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Embraer Brazilian Aviation Co(NYSE: ERJ)
Q2 2022 Earnings Call
Aug 04, 2022, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen, and welcome to the audio conference call for Embraer second quarter of 2022 financial results. Thank you for standing by. We remind that [Inaudible] results will be discussed on [Inaudible] teleconference. At this time, all participants are in listen-only mode.
Later we will conduct a question-and-answer session, and instructions to participate will be given at that time. Should you require assistance during this call, please use the shed on platform. As a reminder, this conference is being recorded and web casted at our ri.embraer.com.br. This conference call includes forward-looking statements or statements about events or circumstances which have not occurred.
Embraer's 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 other markets where the company is present. The words believes, may, will, estimate, continues, anticipate, intend, expect, and similar words are intend 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 statements, 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 is important to mention that all numbers are represented in US dollars as it is our functional 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.
Francisco Gomes Neto -- Chief Executive Officer
Good morning, and thank you all for joining our second 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 second quarter results show a steady improvement in our financial results with our focus and discipline in the execution of our growth plan.
Despite the challenging supply chain environment, which I will talk more about later, we were able to deliver solid results. And we have always maintained our focus on enterprise efficiency and innovation as key pillars of our growth strategy. We reached a fewer order backlog of $17.8 billion in the second quarter 2022, the highest level since the beginning of the pandemic. This number does not consider orders new order announced during the Farnborough Airshow last month.
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And we are pleased to announce it reported adjusted net income of $39.4 million in this quarter. Before we go into more financial details on the quarter, I'd like to give you some quick highlights on our two key pillars. First on innovation. It is like you brought $377 million of gross proceeds, which will be used to accelerate the development, simplification, and commercialization of our urban air mobility solution.
During the Farnborough Airshow, we've announced [Inaudible] Aviation as a launch customer for urban air traffic management solution. At the event, we also unveiled EVE top cabin mockup and updated the product design. Second, enterprise efficiency. We continue to work with great discipline to be more efficient at a vary company.
This quarter, we announced a partnership with Toyota to maximize efficiency in our production and accelerate the use of lead principles to reduce the production cycle lead time of our aircraft by 40% by the end of 2023. Mainly due to our efficient initiatives, the financial performance continues to improve. Free cash flow increased 100% versus the second quarter last year in our gross margin presented a substantial increase compared to the same period last year. On the next slide, we will speak about our main ESG achievements announced in the second quarter.
Embraer releases -- send a letter of intent with a commitment to develop sustainable aviation fuel production ecosystem. Embraer will become the first aircraft manufacture to use SAF that will be distributed by Hastings, a global leader in bioenergy. We also announced a new purchase agreement to source 100% renewable energy in Brazil by 2024, a year ahead of our 2025 target. Embraer and Pratt & Whitney had successfully tested a E195-E2 aircraft on 100% sustainable aviation fuel this quarter.
Finally, our annual 2021 report was published in May. The report brings the main highlights of the year on innovation, financial performance, and a complete overview of Embraer's ESG actions in 2021. Important to note that our report is already inside the framework friendly foreign investors in our company. The next slide, we would talk about growth and see more details of business unit highlights in the quarter.
In commercial aviation during the Farnborough Airshow, we announced a few order of 20 E195-E2 from Porter Airlines, now totaling 50 orders and 50 options, and an additional eight E175-E1 from order from Alaska Air. On the [Inaudible] passenger to freighter project is signing a few order for up to ten aircraft for an undisclosed customer, and an [Inaudible] for 10 freighters. Gross margin of 13.2% in Q2 '22 versus 4.5% in the previous year. Executive aviation keeps up with momentum strong sales.
We delivered 21 jets, being 12 light and nine large. Backlog increase above 16% compared to the previous quarter in gross margin of 22%, compared to 17.5% in the previous year. On defense, we are very pleased to have received in June the Netherlands Ministry of Defense decision to select the C-390 millennium as the sole source to replace its cargo fleet. It is a clear demonstration of the increase in interest in our aircraft from several countries recently.
Gross margin of 28% in Q2 '22 versus 34.6% in the previous year. Serves and support continues to improve its results, with a stable backlog and positive gross margin, which reaches almost 32% in Q2 2022 versus 28% in the same period of 2021. They also signing a new contract with LOT Polish, expanding the pool program to cover 44 aircraft. I will now hand it over to Antonio to give further details on the financial results, and I will return it in.
Thank you.
Antonio Garcia -- Chief Financial Officer
Thanks, Francisco, and good morning, everyone. Let's talk about financial results. We deliver a stronger results in the second quarter. Reinforcing our confidence in our financial performance for the year.
We continue highly focused in our pillars of deleverage the company, driving profitability and efficiency. Embraer delivered 32 jets in the second quarter, of which 11 commercial aircraft and 21 executive jets, 12 large jets and nine mid-size jets, according to our schedule. We reaffirm all aspects of our 2022 financial and deliveries guidance with no material variation. Deliveries is a good base and seasonally concentrated in the second half of the year.
We have noticed some concern from the sell side reports about deliveries for the year. But just as a reminder, we are today just four aircrafts in commercial aviation behind [Inaudible]. Despite the very challenging supply scenario, our plans have not changed, and we remain confident in the delivery of the aircrafts. [Inaudible] order backlog ended second quarter 2022 at $17.8 billion, half billion more versus first quarter 2022.
This is the highest quarter backlog since beginning of the pandemic, 12% higher, driven by solid sales activities. Revenues reached $1.90 billion in the quarter, down 10% compared to the second quarter of '21, due to lower deliveries in commercial and defense segments, partially offset by our service and support business unit. Before starting with EBIT and EBITDA, I want to mention that we reported consolidated gross margin of 21.9% in the quarter was higher than the 18.2% reported in the second quarter of previous year '21. We find year-over-year profit in most segments due to the product and service mix pricing and overall operational performance, including tax efficiencies.
Adjusted EBIT and EBITDA were $81 million and $125 million respectively using adjusted EBIT margin of 8% and adjusted EBITDA margin of 12.2%. It's important that you mention that our adjusted EBIT in second quarter '22 also includes commercial aviation integration and arbitration expenses of around $60.5 million. If we exclude all these extraordinary effects, adjusted EBIT margin would have to be our odds 10% or $100 million in the second quarter '22. And EBITDA margin of 14% excluded its effects.
And please take into account, we book its $21 billion provision for bank debt the second quarter, around $21 million in the quarter cost impact the results here. Quarterly generated $42 million or an increase of $1 compared to the second quarter '21 figures, due to inflation wage adjustments, but no increase in headcount. Fairly expensive reach at $66 million or an increase of $60 million compared to the second quarter '21 figures due to a more active sales campaign and trade events. It's important to mention the [Inaudible] basic does not include $21 million of bad debt provisions that we included in this graph here.
Talk about investment in the second quarter '22, Embraer invested a total of $42 million in product development and research, mainly product development. For example, two family freighter executive aviation [Inaudible]. We invested also 30 million capex, mainly for service and support expansion business. We continue to invest to our future.
Another with the news moving to free cash flow, and that's a results with regards to free cash flow. We continue highly focused and cash flow disciplined for positive trends. Free cash flow in the second quarter '22 was a surplus of $91 million. Represent a significant result supported by the divestment of Embraer facility and optimization for working capital, driven by positive free cash flow year-to-date, even considering a production ramp up and delivered in the second semester.
Moving to adjusted net results was a profit of $39 million due to the better performance and interest reduction of $28 million in the second quarter '22 year-on-year. The company finished the quarter with a total debt of $3.2 billion or $864 million leverage in line with our liability management strategy. Embraer continues to deleverage their balance sheet. Reducing systematically gross debt and improve the credit metrics.
Moreover, reducing interest expenses. It's important to highlight that the net debt EBITDA ratio is around four times in the second quarter of 2022. But in the next quarter, we will show a significant improvement because deliveries are concentrated in the second half. And we remain committed to improve our financial metrics.
With that, I finish my presentation and hand it back to Francisco for his final remarks. Thank you very much.
Francisco Gomes Neto -- Chief Executive Officer
Thanks, Antonio. To close, I would like to make some comments on the supply chain issues. There is a major short term issue for the whole industry globally and we can't undermine this challenging environment. To minimize the impacts, we are working very close to our supply chain.
Having people onsite at the main suppliers, developing all the logistical routes in working on improvements in internal processes in cycles to absorb part of the challenges. Having said that, we are cautiously optimistic about year-end results and very confident about the mid-term future. A combination of innovation, enterprise, efficiency, and our fantastic people is very powerful and will make us grow sustainably. Thank you for your interest and confidence in our company.
Questions & Answers:
Operator
We will now start the question and answer session. [Operator instructions]. Wait while we pool for questions. Our first question comes from Josh Milberg.
Please, Mr. Milberg, your microphone is open. Mr. Milberg, you can activate your microphone.
Josh Milberg -- Morgan Stanley -- Analyst
Very sorry about that. Can you hear me now?
Francisco Gomes Neto -- Chief Executive Officer
Yes. Yes.
Josh Milberg -- Morgan Stanley -- Analyst
OK. Great. Good morning, everyone, and thank you very much for the call and your comments. I had a couple of questions on the turboprop project.
And the first one is if you could just update us on the financial -- on its financial impact for this year. And if I'm not mistaken, you had talked about a potential $50 million effect this year that would be expense recognized in the PNL for the year as a whole. So I just wanted to kind of clarify if in fact, that's how it's been treated and if that's roughly still the magnitude of the impact you expect. And then I was also just hoping you could give us a little bit of your updated thinking on the project and maybe just touch base on what steps remain for it to be greenlighted, what kind of buy in you're looking for -- buy in you're looking for from customers and whether having a JV partner would be critical? Thank you very much.
Antonio Garcia -- Chief Financial Officer
Hello, Josh. Antonio speaking. Thanks for the request. I just want to answer part of it.
Firstly, what we are seeing regards to impact on our financial performance this year for the [Inaudible] is around $25 million. We are working hard in order to minimize because we are still not capitalizing those R&D costs. But for the profit and loss, this year is $25 million and is a red part of our forecast and also our guidance.
Francisco Gomes Neto -- Chief Executive Officer
Josh, Francisco speaking. About the project, I like to say that we are very excited with this project. We are progressing well on tests, wing test, and all the engineering activities. We expect to to decide about the engine selection in the second half of the year.
And we expect to approve the business case beginning of next year. And also even not having the business case approve it, we announced the last time in May -- last month in Farnborough Airshow, that we have already 250 letter of intent -- 250 plus letter of intent of customers in our TP models.
Josh Milberg -- Morgan Stanley -- Analyst
OK. So it sounds like everything's progressing as planned, and that there are very good prospects for the project maybe moving forward as of next year. Could you touch, Francisco, a little bit on the financing aspect of it?
Francisco Gomes Neto -- Chief Executive Officer
Yes. We are working also in parallel with the engineering activities. We are working internally in alternatives to fund the project. So at the time, we expect to approve the business case next year.
We will have the funding solution to finance.
Antonio Garcia -- Chief Financial Officer
Josh, yes, this not to compromise their views on the financial metrics of the running business. We are evaluating for sure with support from customers from suppliers and also how we are going to, I would say, overcome the first two years with this development. But the idea is not to compromise our current business.
Josh Milberg -- Morgan Stanley -- Analyst
Understood. OK. Well, thank you very much. Thank you both very much for that color.
And look forward to hearing more on the project as you advance. Have a nice day.
Operator
Our next question comes from Mr. Marcelo Motta. Please, Mr. Motta, you can proceed.
Marcelo Motta -- J.P. Morgan -- Analyst
Hi. thank you very much. It's a question regarding the deliveries. During the presentation, Embraer commented that around four aircraft in the commercial aviation were not delivered due to supply chain issues.
So just want to know if the company could provide additional color regarding if it was like part, the engine, the reasons behind this delay. And if those parts are ready deliver now at the beginning of August and if there is any other aircraft that is delay as of now. Thank you.
Francisco Gomes Neto -- Chief Executive Officer
Marcelo, thanks for your question. It's highly appropriate. And I wouldn't use the opportunity to say more than you ask me and you ask us here. For sure, the -- what the [Inaudible] said most is normal is changing avionics in order, small parts.
They are concentrating four or five suppliers. And that was the beginning of the year. Maybe you will recall this when we set the guidance and the market reacted quite the negative. It should be on us all overreact when they said 60 to 70 aircrafts, 100, 200 executive jets because at that time we foresee the [Inaudible] type situation that we are living.
And that's why people are getting sicker with the supply chain. But for Embraer, we saw this some months ago is not a surprise. But finalizing the question through the different graphs, there are going to be delivery right now in the month of August.
Marcelo Motta -- J.P. Morgan -- Analyst
Perfect. Thank you very much.
Operator
[Operator instructions]. Wait while we gather for questions. Our next question comes from telephone. If you wish to activate your microphone, press star six, please.
Unknown speaker
Good morning, and thank you very much for taking my question. I'm curious, when we think about supply chain issues, do you see any scope for Embraer to maybe undertake some small acquisitions if you need it to secure critical supply? I did ask the same question of your Canadian competitor earlier this morning. Thank you very much.
Francisco Gomes Neto -- Chief Executive Officer
OK. Francisco speaking. At this moment -- Hello. At this moment that we are working very close to our supply chain.
Very close. We have a small army of people. I mean, the insides of the operations of our suppliers, of our service suppliers, of our sub suppliers. But we don't have any plans to acquire any supply as a strategy to resolve this problem.
We do believe we can resolve this with a closer collaboration with our suppliers partners.
Unknown speaker
OK. Great. And I apologize for all the background noise. Just one very quick follow up, if I may.
Can you remind me whether you have any supply at this juncture coming from the Russian Federation? And that's it for me. Thank you.
Francisco Gomes Neto -- Chief Executive Officer
So I'm trying to speak to here. We only have one supplier from Russia is titanium that we are partially already replacing by US and European suppliers. Or some months ago we were at 85% buying demand in Russia for titanium. Now we are already below 60 and our plan is really to try to eliminate the source of the raw material.
Part of it, we buy enough in Russia.
Unknown speaker
OK. Let me leave it there. Thank you very much for the time.
Operator
[Operator instructions]. Since there are no further questions. This concludes today's question-and-answer session. That does concludes Embraer's conference for today.
Thank you very much for your participation and have a good day.
Duration: 0 minutes
Call participants:
Francisco Gomes Neto -- Chief Executive Officer
Antonio Garcia -- Chief Financial Officer
Josh Milberg -- Morgan Stanley -- Analyst
Marcelo Motta -- J.P. Morgan -- Analyst
Unknown speaker
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