By Bjorn Fehrm

March 26, 2020, ©. Leeham News: Embraer presented its full-year 2019 results today and held an analyst call with the CEO, Francisco Gomes Neto, and the CFO, Antonio Carlos Garcia. The company posted a loss, but the underlying operational performance was a definite improvement over 2018.

The major part of the loss came from extra costs for the formation of a separate Commercial Aircraft division for the joint venture with Boeing. To understand Embraer’s position in these difficult times, we will separate the analysis of the 2019 results in three parts:

• The operational results for 2019
• The costs and effects of the carve-out for the Boeing joint-venture
• The actions by management to work through the Covid-19 crisis

The 2019 operational results

We focus on the Division result first and then discuss Group results including extra costs for the preparations for the Boeing Joint Venture (JV).

Commercial Aircraft

The Commercial Aircraft division delivered 89 E-Jets during 2019 compared with 90 for 2018, Figure 1. The aircraft paying the bills is the E175 as it’s the only in production aircraft for the US Scope Clause market (the CRJ production is stopping).

Figure 1. Commercial jet deliveries. Source: Embraer.

The E190 had eight deliveries, and the newer E2 E190 and E195 variants had 14 deliveries. Segment revenue was down 5% from 2018 at $2,335m versus $2,358m. The reason according to CFO Garcia is the deliveries were mainly to large orders from the US regional carriers where the net price (and margins) are lower.

Embraer delivered 14 E2s during the year, with production now reaching about an aircraft per month. CEO Neto said 2020 would have been similar if Covid-19 wouldn’t have happened. The reason is initial production causes a loss due to the learning curve costs. The ratio of legacy aircraft to new aircraft deliveries is, therefore, carefully managed.

Business Aircraft

The Business jet line has now come out of its large jet slump, Figure 2.

Figure 2. Business jet deliveries. Source: Embraer.

The ratio of margin richer large jets is now 43%, up from 30% for 2018. Segment revenue was up 27% with $1,397m for 2019 versus $1,104m for 2018.

Embraer new large jets Preator 500  and 600 are now selling where the previous program, Legacy 450 and 500, faded in the market. The smaller jets have kept their deliveries with the class-leading Phenom 300 as the star.

Defense & Security

Embraer achieved the first delivery of the KC-390 airlifter to the Brazilian Air Force in 2019, with a further two planned for this year. Segment revenue was up 27% at $775m versus $612m for 2018.

Services and Support

Services revenue for 2019 grew by 7% at $1047m versus $981m 2018.

Group results and Joint Venture effects

All segments increased their revenue for 2019 compared with 2018. The total for the group was $5,462m vs. $5,071 2018, an 8% improvement. Despite the growth, the full-year result was a loss of  $317m, which is 6% of revenue compared with a loss of $171m for 2018.

The reason is extraordinary for costs for 2019 of $347m. The cost of carving out Commercial Aircraft and then running it as a separate business in preparation for the Boeing JV was shown as $182m. In addition, the Business jets took a write-off of $71m on the Legacy 450 and 500 programs.

Without the separation of commercial aircraft division, Embraer would have shown a profit, according to Embraer CFO Garcia. It doesn’t mean Embraer is stepping back from the JV. Management focuses on doing the JV with Boeing, but right now, the execution hangs on the approval from the EU. This is not expected before July.

COVID-19

Embraer is, like other airliner OEMs, facing an unprecedented situation. Airline customers are in discussion to delay deliveries from 2020 to 2021, but no cancellations are on the table. For business jets, there are delivery delay discussions of a quarter but not more.

The group’s liquidity is strong at $2.8bn in cash at exit 2019. A loan of $0.6bn has added to this over the last weeks. Embraer also has a good debt position. It doesn’t have major parts of the loan mass of $3.4bn maturing until 2025.

For the moment there are no declarations of help from the Brazilian government, and right now Embraer can manage the situation according to the CEO and CFO. It now all depends on the further development of the crisis.