Embraer Tumbles as World's Top Currency Gain Weighs on Costs

  • CEO says planemaker may face challenges from real's rise
  • Business jets hurt first-quarter margins, company says

Embraer SA fell the most on Brazil’s benchmark stock index as analysts speculated that a local currency rally may force the planemaker to accept smaller profits on its overseas aircraft sales.

Shares dropped 7.3 percent to 19.83 reais at 4:04 p.m. in Sao Paulo after falling as low as 19.42 reais, the lowest intraday price in almost two years. Embraer was the biggest decliner on the Ibovespa index, which fell 1.1 percent.

The real’s 15 percent gain against the dollar this year, the biggest among 16 major currencies tracked by Bloomberg, may cause some “cost headwinds,’’ Chief Executive Officer Frederico Curado said on a conference call Friday with investors and analysts. The manufacturer is also seeing slimmer profit margins on its business jets, it said in announcing first-quarter earnings Friday.

“We see Embraer sacrificing profitability to boost business jet sales,” Victor Mizusaki and Leandro Fontanesi, analysts at the investment banking unit of Banco Bradesco SA, wrote in a report. “Based on the soft results and foreign-exchange rate outlook, Embraer may need to reduce its 2016 guidance by July or August of 2016.”

Business Jets

Gross margin -- a measure of revenue minus the cost of goods sold -- fell more than three percentage points to 20 percent in the first quarter, the Sao Jose dos Campos, Brazil-based company said. The decline was “due mainly to the drop in profitability in the executive aviation segment,” it said.

Embraer reaffirmed its guidance to deliver 105 to 110 commercial jets in 2016, and between 115 to 135 executive jets. Total revenues are expected to be between $6 billion and $6.4 billion, it said.

The planemaker is ready to face any currency-related cost pressures with measures to reduce expenses, and business-jet margins should improve later this year, Curado said. Embraer’s sales are largely denominated in dollars while many expenses are in reais, so a rising Brazilian currency can wipe out some of its cost advantages abroad.

Cost cuts

The Brazilian real is strengthening as investors expect the country’s political crisis may lead to the ousting of President Dilma Rousseff, which could happen as soon as next month. 

“First quarter results were good, but investors are focusing now on the near future,’’ Rafael Ohmachi, an analyst at brokerage Guide Investimentos, said from Sao Paulo. “The appreciation of the real will affect Embraer’s margins in the coming quarters just as competition with other planemakers seems more aggressive.’’

Embraer had been courting Delta Air Lines Inc. as the U.S. carrier upgraded its narrow-body fleet. Bombardier, Embraer’s main rival in the regional-jet market, announced Thursday that it won a firm order for 75 single-aisle jets from the U.S.-based carrier, with a $5.6 billion value based on list prices. Airlines typically negotiate significant discounts when purchasing aircraft.

Sales Gain

Embraer’s first-quarter sales exceeded analysts’ estimates as commercial aircraft deliveries advanced.

Revenue climbed 65 percent to 5.05 billion reais, reported in dollars at $1.31 billion, Embraer said. Analysts had expected 4.59 billion reais, according to the average estimate compiled by Bloomberg. Net income attributable to controlling shareholders was 385.7 million reais, swinging from a loss of 196.1 million reais a year earlier.

Earnings before interest, taxes, depreciation and amortization climbed 50 percent to 643.8 million reais, topping the average estimate of 617 million reais. Defense and security accounted for 15 percent of revenue, down from 20 percent.

The company’s firm-order backlog was $21.9 billion at the end of the quarter, compared with $20.4 billion a year earlier and $22.5 billion in backlog at the end of 2015.

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