Morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's 4th Quarter 2019 Results. Thank you for standing by. As a reminder, this conference is being recorded at broadcasted@ri.engare.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 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 its 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 Gomez Neto, President and CEO Mr. Antonio Carlos Garcia, Vice President, Finance and Investor Relations and Mr. Eduardo Colto, Director of Investor Relations. I would now like to turn the conference over to Mr.
Antonio Garcia. Please go ahead, sir.
Good morning, everyone, and thank you for all joining the call today. My name is Antonio Garcia. I am Embraerne's CFO, and I will present the earnings results of Q4 2019 for the first time. I joined the company in January 2020, and my background comes primarily from the automotive sector working for German companies in Brazil and abroad. I'd like to say a few words before we start the presentation.
First, I would like to thank Nelson Salgado, our previous CFO, for a nice transition phase. And Nelson is returning to operation. He's going to lead our team as a Chief Operations Officer. 2nd, I decided to change my career and my personal life, coming back to Brazil with my family after years living abroad because I truly believe in Embraer values and the vision for the future. I'm really impressed with what I have seen so far at Embraer.
Embraer is a great company with a lot of opportunities, hard work and passionate employees. My mission at Sembria is to help the company to extract its full potential with increased financial discipline and focus on cost. My pillars are founded in people, cash discipline and shareholder value. I have no doubts that together with our team, we are prepared to face any challenge ahead. Slide number 4.
We found ourselves in a very uncertain times with the COVID-nineteen outbreak and its impact involving every day risk to the global economy that continues to grow. That's why it's important to say that Embraer Liquid's position is very strong, with a total cash of $2,800,000,000 at the end of the year, hence an additional liquidity of $600,000,000 raised now in March. Looking at our debt, we have less than 15% of our total debt coming due in the next 24 months. We have no major debt principal payments until 20222023. And most of our debt has a maturity that stretch out to 20252027.
It's also important to mention that our average debt maturity is almost 5 years. Despite that, we are taking additional measures to preserve our liquidity, to preserve our cash, which includes inventory and production adjustment, extension of payment cycles, CapEx and expense reduction. And we are all committed with the business continuity, with the health of our employees, with our partners, customers, suppliers and in principle also protect the shareholder value. Regarding to the Embraer and Boeing partnership, Embraer finished the carve out of commercial business at the end of January successfully. And we continue to work on satisfying the closing conditions for this transaction.
The European Commission has recently stopped the clock again as they previously updated their deadline for June 23. So we now expect their analysis to go past that date. Slide number 5. With respect to the COVID-nineteen outbreak, we have a crisis committee at Embraer monitoring the development of this situation. We have implemented contingent plans to act as quick as necessary as this pandemic continues to unfold.
If the measures being taken around the world to slow down the COVID-nineteen becomes persistent, this could be negatively impacted the global economy and also our business. Governments have already imposed measures like quarantine, flight and travel restriction and the restriction of movement between countries, all of which we expect to disrupt both the supply chain and demand sides of our business. Heberia has already announced some measures such as a temporary shutdown of operating facilities in Brazil and put the majority of its workforce in paid relief or working remotely. That said, given the level of uncertainty related to the spread of COVID-nineteen, we are suspending our guidance for 2020 results. As soon as we have a better visibility into the impact of the virus on the company business, we will issue an updated guidance to the market.
So let's talk some highlights of our business, starting from the Commercial Aviation, Page 6. For the Commercial Aviation, Embraer delivered on its guidance for the year with a total of 89 e Jets delivered in 2019, which includes 14 jets from the E2 family delivered. During the year, we booked a total of 69th free orders from American Airlines, Azul, SkyWest, United, Fujifilm, Inter and Kylie Am and others. Our E Jet E2 backlog ended the year with a total of 153 premium orders and more than 5,070 total commitments. In 2019, we were proud that the AE195E2 received a triple certification by ANAC, the FAA and Iesa, leading to the first delivery of this aircraft type to AerCap and Azul Airlines in September 2019.
Finally, the smallest and newest member of the E Jet family, E2, the E175 E2 made its finally successful first flight. Page number 7, Let's talk about Exactive Aviation. So some highlights about Exactive Aviation. Executive Aviation, we met also the guidance for 2019. In regards to delivery, we delivered 109 jets, of which 62 were large jets and 47 large jets.
Important to say that we deliver all aircraft produced in 2019 and ended the year with 0 white tails in our inventory. During the year, we delivered the Pheno 300 number and 500 in its history. And we were pleased to have this model of jet leading the large jet category in deliveries for 8 years consecutive. It's really amazing achievement. 2019 marked a very good year for the Executive Jets business in terms of sales activity, which was the highest in the past 5 years.
We increased our margins from a strong price discipline. Our sales also includes a female order contract with Flexjet worth $1,400,000,000 for a combination of Pheno 300 and Praetor 500 and Praetor 600 jets. During the year, our new Praetor 500 and Praetor 600 Jets received certification from ANAC, the FAA and EAA, outperforming on several key performance. Metcalfe's further making the case that jets are the most capable technology disruptive jets in their respective classes. Also, we recently announced further upgrades to the Finno 300E jet, including comfortable and technical enhancement as well as performance enhancement to allow it become the 1st single pilot business jet ever to reach Mack of 0.8.
Slide number 8, let's talk about the Defense business. The Defense and Security business, which continues its transition from the C-three ninety product development phase to Symmos production, which is the highlight of the entry into service with the Brazilian Air Force, with 2 aircraft delivered during 2019. We were also pleased to welcome Portugal as the 1st export customer for the 3 390,000,000 version of this aircraft, with a fee in order of for 5 medium lift cargo transport plans and related services. This contract was included in our backlog in the Q4 of 2019. Further, diversifying our business.
Cisense Corp Marine Systems, Embraer, signed a contract to debut the Brazilian Navy, new Tamandare Class 4 ships. We also signed a memorandum of understanding to start the initial study with the Brazilian Air Force for joint development of a new rugged light military transport aircraft, illustrating that the EIBRA continues to consolidate its position of the defense for the Brazilian government. We have expanded our work with the Brazilian Navy with Tamandare contract, adding to our existing strong position with the Brazilian Air Force and growing exposure to the Brazilian Army. Slide number 9, some highlights about our service and support business units. We continue to grow the service and support business during 2019, signing new maintenance contract to support leasing companies in commercialization and increasing our MRO footprint for executive jets, we recently announced expansion of our executive jet services center in Fort Lauderdale, Hollywood International Airport.
Embraer Services Support also expanded its training capacity for commercial and executive jets. As far as Service and Support sales, we have the record sales for the Defense and Security in 2019. In terms of fleet coverage, we had an important achievement with 100% of G2 fleet in services covered by our total support program. Finally, our NRO in Portugal, Ogema, has a great 2019 with increased services in the engine overall business. So talking and moving to the Innovation Technology, Slide 10.
ABRx reached a significant milestone by unveiling its new eVT offline vehicle concept for the future urban air mobility and tested a scale model mock up of the vehicle as well. In addition, EmbiRx launched a business platform for maintenance services in aviation named VICU, which several customers started to join. Hebrar and VAC also signed a cooperation agreement to work in a electrical propulsion aircraft and Embraer's a Panema crop duster plant will test the new technology during 2020. Finally, EBR and E3 Harris are studying a platform for a new air traffic control to support urban air mobility. So now we start
with the financial results.
We're starting with the company's fair market backlog on Slide 12. Our backlog reached $16,800,000,000 at the end of the year, which is roughly $500,000,000 higher than we had at the end of 2018. And a strong year of sales in the executive debt as well as a key contract signed at the Central Securities such as the contract with Portugal for the C-three ninety aircraft, leading to the increase of in 2019 numbers. As we usually do with our Q4 results, we are showing the breakout of our backlog. With commercial aviation remaining the largest contributor to our backlog, in value terms representing 53% of the total, Executive jets represents around 10%, defense 25% and services and support 13%.
So next on Slide 13, we presented the aircraft deliveries starting with commercialization. As mentioned earlier, we met our 2019 guidance with a total of 89 commercial jets deliveries and also meet our executive debt delivery guidance with a total of 109 deliveries. Point out, in the Executive Jets business, 2019 markets a solid growth in total delivery compared with 2018, and our mix of delivery was also more favorable. We delivered 47 large guests in the year. This is driven by the introduction of the Praetor 500 and Praetor 600 jets during the year, And we are also excited about the future for this best in class aircraft.
Moving to the next revenue at Slide 14. 2019 revenue of $5,400,000,000 was within our previous disclosure guidance range and represented a growth compared to 2018 of August 22%. Higher deliveries in the Executive Debt segment and better performance in Defense and Security were the main drivers to grow in this year. By segment, Commercial Aviation represented 41% of the revenue, followed by the Executive Jets at 26%, Service and Support at 19%, Defense and Security at 14% of revenue. Next slide, on the Slide number 15, we presented SG and A expenses for Embraer.
Our continuous effort to become more efficient have helped us to reduce our SG and A expenses, in which of the 6 years shown on the slide. Fed expenses in 2019 was $286,000,000 while general administrative expenses were $109,000,000 in the year. And we are continuously for efficient product to continue to reduce this number. Moving to the operating results in Slide 16. February 2019 adjusted EBIT was negative $5,000,000 was in line with our guidance of approximately breakeven.
These results do not include around $71,000,000 in impairment charges related to phase out of our legacy family in executive jets that was recognized in the Q4. But this number includes separation costs related to the carve out of the commercial aviation business in preparation for the strategic partnership with Boeing of $120,000,000 If we adjust this separation cost, 2019 adjusted EBIT would have been $150,000,000 positive, representing a margin is likely above 2% for the year. Our operating margins by business segment, excluding impairment charge and separation costs, were positive 1.2 percent for the commercial aviation, positive 1.6 percent for executive jets, defense and security was negative 6%, services and support was positive 13.2%. Moving to adjusted EBITDA on Slide 17. Embraer's 2019 adjusted EBITDA was also impacted by the separation costs.
Adjusted EBITDA reached $182,000,000 or a margin of 3.3 percent for the year. If you take away the impact of the separation costs, adjusted EBITDA would have been $303,000,000 with a margin of 5.5%. So on the Slide 18, we present the net income. Embraer reported an adjusted net loss of 218,000,000 dollars in 2019, implying a negative margin of 4% for the year. Our earnings have been negatively impacted by the combination of the separation costs similar to the impacts already shown in the BIT and EBITDA and the higher financial expenses.
The impact of financial leverage will go away as we close the transaction at point as we will transition to the majority of our debt to the joint venture. On Slide 19, we present Embedded Investments. In 2019, our CapEx was $158,000,000 and our R and D was $328,000,000 leading to a total amount for investment of $486,000,000 Major investments this year were related to the continued development of the 2 family of jets as we as well as expanded to relate to the separation of assets and liabilities to the commercialization business and related services. So moving to Slide 20, we talk about cash flow. As a consequence of the higher number of commercial and executive jet delivery.
In the Q4, Eberia finished the year with one of the highest quarterly positive free cash flow figures in the history of a generation of BRL 739,000,000 in free cash flow. We are proud of it. We finished the year with a free cash flow usage of $182,000,000 dollars which was within previously announced range of free cash flow usage between €100,000,000 to €300,000,000 dollars We also reached this guidance as a result of our positive free cash flow generation in the 4th quarter. On Slide 21, we show our indebtedness. Net debt position improved from $1,300,000,000 at the end of the Q3 to $612,000,000 in net debt at the end of the year.
As mentioned earlier, our liquidity position is strong, with almost $2,800,000,000 in cash and equivalents, not including the $600,000,000 we recently raised 2 weeks ago. Our debt is mostly long term and has an average maturity of almost 5 years, with no major principal due until 2022 and the year 2023. As we continue to monitor the potential impacts of COVID-nineteen, I remain confident in our strong liquidity position and our ability to weather the next few months. And again, just to reconfirm our ability to continue the business and continue to support our partners and our shareholders. In the first place, the health of our employees.
I will now turn the call over to our President and CEO, Francisco Gomez Neto, for his closing remarks prior to the Q and A session. Thank you.
Good morning to all the analysts and investors connected to our call today. I am Francisco Gomez Neto, President and CEO of Embraer. The coronavirus pandemic is affecting the whole world in our lives. We are still not able to quantify the impact that the recent measures of social distancing and travel restriction will have not only on our business, but on many others around the globe. Our customers, especially in commercial aviation, are sharply reducing capacity for domestic and international flights.
And we have started to see increasing risks to our deliveries for the upcoming months. We are taking important measures and have launched a crisis committee formed by all our senior leadership to monitor the situation daily. We have already temporarily closed our main facilities in Brazil and put our workforce at home. Nothing is more important to Embraer than the safety and health of our employees, customers and associates. We are also implementing measures to preserve our liquidity and maintain our solid financials during these turbulent times.
But we also have good news and I would like to mention some important achievements of Embraer during 2019. We had record cash generation in the last quarter of the year of almost $800,000,000 We had record sales in the executive jet business, keeping strong price discipline and the successful launch of the Praetor family. Embraer delivered the first 2 KC-390s to the Brazilian Air Force and completed the first international sale of our new military air lifter to Portugal in the Defense and Security Business. We signed several contracts with the Brazilian government, including the Navy, Army and Air Force, reinforcing our position as Brazil's defense house. And also very important, we carve out the commercial aviation business and its related services into a separate business as we continue to move forward in the partnership with Boeing.
Regarding the partnership with Boeing, we still need antitrust approval in Europe and we continue to work together with Boeing's team to get it. We believe this is an important strategic partnership and remains a priority for Embraer. Finally, I'd like to reinforce that Embraer has already tested different crises in the past and we are confident that this time won't be different and together with all our employees, customers and partners we will come out of this virus outbreak even stronger. We'll keep the market updated as the conditions continue to evolve in the upcoming months. Thank you.
Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from Rom Epstein, Bank of America.
Hey, good morning guys. Just a few of the broader questions. How are conversations going with your customers on the in the commercial business? What are they coming to you? What are they saying?
I mean, how should we think about what the next 3, 6, 9 months could look like in the commercial airplane business?
Hi, Ron.
Hi, Ron. Good morning. This is Antonio speaking here. Ron, it's important to mention for sure we are talking with all of our customers. But it's important to mention that Embraer has not yet any cancellation of orders that's important for us.
And we are discussing about some deferrals of deliveries from 2020 to 2021. It's more or less in a nutshell the discussion we are having.
Okay. Okay. And then if
We needed to also mention this.
And then in the when we look at the Business Jet business, what have you seen there? I mean, has there been an impact yet on customer decision making? And how is that?
I understand what we are seeing right now in regards to impact on the activity that we have, I would say, some small request for deferral, but just quarterly wise and having no cancellation events, I would say, pretty stable for the time being. If I may add, Antonio, you said earlier, Ron. On Adaptive Jets, we continue to deliver frames. We had a few deliveries this week. And we also continue with our sales activity.
We had a couple of sales being confirmed this week as well. So we are feeling good on the adaptive jet side despite all the uncertainties on the COVID-nineteen.
Okay, great. And then maybe just one last question, if I may. On the KC-three ninety, when we think about the delivery profile of those aircraft this year into next, how many aircraft do you expect to deliver this year? I guess they would go to what the Brazilian Air Force, right?
We have our plan 2 aircrafts to be delivered this year, But we're just evaluating right now with the supply chain because we are talking for our customers now, we are aligned with our suppliers in regards to the parts because as everybody knows, we have this threat restrictions. And what we are doing right now is just to make sure that we have the parties to produce and deliver the aircrafts. But we have 2 other programs.
The next question comes from Robert Spingan, Credit Suisse. Mr. Robert speaking. You may proceed.
Good morning. Can you hear me?
Yes. Yes, we can. Loud and clear.
Okay, good. Thank you. On the Boeing deal, what is it that you think the European Commission is focused on at this point that pushes it to the right? Any color on that?
Well, I mean, we are we are buoyant, we continue to work together to establish this important strategic partnership. We as you say, we still needed the antitrust approval in Europe, but we continue to work with Boeing to get it. So providing the documents they ask and try to do this as quick as we can. Okay.
And then is there any what is the latest in terms of your expectations for proceeds from the Boeing deal? Just given the COVID-nineteen situation, does this change anything with regard to the payment of a special dividend?
Well, this we are now focusing on the on to get this approval of the antitrust authorities in Europe. And we'll find and we're still we work together in order to overcome the situation of the COVID-nineteen to make this deal happen.
Okay. And then just going back to the aftermath of 9eleven, at a point where the 50 seat market was very active. There was an unexpected mix shift or demand shift toward the 50 seater, 50 seater expected and the idea that you could fill a 50 seater more easily than a 7 37 or an A320. Do you expect some kind of mix shift in demand away from the Boeing and Airbus narrow bodies and perhaps the A220 toward the E Jet for the next few years to accommodate the lower demand? Traffic?
It's Albert, it's a good point. Our information and marketing people, they are analyzing all the possible impacts. But I'd say that it's too soon for us to come with a good prognosis on this.
Okay. Okay, thank you very much.
Thank you.
Our next question comes from Cai von Hoemer, Cowen.
Yes. Thank you very much. So in the U. S, as you know, they just passed the $2,000,000,000,000 support package. Does Brazil have a support package that gives you support?
And if not, what sort of numbers based on the closures that you currently expect, what sort of numbers might this be just in terms of incremental cost?
Okay. Hello, Kai. We are deeply working to get additional sources of liquidity. I would say too early to say what we are getting here, but for the time being, we are having some support from U. S.
In regards to tax deferral and that's more or less what we have today.
Okay. And then you have this very good Q4 cash flow. Could you update us on what was the status of payments on the KC-three ninety? And have you early in the year seen any resistance by commercial customer or bizjet customers to make PDPs?
Yes, it's Cai. As far as payments from the government and free cash flow overall, We had a very strong Q4, right? As you mentioned, we generated almost $800,000,000 in cash. So we had a lot of deliveries on both commercial and business jets and also payments from the government. So we were able to reduce the level of receivables from the government during the quarter, and it was very important for us to generate the cash that we did during the Q4.
Got it. And then I think at one point, you talked about the incremental cost of keeping a commercial and a defense business has something like $10,000,000 to $15,000,000 in op expense and $10,000,000 to $15,000,000 in interest expense per month. Are those numbers still valid?
Sorry, Kai. You're talking about the additional cost from the delay on the deal?
Well, the incremental cost of sort of running 2 separate businesses.
Yes, we have a cost of cost. The main cost we have is additional financial expenses around $10,000,000 to $15,000,000 per month. And also, you're totally right, we have additional cost of running 2 businesses, another €10,000,000 to €15,000,000 per month.
Got it.
Thank you very much.
Our next question comes from Josh Milberg, Morgan Stanley.
Hey, good morning, everyone. Thank you guys for the call. You guys have covered a lot of ground already, but I wanted to just revisit the commercial profitability outlook. We saw that in the quarter, even adjusting for separation costs, that your commercial profitability was below past 4th quarters. And I know that you've had the issue of the 175 SE and also E2 ramp up.
And I just wanted to ask, assuming that you didn't have further separation costs, also assuming that COVID wasn't an issue, can you just talk a little bit about how profitability for commercial might have evolved this year? And also just remind us what the sort of rough mix of E-2s and E-1s you were anticipating for 2020? Thank you.
Okay. Hi, Josh. A lot of uncertainties right now with the COVID-nineteen, right? But going to your question, the main facts on the commercial side as far as profitability were the mix, right? We had more delivers in the U.
S. Those orders, as you know, they are bigger. So given the bigger orders, they tend to have slightly lower margins. The second point that affected commercial was the Itur ramp up. We continue to ramp up the Itur.
Last year, we had around 15 deliveries. This is starting to help, but we need to continue to move through the learning curve of Day 2 and that will as we continue to move on that, that will possibly affect margin going forward. So overall, those were the impacts. For this year, as I said, we still need to assess the impact of the COVID-nineteen to have a better visibility in terms of margins for this year for commercial. And
if you didn't if we didn't have this COVID effect, I mean, what might have been a reasonable expectation for a mix of deliveries? What percentage of volume could be E2 this year?
Excluding the COVID-nineteen impact, I think this year in terms of delivers and even mix should not be too different from what we had in the last 2 years, so around 90 points to 100 points.
Okay, very good. Thank you.
The next question comes from Noah Poponak, Goldman Sachs.
Hey, good morning, everyone.
Hi, Noah.
I'd love to attempt to get a little bit more precise on the degree of movement your airline customers in commercial are asking for? If we're looking at a production Are we talking 80 units Are we talking 80 units that want to defer? And are we talking deferring quarters or deferring years?
So in general, as I mentioned before, we know the airlines are going to take capacity sharply. We still need to better understand the impact, but at least they are requesting most of them to defer from 20 20 to 2021. And again, the discussion right now is very dynamic and we have changed every day and but it's more between 2020 to 2021 with regards to deferrals and no cancellations. That's important to mention. Yes.
Very important to mention, Antonio. As you said, Noah, we didn't have any cancellations so far. So all the discussions are really regarding delivery schedule, but no cancellations.
And is it the majority of your previously scheduled 2020 deliveries that are discussing deferrals? Or is it something well under half? It's
as I said, situation is really changing. We need to know for how long the capacity reduction will last, right? It will depend. It will depend how long the COVID-nineteen will impact capacity to have an assessment of if we're talking about part of the deliveries or what percentage of the deliveries. We can't answer that right now.
Understood on that given how dynamic it is. But I'm actually just curious what percentage of those deliveries are even asking the question or even having the conversation? I mean, it's literally every airline that's supposed to take a delivery in 2020 having that conversation with you? Or is it some minority of them that's having that conversation with you?
It depends a lot on the region, right, Noah? And also how the COVID-nineteen is evolving in each one of the regions. We have seen some airlines in Asia read the returning operation. In the U. S, the situation is changing a lot.
So there was a shutdown, but a lot of conversations regarding returning operations. It's very difficult to know the impact at this point, man. Unfortunately, as soon as we have more visibility, we're going to restate our guidance and give the market more clarity on that, okay?
Okay. And then just on the planned special dividend, are you today reiterating that or is that under review along with the rest of 2020 guidance being under review?
Yes. Just it's important to clarify. We need for this time being some prudence with our investor and with you guys. And we suspended the guidance. It's much more related to the operational guidance like sales, EBIT and free cash flow.
And the structure of the deals continue to go ahead and for this perspective, it's hard to say that right now that we are changing also the dividend. We continue to work on it. And again, the strategic partnership, we have agreed to close it. It's hard to say right now that we are changing any guidance in regards to investment, but we prefer to suspend all of them and reevaluate the whole scenario.
Okay. Thanks so much.
The next question comes from Cai von Hoemer, Cowen.
Yes. Thank you. I think you had planned to report as NewCo without the commercial business, but clearly that's not going to happen. You're basically going to basically have commercial bizjet, the same businesses that you've had. Are you going to report in the same format for the 1st two quarters?
Because it doesn't sound like the JV is going to get approved before then.
Yes.
Go ahead, Eduardo. Go ahead, Gwen.
Sorry, Francisco. I was just going to mention that we since we signed the we got the approval from the shareholders for the deal last year in February. We have been reporting the commercial aviation business as a separate business, right, as a discontinued operation. And we're going to continue to report commercial as a discontinued operation until closing. So let's say that.
But go ahead, Francesco.
Just to say that complement to what Edu just said, we have implemented our governance, internal governance that we are going to manage the commercial aviation as a separate unit, but we think Embraer Organization with all the process in place and all the reports and so on.
Thank you.
Ladies and gentlemen, 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.