Morning, ladies and gentlemen, and welcome to the ESG Flight Plan Event and Embraer Second Quarter 2021 Financial Results. Thank you for standing by. I'm Felipe Calzada, and I'll be your host for today. At this time, all participants will watch our financial results presentation. Right after, we will conduct a question and answer session and instructions to participate will be given at that time.
If you should require any assistance during the event, You can do so using the chat box on the platform. As a reminder, this presentation is being recorded and webcasted at Reuters Platform. Before we begin, just a legal statement. This conference call includes forward looking statements or statements about events or circumstances which have not occurred. Embraer has based these forward looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance.
These forward looking statements are subject to risks, uncertainties and assumptions, including among other things, General, economic, political and business conditions in Brazil and in other markets where the company is present. The words believes, may, will, estimates, continues, anticipates, intends, expects and similar words Our intended to identify those forward looking statements. Embraer undertakes no obligations to update publicly or revise any forward looking statement because of new information, future events or other factors. In light of these risks and uncertainties, The forward looking events and circumstances discussed on this conference call might not occur, and the company's actual results It could differ substantially from those anticipated in the forward looking statements. Participants on today's conference are Francisco Gomes Neto, President and CEO, Antonio Carlos Garcia, Chief Financial Officer and Procurement and Eduardo Cotto, Director of Investor Relations.
And now I would like to turn the conference over to Francisco Gomez Neto. Please go ahead, Francisco.
Thank you, Felipe. Good morning to all and thank you for joining our call today. I hope that all of you are well and safe And thank you for your interest in our company. As you will see in Antonio's presentation, Our results for the quarter were strong. The Q2 results are a clear example That our strategic planning has been well executed with the right focus and discipline, Showing significant improvement in our financial performance.
Before we go into more details regarding the Q2 results, I'd like to highlight the good momentum we are going in the different business segments. In Commercial Aviation, we announced a new firm order for 3rd E195 E2 Jets From the Canadian Porter Airlines, with purchase rights for 50 more aircraft, We also announced new firm orders for 34 E175 Jets to Horizon Air And SkyWest to be operated for Alaska Airlines and Delta Airlines. These new orders and other activity campaigns reiterate the continuous interest in the E Jet family As the best option in the regional aviation market. In Executive Aviation, we keep up The momentum with record sales in the quarter. We maintained our price discipline strategy We had a strong backlog growth with book to bill in excess of 2 to 1 for this business.
In Defense and Security, we delivered 7 Super Tucano aircraft in the first half of the year. Also, we had strong performance in our cybersecurity and systems integration companies with Double digit revenue growth in the first half of this year compared to the first half Further, in the Q2, the KC-three nineteen Millennium Richard, an important milestone by successfully performing unpaved runaway tests. Although, we are currently in negotiations with the Brazilian Air Force on the KC-two ninety million contract, we're continuing To be focused on the new export sales campaigns for this aircraft as well as the Super Tucano. In Services and Support, we are pleased with the strong second quarter results With better revenues and higher margins as traffic recovery and the strong maintenance activity drove 55% revenue growth in the 2nd quarter. It is exciting to see The continued positive sales activity in services with deals signed with several important customers across All markets and at OGMA, driving backlog expansion for this segment during the period.
This was further highlighted by the contract we signed with Porter Airlines for a 20 year total Support program. With respect to innovation, we continue to make progress on partnerships In the urban air mobility ecosystem through our subsidiary, Yves, in a segment with a strong growth potential In the years to come, in addition, our services collaborative platform Beacon Signed agreements with key customers such as Republic for its maintenance applications. Finally, on the operations front, we continue to see great improvements. We expect a 16% increase In inventory turns compared to 2020 and a 20% reduction in production cycle time of our Aircraft this year positively impacting working capital and production costs. I will now hand it over to Antonio Garcia, our CFO, to give further details on the financial results and I will return in the end.
Thank you.
Thank you, Francisco, and good morning, everyone. I will start with our backlog for the quarter. On Slide 7, the graph shows we ended The 2nd quarter at BRL59 1,000,000,000, up BRL1.7 billion or 12% from the prior quarter. This represents a return to the same EUR15,900,000,000 we were at in 2020 before the pandemic began. In our commercial aviation business, we closed 48 aircraft sales in the quarter spread across several different airlines.
In Executive Aviation, we had record 2nd quarter sales, a solid backlog as demand for light And larger business jets continue to grow. Backlog in service and support and defense and security also grew From the prior quarter's level. In summary, it was the best sales quarter since mid-twenty 19. This give us confidence in our plans for future revenue growth and improvements. Moving to Slide 8.
You can see the continuous improvement in aircraft deliveries compared Last year in both Commercial Aviation and Executive Aviation. In Commercial Aviation, we delivered 14 aircrafts in the quarter. This represents a 56% increase compared to the prior quarter and 2 50% Increase compared to the Q2 in 2020. Year to date deliveries, we were at 23, Almost 2.5 times higher than the same period in the prior year. Of these 23 deliveries, 14 were E2s Compared to 4 E2s in the same period last year, sales continues to perform very well for the E2 as the most efficient Right size single aisle aircraft for the world post pandemic.
In Executive Aviation, we delivered 12 Jets, light jets and 8 larger jets for a total of 20 aircrafts in the 2nd quarter. This represents 54% increase compared to both Q1 2021 and the 2nd quarter of the prior year. Year to date, delivered Executive Aviation delivered 33 aircraft, a 50% increase Compared to the first half of twenty twenty, as noted in the guideline The guidance 2021 we published this morning, we expect deliveries of commercial jets to reach between 45 to 50 aircrafts and executive jets to reach between 90 to 95 aircrafts. On Slide 9, we show Hebraere's net revenue. Hebraere had a solid revenue growth In the quarter, as all 4 business units rebrand stronger from the pandemic, Our top line more than doubled compared to the Q2 of last year.
Growth came primarily From higher deliveries in commercial aviation, although all our segments showed much improved growth during the quarter. Year to date, net revenue was just under $2,000,000,000 at $767,000,000 or 65% increase over 2020. Net revenue breakdown by business show Embraer Diversification. With Commercial Aviation representing 34% of the total revenues, service and support, 28, Executive Aviation, 22% and Defense, 16%. It's important to highlight The stronger recovery in Commercial Aviation as this business was severely impacted by the pandemic last year.
Slide 10. SG and A expenses reduction Continues to trend very favorably over the last 6 quarters. We remain highly focused on the SG and A efficiencies That are being implemented since the company's restructuring last year. Although the 2nd quarter had a slight increase in G and A, This was primarily driven by increase in provision for profit sharing and performance based incentives program due to better Expected results for the company 2021 as compared to 2020. Combined with the consolidation of Expenses from Tempest, our new cybersecurity company acquired in the end of 2020.
Sand expenses remains at historical low levels. Compared to the prior quarters, sand expenses increased 4%, While net revenue increased over 40% sequentially, as percentage of net revenue, Sand expenses was 4.2% in the 2nd quarter compared to 5.7% in the 1st quarter. We achieved these results by levering our sales activity as volume increased combined with more Cost efficiency, digital sales effort. Slide 11 shows our adjusted EBITDA and adjusted EBITDA. We are very encouraged by the strong margin performance Across all business segments in the Q2, our adjusted EBIT margin was 9.3%, up 13 percentage points over the Q1.
Our adjusted EBITDA margin was in double digits at 14%, Up over 16 percentage points from the Q1. Both of these profitability metrics have recovered To the levels not seen before 2020. For the first half of twenty twenty one, Our adjusted EBIT margin was 3.9% and our adjusted EBITDA margin was 9.2%, Both well above prior year's level. This improvement comes from several factors, including higher deliveries, Resulting higher revenue, better gross margin on improved pricing, mix, production efficiency, Fixed cost leverage on higher volumes and favorable tax obligation reversal of this quarter of approximately 25,000,000. All of our segments have much better performance in the Q2.
Adjusted EBIT margin by segment In the Q2 were as follows. Commercial Aviation was at 1.7% negative, Which although negative shows a great improvement from last year. Executive Aviation was at positive 8% With a strong price discipline and consistent profitability. Defense and Security was at positive 25%, Led by Super Tucano deliveries along with positive adjustments on certain defense contracts. And service and support was at 19% as a strong contribution from spare parts programs.
Slide 12 shows our adjusted net income. It was positive €44,000,000 or €0.24 per ADS in the 2nd quarter. This represents the first net profit on a quarterly basis since 2018. The recovery in adjusted net income is primarily driven by improved operating margins. Reductions in financial leverage also contributes to improved profitability and any future debt reduction would naturally have any additional [SPEAKER CARLOS GOMES DA SILVA:] Positive impact on earnings.
Moving to Slide 13, I would like to begin With free cash flow. Free cash flow in the 2nd quarter was positive 45,000,000, $272,000,000 higher than 1st quarter and $517,000,000 higher Then the same period of last year, this is a remarkable achievement. Although year To date, the cash flow is negative BRL181,000,000. This is compared with a free cash flow burden of Around $1,000,000,000 of the first half of twenty twenty, we expect positive free cash flow From the second half of the year of the twenty twenty on, as indicated in this morning guidance. Now to investments.
Our total investments were €50,000,000 in the 2nd quarter €89,000,000 Year to date, both of which are in line with last year levels. This is important because It shows we continue to invest in our future. We have been very judicious in balancing the need to invest our future With the need to preserve cash. Slide 14 shows our cash and liquidity positions. We ended the quarter with EUR 2,490,000,000 cash and cash equivalents, a slight increase from the end of the Q1.
Our debt balance was at BRL4.3 billion, a slight decrease from 3 months ago. Our average debt maturity remains at 4 years. We expect to continue to generate cash in the second half of twenty twenty one. And beyond so, our leverage will naturally decrease. This will correspondingly Reduce our net interest and expenses and have an additional positive impact on net income.
Finally, moving to Slide 16. Hebrayer has published 2021 financial deliveries guidance for the first time since the start of the pandemic. Despite risks of the economy recovery, vaccination rates around the world And with a solid first half and good visibility for the remainder of the year, we decided to share They marked our targets for 2021. We expect to deliver between 54 to 50 Commercial jets, just to correct, 45 to 50 commercial aircrafts in 2021 and 90 to 90 5, executive jets in the year. We have a good confidence in those figures as our skyline are red filled For both segments, combined with the growth in Defense and Security and continued The recovery in the service and support track recovered globally.
We expect consolidated revenues to be between 4 To $4,500,000,000 this year, representing a low double digit growth at the midpoint compared to the last year. Adjusted EBIT margin should be in the range of 3% to 4% and adjusted EBITDA
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] For 2021, should
be between 8.5% to 9.5%. IBRAR has Ed, in the first half of twenty twenty, margin in these ranges as we expect these good margins to repeat in the second half of the year. It's important to mention that those margins includes costs related to the integration of Commercial Aviation [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] As well as expenses related to the arbitration process. Finally, our free cash flow guidance is for It's a range from free cash flow usage of 150,000,000 to a breakeven for 2021. We had €181,000,000 of free cash flow usage in the first half of the year.
So we are anticipating Embraer To generate up to $180,000,000 cash in the second half of twenty twenty one without any cash inflows With that, I conclude my presentation and hand it back over to Francisco for his final remarks. Thank you very
much.
Thanks, Antonio. The 2nd quarter results and the guidance for the year reinforce Our confidence in our strategy. And this confidence motivates us to accelerate The performance improvements and the delivery of our long term strategic plan with focus and discipline. As I have mentioned in the past, this year is one of recovery. And next year and beyond, we plan To capture Embraer's full potential to grow with profitability.
Looking ahead, we foresee in the medium term The potential to double the size of the company and that doesn't include new strategic projects. We are going to be bigger and stronger, focusing not only on the top line, but also Much higher profitability. We are already showing some positive results of the hard work Our united and motivated teams of employees have done over the past several months. With expectation for positive operating profit this year and much better free cash flow performance With a clear potential to breakeven for the year. This will be Supplemented by partnerships and new programs to drive even higher growth opportunities.
We are also advancing on our ESG journey. And right after the Q and A session, We will share with you our new ESG commitments. I invite everyone, therefore, To remain online for this ESG event, which will start just after the results Q and A. Also, we are looking forward to a new chapter of Embraer with our extraordinary shareholder meeting Schedule for next Monday. We expect our shareholders to approve the election of 2 international Board members, with extensive global aerospace industry experience, Following constructive feedback from analysts and shareholders to improve our corporate governance.
These candidates have deep technical knowledge, strategic profiles And an innovative thought process. Finally, I will close today by thanking Everyone for the strong quarter. It always starts with our people And they are focused and passion on executing our strategic planning. As I mentioned to you In the last earnings call, we are a different company today. We are in a process of transformation And we are moving fast.
Thank you for your interest and confidence in our company. Over to you, Felipe.
Thank you very much, Francisco. And before we continue, we'd like to show you a video. Check this out.
The world is a different Has changed too. We're leaner, more agile and fit for growth. We're already on a path And driving new innovations. We're better adapted to the challenges and opportunities of now. Like our customers, we're always looking above
And now let's move on to our questions and answer session. We are preparing the set here and remember that questions can only be sent through the Reuters platform. Eduardo Cotto will be our moderator, and he already has some questions with him. Eduardo, over to you.
Thanks, Felipe. We'll start now the Q and A. So let me see the questions that we have. First question we have is, can you give an update on the SPAC negotiations with Yves? I don't know Francisco or Antonio Who wants to take that?
Yes. Thank you, Eduardo. Thanks for the question. I mean, at this point of time, we can say that the negotiation is moving very well, I will say, we are very optimistic with this process.
Okay. Moving on to questions. 2nd question we have. What work has Embraer been doing to develop electric aircraft And making this product more viable for customers.
Well, thank you. That was a good question. Well, We had our first technical flight recently with Ipanema full electric, and we hope We'll present this aircraft to the public soon and continue to invest in this electrification field As one of the innovations innovation fronts that we have, I mean, to be in line with the ESG Activities that we are moving fast in Embraer. Great.
3rd question we have from investors is from Victor Mizusaki from Bradesco. He said the fans showed a material gross margin expansion In the Q2, can you give more details about that, Antonio?
Victor, thanks for the question. We had in the Q2 2 main effects on the defense side. First one Was the Super Tucano delivered that we were not able to deliver in Q1 that flows to the Q2 figures? In addition to it, We have the adjustment in the defense contract we have in the local currency in Brazil. I would say both In fact, higher deliveries in Super Tucano and the adjustment in the contracts lead us to this 25% margin in Q2.
Okay, very good. Next question comes from UBS. Could you comment on the 25,000,000 reversal mentioned in the press release? Also what was the positive cost base revision Related on the results.
So thanks for the question. First point, We built up a provision in 2018 for the Brazilian guys here, Desireneracion de Fole that we have a claim Discussed being discussed since 2018 and we were able to gain this claim in the Q2. That's why we reversed this tax position. That was also already adjusted in 2018. That's why we're also considering our results.
The second question was in regards to the contracts. You have an adjustment here around $10,000,000 And the second quarter, that were both effects. It's important also to mention that even that we have this tax reversal, 25,000,000, let's put 1st quarter and the 2nd quarter. We do have other types of costs that we are not adjusting. That's also not, I would say, For example, reintegration of commercial aviation and arbitration costs, which is more or less net This EUR25 1,000,000, I would say the numbers we are seeing right now, I'd say combined Q1 and Q2 is really, For me describe the real performance of the company.
We have several questions about EVE. I'll try to summarize them. So basically any general On your eVTOL initiatives would be very helpful, particularly on negotiations with Zenite. We already talked a little bit, but maybe an update of the EBITDAO, Francisco and Antonio.
Yes. Well, as I said, we are very Excited with this initiative, with this product. I mean, we had the first flight with the prototype scale 1 to 3, a successful test by the way. Now we are preparing the next test with the prototype scale 1 to 1. And technically, it's moving very well.
We are planning the certification by 2025 And entering service in 2026. And about the negotiation with Ana, I mentioned already, that's moving very well.
Okay. Very good. Now moving to Business Jets, we have a question from Credit Suisse. Business jet has been very strong. And on the Q1 results, you mentioned half of the deliveries were for 1st time buyers.
In the Q2, how much were first time buyers? Maybe we can give an overview of the business jet market.
I can do it, I would say. Today in our backlog, the portion of first time buyers, I would say is a third, Something like 30% in your backlog and deliveries for the whole year. We are talking about 30% first time buyers And we are going with the market. If you see the industry book to bill between 1 to 5 to 2 to 1, 1 to 5 to 1 and 2 to 1 to 2. And we are, I would say, a little bit above that and it's doing pretty well.
But for sure, the first buy is Pushing also the market, especially in the light jets category.
Now there is a question on commercial From Credit Suisse, your guidance for commercial deliveries of 45 to 50 seems low given your you have already delivered 23, Jets, are there any supply chain issues that could prevent you from being above that range? Also they are asking what do you see in terms of deliveries for 2022? Any color on that?
Let's take into account that commercial vehicle is still suffering for the pandemic. What we are Giving as a guidance to deliver this year is a little bit higher than last year. Last year, we delivered 44. And for sure, we are selling more, but it's going to impact more 2022. And the fact that we deliver at the 23 aircraft It's because it's well divided throughout the year.
That's why the 47, I would say between 45% to 50% is the number we are having. And we do see, I would say, Around 30% for next year between 65 to 70 aircrafts, but As to be confirmed, but it's more or less the number you're seeing. It's important to mention, we do see commercial aviation coming back To historical levels at Embraer, from 2023 onwards, we are selling more, but The sales country we are closing right now is going to fulfill this timeline starting 2022. And 20 21 is more or less the same level from 2020.
If I allow, I'd like to make a link Between this answer and the result of the company, it is true that in this first half of the year, comparing To the first half of last year, we did much better in terms of deliveries, in terms of results. The numbers speak by themselves. But if you look at the guidance for the entire year, you see that no, as planned, we won't see a huge increase in volumes [SPEAKER IGNACIO CUENCA ARAMBARRI:] In the commercial or executive, yes, we are seeing some growth, moderate growth this year compared to the last year. But the improvements in the results, I mean, either the EBIT coming from almost minus 3% last year To something between 3% 4% this year, or the free cash flow for minus BRL900 1,000,000 last year So something between minus 150 this year, all this good performance is came from efficiency gains, Pure efficiency gains. We really did a good rightsizing the organization.
We are improving, I mean, a lot of [SPEAKER JOSE RAFAEL FERNANDEZ:] Activities on cost reduction, on inventory reduction in other company, I mean, pushing sales for the future. So again, I mean, from next year on, I mean, we expect that with a stronger growth in the volumes, in all the business units [SPEAKER JOSE RAFAEL FERNANDEZ:] And with this more efficient and agile company, then you see a much better performance. So that's why our result is coming from this year, From efficiency gains, from some additional sales, of course, but mainly from efficiency gains.
Just to complete the question for supply chain, What we are putting the guidance in, what we agreed with our customer for this year, at least for the commercial base, we have not seen In the supplier chain, I would say problems this year.
We have several other questions. So the next one It's related to margins and free cash flow. So the question is how do we see margins per business in the long term? And what sort of free cash flow conversion, EBITDA into free cash flow conversion does Embraer expect, Antonio?
So in regards to margin, we do see let's in a long term perspective, we do see Service and support is double digit as it is today. We do see executive in the sense single higher digit We are more or less also today. And we do see the commercial aviation, I would say Mid single digit growth between 3% to 5% in the long term. That's what we see In regards to profitability for the company and in regards to the cash, the conversion from EBITDA to EBITDA, I would prefer to talk we are seeing today a 50% conversion from EBIT to cash flow. We still needed to improve something, but [SPEAKER CARLOS ALBERTO PEREIRA DE OLIVEIRA:] It's more or less the metrics I'm using internally.
We do see today in the long run 50% of their BIT being converted into cash for the years to come.
So the next question is from JPMorgan, Marcelo Motta. Any update on the sales campaigns for commercial Aviation, could we see more orders during the Q2?
Yes, good question. Yes, we have a lot of TV sales campaign is ongoing in our commercial aviation. We just announced this sales for SkyWest with 16 aircraft. And yes, we have more to come.
By the way, the SkyWest, it's not part of the backlog in Q2. We are going To book this 70 aircrafts in Q3?
17 aircrafts, correct. Aircrafts, correct. Thank you, Antonio.
There is a question here from Lucas from Santander talking about inflation. Can you please comment on how the company is seeing the raw material inflation and how is the company offsetting this impact?
I'd say we do see in our final projects inflation, I would say, all index we have With our suppliers between 2% to 3% for next year. And to the customer side, we have also The real adjustment clause with the index, I would say, our takeaway for next year It's a balance between what we have internally inflation and the pass through to the customer base. That's more or less what we are seeing. But there is some indicators Spiking deflation index for next year that we are going to discuss for our customer base. Moreover, we do have We did this year and what we are doing this year.
And with that, we do have also a lot of design to value activities inside Embraer To reduce the base of the costs we have today without any impact from any inflationary indicators.
Very good. So now moving to new projects. There is a question from. Any update on the Partnerships for the Tuboprop Aircraft.
That was a good question. Well, this front is also moving very well, Especially with the most with the recent interest of U. S. Airlines in that product. So we see that product as a good alternative for that market and other markets as well And also as a preparation for new technology in the future.
So we are very optimistic and working hard To accelerate this partnership front.
Okay. I think we have at least one final question. It's back to commercial aviation. What do you expect it's from WTS. What do you expect in the mid to long term in commercial aviation as we are seeing recovering demand for flights and also renewal For having more sustainable fleets.
Good question. Thank you. So again, we have No, I mean, globally, 94% of the Embraer fleet back In the skies, in the U. S, I mean, 97% of the Embraer fleet is flying again. So it shows that The recovery in the domestic market really is coming and that's why we are working in very a lot of sales campaigns In that segment, for E1s and E2s as well.
So we are working hard To take advantage of this moment, as Antonio mentioned that we see volumes growing, I mean, in 2020, but Strongly from 2022, but stronger from 2023 onwards.
I think a final question, it's related to defense. Can you please comment on the expectations for new KC-three ninety orders.
Well, it's as I said in the opening, we are working in Many sales campaigns for for import sales campaigns for the KC-three thousand nine hundred and also, I mean, we are working in the To develop partnerships that will help us to open new markets for that great aircraft.
I think that's what we had on the Q and A. So I think that I want to thank you all for the questions and the time. So now Antonio or Francisco no comments. Okay. Thank you all.
Thanks a
lot. Thanks a lot. So thanks for your interest in supporting our company. We are living in a really special moment. As I said before, This year is the year of recovery, the year of turnaround and of Embraer.
And the numbers, as I said before, speak by themselves. We expect to have a much better year in 2021 compared to the last year Coming from a very tough crisis, as you know, and we hope to no, we expect to capture the new Embraer potential To grow from 2022 onwards. So thank you very much for your support.
Thank you. So this concludes today's Q and A That in turn concludes Emperor's Q2 2021 financial results presentation. Thank you very much for your participation. Now we'll be taking a quick break, and we will soon be back to start the ESG flight plan event, Embraer's journey for a sustainable future. Stay with us.