SAO PAULO: Brazilian planemaker Embraer SA is likely to post falling fourth-quarter profit, as soft deliveries to airlines put profitability targets at risk and taxes rose on a currency tumble, a Reuters poll showed on Tuesday.
Embraer's net income probably slipped 39 percent from a year earlier, according to the average forecast of eight analysts in the poll. Some analysts did not include the tax impact of the currency swing in their estimates.
Even more concerning than slipping profit margins may be the outlook for free cash flow this year, after the company warned that delayed government payments would lead to negative cash flow of $400 million in 2014.
The world's third-largest commercial planemaker is set to report quarterly earnings and 2015 performance forecasts after markets close on Wednesday.
Embraer reported previously that it delivered two fewer commercial planes in the fourth quarter than a year ago and deliveries were heavily concentrated in the smaller E175 regional aircraft, which yields a slimmer gross profit margin.
Itau BBA analysts warned in a client note that the weak year-end sales mix could drag 2014 earnings before interest and taxes to the bottom end of the company's forecast, which is a range of 9-9.5 percent of revenue.
In the year ahead, solid executive jet sales and the benefits of a stronger dollar are expected to offset the softer margins of the commercial aviation division, according to analysts Renato Mimica and Samuel Alves of BTG Pactual.
About 90 percent of Embraer's revenue is pegged to the US dollar, while around a quarter of costs are denominated in Brazil's currency, the real - especially labor.
The immediate impact of the real's 9 percent slide in the fourth quarter may be a jump in Embraer's deferred income tax bill, which has dented profit in recent quarters as the US dollar rallied.
Still, the long-term benefits of a stronger dollar contributed to nine of 17 analysts rating Embraer's US-listed shares as a "buy" or "strong buy" and the rest rating it "hold," according to Thomson Reuters data.
As Brazil's exchange rate has grown more volatile this year, its correlation with Embraer's share price has tightened, with the 25-day correlation climbing last week to its highest in over a decade.
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