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spk08: Good morning, ladies and gentlemen, and welcome to the audio conference call from Embraer for Squatter 2022. Financial 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. If you should require assistance during the call, please press the star key fold by zero. As a reminder, this conference is being recorded and webcasted at riinbrouwer.com.br. This conference call includes forward-looking statements or statements about events or circumstances which have not occurred in Brouwer has based its 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 exceptions, 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, expands, and similar words are intended to end in five 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 are discussed on this conference call may not occur. The company's actual results could differ substantially from those anticipated in the forward-looking statements. It is important to mention that all numbers are presented in U.S. dollar as in our functional currency. Participants on today's conference call are Mr. Francisco Gomez Neto, President and CEO, Mr. Antonio Carlos Garcia, Chief Financial Officer and Procurement, and Mr. Leonardo Shinohara, Director of Investor Relations. I would now like to turn the conference over to Mr. Gomes Neto, who will proceed the first remarks of our first quarter 2022. Please go ahead, sir.
spk00: Good morning, and thank you all for joining our first quarter 2022 results call today. I hope that all of you are well and safe, and I thank you for your interest in our company. The first quarter results continue to show that our planned execution and company turnaround remains underway. And our focus to drive innovation and enterprise efficiency are key pillars to our growth strategy. As you will see later in Antonio's presentation, we are maintaining our guidance for the year. And our numbers show that even with a shutdown of our operations during the month of January to reintegrate the commercial aviation systems, we were able to deliver solid results. Before we go into more financial details on the first quarter, I'd like to give you some quick highlights of our key actions. First, on innovation. if its closing is expected in May. The listing at the New York Stock Exchange will accelerate and bring innovation to the new urban air mobility ecosystem. Speaking about our innovation pipeline, we have several ongoing projects, such as zero or low carbon emission and airframe efficiency. Second, enterprise efficiency. We continue to work with great focus and discipline on improving efficiency in all business units, in our administrative areas and operations, applying lean principles and continuous improvement culture to several processes. Our financial performance continues to trend up with the best free cash flow in the first quarter since 2010. As mentioned previously, we are maintaining our guidance for the year, even with a challenging supply chain due to the war in Ukraine and shortages of products worldwide. On the next slide, we'll talk about growth and see more details of business units highlights in the quarter. In commercial aviation, we have several ongoing campaigns, mainly due to a steadily rebound of domestic flights in the USA and Europe. The oil price increase also reinforces the relevance of the E2 family as the most efficient narrowbody in fuel consumption. Executive aviation keeps up the good momentum with sales orders exceeding prior year levels and backlog increase above 12% in Q1-22 versus Q4-21. On defense, we have seen an increased interest in C390 Millennium and the A29 Super Tucano from several countries recently. We expect an acceleration in sales campaigns for these products. Services and support has grown above pre-pandemic levels, with a growing backlog and positive gross margin versus last year. Deliveries of aircraft in the first quarter were slightly below expectations, mainly due to approximately 30-day shutdown, which I have commented earlier on. I will now hand it over to Antonio to give further details on the financial results, and I will return in the end. Thank you.
spk01: Thanks, Francisco, and good morning, everyone. Let's give some highlights of the first quarter of 2022 financial results. By the way, a quarter with 60 days activities for us is a short quarter. Let's get started in the slide five. First of all, we are reaffirming all aspects of our 2022 financial and delivery guidance with no material variations. Embraer delivered 14 jets in the first quarter, of which six commercial jets and eight executive jets. Six light jets and two mid-sized jets, all of this according to our schedule. Deliveries in the quarter were negatively impacted by almost one month shutdown in January 2022 due to the commercialization system and legal reintegration. Third order backlog ended the first quarter 2022 at $70.3 billion, plus $300 million versus Q4 2021. This is the highest quarter backlog since the second quarter 2018. driven by solid sales activity. On the revenue side, revenue reached 601 million a quarter, down 26% compared to the first quarter, 21, with almost one month production shutdown in January. In contrast, reported consolidated gross margin of 20% was higher than the 9.5% reported the first quarter of 2021, we do it to the better performance in all business units. On the slide six, adjusted EBIT and EBITDA. Even with less 26% revenue and higher SG&A compared to the first quarter of 2021, adjusted EBIT and EBITDA margin were 27 million negatives and 13.2 million positive, respectively, yielding adjusted EBIT margin of minus 4.5% and adjusted EBITDA margin of positive 2.2%. Adjusted EBIT Q1 2022 also includes no recurring expenses like commercial aviation integration process, arbitration process, and others of $17 million. If we exclude all of extraordinary effects, adjusted EBIT margin would have been minus 1.7 or minus $10 million and EBITDA margin of 5% or $30 million positive. Complementing our strategy to mitigate exchange risks through the cash flow hedging, we recognize credit of $800,000 related to payroll expenses in the first quarter of 2022. At least we do see a limited FX impact for this fiscal year in our results between Brazilian reais and U.S. dollar basis. Moving to slide seven, let's start with G&A. SG&A as a whole continues to trend infavorably over the past years. Quarterly SG&A reached 95 million or increase of 15 million compared to the first quarter 21 figures. Due to more activity on the sales side, campaigns impacting expenses as well the upstick corporate administrative expenses driven by inflation. It's important to say that we remain highly focused on SG&A efficiency. On investments in Q1 2022, Embraer invested a total of 39 million in product development and research, mainly related to G2 commercial jet programs, and 9 million CAPEX. It's important to mention we continue to invest our future with highly disciplined CAPEX allocations. Another good news, let's go to slide number eight, starting with adjusted free cash flow. In regards to free cash flow, the company continue highly focused to improve the cash steering process. Free cash flow in first quarter 2022 was a usage of 68 million, representing a significant improvement compared to the 227 million negative million in the first quarter of 2021, consistent with working optimization measures and enterprise efficiency. Working capital had a positive impact in the company overall cash performance, even considering the seasonality of the business, delivering its best first quarter cash since 2010. The main highlights were optimized inventory management and higher Advanced payment from customer compared with the fourth quarter of 2021. On the adjusted net results was a loss of 79 million. Although negatives, we do see net results trending up, driven by revenue growth in the next quarters, fixed cost leverage, reduction interest costs due to our liability management activities, and the full tax efficiency that we achieved get back from the legal reintegration of commercial aviation. All of these effects together will provide an additional positive impact earnings for this fiscal year. So let's move to slide number nine, liquidity. The company finished the quarter with a total debt of $3.5 billion, or $500 million less than Q4 2021, in line with our strategy, a net debt of $1.5 billion. Embraer continues to leverage the balance sheet, reducing systematically the gross debt and improve the credit metrics, and we do expect to reduce the interest expenses with that. It's important to highlight that our net debt, the B to the A ratio, is around 3.7 times in the first quarter of 2022, and we remain focused on generating cash and reducing our debt levels. With that, I conclude my presentation and hand over back to Francisco for his final remarks. Thank you very much. Thanks, Antonio.
spk00: To close, I'd like to briefly highlight our Urban Air Mobility ETH. The listing at the New York Stock Exchange and closing is expected for the next month in May, with total investments of about 500 million, which includes SPAC and strategic investors. EVE has strategic support from Embraer with access to infrastructure, extensive aircraft certification and manufacturing experience, and already established global network of services and support, intellectual property and engineers as major differentiators from other projects. Finally, We have strategic partners such as SkyWest, Republic Airways, BAE Systems, Rolls-Royce, Azura, Exiona, Falco, and Thales, who know very well our capabilities. Thank you to our great team for their focus and passion for creating innovation and executing our strategic planning. And thank you for your interest and confidence in our company.
spk08: We will now start the question and answer session. We ask who are interested in asking questions that at any time perhaps start one. Wait to be called and when your name is announced, make sure your microphone is on 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 Maya Water, UBS.
spk05: Hey, good morning. This is Luur Fedawan for Miles. Hello?
spk00: Hello, Luur. How are you?
spk05: Can you hear me?
spk00: Yes, we can.
spk05: All right, great. I just wanted to check on free cash flow. You guys mentioned it was the best in over 10 years. How do we think about that the rest of the year? It seems like a very strong start. Is there anything else that you guys see over the next couple of quarters before your seasonally strong fourth quarter?
spk01: Thanks for the questions. Anthony speaking here. Thanks. It's a great question. We have a good start for sure. And that's why when we. We set the guidance, we set 50 million plus or better. And what we do see a positive trend. Yes, we don't know the magnitude of how much we are talking about to be better, but we should be more precise in the second quarter. But for sure, the trend is highly positive with the good start.
spk05: Okay, great. Thank you. And then, the other expense line. Obviously, there's a lot going on in there. You took out the $9 million of EVE expense. There's this other $17 million in there. How do we think about that line the rest of the year?
spk01: For the EVE, everything we are showing our numbers, we just have the portion of Embraer and EVE. We hope and we expect and we are going to do it in May with the leasing and the New York Stock Exchange. Then the project become a different dynamic in our results because we are going to, on the EFRS terms, to capitalize those expenses, most part of it. And then we are going also to update our guidance, including which is from one side is going to boost the cash flow, but it's also going to impact a little bit the BIT side. So as soon as we close the transaction, then we are going to revise also the guidance. But we do not see a discontinuation, but we do not have also in our numbers today, EVEN BETTER, ONLY THE NINE MILLION THAT WE ARE SEEING IS ADJUSTED, ABIT, THE ADJUSTMENT, BECAUSE THE COMPANY IS STILL APPROVED. AND WE ARE GOING TO REVISE IT IN Q2.
spk05: OKAY. AND I GUESS WHEN I THINK OF THOSE OTHER NONRECURRENT COSTS, YOU SAID THAT HAD ARBITRATION AS WELL AS THE REINTEGRATION, SO I WOULD GUESS THE REINTEGRATION COSTS GO AWAY AND THAT SORT OF NONRECURRENT WILL CONTINUE BUT AT A LOWER RATE THAN THE 17? YEAH.
spk01: uh probably yes uh we for sure uh starting q2 onwards we do not have much more cost for the integration then we still keeping with the arbitration costs that we are not adjusting it's me we you see the magnitude of the number that should be more or less uh on this level a little bit less from the coming quarters okay and please when you do your math i just in your in your calculation this number we are not adjusting because of confidentiality but you have more or less the magnitude and there is in my opinion uh this 70 million that we are seeing right now should be more or less in this range for the coming quarters we do not see exceed on this cost maybe a little bit of reduction okay our next question
spk08: comes from Mariana Parismara, Bank of America.
spk09: Good morning, everyone. Good morning.
spk02: Good morning, Mariana.
spk09: Could you please discuss how sustainable are these margins per segment and how they compare to your targeted margins three to five years from now?
spk01: Yes, Mariana. I would say the margins we are seeing per segment, for sure, we should see in the long term. We are still away from, I would say, executive and service. We are more or less in the level we do see for the future, but we do have, still have to improve in defense and commercial aviation to the same level of the others. It's more or less in a long-term perspective what we are seeing right now. We are in the recovery mode for the commercial aviation and We still have something to do in defense, and most probably defense is going to recover faster because we are going to see significant improvements start from 2023 onwards. Commercial aviation is going to take a little bit more time in order to the new companies start to showing up better. I would say gross margin performance as we have with the old contracts. That's more or less in a nutshell where I see right now all business units come to this level in the midterms.
spk09: Thank you. Could you please discuss what's the customer's interest, how your conversations are going, and how last is demand? And then also, what are you seeing in the services side?
spk00: Could you please repeat your questions? There was some noise in the line. We're not able to understand. Sure.
spk09: So on executives, on executives, Could you please give us some color on the demand going forward, how your conversations with customers are going on, and how sustainable do you think is this really strong demand for executives that we're seeing so far?
spk00: Sure. Well, I think the sales, our sales in the Q1 is showing us that the demand is Continuance is strong. We sold 35 aircraft in Q1. I mean, the highest in the past almost six years. We had only 2016 Q1. We sold 36 aircraft in that quarter. So it's a good sign for us. Yes, we believe we are going to have some changes in the future, but we believe in a soft landing in the market. And we are seeing a lot of first-time buyers in the segment and interest in the small and medium-sized jets, exactly where we have our portfolio of products. So again, we are still confident that this market will continue to be strong during the next two or three years, at least.
spk09: Thank you. And then last one from me on defense. You mentioned foreign interest and strong international interest. Could you please give us some color or try to quantify that interest?
spk00: Mariana, we do not disclosure the volumes, especially in that segment. But what we can see is that, yes, we are having We are having a lot of customers, I mean, coming to us and asking for deliveries opportunities in a short and medium term, which was a change that we believe was because of the situation in Europe between Russia and Ukraine. So, again, good opportunities for us, for our products, you know, the C390 Millennium and the A29 Super Tucano in a short and medium term.
spk09: Thank you very much.
spk00: Thank you, Mariana.
spk08: Our next question comes from Lucas Barbosa Santander.
spk07: Good morning, Francisco. Good morning, Antonio. Thanks very much for the opportunity. I have actually a follow-up from the question on the defense side and actually adding to that the discussion on commercial aviation as well. You mentioned in the presentation that in commercial aviation have some key active campaigns in progress. And then also you mentioned in the presentation the increased interest for the C390 and for the Super Tucano. Could you just comment a little bit of when you would expect new orders to come out? So would you expect more orders to be announced over the second half this year? Or is it something that maybe will take place in 2023? So... Any color you could give on the timing that you would expect new orders to come out, that would be very helpful. Thank you very much.
spk00: Thank you, Lucas. Well, in the commercial aviation, we expect new orders during this year. And in the defense, a mix between 2022 and 2023.
spk07: Perfect. Thank you very much.
spk00: You're welcome, Lucas.
spk08: Our next question comes from Stephen Tran, CED.
spk06: Thank you, everybody, and good morning, and thank you for taking my question. When I think about the order activity or the order potential on the commercial aviation side, do you have any high-level view with respect to where we could see the order activity come from a geographic perspective, you know, are you guys seeing anything in, you know, for example, a potential scope clause adjustment in the U.S., or are you seeing, you know, maybe somewhat better order potential coming from the emerging markets? Thank you.
spk00: Thanks for the question. Well, specifically in the commercial aviation, I mentioned that we are working in several sales campaigns that we believe are because of the domestic air travel recover, and also some decisions on fleet renewal to new generation aircraft, especially where our product, our E-2 family is well positioned because of the efficiency compared to the old aircraft. Also, we launched... the project to convert, I mean, passenger jets into freighters that we believe will, the idea is to export a good opportunity as the global air cargo is growing, you know, up to 12% this year versus 2019. So, and then there is a strong demand for e-jets freighters as the market, you know, wants now to, to receive a, a, the goods, I mean, in the next day or even the same day, so that we see a good opportunity for our EJET freighters. And last, I mean, the scope clause, we don't see any changes in the short term, you know, in the next, I don't know, at least the five, six years, which is a good opportunity for us to continue selling our E1 family, E175, E1s.
spk06: Okay, very helpful. I missed the first two or three minutes of your call, so sorry if that was a repeat of what you said earlier, but thanks very much.
spk00: You're welcome.
spk08: Our next question comes from Noah Poponek, Goldman Sachs.
spk03: Hi, good morning, everyone. Hello, Noah. Hi, hi. What's your expectation for book to bill for the year at commercial?
spk00: Our expectation is to keep the same level we saw last year of two to one.
spk03: Okay. Good to know. What is in the full year revenue guidance for the defense segment at this point?
spk01: As Antonio is speaking here, we do have for the defense around 600 million. That's pretty weak this year for defense.
spk03: Okay. And then, you know, I guess maybe could you speak a little bit to, you know, your thinking on the medium to long-term growth rate in that business from here? I mean, it's been, you know, quite choppy for a while, um, from this lower level of revenue. What's your, uh, how are you seeing that play out?
spk00: Well, Noah Francisco speaking now, uh, uh, Yes, we see a tough year this year for defense, as Antonio said. So we are working on several initiatives to improve the performance of that unit already in 2023. And the new market environment will help us a lot. not only in 2023, but in the years ahead with the highest interest in the C390 millennium. That is a product with a very high value added. So we expect it to reach soon to be back to one billion in revenues in our defense unit.
spk03: Okay. Great. And then On free cash, can you maybe just speak a little bit to your expectation of the sequencing through the year, just given the working capital in the first quarter, the working capital change in the first quarter is different than it's been in the first quarter for a while here. So that sounds like the shape of the year is fairly different than it's been.
spk01: By the way, thanks for the questions. I'm trying to speak again. And thanks also for recognizing our efforts as I try to speak to the market. We are growing revenue, but we are improving the work capital at the same time. And the trend is to become positive in the quarters to come. We do not have a spike on the negative side to go again. We have the cash steering process we control on a daily basis. That's why we are quite confident that the quarters to come will be positive. And to a point that we probably are going to revise our cash guidance in Q2. Because we said 50 million or better. Now we are evaluating how better we could be.
spk03: Okay. Excellent. Okay, great. Thanks so much. I appreciate it. Thank you. Thank you.
spk08: Our next question comes from Miles Warren, UBS.
spk05: Hey, thanks for the follow-up. Just wanted to go back to, I think it's Maria's question on the gross margin. So I know two years ago when you separated out commercial, your gross margins jumped that quarter because of how you were accounting for, I think, pay. Is that sort of going on again this first quarter? Is that driving any of the gross margin increases?
spk01: Yeah, we do have an impact around the 2% because of the obsolescence in January. Okay, so that is... In regards to account. But we do believe we could stay in this level for the quarter.
spk02: Okay, thank you.
spk08: Our next question comes from Josh Milberg, Morgan Stanley.
spk04: Good morning, everyone. Thank you for the question. I just wanted to ask if you could update us on the Turbo Prop project, just touching on how your discussions with both customers and potential strategic investors have evolved. And just on that topic, I think you had previously mentioned having costs of around $50 million related to development of the project this year, and just wanted to see if that was still your expectation. Thank you very much.
spk00: Thank you, Josh, for the question. The turboprop project is moving very well. We are now in the phase to define the supplier for this aircraft. We are doing tests already with the concepts, so it's moving very well. We expect to be ready to make a final decision on the business case by the end of the year, beginning of 2023. And the investments, we are keeping the investments for this year, so we will not stop the development activities during this year. And we are working in parallel on how to fund this program since we approved the business case by, you know, again, end of this year, Q1 next year. Okay, that's great.
spk02: Very helpful. No deviation from the investment, Josh. Understood. Perfect. Thank you.
spk08: Remember that to ask a question, you may press star 1. This concludes today's question and answer session. That does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day.
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