Business Context and Reporting Period
Embraer S.A. filed a Form 6-K on January 16, 2019, announcing a revision to its 2018 financial guidance and providing new projections for 2019 and 2020. The revision is driven by slower-than-expected recovery in the global executive jet market, a strategic shift toward price preservation, and the delayed delivery of the new Praetor executive jets until 2019. Additionally, the Defense & Security segment faced revenue reductions due to cost base revisions on the KC-390 contract following a prototype incident in May 2018.
Key Financial Metrics and Guidance
2018 Revised Guidance
- Deliveries: Executive jets revised down to 91 units (previously 105-125); Commercial Aviation remains 85-95 units.
- Consolidated Revenues: Revised to approximately US$ 5.1 billion (previously US$ 5.4 billion - US$ 5.9 billion).
- Segment Revenues: Executive Jets ~US$ 1.1 billion (previously US$ 1.35-1.50 billion); Defense & Security ~US$ 0.6 billion (previously US$ 0.8-0.9 billion).
- Adjusted EBIT: Revised to ~US$ 200 million (previously US$ 270-355 million) with a margin of ~4% (previously 5%-6%).
- Adjusted EBITDA: Revised to ~US$ 480 million (previously US$ 540-650 million) with a margin of ~9% (previously 10%-11%).
- Investments: Revised to roughly US$ 300 million (previously US$ 550 million).
- Free Cash Flow: Revised to a use of cash of roughly US$ 200 million (previously a use of no more than US$ 100 million).
2019 Guidance
- Deliveries: 85-95 Commercial jets, 90-110 Executive jets, 10 Super Tucano, and 2 KC-390 aircraft.
- Revenues: US$ 5.3 billion - US$ 5.7 billion.
- EBIT Margin: Breakeven (approximately zero).
- Capital Structure: Anticipated net cash position of ~US$ 1.0 billion post-closure of the Commercial Aviation JV with Boeing, following a special dividend of ~US$ 1.6 billion.
2020 Guidance
- Scope: Includes 100% of Executive Jets and Defense & Security; excludes 20% stake in Commercial Aviation JV.
- Revenues: US$ 2.5 billion - US$ 2.8 billion.
- EBIT Margin: 2% - 5%.
- Free Cash Flow: Roughly breakeven.
Material Changes vs. Prior Period
The primary material change is a significant downward revision in 2018 Executive Jet deliveries and revenues, reducing the total consolidated revenue outlook by approximately US$ 0.3 billion to US$ 0.8 billion compared to prior guidance. Profitability metrics (EBIT and EBITDA) were lowered due to reduced fixed cost dilution from lower volumes and the specific impact of the KC-390 contract revision. Investment spending was cut by roughly US$ 250 million, yet Free Cash Flow is projected to be a larger use of cash due to the revenue shortfall.
Outlook, Risks, and Unusual Items
- Strategic Partnership: 2019 guidance includes costs associated with the creation of a Commercial Aviation Joint Venture with Boeing. The company expects to finalize this partnership by the end of 2019.
- Special Dividend: A special dividend of roughly US$ 1.6 billion is planned, subject to fiscal year results and regulatory requirements.
- Unusual Items: The 2018 adjusted figures exclude a US$ 127.2 million impact related to the KC-390 prototype incident cost base revision.
- Risks: Continued slow recovery in the executive jet market and execution risks regarding the Boeing partnership closure.
Investor Verification Checklist
- Confirm the final execution and terms of the Commercial Aviation Joint Venture with Boeing.
- Verify the approval and payment schedule of the US$ 1.6 billion special dividend.
- Monitor the actual delivery count of Praetor executive jets in 2019 to validate the recovery timeline.
- Review the final 2018 audited results to confirm the impact of the KC-390 cost revision on actual EBITDA.
- Assess the company's ability to achieve breakeven EBIT in 2019 amidst the transition to the new capital structure.