Good morning, ladies and gentlemen, and welcome to the Audio Conference Call at the Resil Embraer's Third Quarter 2019 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 that time. As a reminder, this conference is being recorded and webcasted at ri.engraer.com.pr.
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, anticipates, intend, 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 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. Participants of today's conference call are Mr. Francisco Gomez Neto, President and CEO Mr. Nelson Salgado, Executive Vice President, Finance and Investor Relations and Mr.
Eduardo Colso, Director of Investor Relations. I would like now to turn the conference over to Mr. Nelson Salgado. Please go ahead, sir.
Good morning, everyone, and thanks for joining the call. We start our presentation with the commercial aviation highlights at Slide 4. Embraer delivered 17 jets in the Q3 and 54 year to date. Among those, we highlight the delivery of the first Euro 95 E2 to be operated by Azum Airlines. During the Q3, Eurocratic Airways, a Swiss airline, also received its 1st Eur-ninety E2 jet.
It is important to mention that the E2 program is doing very well, and the entry into service of the E2 Jet since last year has been a big success. As far as services and support, Arjun and Horizon Air signed service and support programs for their E1 fleet, And Embraer also achieved 100% E Jet operational enrollment in Asia Pacific for its 2 programs. That includes 60 aircraft and a total of 6 different airlines. Moving to Slide 5, we show the executive jet highlights. Embraer delivered 27 executive jets, 50 light and 12 large in the Q1, leading to 63 airplanes year to date.
During the Q1, we delivered 7 Greater 600, including the 1st Greater 600 jet assembled in Florida. As far as sales, Embraer had the highest year to date sales in executive jets in the last 5 years, with the Praetor 600 as a big success and the best Supermute 5 jets in the market. Interest from customers is very high, and we had the announcement at the NBAA of a $1,400,000,000 deal with Flexjet for the Praetor Jet and the Phenom 300, a deal that can get to the delivery of around 64 jets. Flexjet also became the Praetor fleet launch customer with 1st delivery scheduled for Q1 2019. Finally, in terms of the Praetor program development, the Praetor 500 received triple certification from ANAC, FAA and Reaza outperforming on key performance metrics such as speed and range.
Moving to Slide 6 with Defense and Security Business, which continues its transition from KC-three ninety product development phase to serial production, with special highlights to the entry into service of the KC-three ninety with Brazilian Air Force. First aircraft was delivered to Brazilian Air Force in September, and the second is expected to be delivered by year end. The KC-three ninety also successfully performed a very important air to air refueling test with Brazilian Air Force during the Q1 2019 and continues to move the certification of critical military missions. Also very important to mention is that Portugal became the KC-three ninety first export customer with a field order for 5 KC-three ninety and related services. This contract will amount to approximately $1,000,000,000 and will be included in our backlog in the Q4.
Talking about other defense platforms. We have sold 9 super quick runs to 2 undisclosed customers. And the Brazilian Air Force received the 4th level 500 aircraft modified for airport inspection operations. With that, we conclude by giving the highlights and move to the financial results. We start with the firm order backlog at Slide 8.
Embraer backlog reached US16.2 billion dollars in the Q3 2019, which is almost $3,000,000,000 above what we had 1 year ago. New orders for executive jets have been the main highlight in the backlog this year. And on the defense side, the recent KC-three ninety order for Portugal will be added to the backlog in the Q4. Next slide to Slide 9, we present aircraft deliveries, starting with Commercial Aviation. We delivered 17 jets in the Q3, 2 jets more than what we delivered in the same period of last year.
Year to date, we have delivered 54 jets. We maintain our guidance of 85 to 90 5 deliveries in 2019, inclining a strong 4th quarter in terms of deliveries. On executive jets, we delivered 27 jets in the 3rd quarter, 3 more than what we delivered in the same period of 2018. A special highlight here to the 12 deliveries of large jets advanced 7 in the Q1 of 2018. From these 12 aircraft, we had 5 Praetor, 600 aircraft.
We also reiterate our guidance of 90 to 110 deliveries in 2019 in effective aviation, also implying strong deliveries in the 4th quarter. Next slide represents net revenues. We reached revenues of US1.176 $1,000,000,000 in the Q3 is likely above 2018. Year to date, we achieved US3.378 billion dollars in revenues. These revenues are broken by Commercial Aviation, dollars 408,000,000 Executive Aviation, dollars 363,000,000 defense, dollars 164,000,000 In this defense revenue, we had to account for a loss associated with the KC-three ninety development program of around 30 $4,000,000 and services, dollars US238,000,000.
We reiterate our guidance of revenues from $5,300,000,000 to $5,700,000,000 in 2019. Moving to Slide 11, we present SG and A. Our SG and A expenses totaled $108,000,000 broken by $37,000,000 in G and A and $71,000,000 in selling expenses. We continue to reduce SG and A expenses despite the preparation for the separation of the commercial aviation business. At Slide 12, we show operating results.
Embraer's Q3 EBIT was negative $21,000,000 implying a negative margin of 1.8%. Important to mention that our EBIT included BRL 66 $1,000,000 in separation costs related to the commercial aviation carve outs year to date and 30 5,000,000 in the 3rd quarter alone. Excluding Commercial Aviation, EBIT of the businesses that will remain at Embraer was 2.6% in the 1st quarter and breakeven year to date, mostly driven by better margins at Executive Aviation. Our margins per business in the Q1 were negative 11 percent at Commercial Aviation, driven by carve out costs and the E2 ramp up. Positive 6% in Executive Jets with the beginning of the greater 600 deliveries.
Negative 4% in defense, as I mentioned, impacted by one off charges of BRL 34,000,000 in the KC-three ninety and positive 7% at services and support, also partially impacted by carve out costs. Moving to EBITDA at Slide 14. Embraer's EBITDA was also impacted by the carve out score. EBITDA reached $18,000,000 Q1, equivalent to a margin of 1.5%. EBITDA year to date is $160,000,000 with 3.4% margin.
On Slide 14, we present net income. Embraer reported a net loss in the Q3 of $48,000,000 implying a negative margin of 4.1%. Our earnings have been negatively impacted by the combination of carve out costs, same impact as we had in the EBIT and EBITDA and higher financial leverage that will move as we close the deal as together with the debt that we move to the Boeing Commercial Aviation. Moving to investments. We reached 314 $1,000,000 year to date, broken by $33,000,000,000 in research, dollars 187,000,000 in development and 94,000,000 in CapEx.
Our major investments this year are related to the E2 program development. As far as cash flow at Slide 16. Embraer has a free cash flow consumption of BRL 2.50 $7,000,000 in the Q3 2019 and it's $921,000,000 year to date. We expect to recover $1,000,000,000 out of our cash usage in the Q4 with meaningful free cash flow generation, driven by aircraft deliveries on both executive and commercial that will have a strong 4th quarters. Given that, we anticipate a negative free cash flow in the range of $100,000,000 to $300,000,000 for the full year of 2019.
This negative free cash flow already includes all the separation costs. As a result of the free cash flow consumption, we show our indebtedness profile at Slide 17. Our average debt maturity is 4.9 years, and Embraer ended the 3rd quarter with a cash position of $2,200,000,000 and a total debt position of $3,500,000,000 implying a net debt of 1.3
1,000,000,000.
Moving now to Slide 9, we bring some information about the status of Embraer endpoint partnership. That it was widely published in the press. European Union has recently announced an extension of its decision deadline. Regarding the partnership until at least March 2020. Despite that, the carve out of the company Commercial Aviation business is starting as planned at the end of 2019.
So as we close 2019, we will start implementing the carve out of our commercial aviation business. It will be separated into another company. And it's very important to make clear that Commercial Aviation business will continue to operate normally 100% under Embraer's management until the closing of the operation. We now expect the transaction to be consummated shortly after all regulatory approvals are sustained. Now we move to our guidance.
Given the cash consumption observed in the Q1, the review of short and medium term business plan and considering the new closing time line of the transaction expected to occur in at least March 2020, we updated our 2019 2020 guidance. For 2019, Embraer reaffirmed deliveries of 85 to 95 each, 90 to 110 as active jet, 2 KC to 90s and now expects the delivery of 5 Super Tucano. Embraer also reaffirms expectations for revenues of $5,300,000,000 to $5,700,000,000 and breakeven EBIT margin, while removing the estimates, which were dependent upon closing of the transaction at the end of 2019. We will also introduce 2019 free cash flow guidance of our cash consumption from $100,000,000 to $300,000,000 in 2019, including here again all separation costs. For 2020 guidance at Slide 22, and this guidance includes only the expected results of executive defense and related services, that is the scope that will be retained by Embraer after closing.
We Embraer reaffirms consolidated revenues of $2,500,000,000 to $2,800,000,000 EBIT margin of 2% to 5% and breakeven free cash flow in 2020. Given Emperor's expected 2019 cash consumption, combined with the anticipation of the closing of the Embraer Bond Partnership to March 2020, March or April 2020. And the potential financial impact of these delays. Embraer now expects a special dividend of between BRL1.3 billion and BRL1.6 billion to be paid after closing of the transaction in 2020. With that, I conclude my presentation, and we would like I would like to pass to our CEO, Francisco Gomez, for his closing remarks.
Thanks, Nelson, and good morning to all analysts and investors connected with this call. After 6 months as the Head of Embraer, I would like to share my impressions with the market. First, we have a great team, and I am really impressed by the commitment and hard work of our team in the CarGhaul's process to separate the commercial aviation business into a new company. Of course, the car vault has affected our results in 2019, but we are confident that after the conclusion of this partnership with Boeing, Engraer will be much stronger. 2nd, while we continue to manage our whole business in the ordinary course, we have been extensively working in recent months on a business plan of this new embryo, and important actions have already been taken.
We will present it to the market at the right time, but I am 100% convinced of the huge value we have in executive defense and services. With a lot of focus on sales of the great new products we have, discipline in cost control and cash generation, I believe that our biggest opportunity today is to improve these 3 businesses. No other initiatives will be creating more value to our shareholders than this. That is the reason my management team is deeply engaged reviewing the business plan for effective defense and services. We also continue with focus on the innovation initiatives that will contribute with the future growth of the company.
Finally, we recently announced important changes as Nelson Salgado, our current CFO, will now move to operations to increase the alignment of operations team with the financial targets we have. We also announced Antonio Garcia as our new CFO starting on January 1, 2020. Antonio comes from Cision Group and brings a lot of experience in cost control, profitability turnaround and cash generation. I believe we are building the right leadership at Emboer to take the necessary steps that will bring enormous results to our investors in the coming years. With that, we conclude our presentation, and we would like to open for questions.
Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from Kai Von Runner, Cowen and Company.
Hi, this is Jeff Molinari on for Kai. Good morning and thank you for taking my questions. So the first question I have is on the Boeing Embraer JV. This week it was reported that you stopped the clock to review the proposed JV. Is this latest development contemplated in your expectation for decision in March?
Or how is that will that be up? Will that be delayed substantially? And then I have a couple of follow ups.
Thanks, Jeff. No, we do not see that as any additional delay. Actually, when the European Commission decided to move the process to Phase II, they defined a deadline that would be around mid May, mid March. And they requested additional information from the 2 companies. We are working very hard to deliver this information as soon as possible, but the European Commission stopped the clock until they received the additional information.
We do not see this as any change in the normal course of this process and don't expect these to mean big delays.
Okay. And if I can, another follow-up. So the delay caused a decrease in the special dividend range. So but you didn't quantify what the impact is on separation costs. Can you talk a little bit about what the expectation is for those costs in 2019 and 2020 or collectively, however you want to frame it?
The separation costs, we will amount to 17, bigger than $100,000,000 close to $100,000,000 in 2019. And there may be something left for 2020, but we don't expect that to be significant.
And is there an amount in your free cash flow guidance that you're assuming for the free cash flow guidance 100 to 300 outflow? What are your assumptions of separation costs within that?
Well, I'd say both guidance includes already the separation costs in the order of $400,000,000 as I mentioned too.
Okay. I'll get back in line. Thank you, guys.
Our next question comes from Myles Walton, UBS.
Good morning, everyone. This is Louis Fitter on for Myles. Just wanted to sort of follow-up on that. So what was the driver to the change in the dividend? Was it, I think, previously 1.6 percent, now it's 1.3 percent to 1.6 percent?
And is there a change in the amount of leakage you guys expect from the deal as well?
No, that was given mainly by the cash flow consumption in 2019 and also by the delay the change of the payment from early 2020 to around March, right? So in the light of the cash consumption, we thought it would be better to change the guidance for the dividend.
Okay. And then a follow-up. So I think now you're saying there's, I think, 5 Super Tucanos. I guess I thought previously, were you expecting a few more than that
this year? Or is that Well,
you were expecting 5 of them were postponed to the beginning of 2020.
Okay, great. Thank you very much.
Our next question comes from William Astraub, Global Capital.
My question is about business orders. Wondering if you could provide a little bit of description on how that went for Q3? Sorry, Luke, you're asking about business jet orders?
Yes, correct.
Yes, business jet orders, as we mentioned in the call, we're at the highest level in the 1st 9 months of the year from the last 5 years. So it's been a very good result. And within those orders, we had this $1,400,000,000 orders from Flexjet, which is very important as Flexjet becomes the launch customer of the Praetor 500. So it was a very good year so far to business jet sales. Thank you.
And just a quick follow-up. Can you are you able to discuss backlog for Q3 for business specifically? Well, as a consequence of the sales, backlog is at its highest for Executive Aviation as well. But I don't have here the figure for Executive Aviation backlog, but this is the highest ever
Our next question comes from Cai von Rumohr, Cowen and Company.
Hi, thanks for the follow-up guys. What is your new expectation for NetCast position if the deal were to close in March timeframe?
Thank you.
Well, Kai, this depends on exactly when the deal closes. As you know, as we move by during the year, in our industry, it's normal to have cost consumption in the 1st month of the year because of the seasonality. So the amount of cash that the liquid cash that you the net cash that you have at closing will depend on the moment the closing happens. When the closing was planned to happen coincidentally in the year end, where we have our generally our best cash position, which was one situation. Now with the closing, moving closer to end of Q3 in the year, then it's difficult to predict the net cash.
It will depend on the operational performance and cash consumption of the 1st month of the year.
Okay. That makes sense. And then how is the separation activity progressing? You're on track for internally separating by fiscal year end. What still needs to be done between now and the next month and a half?
You know this is a complex program. We have many, many projects going on to be able to do that separation. Right now, we are upgrading the integrated test for the separation of the ERP system, which is one of the biggest tasks that we have to do. And with that, we consider that most of the activities are finished, right? So our plan was to have finished most of the significant activities by the beginning of December, and that is very much on track.
So what we will do now as we close 2019, we will enter a blackout period because we have to shut down the current system so that we could restart the operation as to different separate companies. So we expect to take the 1st 2 to 3 weeks of January in that process. And when we come back from that, we will already operate as 2 separate companies. The company that will, in the future, become Boeing Bradley Commercial and Embraer with the commercial business private out. As I mentioned in the presentation, from this point until the closing, Embraer will continue to operate commercial aviation as we always done.
The only difference is that now internally, it will be in a separate company, but same management, same leadership.
Our next question comes from George Lorincoll, Morgan Stanley.
Hi. This is actually Josh Milberg from Morgan Stanley. I was hoping I wanted to ask if you could give a little more color on the issue of your commercial profitability in the Q3. In addition to the issue of separation costs, you mentioned that it was affected by ramp up of the E2. Could you talk a little more about that effect and how you see that effect evolving into the Q4 and into 2020?
I realize, of course, that if all goes as planned, you won't be managing the commercial business as of next year. But I thought you still have some perspective. Okay.
So results of commercial aviation in the quarter, they were negatively affected by the separation costs. According to the methodology that was defined, the commercial aviation business exceeds almost all of the separation costs together with some part of the services business that is also moving into commercial areas. So that explains a part of the results that we had in the quarter. And this is a transitory effect. We don't expect to have, as I mentioned, big separation costs moving into 2020.
The other part of the results explanation relates to a mix of margins in the 175,000,000 in Q1, sorry, that we are delivering this year
And at
costs above expectations in the €90,000,000 and €195,000,000 E2s. So we are working with the learning curve of these products. We are reducing costs fast, but it is affecting the results as we start ramping up these 2 new products.
Okay. And then on the E175 issue that you mentioned, could you elaborate a little bit on that? Is that it's the special configuration version of that aircraft, which we had understood in the past at a lower selling price?
Yes. That's right. So the configuration and the fact that this was associated with big orders, but so this drives these margins
down.
Our next question comes from Gabriel Resenti, Credit Suisse.
Hi, thank you for taking my questions. Actually, I have two questions, following up on Josh's questions regarding margins. So can we affirm that the impact on margins came more from the E2 than the E175? And another question, if you could provide any detail regarding the profitability of the operator, it would be great.
Well, as I mentioned, there are 3 components to the commercialization margin. So it was 75 months. So the 19 or 95 issues are ramping up and running curve. And the carve out costs, which, as I mentioned, are impacting almost totally commercial aviation.
The other point The margin on the breakeven?
No, okay. The margin on the breakeven. Well, We had in the quarter a 6% positive EBIT in Executive Aviation with the delivery of the initial 36 100. We are not disclosing individual margins for products, But definitely, the players have a part to play in these better margins in effective aviation.
Our next question comes from Leonardo Fonte, CTM Investmento.
Hi. This is Leonardo from CTM Investmento. I would like to ask you guys, what are your main peers doing in terms of prices in order to achieve the cost and performance of the Praetor business jets?
Sorry, I did not understand the first part of the question. What is the
What are your main peers doing in terms of prices to achieve the cost and performance of the new Praetor Jets? I mean, are they giving more discounts to achieve the spreader price?
No. We believe very strongly that with the Baker 600, we found a sweet spot in terms of positioning. Products that have similar performance are much have much higher prices. So it is very difficult to have price reductions that would get these projects to complete with the Greater 600. So we do not see that this kind of reaction will cause us a big problem in the Greater 6 100.
And can you say something about the business jets used market? Is it getting better?
Yes, it is going well. No special points here.
Thanks.
Excuse me. This concludes today's question and answer session. That does conclude Embraer's audio conference for today. Thank you very much for your participation.