Good morning, ladies and gentlemen. 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 the time. If you should require assistance during the call, please press the star key followed by zero. As a reminder, this conference is being recorded and webcasted at ri.embraer.com.br. 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 other markets where the company is present. The words beliefs, 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 Couto, 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 Gomes 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 preventative measures, raising awareness on the risks and right behaviors to avoid the contamination and reduce the spread of COVID-19. Regarding business continuity, there are key initiatives in place to emphasize 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 aircraft through well-structured, 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. Through the COVID-19 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 presidencies of engineering and strategy and adjusted the structure in operations, Commercial Aviation, and Embraer-X. Here I'd like to thank the VPs, Mauro Kern, Nelson Salgado, and Helio 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 2021-2025, 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, at the same time, making sure we will 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 aviation has been a key element in maintaining essential services and airline networks during the crisis. Some airlines are already gradually resuming commercial flights using E-Jets in the U.S., 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 U.S., business aviation activity is already approaching 2019 levels, and in the defense area, we have several active sales campaigns with opportunities for the C-390 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. Moving to the financial highlights at slide five. Embraer is operating during an unprecedented aviation market slowdown caused by the COVID-19 pandemic. The impacts of COVID were meaningful during the second quarter and were mostly concentrated on the commercial aviation. The commercial aviation business experienced low volumes with only four deliveries that generated excess capacity, idle costs that were recognized in our financial results instead of going to the inventories. Adding to the one-off impairments of BRL 90 million and one-time depreciation of BRL 100 million related to 2019, when commercial aviation business was booked as available for sales. Putting all together, we have a non-recurrent event of almost $200 million in the commercial aviation results during the second quarter of 2020, explaining the majority of our soft numbers, which we don't expect to see again in the following quarters.
The COVID-19 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 signs and expect much better performance in particular for the fourth quarter 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, several initiatives such as cost control, price discipline, right-size production, and to enter into several new products such as Praetor and the C-390 Millennium 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 includes a stronger backlog with zero 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. So far, we already mapped approximately $800 million 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 into optimizing better working capital in the following quarters. Additional funds recently secured of BRL 700 million to further improve our cash liquidity the second half of 2020 and 2021. 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 six, with some highlights for our commercial aviation business. We have been working to reintegrate the commercial aviation business and prepare the future steps of this very important business unit.
As part of the reintegration process into Embraer, we recently announced that Arjan Meijer, 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 Gomes. We believe the future of the business is in good hands with Arjan, 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 Slattery 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 four E-Jets and nine in the first half of the year, with our deliveries being impacted by COVID-19 and its effect in the airline industry.
It's important to note that we didn't suffer any cancellation on the commercial aviation since beginning of this year. One of our recent deliveries was the aircraft number 1,600 of the E-Jets program, and E195-E2 for Eurowings, underscoring the great success of this family of jets. During the second quarter, Eurowings also upgraded an order of four E190-E2 to the bigger 195-E2, to better serve their future growth needs. Congo Airways also upgrade an order of two 175E-1 aircraft to the 190E-2, take advantage of the best-in-class performance of the E2 family. We are not in point where we can give a guidance on expected delivery or financial performance due to the uncertainties caused by the COVID, I'd like to point out that we are cautiously optimistic for the future as we have seen the rebounds in domestic flights activity in several markets around the world.
As an example, you could see in the charts on the top of the right side, E175-E2 in service in the U.S. is already 90% in mid-July services. If you see the graph below, on the right-hand side, you see the information of IATA showing that we do have, I would say, flat U-shape recovery, that we are going to suffer 2020, 2021. 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 E-Jets aviation products. Now moving to executive business jet at slide seven. We delivered a total of 13 jets during the second quarter, with nine of them being light jets and four of them large jets. The jet delivery in the first half of 2020 were 22 aircraft during the quarter.
We delivered the first Phenom 300E, showcasing our ability to maintain the competitiveness of our products, making the best-selling aircraft in the light segment even better. The enhanced Phenom 300E is faster, quieter, and receives 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% fresh air capability with standard filters in all Praetors aircraft. Further, we announced this week the launch of the Phenom 300MED, a unique medevac solution, which is also available for retrofit on the existing Phenom 300s and is designed an ideal medical solution for both civil and defense application.
We would like to reinforce that now with the COVID-19 pandemic, we are even more committed to maintain prices discipline and right-size the 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. You have seen very few deferrals, even less cancellations so far, with highly committed customer to their orders. Finally, as for the business jet flying activities, we have been seeing significant improvement since April. As shown in the graph with the number of business jets, flights worldwide returning fast to 2019 pre-COVID-19 level. In April, business aviation activity was 65% lower than 2019, which improved to 44% lower in May and turning 23% low in June.
The preliminary figures in July had been trend to only around 10%-15% lower than last year, which give us confidence of a V-shaped recovery in this segment of the market. On slide number eight, we show the highlights for our defense and security segment. During the second quarter, we delivered the third KC-390 to the Brazilian Air Force. This aircraft had been very important in the country's humanitarian missions to combat the COVID-19 pandemic, presenting a very high dispatchability in the transport of supplies, cargo, and troops. There are currently five KC-390 Millennium in various stage of production for deliveries to both Brazilian and Portuguese Air Force, with one additional delivery expected to the Brazilian Air Force still in 2020. The developer of the Portuguese version of the C-390 Millennium 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 six M6 Radar units for the Brazilian Army related to Brazil Surveillance of the Border Program. Finally, we also signed two contracts for acquisition in the cybersecurity space in Brazil, make our continued diversification of Defense and Security business into highly strategic and fast-growing segment. Now turning to the Services & Support business at slide number nine. In the middle of the COVID-19 pandemic, our people have been work 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 hastened cleaning procedures for disinfecting aircraft.
Our service support business also successfully completed the first conversion of a Legacy 450 to Praetor 500 aircraft, adding more than 400 nautical miles of range to the plane, among other improvements. The conversion are taking now place at two 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. In Portugal, our OGMA subsidiary signed 12 new contracts for maintenance and repair across commercial, defense, executive customer during this period. Finally, I show an update on the right-hand side about the Embraer Global Fleet Services. 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 $15.4 billion, remaining strong and representing 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 four commercial jets in the second quarter, roughly in line with our deliveries for the first quarter, with the COVID-19 pandemic significantly impacting our deliveries in this segment. Our guidance remains suspended. 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 second quarter.
With our high-quality backlog following a strong year of sales in 2019, we are confident that the executive jets deliveries will continue to increase in the second half of 2020 as our customers continue to reconfirm their upcoming deliveries. At slide 13, we show our net revenue on a consolidated basis. With second quarter coming in at $537 million. The net revenue declined during the second quarter affected all of our business segments due to the COVID-19, but commercial aviation and its related services were particularly impacted, representing almost 75% of this total revenue decline during the quarter. Next is slide 14. Selling and administrative expenses continue to decline in the second quarter, helped by several actions taken to gain efficiency and in spend, as well as the furloughs and salary reductions measures taken and concentrated in the second quarter.
It is important to mention that selling expenses include BRL 60 million in additional bad debts provision compared to last year, second quarter, mostly on Commercial Aviation customers. Excluding this provision, selling expense would have been even lower comparing to the level recognized in the second quarter of 2019. At slide 15, we show operating results. Embraer reported adjusted EBIT of a loss of BRL 141 million in the second quarter of 2020 with a margin of minus 26%. It is important to highlight that Executive Jets, Defense and Security, and related Services & Support reported EBIT numbers close to a break-even during the first half of 2020. 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-19 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 2019 due to price discipline, improved mix, and lower cost base revenues. The adjusted EBIT in the second quarter excluded a total of BRL 200 million in non-cash special items, mostly related to Commercial Aviation, including impairments of the E-Jet family and the recognition of the depreciation and amortization expenses related to the quarters when Commercial Aviation was recorded as a discontinued operation available for sale. Slide 16 shows our adjusted EBITDA, which was a loss of BRL 120 million and also excluded the special items. I already mentioned in the previous slides, adjusted EBITDA margin was -22.4% for the second quarter, also reflecting the pressure on profitability coming from few deliveries in Commercial Aviation during the period, with Executive Jets, Defense and Security Services reporting much better numbers.
Moving to the next slide 17 with earnings. Embraer adjusted net income reached a loss of BRL 199 million in the second 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 cost, similar to the impact already shown in the EBIT and EBITDA and higher financial expenses. Our reported net income was much bigger loss of BRL 350 million, but mostly driven by the previously mentioned non-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 five years, bringing new programs and products to the market, and now we expect to coming years to show lower investment. We have also announced a new timeline of entry into the service of the E175-E2 now in 2023. With that, our CapEx development spending related to this program can be also better spread into the next two or three years. Assuming that is 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 BRL 476 million in the second 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 through higher focus on accounts receivables and payables. Several working capital and expenses control throughout the second quarter, we're able to reduce our cash consumption compared with the first quarter, 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 fourth quarter, with the high deliveries and the working capital reductions leading to these improvements. Finally, at slide number 20, we are happy to show our liquidity position.
We would like to highlight that despite two quarters of a cash burn, our liquidity position remains solid, and finished the second quarter with BRL 2 billion in cash. We also recently signed an additional financial contract with BNDES, private and public banks, for an additional BRL 600 million, and another BRL 100 million supported by the U.S. Ex-Im Bank, of a total of BRL 700 million of additional liquidity coming mostly now in the third quarter. This incremental liquidity, combined with higher expected delivery, gives 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 four years.
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, fast recover, any kind of second phase of COVID-19, and make sure that we 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&A session. Thank you.
As you saw in the presentation, we had a very difficult first half, heavily impacted by the COVID-19 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-19 scenario and to guarantee the execution of our 2021, 2025 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. If you have a question, please press the star key followed by one key on your touch tone phone now. If at any time you would like to remove yourself from the questioning queue, press star two. 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 previously talked about wanting to maintain $2 billion of liquidity at all times, and you've always taken 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. I do believe we are going to stay in the same level at the end of this fiscal year. Historically, the seasonality of our business always very hot in the third and especially in the fourth quarter, where we have our revenues and the cash inflows, I would say, more or less stable to the end of this fiscal year.
A break even free cash flow for the second half? In terms of the operating margins in the segments, I imagine commercial was the largest drop here, but can you give some more color on the operating margins of Executive and Defense? Within Defense, I think you took a charge on the KC-390 to reset the cost base. Can you just elaborate what size of that?
I'm going to pass this to Edu. Edu?
I can give some color, Antonio. On Executive Jets, Myles, we did very well in the first half. We had break-even margins despite lower deliveries. As we show in the charts, the deliveries are picking up. I would say second half should be quite interesting for business jets. Around break-even margins in the second quarter and first quarter. Good numbers in executive, especially if compared to the previous years when we were suffering much more with the product mix. I think we were able to improve that a lot with the Praetors and also with price discipline, right-sizing 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.
Defense margins in the first half were also break-even, 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. The drag on the margins, they really came from Commercial. We had very few deliveries and that affected the margins. Once Commercial deliveries start to recover, the expectation is margins really to pick up in the upcoming quarters.
Okay. All right. Thanks. I'll leave it with you. Thanks.
Thank you, Myles.
Our next question comes from Mr. Ron from Bank of America.
Hey, good morning, guys.
Hi, Ron.
I was wondering 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?
Hello, Ron. Thanks for the question. I would say we have the conversation about deferral. It was highly concentrated between March and April, and still I would say the same situation right now. For sure, we are having a lot of conversation with the airlines, and 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. 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, deferrals stopped, 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.
Got it.
I don't know if I answered your question as you want to.
Yeah, I think that's helpful. How has demand for the E175 been now that the E175-E2's been delayed? Has you seen demand for that pick up?
The main deferral was highly concentrated in the 195 instead in the 175.
Okay.
E175, I would say most of the customers, they are still committed to take the aircraft, especially the U.S. customers.
Got it. Maybe one last question, if I may. The business jet 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 more secure way to travel given the pandemic? If you could maybe offer some more color around.
I can.
What those customers are thinking.
Yeah, it's a good question. How we see today, the fleet owners, even the fractional flights, they are quite busy with the air freight traffic today. 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. Again, the fleet and the fractional owners, they are really evaluating how to go forward, and I do see, I would say, stable with a slight positive trend, especially in the private-owned jets. We cannot make sure 100% that because of the COVID-19, the pandemic, that regional aviation is going to be bigger than last year. I would say, if you see the graphic we display, we are very close to the levels of 2019. The replacement of the aircraft is still, I would say, under evaluation.
What I can make sure, historically, our second half for the executive jets is very strong compared with on the first half.
Francisco speaking.
Yeah.
Yeah. Maybe perhaps the COVID brings us more opportunity for the executive aviation in 2021 as well.
Got it. All right. Thank you very much.
Thank you, Ron.
Our next question comes from Mr. Robert from Credit Suisse.
Hi, good morning. On that 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, Robert, thanks for the question. The Phenom 300 continues to be our best seller, and where we have, I'll say, the highest potential of sales. Also, we are quite optimistic with the Praetors as well.
Okay. 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, Robert, for the Commercial Aviation, again, we for sure have talks every day for our customer, but what you see for the second half of the year is confirmed. Okay? There should be no change or no big surprise, maybe with even a upside potential. The Executive Aviation, let's 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 second semester.
Okay.
That's why we are confident about what we are communicating to the market right now.
Okay. 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?
As I mentioned earlier, we are now finalizing our 2021, 2025 strategic plan. We foresee a growth in all business units, including defense. Especially in the defense, we have now open campaigns going with the KC-390 with different potential customers. We are now working also different segments in defense. We are optimistic that all the BUs, especially defense, will show important growth in the following years.
Okay. Thank you very much.
You are welcome.
You're welcome.
Our next question comes from Mr. Cai von Rumohr from Cowen.
Thank you very much. If I could follow up with Myles's question. If we're looking for break-even cash flow in the second half, does that assume a big deficit in the third quarter? Your fourth quarter historically always has been huge. 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.
Hey. Hi, Cai. It's Edu here. I will take that question. Yes, fourth quarter will be for sure stronger than third quarter. We're not anticipating a big cash burn in third quarter. I think third quarter will already be good. Fourth quarter, for sure positive. Maybe there is some room to be positive in the second half. To be more conservative, we're assuming break even, but definitely fourth quarter stronger and third quarter still more soft.
Thank you very much.
Cai, just to complete in regards to the liability with supplier base, we still just really few discussion with one or all the suppliers about renegotiation. I would say the big guys we already discuss and agree how to move forward. 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.
A second question. I know that you haven't completed your 2021 to 2025 strategic plan. If one looks at the history of Embraer, you've done an incredible job of developing high-performing products, both in regional, in biz jets, now KC-390, 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 that?
Well, good question, Cai. It's a combination of actions we are taking, right? In short term, 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-19 impact and also to eliminating the duplications we had to do because of the deal with Boeing. We are recapturing all the synergies. Then, we are also putting in place a lot of other projects, like to reduce the production cycles of our aircraft, to put more focus on procurement activities, to put more focus on material management, to work with less inventory and reduce the working capital. 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.
Hi. Thank you. 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 & Support division. My second question, there's been a lot of news in the media regarding layoffs. Could you comment a little bit on that? How are negotiations with labor unions evolving?
Yeah, maybe I can take the first one regarding services. Yeah, the service business, especially in commercial, were also affected in the second quarter. Given lower activity as we show in the charts, especially April was a very soft month in terms of flight operations, April and May, and that affected the fixed cost dilution of service and that was reflected in the second quarter numbers. As the activities is returning, we believe service will have better numbers in the second half. We also had some bad debt provisions, in services that affected the costs in the second Q.
Gabriel, could you please repeat your second question?
Yeah. Sure. Yes, it was regarding layoffs and negotiations with labor unions.
Well, we are working this restructuring program. We decided to start in the upper level with the Vice Presidents. We made some important changes there, as I mentioned before. We went out to the second level of directors and managers, made some changes and adjustments in those levels. Now we are studying the following levels. In parallel, we opened this PDV, the voluntary dismissal program to help us in this process. Now we are going step by step in this restructuring program. That's our plan.
Okay. That was helpful. Thank you.
Our next question comes from Mr. Noah from Goldman Sachs.
Hi, everyone.
Hello.
Hi, Noah.
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. I'm just wondering how many aircraft built but not delivered did you end the quarter with? How much of that will you flush through the inventory by the end of the year? How many will you end the year with in commercial?
For sure we have higher inventories, that we would expect, Noah, given the low volume of deliveries that we had in the second quarter. It's tough to give a number, our total inventories are around BRL 3.2 billion, and they could be above BRL 100 million lower, if we were delivering the planes as initially planned. There is room, and the second half will show as we pick up the deliveries. We expect a good reduction in terms of inventory that will translate in cash. 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. It's tough to give a number of how many planes are ready, but we have a good size of inventory in commercial for second half.
Just to complete, Noah. Good question. We were, let's say, prepared before the crisis to produce around 100 aircraft. 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 BRL 3.2 billion inventory that is our opportunity to continuously reduce to the second half of the year with the additional deliveries that we do see historically for the second half of the year.
Okay. 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? 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. 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 we have already in our inventory that it still continue to be to 2021. With the new schedule for 2021, we are going to get rid of this excess material.
Got it. When do you expect to be able to pretty confidently set that 2021 production plan, both on the commercial side and the executive side? Are you kind of already there now because you've had enough of an evolution in your customer conversation, or is it still so uncertain out there that you're not yet really that close to knowing where you want to put production for next year?
No, we do have already a number for next year that we set our production or material program. We have, I would say, the latest revision chance in late August to be done.
Okay.
We set already, I would say, with some conservatisms here, with some be more feet on the ground. We set our number for next year, and if there is a change, it can be only upside potential. We are quite conservative for the numbers for 2021. Maybe Francisco want to comment in addition.
That's what we are doing, Noah. We are trying to be conservative for the plans for next year, but adjusting the organization to those deliveries we are planning for next year. This is what we are doing.
That's helpful. What I'm trying to get at 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 not really that different than the last time you spoke to us because there's so much uncertainty still out there?
No, Noah. We are much more confident when you have the latest call. 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, in regards to the schedule for next year, the programs we have, we are much more confident than three months ago.
Okay. Thanks so much.
You're welcome.
You're welcome.
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?
Well, Ron, 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. To be very honest with you, we don't have yet any concrete result to be and to open to the market. We are working very hard on those fronts. I'm personally involved in following those fronts up in a biweekly basis. We don't have any concrete news to share with you so far.
Okay, thank you.
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.