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 will conduct a question and answer session and instructions to participate will be given at that time. As a reminder, this conference is being recorded and webcasted at ri.endriere.com.br.
This conference call includes forward looking statements or statements about events or circumstances which have not occurred. Embraer has based these following 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 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 Gomez Neto, President and CEO Mr. Nelson Salgado, Executive 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. Nelson Salgado. Please go ahead, sir.
Good morning, everyone, and thanks for joining INDERF's Q2 2018 conference call. We start with the operational highlights at Page 4 with Commercial Aviation. Embraer delivered 26 E Jets in the 2nd quarters and 37 years 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 E175, including 20 few orders. Fujifilm Airlines ordered 2 E175s to add to its Andrea fleet and Bintur signed an order for 2 additional 195 E2s.
Caelian City Hoppers signed an intention to purchase up to 30 5 E195 E2. This is still not less not included in our backlog yet. After the actual SkyWest also signed a few orders for 7 E175 E Jets. In terms of new programs, the 195 E2 that was certified in the 1st part of the year, We will have its first delivery to Azul Airlines in the Q3 of 2019. And Brazil, in preparation for starting the operation of the aircraft, signed a contract for a long term flight hours hour program with Embraer.
BRL 95 E2 began also its global demo tour in Asia. Moving to executive jets at Slide 5. Embraer delivered 25 executive jets, 19 light and 6 large in the Q2 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 600 100 received a 3% certification from ANAC, FAE and EASA with the first delivery to an European customer already happened in the Q2 of 2019.
The Paper 500, it was just announced yesterday, received the AMAC 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 paper jets and related services. We are very happy with the market response to the new papers. Finally, our Casanova Interior won the award for the best interior design at the 20 19 International Yacht and Aviation Award. Next slide, Slide 6, we show the highlights for Defense and Security.
Starting with the KC-two ninety. 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 scheduled to happen in 2019. Embraer also announced its first export customer for the KC-two ninety. The Portuguese government announced a same order for 5 KC-two ninety and related services. That was a very important achievement, introducing the K690 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 2,600 AEW airborne early warning. We believe there is a potential for this project and Embraer wants to explore it with the partnership. Finally, our subsidiary, APAC, successfully completed the delivery of a new aircraft traffic management center in India. And the contractual discussions with the Brazilian Navy for the supply of 4 ships of the Panambare class continue to move as expected. Now we move to the financial results, starting with the backlog at Slide 8.
We continued our backlog recovery and reached US16.9 billion dollars by the end of Q2 2019. This recent increase was driven by demand for our new effective jets, Greater 50600 and the continued success of the casino family. It is important to say that the recent KC 390 order from Portugal is not included in our backlog yet. Next, in Slide 9, we show aircraft deliveries. On commercial, we delivered 26 planes at the 2nd 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 b jets deliveries this year. On Executive Jets, we had a better first half compared to last year, with 25 deliveries in the 2nd quarter and 36 in the first half of the year. We maintain also our confidence to deliver 90 to 110 biscuits this year as we are better sold than last year and have been seeing stronger demand for outlets. Moving to Slide 10, net revenues. We reported 2nd quarter revenues of BRL 1,379,000,000 broken by Commercial Aviation, BRL 631,000,000 Executive Jets, BRL297,000,000 Defense and Security, BRL 196,000,000 and Services and Support, BRL 255,000,000 dollars The total in the first half of the year amounts to US2.2 billion dollars With the exception of commercial aviation, where we had the lower deliveries, we presented good revenue expansion, especially on the Executive Jets and Defense.
On Slide 11, SG and A expenses. We reported a total of SG and A at BRL 119,000,000 with G and A expenses amounting to 46,000,000 and selling expenses to $73,000,000 Our SG and A expenses this year has been affected by the activities related to the separation of Commercial Aviation Business. Moving to the operating results at Slide 12. We reported 2nd quarter EBIT of $27,000,000 with 1.9 percent EBIT margin. The first half EBIT was $11,000,000 implying 0 point 5% margin.
The operating results are in line with our guidance of breakeven margin for the year. And it's important to highlight that the separation costs associated to the Boeing transaction are all included affecting the EBIT. Year to date, we had separation costs of around $30,000,000 Breaking our 2019 EBIT margins per business, we had services 12% commercial 2.7 percent executive around 0% and defense minus 7%. Moving to Slide 13, we show our EBITDA. The same impact that we explained for the EBITDA, our EBITDA also acquired here for the EBITDA.
We reported in the Q2 $67,000,000 EBITDA with 40.9% margin. Year to date, EBITDA is BRL 98,000,000 with 4.4%
margin.
In Slide 14, we present our earnings. Embraer reported a net loss of $14,000,000 in the 2nd 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 investments year to date of $200,000,000 broken by research, dollars 21,000,000 development, dollars 127,000,000 52,000,000 in CapEx. Our investments this year remain concentrated on the E2 program as we enter into service with the 195 Itu and continue the development of the 175 Q2.
At Slide 16, we show our free cash flow. Embraer reported a positive free cash flow of BRL 2,000,000 at the 2nd 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 Q4. Finally, at Slide 17, we show our indebtedness profile. We ended the 2nd quarter with a total cash position of $2,800,000,000 and a total debt position of 3 $57 implying a net debt of $1,090,000,000.
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 Gome, for closing remarks because we open for Q and A. For our view, Francisco, please go ahead.
Thank you, Nelson, and good morning, everyone, from my side as well. It is a great pleasure to become part of the highly skilled team in the year that Embroer is celebrating its 50th anniversary of challenges and achievements. In my first three months at Embroer, 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, continued progress in becoming a more efficient company, the continued 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 Embro Air or eventually work in Boeing and 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'm 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 executive defense and services businesses are stronger than ever after a long period of investment and combined with the maturity of innovative programs will bring value for our shareholders. I have no doubt that working hard will build a strong, solid and sustainable future for Emboer in the next decade.
So thank you very much. Operator, now we move to the Q and A session.
And A session. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from Cai von Rumohr, Cowen and
Company. Hi. Yes, this is Jeff on for Kai. 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 activity progressing? And what is the current view on major milestones, dates and costs?
Well, thank you, Cai. The conclusion of the deal has 2 big fronts. 1 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, but we are moving according to what we can.
The other big front is associated with all the tasks that we have to do to separate the commercialization business. And here, most of the activities are associated with the duplication of the IT systems, with the separation of the people that will go to the company, the separation of infrastructure that we will meet in 2020 after the separation. For example, we will move a lot of people from the main site in where I have today in San Juve, which will be a BDC site, to El Geno de Mello that will be the main site of San Juarez in San Juarez. So for that, we need to accommodate people there. We also are also using the final assembly line of the paper jets because of the short because today it is done at Sao Paulo D'Oscaster.
So 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. And is there any update on the actual the cost, whether for the tax and the separation cost? I think it was previously supposed to be $1,200,000,000 combined or was there a balance?
Yes. Because for now, we're not changing that number. That's what we expecting. Related to the separation activities themselves, we add up in the first part of the year $30,000,000 that we mentioned that are impacting our EBIT.
Understood. And then 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 1. What was the book to bill in the quarter? And any color on what geographies were strongest?
What type of buyers are most active? Thank you.
You're right, Cai. We had a strong book to bill in effective aviation. As we mentioned, the certification of the Praetor aircraft and first delivery of the Plata 600 in Europe and the new the first delivery of the Plata 500 already coming. I think this is having a very good response from the market. Our book to bill was actually around 1.5, but 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 form a basis following the deal closing, if there's been any adjustment?
So we are working towards the break the outlook that we gave in the beginning of the year regarding 2019, which is to pay $1,600,000,000 in extraordinary dividends to shareholders and start the Embraer with a net cash position of $100,000,000 For this year, 2020, we expect the free cash flow to be breakeven sorry, for 2020, for next year, we expect cash flow to be breakeven. And as we reported in January, we projected revenues of 2.5% to 2.8 percent and EBIT margin from 2% to 5%.
And so Nelson, I'm sorry, did you say what the free cash flow was for 2019? I understand the cash position, but I just wonder, is this year a free cash flow breakeven or you'd be able to recover what's been consumed in the first half?
Yes. Generally, the second half is much stronger than the first. That's typical in our cycle, both Executive and Commercial. They have and Defense, they have a stronger second part of the year in terms of cash generation. And we expect that these results from the Q1, especially, will be recovered.
And with that, we remain in line with our guidance of paying $1,600,000,000 dividend and starting the new embryo with around $1,000,000,000 net cash position. We did not give specific guidance to 2019.
And then in terms of the delivery of the KC-three ninety to the Brazilian Air Force, what are the milestones ahead? 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. And as soon as it came back from the Paris Air Show, the delivery process for the Brazilian process started. This is the first delivery of a brand new type to its first customer. So the process takes long. So because there are lots of things that have to be verified by the customer.
And we expect that the delivery will happen in the Q3 of 2019.
Our next question comes from Ronald Epstein, Bank of America Merrill Lynch.
This is Christine Liwag calling in for
Ron.
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. So can you discuss what's driving the margins lower for that segment?
Well, we, for some time, anticipated that this transitional year, when we start ramping up the 1 19 E2 deliveries. The E2 deliveries, first, a product that additionally have a worse margin, right? So I think this as we grow the number of the issues in the mix, that tends to drive margins down. We are also delivering aircraft in the U. S.
Between 75 percent in contracts where we knew also that we would have a worse margin that we had previously in the segment. So that's basically what is affecting the margin. So it's a bit of higher cost on the H2 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 75. Yes. One important thing, Cristin, Pedro Fiesta may add, it's important to say that
the margins we mentioned about commercial, they include the separation costs there. So if you remove the separation costs, the margins in commercial would be like 3 percentage points better. So besides what Nelson mentioned, it's important to have in mind that the decline is also related to the separation costs.
Yes. At the EBIT level, I was talking more about the gross margin.
That's really helpful. And 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's difficult to say. We work very hard every day to try to anticipate the reduction saying one specific amount of aircraft, right? But it's very normal. There is generally in the learning curves, in the first 15 to 80 aircrafts, you have a faster reduction and then a slower reduction up to 150 to 100 aircrafts, right? So that's more or less the profile that we're working on.
Great. And 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 these publications in Executive Aviation are mentioning that. So you have a more positive environment coming from that. And with the introduction of the papers, we differentiated our offering the segment even more with a much bigger range than any other competing aircraft. So it's for the Paper 500 and also the Paper 600. And we expect that this positioning will allow us to practice better prices we've been working in value really the offer that we're providing to the market.
Great. And 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 acquisition, you have commitments from either part. Important to emphasize that business scenario, we don't even consider. We are working very hard to get the regulators approval in all regions of the world.
And internally, we're 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.
The next question comes from Josh Milberg, Morgan Stanley.
Hey, good morning, Francisco, Nelson and Edu. Thank you guys for the call. My first question is a follow-up on the question about your cash flow. In the Q1 call, you had highlighted the $100,000,000 of delayed payments from the Brazilian government, and that apparently did not reverse in the second quarter. So 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 out.
Yes. We the budget problems that the Brazilian government has been facing, they are affecting our results. But we have great confidence that the Brazilian Air Force will manage to sort that out before the end of the year.
Okay. That's helpful. And then 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 the timing that timing and on what penalties could apply if a future Portuguese government decided to cancel or delay the orders?
And then 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 parts by parts. Regarding the contract with Portugal, it is indeed a very important milestone because it's the 1st export customer from the product. And this is always a very important achievement for this program. The time for the delivery of the first aircraft is more driven by the need to develop the later version of the aircraft.
So there is some product development associated with
this
contract, which will this delay the first 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 retreat of around 2 aircraft per year by the Brazilian airport, right? So that's the delivery plan for the KC. I think the piece that we are missing is that there is this product development so that we have an aircraft that is ready to operate in the alternate environment, which, by the way, is very good because we will have opportunities to look for customers in all that have the same need after that.
Okay. That was the exact explanation that I was looking for, just a better understanding of what was behind the 2023 timing. But 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 Portugal government stipulates with respect to eventual decisions to either cancel or delay the order?
Well, every contract has provisions. Its obligations are not fulfilled by either part. But again, we're not contemplating that. We think we have a very strong contract. We have everything in line to have the public development that we have to do ready and the first delivery in 2023.
K23.
The next question comes from Gabriel Cavalcanti, ATM Investments.
Good morning, guys. Thank you for taking my questions. And it's just about the dividends. We know that in the United States, 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.
And 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?
No. There is quite a few treatment from any investor. We will pay the dividends to everyone the same way.
This concludes today's question and answer session. The next question comes from Cai von Humer. This concludes today's question and answer session and concludes our Embraer's audio conference for today. Thank you very much for your participation. Have a good day.