Embraer S.A.

Good morning, ladies and gentlemen, and welcome to the audio conference call that will reveal Embraer's second quarter of 2020 results. Thank you for standing by. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session, and instructions to participate will be given at the 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 this forward-looking statement 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 the other things, general economic, political, and business conditions in Brazil and other markets where the company is present. The words beliefs, may, will, estimates, continuous, anticipates, intends, expects, 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 to turn the conference over to Mr. Francisco Gomes Neto. Please, go ahead.

Good morning everyone and thank you all for joining our call today. I am Francisco Gomez Nito, President and CEO of Embraer. I will make some initial remarks before turning to our CFO, Antonio Garcia, who will detail the results of the company. Our main priority continues to be the health and safety of our people. focusing on preventive measures, raising awareness on the risks and right behaviors to avoid the contamination and reduce the spread of COVID-19. Regarding business continuity, there are key initiatives in place to emphasize business intelligence and alignment within the management team to implement the necessary measures to support the company's short and medium-term performance. In the short term, our focus continues to be on cash preservation. Besides initiatives already implemented, such as a more strict control of accounts payable, accounts receivable, general expenses and investments, we have advanced in additional initiatives such as the implementation of world-class procurement and logistics areas to bring more focus and intelligence on our purchasing and material management processes. The focus here is to reduce further, in a very structured way, the costs of what we buy and reduce our inventory levels as well. More specifically, in the field of expenses control, we have implemented a new process called Spend Control Tower, with a new and much more robust approval process for indirect purchases. In operations, we have initiated many projects to reduce the production cycle of our aircrafts through well-structured value stream mapping processes, combined with a series of Kaizen projects. These initiatives will contribute a lot to reduce costs of our products as well as working capital. As I said, all these initiatives will help us to improve our financial performance in the short and medium term. Due to the COVID-19 pandemic and the current market scenario, Embraer keeps pursuing measures to become a leaner and more efficient organization. We have started a restructuring process initially with important changes in the top management. We consolidated the vice presidencies of engineering and strategy and adjusted the structure in operations, commercial aviation, and Embraer X. And here, I'd like to thank the VPs Mauro Kern, Nelson Salgado, and Elio Bambini, who left our organization in this process for a great contribution to the company over the past years. We also revised our second layer of directors and managers, eliminating duplications created during the separation of the commercial aviation business. In short, we have already recovered synergies over the last few months. Such changes in the organization have focused not only on cost reduction, but also to help us to better execute our strategic plan 2125. keeping our strength in all key areas such as marketing intelligence, sales, engineering, technology, operations, finance, procurement and innovation. It is important to highlight that all the initiatives and projects were created and implemented in a very collaborative process involving the leadership team and key persons of different levels of the organization. helping us to achieve high levels of engagement, commitment and motivation, even during this very tough moment. Regarding the business plan update, we are working to finalize our strategic plan for the period of 21 to 25, which we expect to conclude in the coming weeks. We are focusing on improving our cost structure with short-term actions, but at the same time making sure we will have the intelligence and muscle to exit this crisis stronger, taking advantage of all potential opportunities to grow in all business areas. Our recent investment in cybersecurity is very much aligned with Embraer's strategic plan. as it is an area with several business opportunities and great growth potential in the coming years, in which the company intends to expand its operations in Brazil and abroad. We also continue to pursue potential partnerships to help us to introduce our state-of-the-art products in new markets and develop new projects such as a next generation turboprop aircraft. Finally, we are starting to see positive signs pointing to a recovery in some markets in the second half of the year. Regional aviation has been a key element in maintaining essential services and airline networks during the crisis. Some airlines are already gradually resuming commercial flights using E-jets in the United States, Europe and other parts of the world. It is also important to note that our relationship with our customers remains strong. We have been working very closely with them in order to better understand their present needs and overcome challenges, building a win-win strategy based on confidence and collaboration. The company has developed innovative solutions for a better use of the current fleet and to enhance the safety of the cabin environment in our aircraft, such as solutions to transport cargo in the cabin of commercial aircraft and enhanced cleansing procedures to sterilize passengers' cabins. In addition, the areas of business aviation and defense have shown greater resilience. In the United States, business aviation activity is already approaching 2019 levels. And in the defense area, we have several activity sales campaigns with opportunities for the C390 Millennium and the Super Tucano worldwide. With that, I conclude my remarks and would like to pass to our CFO, Antonio Garcia. Thanks for your attention.

Thank you, Francisco. Now moving to the financial highlights at slide five. Embraer is operating during an unprecedented aviation market slowdown caused by the COVID-19 pandemic. The impacts of COVID were meaningful during the second quarter and were mostly concentrated on commercial aviation. The commercial aviation business experienced low volumes with only four deliveries that generated excess capacity, adding costs that were recognized in our financial results instead of going to the inventories. Adding to the one-off impairment of $90 million, and one-time depreciation of $100 million related to 2019, when commercial aviation business was booked as available for sales. Putting all together, we have a non-recurrent event of almost $200 million in the commercial aviation results during the second quarter of 2020, explaining the majority of our soft numbers. which we don't expect to see again in the following quarters. The COVID impact on the executive and the defense business were much lower and our guidance for 2020 remains suspended, even though we already start to see initial improvement signals and expect much better performance in particular for the fourth quarter of 2019. Despite of all challenges faced during the first half, our performance in executive jets and defense and security had a meaningful improvement when compared to 2019. As we promised last year, several initiatives such as cost control, price discipline, right size production, and to enter in to serve new products such as Praetor and the Street 390 Millennial are already helping and will continue to help our financials in executive jets and defense. Some other financial highlights that we will detail during this presentation include a stronger backlog with a zero cancellation in commercial aviation. In regards to Embraer Cash Management Team, who have been meeting daily to discuss our financials and identify potential cash opportunities for Embraer. And so far, we already mapped approximately $800 million in cash savings for this year, implemented or to be implemented in the coming months, with a meaningful reduction in investments, selling general administrative expenses and overall costs. A detailed plan to optimize Embraer working capital in the following quarters. Additional funds recently secured off 700 billion to further improve our crash liquidity the second half of 2020 and 21. And then we are quite proud to inform that we'll end up with the monitor ship and its financial cost impact at Embraer. Turning to slide six with some highlights for our commercial aviation business. We have been working to reintegrate the commercial aviation business and prepare the future steps of this very important business unit. As part of the reintegration process into Embraer, we recently announced that Arjan Meyer, previously the chief commercial officer of Embraer Commercial Aviation, has become the new president and CEO of the commercial aviation business, reporting directly to our group CEO, Francisco Gomez. We believe the future of the business is in good hands with Arden. We are excited about this, who brings extensive commercial and operating experience from both the OEM and the airline side. I would like also to take this opportunity to thank John Slattery for his time and hard work here at Embraer and wish him good luck in his new role at General Electric. During the quarter, we delivered four E-Jets, and nine in the first half of the year, with our deliveries being impacted by COVID-19, and each infecting the airline industry. It's important to note that we didn't suffer any cancellation of the commercial aviation since the beginning of this year. One of our recent deliveries was the aircraft number 1600 of the E-Jets program, and the in 190E2 for Helvetica Airways, underscoring the great success of this family of jets. During the second quarter, Helvetica also upgraded an order of 4E190E2 to the bigger 195E2s to better serve their future growth needs. Congo Airways also upgraded an order of two 175E1 aircraft to the 1 190E2, take advantage of the best in class performance of D2 family. Although we are not in point where we can give a guidance on expected deliver or financial performance due to the uncertainties caused by the COVID, I'd like to point out that we are culturally Optimistic for the future as we have seen the rebound in domestic flights activity in several markets around the world. As an example, you could see in the chart on the top of the right side, 175 V2 in service in the U.S. is already 90% in July, mid of July in services. And if you see the graph below on the right-hand side, you see that information of IATA showing that we do have, I would say, flat U-shaped recovery. We are going to suffer 2020-2021. But, in fact, we do see a fast recovery path for the domestic traffic, which we do believe is going to impact also our regional and EGETS aviation products. Now moving to executive business jet at slide seven. We delivered a total of 13 jets during the second quarter, with nine of them being a light jet and four of them large jets. The jet delivered in the first half of 2020 were 22 aircrafts during the quarter. We delivered the first Phenom 300E, showcasing our ability to maintain the competitiveness of our products, making the best-selling aircraft in the light segment even better. The enhanced Phenom 300E is faster, quieter, and receives several other upgrades, including avionics and in-flight connectivity. We also announced several breakthrough cabin enhancement for our Praetor families of jets. Consolidated the Praetor's position as the best cabin environment among all medium jets, with the lowest cabin altitude in the class and 100% fair share capability, with standard filters in all Praetor's aircraft. Further, we announced this week the launch of the Phenom 300 MET, a unique mid-walk, solution, which is also available for retrofit on the existing FENO 300S, and is designed an ideal medical solution for both civil and defense application. We would like to reinforce that now, with the COVID pandemic, we are even more committed to maintain prices, discipline, and right size production plans to meet the current business jet market demand. Although we cannot give guidance at this time, we are confident that we will have a much stronger second half in deliveries of executive jets. And you have seen very few deferrals, even less cancellations so far, with highly committed customers to their orders. Finally, as far as the business jet flying activities, we have been seeing significant improvements since April. As shown in the graph with the number of BIS jets, Flights worldwide returning fast to 2019 pre-COVID level. In April, business aviation activity was 65% lower than 2019, which improved to 44% lower in May and 23% lower in June. The preliminary figures in July had been trained to only around 10% to 15%, lower than last year, which gives us confidence of a V-shaped recovery in this segment of the market. On slide number eight, we showed the highlights for our defense and security segment. During the second quarter, we delivered the third KC-390 to the Brazilian Air Force. And these aircraft had been very important in the country's humanitarian missions to combat the COVID-19 pandemic, presenting a very high dispatchability in the transport of supplies, cargo, and troops. There are currently 5K C390 Millenium in various stages of production for deliveries to both Brazil and Portugal Air Force, with one additional delivery expected to the Brazilian Air Force still in 2020. The development of the Portuguese version of the C390 Millenium aircraft also reached an important milestone recently entering in the preliminary design review phase. Other highlights in terms of deliveries during the period were the delivery of the first Super Tucano for the Nigerian Air Force, as well the last six M6 rather units for the Brazilian Army related to Brazil surveillance of the board and program. Finally, We also signed two contracts for acquisition in their cybersecurity space in Brazil, making our continued diversification of defense and security business into highly strategic and fast-growing segment. Now turning to the self-support business at slide number nine. In the middle of the COVID pandemic, our people have been working hard to create innovative solutions in service and support, allowing remote training with full qualification and certification capability, development of cargo transportation solutions for the ERJs and EJs, and enhancing cleasing procedures for disinfecting aircraft. Our service support business also successfully completed the first conversion of a Legacy 450 to a Prater 500 aircraft, adding more than 400 nautical miles of range to the plan, among other improvements. The conversions are taking now place at two service centers in the U.S., one in France, and one in Brazil. We are also proud to announce that the final maintenance schedule was extended to 800 flight hours, which is twice the industry average, helping our customer to avoid the unnecessary spend on aircraft maintenance. And in Portugal, our Ogma subsidiary signed 12 new contracts. for maintenance and repair across commercial, defense, and executive customer during this period. Finally, we show an update on the right-hand side about the Embraer Global Fleeting Service. As you can see, since April, our service has already increased a lot and reached approximately 70% utilization in July. which is significantly above other aircraft model. Moving on to our financial results for the period on the slide 11. Our backlog finished at $15.4 billion, remaining strong and represented several years of revenue for Embraer. It's important to highlight again that despite some deferrals, we didn't have any cancellation commercial aviation. And we have several activities and campaigns right now that may support a backlog expansion in the upcoming quarters. Moving to slide 12, we show our aircraft deliveries. As mentioned previously, we delivered four commercial jets in the second quarter, roughly in line with your deliveries for the first quarter. With the COVID-19 pandemic, significantly impacting our delivers in this segment. Our guidance will remain suspended, but we expect a better delivery performance during the rest of the year. Our executive jets business has seen less of an impact from COVID and we deliver a total of 13 aircrafts in the second quarter. With our high-quality backlog following a strong year of sales in 2019, we are confident that the executive jets delivery will continue to increase in the second half of 2020, as our customers continue to reconfirm their upcoming deliveries. At slide 13, we show our net revenue on a consolidated basis. With second quarter coming in at $537 million, the net revenue declined during the second quarter, affected all of our business segment due to the COVID. But commercial aviation and its related service were particularly impacted, representing almost 75% of this total revenue decline during the quarter. Next slide 14, Sally and administrative expenses continues to decline in the second quarter helped by several actions taken to gain efficiency in Spain as well as the furloughs and salary reductions measures. Two can concentrate in the second quarter. It's important to mention that Sally expenses include 60 million in additional debt provision compared to last year second quarter. mostly on commercial aviation customers. Excluding this provision, selling expense would have been even lower comparing to the level recognized in the second quarter of 2019. At slide 50, we show operating results. Embraer reported adjusted EBIT of a loss of 141 million in the second quarter of 2020 with a margin of minus 26%. It's important to highlight that executive jets, defense and security, and related service and support reported ABIT numbers close to a break-even during the first half of 2020. And commercial aviation was really the segment responsible for the negative operating results during the first half, which is a reflection of the very few deliveries due to the COVID-19 pandemic and the January shutdown for the segregation of the commercial business into a separate entity. As already anticipated, despite the COVID challenges, Executive Aviation Defense has been showing a meaningful improvement versus the first half of 2019, due to price discipline, improved mix, and lower cost base revisions. Finally, they adjusted the BIT in the second quarter excluded a total of $200 million in no-cash special items, mostly related to commercial aviation, including permits of the EJED family and the recognition of the depreciation and amortization expenses related to the quarters when commercial aviation was recorded as a discontinued operation available for sale. Slide 16 shows our adjusted EBITDA. which was a loss of $120 million, and also excluded the special items. I already mentioned in the previous slide, adjusted BTDA margin was minus 22.4% for the second quarter. Also reflecting the pressure on profitability coming from few deliveries in commercial aviation during the period with executive jets, defense and security services reporting much better numbers. Moving to the next slide, 17, with earnings. Embraer adjusted net income reached a loss of 199 million in the second quarter, implying a negative margin of 37% for the quarter. Our earnings have been negatively impacted by the combination of lower deliveries and revenues and the higher separation cost. Similar to the impacts already shown in the BIT and the BTDA, and higher financial expenses. Our reported net income was much bigger loss of $350 million, but mostly driven by the previously mentioned no-cash special items, partially offset by the lower deferred income taxes items. We expect to show much better bottom line performance in the second half as delivery margins start to improve during the rest of the year. Moving to slide 18, which shows Embraer investment over the last several quarters. The company has launched initiatives to reduce investment, including CapEx as well as research and development. This reflects our actions to minimize no essential investment to preserve cash flow in the context of the pandemic. It also reflects updated portfolio with state-of-the-art products in commercial aviation, executive jets, and defense and security. Embraer has invested a lot in the last five years, bringing new programs and products to the market. And now we expect to come in years to show lower investment. We have also announced a new timeline of entry into the service of the 175E2, now in 2023. With that, our CapEx development spending related to this program can be also better spread into the next two or three years. So assuming that is not so easy to talk about profit and loss during this quarter, let's talk about cash flow moving to slide 90. Our free cash flow was a usage of $476 million in the second quarter. The free cash usage was primarily impacted by lower commercial aircraft delivers in the quarter, leading to lower profitability and higher working capital needs, especially due to higher inventories. These impacts were partially offset by lower investment, spend, and other actions taken to reduce cash outflows And we are confident that our free cash flow will continue to be much better in the second half of the year, particularly in the fourth quarter, with the high deliveries and the work capital reductions leading to these improvements. Finally, at the slide number 20, we are happy to show our liquid position. We would like to highlight that despite two quarters of a cash burn, our liquid position remains solid. as well finish the second quarter with $2 billion in cash. We also recently signed an additional financial contract with Development Bank of Brazil, private and public banks, for an additional $600 million, as well another $100 million supported by the U.S. Ex-Im Bank, of a total of $700 million of additional liquidity coming mostly now in the third quarter. This incremental liquidity combined with higher expected deliver give us extra comfort to maintain our solid liquidity throughout the end of this year and into 2021. Our debit maturity are also mostly concentrated in 2022 and beyond that, in average maturity of almost four years. And, again, we are quite happy how we are treating, how we are preserving cash in our liquidity, and gives the comfort that Embraer remains strong, and we are prepared for any kind of change in the market, fast recover, any kind of second phase of COVID, and make sure that you have a good, solid economy. liquidity position towards the future. With that, I conclude my presentation, and I'd like to pass to Francisco for his closing remarks before you open to the Q&A session. Thank you.