliveries and the guidance, but we are still suffering the impact of some extraordinary costs. Again, as soon as we overcome these short-term difficulties, I think the perspective is very positive for the following years. We're enjoying the growth of our revenues and the growth in the market.
What kind of total company adjusted EBITDA margin would you expect if you were to achieve that doubling of the revenue?
Our dream here is to be a higher single digit margin and also cover the CapEx in the medium term. The EBIT higher single digit margin. That's our dream.
Exactly.
I hope that we are going to see not too far away, in our opinion. If you would except this cost that we needed to face here, we would be already in the range of 6%. 2021, we closed with 4% without this hit from Brazilian Air Force, we'd be at above 5% already. That's why we are still facing this, let's say, impact from the past transaction with this joint venture. A part of it, the business is showing that are resilient, right? I would say close to above 8% in the midterm. That's our plan, that's our dream, and we should see also.
That's a EBIT, EBITDA or EBITDA number?
EBIT.
EBIT.
EBIT.
Yeah.
EBIT.
Okay, great. Okay, thank you so much. I appreciate it.
Welcome.
Thank you, Noah.
Thank you. This concludes today's question and answer session, and also Embraer's audio conference call for today. Thank you very much for your participation. Have a good day.