Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's Second Quarter of 2020 Results. Thank you for standing by. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions to participate will be given at that time. As a reminder, this conference is being recorded and webcasted at ri.mbraer.com.
Br. This conference call includes forward looking statements or statements about events or circumstances 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, in other markets where the company is present. The words believes, may, will, estimates, continues, anticipates, intends, expects and similar words are intended to identify forward looking statements.
Embraer undertakes no obligations to update publicly or revise any forward looking statements 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. The company's actual results could differ substantially from those anticipated in the forward looking statements. Participants on today's conference call are Mr. Francisco Gomes Neto, President and CEO Mr.
Antonio Carlos Garcia, Executive Vice President, Finance and Investor Relations and Mr. Eduardo Cote, Director of Investor Relations. I would like now to turn the conference over to Mr. Francisco Gomes Neto. Please go ahead.
Good morning, everyone, and thank you all for joining our call today. I am Francisco Gomez Neto, President and CEO of Embraer. I will make some initial remarks before turning to our CFO, Antonio Garcia, who will detail the results of the company. Our main priority continues to be the health and safety of our people, focusing on preventive measures, raising awareness on the risks and right behaviors to avoid the contamination and reduce the spread of COVID-nineteen. Regarding business continuity, there are key initiatives in place to emphasize the business intelligence and alignment within the management team to implement the necessary measures to support the company's short and medium term performance.
In the short term, our focus continues to be on cash preservation. Besides initiatives already implemented, such as a more strict control of accounts payable, accounts receivable, general expenses and investments, we have advanced in additional initiatives such as the implementation of world class procurement and logistics areas to bring more focus and intelligence on our purchasing and material management processes. The focus here is to reduce further in a very structured way the costs of what we buy and reduce our inventory levels as well. More specifically, in the field of expenses control, we have implemented a new process called Spend Control Tower with a new and much more robust approval process for indirect purchases. In operations, we have initiated many projects to reduce the production cycle of our aircrafts through well restructured value stream mapping processes combined with a series of Kaizen projects.
These initiatives will contribute a lot to reduce costs of our products as well as working capital. As I said, all these initiatives will help us to improve our financial performance in the short and medium term. Due to COVID-nineteen pandemic and the current market scenario, Embraer keeps pursuing measures to become a leaner and more efficient organization. We have started a restructuring process initially with important changes in the top management. We consolidated the Vice Presidency of Engineering and Strategy and adjusted the structure in operations, commercial aviation and Embraer X.
And here, I'd like to thank the Rippies, Mauro Cairn, Nelson Salgado and Elio Bambini who left our organization in this process for a great contribution to the company over the past years. We also revised our second layer of directors and managers, eliminating duplications created during the separation of the commercial aviation business. In short, we have already recovered synergies over the last few months. Such changes in the organization have a focus not only on cost reduction, but also to help us to better executing our strategic plan 2,125, keeping our strength in all key areas such as market intelligence, sales, engineering, technology, operations, finance, procurement and innovation. It is important to highlight that all the initiatives and projects were created and implemented in a very collaborative process involving the leadership team and key persons of different levels of the organization, helping us to achieve high levels of engagement, commitment and motivation even during this very tough moment.
Regarding the business plan update, we are working to finalize our strategic plan for the period of 2021 to 2025, which we expect to conclude in the coming weeks. We are focusing on improving our cost structure with short term actions, but at the same time making sure we have the intelligence and muscle to exit this crisis stronger, taking advantage of all potential opportunities to grow in all business areas. Our recent investment in cybersecurity is very much aligned with Embraer's strategic plan, as it is an area with several business opportunities and great growth potential in the coming years, in which the company intends to expand its operations in Brazil and abroad. We also continue to pursue potential partnerships to help us to introduce our state of the art products in new markets and develop new projects such as a next generation turboprop aircraft. Finally, we are starting to see positive signs pointing to a recovery in some markets in the second half of the year.
Regional and Some airlines are already gradually resuming commercial flights using ejets in the United States, Europe and other parts of the world. It is also important to note that our relationship with our customers remains strong. We have been working very closely with them in order to better understand their present needs and overcome challenges, building a win win strategy based on confidence and collaboration. The company has developed innovative solutions for a better use of the current fleet and to enhance the safety of the cabin environment in our aircraft such as solutions to transport cargo in the cabin of commercial aircraft and enhanced cleansing procedures to sterilize passengers cabin. In addition, the areas of business aviation and defense have shown greater resilience.
In the United States, business aviation activity is already approaching 2019 levels. And in the defense area, we have several activity sales campaigns with opportunities for the C390 Millennium and the Super Tucano worldwide. With that, I conclude my remarks and would like to pass to our CFO, Antonio Garcia. Thanks for your attention.
Thank you, Francisco. Now moving to the financial highlights at Slide 5. Embraer is operating during an unprecedented aviation market slowdown caused by the COVID-nineteen pandemic. The impacts of COVID were meaningful during the Q2 and were mostly concentrated on commercial aviation. The commercial aviation business experienced low volumes with only 4 deliveries that generated excess capacity, adding costs that were recognized in our financial results instead of going to the inventories and adding to the one off impairment of €90,000,000 and onetime depreciation of €100,000,000 related to 2019 when commercial aviation business was booked as available for sales.
Putting all together, we have a nonrecurrent event of almost $200,000,000 in the commercial VAT results during the Q2 of 2020, explaining the majority of our soft numbers, which we don't expect to see again in the following quarters. The COVID impact on the executive defense business were much lower And our guidance for 2020 remains suspended even though we already start to see initial improvement signals and expect much better performance, in particular, for the Q4 of 2019. Despite of all challenges faced during the first half, our performance in executive jets and defense and security had a meaningful improvement when compared to 2019. As we promised last year, serving initiatives such as cost control, price discipline, rightsize production and to enter into serving new products such as Praetor and the Street 390,000,000 are already helping and will continue to help our financials in executive jets and defense. Some other financial highlights that we will detail during this presentation include a stronger backlog with 0 cancellation in commercial aviation.
In regards to Embraer cash management team, we have been meeting daily to discuss our financials and identify potential cash opportunities for Embraer. And so far, we already mapped approximately $800,000,000 in cash savings for this year implemented or to be implemented in the coming months with a meaningful reduction in investments, selling, general administrative expenses and overall costs, a detailed plan to optimize Embraer working capital in the following quarters. Additional funds recently secured of €700,000,000 to further improve our acquired liquidity in the second half of twenty twenty and 'twenty one. And in the end, we are quite proud to inform that we'll end up with the monitorship and its financial cost impact at Embraer. Turning to Slide 6 with some highlights for our commercial aviation business.
We have been working to integrate the commercial aviation business and prepare the future steps of this very important business unit. As part of the integration process of into Embraer, we recently announced that Arjan Meir, previously the Chief Commercial Officer of Embraer Commercial Aviation, has become the new President and CEO of the Commercial Aviation Business, reporting directly to our group CEO, Francisco Gomez. We believe the future of the business is in good hands with Arden. We are excited about this, who brings extensive commercial and operating experience from both the OEM and the airline side. I would like also to take this opportunity to thank John Hislettery for his time and hard work here at Embraer and wish him good luck in his new role at General Electric.
During the quarter, we delivered 4 e Jets and 9 in the first half of the year, with our deliveries being impacted by COVID-nineteen and each effect in the airline industry. It's important to note that we didn't suffer any cancellation in the commercial aviation since beginning of this year. One of our recent deliveries was the aircraft number 1600 of the E Jets program and in 192 for Ilvetka Airways, underscoring the great success of this family of jets. During the second quarter, Eluveska also upgraded an order of 4E190E2 to the bigger 195E2s to better serve their future growth needs. Congo Airways also upgraded an order of 2 175E1 aircraft to the 190E2, take advantage of the best in class performance of the E2 family.
Although we are not in point where we can give a guidance on expected deliver of financial performance due to the uncertainties caused by the COVID, I'd like to point out that we are culturally optimistic for the future as we have seen the rebound in domestic flights activity in several markets around the world. As an example, you could see in the chart on the top of the right side, 175 V2 in service in the U. S. Is already 90% in July, mid of July in services. And if you see the graph below on the right hand side, you see that information of IATA showing that we do have, I would say, flat U shaped recovery that we are going to suffer 2020, 2021.
But in fact, we do see a fast recovery path for the domestic traffic, which we do believe is going to impact also our regional and Egypt aviation products. Now moving to executive business jet at Slide 7. We delivered a total of 13 jets during the Q2, with 9 of them being a light jet and 4 of them large jets. The jet delivered in the first half of twenty twenty were 22 aircrafts during the quarter. We delivered the first Finno 300E, showcasing our ability to maintain the competitiveness of our products, making the best selling aircraft in the light segment even better.
The enhanced Finno 300E is faster, quieter and received several other upgrades, including of avionics and in flight connectivity. We also announced several breakthrough cabin enhancements for our Praetor families of jets, consolidating the Praetor's position as the best cabin environment among all medium jets, with the lowest cabin altitude in the class and 100 percent fair share capability with standard filters in operators' aircraft. Further, we announced this week the launch of the Pheno 300 MET, a unique mid walk solution, which is also available for retrofit on the existing Pheno 300S and is designed an ideal medical solution for both civil and defense application. We would like to reinforce that now with the COVID pandemic, we are even more committed to maintain prices, discipline and rightsizing production plans to meet the current business jet market demand. Although we cannot give guidance at this time, we are confident that we will have a much stronger second half in deliveries of executive jets.
And you have seen very few deferrals, even less cancellations so far with highly committed customer to their orders. Finally, as far as the business jet flying activities, we have been seeing significant improvements since April. As shown in the graph, with the number of these jets, flights worldwide returning faster 2019 pre COVID level. In April, business aviation activity was 65% lower than 2019, which improved to 44% lower in May 23% lower in June. The preliminary figures in July had been trend to only around 10% to 15%, lower than last year, which give us confidence of a V shaped recovery in this segment of the market.
On Slide 8, we show the highlights for our defense and security segment. During the Q2, we delivered the 3rd KC-three ninety to the Brazil Air Force. And these aircraft had been very important in the country's humanitarian missions to combat the COVID-nineteen pandemic, presenting a very high dispatchability in the transport of supplies, cargo and troops. They are currently 5 KC-three ninety million in various stage of production for deliveries to both Brazil and Portugal Air Force, with one additional delivery expected to the Brazilian Air Force still in 2020. The development of the Portuguese version of the C390,000,000,000 aircraft also reached an important milestone, recently entering in the preliminary design review phase.
Other highlights in terms of deliveries during the period were the delivery of the first Super Tucano for the Nigerian Air Force as well the last 6 M6 rather units for the Brazilian Army related to Brazil surveillance of the Bordon program. Finally, we also signed 2 contracts for acquisition in the cybersecurity space in Brazil, making our continued diversification of defense and security business into highly strategic and fast growing segment. Now turning to the self support business at Slide 9. In the mid of the COVID pandemic, our people have been working hard to create innovative solutions in service and support, allowing remote training with full qualification and certification capability, development of a cargo transportation solutions for the ERJs and E Jets and in hasten, placing procedures for disinfecting aircraft. Our service support business also successfully completed the first conversion of a legacy 450 to a Praetor 500 aircraft, adding more than 400 nautical miles of range to the plan among other improvements.
The converters are taking now place at 2 service centers in U. S, one in France and one in Brazil. We are also proud to announce that the final maintenance schedule was extended to 800 flight hours, which is twice the industry average, helping our customer to avoid unnecessary spend on aircraft maintenance. And in Portugal, our AUGMA subsidiary signed 12 new contracts for maintenance and repair across commercial defense and executive customer during this period. Finally, we show an update on the right hand side about the Embraer Global Fleeting Service.
As you can see, since April, our service has already increased a lot and reached approximately 70% utilization in July, which is significantly above other aircraft model. Moving on to our financial results for the period on Slide 11. Our backlog finished at $15,400,000,000 remaining strong and represented several years of revenue for Embraer. It's important to highlight again that despite some deferrals, we didn't have any cancellation commercial aviation. And we have several activities and campaign right now that may support a backlog expansion in the upcoming quarters.
Moving to Slide 12, we show our aircraft deliveries. As mentioned previously, we delivered 4 commercial jets in the Q2, roughly in line with our deliveries for the Q1 with the COVID-nineteen pandemic significantly impacting our deliveries in this segment. Our guidance will remain suspended, but we expect a better delivery performance during the rest of the year. Our Executive Jets business has seen less of an impact from COVID, and we delivered a total of 13 aircrafts in the 2nd quarter with our high quality backlog following a strong year of sales in 2019. We are confident that the executive jets delivery will continue to increase in the second half of twenty twenty as our customer continues to reconfirm their upcoming deliveries.
At Slide 30, we show our net revenue on a consolidated basis. With 2nd quarter coming in at $537,000,000 The net revenue decline during the 2nd quarter, affected all of our business segment due to the COVID. But commercial aviation and its related service were particularly impacted, representing almost 75% of this total revenue decline during the quarter. Next, Slide 14. Selling and administrative expenses continues to decline in the 2nd quarter, helped by several actions taken to gain efficiency in Spain as well as the furloughs and salary reductions measures took and concentrate in the Q2.
It's important to mention that selling expenses include €60,000,000 in additional bad debt provision compared to last year Q2, mostly on commercial aviation customers. Excluding this provision, selling expense would have been even lower comparing to the level recognized in the Q2 of 2019. At Slide 15, we show operating results. Embraer reported adjusted EBIT of a loss of 141,000,000 in the Q2 of 2020 with a margin of minus 26%. It's important to highlight that Executive Jets, Defense and Security and Related Service and Support reported EBIT numbers close to a breakeven during the first half of twenty twenty.
And commercial aviation was really the segment responsible for the negative operating results during the first half, which is a reflection of the very few deliveries due to the COVID-nineteen and the January shutdown for the segregation of the commercial business into a separate entity. As already anticipated, despite the COVID challenge, Executive Aviation Defense has been showing a meaningful improvement versus the first half of twenty nineteen due to price discipline, improved mix and lower cost base variance. Finally, the adjusted EBIT in the 2nd quarter excluded a total of 200,000,000 in no cash special items, mostly related to the commercialization, including impairments of the Egypt family and the recognition of the depreciation and amortization expenses related and acquired as when commercial aviation was recorded as a discontinued operation available for sale. Slide 16 shows our adjusted EBITDA, which was a loss of BRL120 1,000,000 and also excluded the special items. I already mentioned in the previous slides, adjusted EBITDA margin was minus 22.4% for the 2nd quarter, also reflecting the pressure on profitability coming from fuel deliveries in commercial aviation during the period with executive at Defense and Security Services reporting much better numbers.
Moving to the next Slide 17 with earnings. Embraer adjusted net income reached a loss of BRL199 1,000,000 in the 2nd quarter, implying a negative margin of 37% for the quarter. Our earnings have been negatively impacted by the combination of lower deliveries and revenues and the higher separation costs, similar to the impact already shown in the BIT and EBITDA and higher financial expenses. Our reported net income was much bigger loss of BRL350 1,000,000 but mostly driven by the previously mentioned no cash special items, partially offset by the lower deferred income taxes items. We expect to show much better bottom line performance in the second half as delivery margins start to improve during the rest of the year.
Moving to Slide 18, which shows Embraer investment over the last several quarters. The company has launched initiatives to reduce investment, including CapEx as well research and development. This reflects our actions to minimize non essential investment to preserve cash flow in the context of the pandemic. It also reflects updated portfolio with state of the art products in commercial aviation, executive jets and defense and security. Embraer has invested a lot in the last 5 years, bringing new programs and products to the market.
And now we expect to come in years to show lower investment. We have also announced a new timeline of entry into the service of the 175 E2 now in 2023. With that, our CapEx development spending related to this program can be also better spread into the next 2 or 3 years. So assuming that it's not so easy to talk about profit and loss during this quarter, let's talk about cash flow moving to Slide 19. Our free cash flow was a usage of BRL476 1,000,000 in the 2nd quarter.
The free cash usage was primarily impacted by lower commercial aircraft deliveries in the quarter, leading to lower profitability and higher working capital needs, especially due to higher inventories. These impacts were partially offset by lower investment, spend and other actions taken to reduce cash outflows, such higher focus on accounts receivables and payables. Several working capital and expenses control throughout the Q2 were able to reduce our cash consumption compared with the Q1. And we are confident that our free cash flow will continue to be much better in the second half of the year, particularly in the Q4 with the high deliveries and the work capital reductions leading to these improvements. Finally, at Slide 20, we are happy to show our liquid position.
We would like to highlight that despite 2 quarters of a cash burn, our liquidity position remains solid as well finished the 2nd quarter with BRL2 1,000,000,000 in cash. We also recently signed an additional financial contract with Development Bank in Brazil, private and public banks for an additional €600,000,000 as well another €100,000,000 supported by the U. S. Exane Bank of a total of €700,000,000 of additional liquidity coming mostly now in the Q3. This incremental liquidity combined with higher expected delivery give us extra comfort to maintain our solid liquidity throughout the end of this year and into 2021.
Our debt maturities are also mostly concentrated in 2022 and beyond that, in average maturity of almost 4 years. And again, we are quite happy how we are treating, how we are preserving cash in our liquidity and gives the comfort that Embraer remains strong and we are prepared for any kind of change in the market, faster recover, any kind of second phase of COVID and make sure that you have a good solid liquidity position towards the future. With that, I conclude my presentation. And I'd like to pass to Francisco for his closing remarks before we open to the Q and A session. Thank you.
As you saw in the presentation, we had a very difficult first half, heavily impacted by the COVID-nineteen crisis and the redundancies in the commercial aviation business. At the same time, as I mentioned earlier, we are already taking the necessary actions to regain synergies and adjust the company to the COVID-nineteen scenario and to guarantee the execution of our 'twenty one, 'twenty five strategic plan. We may still face some challenging months ahead, but I am very confident that we will get at the end of this year much stronger and well prepared for a sustainable future. I'm really proud of all the effort made so far as the Embraer leadership team is united and focused to do what needs to be done to allow this great company to succeed.
That
together with the continued support of our customers, suppliers and investors will make Embraer to emerge even stronger from these turbulent times. Thank you.
Ladies and gentlemen, we will now begin the question and answer session from investors and analysts. Our first question comes from Mr. Myles from
UBS.
Thanks. Good morning, Francisco, Antonio, Garcia. Could you maybe go over a little bit about the cash in the second half? You had previously talked about wanting to maintain $2,000,000,000 liquidity at all times and you're already taking out some debt here. As you look to the second half, is it still a burn in the second half on the order of a low number?
Or is it a positive in the second half from here?
Hello, Myles. Thanks. It's a good question. And we I do believe we are going to stay in the same level at the end of this fiscal year because historically, the seasonality of our business is always very hot in the 3rd and the especially in the 4th quarter, where we have our revenues and the cash inflows, I would say, more or less stable to the end of this fiscal year.
Okay. So a breakeven free cash flow for the second half? Okay. And then in terms of the operating margins in the segments, I imagine commercial was the largest drop here, but can you give us some more color on operating margins of executive and Defense? And within Defense, I think you took a charge in the KC-three ninety to reset the cost base.
Can you just elaborate if that's what size of that?
I'm going to pass just to Edu. Edu?
Yes, I can give some color, Antonio. Yes, on Active Jets, Mayo, we did very well in the first half. We had breakeven margins despite lower delivers. And as we show in the charts, the deliveries are picking up. So I would say second half should be quite interesting from for Business Jet.
So around breakeven margins in the Q2 and Q1. So good numbers in effective, especially if we compare to the previous years when we are suffering much more with the product mix. I think we're able to improve that a lot with the operators. And also with price discipline, rightsizing the production, a lot of measures that Michael is implementing on business jets. In defense, of course, there is some seasonality, but we prefer to look at the first half as well.
And defense margins in the first half were also breakeven, which we believe are good news. As we have highlighted in the past, there was a lot of focus to improve margins in executive and defense, and we are really showing that. So the drag on the margins were they really came from commercial. Now we had very few deliveries and that affected the margin. So once commercial deliveries start to recover, the expectation is this margin is ready to pick up in the upcoming quarters.
Our next question comes from Mr. Ron from Bank of America.
Yes. Hey, good morning, sir. Hi, Ron. If you could maybe characterize how the conversations are going with airlines. Like you mentioned, you said you haven't seen any cancellations, but how does deferrals look?
And when do you expect some airlines to begin to take more commercial airplanes?
Thanks for the question. I would say, we I guess, we have the conversation about deferral. It was highly concentrated between March April. And still, I would say, the same situation right now. For sure, we are having a lot of conversation with the airlines and for a lot of negotiations and a lot of discussions ongoing.
I cannot assure that the market recover is going only in favor of the regional jets. But again, we do have a lot of campaigns in the field right now. And also in regards to change models, change the setup of more regional domestic than, I would say, big airplanes. In summary, the ferro stop, and we are just talk about new campaigns that, again, we are having a lot of requests. And I cannot make sure that's a trend, but I would say we do have a good feeling.
I don't know if I answer your question as you want to, but
Yes. I think that's helpful. How has demand for the E11175 been now that the E2 175 has been delayed? I mean, have you seen demand for that pickup?
The main deferral was highly concentrated in 195 instead in the 175. 175, I would say most of the customers, they are still committed to take the aircraft, especially the U. S. Customers.
Got it. Got it. And then maybe one last question, if I may. The business environment seems to be doing better and you guys have alluded to that in the second half, we could see a pickup in deliveries. How are those conversations going?
When you look at the customers, there's no reticence to get airplanes around the economy? Or are they looking at business aviation as a secure more secure way to travel given the pandemic? If you could maybe offer some more color around what those customers are thinking.
Yes. It's a good question. How you see today, the fleet owners, even the fractional flights, they are quite busy with the freight traffic today. And what we are seeing right now, I cannot say, is a trend that we are having a lot of, I would say, private owned jets being bought right now. And again, the fleet and the factory owners, they are really evaluating how to go forward.
And I do see, I would say, stable in with a slight positive trend, especially in the private owned jets. But we cannot make sure 100% that because of the COVID, the pandemic, that regional aviation is going to be bigger than last year. But let's say, if you see the graph, we display, we are very close to the levels of 2019. But the replacement of the aircraft is still, I would say, under evaluation. What I can make sure, historically, our second half for the executive debt is very strong compared with on the first half.
And you're sorry? Francisco speaking, yes, maybe perhaps the COVID brings us more opportunity for the Executive Aviation in 2021 as well.
Our next question comes from Mr. Robert from Credit Suisse.
Hi, good morning. Just on the last question that Ron asked on Executive Aviation, as you see opportunity perhaps in the second half, where do you see it? Is it at the Praetor level, at the Phenom? Any color on the interest levels?
Well, Albert, thanks for the question. The Phenom 300 continues to be our best seller and where we have, I would say, highest potential of sales. But also, we are quite optimistic with the Praetors as well.
Okay. And you talked about the stronger second half because of higher deliveries across the commercial portfolio, executive jet portfolio. How good is the visibility here? How reliable are these deliveries and the customers?
I would say for the Robert, for the commercial aviation, again, we for sure have talks every day for our customers. But what you see for the second half of the year is confirmed, okay? And there should be no change or no big surprise, maybe with even upside potential. And the executive aviation, I would say, big portion of the second half is already sold, is just to deliver. And we still have just a few white tails to be sold in the 2nd semester.
That's why you are confident about the what you are communicating to the market right now.
Okay. And then longer term question on defense. Given the new areas that you're beginning to pursue and with the product portfolio that you currently have, if we look out a few years, how big do you see the business annually in terms of revenues?
We are now as I mentioned earlier, we are now finalizing our 'twenty one, 'twenty five strategic plan. And we foresee a growth in all business units, including defense. Especially in defense, we have now campaigns, open campaigns going with the KC-three ninety with different potential customers. So we and we are now working also different segments in defense. So we are optimistic that all the BU's special defense will show important growth in the following years.
Our next question comes from Mr. Cai Von from Cowen.
Thank you very much. So if I could follow-up with Myles' question. If we're looking for breakeven cash flow in the second half, does that assume a big deficit in the Q3 because your Q4 historically always has been huge. And maybe give us some color on some of the moving parts, for example, the inventories, the contract liabilities were down in Q2. I assume you paid off your suppliers.
Is that an opportunity that maybe you could move back to more normal levels? Thank you.
Hi Kai, it's Edu here. I will take that question. Yes, Q4 will be for sure stronger than Q3. We are not anticipating a big cash burn in Q3. I think Q3 will already be good.
But Q4, for sure, positive. So maybe there is some room for to be positive in the second half. But to be more conservative, we're assuming breakeven, but definitely the 4th quarter stronger and third quarter still more soft.
And just to complete, in regards to the liability with supplier base, we still just really feel discussion with 1 or other suppliers about renegotiation. But I would say the big guys we already discussed and agree how to move forward and with the new volumes, we are quite confident to not see any big liability in the second quarter or the second half of the year. And then
a second question. I know that you haven't completed your 2021 to 2025 strategic plan, but if one looks at the history of Embraer, you've done an incredible job of developing high performing products both in regional and biz jets, now KC-three ninety and yet you pretty consistently have not generated substantial profits or cash flow for shareholders. As you think about that strategic plan, what kind of priority is there in terms of return to the shareholders and what are you doing to assure them?
Good question, Cai. I mean, again, it's a combination of actions that we are taking, right? I mean, in short term, we are as we mentioned before, we are focusing on the cash preservation with all measures mentioned before. We are also taking care to adjust the organization in the light of the COVID-nineteen impact and also to eliminating the duplications we had to do because of the deal with Boeing. We are recapturing all the synergies.
And then we are also putting in place a lot of other projects like to reduce the production cycles of our aircrafts, to put more focus on procurement activities, to put more focus on material management, to work with less inventory and reduce the working capital. And all of this, combined with this future growth that are included in the growth drivers of our 2021, 2025 strategic plan, we believe this will improve a lot our financial performance in the following years.
Thank you very much.
Our next question comes from Mr. Gabriel from Bradesco BBI.
I have two questions here on my side. I wonder if you could comment a little bit on the higher operational expenses in the Services and Support division. And also my second question, there's been a lot of news in the media regarding layoffs. Could you comment a little bit on that? I mean, how are negotiations with labor unions evolving?
Yes, maybe I can take the first one regarding services. Yes, the service business, especially in commercial were also affected in the Q2, right, given lower activity as we show in the charts, especially April was a very soft month in terms of flight operations, April May, and that affected the fixed cost dilution of service and that was reflected in the 2nd quarter numbers. But as the activities is returning, we believe service will have better numbers in the second half. We also had some bad debt provisions, right, in services that affected the costs in the 2nd Q.
Gabriel, could you please repeat your second question?
Yes, sure. Yes, it was regarding layoffs and negotiations with labor union.
Well, we are working this restructuring program. We have we decided to start in the upper level with the Vice President. So we made some important changes there, as I mentioned before. Then we also did we went out to the 2nd level of directors and managers and make some changes in the adjustments in that those levels. And now we are studying the following levels.
In parallel, we opened this PDVs, the Voluntary Dismissive Program, to help us in this process. So now we are going step by step, I mean, in this restructuring program. That's our plan.
Our next question comes from Mr. Noah from Goldman Sachs.
Is it possible to attempt to quantify or give a little bit more detail on your production and delivery mismatch? I assume you're producing ahead of deliveries as you field near term deferrals. And so I'm just wondering how many aircraft built but not delivered did you end the quarter with? And how much of that will you flush through the inventory by the end of the year? Or how many will you end the year with in commercial?
Yes. For sure, we have higher inventories that we would expect given the low volume of deliveries that we had in the second quarter. It's tough to give a number, right? But our total inventories are around BRL3.2 billion and they could be above BRL100 million lower if we're delivering the planes as initially planned. So there is room.
And the second half will show, as we pick up the deliveries, we expect a good reduction, right, in terms of inventory that will translate in cash. But it's tough for us to quantify a number because sometimes the planes are really close to conclusion in the production line, but we still show them as work in progress. So it's tough to give a number of how many planes are ready, but we have a good good size of inventory in commercial.
Just to complete, no, good question. We were, I'd say, prepared before the crisis to produce around landed aircraft. And with the slowdown and deferrals, we should not see more than a half of this number. And that's impact our inventory in many cases. That's why we do have this 3 200,000,000 inventory.
That is our opportunity to continuously reduce to the second half of the year and with the additional deliveries that we do see historically for the second half of the year.
Okay. So would you expect to end the year with that production and delivery mismatch gone and everything lined up and then you just reset production for next year? Or will you move into 2021 with some lingering inventory from this year?
I would say we are moving a little bit inventory for next year. We are revising the supplier chain and the material we have in a daily basis, okay? But we should have some especially in commercial side, some carryover for 2021. Not huge because we did a great job to reprogramming all material, but some material have already in our event that still continue to be to 2021. Then with the new schedule for 2020, when we are going to get rid of this excess material.
Got it. And then when do you expect to be able to pretty confidently set that 2021 production plan, both on the commercial side and the executive side. I mean, are you kind of already there now because you've had enough of an evolution in your customer conversation? Or is it still uncertain out there that you're not yet really that close to knowing where you want to put production for next year?
Now we do have already a number for next year that we set our production or material program. We have the, I would say, the latest revision chance in late August to be done. But we set already, I would say, with some conservative reasons here, with some a bit more feet on the ground, we set our number for next year. And if there is a change, it can be only an upside potential. We are quite conservative for the numbers for 2021.
Maybe, Francisco, you want to comment in addition?
No, that's what we are doing. Noah, we are trying to be conservative for the plans for next year, but adjusting the organization to that to those deliveries we are planning for next year. This is what we are doing.
Is your that's helpful. What I'm trying to get at is, is your level of confidence in that right now as you speak to us substantially higher than it was when you last reported results to us because there's been enough firming up with the customers? Or is it still is it not really that different than the last time you spoke to us because there's so much uncertainty still out there?
No, Arun, we are much more confident when you have the latest call. However, we are still having this credit facility, which is not available for all airlines. I would say, if I would see a constraint is related to the credit. But in regards to the schedule for next year, the programs we have, we are much more confident than 3 months ago.
Our next question comes from Mr. Ron from Bank of America. Mr. Ron, you may proceed.
Sorry about that. I was on mute. How has interest from China been? Have you seen a pickup in interest in commercial airplanes or even business aircraft from the Chinese market?
We are wrong. Actually, we are working in several fronts looking for potential partnerships to help us to introduce our state of the art products in new markets and also to help us to develop specific projects as a turboprop. But to be very honest with you, we don't have yet any concrete result to be and to open to the market. But we are working very hard on those those fronts. I'm personally involved in following those fronts up in a biweekly basis.
But we don't have any concrete to share with you, any concrete news to share with you so far.
This concludes today's question and answer session. That does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day.