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ANALYSIS: Embraer misses 2018 targets but upbeat on E2 sales

Embraer has missed companywide revenue and operating margin targets for 2018 following last year's runway excursion involving the KC-390, but the manufacturer's commercial aircraft division holds renewed optimism over E-Jet E2 sales this year ahead of launching a joint venture with Boeing.

The Brazilian manufacturer expects to record net revenues of $5.1 billion over its four business segments in 2018, missing the anticipated range of $5.4 to $5.9 billion it earlier set out. Full-year operating profit is now expected to be around $200 million, also missing a previously guided range of $270 to $355 million.

Embraer anticipates a full-year operating margin of 4%, falling outside the 5-6% range it had previously forecasted. The company's updated operating profit and margin figures exclude a special item of $127 million related to the KC-390 incident in May 2018. That incident depressed Embraer's defense and security segment revenue to $0.6 billion, down from $0.8 to $0.9 billion as previously forecasted. The manufacturer's executive jet segment also underperformed, pulling in only $1.1 billion in revenue instead of $1.35 to $1.5 billion as previously projected.

Embraer has yet to release full-year delivery numbers for its commercial aviation segment, which will be announced with its full-year financial results in early March. It had earlier targeted to deliver 85 to 95 commercial jets in 2018 – a range that it is retaining for its 2019 outlook that was released today. The manufacturer is forecasting $5.3 to $5.7 billion in companywide revenue for 2019.

It guided to a breakeven operating margin in 2019, when excluding the gain on the sale of its commercial aviation business to a new joint venture with Boeing but including any separation costs borne by Embraer.

After recently securing Brazilian government approval for the partnership with Boeing, Embraer will put the deal to a vote by shareholders in February, says chief financial officer Nelson Salgado at an investors day at the New York Stock Exchange today. The two manufacturers are hoping to secure anti-trust approvals from regulators and to close the deal by year-end.

Salgado and other company executives today sought to highlight the benefits that the deal will bring to shareholders, following some contentious months in which the partnership attracted a couple of lawsuits in Brazil before it was cleared last week by the administration of new Brazilian president Jair Bolsonaro. The government owns a golden share in Embraer and had the right to veto the deal.

Salgado says Embraer expects to retain $1 billion in net cash following the sale of an 80% stake of its commercial aviation business to the new joint venture formed with Boeing. Another $1.6 billion will be distributed to Embraer shareholders in the form of extraordinary dividends.

The partnership between Boeing and Embraer is projected to produce $200 million in annual cost synergies, split between $150 million for commercial aviation and $50 million for executive jets and defense. This is the result of Embraer optimising its procurement and supply chain by leveraging Boeing's volumes and scale, as well as combined efficiencies through joint sales and marketing efforts, says Salgado.

While Embraer will retain a 20% share in the commercial aviation joint venture with Boeing, it will hold a put option to sell the stake at the deal price adjusted for US inflation over a 10-year period. After 10 years, the stake may be sold at fair market value.

Boeing is paying $4.2 billion for the 80% stake in Embraer's commercial aviation business, the total value of which was upped to $5.26 billion in December 2018.

Contingent on the Boeing-Embraer joint venture closing by end-2019, Embraer expects to book $2.5 to $2.8 billion in net revenue for 2020, and an operating margin of 2-5%. This forecast covers only Embraer's executive jets and defense segment, and excludes any anticipated revenue from its 20% share in the commercial aviation joint venture with Boeing.

E-JET E2 SALES PUSH

Even as the planned joint venture between Embraer and Boeing makes progress through the necessary approvals, the Brazilian manufacturer is focused on winning more orders for the E-Jet E2 family which entered into service in 2018 when Embraer handed over the first E190-E2 to Wideroe.

Four E190-E2s are in service, comprising three with Wideroe and one with Air Astana, Flight Fleets Analyzer shows. Embraer's commercial aviation chief executive John Slattery says the airframer's ability to certify and deliver the aircraft on time, as well as the accumulation of flight time at launch operator Wideroe has given the programme a "natural tailwind".

Embraer plans to deliver the first E195-E2 to Azul this year.

"The momentum from the E2 was building up anyway," says Slattery when asked if the planned commercial aviation partnership with Boeing has boosted sales prospects for the aircraft. "Without giving any guidance of course, we've had more meaningful conversations with carriers around the world than we had in the five years of the programme to date."

Of top priority is a push to win some marquee customers for the E2, says Slattery. "Our focus is directed to bringing in what I would describe as marquee names for the E190 and E195-E2," he says. "I will be very disappointed if that doesn't materialise this year."

Embraer holds 154 firm orders for the E-Jet E2 family, Flight Fleets Analyzer shows. Azul is so far the biggest E-Jet E2 operator, with plans to operate at least 57 E195-E2s. Of these, 51 aircraft were ordered directly by the Brazilian airline while another six are coming from lessors.

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