Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's first 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. 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 believes, may, will, estimate, continues, anticipate, intend, expect, and similar words are intended to identify forward-looking statements. Embraer undertakes no obligations to update publicly, sorry, 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. 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. We start our presentation at slide four, talking about the business unit highlights, first on commercial aviation. We delivered 11 E-Jets in the first quarter of 2019, including the first delivery of E175 jets in Africa to Mauritania Airlines. In terms of new E175 sales, the American airline, SkyWest Airlines, signed an additional firm order for nine E175 jets, reaching an impressive mark of 158 orders since 2013. From these, 147 aircraft have already been delivered to SkyWest Airlines. As far as the E2 program, we had a very important result in the first quarter. Similar to what happened last year with the E190-E2, the E195-E2 was granted triple certification by ANAC, FAA, and EASA, the authority from Brazil, U.S., and Europe. With the first delivery of the E195-E2 to Azul Airlines is expected to happen in the first quarter of 2019.
Finally, regarding E2 new sales, the Nigerian carrier, Air Peace, placed an order for up to 30 E195-E2 jets, and this was our first E2 order in Africa. Moving to slide five, highlights of executive aviation. We have delivered 11 executive jets in the first quarter. And important to say, we sold more than BRL 300 million in new jets during this period. This was our best first quarter result in terms of sales in the last two years. Embraer was also very proud to deliver the 500th Phenom 300 aircraft, the only business jet to achieve this milestone in the last 10 years. This is a real proof of the huge success of the Phenom program and its ability to deliver superior performance, technology, and comfort to our customers. Finally, talking about our most recent launch.
We announced it in the first quarter that the Praetor 600 was granted its type certificate by ANAC, the certification authority from Brazil, and thus became the only super-midsize business jet to be certified since 2014. Very important to say, that with this certification and the last flight tests, we are very happy to announce that the Praetor 600 surpassed all main design goals, including a range that goes beyond 4,000 nautical miles, being able to make non-stop flights between London and New York, São Paulo and Miami, Dubai and London. Customers have already noticed the superior performance of the Praetor 600, and we're happy to announce that the Praetor is sold out until May 2020, with first deliveries happening now in the second quarter of 2019. Next slide six, we move to defense and security.
The KC-390 program continues its preparation for entry into service with the Brazilian Air Force in 2019. Flight test campaign exceeded 2,000 flight hours, with focus now on the military missions. The aircraft has successfully accomplished two important airdrop cargo series of tests in Brazil and in the U.S. As far as new programs, the Consórcio Águas Azuis, formed by ThyssenKrupp, Embraer, and Atech, was chosen as the preferred supplier to build four new ships to the Brazilian Navy. Finally, two A-29 Super Tucano aircraft were delivered to the Light Air Support Program, LAS, of the U.S. Air Force in the first quarter of 2019. Moving to slide seven, with highlights of services and support. We continue to expand the services and support business, with revenue and profitability growth.
In the first quarter of 2019, we added to our team program new customers, new E1 operators, including WDL Aviation, Mauritania Airlines, and Air Botswana. We have also added new E2 operators to our services and support base, such as Air Astana from Kazakhstan and Binter Canarias from Spain. Moving now to financial results. We start in slide nine with firm order backlog that reached BRL 16 billion at the end of the first quarter. This is slightly down the value at the end of 2018, but significantly above the value that we registered in the third quarter of 2018, which was BRL 13.6 billion. We affirm here the trend of a recovery in our backlog. As far as deliveries in slide 10, in commercial aviation, we had a soft quarter, with 11 deliveries versus 14 the same period last year.
This does not impact our guidance for the year, which remain 85-95 deliveries in 2019. Just as an additional information, in April alone, we delivered nine additional jets. In executive jets, we had 11 planes delivered in the first quarter, same number of last year, with eight small jets and three larger jets. Important to say, we anticipate a stronger business jet deliveries in the rest of the year, especially with the entry into service of the Praetor 600 that will happen now in June. Here also, we reiterate our guidance of 90-110 deliveries of executive jets in 2019. Moving now to slide 11. We show our revenues in the periods. Consolidated revenues declined to BRL 823 million in the first quarter of 2019, relatively to first quarter 2018. This reduction was mostly driven by lower commercial jet deliveries.
This is broken by BRL 281 million in commercial aviation, BRL 117 million in executive, BRL 179 million in defense and security, and BRL 244 million in services and support. In slide 12, we present our SG&A expenses, which are very much stable compared to first quarter 2018. We had BRL 116 million in expenses, broken by BRL 46 million in G&A and BRL 70 million in selling expenses. Moving to slide 13, we present our adjusted EBIT. We reported a negative EBIT of BRL 50 million, implying a negative 1.8% EBIT margin. This EBIT margin includes the additional separation costs for the carve-out and preparation of the conclusion of the transaction with Boeing by the end of the year. Important to remember that in this first quarter, the results were negatively impacted by lower commercial aviation deliveries that we expect to recover in the next quarter.
As I already mentioned, in April alone, we delivered nine additional jets. We maintain our guidance of EBIT and EBITDA for the company in 2019, remembering again that this includes the separation costs associated with the carve-out of our commercial aviation business. Moving to slide 14, we reported EBITDA of BRL 31 million with 3.8% EBITDA margin, driven by the similar reasons we already explained in the operating results. Next slide is slide 15. We show net income. We reported an adjusted net income excluding here the impact of deferred income tax of negative BRL 62 million, affected by the weak operating results that are normal in the first quarter. Slide 16, we present our investments, which amounted to BRL 102 million, broken by nine in research, BRL 65 million in development, and BRL 28 million in CapEx. Different from last year, in this quarter, we did not receive any contribution from risk-sharing partners.
Next slide 17, we present our free cash flow. Embraer had a free cash flow consumption of BRL 665 million in the first quarter of 2019. With BRL 558 million negative coming from operations, BRL 43 million additional to power, property, and equipment, and BRL 65 million additional to intangibles. Our free cash flow consumption is generally negative in the first quarter. Compared to first quarter last year, we had BRL 435 million negative in spite of around BRL 67 million of contribution for risk-sharing partners. In this quarter, the main reasons for the growth of the consumption are, first, the higher inventories, that again, are normal in the first quarter as we prepare for higher delivery rates in the rest of the year, especially here in commercial aviation. Second, by lower payments from the Brazilian government in some of our defense quarters during the contract. This amounts to around BRL 100 million, which we did not receive.
Moving to slide 18, we highlight our indebtedness profile. Again, 92% of our total debt remains in the long term with an average maturity of 5.2 years. We closed the first quarter with a total cash of BRL 2.48 billion and a total debt of BRL 3.59 billion, implying a net debt of $1.1 billion. We announced a guidance for the year, that with the closing of the transaction, we intend to pay BRL 1.6 billion in extraordinary dividends to our shareholders and start life with new Embraer with a BRL 1 billion net cash position after close. These results are obviously subjected to the results that we will have throughout the year, but we feel confident that we will get there, and we will keep you posted on this as next results come. Finally, moving to slide 19, our final configurations and closing remarks.
I just like to mention that Embraer has announced Francisco Gomes Neto, the former President of Marcopolo, as our new CEO and President. That was effective now in May. Francisco brings a long experience from the automotive sector, leading an important turnaround at Marcopolo in the last three years. Francisco is now investing in his integration at Embraer, visiting our main facilities, clients, and suppliers, and he will join us in our next conference call. Second, just a brief update on the Embraer Boeing strategic partnership. We currently have ongoing interaction with several antitrust authorities in different jurisdictions throughout the world, and we keep working hard on the carve-out project so that we can separate the commercial aviation business. We expect the transaction to close by the end of 2019. Obviously, that depends on all approvals being obtained on time.
With that, we conclude our presentation and would like to open for questions.
Ladies and gentlemen, if you would like to pose a question, please press star one. To remove yourself from the question queue, press star two. Our first question comes from Ronald Epstein, Bank of America Merrill Lynch.
This is Cai von Rumohr on for Ron Epstein. With respect to the recent 737 MAX issues, has there been a change in Boeing's commitment to the Embraer partnership? Do you see this affecting the timing of the deal close?
No, there is no relation between this and the strategic partnership between Boeing and Embraer at all.
Okay. Thank you. One more, if I could. Volume was a little light in the quarter, but gross margin was solid. What's driving the better gross margins at these low volumes?
I did not understand the question, please.
Revenues were a little light in the quarter, gross margin was solid and strong in the quarter. Can you talk a little bit about what's driving the better gross margins?
That was driven by services and defense, that had a good growth margin in the period.
Okay, thank you.
The next question comes from Cai von Rumohr, Cowen and Company.
Yes, thank you very much. Nelson, you had very good book-to-bill in your biz jet business. Can you first give us a little bit of color of what products, what geographies are particularly strong? Secondly, given the very strong orders you had, how come the deliveries were as weak as they were?
Well, thank you, Cai. The U.S. remains the most important market for business jet deliveries. We had these 11 deliveries, which are normal for the quarter.
We're still not delivering the Praetor.
Yeah, the sales are driven mainly by the Praetor 600, which will only start to be delivered after June. That's when we have the first unit. Obviously, the Phenom 300 remains a strong player, and will remain so for the next months. I'd say that the Praetors are the big drivers for the additional sales, and delivery will only start by mid-year.
If I may add, Nelson. It's a good year, Cai. It's important to say that we are better sold this year on business jets than we were last year at the same time. We are confident in our guidance of 90 to 110 deliveries, and that is reflected in our amount of sales.
Thank you very much. A last question. Commercial aircraft orders. What impact has the expected Boeing JV venture had on demand for the products? Have you seen greater interest as a result of that, or maybe a delay until people see that the deal actually goes through? What impact has that had on your commercial orders?
Look, I think the last part of last year, we saw since the air show, we announced many new orders. These new orders converted into contracts have slowed down a little bit. The interest in the market is very high. There are lots of campaigns going on. We cannot say for sure how much of this is really influenced by the announcement of the deal, or it's just market dynamics. We can confirm that there are lots of campaigns going on and a lot of interest in the products.
Thank you very much.
Our next question comes from Augusto Ensiki, HSBC.
Hi, thank you for taking my questions. Firstly, you mentioned that the Praetor 600 through May 2020. Could you tell us how many units approximately that represents? Secondly, sorry if this was already discussed during the call, the one-time items regarding impairments in the quarter as well as the JV costs, would you guys want to quantify how much those were? Thank you.
The Praetor 600 in this year, I think we have around 15 deliveries. This rate will increase as we move to the next years. As we said, the first open position for delivery is around May next year. Can you repeat the second part of the question, please?
Sure. Thank you for that. The second question was regarding the impairments on the used jet portfolio and the separation costs that you had in the quarter. I wish you can give us exactly or break out how much each of those were separately. Thank you.
Yeah. We had some regular impairments in the commercial aviation aircraft, but nothing different from what we generally register every year. In executive aviation, there is nothing
In terms of the separation and also costs?
Oh, separation costs. We had around BRL 12 million recorded in separation costs during this quarter.
Thank you. Sir, I just want to follow up on the separation costs. I think you previously mentioned, I think you had guided about BRL 1.2 billion of separation costs, including taxes. Is that estimate still hold, you said that there might be additional savings on that figure? If you look at that. Thank you.
The estimate still holds, we are really working very hard to bring that number down.
Great. Thank you once again.
Our next question comes from Victor Mizusaki, Bradesco BBI. I'm sorry, BBA.
Hi. I have two questions here. The first one, I don't know if it's special, but can you give the breakdown for pre-tax margins per business unit in the first quarter? The second one, when we take a look at inventories on quarterly basis, we can see an increase. I'd like to understand how much it came from commercial and how much came from executive aviation.
Regarding the first part of the question, we are not disclosing EBIT by business. What we can tell you is that when we look at the results for the business that is being separated with commercial and restroom and related services, that margin was approximately zero, and the margin for executive defense and related services was around 3.5 negative. Can you repeat the second part of the question?
With regards to inventories, we can see an increase in the first quarter if you compare it to Q4. I'd like to have a better sense how much is related to commercial aviation and how much is related to executive aviation.
You're asking about the increase in inventory during the first quarter. Is that your question, Victor?
Yes.
I would say that around 70% of that is associated to commercial aviation, and the rest to executive, which again, is normal at this point of the year, right?
Okay, thank you.
Thank you.
The next question comes from Turan Cercioglu, Cosan Bank.
Yes. Hi, good morning. Thank you for taking my question. I guess I was wondering, you mentioned that the used jet sales were lower in the quarter over last year. Can you just give us some reasons to why that happened this year?
My sales in commercial, I think, were lower than the last part of last year. We announced the on tracks for many sales that we had previously announced at the air show. There were not as many announcements during this first quarter in commercial aviation. As I mentioned, we have lots of campaigns going on. In executive aviation, on the other hand, I think we had our best first quarter in sales for the last two years, which is really an effect of the Praetor 600 and 500 coming to the market later this year.
No, I was talking about the used jet sales that you said were lower in the quarter. Revenue from used jet sales in executive aviation.
Yeah. We mentioned that in the press release, but it was a small amount, so we didn't have that many deliveries in the first quarter. We also didn't sell that many used jets, but it's really not important. The important number is the new sales of business jets that were very solid in the first quarter, as we mentioned, above BRL 300 million in new sales.
Okay, fair enough. I guess this is the last question here from me. I was really surprised to see that the SkyWest order, you have deliveries that are going this year. Can you give us a sense of how many open spots you have on commercial aviation for the year?
No, for the year, all the positions are firm. We have no open spots.
All good. Thank you.
Our next question comes from George Ferguson, Bloomberg.
Yes, thank you. Can you speak to how much the U.S. scope clause negotiations could be slowing down orders for commercial jets? I know United is underway right now with pilot negotiations, and they're trying to change some of that scope clause. I'm wondering if that is having an effect on commercial jet sales.
Well, we have a strong demand for our current E175s. We are not seeing a lot of movement in terms of scope negotiation. We think this is something positive for us because weA very dominant product in the segment that has conquered more than 80% of market share in the segment. We not seeing really a lot of movement, we think it is positive for us.
Thank you.
The next question comes from Kesley Conno, Aegon.
Hi, thank you for the call. I was just wondering if you could clarify how much debt you plan to transfer to the JV, and if that includes the existing bonds.
That includes all the bonds. Basically, we will transfer all the bonds and an equivalent amount in cash.
Okay. Thank you.
The next question comes from Gabriel Cavalcanti, CTM Investimentos.
Good morning, guys. Thank you for taking my question. I was just wondering if you guys could clarify a little bit more about the matter of the new KC-390 being produced in the United States. Thank you.
Yeah, I think the important point here is the partnership with Boeing for the KC-390, which is part of the strategic partnership that we hope to close by the end of the year. The JV main objective is to open up new markets for the KC-390. The industrial footprint of the KC-390 will depend on the customers that acquire the aircraft that will be sold through the JV. We have a final assembly here in Brazil. If it is not necessary, the aircraft will be delivered regularly from this final assembly. The main objective of the partnership is not to assemble aircraft outside of Brazil, it's to sell more aircraft to markets in which we could not sell. If at any point, these new sales demand that we have some industrial activity in the U.S., then we will consider, in the JV, we will consider how to do that.
Again, it's not the main objective of the partnership.
Okay, thank you.
Ladies and gentlemen, if you would like to pose a question, please press star one. Again, if you want to pose a question, please press star one. This concludes today's question and answer session. I would like to turn the conference over to Mr. Nelson Salgado for his final remarks.
Thank you very much for your participation in our conference and the questions. Thank you.
That does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day.