Morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's First Quarter 2018 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.
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, anticipates, intends, expects and similar words are intended to identify forward looking statements.
Embraer undertakes no obligations 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 on today's conference call are Mr. Paulo Cesar de Silva, President and CEO Mr.
Nelson Salgado, Executive Vice President, Finance and Investor Relations Jose Filippo, Executive Vice President and Mr. Eduardo Coteau, Director, Investor Relations. I would now like to turn the conference over to Mr. Paulo Cesar de Sousa, Silva. Please go ahead, sir.
Thank you. Good morning to all. So thank you for joining us this morning. Before I start, I would like to just make a few comments. Filippo, as you know, is leaving the company shortly.
Filippo is staying with us until beginning of May, and then he will leave. I would like to take this opportunity to thank Baixilippo very much for this excellent job he did this year at Embraer for the last almost 7 years. At the same time, same few words about Nelson Salgado. Nelson has been with Embraer more than 30 years. So Nelson has been already in many functions at Embraer, including years ago, he was the controller of Embraer.
And Nelson knows very well the company. So I welcome Nelson and wish him good luck in his new responsibilities. So with that, I would ask Nelson to start the presentation.
Okay, Paulo. Thank you. Good morning, everybody. We start the presentation at Slide 4 with the Commercial Aviation business highlights. Embraer delivered 14 E Jets in the Q1.
The big highlight of the quarter, however, was the certification of the first E190E2. The E190E2 was the first aircraft to receive triple certification from ANAC, Brazil, FAA, U. S. And EASA Europe simultaneously. That happened in the end of February in our facility in San Jose dos Carlos.
As far as performance is concerned, the UH-ninety E2 exceeded by 1.3% to the original specification of 16% better fuel burn, confirming the A190E2 as the most efficient aircraft in its segment with more than 17% fuel consumption improvement compared to our current generation jets. Just some days later, we delivered the first 2019 E2 to the Norwegian company, Hydro, on April 4. And that aircraft has already started revenue flights with the first flight being completed on perfection on April 24. Finally, our second model of the Itu family, the UN95 Itu is also on track for entering into service in the first half of twenty nineteen. Next page, Page 5, where we show the executive jet business highlights.
We delivered 11 Executive Jets in the quarter, 8 light jets and 3 large jets. On market activity, we started to see signs of improvement in the business jet market conditions during the Q1 of 2018, recording sales of 17 aircraft during the period. As far as sales activity, we delivered the first Phenom 300E after receiving certification from FAA and EASA and ANAC in the Q1. The Phenom 300E is a new version of the Phenom 300 with a completed redesigned interior and also some other improvements. Another important milestone that we have, as mentioned before, is the Phenom 300 was again the best selling and most delivered light business jet for the 6th consecutive year globally.
We also launched a new tool, called Fleet Logic, to support corporate flight department's planning. And finally, on customer support, we developed Pacino 300 interior layout option to seat up to 11 occupants, which is the highest number in its class. Moving on to defense and security highlights and starting with the KC-three ninety. The KC flight test campaign is moving towards final certification with the 2 prototypes exceeding 1600 flight hours. First delivery is expected for the second half of twenty eighteen to the Brazilian Air Force.
With the advance of the certification campaign, we've started also the production process with assembly of aircraft number 3, 45. As far as sales activity in other products in defense, we delivered 2 A20 2 Super Tucanos to a Latin American customer in the Q1 of 2018. We also delivered the 5th CINA 100 to flight training services, a provider in the UK that provides training services for the U. K. Ministry of Defense.
And finally, our subsidiary, APAC, implemented the 1st fixed command control and air traffic management center for an African nation. With that, we conclude our business unit highlights and move to the financial results. In Slide 8, we present our backlog. Our backlog reached US19.5 billion dollars in the end of the first quarter. It is important to note that with the launch of a separate business unit for services and support, we started to include services contracts in the backlog like pool parts and maintenance programs that we did not include before.
Excluding that addition from our backlog, the backlog was almost flat with increase in the respective jets offset by a decline in commercial aviation. Next slide, Slide 9, we show aircraft deliveries by business units. As I mentioned before, we delivered 14 commercial jets. This is a decline versus last year's Q1, but it is in line with our 2018 guidance of 85 to 95 planes. In Executive Jets, we delivered 18 aircrafts broken by 8 light jets and 3 large jets.
Here, it is important to say that 5 planes were delayed to be delivered in the 2nd quarter. We delayed our 2018 guidance of we reiterate our 2018 guidance of MXN 100 and 5 to 125 aircrafts, broken by 70 to 80 light jets and 35 to 45 large jets. Next slide, Slide 10. As far as revenues, we reported US992 $1,000,000 in the quarter, broken by US380 in International Aviation, 128 in Executive Aviation, dollars 243,000,000 in expense and security and dollars 239,000,000 in services. Compared to last year, our revenues in Commercial and Executive Aviation were affected by lower deliveries, while defense revenues were positively impacted by the KC-three ninety program.
Our outlook for 2018 is unchanged at $5,400,000,000 to $5,900,000,000 Moving to Slide 11, sales and general and administrative expenses. We reported a flat year over year SG and A at US115 million dollars broken by US44 million dollars in G and A expenses and US71 million dollars in selling expenses. We remain focused on our cost cutting initiatives that will continue to positively affect SG and A as well as other costs in the near future. Next slide, we show the operating results. Embraer reported an EBIT of US26 $1,000,000 in the first quarter, implying an EBIT margin of 2.7%.
This margin and result is in line with normal seasonality in the Q1 with lower dilution of fixed costs. We didn't have any special item in the quarter. Looking at the margins by segment. We reported Commercial Aviation at 4.5 percent, Executive at minus 16.7 percent, defense at 4% and services at 9.8%. Again, here, we reiterate our 2018 EBIT guidance of $270,000,000 to 3.50 5,000,000 with 5% to 6% margin.
Next slide, Slide 13. Our EBITDA reached $90,000,000 in the quarter with a margin of 9%. Again, here, we reiterate the guidance of BRL 540,000,000 to BRL 650,000,000 equivalent to 10,000,000 to 11,000,000 EBITDA margin. Moving to Slide 14, we show earnings. Embraer reported a net loss of BRL 25,000,000 in the Q1 of 2018, implying a negative margin of 2.5%.
Our earnings were down to the combination of lower operating results and higher financial expenses. These higher financial expenses are, however, in line with our strategy. In the end of last year, we anticipated that interest rates would go up, And we issued a bonus in line with our strategy of maintaining a high level of liquidity. So we issued a $750,000,000 bond. And now we are seeing the interest rates go up.
We should benefit our financial revenues in the future. Moving to investments. We our investments reached BRL46 $1,000,000 during the Q1, broken by $10,000,000 in research, dollars 30,000,000 in development and dollars 23,000,000 in CapEx. Our first quarter development investment was positively impacted by a BRL 65,000,000 received from suppliers' contribution for the Itu program. The Itu development program, it's important to note, remains in line with our plan as far as budget and performance is concerned.
Again, here, we maintain our 2019 investment outlook of US550 $1,000,000 Next slide, as far as free cash flow. We reported a free cash flow consumption of $431,000,000 broken by $311,000,000 of operating cash flow, BRL 40,000,000 CapEx and BRL 80,000,000 developments. Given the normal seasonality for our Q1, our free cash flow reflects higher inventories of BRL330,000,000 as we prepare for higher deliveries in the coming quarters and also with addition of some Finnish Air Good aircraft, which deliveries were postponed to the Q2. We reinforced our expectation of usage of no more than US100 $1,000,000 of cash flow in 2018. Finally, in Slide 17, we show our indebtedness profile.
We ended the quarter with a total debt of US4.2 billion dollars and total cash of $3,400,000,000 resulting in a net debt position of $759,000,000 around $60,000,000 better than Q1 2017. Our debt level remains comfortable with an average maturity of 5.7 years. With that, we conclude the presentation of our financial results and move on to the Q and A session. Thank
And our first question comes from the line of Robert Spingarn from Credit Suisse. Your line is now open.
Hi. This is Audrey Preston on for Rob. So I was just curious, could you give us an update on the potential Boeing tie up? And what details are left to be negotiated? And what benefits are you expecting to derive from this deal?
And then what are you expecting to bring to the table yourself? And then a follow-up after that, with the Airbus and Bombardier deal expected to close next month, would that generate any additional
pressure to accelerate
that negotiation timeline? Thank you.
So thanks for your question. We don't have too much to add on this topic. Boingo Embraer, I think we have released again an update together with our financial results. So we continue to work in the transaction with Boeing and with the Brazilian Biotechnical Group that was established. So the negotiations are quite complex.
It's going well. But we have no expectation for any time frame to conclude this. So this is what I can add in addition to what was already disclosed in our earnings results.
All right. Thank you.
Sure.
Thank you. And our next question comes from the line of Calvin Rumohr from Cowen and Company. Your line is now open.
Hi, good morning. This is Bill on for Kai. I wanted to check-in on Bizjets for a second. First, can you confirm the Bizjets margins in Q2? I didn't hear those.
Were they negative 16.7% or positive 16.7%? And if they were negative, how much were the impairments? And then just broadly on biz jets, if you could speak to orders, what are you seeing? Have they picked up recently? And what are the products people are most interested in?
Okay. It's I confirm it's negative 16.7%. And that's basically due to a lower level of deliveries. There's no impairment impact here in Aviation. And as we mentioned in the call, we see signs of recovery in this market with actually average prices going up a bit and increased sales activity.
All right. Thanks. And then just a follow-up on commercial margins. They were down a lot year over year. Can you just discuss what's going on in that business line in Q1?
Basically, Kai, the commercialization and also business jet, we have we are short of about 5 deliveries in business jets, and I believe 3 or 4 in commercial aviation. So aircraft is being manufactured, but it was not delivered given that the client asked to deliver these aircraft in the 2nd Q1. So this is basically the major impact in both business.
Yes. And that's because the lower number of aircraft, as we said, it affects the EBIT margin because of lower dilution of fixed costs. The gross margin, however, is very much in line with what we used to have or what we have
changed. And if I add Nelson, if we exclude these few deliveries that moved to the coming quarters, the EBIT margin wouldn't be too different from what we report on the previous year, okay?
All right. Thank you, gentlemen. Appreciate it. I'll pass it along.
Thank you. And our next question comes from the line of Ronald Epstein from Bank of America Merrill Lynch. Your line is now open.
Hey, good morning guys.
Can you give us a quick
update on how we're doing on sales campaigns for the E-two? I mean the sales for the program over
the last couple of years
have been reasonably anemic. Now that the airplane is certified and in service, right? What's going on? Are we is there anything closer to being booked? I mean, how would you describe that?
Thank you, Ron, for your question. Yes, definitely, after the certification in February, right, of the E219 2 and the first delivery and EIS of the E2 this week. So since the certification, we are seeing more and more attraction, more interest. Our teams are very busy involved with our already clients and potential clients. Of course, I cannot disclose here any names and any stage of these negotiations.
But I feel pretty good that we are going to have a very good year. The EIS of the 2 this week has been great. So the aircraft is performing very well, and we are very bullish that that's going to be a strong year for us. Can you give us a sense,
I mean, are you thinking of book to bill greater than 1? I mean, that's sort of one metric maybe you could mention.
Yes. So we are targeting at least 1, at least 1. But given the level of activity that we are seeing, so it can be greater than that.
Okay. Okay, great. And then back to business just for a moment. When you the sense of recovery that you're seeing, is it just in the smaller product? Is it in the larger product?
Is it the U. S? Is it Europe? And can you give any more feel for the kind of the tone and tenor of the recovery you're starting to see?
Sure. I think, first of all, we are seeing overall improvement in the used aircraft, right? So inventory is being reduced. So prices on the used aircraft stopped to not to fall. We are seeing slightly better prices on the new aircraft.
Definitely, U. S. And Europe, I think these are the both markets, regions that are needing this recovery, okay? So U. S, given the like the tax reform and the economic growth.
Europe, more, of course, on the economic growth in the whole Europe, European countries. We are seeing a good perspective for the medium sized aircraft in SuperMeet, legacy 450, legacy 500. So we are seeing very good activity there. So we are also on the business jet unit business. So we are more positive this year.
So I believe we are coming out of the woods finally. It's not a great improvement, but it's an improvement.
Okay, great. Thank you very much. Sure.
Thank you. And our next question comes from the line of Noah Poponak from Goldman Sachs. Your line is now open.
Hey, this is Gavin Parsons on for Noah. Good morning, everyone.
Good morning.
Just taking a step back and looking at regional jet demand from a higher level, the global fleet has been pretty flat for the last decade or so and most of the demand has been replacement driven. So do you think that changes meaningfully over the next 5 to 10 years? Or do you think replacement demand will kind of be the more meaningful driver for you?
Well, we stick to our market forecast, about 6,000 jets for the next 20 years from the segment 70 seats up to 130. So don't forget that we have the U. S. Market for our 76 seater, right? So it's still a lot of opportunities in the U.
S. For this aircraft as we move forward. And for the 190, 195 E2, as I mentioned before, starting to deliver. So we are seeing and we'll continue to see a great opportunity. So we are stick to our market forecast.
So we continue to see that size of the market. We have a China with opportunities not for the peso but for growth, right? And we have other markets in Asia as well for growth and replacement in Europe, so definitely, right, and as well as Middle East. But I think it's a mix of growth, replacement, right, and scope change or scope of relaxation a little bit in the United States as we replace the 70 seater with Embraer 175.
Okay. And then you called out impairments, I guess residual value guarantee impairments on commercial jets. Can you talk about what you're seeing in the marketplace today as far as values, the trends? And remind us what your total exposure is and what you have in guidance for the year?
I don't have a specific here. So I'm sorry, you are talking about the $145,000,000
Yes. And other expense, you highlighted expected impairments on commercial.
In terms of commercial. So it's basically with reference to the ERJ 145 that we still have some in our books, right? And from time to time, so we have this impairment. But I don't have the specifics now here. The market is improving a little bit for the $145,000,000 We are seeing relatively good demand in countries in Africa, for instance, in Eastern Europe.
So we have been able to place these aircraft in the secondary market. But always there is a need for some impairment, right? In the past, this impairment was bigger. Now it's being much reduced. But I don't have the specific here.
So do you have any? In the Q1, we had around $10,000,000 or $10,000,000 to $11,000,000 on this impairment of used aircraft. It's not really RVG. For the upcoming quarters, we are expecting less than that. So we shouldn't see the same amount for the rest of the year.
But it's always difficult to know.
Great. And then just last one for me. You're highlighting improvement in the business jet market and orders, but 1Q deliveries looked a little bit seasonally light. Did you say there was some slippage to the Q2 there?
Yes, exactly. So 5 aircraft that will leave to the next quarter.
Got it. Thank you. Sure.
Thank you. And our next question comes from the line of Pete Skibitski from Drexel Hamilton.
Best of luck to Jose Filippo. Also congratulations on the E2 lettering service. My question is, on the strong revenue growth in defense, I'm not sure I understand what drove that. It was up really sharply year over year. It looks like you think it will kind of flatten the balance of the year.
Can you give us some more color on the strength in Q1?
Yes. The debt growth was mainly driven by the KC-three ninety because we actually started the work on the contract for the serial delivery of aircraft to the Brazilian Air Force. So as I mentioned, we have aircrafts on 3, 45 in production. And that contract is has revenues recognized as we move on with the assembly of aircraft. So that is responsible for most of the increase in the defense revenue in the Q1.
Okay. And it's percentage of completion, so you're not going to get a bump in revenue in the second half when you actually deliver. Is that correct?
Well, it's you recognize revenue as you assemble the aircraft, but there is always a portion, a significant portion left for the final delivery of the aircraft.
Okay. That's very helpful. Okay. And then last question is just as the Brazilian economy kind of stabilizes and returns to growth, What kind of defense budget growth are you guys expecting going forward as a result of that?
Well, we are expecting the growth in our program so that we can have the commitments the government has for delivery of the KC-390s ahead. There is no new program for the moment, but we have the contract for the final the big contract for the final certification of the KC and also for the deliveries of the KC. Looking at our other product lines, we have expectation of continuing work on the border protection program. And also, we've been working with the government to for the 2nd geostationary satellite that is actually needed already for Brazil. So I'd say these are the major activities that we foresee with the government of Colombia.
Okay. Do you guys think the election later this year is going to have any kind of meaningful impact to the defense outlook?
No. We don't expect impact because these are long term contracts that don't they go from one government to the other. So we don't really expect any impact because of the change in government.
Okay. Thanks, guys. Appreciate it.
Thank you. Our next question comes from the line of Turan Kotiwala from Deutsche Bank. Your line is now open.
Yes. Good morning and thank you for taking my question. Also wanted to wish Filippo all the best for his future. Just I guess my first question, just wondering if you could talk a little bit about your Executive Aviation business. Obviously, the sales were deliveries are a little bit softer in Q1.
I understand that there was a bit of movement from Q1 to Q2. But could you give us a sense of how much sales you need to do on that business to kind of get to the guidance here on deliveries for 2018?
Well, we despite the soft deliveries in the Q1, we are maintaining our guidance for the year, right? So if you look at our guidance, that's where we expect to get. And with that, we will improve our margins as
well. It's important to mention also the transformation we are going through in the company, right, with the production for accidents. So we are now in the this year, 'eighteen, is a very important year. So we have launched the program in August last year, and we're implementing now. So it's going well.
So it's moving well. So our plan fully takes into account this program that is being managed by us with the support of Maquingre. So it's going very well, as I said, And we are on target so far. If I may add, Paulo, it's Eduardo here, Cora. We had, I would say, a positive trend in terms of pricing on executive jets.
If you look at our average prices, they were 4% to 5% better in the Q1 of this year compared to last year. And this improvement was across most of the models. So we are feeling better demand and some price recover. So that's the reason we are, I would say, cautiously optimistic on executive jets.
No, I understand that. I just try to understand how much of the $105,000,000 or so in deliveries is in backlog.
It's we are very confident in our guidance of $105,000,000 percent to 1.25 percent. So I think the risk is very reduced. We don't disclose how much sold out we are, but are very, very comfortable with that.
That's helpful. Thank you, Eduardo. I guess maybe just one more from me. Paolo, I was wondering if you can talk a little bit about obviously, I understand the Boeing deal is pretty complicated here to kind of get done. Just wondering, is the uncertainty around that affecting the business at all with regard to maybe campaigns on the E2?
And I guess even just something maybe you could provide some insight on how the employees are faring as well. Thank you.
No, it's not affecting at all. So we are in touch and content, of course, with our clients. So the campaigns that we are involved is not predicated at all in the transaction. So we feel very good about that. So internally, of course, there is anxiety, right, to see the outcome of this.
But there is no issue whatsoever. So I'm sure that people is very much focused on their job. And however, having said that, we want to, of course, to have an outcome for this transaction as soon as possible. So it's important that we reach a final resolution on that soon.
Okay, great. Thank you so much for your help.
Thank you.
Thank you. And our next question comes from the line of Stephen Trent from Citi. Your line is now open.
Good morning, gentlemen, and thanks very much for the time. And I echo other folks' comments. Very best wishes to Filippo. I had 2 follow-up questions on the Defense segment. When we look at the activity here in the United States, there seems to be at least some indication that there might be additional opportunities for the A29 and maybe the Air Force having a close look and just curious if you have any comments on this?
Yes. There is a growing interest in the Super Tucano. And the United States Air Force is actually performing right now an evaluation process for light attack aircraft. The Super Tucano has been selected as one of the 2 finalists of this campaign, which is moving ahead and we are cautiously optimistic about our prospects in these as the Super Tucano is really the only aircraft around with combat proven experience.
Okay. That's very helpful. Appreciate the color. And just one more. While I'm at it, it's encouraging to hear the KC-three ninety rolling along in terms of the contractual work you're doing for Brazil's military.
Any indication at this point? Anything you can say with respect to how the efforts are going vis a vis potential international traction to the aircraft, especially as Boeing has some skin in the game on this process?
Well, in the defense market, we know that it seems really start to heat up when your own Air Force receives and starts to operate the air burn, right? So we continue to see a lot of interest in the casing. We've been approached by many, many Air Force throughout the world. There are some campaigns going on. But we really expect to see that turning into real sales as the Air Force the Brazilian Air Force receives and starts operating the aircraft.
Okay, very helpful. Let me leave it there. I'll let someone else ask a question. Thank you.
Thank you. And our next question comes from the line of Ricardo Alves from Morgan Stanley. Your line is now open.
Good morning. Thank you, gentlemen. Just one for me. Most of my questions have been answered. On the defense profitability, I mean, this big improvement from -eight percent to positive 4%.
Now that you're getting ready to deliver the 1st aircraft, is this the kind of profitability we should expect for the next few quarters? I remember you guys guiding low, if I may take a low to mid single digit margin for the defense segment in 2018. So just wonder if that should continue. And also if you could give a quick update on what you expect in terms of margin per segment. I guess it shouldn't have changed because you're reiterating your margin guidance, but just to make sure, because we saw this big bounce back on defense and a significantly lower profitability on the executive side.
Okay. Thanks, Ricardo. I would say the Q1 margins on defense were more normal or back to a normal level that last year was really unusual. We had negative margins, mostly driven by some cost based revisions that we had in some of our programs. This year, at least in the Q1, we didn't have any cost base revision.
At this point, we are not anticipating that for the remaining of the year. So we expect to see better defense margins. Looking the margins per business, we don't give a guidance on that. But as we already mentioned, executive jet should be a lowtomidsingle, similar to defense. On commercial, we expect to see a mid- to high single digit.
And service and support, mid teens or a low double digit. That's more like how we see the margins per business.
Thank you so much, Edu. Helpful.
Thank you. And I'm showing no further questions over the phone lines at this time. I'd like to turn the call back over to Nelson Salgado for closing remarks.
Well, thank you very much all for attending our results conference. Thank you.
And that does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day.