Good morning, ladies and gentlemen, and welcome to the Embraer conference call partnership Embraer Boeing. 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's present.
The words believe, may, will, estimate, continues, anticipate, intends, expect, and similar words are intended to identify forward-looking statements. Embraer undertakes no obligations to update publicly or revise any forward-looking statements because of new information, future events, or other factors. In light of these risks and uncertainties, the forward-looking events and circumstances discussed on 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. Antonio Carlos Garcia, Executive Vice President, Finance and Investor Relations, and Mr. Eduardo Couto, Director of Investor Relations. I would like now turn the conference over to Mr. Francisco Gomes Neto. Please go ahead, sir.
Good morning to all analysts and investors connected to our call today. Thank you for joining on such a short notice. My name is Francisco Gomes Neto, and I am the President and CEO of Embraer. We are hosting this call following a release published by Embraer regarding the most recent developments of the partnership between Embraer and Boeing, which we have been working on since 2017. Just giving some background on the transaction. After a long period of negotiations in 2018, the contracts were finally signed between Embraer and Boeing on January 24th, 2019, and detailed the partnership between both companies. After that, the transaction was recommended to move forward by our board of directors, supported by government authorities, and approved by the substantial majority of our shareholders in 2019.
As you see, this transaction has involved a long, costly, and complex process. Embraer has been working nonstop, day and night to conclude it. On April eighth, we notified Boeing regarding Embraer's intention to extend for six months the Master Transaction Agreement for the closing of the transaction, which was only subject to the approval by the European Commission. On April twenty-fifth, while with disappointment, we received the notes from Boeing communicating its decision to terminate the agreement. Embraer strongly believes that Boeing has wrongfully terminated the agreement to avoid its commitments to close the transaction and pay Embraer the $4.2 billion purchase price. Embraer believes it is in full compliance with its obligations under the agreement.
As we have said, we will pursue all remedies against Boeing for the damages incurred by Embraer as a result of Boeing's wrongful termination and violation of the contract. Before I turn to Antonio, our CFO, who will give an update of our financials and initiatives we are taking to preserve liquidity, I just want to talk about Embraer's commercial aviation business. Our commercial aviation business remains strong. We are leaders in the regional jet market, and we believe regional jets will lead the rebound in the aviation industry in the upcoming quarters as airlines will resume their operations through regional and domestic routes, which are our key markets. Our U.S. exposure in the short-term deliveries is another advantage, as the United States is a region where the airlines are more advanced in terms of restructuring, rescue packages, and restarting operations.
Our deliveries are also primarily concentrated in the replacement of old aircraft rather than growth. With the return of the airlines, we expect those deliveries to resume immediately. I also want to call attention to our state-of-the-art and complete aircraft portfolio with the E2 family and the massive leadership of the E175 in the U.S. This flexibility to produce at the same line E1 and E2 jets is another big advantage for us. Of course, our industry will have to address the challenges of COVID-19 and current economic conditions. Finally, I would like to reinforce that Embraer has a great future ahead, and we will continue to be a proud Brazilian company competing in the global aerospace industry, as we have been doing with great success in the last 50 years. As we proudly say in Embraer, we live for the challenge. Now, please, Antonio, go ahead.
Thank you, Francisco. I will detail now our liquidity and initiatives we are doing to preserve cash. We are working 24 by seven at Embraer to preserve cash and address the current market environment to steer the company based on cash preservation and stringent cost control. I'm the leader of the cash management team. We are having daily meetings to assess the impacts of COVID-19 in each one of our businesses. Just to give details of our work, we are taking a deep look at the four key areas of the company. People's health, cash inflow, cash outflow, and financial liquidity. In terms of cash inflows, we will be managing sales, revenues, receivables, and advance to guarantee we will maximize the potential cash inflows and create specific action plans throughout the company to maximize aircraft deliveries, receivables collection, and potential new advance.
As far as cash outflows, we have several initiatives that includes negotiation with suppliers on payment terms, inventory management to adjust short-term production plans to the latest delivery schedule. Direct labor, engineering, and SG&A adjustment include an agreement with all of our unions that covers furloughs, reduced hours, and salary cuts. We currently have around 30% of our workforce in furloughs and have cut all leadership and board salaries by 25%. Include all of these initiatives, we have at this point identified approximately $1 billion in potential cash savings for 2020, which will help us to offset the impacts of lower deliveries and to preserve cash. Our third pillar is the financial liquidity of Embraer. We ended 2019 with a cash position of $2.8 billion and raised another loan of $600 million in March.
Despite solid liquidity, we will have a frequent discussion to assess our cash balance, revisit the pace and size of our investments, reduce the working capital needs, and maintaining open dialogues to ensure sales finance availability and look into additional financial lines. Our liquidity position is solid, with very little debt obligation due until 2022. Embraer has additional credit facilities under discussion up to $1 billion with the Brazilian and international banks. The actions we are taking now will help Embraer to preserve cash this year and ensure that Embraer liquidity remains strong. Now we open for Q&A. Operator, please go ahead.
Ladies and gentlemen, we'll now begin the question-and-answer session. If you have a question, please press star one. If at any moment you would like to remove yourself from the questioning queue, please press star two. Our first question comes from Josh Milberg, Morgan Stanley.
Good morning, everyone. Thank you for the call. My first question relates to your indication that you'll pursue remedies against Boeing for the damages. I was just wondering if you could comment on whether there's already a legal proceeding or arbitration process underway, and if so, what the nature of that process is.
Thanks, Josh, for the question. Yes.
That's my first question.
Okay. Thanks for the question, Josh. Yes, there is an arbitrage process in place, but I cannot give you more details at this point of time.
Okay. Fair enough. Do you have an updated estimate on what your total deal separation costs add up to at this point, considering both OpEx and CapEx?
No, not yet. We don't have this number yet. We just can say that we are talking about substantial costs.
Okay, understood. If I might just squeeze in one more. Could you talk about what the deal conditions are that Boeing alleges you failed to meet? Is that something you can address?
Well, Josh, what I can tell you is that Embraer believes it is in full compliance with its obligation under the agreement, and Boeing has wrongfully terminated the MTA to avoid closing the transaction and pay us the $4.2 billion purchase price.
Okay. I imagine you're not at a point where you can really give much detail on the specific points that Boeing is making and the specific conditions that it's indicating you have not satisfied.
Yes, we are working on that, Josh. We don't have more information yet to give you.
Okay. Thank you very much.
You are welcome.
Our next question comes from Myles Walton, UBS.
Hi, good morning. Francisco, I wonder if you could comment, the original rationale for the deal, to tie up with Boeing was to basically add more scale to your existing commercial aviation business to compete with others who are also increasing their own scale, whether the CSeries, with Airbus or MRJ and the Bombardier eventual transaction. I'm just curious, as you look at the landscape today in your commercial aviation business, would you now consider looking for other partners, for that same means and end?
Yes, the JV would be a win-win situation for both companies. We are leaders in the regional jet market, and we believe regional jets will lead the rebound in the aviation industry as airlines will resume their operation through regional and domestic routes, which are our key markets. Our U.S. exposure is another advantage. The United States is a region where the airlines are more advanced in the rescue packages are restarting operations. We understand that the competitive scenario has become more difficult, but we have a great product portfolio, and we are ready to move on with our commercial aviation.
Just to allow me to complete a little bit. It's important to mention we have not yet faced any cancellation in regard to the commercial aviation, just deferrals, which shows a little bit that we still have our strength on the market.
If I may add as well, Myles, just to say that we don't comment specific speculations about potential new partnerships. We cannot comment on that. Okay?
Well, maybe another way to ask it a little bit is, you've done a significant amount of work to separate the commercial aviation business from Embraer as it was preparing for this joint venture. Do you anticipate reintegrating that or for the meantime, leaving it outside as almost a separate organization?
Well, it's too soon. We are going to analyze all the situation, and we will inform the market as soon as we have made some decision on that.
Okay. Maybe just a clarification, Antonio Carlos, you mentioned $1 billion in cash savings for 2020 as a result of your inflow outflow exercise. Can you just maybe give us color of what you anticipate for cash burn for 2020 is? Maybe the size of the damages you think are done because of this deal cancellation.
Myles, the guidance is still suspended, right? We are working very hard to have a new guidance as soon as possible. As Antonio mentioned, we have already identified this $1 billion in potential savings for outflows. In terms of the cash inflow impact, we still need a little bit more time. As soon as we have a new guidance, we're going to publish to the market.
Okay. All right. Thank you.
Just to comment a little bit. Embraer is not only the commercial aviation. We for sure have impacts in the commercial aviation, as I mentioned, the latest call we did for the 2019 figures. We have a minor effect in the executive aviation and also in defense and the respective services. Means, I would say it's nice to be present in different types of segments.
Okay. Thank you, guys.
Our next question comes from Robert Spingarn, Credit Suisse.
Yeah. Hi, good morning.
Good morning.
I think you said that you couldn't talk about potential other partnerships, but do you see Embraer as offering a value proposition that would be attractive in a partnership format with others?
Oh, absolutely. We want to do our homework first, and we'll need some time to do that. We think about the next strategic step for our commercial aviation.
Okay. Just going back to your comment on the E-Jet leading the recovery. While there clearly was a trend toward down gauging after 9/11 and another might be expected now, you did come into this crisis with a fair number of E-Jets parked. Prior at least end of February, there were already 300 parked. We have to absorb a fair amount of stored aircraft first, wouldn't you say, before you can get back to increased production because of leading the recovery?
Well, this year will be a tough year, and next year probably will be worse than we expected before. We do believe this recovery of the market, starting with the regional jets, will benefit Embraer for sure. We'll be analyzing our production plans within the next weeks.
Okay. Could you give us some understanding, I'm not asking for guidance here, but the environment in terms of corporate aircraft and biz jets. How you expect that market to be impacted by this situation?
Robert, basically, we're expecting business jet to have very little impact. I think Antonio is on mute. Antonio?
Yes. I was on mute. Continue, Edu.
I was just saying that, we're expecting business jet to have very little impact. We continue to deliver planes. We continue to produce the planes. We didn't shut down our facilities in Florida. A couple of days ago, we delivered another plane. We continue to sell. We remain, I would say, optimistic on the business jet market. We are not seeing meaningful impacts from COVID on business jets. We are upbeat on exec. Even defense. The programs we have with the Brazilian government, they continue to go ahead. Exec and defense, we are feeling good, and we are addressing the potential impacts on commercial.
On the biz jet side, you haven't had any customer behavior changes, deferrals, cancellations, anything like that?
We face, until now, just one single cancellation during this year. We have a really small amount of deferrals for next year.
There is some-
Very small amount. Yeah.
Okay. There are some who believe this will actually increase demand for the biz jet, because of the health risk of flying with other people and the greater privacy on the biz jet. Do you agree with that? I've always found that the biz jet market tracks corporate profitability. That is the strongest driver, and of course, corporate profitability is going to be under pressure for some time. Net-net, are you saying there's no effect or it's positive or it's negative over the next two years?
I would say more positive.
Yes.
Go ahead, Francisco.
Yes, we have some opinion, and we had a great year in the business jet, in 2019. We were prepared to have another great year in 2020. Because of the COVID, we had some impact. As Antonio and Edu said, minor impacts in terms of, in the business jet, with some deferrals for the second semester and some for next year. We do believe the business jet will recover in 2021, and it will be a great help for Embraer.
Okay. Thank you.
Our next question comes from Ronald Epstein, Bank of America.
Good morning, guys.
Hi, Ron.
What's the path forward here, right? I guess a couple questions. One, are you really all that surprised given the situation Boeing got themselves into and the need for government support and so on and so forth? This couldn't have been that big a surprise that they tried to do what they did or did what they did. Two, what is the path forward? Myles suggested maybe you have another suitor, how do you view the company as just an independent standalone airplane company?
Well, thanks for the question. We were surprised and disappointed with Boeing's decision. As I said before, I believe Boeing has wrongfully terminated its MTA. The reason is to avoid closing the transaction and pay us this $4.2 billion. Second, now we are really considering what will be the best strategy for our commercial aviation. We believe we do have great products. As I said before, I think the rebound of the market will be another opportunity for regional jets. We are going now to deep dive in the plans to review our current structure and current strategy for the commercial aviation.
How much redundancy is there now in personnel? After all the separation activities that happened, is there 10%, 20% overlap in personnel? How do we think about that? As a follow-on to that, to become one company again, is it simply just moving people from one campus to another campus? Just very high level, how do we think about the reintegration of the two business units? How disruptive is that?
Ron, this is another work we have to do. Our focus is to go through this crisis to preserve our cash. After this decision from Boeing, we have in place a lot of programs now to overcome these difficulties. We'll do more studies and analysis about personnel and how can we proceed with the current situation we have.
Okay. Maybe just one last final question, and I'll hand it on to somebody else. When you think about the action with Boeing, are you going to pursue it in a Brazilian jurisdiction, in an international jurisdiction? Sorry, yeah, just repeat that because my phone might have been unclear. With the action against Boeing, are you going to pursue that in an international jurisdiction, international court, or in the Brazilian court? How long would you expect it to take? These international disagreements can be years and years to close.
I understand your question, but at this point of time, the only information we can give you is that there is an arbitrage process in place, and we cannot give you more details. Sorry.
Okay, guys. Thank you very much.
Our next question comes from Kai von Romer, Cowen.
Yes. Thank you very much. Both of these proposed JVs, commercial and KC-390, looked like they had significant strategic advantages for both parties. Where are you with the KC-390? Is that JV dead? Is it on life support? Is it alive? What's the status?
The JV for the KC-390 was part of the transaction. As Boeing decided to terminate the deal, we understand this includes the C-390 JV.
Okay. Obviously, you're upset with the outcome and you're in the midst of arbitrage. As I look at the landscape, there are no other obvious partners who would've brought the advantages that Boeing would've. Is there any chance that this transaction could be resurrected under somewhat different terms?
I don't believe that. Boeing has decided to terminate the MTA.
Okay. In terms of cash, you exited the year with $2.3 billion. You basically had a financing of $600 in March, another $1 billion of potential. That brings us to $3.9 billion. How much cash do you need on hand to run the business?
We believe to run this company to be able to absorb the turbulence, we always need it to be around above $2 billion. That's more or less our internal number here. Again, we do have liquidity available, and we should also see more deals this week that are still additional help if it's necessary.
If I may add.
So do you-
Sorry, Kai. I was just going to say that, if I may add, our working capital for the whole business, it ranged from $500 million-$700 million throughout the year. With this cash, around $3 billion, we are super strong to go through the working capital needs throughout the year. We don't see any liquidity issue on Embraer right now.
Thank you very much.
Welcome.
Thank you. This concludes today's question and answer session. That does conclude Embraer's audio conference call for today. Thank you for your participation. Have a good day, and thank you for using Chorus Call.