July 30, 2015: Embraer reset entry into service for its KC-390 tanker/transport will be in 2018 vs 2017 when it reported its 2Q2015 earnings today.
The press release is here.
The KC-390 is Embraer’s largest aircraft, with a fuselage the size of a Boeing 767 width and the length of a Boeing 737. The airplane is being developed with government backing, intended to serve the remote regions of Brazil. Embraer also plans to market the airplane for export. Government funding has been squeezed with Brazil’s latest economic decline. Embraer has $390m in accounts receivable from the government.
The financial numbers were somewhat mixed, with a decline in revenue forecast for its defense unit, lower EBIT margins but solid commercial aircraft backlogs.
Goldman Sachs has this initial reaction:
Embraer (Neutral; $32 12-month price target) reported 2Q15 EBIT 30.6% below our estimate and 26.9% below consensus, with revenue 3.0% below our estimates and 6.0% below consensus. Embraer lowered its revenue outlook for Defense & Security from FX, but was able to reiterate its EBIT and EBITDA guidance for the year.
Total revenue in the quarter of $1.51bn is below consensus of $1.61bn and our estimate of $1.56bn. All segments except Commercial Aviation are below our estimates. Commercial Aviation revenue is $883mn, down 9.2% yoy and 2.0% above our estimate. Defense & Security revenue is $216mn, down 39.4% yoy and 13.4% below our estimate. Executive Aviation revenue is $404mn, down 4.0% yoy and 6.7% below our estimate.
Total EBIT margin of 6.8% is 260 bp below our 9.4% estimate and down 380 bp yoy, with a weak gross margin, worse overhead absorption and impairment expense on used aircraft. 2Q EBIT of $102.2mn is below consensus of $139.9mn and our estimate of $147.3mn. Gross profit is 18.6% below our estimate, with a gross margin of 18.9% 370 bp below our estimate due to a combination of lower revenues negatively affecting fixed cost dilution, and a cost base revision for certain contracts in the Defense & Security segment. Other expense is $(0.07) worse than we expected driven by impairment expenses on the portfolio of used aircraft in 2Q15, though this is more than offset by $0.16 upside from lower SG&A and R&D costs.
Free cash flow is $165mn (1.28X FCF/NI) compared to a use of $(23)mn in 2Q14 and a use of $(581)mn last quarter.
Total backlog increased to $22.9bn, up 12% sequentially from 1Q15. The change in backlog implies $4.0bn in new orders, generating a book-to-bill in the quarter of 2.65X (1.95X on a TTM basis). The backlog was previously reported in the company’s orders and deliveries report.
Embraer reiterated its guidance for 2015 EBIT of $490mn-$560mn and EBITDA of $730mn-$850mn, but reduced revenue guidance to $5.8bn-$6.3bn from $6.1bn-$6.6bn (all in Defense & Security) to reflect the Brazilian Real devaluation. EBIT margin guidance was revised to 8.5%-9.0% from 8.0%-8.5%, and EBITDA margin to 12.6%-13.6% from 12.0%-13.0%.
Our 12-month $32 price target is derived from target CY16E P/E of 12.8X. Key risks include (1) regional jet demand, (2) business jet demand, (3) new program development risk, (4) FX.