Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's second quarter 2019 results. Thank you for standing by. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions to participate will be given at that 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 in other markets where the company is present. The words believe, may, will, estimate, continue, anticipate, intend, expect, and similar words are intended to identify forward-looking statements. Embraer undertakes no obligation 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 in 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. Nelson Salgado, Executive Vice President, Finance and Investor Relations, and Mr. Eduardo Couto, Director of Investor Relations. I would now like to turn the conference over to Mr. Nelson Salgado.
Please go ahead, sir.
Good morning, everyone. Thanks for joining Embraer's second quarter 2019 conference call. We start with the operational highlights at page four with commercial aviation. Embraer delivered 26 E-Jets in the second quarter and 37 year-to-date. As far as sales activity, Embraer signed up to 78 aircraft commitments during the Paris Air Show, including United Airlines for up to 39 E175s, including 22 orders. Fuji Dream Airlines ordered two E175s to add to its Embraer fleet. Binter signed an order for two additional E195-E2s. KLM Cityhopper signed an intention to purchase up to 35 E195-E2s. This is still not included in our backlog yet. After the air show, SkyWest also signed a firm order for seven E175 E-Jets. In terms of new programs, the E195-E2 that was certified in the first part of the year will have its first delivery to Azul Airlines in the third quarter of 2019.
Azul, in preparation for starting the operation of the aircraft, signed a contract for a long-term flight hour pool program with Embraer. The E195-E2 began also its global demo tour in Asia. Moving to executive jets at slide five. Embraer delivered 25 executive jets, 19 light and six large, in the second quarter of 2019, and 36 year-to-date. This volume is around 20% above the same period of 2018. As far as the new products, the Praetor 600 and the Praetor 500. The Praetor 600 received triple certification from ANAC, FAA, and EASA, with the first delivery to an European customer already happened in the second quarter of 2019. The Praetor 500, it was just announced yesterday, received the ANAC certification, outperforming on key performance metrics such as range and speed.
In terms of new sales, Embraer had an expressive backlog increase due to the new sales of Praetor jets and related services. We are very happy with the market response to the new Praetors. Finally, our Bossa Nova interior won the award for the best interior design at the 2019 International Yacht and Aviation Awards. Next slide six, we show the highlights for defense and security. Starting with the KC-390. The program continue its flight test program with focus on the military missions. Looking forward to the first delivery to the Brazilian Air Force that is scheduled to happen in 2019. Embraer also announced its first export customer for the KC-390. The Portuguese Government announced a firm order for five KC-390 and related services. That was a very important achievement, introducing the KC-390 in the European market and reinforcing the program's success.
Still regarding new products, Embraer and Elta Systems from Israel signed a strategic agreement to introduce the Praetor 600 AEW, airborne early warning. We believe there is a potential for this product, and Embraer wants to explore it with the partnership. Finally, our subsidiary, Atech, successfully completed the delivery of a new aircraft traffic management center in India. The contractual discussions with the Brazilian Navy for the supply of four ships of the Tamandaré-class continue to move as expected. Now we move to the financial results, starting with the backlog at slide eight. We continued our backlog recovery and reached BRL 16.9 billion by the end of second quarter 2019. This recent increase was driven by demand for our new executive jets, Praetor 500 and 600, and the continued success of the Phenom family.
It is important to say that the recent KC-390 order from Portugal is not included in our backlog yet. In slide nine, we show aircraft deliveries. On commercial, we delivered 26 planes at the second quarter and 37 year-to-date. This is below last year, but in line with our expectations, and we reiterate our guidance of 85 to 95 E-Jet deliveries this year. On executive jets, we had a better first half compared to last year, with 25 deliveries in the second quarter and 36 in the first half of the year. We maintain also our confidence to deliver 90 to 110 big jets this year, as we are better sold than last year and have been seeing stronger demand for our planes. Moving to slide 10, net revenues.
We reported second quarter revenues of BRL 1.379 billion, broken by commercial aviation, BRL 631 million, executive jets, BRL 297 million, defense and security, BRL 196 million, and services and support, BRL 255 million. The total in the first half of the year amounts to $2.2 billion. With the exception of commercial aviation, where we had lower deliveries, we presented good revenue expansion, especially on the executive jets and defense. In slide 11, SG&A expenses. We reported a total of SG&A at BRL 119 million, with G&A expenses amounting to BRL 46 and selling expenses to BRL 73 million. Our SG&A expenses this year have been affected by the activities related to the separation of commercial aviation business. Moving to the operating results at slide 12. We reported second quarter EBIT of BRL 27 million, with 1.9% EBIT margin. The first half EBIT was BRL 11 million, implying 0.5% margin.
The operating results are in line with our guidance of break-even margin for the year. It's important to highlight that the separation costs associated to the joint transaction are all included, affecting the EBIT. Year to date, we have separation costs of around BRL 30 million. Breaking our 2019 EBIT margins per business, we had services 12%, commercial 2.7%, executive around zero, and defense minus 7%. Moving to slide 13, we show our EBITDA. The same impact that we explained for the EBIT also applies here for the EBITDA. We reported in the second quarter, BRL 67 million EBITDA, with 40.9% margin. Year to date, EBITDA is BRL 98 million with 4.4% margin. In slide 14, we present our earnings.
Embraer reported a net loss of BRL 40 million in the second quarter, with margin of negative 1%. Again, here our earnings have been impacted by the low operating results and also higher financial expenses given our increased leverage. As far as investments in slide 15, we reported total investment year-to-date of BRL 200 million broken by research, BRL 21 million, development, BRL 127 million, and BRL 52 in CapEx. Our investments this year remain concentrated on the E2 program as we enter into service with the E195- E2 and continue the development of the E175- E2. At slide 16, we show our free cash flow. Embraer reported a positive free cash flow of BRL 2 million at the second quarter, and a free cash flow consumption of BRL 664 year-to-date.
As we have been saying, we expect a positive cash flow generation in the second half of the year because of the higher deliveries, especially in the fourth quarter. Finally, at slide 17, we show our indebtedness profile. We ended the second quarter with a total cash position of $2.8 billion and a total debt position of $357, implying a net debt of $1.090 billion. Our debt maturity remains comfortable, with an average of 5.1 years. With that, I concluded the presentation and I will pass to our new CFO, Francisco Gomes, for closing remarks because we open for Q&A. Francisco, please go ahead.
Thank you, Nelson, and good morning, everyone from my side as well. It is a great pleasure to become a part of the highly skilled team in the year that Embraer is celebrating its 50th anniversary of challenges and achievements. In my first three months at Embraer, I have visited all of our sites around the world, and I'm greatly impressed with the levels of engagement, ethics, and teamwork that our Embraer team shares. I am convinced that Embraer is very well-positioned for a promising future. Through the combination of our state-of-the-art products, continuous progress in becoming a more efficient company, the continuous support of our customers, and the consummation of the strategic partnership with Boeing.
We continue to work on several fronts to ensure that the strategic partnership between Embraer and Boeing is successfully concluded, and all of our employees, regardless of whether they will remain with Embraer or eventually work in Boeing Brazil Commercial, are fully engaged with the necessary processes to complete this important transaction. After what I have experienced in Embraer in these initial months, I am convinced that the company will return to its growth path. With our team working in a lean manner with ethics, unity, and oriented by results, we believe Embraer will recover and even surpass its current market value. Our executives, defense, and services businesses are stronger than ever. After a long period of investment and combined with the maturity of innovative programs, we'll bring value for our shareholders.
I have no doubt that working hard will build a strong, solid, and sustainable future for Embraer in the next decades.
Thank you very much. Operator, now we move to the Q&A session.
Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question, please press the star key followed by the one key on your touchtone phone now. If at any time you would like to remove yourself from the questioning queue, press star two. Our first question comes from Cai von Rumohr, Cowen and Company.
Cai, can you hear us?
Hi. Yes, this is Jeff on for Cai. Can you hear me?
Yes, very clear.
Okay. Good morning and welcome aboard, Francisco. Thank you for taking my questions. I'd like to ask about the Boeing partnership, specifically, how are the separation activities progressing, and what is the current view on major milestones, dates, and costs?
Well, thank you, Cai. The conclusion of the deal has two big fronts. One relates to the work with the regulatory authorities of several jurisdictions, so that we get approval. We are doing well on this front. We are not talking about specific regions, we are moving according to what we planned. The other big front is associated with all the tasks that we have to do to separate the commercial aviation business. Here, most of the activities are associated with the duplication of the IT systems, with the separation of the people that will go to either company, the preparation of infrastructure that we will need in 2020 after the separation. For example, we will move a lot of people from the main site Embraer has today in São José, which will be a BBC site, to Eugênio de Melo.
That will be the main site of Embraer in São José dos Campos. For that, we need to accommodate people there. We are also moving the final assembly line of the E-Jet to Gavião Peixoto, because today it is done at São José dos Campos. Many different activities, but we are confident that we are moving ahead as planned to target the transition by the end of the year.
Okay. Thank you. That's helpful. Is there any update on the actual cost, whether for the tax and the separation cost? I think it was previously supposed to be BRL 1.2 billion combined.
Yes. For now, we're not changing that number.
Right.
That's what we're expecting. Related to the separation activities themselves, we add up in the first part of the year, BRL 30 million that we mentioned that are impacting our EBIT.
Understood. One more question, if I can, on a different subject here on executive jets. It looks like the book-to-bill was quite strong, but it's difficult to tell exactly what it was, although it looks like it was above one. What was the book-to-bill in the quarter? Any color on what geographies were strongest, what type of buyers are most active? Thank you.
As you're right, Cai, we had a strong book-to-bill in executive aviation. As we mentioned, the certification of the Praetor aircraft and first delivery of the Praetor 600 in Europe and the news, the first delivery of the Praetor 500 already coming, I think these are having a very good response from the market. Our book-to-bill was actually around 1.5. We are not able yet to provide details of where this growth came from.
The next question comes from Myles Walton, UBS.
Thanks. Good morning. Welcome, Francisco. I was hoping maybe you could start around the cash flow of the business and kind of what your expectation is for free cash flow for the year, and/or maybe where you think the balance sheet is on a pro forma basis following the deal closing, if there's ever any adjustment?
We are working towards the outlook that we gave in the beginning of the year regarding 2019, which is to pay BRL 1.6 billion in extraordinary dividends to shareholders and start the new Embraer with a net cash position around BRL 1 billion. For this year, 2020, we expect the free cash flow to be breakeven. Sorry, 2020, next year. For next year, we expect cash flow to be breakeven. As we reported in January, we projected revenues of BRL 2.5-BRL 2.8 and EBIT margins from 2%-5%.
Nelson, I'm sorry, did you say what the free cash flow was for 2019? I understand the cash position, I just wonder is this year a free cash flow breakeven? Will you be able to recover what's been consumed in the first half?
Yeah. Generally, the second half is looking stronger than the first. That's typical in our cycles. Both executive and commercial, and defense, they have a stronger second part of the year in terms of cash generation. We expect that these results for the first quarter especially, will be recovered. With that, we remain in line with our guidance of paying BRL 1.6 billion dividend and starting the new Embraer with around BRL 1 billion net cash position. We did not give specific guidance to 2019.
Then in terms of the delivery of the KC-390 to the Brazilian Air Force, what are the milestones ahead? Is there any required further testing or is it purely paperwork at this point, just in terms of getting that delivered?
Actually, the first KC that we delivered, to be delivered to the Brazilian Air Force was the aircraft that we presented in the Paris Air Show. As soon as it came back from the Paris Air Show, the delivery process for the Brazilian Air Force has started. This is the first delivery of a brand-new type to its first customer. It's a process that takes long, because there are lots of things that have to be verified by the customer. We expect that the delivery will happen in the third quarter of 2019.
All right. Very good. Thanks so much.
Thank you.
Our next question comes from Ronald Epstein, Bank of America Merrill Lynch.
Hi, good morning, guys. This is Kristine Liwag calling in for Ron.
Hi, Kristine.
Hi. My first question is on commercial aviation. Can you walk us through the moving pieces in margin for that aircraft? In your press release, you mentioned that there are weakness because of shift in mix. Can you discuss what's driving the margins lower for that segment?
Well, we, for some time, anticipated that this transition year, when we start ramping up the E190-E2 deliveries or the E2 deliveries. First products, they traditionally have a worse margin, right? I think as we grow the number of the E2s in the mix, that tends to drive margins down. We are also delivering aircraft in the U.S., the E175s, in contracts where we knew also that we would have worse margins that we had previously in the segment. That's basically what is affecting the margin. It's a bit of higher costs on the E2, relatively to what we expect to be in the future because of the learning curve, and more tight margins because of sale prices on the E175.
One important thing, Kristine, that Rodrigo here can add, it's important to say that the margins we mention about commercial, they include the separation costs there. If you remove the separation cost, the margins in commercial would be three percentage points better. Besides what Nelson mentioned, it's important to have in mind that the decline is also related to the separation costs.
Yeah, at the EBIT level, I was talking more about the gross margins.
That's really helpful. When you think about the learning curve on the E2, at what unit delivery do you expect incremental E2 margins to be closer to parity to what your legacy E-Jet margins were?
Well, that is difficult to say. We work very hard every day to try to anticipate the reduction of costs. I would not take the risk of saying one specific amount of aircraft, right? It's very normal. There is generally, in the learning curves, in the first 15 to 80 aircraft, you have a faster reduction, and then a lower reduction up to 150, 200 aircraft. That's more or less the profile that we work with.
Great. In executive aviation, can you discuss the demand environment and also the pricing? Are you starting to see pricing improve in executive?
Well, the market is better, generally speaking, not spectacularly, but it is better. All the publications in executive aviation were mentioning that. You have a more positive environment coming from that. With the introduction of the Praetors, we differentiated our offer in the segment even more, with a much bigger range than any other competing aircraft, from the Praetor 500 and also the Praetor 600. We expect that this positioning will allow us to practice better prices as we've been working in valuing really the offer that we are providing to the market.
Great. Lastly for me, if I could squeeze one more. For the Boeing deal, are there termination costs if the deal doesn't close?
There are. I don't know the details here, but depending on the reason for potential not closing, you have commitments from either party. Important to emphasize that this is a scenario we don't even consider. We are working very hard to get the regulators approval in all regions of the world, and internally, working very hard to make all the activities that we have to make and complete before the separation starting in the end of the year.
Thank you very much.
Thank you.
The next question comes from Josh Milberg, Morgan Stanley.
Hey, good morning, Francisco, Nelson, Edu. Thank you guys for the call. My first question is a follow-up on the question about your cash flow. In the first quarter call, you had highlighted the BRL 100 million of delayed payment from the Brazilian Government. That apparently did not reverse in the second quarter. I just wanted to see if you could give us a little bit of a better understanding on what's your basis for anticipating a normalization in the second half of this year. That's the first doubt.
Yes. The budget problems that the Brazilian Government has been facing, they are affecting our results. We have great confidence that the Brazilian Air Force will manage to sort it out before the end of the year.
Okay. That's helpful. My second question is on the KC. We recognize that the sales to Portugal did represent a big milestone for you guys, but we had thought that deliveries might have started a little earlier. Could you guys comment on that timing and on what penalties could apply if a future Portuguese Government decided to cancel or delay the orders? If we also think about other potential KC orders from abroad, do you think that 2023 is a reasonable assumption for the earliest when those other orders might start delivering?
Well, I'm not sure I understood the question completely. Let's go part by part. Regarding the contract with Portugal, it is indeed a very important milestone because it's the first export customer for the product, and this is always a very important achievement for these programs. The time for the delivery of the first aircraft is more driven by the need to develop the NATO version of the aircraft. There is some product development associated to this contract, which will not delay, but it will make that the first delivery will not happen before 2023, and with the other deliveries happening up to 2027. In parallel to those deliveries, we will have a regular repeat of around two aircraft per year by the Brazilian Air Force. That's the delivery plan for the KC.
I think the piece that was missing is that there is this product development so that we have an aircraft that is ready to operate in the open NATO environment. Which, by the way, is very good because we will have opportunities to look for customers that have the same needs after that.
Okay. That was the exact explanation that I was looking for, just a better understanding of what was behind the 2023 timing. The other doubt I had raised was, if you could just comment, and maybe this is something that you don't disclose, but what the contract with the Portuguese Government stipulates with respect to eventual decisions to either cancel or delay the order.
Well, every contract has provisions if obligations are not fulfilled by either party. Again, we're not contemplating that. We think we have a very strong contract. We have everything in line to have the product development that we have to do ready and the first delivery in 2023.
Okay. Thank you very much.
Ladies and gentlemen, as a reminder, if you would like to pose a question, please press the star key followed by the one key on your touchtone phone. The next question comes from Gabriel Cavalcante, CTM Investment.
Good morning, guys. Thank you for taking my question. It's just about the dividends. We know that in the U.S., dividends are taxed differently from what they are in Brazil. I just want to know if there's any type of initiative coming from Embraer, maybe working with somebody else to maybe put a different situation for the American investors that are receiving this dividend. It's just about if they're going to be taxed the same way they're taxed on regular dividends, or there's something that are going to help these investors to get taxed differently. Thank you.
There is no different treatment from any investor. We will pay the dividends to everyone the same way.
Okay, thank you.
This concludes today's question and answer session. Sorry. The next question comes from Cai von Rumohr. Sorry. This concludes today's question and answer session, and concludes our Embraer audio conference for today. Thank you very much for your participation. Have a good day.