Embraer will not follow Boeing and Airbus in banking its aircraft, should financing become difficult for its customers, said CEO Frederico Curado, who said the company prefers to take a very conservative approach to putting sales on its own balance sheet.
“We may surgically use some support and bridge financing is the one we dislike the least,” he said. “But in overall terms we are not assigning a big chunk of balance sheet to finance customers. We would rather agree to a deferral. I’m not saying we will not do anything, but overall we are protecting our balance sheet. I expect export financing in Brazil will be more active since they have do not have much exposure in the aviation market. We will be making them aware of that and the fact that it is time to step up and do more.”
Net revenues for 3Q08 totaled $1,546.0 million, an 8.2 percent increase over the $1,428.5 million in net revenues for 3Q07, owing to the higher number of aircraft deliveries and a more favorable product mix. Net income totaled $57.7 million in 3Q08, compared to $194.9 million in 3Q07 and $134.4 million in 2Q08. The net margin decreased to 3.7 percent in 3Q08, compared to 13.6 percent in 3Q07 and 8.2 percent in 2Q08.
Curado reported the volatility of the Brazilian currently impacted Embraer’s net results as he briefed analysts last week. The company's policy to mitigate its exposure to currency variations is based on the balance between assets and liabilities indexed in foreign currency and on the daily management of its currency trading, since most of its revenues are denominated in dollars and possibly could act as a natural hedge. However, he warned the appreciation of the U.S. dollar against the real might cause losses in its derivative instruments, but counseled that those losses would be mitigated by in operating revenues, since part of Embraer's costs are denominated in reais.
Embraer holds derivative positions amounting to $875 million, mostly Non-Deliverable Forward ("NDF"), to hedge its exposure to the Brazilian currency. There is no speculative component. They only serve to protect the company's operations against a potential loss arising from adverse changes in currency exchange rates.
At press time, Embraer was set to release its forecast for 2009 but would not give analysts a sneak peak during its conference call. Curado said that the vast majority of aircraft set for delivery in the near term have financing. He also addressed rumors that Embraer and Airbus were developing a joint venture, saying they were completely untrue. The two companies have had working relationships for years including a partnership in Portugal and Airbus’ recent visit to Brazil and Brazilian customers included a courtesy call on Embrear, which has happened before.
Embraer saw a sharp decline in demand during the past three months both for RJs and executive jets. This year will close out with more orders than revenues. “However the general outlook for next year is not that positive,” he said. “Now is a good time for us to hold on to our solid backlog, but I think the whole industry will have a dry season for a long time. Even with deferrals or cancellations we have backlogs to 2012/13. In fact, people are asking to advance their deliveries should there be a deferral or cancellation. The average back log price for an ERJ 170 is $26.5 million; $27.3 million for an ERJ 175; $29 million for an ERJ 190 and $30.5 million for an ERJ 195.
“We believe we have a reasonable protection for the mid term,” he said. “The industry has a crisis in front of it. In our case we are holding to the fundamentals, working strongly on streamlining, investing in productivity and also holding onto our cash.”
The company recorded third quarter 2008 (3Q08) net sales of $1,546.0 million and net income of $57.7 million, equivalent to diluted earnings per ADS of $0.3190. Embraer delivered 48 aircraft during 3Q08, compared to 47 in the third quarter of 2007 (3Q07) and 52 aircraft in 2Q08, totaling 145 jets delivered in by September 30, 2008. Embraer reaffirmed its estimate of delivering 195 to 200 jets in 2008, tending toward the higher figure, as well as 10 to 15 Phenom 100 jets. The Phenom 100 is closing in on certification at the end of the month and certification of the Lineage is set for December.
Embraer's firm order backlog on September 30, 2008, reached a record high of $21.6 billion, including sales to the Executive Aviation market, which backlog is approximately US$ 7.0 billion. The ERJ 170/190 jet family backlog accumulated a total of 865 firm orders and 813 options.
The gross margin for 3Q08 totaled 21.7 percent, representing an increase over the 21.2 percent in 3Q07 gross margin in despite the impact of the 13.0 percent decrease in the average exchange rate (R$/US$) on the portion of the company's cost stated in reais, and the average increase of 10.13 percent in the payroll. The higher gross margin is due to productivity gains achieved since the improvement of the company's industrial processes that started in mid-2007. The gross margin for 3Q08 is in line with the 21.9 percent for 2Q08.
Income from operations reached $100.5 million in 3Q08, representing a decrease from the $162.2 million recorded for the same period in 2007. The operating margin was 6.5 percent in 3Q08, representing a decrease from the 11.4% for 3Q07 and also a decrease from the operating margin of 6.9 percent for 2Q08.
The company maintained its high level of liquidity, and its net cash position was $491.9 million for the quarter ended September 30, 2008.