Embraer S.A.

Good morning, ladies and gentlemen, and welcome to the ESG Flight Plan event in Embraer's second quarter 2021 financial results. Thank you for standing by. I'm Felipe Calçada, and I'll be your host for today. At this time, all participants will watch our financial results presentation. Right after, we will conduct a question and answer session, and instructions to participate will be given at that time. If you should require any assistance during the event, you can do so using the chat box on the platform. As a reminder, this presentation is being recorded and webcasted at Reuters' platform. Before we begin, just a legal statement. This conference call includes forward-looking statements or statements about events or circumstances which have not occurred. Embraer has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance. These forward-looking statements are subject to risks, uncertainties, and assumptions, including, among other things, general economic, political, and business conditions in Brazil and in other markets where the company is present. The words believes, may, will, estimates, continues, anticipates, intends, expects, and similar words are intended to identify those forward-looking statements. Embraer undertakes no obligations to update publicly or revise any forward-looking statement 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. And the company's actual results could differ substantially from those anticipated in the forward-looking statements. Participants on today's conference are Francisco Gomes Neto, President and CEO, António Carlos Garcia, Chief Financial Officer and Procurement, and Eduardo Couto, Director of Investor Relations. And now, I would like to turn the conference over to Francisco Gomes Neto. Please go ahead, Francisco.

Thank you, Felipe. Good morning to all, and thank you for joining our call today. I hope that all of you are well and safe, and thank you for your interest in our company. As you will see in Antonio's presentation, our results for the quarter were strong. The Q2 results are a clear example that our strategic planning has been well executed with the right focus and discipline, showing significant improvement in our financial performance. Before we go into more details regarding the Q2 results, I'd like to highlight the good momentum we are going in the different business segments. In commercial aviation, we announced a new firm order for third generation E-195, E-2 jets from the Canadian Porter Airlines with purchase rights for 50 more aircraft. We also announced new firm orders for 34 E-175 jets to Horizon Air and SkyWest to be operated for Alaska Airlines and Delta Airlines. These new orders and other active campaigns reiterate the continuous interest in the E-jet family as the best option in the regional aviation market. In executive aviation, we keep up the momentum with record sales in the quarter. We maintained our price discipline strategy and had a strong backlog growth with book to bill in excess of two to one for this business. In defense and security, we delivered seven Super Tucano aircraft in the first half of the year. Also, we had strong performance in our cybersecurity and systems integration companies with double digit revenue growth in the first half of this year compared to the first half of last year. Further, In the second quarter, the KC-390 Millennium reached an important milestone by successfully performing unpaved runaway tests. Although we are currently in negotiations with the Brazilian Air Force on the KC-390 Millennium contract, we continue to be focused on the new export sales campaigns for this aircraft as well as In services and support, we are pleased with strong second quarter results, with better revenues and higher margins, as traffic recovery and strong maintenance activity drove 55% revenue growth in the second quarter. It is exciting to see the continued positive sales activity in services, with deals signed with several important customers across all markets and at OGMA, driving backlog expansion for this segment during the period. This was further highlighted by the contract we signed with Porter Airlines for a 20-year total support program. With respect to innovation, we continue to make progress on partnerships in the urban air mobility ecosystem through our subsidiary, IVE, in a segment with a strong growth potential in the years to come. In addition, our services collaborative platform, Beacon, signed agreements with key customers such as Republic for its maintenance applications. Finally, on the operations front, we continue to see great improvements. We expect a 16% increase in inventory returns compared to 2020 and a 20% reduction in production cycle time of our aircraft this year, positively impacting working capital and production costs. I will now hand it over to Antonio Garcia, our CFO, to give further details on the financial results, and I will return in the end. Thank you.

Thank you, Francisco. And good morning, everyone. I will start with our backlog for the quarter. On slide seven, the graph shows we ended the second quarter at 59 billion, up 1.7 billion, or 12% from the prior quarter. This represents a return to the same 15.9 billion we were at in 2020, before the pandemic began. In our commercial aviation business, we closed 48 aircraft sales in a quarter, spread across several different airlines. In executive aviation, we had to record second quarter sales. A solid backlog as demand for light and larger business jets continue to grow. Backlog in service and support and defense and security also grew from the prior quarter's level. In summary, it was the best sales quarter since mid-2019. This gives us confidence in our plans for future revenue growth and improvements. Moving to slide eight, you can see the continuous improvement in aircraft deliveries compared last year and both commercial aviation and executive aviation. In commercial aviation, We delivered 14 aircrafts in the quarter. This represents a 56% increase compared to the prior quarter and 250% increase compared to the second quarter in 2020. Year-to-date deliveries, we were at 23, almost two and a half times higher than the same period in the prior year. Of these 23 deliveries, 14 were issues. compared to four E2s in the same period last year. SEIUS continues to perform very well for D2 as the most efficient right-sized single-aisle aircraft for the world post-pandemic. In executive aviation, we delivered 12 jets, light jets, and eight larger jets for a total of 20 aircrafts in the second quarter. This represents 54% increase compared to both first quarter of 2021 and the second quarter of the prior year. Year-to-date, Executive Aviation delivered 33 aircraft, a 50% increase compared to the first half of 2020. As noted in the Guidance 2021 we published this morning, we expect deliveries of commercial jets to reach between 45 to 50 aircrafts and executive jets to reach between 90 to 95 aircrafts. On slide nine, we show Embraer's net revenue. Embraer had a solid revenue growth in the quarter as all four business units rebounded strongly from the pandemic. Our top line more than doubled compared to the second quarter of last year. Growth came primarily from higher deliveries in commercial aviation, although all our segments showed much improved growth during the quarter. Year-to-date net revenue was just under $2 billion, as $767 million, or 65% increase over 2020. Net revenue breakdown by business show Embraer diversification, with commercial aviation representing 34% of the total revenues. Service and support, 28%. Executive aviation, 22%. And defense, 16%. It's important to highlight the strong recovery in commercial aviation, as this business was severely impacted by the pandemic last year. Slide 10. SG&A expenses reduction continues to trend very favorably over the last six quarters. We remain highly focused on SG&A efficiencies that are being implemented since the company's restructuring last year. Although the second quarter had a slight increase in G&A, this was primarily driven by increase in provision for profit sharing and performance-based incentives program due to better expected results for the company in 2021 as compared to 2020. Combined with the consolidation of expenses from Tempest, our new cybersecurity company acquired in the end of 2020. Selling expenses remains at historical low levels. Compared to the prior quarters, selling expenses increased 4% while net revenue increased over 40% sequentially. As percentage of net revenue, sale expenses was 4.2% in the second quarter compared to 5.7% in the first quarter. We achieved these results by leveraging our sales activity as volume increase combined with more cost efficiency digital sales effort. Slide 11 shows our adjusted EBITDA and adjusted EBITDA. We are very encouraged by the strong margin performance across all business segments in the second quarter. Our adjusted EBITDA margin was 9.3%, up 13 percentage points over the first quarter. Our adjusted EBITDA margin was in double digits, at 14%, or up over 16 percentage points from the first quarter. Both of these profitability metrics have recovered to the levels not seen before 2020. For the first half of 2021, our adjusted EBITDA margin was 3.9%, and our adjusted EBITDA margin was 9.2%, both well above prior year's level. These improvements come from several factors, including higher deliveries resulting in higher revenue, better gross margin on improved pricing, mixed production efficiency, fixed cost leverage on higher volumes, and favorable tax obligation reversal of this quarter of approximately $25 million. All of our segments have much better performance in the second quarter. adjusted a beat margin by segment in the second quarter were as follows. Commercial aviation was at 1.7% negative, which, although negative, shows a great improvement from last year. Executive aviation was at positive 8%, with a strong price discipline and consistent profitability. Defense and security was at positive 25%, led by Super Tucano deliveries along with positive adjustments on certain defense contracts. And service and support was at 19% as a strong contribution from spare parts programs. Slide 12 shows our adjusted net income. It was positive 44 million, or 24 cents per ADS, in the second quarter. This represents the first net profit on a quarterly basis since 2018. The recovery in adjusted net income is primarily driven by improved operating margins, reductions in financial leverage also contribute to improved profitability, and Any future debt reduction would naturally have an additional positive impact on earnings. Moving to slide 13, I'd like to begin with free cash flow. Free cash flow in the second quarter was positive 45 million, 272 million higher than first quarter, and 517 million higher than the same period of last year. This is a remarkable achievement. Although year-to-date the cash flow is negative 181 million, this is compared with a free cash flow burden of around a billion of the first half of 2020. We expect positive free cash flow from the second half of the year, of the 2020 year as indicated in this morning's guidance. Now to investments. Our total investments were $50 million in the second quarter and $89 million year-to-date, both of which are in line with last year's levels. This is important because it shows we continue to invest in our future. We have been very judicious in balancing They needed to invest our future if they needed to preserve cash. Slide 14 shows our cash and liquidity position. We ended the quarter with $2.49 billion cash and cash equivalents, a slight increase from the end of the first quarter. Our debt balance was at $4.3 billion, a slight decrease from three months ago. Our average debt maturity remains at four years. We expect to continue to generate cash in the second half of 2021. And beyond so, our leverage will naturally decrease. This will correspondingly reduce our net interest and expenses and have an additional positive impact on net income. Finally, moving to slide 16, Embraer has published 2021 financial deliverance guidance for the first time since the start of the pandemic. Despite risks of the economic recovery, vaccination rates around the world, and with a solid first half and good visibility for the remainder of the year, we decided to share the marked our targets for 2021. We expect to deliver between 54 to 50 commercial jets, just to correct, 45 to 50 commercial aircrafts in 2021, and 90 to 95 executive jets in the year. We have a good confidence in those figures as our skyline, our red field for both segments. Combined with the growth in defense and security, and continued the recovery in the service and support traffic recovered globally, we expect consolidated revenues to be between $4 to $4.5 billion this year, representing a low double-digit growth at the midpoint compared to the last year. Adjusted EBIT margin should be in the range of 3 to 4%. and adjusted EBITDA for 2021 should be between 8.5 to 9.5%. Embraer has had, in the first half of 2020, margin in these ranges, as we expect these good margins to repeat in the second half of the year. It's important to mention that those margins include costs related to the reintegration of commercial aviation as well as expenses related to the arbitration process. Finally, our free cash flow guidance is arranged from free cash flow usage of $150 million to a break-even for 2021. We had $181 million of free cash flow usage in the first half of the year, so we are anticipating to generate up to $180 million cash and the second half of 2021 without any cash inflows from M&A projects. With that, I conclude my presentation and hand it back over to Francisco for his final remarks. Thank you very much.

Thanks, Antonio. The second quarter results and the guidance for the year reinforce our confidence in our strategy. And this confidence motivates us to accelerate the performance improvements and the delivery of our long-term strategic plan with focus and discipline. As I have mentioned in the past, this year is one of recovery. And next year and beyond, we plan to capture Embraer's full potential to grow with profitability. Looking ahead, we foresee in the middle term, the potential to double the size of the company. And that doesn't include new strategic projects. We are going to be bigger and stronger, focusing not only on the top line, but also much higher profitability. we are already showing some positive results of the hard work our united and motivated teams of employees have done over the past several months, with expectation for positive operating profit this year and much better free cash flow performance, with a clear potential to break even for the year. This will be supplemented by partnerships and new programs to drive even higher growth opportunities. We are also advancing on our ESG journey. And right after the Q&A session, we will share with you our new ESG commitments. I invite everyone, therefore, to remain online for these ESG events. which will start just after the results Q&A. Also, we are looking forward to a new chapter of Embraer with our extraordinary shareholder meeting scheduled for next Monday. We expect our shareholders to approve the election of two international board members with extensive global aerospace industry experience following constructive feedback from analysts and shareholders to improve our corporate governance. These candidates have deep technical knowledge, strategic profiles, and an innovative thought process. Finally, I will close it today by thanking everyone for this strong quarter. It always starts with our people and their focus and passion on executing our strategic planning. As I mentioned to you in the last earnings call, we are a different company today. We are in a process of transformation and we are moving fast. Thank you for your interest and confidence in our company. Over to you, Felipe.

Thank you very much, Francisco. And before we continue, we'd like to show you a video. Check this out.

The world is a different place to a year ago. Industries have changed. Aviation perhaps more than any other. Embraer has changed too. We're leaner, more agile, and fit for growth. We're already on a path that will make us bigger and stronger. And with an all-new product portfolio, that are the most efficient and technologically advanced in their class. All built with the passion to improve sustainability, economics, cost efficiencies, and driving new innovations. We're better adapted to the challenges and opportunities of now. Like our customers, we're always looking above and beyond what was previously thought possible. That's why the world looks to Embraer. We're right for the world ahead. Right now. And now let's move on to our questions and answers session.

We are preparing the set here, and remember that questions can only be sent through the Reuters platform. Eduardo Couto will be our moderator, and he already has some questions with him. Eduardo, over to you.

Thanks, Felipe. We'll start now the Q&A. So let me see the questions that we have. The first question we have is, can you give an update on the SPAC negotiations with EVE? I don't know, Francisco or Antonio, who wants to take that?

Yes. Thank you, Edu. Thanks for the question. I mean, at this point of time, we can say that the negotiation is moving very well, I would say. We are very optimistic with this process.

Okay. Moving on the questions, second question we have, what work has Embraer been doing to develop electric aircraft in making this product more viable for customers?

Thank you, also good question. Well, we had our first technical flight recently with the Ipanema, full electric, and we hope to present this aircraft to the public soon. And they continue to invest in this electrification field as one of the innovation fronts that we have, I mean, to be in line with the ESG activities that we are moving fast in Embraer.

Great. Third question we have from investors is from Victor Misuzaki from Bradesco. He said the fence showed a material gross margin expansion in the second quarter. Can you give her more details about that, Antonio?

Vitor, thanks for the question. We had in the second quarter two main effects on the defense side. First one was the Supertucana delivery that we were not able to deliver in Q1 that flows to the Q2 figures. In addition to it, we have the adjustment in the defense contract we have in the local couriers in Brazil. I would say both effects, higher delivers in Super Tucano and the adjustment in the contracts lead us to this 25% margin in Q2.

Okay, very good. Next question comes from UBS. Could you comment on the 25 million reversal mentioned in the press release? Also, what was the positive cost-based revision related on the results?

So, thanks for the question. First point, we built up a provision in 2018 for the Brazilian guys here, Deseneração de Folha, that we have a claim being discussed since 2018. And we were able to gain this claim in the second quarter. That's why we reversed this tax position. That was also read adjusted in 2018. That's why we're also considering our results. The second question was in regards to the contracts. We have an adjustment here around $10 million in the second quarter. That were both effects. It's important also to mention that Even that we have this tax reversal, 25 million, let's put first quarter and the second quarter. We do have other types of costs that we are not adjusting. That's also not, I would say, for example, reintegration of commercial aviation and arbitration costs, which is more or less net this 25 million, I would say. The numbers we are seeing right now, I would say, combined Q1 and Q2 is really, for me, describe the real performance of the company.

We have several questions about EVE. I'll try to summarize them. So basically, any general updates on your eVTOL initiatives would be very helpful, particularly on negotiations with Zenite. We already talked a little bit, but maybe an update of the eVTOL.

Yeah, well, as I said, we are very excited with this initiative, with this product. I mean, we had the first flight with the prototype scale 1 to 3, a successful test, by the way. Now we are preparing the next test with the prototype scale 1 to 1. And technically it's moving very well. We are planning the certification by 2025. and entering service in 2026. And about the negotiation with Zanartan mentioned already, that's moving very well.

Okay, very good. Now moving to business jets, we have a question from Credit Suisse. Business jet has been very strong, and on the first quarter results, you mentioned half of the delivers were for first-time buyers. In the second quarter, how much were first-time buyers Maybe we can give an overview of the business jet market as well.

I can do it. I would say today in our backlog, the portion of first-time buyers, I would say, is a third, something like 30%. In our backlog and deliveries for the whole year, we are talking about 30% first-time buyers. And we are going with the market, if you see the industry, book to be between 1 to 5, 2 to 1, 1 to 5 to 1 and 2. to one to two, and we are, I would say, a little bit above that, and it's doing pretty well, but for sure the first buy is pushing also the market especially in the light jets category.

Now there is a question on commercial from Credit Suisse. Your guidance for commercial delivers of 45 to 50 seems low, given you have already delivered 23 jets. Are there any supply chain issues that could prevent you from being above that range? Also, they are asking, what do you see in terms of delivers for 2022? Any call on that?

Let's take into account that commercial aviation is still suffering from the pandemic. What we are giving as the guidance to deliver this year, is a little bit higher than last year. Last year we delivered 44, and for sure we are selling more, but it's going to impact more 2022. And the fact that we deliver already 23 aircraft is because it's well divided throughout the year. That's why the 47, I would say between 45 to 50 is the number we are having, and we do see I would say around 30% for next year, between 65 to 70 aircraft. That has to be confirmed, but it's more or less the number you're seeing. It's important to mention, we do see commercial aviation coming back to historical levels at Embraer from 2023 onwards. We are selling more, but the sales country we are closing right now is going to the skyline started in 2022, and 2021 is more or less the same level from 2020.

If I may, I'd like to make a link between this answer and the result of the company. It is true that in this first half of the year, comparing to the first half of last year, we did much better in terms of deliveries, in terms of results. The numbers speak for themselves. But if you look at the guidance for the entire year, you see that, no, as planned, we won't see a huge increase in volumes in the commercial or executive. Yes, we are seeing some growth, moderate growth this year compared to the last year. But the improvements in the results, I mean, either the EBIT coming from almost minus 3% last year to something between 3% and 4% this year, But the free cash flow from minus 900 million last year to something between minus 150 and zero this year, all this good performance is came from efficiency gains, pure efficiency gains. We really did a good right size in the organization. We are improving, I mean, a lot of activities on cost reduction, on inventory reduction in all the company, you know, I mean, pushing the sales for the future. So again, I mean, from next year on, I mean, we expect that with the stronger growth in the volumes, in all the business units, and with this more efficient and agile company, then you see much better performance. So that's why our result is coming from this year, from efficiency gains, from some additional sales, of course, but mainly from efficiency gains.

Just to complete the question for supplier change, what we are putting the guidance in, what we agreed, with our customers for this year, at least for the commercial variation, having not seen any supplier chain, I would say, problems this year.

We have several other questions. So the next one is related to margins and free cash flow. So the question is, how do we see margins per business in the long term? And what sort of free cash flow conversion, EBITDA into free cash flow conversion does Embraer expect, Antoine?

So, in regards to margin, we do see, let's, in a long-term perspective, we do see service and support at double digit as it is today. We do see executive in the sense single higher digit, and we are more or less also today. And we do see the commercial aviation, I would say, mid-single digit, close between 3% to 5% in the long term. That's what we see in regards to profitability for the company. And in regards to the cash, the conversion from EBITDA to EBITDA, I would prefer to talk, we are seeing today, a 50% conversion from EBIT to cash flow. We still need to improve something, but it's more or less the metrics I'm using internally. We do see today in the long run 50% of their BIT being converted into cash for the years to come.

So the next question is from JP Morgan, Marcelo Mota. Any update on the sales campaigns for commercial aviation? Could we see more orders during the second quarter?

Good question. Yes, we have a lot of active sales campaigns ongoing in our commercial aviation. We just announced this sales for SkyWest with 16 aircraft. And, yes, we have more to come.

By the way, the SkyWest, it's not part of the backlog in Q2. We are going to book these 70 aircrafts in Q3.

17 aircrafts, correct. Aircrafts, correct. Thank you, Antonio.

There is a question here from Lucas from Santander talking about, you know, inflation. Can you please comment on how the company is seeing the raw material inflation and how is the company offsetting these impacts?

I would say we do see in our final products inflation, I would say, all index we have with our suppliers between 2% to 3% for next year. And to the customer side, we have also the readjustment clause with the index, I would say. our takeaway for next year is a balance between what you have internally, inflation, and the pass-through to the customer base. That's more or less what you are seeing, but there is, in some indicators, a spike in deflation index for next year that we are going to discuss for our customer base. Moreover, we did this year, and we are doing this year, and we do have also a lot of designed to value activities inside Embraer to reduce the base of the costs we have today without any impact on any inflation or indicators.

Very good. So now moving to new projects, there is a question from Rio Verde Investimentos. Any update on the partnerships for the turboprop aircraft?

That was a good question. Well, this front is also moving very well. especially with the recent interest of U.S. airlines in that product. So we see that product as a good alternative for that market and other markets as well, and also as a preparation for new technology in the future. So we are very optimistic and working hard to accelerate this partnership front.

Okay, I think we have at least one final question. It's back to commercial aviation. What do you expect? It's from WTS. What do you expect in the mid to long-term in commercial aviation as we are seeing recovering demand for flights and also renewal for having more sustainable fleets?

Good question. Thank you. So, again, we have, you know, I mean, globally... 94% of the Embraer fleet back in the skies. In the US, I mean, 97% of the Embraer fleet is flying again. So it shows that the recovery in the domestic market really is coming. And that's why we are working in a lot of sales campaigns in that segment for U1s. and E2s as well. So we are working hard to take advantage of this moment. As Antonio mentioned, that we see volumes growing. I mean, in 2020, but strongly from 2022, but strongly from 2023 onwards.

I think a final question, it's related to defense. Can you please comment on the expectations for new KC-390 orders?

Well, as I said in the opening, we are working in many sales campaigns for import sales campaigns for the KC-390. And also, I mean, we are working to develop partnerships that will help us to open new markets for that great aircraft.

I think that's what we had on the Q&A. So I think that concludes the Q&A. I want to thank you all for the questions and the time. So now, Antonio, Francisco, no comments? Thank you all.

Thanks a lot. Thanks a lot. So thanks for your interest in supporting our company. We are living a really special moment. As I said before, this year is the year of recovery, the year of turnaround. And of Embraer, and the numbers, as I said before, speak by themselves. We expect to have a much better year in 2021 compared to the last year, coming from a very tough crisis, as you know. And we hope to, no, we expect to capture the new Embraer potential to grow from 2022 onwards. So thank you very much for your support.

Thank you. So this concludes today's Q&A session that in turn concludes Emperor's second quarter 2021 financial results presentation. Thank you very much for your participation.