Afternoon, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's Third Quarter 2015 Results. Thank you for standing by. This conference call is being held during the Embraer Day in New York with the presence of investors and market analysts. At this time, the company will present its Q3 2015 results. Afterwards, 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 www.embrayer.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, estimates, 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. Federico Curado, President and CEO Mr.
Jose Filippo, Chief Financial Officer and IRO and Mr. Eduardo Cotto, Director of Investor Relations. I would now like to turn the conference over to Mr. Jose Filippo. Please go ahead, sir.
Okay. Thank you, and good afternoon, and thanks for joining the Embraer 3rd quarter 2015 earning results. As we normally do, we go with the presentation, then we'll be open for questions. So starting in Page 3 with the corporate highlights, we were listed for the 5th or the 6th consecutive year on the Down Jones Sustainability Index. Important for us that very much in terms of sustainability initiatives.
Also regarding management excellence, we received Magna con laude recognition from the Brazilian National Quality Foundation, which is equivalent to the Malcolm Baldrige Quality Award. And also in relation to PeopleManagement, we received important recognitions in Brazil and Latin America. Next page, Page 4, in terms of highlights for Commercial Aviation. We had the delivery of 21 ejets in the Q3 of 2015. We have now accumulated 68 aircraft delivered this year.
And also we were able to record 20 new film orders accounting now for 146 to date. In these 20 orders, we like to break this highlighting SkyWest order at 18175 that we will fly for United Airlines and also to undisclosed orders for 190s. Also in terms of orders, the highlight of the firm orders for 19 E175 also from SkyWest that will fly for Delta Airlines. This was announced after the closing of the quarter in October 2015. Confirming the good commercial performance, we achieved the ratio of book to bill above 2 over the 1st 9 months of 2015.
And finalizing these highlights in relation to the development of the E2 program, It was initiated the final assembling of the first E190 E2 prototype. This was showed to the market last week actually. Okay. Next page, sorry. Going to Page 5, the highlights of commercial of Executive Jets business.
We had a delivery of 30 Executive Jets in the 3rd quarter, broken by 21 lights and night large aircraft. And we account now for 57 light and 18 large year to date. In relation to the Phenom program, we had in the Q3 the delivery of the Phenom 300 number 300 is important milestone in this program. And also as far as the Lagos 5 100 and 450 program, important information related to the certifications of the Lagos 500 in Mexico and China and also the Lagos 450 in Brazil, USA and Europe. In relation to the quality and customer perception, we also ranked by important magazines.
At this time, we show here the 1st place in the Global Executive Jet Industry ranking by the Professional Pilot Magazine. Next page, Page 6 and now the highlights of Defense and Security Business. We start with the information that contract with Gripen program became effective. We actually have currently a group of engineers already in Sweden preparing for this program that is starting now. And also regarding the KC-three ninety program, we had a resumption of the flight test campaign with a second flight that actually happened yesterday.
In relation to the LAS program, we had the delivery of 2 aircraft in the Q3 of 2015 to the U. S. Air Force. And now actually today, to date, we have 12 already delivered, which includes 2 additional ones that happened after the end of the quarter. Now next page regarding the financial results of the Q3.
And in Page 8, we start with the backlog. We reported deferred backlog of $32,800,000,000 at the end of September, basically in line with the figures of the previous quarter. Next page, Page 9. In relation to deliveries, already mentioned, but just reemphasizing here, starting with the commercial aviation on the left, 21 aircraft delivered in the Q3, 68 to date, actually to the end of the Q3. And in relation to Executive Jet Aviation, we had 30 delivered broken by 21 lights and 9 large in the quarter and accumulated figures of 75 deliveries broken by 57 lights and 18 large.
With that, we take the opportunity to confirm our outlook for the year, which is in the range of 95 to 100 ejets in the commercial aviation and 35 to 40 as active large jets and 80 to 90 as active light jets. Next page, in terms of net revenues by segment, starting from the top right, Commercial Aviation reported revenues of $688,000,000 in the 3rd quarter with a
total of
2,230,000,000 dollars as of September. Going down to the bottom right, Defense and Security with a total of $182,000,000 in the 3rd quarter, which accumulated in the 3 quarters of 0.6 $1,000,000,000 this year. Continuing with the Executive Jet Business, the total $402,000,000 in the 3rd quarter accumulated €0.97,000,000 in the year. The consolidated figures, maybe moving to next page. I think we have the in reals and in U.
S. Dollars, total reported of almost $1,300,000,000 in the 3rd quarter, accumulated of 3,800,000,000 in the year. With that, we also take the opportunity to reiterate our guidance range of net revenues from 5,800,000,000 to $6,300,000,000 in 2015. Next page, as far as SG and A, we had a total of $121,000,000 in the 3rd quarter, broken by 43,000,000 dollars in G and A expenses and $78,000,000 for selling expenses. Those figures are the lowest when we compare to the previous quarters 2015, and they represent 9.4% of revenues in the 3rd quarter compared to 12.2% in the Q3 of last year.
We would like to confirm our commitment with cost control and reduction. Next page, now Page 13. As far as EBIT, we reported operating profit of $84,000,000 in the 3rd quarter, accumulated of 266 in 2015. Operating margins were 6.6% in the quarter and 6.9% accumulated in the year. Next page, terms of EBITDA, we had a total of 158 $1,000,000 in the 3rd quarter, accumulated $485,000,000 Margin in the 3rd quarter achieved 12.3%, with accumulated of 12.6% in the year until September.
Next page in terms of net results, we had a net loss of $110,000,000 in the 3rd quarter, accumulated loss of $43,000,000 in 2015.
The main
reason for this figure was the negative impact of the deferred income tax in the Q3 of $181,000,000 Without this effect, we would be reporting a net profit of €71,000,000 in the quarter. And this negative impact is reflects a non cash effect, which results from the income tax on the Brazilian local currency gains on the non cash asset items. Basically, as you can see, we have 28% devaluation of the Brazilian real against the dollar in the quarter. And that return to the Brazilian real gain on those non cash items, which we had to record a deferred income tax. This is a non cash income tax and that's the way you have to record in terms of the Brazilian tax law.
The non currency items they refer to typically fixed assets, intangible assets and inventories. Next page, in terms of cash flow. We had a cash consumption of $115,000,000 in the 3rd quarter, with positive operating cash generation of $70,000,000 offset by $76,000,000 of CapEx and $110,000,000 of development, both primarily related to the E2 program development. And as of September 15, the free cash flow accumulated was $482,000,000 negative. But considering our expectations for the Q4, we reiterate our estimate of the negative $100,000,000 or better in terms of cash generation in the full year 2015.
Next page, Page 17, in terms of investments. We had a total investments of 3 $34,000,000 as of the end of the 3rd quarter, broken by $27,000,000 in research, dollars 100 and 64,000,000 for development and EUR 143,000,000 for CapEx. The figures for the year are tracking below guidance mainly due to the weaker Brazilian real currency. Next page, Page 18 and finalizing the presentation. Regarding our cash and debt position, we achieved a total net debt of $644,000,000 at the end of the 3rd quarter, which we expect to be reduced by the end of the Q4.
Our cash position in the end of the quarter was $2,750,000,000 and a total debt of $3,390,000,000 In terms of our debt profile, it is in it has an average terms of 6.5 years and 91% maturing in the long term after 12 months. Okay. With that, we finalize the presentation and we now open for the Q and A session. Thank you.
Certainly. Thank you. Our first question comes from the line of Daryl Genovesi from UBS. Please go ahead.
Hi, guys. Thanks for
the time.
Filippo, on the adjusted net income number that you've provided, when you're just backing out the deferred tax impact. It's actually above the pretax income. So I guess that would imply a tax gain in the quarter. Is that a cash gain? And is that something that's sustainable for some reason?
Basically, like I mentioned, this is we have to take all the assets, the known monetary assets and they are referred in dollar terms. So when we take the Brazilian real, we have a gain, a non cash gain and we have to record the income tax of that gain. This is a non cash Like I said, it's a deferred. And the assumption is that those inventory will turn into final good and sometime this will be sold and then the profit will come. So that's why actually it's in anticipation of that.
But this is not a cash item. It's just like a noncurrent income tax. I don't know if it's exactly
Right. I guess what I'm saying is the adjusted number that you provide, the $71,500,000 compares to $59,000,000 pretax on the income statement in your release. And so I guess I'm just trying to reconcile why the why the adjusted net income number is higher than the unadjusted profit before tax number?
What we did is only the adjustments for the deferred tax. It's just like a calculation to help you to see without that effect, which we have the current income tax, which was as recorded there, but just a piece related to the deferred piece actually.
Okay. And then also can you quantify the adjustment at the defense business?
Can you repeat there?
Sure. You had in your press release, talked about a cost base revision for certain contracts in the Defense and Security segment due to the negative impact of foreign exchange variation. Can you quantify that?
Yes. It was $30,000,000 in the 3rd quarter, accumulated $90,000,000 in the year. That's the effect again is the same effect of the currency, which we have to reset the contract and we make this adjustment every quarter when we had the valuation. Normally, we used to do this every quarter, but when we had the evaluation like we had recently in recent quarters, this effect is higher. So for the Q3 was $30,000,000 and we had to accumulate in the 3 quarters of $90,000,000
Great. Thanks very much.
Thank you. The following question comes from the line of Josh Milberg from Morgan Stanley. Please go ahead, sir.
Good afternoon, everyone, and thanks very much for the call. I had a couple of questions on the commercial division. The first one is just if you could update us on how you're seeing the 20 16 outlook for deliveries and for mix? Also just what's how's your visibility on next year? And with the firm backlog as it stands, is it reasonable to expect that we could have a similar level of deliveries next year?
I don't know what you can say. Maybe that's not something you're ready to comment on.
Sure. Glad to answer. No, we are totally sold out, of course, for 2015. So always some, of course, customer finance things to be finished. But we do not see any risk at this stage for the guidance that we have provided.
So it looks really, really solid. Same thing probably for next year. I think as we mentioned in the last quarter, we felt comfortable feeling we feel increasingly comfortable with at least maintaining the current level of production revenues in that market. Of course, we can give you more color early next year. But we are with this recent sales last year, I mean, 2014 was a very strong year in sales and 'fifteen again.
So that really gives us a, let's say, very comfortable position in the years ahead.
Okay. That's great. And then the other thing is just with respect to your residual value guarantees and whether the level of provisioning we saw in the Q3 is what we could expect going forward? And also just if there's anything else relevant to highlight on that particular issue?
Yes, that's an important question. Thank you. There has been recently there has been a revision by all the appraisers and the whole industry. And in general, there is a reduction of expected values over time of commercial airplanes in general. So it is possible that we have an impairment in the 4th quarter.
We estimate that this stays something in the range of $30,000,000 So it's definitely which is possible. And that would be if that is confirmed, will be a downside risk to our guidance. But that's due to be confirmed.
Okay, great. Appreciate that.
Okay. I would like to put on hold the questions remote, please to have give a chance for people inside here to ask questions.
Could you touch on the margins by segment, Eduardo? And also in terms of the non recurring FX charges in defense of about $90,000,000 year to date, obviously, presuming those don't recur into next year. What's the outlook for defense from here? Are we kind of bouncing around the bottom kind of in a breakeven situation? And are you able to contain the cost to keep it there?
Yes. Just to give the EBIT margin breakdown by business, We had 3rd quarter Commercial Aviation 12%, Business Jets around 5% and defense and security negative 11%. So the consolidated margin was 6.6
percent. Yes. The defense, Mahesh, as I said, this impact of the exchange rate, negative there. We have to do this every quarter. This is not the first time we do in this year because we saw that the currency in Brazil has been losing, especially with higher rates.
But if that comes stays stable in the Q4, we shouldn't see this in the next quarter. This is too much exposed to this effect. So this is basically the reason why the defense business had negative margin.
If I may add, Myles, if I got your question completely, that business was hit by 2 major, I know, let's say trucks. We ran over by 2 major trucks this year. We're impacted by the currency 50% debt, specifically the Brazilian denominated revenues, 50% devaluation in the year, 28% alone in the last quarter. So that goes from the top line and of course everything downwards, but also financial promise with our main customer in defense, which is the Brazilian government, which they had they have cash issues. So that has impacted our cash flow and also our revenue.
So the 2015, I think a good way to look at what happened is an adjustment. I think we are now at a different level. There's a step function downwards as far as the size of the programs, the KC-three ninety, as we have already divulged, is being delayed by a year. The smaller programs also that have been all adapted to the new reality of the ability of the government to pay us on time. We're not planning to fund those programs on our own.
So we prefer to adjust it to the capacity of the real capacity of the customer to pay it. So it's a year of transition. I think as Jacques will go into more details in his presentation, but I think he did a great job in rapidly adjusting the business to the new reality. What I expect for next year in defense is something of a similar level as far as activity. Maybe some upsides because there is an increasing activity in exports, but certainly a return to profitability hopefully to the levels where we were before.
So that's the kind of a macro vision. By the way, if I may add, just anticipating maybe a question about the KC-three ninety. I heard some questions about why did it take so long between the first and the second flight. And the answer is that well, that coincided, of course, with this whole commercial discussion about the new pace of the program. So what strategically what we decided was to do 2 things.
1, to go and do all the ground vibration tests on the airplane, the GVTs. Another was to have a full layup of the airplane to the state of the art of our engineering design. So that will significantly increase the efficiency of our flight test campaign. So from now on, we're going to see this airplane flying much, much more than the last several months.
It looks like the Q4 is going to be a really strong cash flow quarter for you to hit your guidance. Can you talk about the puts and takes there? Is it lower development expense because of the real? Or are you expecting cash advances? Or are there just other puts and takes that are going to lead to a really strong quarter year over year?
The strong quarter, of course, typical the seasonality of the business brings this as Q4 as a strong quarter. But regarding investments, that's correct, your point. We had early this year contributions from partner that reduced some of this. We don't expect to see that mostly now in the end of the year. Also engineering was the major piece of investment more certification and other tests that brings more like dollar denominated costs.
So we expect to see this increasing, but that enough probably to meet the levels that we expected before. I think we end up the year with a better position in terms of cash consumption without affecting any of the schedule of the program. Programs is on schedule completely as expected and going forward. That's how we expect.
Piotr, I think to your point, we will see a reduction in inventories. So that's going to help the cash. And the activity of course all the income from the deliveries. So that'd be twofold, more deliveries, cash inflow and reduction in inventories. I think that's a major contribution for the cash flow in the Q4.
Great. This is Derek Spronck at RBC. Have you changed your hedging policy at all?
No, no. We do hedge all the balance sheet is hedged all the time. Our cash flow hedging position, the policy established that we do this every year. So we're now in the process of contracting the 2016 hedging for the cash flow position. So we didn't change our hedging position.
If the real stays at current levels, would the Defense division going forward on a quarterly basis then be producing positive gross margins?
Yes. It tends to be positive because most of the effect was the adjustment on the currency. So as we have the program stabilized in terms of currency impact, it tends to be profitable and returning margins definitely.
And just one more quickly. Your reduction in SG and A, could you break that out between how much of it was FX related versus cost controls that you've implemented?
I don't think we have this number available at this point. We can make some conclusion in the form to you later.
One thing I think I can say now is that and we control that by currency, the piece in reals, and we are below budgets in both currencies. So we are also being leaner in reals, it is not 100% currency. So that much you can say.
Do you have specific cost reduction programs that you're implementing?
You bet. Yes.
Okay, great.
Yes. Thank you, Jose. So this year, you got caught short because of the big decline in the real in terms of your cost collar. I think it's around $340,000,000 Can you tell us kind of preliminarily what kind of a range or cost on the cost collar of the FX you would anticipate for next year or at least your approach to that issue?
No. But if we stay in this level of the currency, maybe it's seen in a different way. We skip on the 25% of the cost associated to the real denominator. So this is the benefit that we have. Part of this benefit, of course, goes into the deferred assets, which is development of the programs
and part to
go into the cost. But you have to take into account that to benefit from that, this cost has to go through the inventory. And then when we deliver, then we capture. There's a delay about 2 or 3 months to have a full capture of this effect. But going forward, maybe we should think that the currency shouldn't be increasing that much.
We expect to see this more stable. What we saw this year was more a volatile approach from the currency. We still continue to benefit because we're not increasing the costs. So we're keeping retaining this in dollar terms the piece of the real cost that we have.
But if I may add, Filippo, you're asking about the hedge, the labor cost if we already have a 0 cost collar in place for next year? We do.
No, we're starting to do. And what we've been doing so far is we have a cap of above BRL6 and a floor about BRL3.5, BRL3.4, BRL3.5. That's what we're working on.
Terrific. Thank you.
Steve
Tran from Citi. Just Two questions for me, if I may. I noticed in the quarter, if you look at current and noncurrent receivables in 3Q, there was a small sequential decline versus 2Q, which I thought was intriguing. And when you dig into that number, is there any sense you can give us as to whether the flow from the Brazilian government was in line with your expectations or below or above or receivables turnover was much stronger in a particular area than you'd anticipated?
Yes. What we've been as Fred mentioned, we already reviewed that contract, especially the main customer, which was something that led us to increase these accounts receivables. We currently are experiencing a balanced situation where the expenses are the same, where revenues are related to the payments. So we keep seeing that. The variation is primarily due to some exchange variation effect on some part of this local currency.
But basically, we are continuing to receive what we've been expensing.
Okay. Got it. Thank you. And just one other general question. When you look at your campaigns for commercial aircraft and other people or other companies are showing up in these RFPs, What are you seeing in the competitive environment, more of Mitsubishi, less of other competitors?
If you could give us a sense as to what that looks like?
Sure, Sebastien. Be glad to. If we separate in 2 different markets artificially in the regional pure like 75 seater market, typically regional feeder market and the mainline market. So well, currently in every campaign that we have, we have ourselves, we see Mitsubishi and we see of course Bombardier there. We have been successful in especially after the enhancements to our AE-one hundred and seventy five, which we introduced last year.
We've been successful in seizing all the opportunities, almost all the opportunities which are there. So I think on that front, we feel very comfortable. And on the mainline side of $190,000,000 $195,000,000 we have less of a concentrated demand, but there are several campaigns out there. We just mentioned 2 undisclosed orders, which are not the United States. And if I may add one, let's say, one possible positive prospect, of course, this is something which is a ways from being a reality, but can happen is major airlines in the U.
S. Discuss with their pilots and possibly flying 100 seaters at mainline level. So if that happens, of course, that's a plus to everything that we are doing. So between the E2, D1, the E2, which is on time, by the way, absolutely on time, you saw the picture and Paolo will go into details. We feel that we're covering from the 70 to 100 and 30 seat markets pretty well and comfortable that we keep being the dominating player there.
Okay. Very helpful. Thank you. Thank you.
Let's take the Touran's question here. So you'll be ready for the to cut this part of the event and continue the presentation.
Thank you. I guess my question
is on next year on the Commercial Aviation segment. Obviously, you have the skyline pretty much filled up for the year. So you know where the pricing is going to be and the real is going to be a tailwind here as well. Is it fair to assume we can see a decent increase in margins next year for the Commercial Aviation segment?
It's possible. You see where the currency will stay. Of course, let's say, it stays at level 4. That's a tailwind for us. So everything we're doing is to keep maybe if we go back probably 2 years ago when we said that we would we were seeing at that time that the mix of aircraft is 190, 195 versus 175, which historically tends to have a lower margin.
We saw the mix changing significantly over the next several years, but we thought we could have resilience in holding, maybe not exact same margin, but kind of a low double digit margins. And I think we have demonstrated that in the last 18, 24 months. So this is pretty much the story. So yes, the exchange rate helps in that. As the standardization of larger contracts, same configuration that helps more and more scale, dilute more fixed costs.
So it's a good momentum in that sense.
So there's nothing in the pricing that should
be extremely worrisome there? No, there is pricing pressure. We've seen pricing pressure. There is one competitor in particular who's been very, very aggressive in both commercial and executive jet segments. And of course, to say that this is irrelevant is not true.
I mean, it is relevant. We have to react to that. And we have maybe felt that a little bit we are feeling that a little bit more in the Executive Debt segment. On the commercial, we have been able to really sustain certainly the value of the Airwave products really differentiates itself and help us to sustain a healthier price and therefore margin. But on the cost side, it's relentless efforts.
Thank you.
That does conclude MREL's audio conference for today. Thank you very much for your participation. Have a good day.