Good morning, ladies and gentlemen, and welcome to the audio conference call from Embraer's financial results for the first quarter of 2023. Thank you for standing by. We remind that Eve's result will be discussed on Eve's conference. It's important to mention that all numbers are presented in U.S. dollars as it's our financial currency. Additionally, the numbers in this presentation contain non-GAAP financial information to facilitate investors to reconcile Eve's financial information in GAAP standards to Embraer's IFRS. At this time, all participants are in listen-only mode. Later, we'll conduct the question and answer section, and instructions to participate will be given at that time. Should you require assistance during the conference, please use the Q&A button on the platform. 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 the 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 believes, may, will, estimates, continues, anticipates, intends, expects, and similar words are intent to identify forward-looking statements. Embraer undertakes no obligation to update publicly or revise any forward-looking statements because of information, future events, or other factors. In light of those risks and uncertainties, the forward-looking events and circumstances discussed on this conference call might not occur. The company actual results could differ substantially from those anticipated in the forward-looking statements.
Participants on today's conference call are Francisco Gomes Neto, President and CEO, Antonio Carlos Garcia, Chief Financial Officer, and Leonardo Shinohara, Director of Investor Relations. I would like now to turn the conference over to Francisco, who will proceed with the first remarks. Please go ahead, Francisco.
Good morning, thank you all for joining our first quarter 2023 results call today. We delivered Q1 results according to our expectation. Revenue increased by 19% versus Q1 2022 due to better commercial mix, strong growth in defense, 56% year-over-year, and service, 20% year-over-year. Constraints in the supply chain are still present, we continue to act to mitigate these risks. We see some improvements this year. However, the scenario is still challenging. Firm order backlog ended Q1 2023 at $17.4 billion, stable quarter-over-quarter and driven by evolution in executive and service and support. In the coming quarters, we foresee a better perspective in terms of deliveries, revenue, and profitability growth.
We are working in many active sales campaigns with excellent chances of new orders for the years ahead in all business units, particularly commercial and defense. We continuously focus on enterprise efficiency in our operations and innovation through our subsidiary, Eve. On the next slide, we will see ESG alignments and achievements, and after that, we will show more details of each business unit in the quarter. Regarding ESG, our sustainability report was launched last month and brings the environmental, social, and governance indicators aligned by international standards, GRI and SASB. Our actions are on track, and this was reflected in the improvement of our performance in the CDP report and in the ESG rating agency, MSCI.
On the next slide, I confirm that Eve has the largest and most diversified backlog with 2,770 LOIs valued at $8.3 billion, the highest in the industry. On the next slides, I will discuss the main highlights of the business units. In commercial aviation, we have above 200 aircraft under discussion in several campaigns covering all regions of the world. We announced the expansion of our presence in the Asian market with Scoot adding 9 E190-E2 to its fleet, and also Binter confirming its order of 10 E195-E2. Reported revenue growth of 17.5% year-on-year to $199 million. Due to one additional delivery in Q1 with more deliveries of E2 family, which has a higher price. Executive aviation continues with a strong book-to-bill in a market going back to normal levels.
Revenues were $87 million, 3% lower year-on-year, driven by mix compared to Q1 2022. Our portfolio keeps up with a strong demand and very well positioned, with backlog growing quarter-over-quarter with resilient price discipline. On defense, we were very pleased to announce the MOU with Saab to expand the collaboration in several areas, including C-390 Millennium. The C-390 Millennium has been awarded the final type certificate, reflecting its full operational capability, FOC, that the aircraft is capable to perform all the missions for which it was designed. Finally, revenue of $98 million, 56% higher year-on-year due to better C-390 revenue recognition in Q1 2023. Margins show improvement compared to last year.
On service and support, we announced an extension to the service and support agreement with Porter Airlines to include 20 E195-E2 jets to the firm order. With this extension, all 50 aircraft will be supported by the pool program for parts and heavy checks. Highlights also included the entering into service support for SalamAir and Endeavor. We announced a Phenom 300 full flight simulator in Las Vegas in a joint venture with CAE Group. During the first quarter, we received the first E190 to be converted into a freighter at a dedicated MRO facility for all passenger to freight conversions. Revenues of $326 million represent a year-on-year growth of 20%. I will now hand it over to Antonio to give further details on the financial results, and we'll be back with closing remarks.
Thank you, Francisco. Good morning, everyone. Before we start with the slides, first quarter results was a solid quarter for us and within expectations. Historically, this quarter is our lowest in terms of deliveries and most other metrics. We met and our execute our Q1 planned targets in terms of deliveries, revenue, operating profit, and cash flow. Sales continue to be strong. Our backlog remains solid. Moving to slide number nine. Embraer delivered 15 jets in the first quarter, seven in commercial and eight in executive. It is important to point out, commercial deliveries are ahead of last year with an improving mix of aircraft. Last year, we delivered two E2s in Q1. This year, we delivered five E2s. The E2 is a global aircraft and both sales and deliveries continue to grow worldwide. In executive, we delivered 8 business jets on plan and equal to last year.
Moving to slide 10. Our firm order backlog ended the quarter at $17.4 billion, basically equal to both year-end 2022 and the end of the first quarter last year. As we deliver aircraft, our sales teams continue to win new aircraft orders and new service contracts at the same rate. Our backlog remains roughly the same. This stability in our backlog is a source of strength and provide us with steady cash flow to support and execute our strategy plan. Moving to net revenue. We ended the first quarter with $770 million of net revenue, $160 million or 19% above the same period last year. The revenue increase is in line with our growth forecast for this year. Slide 11. First quarter adjusted EBIT was -$32 million and adjusted EBITDA was positive $10 million.
Both are slightly below the first quarter of 2022, primarily driven by no recurrence of several one-time benefits we had last year. We fully expect our EBIT and EBITDA margins to increase as we leverage our fixed costs as deliveries grow in the remainder of the year. Slide 12. Free cash flow, excluding Eve, was minus $399 million in the first quarter. This includes cash outflows of over $450 million to build inventory to meet our production requirements for the remainder of the year. We will recover these outflows as we deliver aircraft, and we are here firming our full year guidance of $150 million or better in free cash flow. Moving to investments.
We funded $40 million of product development and research and development and invested $70 million CapEx for an investment total of $57 million in the first quarter. The majority of this went to fund the development of our passenger to freighter conversion initiative and invest in additional capacity expansion of our service and support unit. Our net results were -$89 million. Although negative, the first quarter is historically our weakest period, and with our positive delivery and EBIT margin guidance, we'll certainly recover in the quarters ahead. Slide 13. We finished the quarter with a net debt excluding EVE of $1.4 billion, as shown at the top center of the slide. This is up slightly from year-end due to the increased inventory related to cash outflows, as previously mentioned. Our leverage ratio shown to the upper right is at 3.1x .
A slight increase from the prior quarter, a decrease from 4.1x in the same period of one year ago. The bottom half of the chart shows we ended the quarter with $2.85 billion of liquidity. Our strong liquidity position, combined with future free cash flow, will allow us to cover all debt maturity well past 2027. With that, I conclude my presentation and hand it back to Francisco for his final remarks. Thank you very much.
Thanks, Antonio. As mentioned, the first quarter reflects the industry seasonality, and we expect more sales activity and better results over the next quarters. There are several sales campaigns underway, with excellent growth perspectives in 2024 and years ahead. In the past few weeks, I have visited China and Portugal, and we are excited about new business opportunities, especially in commercial, aviation and defense. We expect to bring good news in the coming quarters. Having said that, we are totally committed to the execution of our plan and the guidance for the year. Thanks again for your interest and confidence in our company.
Thank you. We'll now start the question and answer section. We ask who are interested in making questions, at any time press star nine in your phone or press raise hand on the platform. When your name is announced, press star six on your phone to make sure your microphone's on and/or start your microphone on the platform 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 Josh Milberg from Morgan Stanley. Your microphone's open, Mr. Josh.
Okay. Good day, everyone. Thank you very much for the call. Hope you guys are doing well. You provided great color in the Portuguese call on the factors behind the commercial and executive gross margin pressure. Thank you very much for that. My question is on defense and on your indication that the division's revenue this year could be between $600 million and $700 million, if we got that right. I was just hoping you could talk about what variables might move that up or down and also discuss how much visibility you already have on 2024 for defense. Finally, comment on the status of the opportunity with the US Air Force that you've highlighted in the past. That's my question.
Josh.
Hopefully you-
It's Anto-.
Oh.
It's Antonio speaking. How are you?
Hi, Antonio.
Josh, as we do see the recovery on defense starting from 2023 onwards, basically driven by the KC-390. We do have other types of business, but awarded like radar, but it's I would say, not in the magnitude of the recovery of the C-390. Last year we were, I would say, in order to retain cash, we were keeping buying less material than we are doing right now, because now we have the contracts for Portugal, for Hungary, and we are even seeing positions for other types of order that we may receive. I would say the visibility today shows that we are close to the 600. If you award the Portugal contract for Super Tucano, 700 are single-digit EBIT margins. Let's see positive cash flow.
For the discussion about United States Air Force, I'm going to pass to Francisco.
Thank you, Antonio. Thank you, Josh. Well, I mean, the partnership with L3Harris is moving well. We are working together to equip the C-390 with the special systems as the boom refueling system. We are planning even a demonstration of the C-390 this year in the U.S. We're moving well. We're very excited about this opportunity.
Josh, just to complete one point that I forgot to mention, we do see defense in the range of $800 for 2024, around in regards to revenue.
That's great color, Francisco and Antonio. If I might just actually squeeze in one more. I don't think you addressed this on the Portuguese call, just if you could talk about the revenue outlook you're seeing for services and support, both in 2023 and 2024. I know that in the past you've highlighted OGMA's contract with Pratt & Whitney as a source of substantial upside.
Thanks, Josh, for the nice question. We do see this year the services sides around $1.4 billion revenue. We do see for 2024 around $1.5 billion at least.
Okay. That's interesting info.
Thank you.
Thanks again. Have a nice day.
Thank you.
You too, Josh.
Our next question comes from Marcelo Mota from JP Morgan.
Hi, everyone. Good morning. I have a question regarding what do you guys foresee in terms of seasonality of deliveries doing this year? I mean, we all know that the first quarter is usually a little bit weaker, but when we think about second, third quarter and fourth quarter, I mean, should it be similar to last year or should it be, you know, a little bit better when we think about especially the second and third quarter? Thank you.
Thanks, Marcelo, for the nice question. I need to tell you, we are looking forward to have a more stable distribution among the quarters. We are not foreseeing today a hot Q4 as we saw last year. It's well spread between Q2, Q3 and Q4. For sure, Q3 and Q4 is slightly higher than Q2, but it's better distribution. The same we are seeing for Q1 next year, that we do see a much higher Q1 compared with this Q1 in terms of deliveries. Let's say we are moving to the right direction, even face some issues with the suppliers, but it's more better divided than last year.
Antonio, if you allow me to complement. You know, we are bringing other challenges to the supply chain because we are increasing the production volume in both in the commercial and executive. Again, we were working to stabilize the supply chain, but now we bring higher volumes. That's why we see a better distribution of the deliveries throughout the year, but still with a concentration in the Q4 because of higher volumes in 2023 comparing to 2022.
No. Perfect. Super clear. Thank you, Antonio. Thank you, Francisco.
Thank you.
Have a nice day.
Sure.
Our next question comes from Cai von Rumohr from Cowen. Mr. Cai, you can open your microphone pressing star six.
Hey, you guys have, Louis Raffetto from Wolfe Research.
Hello, Lou.
Hey, how are you? I was not on the Portuguese call, so I was hoping maybe you could provide a little color on the executive aviation margins and commercial margins. Just, you know, deliveries were essentially flat year-over-year, but margins were significantly lower. If we start there.
Yeah, absolutely. Lou, as I mentioned, the Portuguese version, the Q1 last year was too good compared with this one. We did have something like 5%, I would say one time effects in Q1 last year that we did not have in 23.1. We have other types of costs like bringing new customer for commercial aviation. We have always an interior design, this and this and this and learning curve. We have more E2s than E1s. If you're comparing a quarterly year-over-year basis, last year we delivered five E1s and two E2s. This year is totally different. It's 75% E2s and E1s. That's also does not help in the learning curve in this Q1. I would say for executives is a bit different.
We always have the good guys last year, something around 5%. You have carry over cost from the hottest Q4 we have in the history to Q1, a little bit rework. We also sold a trade aircraft last year that helps the margin for last year. On top of it, the mix was a little bit different. We delivered Phenom 100 instead of Phenom 300. That also affect the gross margin. Lou if nothing that's concerning us for the whole year, also for the guidance, we should expect executive aviation again with double digit EBIT margin, gross margin above 20%. I would say everything under control, the seasonality really make our life difficult in this quarter.
All right. That's great color. Thank you. Then just back over to the defense margins. 5% EBIT in the quarter, you know, pretty good. You talked about better commercial agreements. Are margins kind of stable here or should we expect some continued volatility? Any help from FX this quarter?
Remember when we met for the last time in Boston, I mentioned to you that we were seeing an improvement in defense, but we have today the BIT for Q1 under 5% and our expectation to be on defense, a higher single-digit margin for this year and continue to grow in revenue, I would say. As we said, we are fulfilling what we said some weeks ago in Boston.
All right, great. Just last one, again, I think you kind of covered this, but just to be sure, the spike in inventory, you know, to support the delivery ramp, you know, last time you kind of saw this level, if we kind of ignore 2020 was back in 2019, you were going to deliver, you know, 80-90 commercial jets versus 60-70 this year. I think you maybe said that there was a little bit of inventory build for defense, but just wanted to make sure that we figured that one out.
I would say two, three effects, and I would ask Francisco also to comment, but we are growing 20% this year minimum and also 20% next year. From this perspective, the inventory is really to make sure that we deliver the guidance this year, but also prepare the field for a very hot and strong next year. Now, I would say both combined and I would say and a bit unbalanced because of supplier delays, this and this and this. Just keep in mind, 2019, our revenue was $5.4 billion, is more or less what we are guiding to the market. Let's say, inventory is not what we like to see, but I would say in line with the expectation for two years of fast growth, 2023 and 2024. Francisco.
Oh, that-
If you want to.
I think that's the reason, Cai. We are now as we didn't have a high level of deliveries in Q1, then we are suffering with the cash, right? Because we are ramping up the production, bringing materials for the higher production 2023. We are bringing materials for the beginning of 2024 for both commercial and executive. Now in Q1, we didn't have higher sales, so higher deliveries. We expect this to improve from Q2 onwards. That's the reason we have higher inventory levels.
Great. Appreciate it. Thank you very much.
Our next question comes via phone and the numbers ends with 7519. Please, mister with the telephone that ends with 7519, press star six.
Yes. Good morning. Can you hear me?
Yes.
Yes, we can.
Good morning. It's Steve Trent from Citi. Thanks very much for taking my question. I will stick to your one question request. I'm just curious, when we think about China, I know you mentioned visiting there. I'd just love to sort of get your take on the potential opportunity, considering that, in the domestic market there's a very limited opportunity for commercial aviation slots versus military. You guys did have the Harbin joint venture in the past, which eventually, you know, got shut down. I'm just curious, you know, what you think has changed this time around. Thank you.
Well, thanks. Thanks for your question. We still have, more than 80 aircraft flying in China in different, in different airlines. Embraer is really interested in come back to China to expand, our footprint there. We have been working very hard on that. You know, we see as, that the results of the bilateral meeting between Brazil and China governments as very positive because, you know, the joint declaration between both presidents lays the foundation for a broader cooperation in the aerospace sector. That declaration positions Embraer as a central player in this partnership.
We see now with perspectives to evolve our activities in China and, you know, an open door for local cooperation and new sales of our commercial jets in that important market.
Great. Appreciate it. If I may cheat and just have one quick follow-up. Do you think that your collaboration with them might be somewhat limited considering, that you guys do use a lot of U.S. technology? Thank you.
Our aircraft uses a lot of U.S. equipments, right? The engines, avionics, and many other equipments. This is what we are working on with the same product we have.
Okay. Let me leave it there. Thank you very much.
Our next question comes via phone also from the number that ends with 1327. Please, if you have your hands up, you can start questioning.
Hello? Yes. Hello.
Hello. We are hearing you.
Can you hear me?
Hello.
Yes, we can.
Yes. Terrific. Hey, Antonio, Francisco. Maybe give us a little bit more color, if you could. You mentioned, you know, discussions of 200 aircraft in commercial, and yet, you know, had some trouble closing it, but strong demand in the market. Maybe, you know, when we might see some closing, specifically at Paris, what the pricing environment is. Similarly, in executive, you had a very good book-to-bill, but on very low deliveries. What is the demand tone there and the pricing there? Thank you so much.
Well, I mean, regarding executive, we were expecting this, I mean, low deliveries in the Q1, but, the plan is still good and is strong for the year. We are planning a growth, I mean, of, you know, about 20% in the, in the production and delivery, and deliveries of executive jets. We are on track, and we'll get there this year. Regarding the commercial jets, yes, we have many campaigns ongoing. You know, I joined Embraer in May 2019. Since then, this is the first time I see a lot of campaigns, sales campaigns, active sales campaigns in commercial aviation in many different areas of the globe. We are optimistic.
We believe that we'll bring good news in the next quarters about orders for commercial jets and also for defense products. We have in both. You didn't ask about defense, but in defense we are also working many active campaigns. I think 2023 will be good in terms of new orders for Embraer.
Excellent. Actually, what I meant on business jets is, you had a book-to-bill of 2.5, which is probably the best within the sector. Everybody had particularly weak deliveries in the first quarter. What are you seeing in terms of on a go-forward basis? Is the demand as strong as it was? Is the pricing, the net pricing after inflation still as good as it was, or is it starting to slip? Thank you.
Okay, understood. Again, the market is still good for us, not as strong as it was. Market is back to normal levels of a growth of one digit. In our specific case, we see an important change in the mix. We are growing the production and deliveries and growing the mix of Praetor as well. Last year, we, you know, the mix was about 35% Praetor and 65% Phenom. And this year we are almost 50/50 with a growth of about 20%. This brings us some more comfortable for comfort for the next years as well. And we have a very good discipline in terms of price keeping and even improving the margin of our jets.
Of course, the Praetor, they bring more margin, absolute margin in dollars. We are also keeping the discipline in price. Our sales teams is doing a very good job on that. Hope I answered your question now.
Perfect. Thank you so much.
You're welcome.
Thanks, Cai. This concludes today question and answer section and thus concludes Embraer audio conference. Thank you so much for your participation and have a wonderful day.