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Embraer revenue slides 10% in 1H2010, net profit remains strong – Suppliers Share Wrap

Analysis

Despite a 10% drop in revenue in the first half of 2010, Embraer has lifted its full-year revenue guidance, based on recent strong ordering. At the Jul-2010 Farnborough Airshow, the Brazilian manufacturer secured 35 firm orders and 46 LoIs for new aircraft, with another 70 purchase options taken by customers.

Summary
  • Embraer has raised its full-year revenue guidance despite a 10% drop in revenue in the first half of 2010.
  • The company secured 35 firm orders and 46 Letters of Intent (LoIs) for new aircraft at the Farnborough Airshow, leading to an increase in revenue outlook.
  • Embraer delivered 50 commercial aircraft in the first half of 2010 and is on track to meet its annual delivery projections.
  • The order backlog declined by USD1.4 billion in the second quarter of 2010, but still represents more than three years of production at current levels.
  • Revenue in the first half of 2010 was pulled down by lower commercial aircraft deliveries, with commercial aircraft sales accounting for 57.5% of revenue.
  • Embraer's cash position improved, but it paid off a significant part of its short-term debt and expects increased capital expenditure in the second half of 2010.

As a result, the manufacturer has raised its 2010 revenue outlook from USD5 billion to USD5.25 billion, and EBIT forecast to USD340 million. The company's operating margin forecast has been increased fractionally, from 6% to 6.5%.

Embraer delivered 50 commercial aircraft during 1H2010 and is on target to meet its annual delivery projections. In the period, 60 business and military aircraft were delivered, bringing total deliveries to 110. Commercial deliveries are down from 2009, with Embraer focusing on business and executive aviation deliveries, predominately its light jet aircraft.

The company's order backlog declined by USD1.4 billion over 2Q2010, to USD15.2 billion. Since peaking at USD20.9 billion during 2008, the company's backlog has slipped by USD5.7 billion, a reflection of the shifting product mix and the affects of the economic downturn. The order backlog still represents more than three years of production at current output levels. E-jet production is expected to remain at current levels to 2012.

Revenue in 1H2010 was USD2,344 million, pulled down by lower commercial aircraft deliveries. Commercial aircraft sales accounted for 57.5% of revenue, down from approximately two thirds of revenue in 1H2009. Commercial aircraft revenues dropped 15% over the first half of the year.

The company declared an EBITDA of USD218.5 million and a net profit of USD105.6 million. Embraer cut USD22 million out of its operating expenses, despite the affects of a stronger Brazilian real and much higher R&D expenses. Embraer's strong commercial campaigns increased selling expenses by 28.8%.

Embraer's cash position improved to USD658.7 million, but it paid off a significant part of its short-term debt. Capital expenditure is expected to increase in 2H2010, as the company drives forward with several new business aviation programmes.

Relating to the solid results and the improved outlook, JP Morgan and Credit Suisse have upgraded their recommendations for Embraer shares. The company's share price jumped 2.4% in trading yesterday, outperforming local markets.

Selected Original Equipment Manufacturers daily share price movements (% change): 02-Aug-2010

Selected Aviation Suppliers & Leasing daily share price movements (% change): 02-Aug-2010

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