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Operator
Good morning, ladies and gentlemen, and welcome to the audio conference call from Embraer's second quarter of 2022 financial results. Thank you for standing by. We remind that EVE's results will be discussed on EVE's teleconference. 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 that time. Should you require assistance during this call, Please use the chat on the platform. 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's 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 economics, political and business conditions in Brazil and 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 obligation to update publicly or revise any forward-looking statements because of new information, future events or other factors. In light of those risks and uncertainties, the forward-looking statements, events and circumstances discussed on this conference call might not occur. The company actual results could differ substantially from those anticipated in the forward-looking statements. It's important to mention that all numbers are presented in US dollars, as it is our functional currency. Participants on today's conference call are Mr. Francisco Gomes Neto, President and CEO, Mr. Antonio Carlos Garcia, Chief Financial Officer and Procurement, and Mr. Leonardo Shinohara, Director of Investor Relations. I would like now to turn the conference over to Mr. Gomes Neto, who will proceed with the first remarks. Please go ahead, sir.
Gomes Neto
Good morning and thank you all for joining our second quarter 2022 results call today. I hope that all of you are well and safe and I thank you for your interest in our company. The second quarter results show a steady improvement in our financial results with our focus and discipline in the execution of our growth plan. Despite the challenging supply chain environment, which I will talk more about later, we were able to deliver solid results. And we have also maintained our focus on enterprise efficiency and innovation as key pillars of our growth strategy. We reached a firm order backlog of 17.8 billion in the second quarter 2022. the highest level since the beginning of the pandemic. And this number does not consider Porter's new order announced during the Farborough Airshow last month. And we are pleased to announce a reported adjusted net income of $39.4 million in this quarter. Before we go into more financial details on the quarter, I'd like to give you some quick highlights on our two key pillars. First, on innovation. IFES IPO brought 377 million of gross proceeds, which will be used to accelerate the development, certification, and commercialization of our urban air mobility solution. During the Farnborough Air Show, EV announced Halo Aviation as the launch customer for its urban air traffic management solution. At the event, we also unveiled the EVTOL cabin mock-up and updated the product design. Second, enterprise efficiency. We continue to work with great discipline to be more efficient at the entire company. This quarter, we announced a partnership with Toyota to maximize efficiency in our production and accelerate the use of lean principles to reduce the production cycle lead time of our aircraft by 40% by the end of 2023. Mainly due to our efficient initiatives, the financial performance continues to improve. free cash flow increased 100% versus the second quarter last year. And our gross margin presented a substantial increase compared to the same period last year. On the next slide, we will speak about our main ESG achievements announced in the second quarter. Embraer and Raizins signed a letter of intent with a commitment to develop a sustainable aviation fuel production ecosystem. Embraer will become the first aircraft manufacturer to use SAFTET. It will be distributed by Raizins, a global leader in bioenergy. We also announced that a new purchase agreement to source 100% renewable energy in Brazil by 2024, a year ahead of our 2025 target. Embraer and Pratt & Whitney had successfully tested an E195E2 aircraft on 100% sustainable aviation fuel this quarter. Finally, our annual 2021 report was published in May. The report brings the main highlights of the year on innovation, financial performance, and a complete overview of Embraer's ESG actions in 2021. Important to note that our report is already in SASB framework, friendly for investors in our company. On the next slide, we will talk about growth and see more details of business unity highlights in the quarter. In commercial aviation, during the Fibreware show, we announced a firming order of 20 E195E2 from Porter Airlines, now totaling 50 orders and 50 options, and an additional eight E175E1 firm order from Alaska Air. On the P2F Passenger to Freighter project, we signed a firm order for up to 10 aircraft for an undisclosed customer and an LOI with NAC for 10 freighters. Gross margin of 13.2% in Q2 2022 versus 4.5% in the previous year. Executive Aviation keeps up good momentum with strong sales. We delivered 21 jets, being 12 light and 9 large. Backlog increased above 16% compared to the previous quarter and gross margin of 22% compared to 17.5% in the previous year. On defense, we are very pleased to have received in June the Netherlands Ministry of Defense's decision to select the C390 Millennium as the sole source to replace its cargo fleet. It is a clear demonstration of the increased interest in our air product from several countries recently. Gross margin of 28% in Q2 22 versus 34.6% in the previous year. Service and support continues to improve its results, with a stable backlog and positive gross margin, which reached almost 32% in Q2 2022 versus 28% in the same period of 2021. We also signed a new contract with Lot Polish, expanding the pool program to cover 44 aircraft. I will now hand it over to Antonio to give further details on the financial results, and I will return in the end. Thank you.
Antonio
Thanks, Francisco, and good morning, everyone. Let's talk about financial results. We delivered stronger results in the second quarter, reinforcing our confidence in our financial performance for the year. We continue highly focused in our pillars of the leverage, the company, driving profitability and efficiency. Embraer delivered 32 jets in the second quarter, of which 11 commercial aircrafts and 21 executive jets, 12 light jets and nine midsize jets, according to our schedule. We reaffirmed all aspects of our 2022 financial and deliveries guidance with no material variations. Deliveries is in a good pace and seasonally concentrated the second half of the year. We have noticed some concern from the south side reports about deliveries for the year. But just as a reminder, we are today just four aircrafts from commercial aviation behind our skyline. Despite the very challenging supply scenario, our plans have not changed, and we remain confident in the delivery of the aircrafts. Fermi order backlog ended second quarter 2022 at $17.8 billion, half billion more versus first quarter 2022. This is the highest quarter backlog since beginning of the pandemic. 12% higher, driven by solid sales activities, mainly in executive aviation. Revenues reached $1 billion and $90 million in the quarter, down 10% compared to the second quarter of 2021, due to lower deliveries in commercial and defense segments, partially offset by our services and support business units. Before I start with EBITDA and EBITDA, I want to mention that we reported consolidated gross margin of 21.9% in the quarter. It was higher than the 18.2% reported in the second quarter of previous year, 2021. We find year-over-year improvement in most segments. due to the product and service mix, pricing, and overall operational performance, including tax efficiencies. Adjusted EBIT and EBITDA were 81 million and 125 million respectively, yielding adjusted EBIT margin of 8% and adjusted EBITDA margin of 12.2%. It's important to mention that our adjusted EBIT in the second quarter of 2022 also includes commercial aviation integration and arbitration expenses of around $16.5 million. If we exclude all these extraordinary effects, adjusted EBIT margin would have been around 10% or $100 million in the second quarter of 2022. And EBITDA margin of around 14%. excluded these effects. And please take into account, we book it, 21 million provision for bad debt in the second quarter, around 21 million in the quarter. Also impact the results here. Quarterly, G&A reached $42 million, or an increase of 1 million compared to the second quarter 21 figures. Due to inflation, wage adjustment, but no increase in headcount. Selling expenses reach at 66 million or an increase of 60 million compared to the second quarter, 21 figures, due to more active sales campaign and trading events. It's important to mention the selling expense does not include 21 million of bad debt provision that we exclude in this graph here. Talk about investment. In the second quarter of 2022, Embraer invested a total of 42 million in product development and research, mainly in product development, for example, with two-family freighter, executive aviation, and TP projects. We invested also 30 million CAPEX, mainly for service and support expansion business. We continue to invest in our future. Another good news moving to free cash flow and net results is slide number eight. In regards to free cash flow, we continue highly focused and cash flow discipline for positive trends. Free cash flow in the second quarter of 22 was a surplus of $91 million, represent a significant results supported by the divestment of Everett's facility and optimization for working capital. driven by positive free cash flow year-to-date, even considering a production ramp-up and deliveries in the second semester. Moving to adjusted net results was a profit of 39 million due to the better EBIT performance and interest reduction of 28 million in the second quarter, 22 year-on-year basis. The company finished the quarter with a total debt of $3.2 billion, or $864 million last year to date, in line with our liability management strategy. Embraer continues to leverage the balance sheet, reducing systematically gross debt and improving credit metrics. Moreover, reducing interest expenses. It's important to highlight that our net debt EBITDA last 12 months ratio is around four times in the second quarter 2022. But in the next quarter, we will show a significant improvement because deliveries are concentrated in the second half and we remain committed to improve our financial metrics. With that, I finish my presentation and hand it back to Francisco for his final remarks. Thank you very much.
Gomes Neto
Thanks, Antonio. To close, I would like to make some comments on the supply chain issues. It is a major short-term issue for the whole industry globally, and we can't undermine this challenging environment. To minimize the impacts, we are working very close to our supply chain, having people on-site as the main suppliers, developing other logistical routes and working on improvements in internal processes and cycles to absorb part of the challenges. Having said that, we are cautiously optimistic about year-end results and very confident about the mid-term future. The combination of innovation, enterprise efficiency, and our fantastic people is very powerful and will make us grow sustainably. Thank you for your interest and confidence in our company.
Operator
We'll now start the question and answer session. We'll ask who are interested in making questions at any time. Press star 9 in your phone or press the button raise hand on the platform. When your name is announced, press the star 6 or activate your microphone on the platform. To give everyone a chance to participate, we suggest you to ask just one question per request. Wait while we pull four questions. Our first question comes from Josh Milberg. Please, Mr. Milberg, your microphone is open. Mr. Milberg, you can activate your microphone.
Milberg
Oh, very sorry about that. Can you hear me now? Yes, yes. Okay, great. Good morning, everyone. And thank you very much for the call and your comments. I had a couple of questions on the Turboprop project. And the first one is if you could just update us on its financial impact for this year. And if I'm not mistaken, you had talked about a potential $50 million effect this year that would be, you know, expense recognized in the P&L for the year as a whole. So I just wanted to kind of clarify if in fact that's how it's being treated and if that's roughly still the magnitude of the impact you expect. And then I was also just hoping you could, you know, give us a little bit of your updated thinking on the project um and you know maybe just touch base on on what what steps remain um for it to be green lighted you know what kind of buy-in you're looking for cut buy-in you're looking for from customers and and and and whether you know having a jv partner would be critical thank you very much
Antonio
Hello, Josh. This is Antonio speaking. Thanks for the request. I just want to answer part of it. Firstly, what we are seeing regards to impact on our financial, our profit and loss this year for DTP is around 25 million. We are working hard in order to minimize because we are still not capitalizing those R&D costs. But for the profit and loss this year, it's 25 million and is already part of our forecast and also our guidance.
Gomes Neto
George Francisco speaking about the project. I'd like to say that we are very excited with this project. We are progressing well on tests, wind tests and other engineering activities. We expect to decide about the engine selection in the second half of the year. and we expect to approve the business case beginning of next year. Even not having the business case approved, we announced in May, last month in February, that we have already 250 plus letters of intent of customers in our TP models.
Milberg
Okay, so it sounds like everything's progressing as planned and that there are very good prospects for the project maybe moving forward as of next year. Could you touch, Francisco, a little bit on the financing aspect of it?
Gomes Neto
We are working also in parallel with the engineering activities. We are working internally in alternatives to fund the project. So at the time we expect to approve the business case next year, we will have the funding solution defined.
Antonio
Josh, the idea is not to compromise the running business, the financial metrics of the running business. We are evaluating for sure with support from customers, from suppliers, and also how we are going to, I would say, overcome the first two years with this development. But the idea is not to compromise our current business.
Milberg
Understood. Okay. Well, thank you very much. Thank you both very much for that color and look forward to hearing more on the project as you advance. Have a nice day.
Operator
Our next question comes from Mr. Marcelo Motta. Please, Mr. Motta, you can proceed.
Marcelo Motta
Hi, thank you very much. It's a question regarding the deliveries during the presentation and rare comment that around four aircraft on the commercial aviation, you know, were not delivered due to supply chain issues. So just want to know if the company could provide additional color regarding if it was like parts, the engine, the reasons behind this delay and if those aircraft were already delivered now at the beginning of August and if there is any other aircraft that is delayed as of now. Thank you.
Antonio
Marcelo, thanks for your question. It's highly appropriate, and I want to use the opportunity to say more than you asked me and you asked us here. For sure, what we are missing most is normally changing avionics and other small parts. They are concentrating four or five suppliers. And that was since the beginning of the year, maybe you will recall this, when we set the guidance. And the market reacted quite negative, to be honest, or overreacted when it said 60 to 70 aircrafts or 100 to 110 executive jets. Because at that time, we foreseen already this tight situation that we are living. And that's why... Uh, people are getting sick with supply chain, but for Embraer, we saw this, uh, some months ago is not a surprise, but finalizing the question to the, the, for aircrafts, they are going to be delivered right now in the month of August.
Marcelo Motta
Perfect. Thank you very much.
Operator
Just to remind you all, if you wish to ask a question via phone, please press star 9 to join the queue or press the button raise hand on the platform. Wait, while we gather for questions. Our next question comes from telephone. If you wish to activate your microphone, press star 6, please.
Anthony
I know, but I need to find your locker on your dashboard.
spk04
Good morning, and thank you very much for taking my question. I'm curious, when we think about supply chain issues, do you see any scope for Embraer to maybe undertake some small acquisitions if you need it to secure critical supply?
Anthony
I did ask the same question of your Canadian competitor earlier this morning. Thank you very much. Hi, Kai. Francisco speaking.
Gomes Neto
At this moment... Hello? At this moment, we are working very close to our supply chain. Very close. We have... a small army of people. I mean, inside of the operations of our suppliers, of our sub-suppliers, of our sub-sub-suppliers, but we don't have any plans to acquire any supply as a strategy to resolve this problem. We do believe we can resolve this with a close collaboration with our suppliers' partners.
spk04
Okay, great. And I apologize for all the background noise. Just One very quick follow-up, if I may. Can you remind me whether you have any supply at this juncture coming from the Russian Federation? And that's it for me. Thank you.
Antonio
So, Anthony speaking here. We only have, or you only had one supplier from Russia, it's Titanium, that we are partially already replacing by US and European suppliers. Some months ago, we were at 85% buying demand in Russia for titanium. Now we are already below 60. And our plan is really to try to eliminate the source of raw material. Apart of it, we buy nothing in Russia.
Anthony
Okay, let me leave it there. Thank you very much for the time.
Operator
Once again. Once again, if you wish to ask a question via phone, please press star 9 to join the queue. And if you want to ask a question via Zoom, please press raise hand. Wait, while we pull for questions. Since there are no further questions, this concludes today's question and answer session. That thus concludes Embraer's audio conference for today. Thank you very much for your participation and have a good day.
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