Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's Second Quarter 2017 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.mbreier.com.br.
This conference call includes forward looking statements or statements about events or circumstances that have not occurred. Embraer has based these forward looking statements largely on its current expectations and projections about the future events and financial trends affecting the business and its future performance. These forward looking statements are subject to risks and uncertainties and assumptions, including, among other things, general economic and political and business conditions in Brazil and other markets where the company is present. The words believe, 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 statements, events and circumstances discussed on this conference call might not occur. The company's actual results could differ substantially from those anticipated in the forward looking statements. Participants on today's conference call are Mr. Paolo Azar de Souza Isvylva, President and CEO Mr. Jose Filippo, Chief Financial Officer and IRO and Edward Couto, Director of Investor Relations.
I would now like to turn the conference over to Mr. Jose Filippo. Please go ahead, sir.
Thank you, and welcome and thanks for joining Embraer's Q2 2017 annual results. We're going to go through the presentation and I'll pass to Paul Cesar to give some comments and then we'll be following the Q and A section. Okay. So starting the presentation, in Page 3 regarding the highlights and we start with the corporate highlights. In June, Embraer attended the Peyre's Air Show with its largest presence ever.
We showed at the Air Show with the units for each of our business, the E195, E2, the KC 390 and the LAGUS 450. The E2-one hundred and ninety five and the KC-three ninety not only showed at the static, but also did flight demos. Also in corporate highlights Embraer was awarded by the most innovative company in Brazil for the 2nd consecutive year. Moving to next page, Page 4, in terms of highlights for Commercial Aviation, we delivered 35 E Jets in the 2nd quarter, a growth of 35% when compared to 2016. As far as commercial activity, we announced 51 commitments at the Peraza show being 18 from orders and 23 purchase rights.
In terms of from orders, we sold 22 planes in the year to date. Finalizing commercial aviation highlights regarding the E2 development, we advanced with 5 prototypes, one for 195 and 4 prototypes of 190, which now reached over 1,000 flight hours test and more than 3,000 ground test hours. Next page, in Page 5 highlights for executive jets. We delivered 24 executive jets in the 2nd quarter being 16 light and 8 large aircraft. Those deliveries included the delivery of the Embraer An important milestone of our manufacturing in the U.
S. Was the first flight of the 1st Leggett 500 assembled in Melbourne. This plane will be delivered to a corporate flight department in Florida this year. And regarding commercial activity, we secured an order of 3 Legga 650E2 air handler. Next page, Page 6, highlights for defense and security, starting with the formation of the launch successfully launch of the Brazilian satellite, which happened in May.
And in terms of deliveries of Super Tucano, we had our final delivery of the U. S. Air Force of 6 Super Tucano commissioned to the level. In relation to the KC-two ninety program, we continue to advance the schedule with 2 prototypes with more than 1200 flight hours. We are confident on the commercial success of the KFC-three ninety.
At the Paris Air Show, we had more than 60 delegations visiting the plane. And after that, we performed a demo tour visiting places in Europe, Asia, Middle East and Africa. In terms of commercial opportunity in defense, we will participate in the U. S. Air Force capability assessment for light attack platforms of the Super Tucano, which can be potentially a new program.
Also our subsidiary, Resavis Vadar, established a partnership with Thales for air air traffic control radar solution. With that, we conclude the corporate highlights and we're now moving to the financial results. Starting Page 8, our firm backlog. We reached a total of $18,500,000,000 at the end of June. This amount reflects the strong deliveries of commercial aviation in the Q2.
In terms of sales activity in 2017, we are positive with the campaigns of the KC-three ninety with a book to bill above 1 in executive jets. And for commercial aviation, we expect to reach a book to bill of 1 this year. Next page, Page 9, as far as deliveries. Starting with Commercial Aviation, we delivered a total of 35 aircraft in the 2nd quarter and 53 year to date. We are maintaining our estimate of the range of 97 to 102 aircraft for 2017.
In terms of executive jet deliveries, we had a total of 24 deliveries in the Q2, broken by 16 light and 8 large planes. In the year, we already delivered 39 aircraft being 27 light jets and 12 large jets. Also for executive jets, we are maintaining our guidance of 105 to 135 aircraft in the year, being 70 to 80 light jets and 35 to 45 large jets. Next page, Page 10. We show our net revenues.
We reached 1.7 $7,000,000,000 in the 2nd quarter, which is a growth of 30% when compared to last year. All three segments of business reported growth from last year with revenues reaching $1,090,000,000 for commercial aviation, $340,000,000 for executive jets and $335,000,000 for defense. For all business units, we are confirming our expectation for the year. Next page, as far as SG and A expenses, we reported total of $135,000,000 in the 2nd quarter, broken by $40,000,000 in G and A expenses and $85,000,000 in selling expense. The reduction of total SG and A expenses when compared to last year reflect our focus on cost control.
Next page, Page 12 regarding operating results. Excluding non recurring items listed in the highlighted box, our adjusted EBIT reached $165,000,000 in the second quarter with 9.3% margin reflecting the level of deliveries of commercial aviation. For the 6 months of 2017, we had a total of $196,000,000 with 7% margin. The 9.3% operating margin in the Q2 can be broken by positive 15.1% in commercial aviation, positive 3.5% in defense and negative 2.7% in effective jets. We are maintaining our guidance range for 2017 of $450,000,000 to $550,000,000 with margins from 8% to 9%.
In Page 13, the adjusted EBITDA, we reported total of 245 $1,000,000 in adjusted EBITDA for the 2nd quarter with 13.9% margin. For the 6 months of 2017, the total adjusted EBITDA was $349,000,000 with 12.5% margin. For the full year of 2017, we are maintaining our guidance of the range of $770,000,000 to $890,000,000 and margins between 13.5% to 14.5%. In Page 14, adjusted net income excluding extraordinary items, which includes primarily deferred income tax, we reached the total of $133,000,000 in the Q2 of 2017 with 6.9% net margin. The total of 2017 year to date reached $146,000,000 with 5.2% margin for adjusted net income.
Next page, Page 15 in terms of investments. For the year for 2017 year to date, we had a total of $244,000,000 being $18,000,000 for research, $148,000,000 for development and $78,000,000 for capital spending. For full year, we are estimating the total investments of $650,000,000 Next page, Page 16, adjusted cash flow. We had a positive cash generation of $220,000,000 in the second quarter due to the positive results combined with improvement in working capital requirements, mainly related to the reduction of inventories. Our estimates for 2017 is maintained of a consumption of $150,000,000 or better.
Next page, finalizes the presentation before I turn it to Paolo. Our debt at the end of June was $4,200,000,000 with cash of 3,500,000,000 dollars We turned it to a net debt of $662,000,000 better than the previous quarter. Regarding our debt profile, the average terms of debt reached 6.2 years with 93% maturity after 12 months. So with that, we conclude the presentation and I turn it to Paul's comments before we go into the Q and A section.
Thank you, Filippo. Good morning to all. Thank you for joining us this morning for this call. Few comments I'd like to make. I believe as you can see, so we have a very strong quarter.
We continue to see improvements on our costs. So this is a the result of the 200 of the mission, 200 that we implemented last year and more and more so we are seeing the benefits of this program. I'd like to make few comments on the business units on Executive Aviation. We believe we are seeing some improvements. Of course, the market is still under big pressure.
However, we have seen some signs of improvements on the used markets. There are some stability in prices, no further deterioration in general in the value of the aircraft. For us here at Embraer, we had a good improvement in cash operation, generation of cash for the business jet unit. So it's more stable as well. And the strategy that we adopted for a few quarters already of having more discipline in terms of price and emphasizing more value in our business is started to generating improved margins.
So we can see already that probably in the next quarters. This will be even more evidence. So we will see even more in the next quarters. On the commercial aviation, we had soft first half in 2017, few orders were announced. We are seeing very strong sales activity.
I'm very confident that we can make big progress in the second half of this year. As you can see the margin in commercial aviation is quite good. And we continue to see also in commercial aviation the continuation of the E2 program on time, on budget, and we continue to be very bullish that the first delivery will indeed happen in the first half of next year in 2018. On defense, the KC-three ninety program also continues to move very well. I'll make some comments on the Paris Air Show, but after the Paris Air Show, the KC-three ninety went for a demo tour.
We covered 18 countries in Europe, Africa, Asia and Oceania. We had 52 landings in 18 different countries and we covered 50,000 miles nautical miles in 40 days. So you can appreciate that the KC-three ninety is already a mature right product, not yet certified, right? It's in the process of the certification, however, showing already signs of a very good maturity for in aircraft like this one. So 40 days, 50,000 nautical miles, right program without any problem, completely flawless.
So we are very happy and satisfied with the performance of the K Futur 90. We are starting the discussions with the government of Portugal to negotiate the contract. The ministers the ministers council approved this transaction. So Embraer in Portugal now, so we have 90 days to negotiate the contract. Last but not least, few comments on the Terrizzar show.
For those who were there, I think you could see our very strong presence was the best ever show for Embraer. So we brought 2 new programs still under certification, the final stage, the E2 and the KC-three ninety, the legacy 450 already certified. So I believe Embraer has shown its force and its important presence in the 3 units showing that Embraer is prepared for the future with the state of the art very up to date aircraft that we will compete KC-three nineteen. So with that, I believe we can move to the questions, please.
Thank Our first question comes from the line of Myles Walton of Deutsche Bank. Your line is now open.
Thanks. Good morning.
Good morning, Mike.
I was hoping you could talk a bit about the order activity, you're sounding incrementally positive as it relates to the commercial aviation business. Obviously, you had about 20 orders in the first half, but 80 implied orders to get to your one time book to bill seems like a pretty high hurdle, but probably you sound pretty darn bullish. So can you talk either specifically or about relative geographic areas of strength that you're seeing that could come and close deals that quickly?
Well, it's a little bit spread out. It's a little bit spread out. We have North America, we have Europe, we have Asia. I wouldn't like to go into the details at this stage. I feel very good on the campaigns that we are involved.
Of course, it's not a guarantee that we will close them. But with our experience in these markets, I feel very good that we have a very good opportunity here to do a 1 to 1 in terms of book to bill.
Is that E1 or E2? Obviously, the E1 is where you need to cover a lot of ground for next year in terms of production. But are you seeing the E2 traction now that you're getting closer to 1st in terms of service or?
Yes, that's the beauty of what we are seeing. It's a combination of E1, E2s. It's a combination of the smaller aircraft and also the bigger one. So it's really a mix. So this is quite positive.
Okay. And just one other one, Filippo, on cash flow, you're in a pretty good position relative to your full year guidance. You're usually not in quite this good a position halfway through the year. Is there actually upside pressure to your full year targeted guidance or any other how are you feeling relative to the greater than $150,000,000 burn? Yes, Myles.
I think that you're right. I think we had a very good Q2. The accumulated year is also something that probably in the past we never saw that situation, but it was a combination that I think that mostly you have to remember that we had some contributions from suppliers in the beginning of the year. But the good working capital improvement I think helped. I believe that we at this point, we don't have a position to review that in terms of how we see.
There's still a lot of investments to be made, especially in the EQ program at the second half of the year. But the 150 or better, I think we have some space to get an improvement there. But again, it's too early to commit with that. But I understand we are well positioned to really put in place a strategy to benefit in terms of cash generation this year.
Okay. All right. Thanks.
Thank you. Our next question comes from the line of Pete Skibitski of Drexel Hamilton. Your line is now open.
Good morning, guys. Just to go further on both those themes, I thought last quarter you talked about your 2018 expectations for commercial deliveries being around 85 to 90 aircraft. Is that no longer the case? And whatever your expectation is, how many of those slots are filled? And how many will be E2s would you expect?
Yes, Pete. We still have the working still working on 2018 and the following years. As you know, 2018 will start the very transition of the current model to the new one and the 190 that will be entering into service. So I feel that this is important for us to not to review at this point. So we still think some challenges.
We I think sales campaigns are on way. Like Paolo mentioned, we are positive the way we see. It's a little bit different dynamics. We see more spread in geographic those activities. But we feel confident that we can this year have your number about the book to bill of 1, that's what we're working these days.
But we still have, of course, challenges because of the transition that we have next year.
Okay. Okay. Can I I don't know how sensitive this is, but can I ask about Iran? I mean, I see Airbus and Boeing have locked in commercial deals with Iran, Embraer has not. It was kind of depressed, but then there's also some reports out there that maybe Brazil is not willing to finance any deals with Iran.
I was wondering if you could validate any of that and give us a sense of is Iran completely off the table or not?
Well, of course, Iran is a very important country and aviation is a very good opportunity there for the manufacturers. And we see this market as an excellent opportunity also for the our segment. We continue to work with the OFAC office. So of course, as you know Airbus and Boeing has gotten their approval. In general, it takes 9 to 11 months, as I understand, to go through the process.
So we are still within this period. So we are expecting that OFAC will approve our request after they have approved more recently the Boeing order. So let's see. So there is no news as of yet. We continue to be engaged with the opportunities.
But of course, we have to wait for the clearance of our costs to move forward.
And Pete, just adding, we don't think it's an issue of financing. I think the Brazilian government is ready to support all the exporters that can sell its products to Ireland. So it's more a question like Paolo said about the clearance from OFA.
Okay. Okay. That's very helpful. Thank you very much. My last question, I feel like I've hit on this theme every quarter in terms of the slope of the potential improvement in free cash flow over the next few years as E2 development winds down.
Is it are you confident is that development spending going to come down pretty linearly over the next few years as you as E2 enters service? And does it does the visibility seem pretty good that free cash flow can then become pretty nicely positive over the next few years?
Yes. We're still working the same projection. However, just to make sure that we have the entry service in phasing, we started with 190, then we have 195 in 2019 and then to 1 75 in 2021. So we still have investments to be made in these programs. I would say that by 2020 definitely it was going to go down because we end up most of the development of the major pieces of this project.
But that's exactly the way we used to be. I think we're on track on that and on schedule.
Great. Thanks so much, guys.
Thank you. Our next question comes from the line of Keay von Rumohr of Cowen and Company. Your line is now open.
Yes, thank you very much. So what is your lead time on E1s for delivery in 2018? I mean, I assume you still have slots to sell. When do you have to sell them or and if you don't, because I assume you do 15 to 20 E2s, you're really kind of locked into doing under 100 planes?
Well, we are as Filippo mentioned, so we are still working for 2018. So we don't have yet the final numbers. We have a lead time of about 9 mile that we can work give or take. So it's not a fixed number of miles, but depending on the type of aircraft, we can go a little bit more aggressive. So we feel good that we still have right time this year to close more deals and take the commitment to deliver this aircraft next year.
Got it. Can you give us you mentioned that the pickup in demand and really if we go back to earlier in the year, there was not a lot of interest. What's changed?
It's the dynamics of the market in general, right? So you have airlines that they have needed to upgrade the fleet, replace old aircraft. So we have others that are startups like in Asia, big Asia. So you have airlines that want to replace smaller jets. So it's a combination.
I mean, there is not only one reason. I think it depends on the region, depends on the type of the airline and the needs of the airline.
Thank you. And can you refresh our memory in terms of your rough margin targets for the 3 businesses for the full year?
Yes, Cai. We don't give guidance for margin for specific business units, but in some color on this. I think the commercial aviation, like low double digits. In terms of the Commercial Aviation and Defense, maybe mid single digit is what could be an information for you.
And for Bizjet also mid single digit?
Yes.
And you'd mentioned, Felipe, that next year you have to the E2. So I assume if deliveries are flattish to down, there's more pressure on commercial. Can you just talk directionally about what should we look? I would assume, for example, that the executive jets would be considerably stronger because you would be building closer to the delivery rate and the market might be stronger. But any color you could offer would be great.
Yes. Again, I think it's too early for us to give the guidance for next year. But as we've been saying related to next year, maybe we should think about, of course, if the lower level of delivery is expected for commercial aviation with the historical average, I think we can be more like in the high single digit, but it's I think it's not a moment now to anticipate how executive jets will work. We believe that with some sentiment about positive over market that we can have some improvements and that can partially, if not in full, like Oskar said that. We believe that Executive Jets definitely is going to be a better year next year compared to the previous ones, and that could help to be in that level.
So that's basically what I where we can say at this point. But sometime, we closer to the end of the year, we'll be releasing more specific information about next year's expectations.
Thank you very much.
Thank you. Our next question comes from the line of Alberto Delaero of Citibank. Your line is now open.
Hi. Thank you for taking my questions. Today, I listened from one of your competitors that the C Series can be used longer and thinner roads, roads that are not dense enough for Bonguen and Airbus and too long for Bonguen by regional jets. I've seen the same potential for E2?
Yes, I think the E2, the 195 E2 has we have announced in Paris an extended range. We are going up to 2,600 Nautic miles. So this is enough to cover maybe 98% of the narrow body mission worldwide. So I think we are in very good shape in this regard and with excellent economics, very appealing operational costs. So we are definitely very bullish.
Okay. Thank you very much. And has Embraer and Boenji been consulting charters regarding what seems to be a common complaint about this series pricing?
We as we announced already back in December of last year, so we asked the Brazilian government to go to the WTO and challenge the Canadian programs and help us to support our case against Bombardier. We are always looking to have a level playing field in both in development and financing of aircraft. Financing of aircraft. We already dealt with that many years ago among all the manufacturers and we have a program that has been working very well. But regarding development, so we are not happy at all with the situation and we have to be sure that everybody will be operating in 11 playing fields.
So the Brazilian government is supporting Embraer and we are supporting the Brazilian government of course in this action. And hopefully this will pay right benefits going forward.
Okay. Thank you very much for the answers.
Sure.
Thank you. Our next question comes from the line of Pedro Bruno of Santander. Your line is now open.
Good morning, everybody. My question is on the defense margin for the rest of the year, because we saw a very low margin or highly negative margin in the Q1 because of the satellite delay, which happened in the 2nd quarter now. And we saw quite big improvement in revenues, but not so much in margins. The mid single digit that was mentioned for the year implies close to 15% margin for the second half of the year in the defense. Is that what we should be expecting?
And what would trigger that since the satellite program has been launched on the second quarter? Thank you.
Yes, Pedro. Of course, the launch of the satellite that was captured in the Q2 helped the result of defense in this quarter. We still have to deal with some costs associated to the KC-two ninety development program, although it's in the end of the development phase. And that sometimes can impact. I believe that we should look in an annual basis the defense results.
That will be more easy for us to identify there's still some deliveries of Super Tucano's expected for this year that can impact that. We still think that the target for the mid single that I just mentioned, I think it's the best guess for the year. I think we're still confident that, that should be the results for 2017 in defense.
Okay. Thank you.
Thank you. Our next question comes from the line of Carlos Lefebvre of JPMorgan. Your line is now open.
Good morning. Thank you. I have one question regarding the studies for the potential cost reductions going forward. I'd just like to know if you could provide a little bit more detail on this and whether such cost reductions could help smooth out results for 2018?
Carlos, last year we announced a plan of a cost reduction specifically a program what we call emission 200, which is primarily focused on overhead and headcount reduction through a voluntary dismissal plan and also some expenses reduction in travel and other general expenses. We get there. The program of the reduction of headcount already was already concluded in the Q1 of this year. And the other expenses already adjusted and all the leaders of the company have their budget adjusted for this new standard. I think that opportunities of cost reduction we still have.
I don't think we're going to have like a step like we announced before of our Mission 200 plan, but opportunities may have and the focus on continuing to improve maybe more like slowly, but that's still on. You have to take into account as well that the company has its activity for the year that we have to deliver aircraft, we have to manufacture and produce aircraft. So it's important that we have the certain level of support for that to happen. So cost reduction is still associated to that. But we understand we've got a level which has efficiency now and that we have a lower level of expenses.
And again, I don't believe there's going to be a dramatic drop in the future, but we still will be able now, I think, to build a structure to benefit from the dilution of those costs as we have opportunities for revenue growth. That's basically how we see this. But we continue to see opportunities of efficiency. This a permanent program that we have and that will be capturing whatever opportunities we may have in terms of cost reduction and efficiency.
Perfect. Thank you.
Thank you. And our next question comes from the line of Pete Cieszki of Jefferies. Your line is now open.
Yes. Just a follow-up. I want to ask another question kind of qualitatively about 2018. It sounds like commercial deliveries will be down in 2018. Is it fair to think that defense revenue will be down in 2018 as well, just on less satellite revenue and maybe you haven't ramped fully on the KC-three ninety yet.
But that in 2019 and beyond, you kind of start to ramp on the KC-three ninety and that's maybe kind of a multiyear growth story for you at that point?
No, I don't think so. I don't think so, Pete. I think we don't have the numbers yet for the commercial aviation as what Philippe already indicated. For the defense, we are expecting good activity for the KC-three ninety and maybe for the Super Tucano as well. So the 2 main products of the unit, We are seeing very strong activities on the KC-three ninety, a lot of interest in the Paris Air Show.
We received the visit of 65 delegations and this worldwide tour now, almost worldwide tour also has been showing that the KC-three ninety has a tremendous acceptance in the market. So we are very bullish on the discussions that are going on now. And on the business jet, as I said, we might have a better year next year than this year. So I believe we have reached the bottom now in the business jet. And we are counting on improvement step by step and not a big improvement, but we may see a better year in 2019 than 2017 for Business Aviation as well.
Okay. Fair enough. I appreciate it. Thank you.
Sure.
Thank you. And I'm showing no further questions at this time. I'd like to hand the call back over to Mr. Jose Filippo for any closing remarks.
Okay. Thank you. And my name and Paulo and all the team here, I'd like to thank you again for participating in this. And as usual, our IR team is open and ready for you to access whatever need for additional information. So thank you very much and have a nice day.
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.