Embraer S.A.

Good morning, ladies and gentlemen, and welcome to the audio conference call that will reveal Embraer's third quarter 2020 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 the time. If you should require assistance during the call, please press the start 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 other things, general economic, political, and business conditions in Brazil and in other markets where the companies present. The words believes, may, will, estimates, continues, anticipates, intends, expects, and similar words are intended to identify forward-looking statements. Embraer undertakes no obligations to update, publicize, 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 Gomez Netto, President and CEO, Mr. Antonio Carlos Garcia, Chief Financial Officer in Procurement, and Mr. Eduardo Couto, Director of Investor Relations. I would like now to turn the conference over to Mr. Francisco Gomez Netto. Please go ahead, sir.

Good morning, everyone. Thank you very much for participating in this conference call. I am Francisco Gomez Neto, President and CEO of Embraer. Before giving the floor to Antonio Garcia, our CFO, I would like to make some initial comments. With the recent growth in the number of COVID-19 cases in different parts of the world, notably in Europe and in the United States, we remain focused on the health and safety of our people, assessing the situation on a daily basis at each of our units around the globe. Regarding finance, our focus in the short term remains on preserving cash through the execution of a series of measures implemented over the past few months, which I have already discussed with you during our past earning calls. In parallel, we are preparing the ground for a much better financial performance in 2021 and grow in the following years. Today, I'd like to take a few minutes to focus on some of our priorities, namely a lean organization and recapture synergies and business plan update. Next slide, please. Regarding our lean organization and recapture synergies pillars, we have made every effort to maintain the know-how and competitive advantage brought by our remarkable people. But in view of the new market reality, it has become essential to review our workforce. And in the last quarter, we made a significant adjustment to our structure. We analyzed the structures and teams of each area within the company with the goals of creating a leaner and more agile organization and eliminating the duplications generated by the commercial aviation carve-out. We have already recovered synergies with the reintegration of commercial aviation and the associated services and supports. And at the same time, we have retained all the skills necessary to return to grow in the coming years. A simpler and leaner organization has been prepared for properly implementing our 21-25 strategic plan, a theme that I will address on the next slide. While we are dedicated to managing the impacts generated by the crisis in the short term over the past few months, we have also focused on updating our business and growth plan. We believe that the period between now and 2025 can be divided into three phases. This year is dedicated to crisis response. Starting next year, we expect that the market will start to recover with variations depending on the specific business areas and markets. And From 2022 onwards, our projects will mature and allow us to grow profitably. Regarding the Embraer 2125 strategic plan, we have reviewed the details over the past few months. In response to the new market scenario, including the impacts generated by the pandemic, the end of the agreement with Boeing, and the reintegration of commercial aviation. This was a collaborative effort involving dozens of company leaders. We focused on the plan's effectiveness, and we know it is realistic. The goals are challenging but doable, and we will execute with focus, governance, and discipline. The plan has two main objectives, to increase revenue and to improve profitability. To achieve these two objectives, we defined three lines of action. Number one, initiatives aimed at efficiency gains. Number two, actions to increase the sales of our current product portfolio. And number three, a combination of business diversification projects, innovation, and strategic partnerships. In total, the plan comprises 18 projects. that will bring more agility and intelligence to the processes and reinforce alignment across the company. Just to give you a little more visibility, the first front, which is related to efficient gains, entails the creation of a web-based purchasing organization reporting to the CFO and focusing in a very structured way on intelligent cost reduction. At the same time, we are incorporating more intelligence into the processes, including the material planning and logistics area, focusing on increasing inventory return to reduce substantially working capital. In operations, the project aims to reduce aircraft production cycles, which will allow us to have more competitive products and reduce working capital as well. Regarding the second front dedicated to the growth of portfolio sales, we will intensify the sales efforts of our products. We benefit from new and competitive products in every segment in which we operate. Additionally, we will focus on adapting and converting aircraft for specific segments, such as converting e-jets to carry cargo in the passenger cabin, or the recently launched Pheno 300 meds, which was designed for medical evacuation. Finally, on the diversification innovation and partnerships front, we are going to expand our operations. This year, we have already announced investments in cybersecurity with the acquisition of Tempest, the Fragate project with the Brazilian Navy, and more recently, the creation of EV, a company dedicated to the development of the urban air mobility ecosystem, and EVTOL, electric vertical landing and takeoff aircraft. With this front, we are also developing project to expand our service offerings for aircraft from other manufacturers. And we are discussing potential strategic partnerships aimed at opening new markets and developing new products such as the TurboProf. It's important to note that, in addition to managing where we structure the product, the PEN focused on the process of execution and on the constant monitoring of the evolution of all initiatives. We are aware of the challenges we have ahead, especially in commercial aviation in 2021. But we are very confident in the future of Embraer. We know what must be done. We know how the plan should be carried out. And we have an immensely competent and aligned team that will develop the necessary initiatives to make the company grow profitably in the coming years. With that, I have concluded my comments, and I would like to give the floor to our CFO, Antonio Garcia. Over to you, Antonio. Thank you all.

Thank you, Francisco. Good morning, everyone. It's really a great pleasure to talk to all of you. Now moving to the commercial aviation highlights on slide seven. During the third quarter, we delivered seven E-Jets, representing a sequential improvement compared to the first and second quarters that we will accelerate even more in the fourth quarter. Among our third quarter deliveries, we had five 175s for United Airlines, highlighting our continuous leadership in the U.S. regional jet market. As another example of our continued improvement, we have already delivered more planes in October than in the entirely third quarter of 2020. As far as new operators, Alliance Airlines from Australia received 14 pre-owned E190s and Bamboo Airways from Vietnam started operation with two E195s. We are still not in the point where we can give guidance on expected deliveries or financial performance due to the COVID-19 uncertainties. But we would like to point out that we remain cautiously optimistic for the future, as we have seen a gradual rebound in domestic flight activities in several markets around the world, including the United States. Looking at commercial aviation in 2021, the uncertainties around the COVID pandemic are still our biggest concern for next year. The fleet of 175 in operations continues to improve with 93% in service as of end of September, outpacing our competitors in the market. I'm also proud to say that we had zero cancellation of commercial jet orders since beginning of the COVID pandemic. In executive jets, on the slide eight, we had a strong delivery pickup during the third quarter with 21 deliveries. This brought a total executive jet delivery so far in 2020 to 43 aircrafts. We expect the fourth quarter to remain strong for Embraer, and deliveries should continue to increase compared to the previous quarter. As a result of higher deliveries, improved mix, and measures taken to be more cost-efficient, the executive debt segment posted positive operating margins in the third quarter and year-to-date, marking the continuous turnaround of our profitability on this segment despite the COVID-19 pandemic. Also, as mentioned in the last call, we launched the Spinum 300 Med during the third quarter, which is a unique mid-box solution that's also available for retrofit on existing Finul 300s. In terms of new technology, Embraer continues to disrupt the medium segment respirators, HIPAA filters, now being standard wide levatory electrical doors and synthetic vision systems were both certified during the quarter. Finally, we would like to highlight the continued recovery during the third quarter. in particular with respect to the fractional and charter operation, with smaller and medium jets. Among fractional, small jets activity was down only 13%. Year over year, compared to the medium jets, down to 18%, and larger jets, 33%. Among charters, small jet activity was almost flat versus last year, while the medium and large jet class were down 5% to 70% respectively. As you can see, the markets where Libra is positioned with the Finans and Pretos are recovering faster. Moving to slide 9, we showed the highlights for defense and security. Regarding the C-390 Billionaire Program, there are currently six C390 in various stages of production for future deliveries to Brazil and Portugal. And we expect to deliver one more aircraft to the Marine Air Force this year. The program also received the 2020 Grand Laureate Award for Defense from the Aviation Week, which selects the best aircraft programs across commercial executive defense around the world. Another highlight during the quarter was the Super Tucano, as Embraer was able to deliver 10 plants to international customers. With the reopening of global borders, we were able to deliver Super Tucanos to Nigeria, Chile, and the Philippines. Finally, the first Gripen E arrived in Brazil to start its flight test campaign. which is a major milestone in the Brazilian jet fighter program with Saab. Embraer will also play a leading role in the execution of the program in Brazil, and will be responsible for the systems development, integration, flight testing, and delivery of the aircraft to the Brazilian Air Force. Now turning to service support on slide 10. We are proud to say that Embraer once again was ranked first in ProPILOT's Corporate Aircraft Product Support Survey 2020, underlining our commitment to customers to provide the best after-sales support possible. Our service and support team also completed the seventh conversion of Legacy 450 to Operator 500 since the service became available early this year. We were also able to get a certification of the first E-Jet modified for cargo transportation in cabins, offering our customer a solution to better utilize their fleets in the environment of lower passenger traffic caused by the COVID-19 pandemic. Further in service, we are pleased to see that the KC390 millennium has been showing excellent reliability in the military missions in Brazil and abroad. Moving on to our financial results on slide 12. Our backlog finished third quarter at $15.1 billion, representing several years of revenue for Embraer. It's It is important to highlight again that despite some deferrals, we didn't have any cancellation in commercial aviation. And we expect some new sales to potentially lead for backlog expansion in the upcoming quarters, depending on the impacts of a second COVID wave in certain regions. On slide 13, we show revenues and deliveries. We can clearly see an improvement in the third quarter relative to what we had in the first half of the year and the impacts of COVID on the industry start to reduce. With a higher commercial and executive jets delivered in the quarter. As I mentioned earlier, we expect an even better fourth quarter compared to the third quarter. We also had a strong revenue improvement in defense and security. following the reopening of international borders to allow for the delivery of supertucanos. Our service and support business, despite a year-over-year decline due to the COVID-19, has also increased double-digit sequentially from the second quarter with a potential to improve activities across the commercial, executive, and defense markets. Next, on slide 14, Embraer highlights its continued cost control in selling and administrative expenses. The reduction of SG&A reflects our ongoing efficiency and infrastructure actions, as already mentioned earlier in this presentation, combining, of course, lower marketing expenses coming from the COVID-19 restriction. It is important to mention that said expenses includes higher bad debt provisions compared to last year, mostly related to our services and support receivables. Excluding the bad debt provision, SG&A expenses on a year-to-date basis in 2020 are 30% lower than the same period of 2019. On slide 15, we show our operating results. Embraer reported adjusted BIT of a loss of $45 million in the third quarter with a margin of minus 6%. The adjusted BIT in the third quarter excluded a positive impact of $7 million for special items, including $54 million in charges related to our restructuring announced in September and $30 million in additional bad debt provisions. offset by 75 million positive in reverse of non-cash impairments charged in executive and commercial aviation. Breaking our third quarter margin by business, executive debt was positive 2%, service and support 4% positive, defense and security breakeven, similar to previous quarter. Commercial aviation was responsible for the negative operating results due to the low deliveries and the COVID impacts. So in slide 16 shows our adjusted EBITDA, which was a loss of $80 million and also excluded the special items already mentioned in the previous slide. Adjusted BIT margin was minus 1%. The combination of better volumes and cost cut initiatives have already started to appear in the third quarter. And we expect this trend to accelerate in the fourth quarter of the year. Moving to next slide 17 with earnings. Embraer adjusted net income and reached a loss of $148 million in the third quarter. Our earnings have been negatively impacted by the lower operating results, as well as higher financial expenses and no cash FX losses, similar to the operating numbers. Net income also reached a bottom in the second quarter and has started to rebound, and we expect better borderline performance in the fourth quarter of this year, driven by higher delivers. Next slide, slide 18. We show Embraer's total investment over the last few quarters. The company has launched several initiatives to cut investment, including CAPEX, as well as research and development. These reflect our actions to preserve cash. It also highlights Embraer's updated portfolio with state-of-the-art products in commercial aviation, executive jets, 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 the upcoming years to show lower investments. Total investment during the third quarter reached 45 million and 134 million year-to-date, which is less than half of our investment level of 2019. Moving to slide 19, our free cash flow was a usage of $567 million in the third quarter. This free cash flow usage was negatively impacted by approximately $250 million, including three major items. First, one-off charge of around $70 million related to the restructuring and severance costs package of our headcount reduction in beginning of September. Second, around $100 million in short-term customer finance that will be normalized now in the fourth quarter. And third, another $80 million related to three plans that skipped from the end of the third quarter to the fourth quarter. Excluding that, our cash consumption in the third quarter of this year will be very close to the third quarter of 2019. Giving expectation for higher deliveries in the fourth quarter with a positive impact on our working capital, as well as our cost reduction initiatives, we are confident that our free cash flow will be much better in the fourth quarter of the year, and we should be at least cash break-even in the second half of 2020. Finally, on slide 20, we highlight our strong cash position. Our liquidity increased during the third quarter with a total cash position of $2.2 billion, which is a similar cash level that would have prior to COVID pandemic. I'm also happy to announce that we complete a series of liability management initiatives, new loans with private and public banks, as well new bonds insurance of $750 million, maturing in 2028. and has repurchase of $250 million of outstanding 2022 and 2023 bonds. It's important to highlight that our new 2028 bonds is unsecured and had a market demand above $3 billion, showing the confidence of the investor in long-term of Embraer. With that, I conclude my presentation, and we can open for questions. Thank you very much.