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spk05: Good morning, ladies and gentlemen, and welcome to the audio conference call for Embraer's third quarter of 2022 financial results. Thank you for standing by. We remind that EVE's results will be discussed on EVE teleconference. At this time, all participants are in listen-only mode. Later, we will conduct a 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 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 obligation to update publicly or revise any forward-looking statements because of new 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. It's important to mention that all numbers are presented in US dollars, as it is our financial currency. Participants on today's conference call are Mr. Francisco Gomes Neto, President and CEO, Mr. Antonio Carlos Garcia, Chief Financial Officer and Procurement, and Mr. Leonardo Shinohara, Director of Investor Relations. I would like now to turn the conference over to Mr. Gomes Neto, who will proceed with the first remarks. Please go ahead, sir.
spk06: Good morning and thank you all for joining our third quarter 2022 results call today. Mainly due to our continuous focus on efficiency, we were able to deliver better margins even with the supply chain constraints. And our firm order backlog is one of the highest since the beginning of the pandemic. It is important to highlight that we, the whole company, have concentrated our focus on year-end aircraft deliveries. There are comprehensive initiatives in place, and they are progressing well to mitigate the production challenges. always keeping a strong focus on safety and quality. Regarding growth, several campaigns are advancing well, both in commercial aviation, mainly the E-2 family, and in defense, including the C-390 and A-29 Super Tucano. In this quarter, as we will see on the next slide, we have already reached new regions and operators for E2. Having said that, we maintain our confidence in our guidance for the year, and we are pleased to share that our free cash flow will increase to 150 million, or better. On the next slide, we will see more details of business unity highlights in the quarter. In Commercial Aviation, we announced a firm order of 20 E195-E2 from Porter Airlines, now totaling 50 orders and 50 options. We also announced the expansion of our presence to the Middle East with a new operator, Salaam Air, which ordered 6E195E2. On the freighter's project P2F, we signed a firm order for up to 10 aircraft with NAC. More recently, we received a great and promising news. The China Aviation Authority granted certification for our E190-E2, opening the door of a relevant market for the E2 family. And considering the nine-month period, the gross margin in our commercial aviation improved to 10% from 3.2% in the previous year. Our executive aviation keeps up the good momentum with fantastic performance. We delivered 23 jets in Q3 2022, 10% higher than the same quarter last year. And the gross margin was 20.6% in the last nine months, compared to 16.3% in the previous year. On defense, the conflicting environment continues to influence countries around the world to revise plans and update their capabilities and readiness. During the quarter, we were pleased to announce a partnership with L3Harris to expand the capabilities of the KC-390 Millennium as a jet-powered agile tanker, addressing the U.S. Air Force's operational requirements. More recently, we signed some MOUs with South Korean aerospace industries for future collaboration in the KC-390 program. Finally, we reached a final agreement with the Brazilian Air Force on the KC-390 contract, preserving the company's cash flow and ensuring the economic and financial viability of the project. The service and support business continues to positively evolve with a growing backlog and positive gross margin, which reached 29.90% in the nine-month period versus 26.4% in 2021. 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.
spk08: Thanks, Francisco, and good morning, everyone. We delivered reasonable results in the third quarter, reinforced our confidence in our financial performance for the year end, highly focused on enterprise efficiency. As a remark, our guidance does not include EVE numbers. Moreover, the final numbers also include the account adjustment performed by EVE in the second quarter. So moving to slide five, aircraft deliveries. Embraer delivered 33 jets in the third quarter, of which 10 commercial aircrafts and 23 executive jets. Year to date, we have delivered 27 commercial and 52 executive jets. We all know the supply chain constraints, which is impacting Embraer and moving big portion of the deliveries to Q4. Deliverers are in a good pace, and we have noticed concern from the street about deliverers for the whole year. We have affirmed all aspects of our 2022 revenue and delivery guidance. Despite the challenging supply scenario, we should stay in the lower end of the delivery guidance for both commercial and executive jets, with some minor risk on the downside. Firm order backlog ended 30 quarter 22 at 70.8 billion, or 1 billion versus the same period last year. This is one of the highest quarter since the beginning of the pandemic, driven by solid sales activity in executive aviation and service and support. Revenue reached 929 million in the quarter, down 30 million compared with the same period at 30 quarter 21, mostly driven by lower revenue and the sense of security partially offset by the other business unit. The revenue breakdown even spread through the business unit have helped to contribute to the consolidated gross margin. Moving to slide number six, let's talk about adjusted EBITDA and EBITDA. Before that, just to report, In the first nine months of 2022, Embraer reported consolidated gross margin of 20.9%, then 16% report in the same period of 2021. Due to the enterprise efficiency as a whole, 1% mix, 1% one-time effect, and 2% margin improvements driven by enterprise efficiency, even with lower volumes that we delivered in the first nine months. Adjusted EBITDA and BTDA were 50 million and 93 million respectively, yielding an adjusted EBITDA margin of 5.4% and adjusted EBITDA margin of 10%. Adjusted EBIT in the third quarter 2022 also includes extraordinary items. If we exclude all extraordinary items, adjusted EBIT margin would have been around 6.8% or 63 million in the third quarter 2022. Adjusted EBIT margin would be around 11.4% in the third quarter 2022. In regards to our guidance for EBIT and EBITDA, we should stay in the upper range of the guidance for EBIT and EBITDA with some upside potential if all delivers happen as planned. Quarterly G&A expenses reached 41 million, with no significant changes compared to the second quarter 22. Selling expenses reached 67 million due to higher volumes of campaigns in all segments, promising in defense in commercial aviation. Investments in the third quarter Embraer invested a total of 41 million in product development and research, mailing due to development, for example, into family, executive aviation, and other products. And we've invested 14 million in CAPEX mailing for the service and support expansion. Moving to slide eight, starting with adjusted free cash flow. Free cash flow in the third quarter was negative 109 million. This easily to expand due to the higher working capital needs for the higher deliveries in the fourth quarter 2022. Free cash flow year to date is negative. 86 million is slightly better than nine months consolidated basis. Therefore, regarding to the free cash flow, we continue highly focused on the cash flow discipline, and we decided to increase our free cash flow guidance from 50 million to 150 million or better in 2022. On the right side, adjusted net results was a profitable 24 million adjusted, trading positive from efficiency and less interest expenses. Year to date, we are more or less close to zero. In slide number nine, we are extremely happy with the developer's strong liquidity profile. the company reduced the quarter, finished with a total debt of 3.1 billion, or 808 million less year to date in line with our liability management strategy to reduce gross debt and interest expenses. The current schedule of our debts give us a comfortable situation on our monetization for the next two years. If you see, we do have 37 million residual value to pay in 2022, 244 in 2023. Moreover, The 310 we have for 2024 has been already refinanced, being postponed to 2027. Means we do have three years and a comfortable situation to overcome any kind of recession or volatility in the market. And we continue to work on increasing duration and improving the financial metrics. to ensure the company liquidity, Embraer obtained in October 2022 a revolving credit facility line RCF in the amount of 650 million and the renewal of the current loans with the national bank in Brazil with additional two years maturity from 300 million. We thank all of our banking partners for the support through the revolver credit facility. To finish my presentation, moving to the slide number 10, talk about if accounting restatement for the second quarter 22, no cash adjustments. If you issued warranties to a strategy and spec investor during the IPO. In September, we reviewed its account for central warrants that were issued and became exercisable at the close in May. Based on such a review, Embraer expects to recognize the following no-cash expenses associated with the issuance of such warrants for the second quarter. Warranties. The revised accounting treatment is to measure the warrants as a fair value. Based on these premises, we recognize a non-cash impact of 76 million in net results, of which 142 million in other operating expenses and 67 million are fair value financial income. Second, listing expenses. We recognize a non-cash expense of 136 million in other operating expenses as a listing expense. All values were known, but was previously booked in the equity. Now we are recognizing the profit and loss before impact the equity of the company. Transaction cost. Embraer assessed its direct and incremental costs and concluded that the amount to be reclassified is 15 million in equity to other operating expenses. With that, I conclude my presentation, pass, Francisco, the final words. Thank you very much.
spk06: Thanks, Antonio. To close, I would like to make some comments on the year end and near future. The end of the year will still be challenging, with a concentration of deliveries in the fourth quarter. But we have known this since the beginning of the year, and the company's focus has been on mitigating such issues, and we are prepared to deliver solid full-year results. Regarding the coming years, we foresee a better perspective in terms of revenues and profitability growth. The aircraft slots in the production line for deliveries in 2023 and 2024 are almost completely filled for both commercial aviation and executive jets. And, as I said before, we are working in many active campaigns with good chances of new orders for the years ahead in all business units. On top of that, considering the new campaigns under negotiation, the continuous focus and discipline to increase enterprise efficiency and innovation projects, we are very confident about the mid-term future of Embraer. In closing, I am very pleased to announce that Embraer has been awarded with the Great Place to Work certification in several countries we operate. We celebrate this recognition and continue to believe that engaged and passionate people achieve the greatest results and nurture a happy and healthy work environment. Our people are what make us fly, as stated in our values, and we will continue to work to deliver the best value to them, to our clients, shareholders, and society. Thank you for your interest and confidence in our company.
spk05: Thank you. We'll now start the question and answer session and we'll ask who are interested in making questions. At any time, press star 9 in your phone or press raise hand on the platform. When your name is announced, press star 6 on your phone or... Activate your microphone on the platform and start your question. To give everyone a chance to participate, we request you ask just one question per queue. Wait while we pull four questions. Our first questions come from Marcelo Mota from JP Morgan. Please, Marcelo, you may proceed.
spk04: Hi, everyone. Good morning. Thank you for taking the question. I mean, it's more of a strategic question regarding EVE. I mean, when we look at the company, you know, the market cap, you know, has been, you know, growing since its listing today is worth more than the state that Embraer holds on the company. So even though, you know, there are several lookup agreements, just wondering how Embraer think about EVE in the long term, if maybe it could be a company that you could monetize part of it, you know, to strengthen even more your cash, So how do you guys see the current moment for EVE and how you see yourselves holding a position in EVE in the long term? Thank you.
spk06: Marcelo, Francisco speaking. Antonio, we will answer together this question to you. I start saying that we continue to be very excited with this project. We have now more than 200 engineers working dedicated to the EEV development. So that is moving well. And we do believe that EEV was a great movement of Embraer in terms of innovation to help our growth in the long term. So again, about the future of EEV, we are confident that it was a very positive movement. So about the finance, I'll leave this with Antonio to answer to you.
spk08: Marcelo, for sure, we have today 90%. shareholder who wants the warranties, if they exercise the warranties, we are going to get half a billion dollars in the cash flow and probably are going to dilute a little bit, which is already a way to monetize. But at least we all are locked up for the next two years. There is no short-term... Anything that we could think apart of the ones that could provide us more cash flow than we have today. But the next three years, nothing's going to happen.
spk04: Perfect. Thank you very much, Francisco Antonio. Have a nice day.
spk06: And Marcelo, just to complement this, we also finalized the studies for the industrialization of ETH. with a global network of production and logistics. So we are moving according to our plan to have the EV entering in servicing by 2026.
spk05: Our next question comes from a number that begins with 1656 from New York. You are allowed to talk. Please press star 9 to activate your microphone.
spk00: Yes, I think that's me. Kai Von Rumor from Cowan. So you said that, you know, you've pretty much filled for 23 and 24. Can you give us any helpful color in terms of where those deliveries might be for commercial and business jets?
spk06: Well, thanks for the question, so Francisco speaking, we are still in the middle of our planning process for the next five years, including 2023. But what I can tell you that we see a two-digit growth of Embraer. And basically all business units should grow two digits in 2023 according to our view at this point of time. So we are very positive about the years ahead.
spk00: Thank you.
spk01: our next question comes from miles walton from wolf research please miles your microphone's open thank you uh good morning francisco antonio i was wondering antonio could we talk about the the cash flow for a moment the fourth quarter implied cash flow i think is just under 250 million dollars and If you look back at the last five years or so, you generate in the fourth quarter anywhere between $400 and $700 million free cash flow. And obviously, you're looking for a very large delivery number. So why only $250 million of implied fourth quarter cash flow?
spk08: Good morning, Miles. Thanks for your question. We put $150 or better because in regards to, we are in the, I would say, the final sprint for the year. Just five yards to the touchdown with one pass. And if something happens in the delivery, then we are going to miss a big portion of the cash flow. You are right. If you complete the guidance as you are seeing today, it will be much higher than 150 million. But in order to not, I would say... give you a false information, you prefer to stay in the 150 million. It's just a matter to get the aircrafts out of the door. Then probably it's going to be much better. And you are totally right. If comparison with previous year, but at least today, assuming the risk you have in front of us, we are a little bit cautious to give a higher numbers, but a lot of upside potential. You're right.
spk01: Okay. And one other one on cashflow. You make adjustments for the income statement and the balance sheet for EVE, but I haven't seen an adjustment for cash flow for EVE. So can you provide that?
spk08: Yes, absolutely. It was just accounting adjustment with no cash adjustments. It was just pure accounting issue, for example.
spk01: Warranties we needed to... I'm sorry, I'm not speaking to the restatement. I'm just talking about the ongoing operations. I haven't seen an adjustment for how much EVE is burning.
spk07: It's just 10 million for each quarter. It's the one that was in Q3. Okay. 16, sorry, 16. I'm sorry, six zero or one six?
spk01: 16, one six. One six, 16. Thank you. One for Francisco, with the certification of the E2 in China, Francisco, should we expect a significant change in the order dynamics out of China that haven't really been active in the last couple of years?
spk06: Miles, I have here a special guest with me, Arjen Maier. So I brought him because I knew this question would come. So Arjen, please.
spk02: Thank you, Francisco. Good morning, Miles. Thanks for the question. Well, first of all, we're very pleased we got the certification over the line very recently. We are actively working in the Chinese market, so that is progressing. What I will say is that the reason why I was so pleased with the E2 is the 190 which is certified now and the 195 E2 which we will certify next. Those fall very nicely between the ARJ21, which is the smaller Chinese jet product, and the 919, which is the narrowbody. So we feel that the E2 complements the Chinese production line very well. So we have very good hopes for the Chinese market.
spk01: Okay, very good. Thank you. Thank you.
spk05: Our next question comes from telephone, from the number that starts with 191-75. Please, sir, just press star 9 to start your microphone.
spk09: Hi, this is Elizabeth Grenfell on Tehran. Can you hear me?
spk03: Yep, we can hear you. Yes, we can.
spk10: Okay, hi, great, good morning. I think you spoke to there's weaknesses in the supply chain and there's downside risk to your delivery forecast for the year. Could you speak to what you're seeing in the supply chain, where there's specific weaknesses and how much downside risk you do see to the full year delivery guide?
spk06: Hi, Elisabeth. So thanks for the question. Well, we are really still suffering with the supply chain this year a lot. especially with engines, avionics, and interiors. And we are getting parts, but with a lot of delays. And then we have... We had to try to change a lot our production schedule during the past month to accommodate the production with the delays. We see this situation still going, especially into the first half of next year. I mean, improving, but still with a lot of delays. And we see that delays being reduced during the second half of next year, but still not at the normal situation. I think this situation will normalize completely only 2024. But again, we are prepared to, you know, with our production plan to live with this situation in 2024.
spk10: So the downside risk to deliveries versus where you originally expected for this year is what? Yeah.
spk08: Yeah, Lisa, when we place the guidance, if you see commercial aviation, 60 to 70, 100 to 110, we read for seeing beginning of the year, this constraint and shortage in supply chain. That's why, as I mentioned in my speech, we are seeing ourselves today in the lower end of the guidance, 60 to 100. If I would call a risk, three to four aircraft, each business unit, no more than that. For this year and for next year, we should have, I would say, a growth of two digits for commercial and executive. even with such a restriction. But I would say, if you ask me today, we are at the lower end of our guidance. It means we lost 10 aircrafts in commercial, we lost 10 aircrafts in executive, and we may have additional risk between four or five aircraft, each business unit. But we continue to fight to the last day of the year. All aircrafts on the assembly lines to be finished, to get their missing parts, and deliver to those customers.
spk10: TAB, Okay, great and then one more question, if I could please on the defense side, could you speak to the percentage of completion recognition revenue recognition on the a 29 program what what was what was the impact they're attributable to.
spk08: We compared with the previous year, we have a gap of something around 60 million. We were not able to sell any 829 this year. That's why last year was a strong one. We have a lot of revenue out of the Super Tucano, the 829. This year, we were not able to perform any sales. We do have... uh, aircrafts and inventory, but we were not able to recognize as a revenue for the missing contracts. However, we do see a nice potential in front of us for the 8 to 29 for the coming months. We are going to announce for sure some campaigns, but it's not going to influence this year, unfortunately.
spk10: Okay, great. Thank you very much.
spk08: Thank you.
spk05: Our next question comes also via phone, and the number starts with 0056. Please press star 9 to activate your microphone.
spk11: Hi, guys. This is Florencia Machado from MetLife. Can you hear me well?
spk05: Yep.
spk11: So thanks for taking my questions. a couple of questions. One's regarding service and support, which has been a business that performed very well during the year with very high margins. What's your expectation regarding margins by next year for this business? And the other one is I think a follow-up regarding deliveries. You mentioned that you continue to see issues for next year and perhaps for the next of this year. So why is the main reason that you are still reaffirming the guidance regarding deliveries or when do you expect some more downside on commercial and executive checks? Can you provide more color on that point? Thank you.
spk08: This is Antonio speaking here. Good morning. So service and support, you are under two digits ABIT margin this year. And I would say we continue to perform very well in the service and support. And we should keep the same level for the years to come, especially 2023. And we are also growing in the service and support because our fleet is growing. We need to fulfill those services. That's why. continues to drive the enterprise efficiency and make sure that we continue to write this nine mark the report to this nice margin second regards to deliveries uh our forecast today for our schedule and delivery schedule is continues to be on the on the guidance we place since beginning of the year and for next year we already adapt The short is, but however, there is a red two digits growth for next year and all positions, they are red buckets. And I would say even with the supplier chain constraints, we have some, the situation is improving, but not in the speed we would like to see. And now it's concentrated just few suppliers. Before it was almost all of them. Today it's just a few suppliers. This year will continue to be in the lower end of the guidance. We are going to fight to the end of the year. Every day counts. And next year, we are ready to adapt. And Francisco, you may want to comment.
spk06: Yeah, just a quick comment that you mentioned this year. Even with this tough situation with the supply chain, we're continuing... We continue affirming that we will be within the guidance. The reason of this is because we were more conservative in the beginning of the year announcing the guidance. So we announced a range that we knew that we would face difficulties this year with the supply chain. So we knew since the beginning of the year. So that's why we, with all the difficulties, we still believe we will be in this lower end of the range of the guidance we give to the market in the beginning of the year.
spk11: Okay, thank you so much. I just have a quick follow-up regarding the free cash flow. In terms, are you expecting some improvement on the working capital side? And regarding this excess free cash flow, are you expecting any liability management in the near term?
spk08: No, not really. In fact, if you take into account that we are going to have in Q4 almost 40% of the whole year revenue is going to be done in Q4. We are going to release a lot of inventory. That's the main reason of the free cash flow. And there is no special measures in Q4 in order to improve our free cash flow guidance, just to get rid of those aircrafts out of the door. It's the only reason.
spk11: Okay, perfect. Thank you.
spk05: Our next question comes from Pedro Fontana from Bradesco BBI. Please, Mr. Pedro.
spk03: Hi, good morning. Thank you for taking my question. Congrats on your result. If you could provide us some color on the ongoing pilot shortage in the U.S. and how is this impacting our commercial campaigns and when do you expect this situation to improve? Thank you.
spk06: Okay, now here I hand over to Ari and Mayer to talk about this issue in the U.S.
spk02: Thank you, Pedro, for that question. Yes, the pilot shortage in the US is affecting the E1 deliveries. So we think it's going to be less than we've seen in the previous years in 23 and 24. We do believe that that will correct itself towards the end of 23, somewhere in 24. So we'll have to see how that develops. Fortunately, what I will add is that we see a lot of traction at the moment on the E2 side. So you've seen some deals close over the last couple of months. And we see a very good appetite from airlines on that side. So we believe that the mix of the E1 and E2s together is going to stay healthy going forward. And we believe the E1s over time will start to pick up again towards 24-25. Very clear. Thank you.
spk05: Once again, to ask a question, please press star six on your phone or raise hand on your Zoom platform. Wait, while we pull for questions. This concludes today's question and answer section. That thus concludes Embraer Audio Conference for today. Thank you very much for your participation and have a wonderful day.
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