Good morning, ladies and gentlemen, welcome to the audio conference from Embraer's financial results for the second quarter of 2023. Thank you for standing by. The numbers of this presentation contain non-GAAP financial information to facilitate investors to reconcile Eve's financial information and GAAP standards to Embraer IFRS. We remind that Eve results were discussed in Eve's teleconference. It's important to mention that all numbers are presented in U.S. dollars, as it is our functional currency.
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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, is present. The words believes, may, will, estimates, continues, anticipate, intends, 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 on today's conference call are Francisco Gomes Neto, President and Chief Executive Officer, 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 and thank you all for joining our second quarter 2023 results call today. Aircraft deliveries reached 47 jets in the quarter, a strong increase of 47% compared to the second quarter last year. Revenue grew significantly, 57% in Commercial and 42% in Executive. Even with the higher deliveries, backlog remains stable at $17.3 billion, with strong sales performance in Executive A viation. We have been able to reduce and extend the duration of our debts. Our operational and financial guidance for the year remain unchanged. On the next slide, highlights of our business units. In Commercial A viation, we reported a strong revenue growth of 57%, as mentioned before, and an EBITDA increase of 17% compared to the same quarter last year. Adjusted EBITDA margin increased from 4.9% to 5.3% on a year-on-year basis.
We announced recently new operators in Asia, Scoot from Singapore, SKS Airways from Malaysia, and Royal Jordanian in the Middle East. In Europe, a new order from Binter, totaling now 16 E2 jets. In the U.S. market, American Airlines announced a firm order of seven new E175 E1 jets. This is an important highlight, as it shows that pilot shortage situation is improving in the U.S. with new orders for E175 E1s, an important segment for Embraer. We also have additional firm sales of $700 million from undisclosed customers in the beginning of the third quarter. Executive Aviation continues with a strong book-to-bill of 2: 1. Adjusted EBITDA margin at 8.8% compares to 9.5% in the same period last year.
We announced this quarter a very relevant deal with NetJets of up to 250 Praetor 500 jet options, along with a comprehensive services and support agreement valued at $5 billion. Our portfolio is very well- positioned, with a backlog growing quarter-over-quarter, with a resilient price discipline. On defense, the delay of new contracts and revenue recognition are impacting margins. Adjusted EBITDA margin dropped from 16.9% to -4.1%. We expect to recover in the coming quarters. We have several sales campaigns gaining momentum, and we hope to make announcements in the second half of the year. On Services and S upport, our year-to-date revenue has increased by 13% to $666 million. Our EBITDA margin increased from 12.5% to 15.7% compared to the same quarter last year.
We signed a letter of agreement with the Chinese Lanzhou Aviation Industry Development Group for the conversion of 20 E-Jets to freighters. This is an important movement of Embraer returning to the Chinese market. On the next slide, some updates about Eve's numbers and milestones . We have announced the first production facility in Taubaté, and also a joint venture with the Japanese Nidec, world's leading electric motor manufacturer, to develop electric propulsion systems for the aerospace sector. Eve's backlog is now totaling 2,850 Letter of I ntents, valued at $8.6 billion, the highest in the industry. The company has 28 eVTOL customers in 14 different countries. Our Vice President of Service and Support, Johann Bordais, was named as the new Chief Executive Officer of Eve to lead the next phase of the company.
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, and good morning, everyone. We had another solid quarter, with nearly all metrics moving higher when compared to the first quarter of this year and the second quarter of last year. In slide 8, now on to deliveries. Embraer delivered 47 E-Jets in the second quarter, 17 in Commercial and 30 in Executive. This is up 47% compared to the second quarter of last year, and more than 3 x the deliveries from the first quarter of this year. We are very pleased to announce in our commercial segment, deliveries of E2s continue to grow. We had seven E2 deliveries in the quarter, up 40% compared to the first quarter, and up more than 100% compared to the second quarter of last year. E2 demand continues to grow worldwide. Deliveries in Executive continues to increase as well.
With 30 deliveries in Q2, it was the highest second quarter in the last seven years. As a result, we are confirming the delivery outlook in our Commercial and Executive business. Slide 9. Our firm order backlog ended the quarter at $17.3 billion, consistent with the last three quarters. In Executive, strong demand continues for Embraer Phenom and Praetor aircraft, as the year-to-date book-to-bill ended the second quarter at 2 : 1. This stability in our backlog is accretive to the guidance growth and profitability, giving us a steady and reliable stream of cash flow that strengthens our balance sheet. Moving to revenue, we ended the second quarter with approximately $1.3 billion of net revenue, $273 million, or 27% above the same period last year.
Year- to- date, revenues are above $2 billion, with all four business units posting highest first half revenue in 2023 compared to the 2022. With over 60% of the revenue to be realized in the second half of this year, as the entire company commits to deliver more aircraft and services to our customers. Slide 10. Second quarter adjusted EBITDA was $100 million, and adjusted EBITDA was $149 million, both better than the second quarter of 2022. Adjusted EBITDA and EBITDA margins were a few basis points lower than the second quarter of last year, due to the non-recurrence of several one-time benefits we had in early 2022. We are reaffirming our adjusted EBITDA and EBITDA margin guidance for this year. Slide 11.
Free cash flow, excluding Eve, was $-11 million in the second quarter, basically break even. As a reminder, last year we had a cash inflow from a divestment in Europe, which benefited our free cash flow in the second quarter of 2022. This year, we already forecasted working capital usage to build up inventory needed to meet our production requirements for the remainder of the year. We will recover this outflow in the second half of the year with higher aircraft deliveries. Our outlook remains unchanged, with free cash flow at $150 million or better. Moving to investments, we funded $56 million of research and development and invested $25 million CapEx, for an investment total of $80 million in the second quarter similar to the last quarter.
The majority of this went to fund the development of our Passenger to Freight Conversion initiatives, and invest in capacity expansion of our service and support business unit. On net results, our adjusted net results were $58 million, $12 million better than the second quarter of last year. $147 million better than the first quarter. It's important to highlight that reported net results were negatively impacted by non-cash mark-to-market IFRS in the amount of $53 million. Our adjusted net margin was 4.5%, equal to the second quarter of last year. In Slide 12, as seen on this slide, I'm happy to share with you the $500+ million cash tender of our corporate bonds. This cash tender was to reprofile our debts, and strengthening our balance sheet and reduce our overall liabilities.
As previously announced, we recently placed $750 million seven-year bonds in July 2023, and used the proceeds to increase our duration from three to five years. The positive impact on this liability management plan can be seen in the chart at the bottom of the slide. Our $2.3 billion liquidity position, strengthened by reprofiled liabilities, and combined with future cash flow, will allow this to cover all debt maturity obligation well past 2028. Our net debt at the end of the second quarter was $1.459 billion, as shown at the top center of the slide. This is up slightly from the first quarter due to the increase of working capital previously mentioned.
Our leverage ratio showed to the upper right is at 3 x, a decrease from 4.7x in the same period one year ago. It's important to point out the positive results from our business unit is what allowed us to execute our liability management plan. Embraer is now very well- positioned to move forward in the years ahead. With that, I conclude my presentation and hand it back to Francisco for his final remarks. Thanks for your attention.
Thanks, Antonio. The Q2 results show t hat we are making consistent progress in our journey to improve the financial performance to deliver sustainable growth in the near future. We are confident to share announcements that quarters, combined with even better results, in line with our guidance for the year. On top of that, the aircraft slots on the production line for deliveries in 2024 and 2025, are practically fillers for Commercial A viation and Executive J ets, which will result in a sustained increase in our revenue and profitability. Thanks again for your interest and confidence in our company.
Thank you. We'll now start the question- and- answer session, and we ask who are interested in making questions at any time, press star nine on your phone or raise hand on the platform. When your name is announced, press star six on your phone to make your microphone on or press 'Activate Microphone'. To give everyone a chance to participate, we request to ask just one question per call. Wait while we pull for questions. Our first question comes from Kristine Liwag from Morgan Stanley. Please, Kristine, your microphone is open.
Great. you know, good morning, everyone. Thanks for letting me ask the question. In terms of your sales campaign, you talked about some of these active orders that could potentially come through this year. From your conversations with your airline customers, what have been the key sticking points that prevent some of these campaigns into converting into firm orders?
Hello, Kristine. Thank you for your question, Francisco speaking. Well, I think this, you know, this is a good momentum for the E2s now. I mean, to complement the operation, different airlines, to complement the bigger aircraft. We do believe the E2s are a perfect fit for them, you know, to offer a high frequency of flights with very attractive cost benefits. As I said in my opening, we are working many different campaigns in different regions for, especially for the E2s. We expect to make some announcements in this second half of the year. There's nothing against the, the, the aircraft. On the opposite, I think it's a natural sequence for the airlines now to go to this regional aviation.
Great. Thanks, Francisco.
Thank you, Kristine.
Our next question comes from Myles Walton from Wolfe Research. Please, Mr. Myles, press star six to activate your microphone.
Thank you. Good morning. I was hoping you could maybe touch on the Defense outlook. You've mentioned it's as a result of contract delays that are causing reduced sales and profitability. I think you'd previously talked about $600 million in sales for the year. Is that, is that still achievable? Then also, the, the delays that are happening, are they specifically KC-390, Super Tucano? Perhaps something you could add in terms of color.
Hello, Myles. Good morning. Antonio speaking. Myles, the issue in Defense is we have first, what we have a heavily impact in Q2, was material delay, especially for the KC-390, huh? Assuming that we were not able to book as a revenue on the percentage of completion, point one. What we are seeing delay right now with the Super Tucano, we have some already finished in the event, to just waited the new orders to ship those aircraft this year. I would say the level of $600 million revenue we heavily discussed last week, and we are confirming is doable and achievable due to these two facts. The new order that's coming for the Super Tucano, which is fast-tracked because the aircraft, they are ready, and also the increase of production for KC-390 in the second half of the year.
The margin, again, the revenue in Q2 was pretty low, and we have adjustment in some basis of the contracts and with minor effect, but assuming that the revenue was too low, we have this impact. I would say, we in our expectation, we confirmed the revenue above $600 million and fighting for EBITDA margin, higher single-digit for this fiscal year. Moving ahead, we are quite confident that Defense is going to added more, much more value in this company here.
Okay, thanks. Just a clarification or in addition to Kristine's question, Francisco, do you expect book-to-bill to be above 1 or well above 1 for 2023 or below 1?
We expect to know at least 1:1 , but with the potential to be higher than that.
Thank you.
Our next question comes from Ron Epstein from Bank of America. Please, Mr. Ron, your microphone is open.
Hey, can you hear me okay?
Yes, we can, Ron. Go ahead.
Yeah, yeah. Good morning, guys. Maybe one question and then a super quick follow-up. What do you expect the normalized volume of E2s to be when we're kind of back to a normal state? Because it seems like we're still in this tail of recovery from, from COVID, and it was, you know, very disruptive for the mainline airlines and kind of like hyper disruptive for the regionals. Kind of once everything sorts itself out and we're back to sort of a normal cadence, what do you expect annual deliveries to be? You know, is it 100 airplanes a year, 120, 140? I mean, kind of what's, what's something we can think about as sort of a reasonable normal target?
Well, Ron, thanks for the question. I mean, 2023 is expected to be the year with the highest number of E2 deliveries since the program was launched. We believe the, the, the, the E2 family is, is on the rise in the market, and this is going to be in the, in the following years as well. We expect to be, you know, with between 90 and 100 total aircraft deliveries by 2025, and most of them will be E2s. Again, we, we see the, the E2 family growing faster, much faster than E2 in the following years. We expect, you know, 2025, 2026 to be, you know, combining E2s and E1s , I mean, over 100 aircraft a year as we had pre-pandemic levels.
Got it. Just a quick follow-up on the Super Tucanos. I'm surprised that you're having some trouble there, be it that the airplane's been in fabrication for a very long time. I mean, if you can describe maybe a little more what's going on.
Well, we, you know, we produce Super Tucanos in Brazil and in Jacksonville as well. We have opportunities. We are working on sales campaigns for both sides. In Brazil, we expect to announce this year important orders, as Antonio just mentioned, to, you know, to deliver the white tails we have in production. In the Jacksonville plants, we are also working with our partner there, Sierra Nevada, to sell aircraft to some other countries using the FMS support. Again, we expect to announce new orders for Super Tucano as well as the KC-390 in the second half of the year.
Great. Thank you very much.
Thank you, Ron.
Our next question comes from Marcelo Motta from JP Morgan. Please, Mr. Marcelo, your microphone is open.
Hi, everyone. Good morning. A question regarding this new order that you guys mentioned about $700 million that will be added to the backlog of Commercial in the third quarter. Could you provide any additional detail, in addition to what is on the release, like the number of aircraft or the family or maybe let's say, the continent that this order is coming from? Thank you.
Hi, Marcelo. Thanks for the question. Sorry, this order is still confidential, and we promise to you to disclose as soon as we have an agreement with the customers.
Perfect. Thank you.
Our next question comes from Andre Ferreira from Bradesco BBI. Please Mr. Andre, your microphone is open.
Hi. Good morning, guys. My question is regarding Eve. The FAA recently published the Innovate28 plan, which foresees eVTOL starting operations only in 2025, but mostly in 2028. Some eVTOL companies had plans to start operations in 2024. My question is, Eve was already a leader in the number of orders, or at least close to it, but given this projection by the FAA closer to Eve's launch date, do you see a greater interest now from the part of the customers for Eve solution compares to competitors? Thanks.
Thank you, Andre, for the question. Yes, absolutely, we do more interest in that, in that new business model. Let's put it like that. We are working very hard, and we have more than 600 people working the development of the Eve, and we are lucky to have a so respectful authority in Brazil as ANAC, and we are in contact with them. We are working with them in order to certify both the aircraft and the, you know, the air traffic management in Brazil. With the work progressing well with ANAC, we'll have more chances, you know, to do the same with FAA and EASA as well.
Again, we are very excited about that and Eve is progressing well to certify and enter in service by 2026.
Perfect. Thanks.
Our next question comes from Jay Singh from Citi. Please, Mr. Jay, your microphone is open.
Good morning, guys. Can you provide us with any color regarding any product developments?
Could you please repeat?
Can you provide us with any color regarding product developments at the moment?
You mean new product development?
Correct.
Yeah. Well, we are working in different fronts, you know, in the different business units. I mean, evaluating the possibilities for the future. But at this moment, we have a very competitive and modern portfolio of products. Now, in all business units, we have the Phenom and Praetor in the executive, we have the E2 family in Commercial, and the KC-390 in Defense. So again, our focus at this moment is really to sell the existing portfolio of products, and of course, we continue working in new generation in the future, as we are doing with the eVTOL, with the Eve, and other fronts as well.
At this point of time, our main focus is to sell the current portfolio and to enter in service with the Eve by 2026.
Very helpful. Thank you.
Thank you, Jay.
Our next question comes from Ron Epstein from Bank of America. Please, Mr. Ron, your microphone is open.
Hey, thanks, guys. Thanks for the follow-up. We didn't talk much about China. If you could, could you mention, you know, how is the opportunity there? What's going on? Because to be honest, I'm a little surprised that we haven't heard much out of China yet in terms of demand for E2s.
Thank you for the question, Ron. Well, you know that we have recently certified the E190-E2 in China, and the certification of the E195-E2 is on the way. We do believe our jets are the best alternative to complement, you know, the local products. The ARJ21, I mean, up to 100 seats from COMAC, and the same C919 from COMAC, about moving 150 seats. Again, our E2s, they go exactly in the middle, and they would help a lot to improve the efficiency of the Chinese air traffic. We announced it during the Paris Air Show, this agreement, this letter of agreement to convert, I mean, E1s from passenger-to-freighter in China, to any aircraft.
This, this movement is a highlight that Embraer is returning to China. You know that the bilateral agreement between our President and the Chinese President, I mean, includes a, a collaboration between Embraer and Chinese airlines. Again, we are working in the, in advanced negotiation to sell E2 in China, and we, we do believe in, you know, this, this scenario, China will be an opportunity for Embraer in the, in the next future to introduce our E2s in that market.
Our next question comes from Cai from Cowen. Please, Mr. Cai, press star six to activate your microphone.
Thank you so much. Commercial, a couple of, sort of questions. The $700 million that you'll add in the third quarter, is that one order or several? Secondly, if you get to 90 to 100 in 2025, what should we expect the mix to be between E2s and E1s? Thirdly, what is the pricing environment like now for E2s, given you have a much stiffer competition there than you do in E1s? Thanks so much.
Okay, thank you for, thank you for the question. Well, I mean, by 2025, as I said before, 2023, we have already majority of the deliveries with E2s. This is going to remain in the following years. By 2025, we believe that the E2s will be responsible for 65% of the total deliveries in the year. As the E1, we believe the E1 still have an important market, especially in the US, and with the resolution of this pilot shortage issue, we will have more and more opportunities for E1s in the next 10 years, at least. Regarding the price, you know, I mean, it's a, it's a tough competition, we know.
We know that, but we are working on also to, to optimize and reduce the costs of E2s, which, in the, in the ramp up, is helping us in that, in that, direction as well. Again, we believe that we can make, you know, mid-single-digit margin in the commercial aviation with the projection we have with the E1, the, the, the mix we have for E1 and E2s for the next years. Is there any other question, Cai, that I missed here?
The last of the, the third one was, the $700 million addition.
Ah, okay.
To backlog in the third quarter, is that one order or several orders? Is it basically signed and already there, or is it about to be signed?
Well, it's, it's signed. What I can tell you, this is more than one.
Thank you.
Our next question comes from Myles Walton from Wolfe Research. Please, Mr. Myles, press star six to activate your microphone.
Thanks for the, for the follow-up. I was hoping to, to touch back on Executive A viation and, and maybe the NetJets order. When, as NetJets has been taking the latitude from Cessna for the better part of the last, six or seven years, they've been taking about 20 planes a year on average. Is that roughly the cadence that you'd, you'd think about out in 2025 when they start to accept deliveries? Then also, in the backlog or book-to-bill in Executive of 2: 1, this, this quarter, what was the... excluding NetJets, how was the rest of the order book looking in terms of cancellations and orders? Thanks.
Well, Myles, thanks for the question. Actually, NetJets is not included yet in our backlog. I mean, NetJets, it's an option, and w e started the deliveries, we start in 2025 on, from in that year on, that we will see, you know, according to the demands of NetJets, we will bring the demands to the backlog. Our history with NetJets has been very positive with the Phenom, we believe they will take all the 250 Praetor 500 aircraft or even more in the future, in the future years.
Regarding the backlog, I mean, we, we, we have a very comfortable situation today, year- to- date, I mean, with a book-to-bill ratio of 2: 1. In the long term, we, we expect the market to normalize. I mean, going back to pre-pandemic levels. This means a book-to-bill closer to 1 : 1. I think we believe this is the trend. Remember that we are already with a delivery volume, delivery quantity, much higher, and we, we will grow in the following years. Even with the backlog approaching 1 : 1, we'll, we'll, we'll keep an important volume for the terms of jets in the Executive A viation.
Similar to Commercial, where you had a target for 2025, 2026, do you have a similar one for Executive to share in terms of deliveries?
Well, we are growing this year about 20% in Executive A viation, and the projection for the next years is to continue to grow double- digits every year in the deliveries as well.
Thank you.
Our next question comes from Kristine Liwag from Morgan Stanley. Please, Mrs. K ristine, your microphone is open.
Thank you. Just following up on the business jet, the Executive J ets questions. With the orders that you're getting, can you provide more color regarding the pricing environment? Then also, a follow-up to that follow-up, is that we're hearing that the MRO facilities for Executive J ets are pretty much full until, you know, second quarter of next year, and there's a shortage of spare engines, and customers are unable to fly their assets right now. Is that spurring more activity for Executive J ets, and could we see Executive J ets book-to-bill be significantly greater than one this year?
Hi, Kristine. Thanks again for the questions. You're helping me if I can to cover all your questions here. For the book-to-bill, as I said, so far is 2: 1, which is, which is excellent. We have the highest backlog at Embraer ever, with over $4 billion which is excellent. As I said before, we believe this book-to-bill, I mean, going to the end of the year, t he trend may be to approach 1: 1. Which, again, which the backlog we have in-house means that we will continue to grow in important volumes in the following years, in the Executive J ets. I mean, the margins you ask about the price.
I think our team is doing a great job keeping the price discipline in the new sales. We can see this by, you know, looking at the margins. We now have a good mix between fleet and retail. You see the margin of Commercial A viation, I mean, going up. W hat is your other question?
No, like the MRO.
Oh, MRO.
Facilities being available and not having any spare engines, you know, could you get even more orders in the 2 : 1? I recognize, Antonio, that's pretty greedy, you know, because it is already a spectacular year. I was wondering if that shortage is gonna create even more demand and even better pricing than what we're already seeing.
Yeah, we are having difficulties with engines for Executive J ets as well. I mean, our supplier is improving. We believe we will, we'll do much better from now on. I mean, that since they are resolving some issues with their sub-suppliers. MRO, I mean, it's another opportunity for us to grow our business. We duplicate this at Sorocaba. We are working also to expand also all their MROs, I mean, the U.S. and Europe. I mean, it's another good opportunity for us to grow. We don't see big issues with engines in the future.
As I said, we believe, you know, by the end of the year, I mean, first quarter or second quarter next year, the situation with the engines will be, I mean, totally normalized for Executive J ets.
Great. Thank you very much.
You are welcome, Kristine.
Our next question comes from Cai from Cowen. Please, Mr. Cai, press star six.
Yes, thank you. No one's asked for a while, but the arbitration with Boeing, their Form 10-Q indicates that they expected, I guess, about year-end. When do you expect that arbitration decision? Will it be binding, and are you optimistic this will still be a net plus for Embraer?
Yeah, well, the process had some, some delays because of the complexity, but Cai, we expect to, to see an end of this, of this process during the first half 2024.
Excellent. Thank you.
You are welcome.
Thank you. This does conclude today's question- and-a nswer session. That does conclude Embraer's audio conference too. Thank you for your participation. Have a wonderful day.