EMBJ

Business Context and Reporting Period

Company: Embraer S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter ended September 30, 2021 (3Q21)
Business Overview: Global aerospace company operating in Commercial Aviation, Executive Aviation, Defense & Security, and Services & Support segments. The company designs, manufactures, and markets aircraft and systems.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Expansion: Consolidated revenues grew 26.3% year-over-year in 3Q21, driven by higher deliveries in Commercial Aviation and a favorable mix of large jet deliveries in Executive Aviation. All segments reported double-digit growth.
• Profitability Turnaround: Adjusted EBIT margin improved from -6.0% in 3Q20 to 3.7% in 3Q21. Gross margin expanded to 19.0% from 7.2% in the prior year, aided by better pricing, positive mix, and lower idle capacity expenses.
• Cash Flow Milestone: The company generated positive free cash flow of US$ 21.3 million in 3Q21, the first time in over 10 years this occurred in the third quarter (typically a cash-use period). This was driven by working capital efficiencies, particularly inventory management.
• Debt Reduction: Net debt decreased to US$ 1.8 billion from US$ 2.4 billion in 3Q20, supported by cash generation and loan repayments.
• Deliveries: Total deliveries reached 30 aircraft in 3Q21 (9 commercial, 21 executive), compared to 28 in 3Q20. Year-to-date deliveries totaled 86 aircraft.

Guidance, Outlook, and Risks

Updated Guidance (2021 Full Year)

• Free Cash Flow: Updated to US$ 100 million or better (previously US$ (150) million to breakeven).
• Commercial Jet Deliveries: 45-50 aircraft.
• Executive Jet Deliveries: 90-95 aircraft.
• Consolidated Revenues: US$ 4.0 to US$ 4.5 billion.
• Adjusted EBIT Margin: 3.0% to 4.0%.
• Adjusted EBITDA Margin: 8.5% to 9.5%.

Management Commentary

Management attributes the improved cash flow to strong sales activity, customer down payments, and inventory control. The company expects the fourth quarter to follow normal seasonal patterns with higher deliveries and revenues. The backlog of US$ 16.8 billion is the highest quarter-end value since the end of 2019.

Risks and Contingencies

• Exchange Rate Exposure: Approximately 10% of net revenues are in Reais while 20% of costs are in Reais. The company utilizes financial hedges to mitigate this exposure.
• Operational Risks: Risks include general economic conditions, capacity to deliver products on agreed dates, and governmental regulations.
• Special Items: Results include non-recurring items such as restructuring provisions and costs related to the re-integration of the Commercial Aviation business following the termination of the strategic partnership with Boeing.

Investor Verification Checklist

• Backlog Quality: Verify the composition of the US$ 16.8 billion backlog, specifically the ratio of firm orders to purchase rights and the timing of expected deliveries.
• Inventory Levels: Confirm the sustainability of the US$ 2.3 billion inventory level and the specific measures taken to reduce it by US$ 933.4 million year-over-year.
• FX Hedging Strategy: Review the details of the currency hedges (floors and caps) protecting against Real depreciation and their impact on future margins.
• Special Items Impact: Assess the magnitude of "One Embraer" re-integration costs and restructuring provisions to understand the core operating performance.
• Customer Concentration: Evaluate the financial health of key commercial airline customers, given the reversal of credit loss provisions in 3Q21.