Eve Holding, Inc. Q3 FY2023 Earnings Call

Greetings, and welcome to the Eve Air Mobility Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lucio Aldworth, Director of Investor Relations. Thank you, sir. You may begin.

Thank you, operator. Good morning, everyone. This is Lucio Aldworth, the Director of Investor Relations at Eve, and I would like to welcome everyone to our third quarter 2023 earnings conference call. I have here with me our newly appointed Board Member, Jerry DeMuro, our new CEO, Johann Bordais, our CFO, Eduardo Couto, and our Chief Engineer, Luiz Valentini. After their initial remarks, we will open the call for questions. We also have a deck with a few additional slides and more information on our website at ir.evermobility.com, so please feel free to download it and follow along. Let me just start by saying that this presentation includes forward-looking statements or statements about events or circumstances that have not yet occurred. These are largely based on our current expectations and projections about future events and financial trends affecting our business and our future financial performance. These statements are subject to risks, uncertainties, and assumptions, including, among other things, general economic, political, and business conditions both in Brazil and in our markets. The words 'believe', 'may', 'will', 'estimate', 'continue', 'anticipate', 'intend', 'expect', and similar words are intended to identify forward-looking statements. We undertake no obligation to update publicly or revise any of those forward-looking statements due to new information, future events, or other factors. In light of these risks and uncertainties, the future events and circumstances discussed in this presentation might not occur. Our actual results could differ substantially from those anticipated in our forward-looking statements. With that, I will now turn the presentation over to Jerry. Jerry?

Thanks, Lucio, and good morning to everyone. Before we dive into the third quarter results, I want to say that it has been a distinct privilege to have worked with the incredible Eve team for the past two years. The deal with Zanite through listing on the New York Stock Exchange in our critical startup phase has allowed us to establish our structure and operating model with our partner, Embraer, exceptionally well. The program is now progressing at pace, and we have created irreversible momentum. It is the right time to step aside for someone who is well prepared and uniquely qualified to lead Eve through its next phase. As Lucio mentioned, I will be moving to the Board of Directors, and Andre Stein and I have passed the baton to Johann Bordais. Johann is a proven senior executive with an exceptional record of success in building and operating multibillion-dollar global businesses within the aviation sector. With his record and direct experience with our major partner, Embraer, Johann will be a tremendous asset and leader for Eve. With that, I will now turn it over to our new leader, Johann Bordais. Johann, welcome.

Thanks, Jerry. After being on the job for 60 days, let me start by saying how happy I am to host this first earnings conference call and share this moment with such an accomplished team. I'm proud and impressed by all of what they have achieved, but I know that there is much more to go. This is a reason why I'm here: to carry the torch and ensure Eve brings to market the best-in-class aircraft, as well as services, to transform Eve Air Mobility on a global scale. Having said that, we continue to make progress in the development of our suite of products and services for the UAM market. Last quarter, we announced the definition of our aircraft architecture. Since then, we have taken significant steps in the development of our project. We started building several components of our first full-scale prototype, such as the wings and its many structural parts, the harness to integrate sensors and systems through the aircraft, and the fuselage. We also launched what we call the Joint Definition Phase, or JDP. This is important because this is when our engineers interact closely with their counterparts from the chosen suppliers, and we review the minute details of how each component will work and interact with each other as a seamless and integrated system. Ultimately, we are developing a lift and cruise aircraft that will be simple to fly and maintain, and this is one of our main differentiators in this market. I have no doubt about this. Moving to Slide 3, it shows you some of the components I just mentioned before we started coming together. I am thrilled to show you the results of the recent wind tunnel tests we conducted with the powered rotors that we use to validate flight simulator fidelity and the simulations as we are well expected to look at the aircraft's envelope. Going to Slide 4, we have previously selected suppliers needed to provide our electric motor, the BAE for emergency management, and DUC for propellers, and we continue to down-select other suppliers for other critical components of our aircraft. Embraer will supply the fly-by-wire control computer and systems for the flight control hardware, and will also provide support for certification. You will notice that Garmin has been chosen to supply the flight deck and high-resolution displays to integrate the aircraft management and flight control system. The Garmin device will feature an intuitive touch screen designed to reduce pilot workload and will include a full suite of bionics capabilities with an integrated flight management system, radio, audio management, and detailed maps that pilots want to see. We also selected Liebherr for the flight control actuators, which will provide fifth-generation fly-by-wire capabilities. We know Liebherr for manufacturing precision gears, and these actuators will ensure high performance and ease of maintenance, always at the core of our project. Lastly, Intergalactic will provide the thermal management system, which will maintain an optimal temperature range for equipment, including batteries and other electronic components. The system will also help ensure a comfortable temperature inside the cabin of the aircraft. As we move along with the program, we are also in the advanced stage of selecting suppliers for sensors and computers to gather critical data such as airspeed, altitude, and environmental conditions. This data will be relayed to the pilots on the Garmin flight display to ensure safe and efficient flight under various weather conditions. This exemplifies the importance of the JDP, the Joint Definition Phase we just launched. This is when our solution data provider and Garmin will need to work together to ensure that all interfaces operate seamlessly so that the pilot has the correct readings on their screen. This relationship will be replicated among all of the suppliers I just mentioned to optimize how different systems work together. Moving on to Slide 5, besides working on the aircraft itself, we continue to study the impact on the urban environment and have just completed a visual and sound perception study. The goal is really to learn how people respond to eVTOL operations to optimize aircraft design and flight operation while minimizing the impact on communities. In parallel, we held what we call the Human-Machine Interface (HMI) summit to gather customer feedback. It took place in Brazil, and we engaged with representatives from various sectors, including fixed-wing, rotary-wing, and drone operators, to discuss topics ranging from flight control to avionics, electrical systems, propulsion, and interior design. The recent HMI summit provided a great way to share Eve's approach while also receiving valuable feedback from experienced pilots regarding the interfaces and ergonomics designed into the Eve aircraft. This is one of many events we've hosted over the years to gather insights from customers and partners. We aim for a better understanding of many components of the UAM ecosystem because we are talking about a complete ecosystem, not just an aircraft. Now going to Slide 6, as we mentioned before, we are replicating elements of Embraer's proven business model. We will design, manufacture, and sell the aircraft. On top of this, I believe it is crucial to leverage Embraer's global presence to provide local solutions for our customers and offer after-sales eVTOL services on an agnostic basis. So far, as you can see, we have secured contracts with seven different customers for maintenance, repair, and overhaul (MRO) services, which could generate approximately $540 million in revenues for Eve over five years. Importantly, these customers have placed Letters of Intent (LOIs) for 825 aircraft, which means we have the potential to expand this business within our customer base. Because we are agnostic, we believe we could serve as eVTOL maintenance providers for our competitors. This service revenue could precede aircraft sales. On Slide 7, it shows what we believe to be the largest and most diversified backlog in the industry, with committed customers from 14 countries and 28 different companies, including mainline and regional airlines, helicopter operators, ride-sharing platforms, and leasing companies. We also have LOIs for our urban air traffic management system from 11 customers. We believe this reflects the market-leading value proposition we bring to our partners and clients. This pipeline offers strong long-term revenue visibility, supporting smooth cash flow generation in the upcoming years as we convert existing Letters of Intent into firm orders and collect pre-delivery payments. Beyond that, we are developing a solid network of partners and strategies to address one of urban mobility's largest challenges: creating the whole ecosystem. You've heard me say this many times, but this is the key element. Aside from simply developing an aircraft, we believe that together with customers, we can begin to announce the focus cities where we've been accelerating efforts, particularly in San Francisco with United Airlines in the U.S. and in Rio de Janeiro with Helisul in Brazil. I can assure you there is more to come.

Thanks, Johann. Now moving to Slide 8, Eve is a pre-operational company, and our financial results mostly reflect the costs associated with the development of our eVTOL and our solutions for the urban air mobility market. Starting with income statement highlights, we invested $28.6 million during the third quarter '23 in our program development, compared to $40 million a year ago. The majority was invested in developing our eVTOL, with a portion allocated to service and support solutions in the urban air traffic management system. In addition to development expenses, we also spent $5 million in SG&A this quarter, down from $7 million last year. However, keep in mind that we incurred several non-recurring expenses last year, and when those are excluded, SG&A is actually growing as we now have a larger corporate structure and a more mature development program. Eve also reported $4 million in financial income during the third quarter, double the amount from last year, primarily due to higher interest rates. We maintain a conservative financial policy, investing our cash in short-term deposits with first-grade banks. With that, we reported a net loss of $31 million in the third quarter of 2023. Now moving to cash flow, our operations consumed $22.4 million this quarter compared to $16.8 million last year, attributed mostly to higher R&D expenses. It's important to note that we are intensifying our tests with various rigs, performing systems and components tests, wind tunnel tests to validate our models for aerodynamic drag and efficiency, and we are assembling our first full-scale prototype, which involves supply payments, leading to increased cash consumption. During the first nine months of the year, our cash consumption totaled $70 million, almost double compared to the same period last year. We ended the second quarter with $256 million in cash, and despite the greater intensity of our operations, our cash position dropped just $12.6 million this quarter as we began withdrawing from credit lines provided by the Brazilian development bank late last year. During the third quarter, we withdrew $12 million, leaving $86 million available. This brings our total liquidity position to $343 million, sufficient to fund our operations well into 2025. We intend to continue drawing from these credit lines through 2024 to fund our operational engineering tools for maintaining a solid cash position. Finally, Slide 9 summarizes our milestones and reaffirms our commitments. As mentioned before, we concluded the first three milestones: selecting primary suppliers for critical components of our aircraft and freezing the configuration of our eVTOL. We have also started manufacturing some individual components of our first prototype and begun assembly into a full-scale eVTOL. We plan to initiate the test campaign once assembly is completed next year. In parallel, we are working on trial software for our urban ATM system and aim for a trial run this quarter. We expect cash consumption to continue accelerating as we intensify our investments in the program. That said, we maintain a strong focus on cost control and enjoy important synergies with Embraer. Our cash preservation focus may shift some supplier payments from the fourth quarter of '23 to the first quarter of '24. Therefore, we anticipate our total cash consumption for 2023 to be closer to the lower end of the expected range of $130 million to $150 million. With that, we conclude our remarks and would like to open the call for questions. Operator, please proceed.

Thank you. We will now be conducting a question and answer session. One moment please while we poll for questions. Thank you. Our first question comes from the line of Savy Syth with Raymond James. Please proceed with your question.

Hey, good morning, everyone. My first question is for Johann here. The team is clearly executing the plan, and I'm curious with your leadership, what do you see as your priorities?

Thanks, Savy. Yes, 60 days into the job, and I can clearly see that the team is passionate about what they are doing. We have a big mission to reimagine urban mobility, which requires substantial know-how. It’s not just about the vehicle; it's also about the entire ecosystem, including service and support. My focus in the short term will be to continue working with the team on the development of the eVTOL for certification and preparing for the service launch planned for 2026. We will also collaborate with the UAM ecosystem, as it’s crucial to ensure the success of the operators in addition to our commitments at Eve.

That makes sense. On the services and operations deals set up with certain customers, could you provide some clarity on how those are structured? Are those similar to power by the hour programs, and what is the typical length of those contracts?

Certainly. At Eve, we are focused on delivering a product that ensures high operational standards. We are looking beyond just replacing helicopters or sightseeing flights and focusing on commuting and inter-urban shuttles, which require a mature operation. It’s about providing both operators and the OEM with necessary support for a successful operation, including working with energy providers and creating the required support systems. Clients must understand that with the right infrastructure, they will see operational successes. The operators will always ask for aircraft availability and optimized operating costs, and our solutions will focus on ensuring both of these needs are met.

So to clarify, the deals you're offering include guarantees and support to scale operations?

Yes, a comprehensive solution covering MRO, spare parts solutions, exchange programs, and training as a turnkey offering. Eve should be seen as a provider of urban solutions as a service with a pay-as-you-use model. This approach is critical, ensuring operators can maximize efficiency and predict costs, thereby ensuring profitability.

Interesting. Thank you.

Our next question comes from a line of Conor Walters with Jefferies. Please proceed with your question.

Hi, thanks for taking my question. Having completed the final design configuration in Q2 and initiated the prototype build in Q3, can you walk us through the next steps on the road to the initial service, and what you see as the largest hurdle toward the initial test campaign next year?

Thanks for the question. We are focused on completing the full-scale prototype assembly, and we'll start early next year with additional prototypes. Simultaneously, we are continuing to down-select suppliers for components. Both tasks are parallel processes essential for preparing the prototype.

Got it. And what does the path forward for the ATM software look like between now and the beginning of customer trials?

Our ATM system is based on the experience that we have at Atech, part of the Embraer Group, which has developed the ATM software for Brazil. As a result, we have several releases planned. Next week, we will start testing with operators, and by early next year, we expect our third and fourth release to be in place. We aim to have our operators and helicopter customers start operating it, even before the eVTOL is operational.

Good morning. As Johann mentioned, the next steps will involve further integration with potential operators to ensure the solutions we develop will provide value and address their current challenges. Our ATM system includes various modules that can be adopted independently, depending on customer needs and value.

Got it. That's very helpful. Thank you for taking my question.

The next question comes from the line of Cai von Rumohr with TD Cowen. Please proceed with your question.

Yes, thank you, Johann. My question is for Luiz. The FAA is proposing side-by-side pilot training for in-flight training, which is currently incompatible with your pilot setup and others. What position do you see ANAC taking, and how do you foresee this issue being resolved?

Good morning, Cai. This is an important topic for discussion with both FAA and ANAC. ANAC is the primary authority for Eve's development with respect to certification. For operations, the vehicle will follow local rules. Both FAA and ANAC are attempting to align their standards as much as possible. This includes reviewing pilot training requirements and flight hours. Currently, the FAA is reviewing industry comments before publishing a final rule, likely by the end of next year. We expect significant evolution on these topics, with both ANAC and EASA contributing insights.

Thank you very much. Johann, on the service side, could you give us some color on the $540 million service revenue and whether it's primarily from servicing United?

Thanks for your question. The relationship with United reflects the understanding that operational performance is as crucial as the design of the vehicle. We believe we have an advantage due to Embraer's support and established business model, allowing us to provide various services worldwide. While we have been in talks with Archer, at this stage, I won’t delve into specifics. However, our market position allows us to grasp the operational challenges ahead.

Thank you.

Our next question comes from the line of Andres Sheppard with Cantor Fitzgerald. Please proceed with your question.

Hi, good morning, everyone. Thank you for taking my question. Johann, welcome aboard! Could you provide more detail on the test flight campaign planned for 2024, especially as it transitions towards pilot test flights?

If you don't mind, I'll pass it to Valentini for more insight.

Sure! The vehicle is unmanned for testing, which simplifies our progression toward flight tests. We are focused on establishing flight characteristics and noise characteristics from hover to cruise. While this test campaign is vital for the full-scale prototype, having simplified systems allows us to progress more efficiently.

Got it. That's helpful. Regarding the ramp-up of service and support revenue, especially in the context of certification efforts, can you provide any updates?

Yes, our priority is certainly to get the prototype ready next year for testing, focusing on urban traffic management solutions. We do see possibilities for opportunistic offerings outside our core focus, but we will prioritize on developing our solution correctly without overstretching our resources.

Hi, good morning. Can you discuss the safety rating that you're certifying to both ANAC and the FAA? How will this impact the aircraft's portability as an asset internationally?

Thanks, Austin. I'll defer to Valentini.

We intend for the vehicle to operate globally, and we aim to certify it under as many authorities as possible to avoid multiple versions. We are currently aligning our designs with the requirements put forth by authorities like EASA and working through the safety levels to ensure compliance with all operational rules globally.

Do you expect the 60-mile range on your eVTOL to be sufficient for most urban air mobility use cases?

The 60-mile range should cover most urban air mobility functions, but we expect shorter missions closer to 30 miles. Our technical decisions focus on missions suited for urban environments, although we are still discussing reserve requirements with authorities.

Great, thanks for the details.

Good morning. Thank you for taking my question. Johann, could you provide insights on the $540 million solution revenue, focusing on its margin profile?

Yes, services and support typically yield better profitability, and we are closing long-term agreements with suppliers. We expect similar profitability margins to what Embraer has been able to generate.

By signing long-term binding agreements, we ensure good profitability on the service side, and these contracts are structured throughout the vehicle's lifecycle.

Thanks so much, guys.

We have no further questions. At this time, I'd like to turn the floor back over to management for closing comments.

Thank you, Christine. I want to thank everyone who joined the call today and for your questions. We look forward to updating you on our upcoming milestones in the quarters to come. In the meantime, if you have any questions, please don't hesitate to reach out via email or phone, and I will be glad to talk to all of you. Thank you so much. Have a good day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.