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Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's second quarter 2019 results. Thank you for standing by. [Operator Instructions] As a reminder, this conference is being recorded and webcast at ri.embraer.com.br. This conference call includes forward-looking statements or statements about events or circumstances which have not occurred. Embraer has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting the business and its future financial performance. These forward-looking statements are subject to risks, uncertainties and assumptions, including, among other things, general economic, political and business conditions in Brazil and in other markets where the company is present.
The words believe, may, well, estimates, continues, 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 statement because of new information, future events or other factors. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in 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. Nelson Salgado, Executive Vice President, Finance and Investor Relations; and Mr. Eduardo Couto, Director of Investor Relations. I would now like to turn the conference over to Mr. Nelson Salgado. Please go ahead, sir.
Good morning, everyone, and thanks for joining Embraer's Second Quarter 2019 Conference Call. We start with the operational highlights at Page 4, with Commercial Aviation.
Embraer delivered 26 E-Jets in the second quarter and 37 year-to-date. As far as sales activity, Embraer signed up to 78 aircraft commitments during the Paris Air Show, including: United Airlines for up to 39 E175, including 20 firm orders; Fuji Dream Airlines ordered 2 E175s to add to its Embraer fleet; and Binter signed an order for 2 additional 195-E2s; KLM Cityhopper signed an intention to purchase up to 35 E195-E2s, which we [ decided ] not to include it in our backlog yet. After the air show, SkyWest also signed a firm order for 7 E175 E-Jets.
In terms of new programs, the E195-E2 that was certified in the first part of the year will have its first delivery to Azul Airline in the third quarter of 2019. And Azul, in preparation for starting the operation of the aircraft, signed a contract for a long-term Flight Hour Pool Program with Embraer. And the E195-E2 began also its global demo tour in Asia.
Moving to Executive Jets at Slide 5. Embraer delivered 25 executive jets, 19 light and 6 large, in the second quarter of 2019 and 36 year-to-date. This volume is around 20% above the same period of 2018. As far as the new products with the Praetor 600 and the Praetor 500. The Praetor 600 received a triple certification from ANAC, FAA and EASA, with the first delivery to a European customer already happened in the second quarter of 2019. The Praetor 500, it was just announced yesterday, received the ANAC certification, outperforming on key performance metrics, such as range and speed. In terms of new sales, Embraer had an expressive backlog increase due to the new sales of Praetor jets and related services. We are very happy with the market's response to the new Praetors. Finally, our Bossa Nova interior won the award for the Best Interior Design at the 2019 International Yacht & Aviation Awards.
Next slide is Slide 6. We show the highlights for Defense & Security, starting with the KC-390. The program continued its flight test program with a focus on the military missions, looking forward to the first delivery to the Brazilian Air Force that is scheduled to happen in 2019. Embraer also announced its first export customer for the KC-390. The Portuguese government announced a firm order for 5 KC-390 and related services. That was a very important achievement introducing the KC-390 in the European market and reinforcing the program's success.
Still regarding new products. Embraer and ELTA Systems from Israel signed a strategic agreement to introduce the Praetor 600 AEW, airborne early warning. We believe there is a potential for these products and Embraer wants to explore it with the partnership. Finally, our subsidiary, Atech, successfully completed the delivery of a new aircraft traffic management center in India. And the contractual discussions with the Brazilian Navy for the supply of 4 ships of the Tamandaré class continue to move as expected.
Now we move to the financial results, starting with the backlog at Slide 8. We continued our backlog recovery and reached USD 16.9 billion by the end of second quarter 2019. This recent increase was driven by demand for our new executive jets, Praetor 500 and 600, and the continued success of the Phenom family. It is important to say that the recent KC-390 order from Portugal is not included in our backlog yet.
Next in Slide 9 we show aircraft deliveries. In commercial, we delivered 26 planes at the second quarter and 37 year-to-date. This is below last year but in line with our expectations. And we reiterate our guidance of 85 to 95 E-Jet deliveries this year. On Executive Jets, we had a better first half compared to last year, with 25 deliveries in the second quarter and 36 in the first half of the year. We maintain also our confidence to deliver 90 to 110 E-Jets this year as we are better sold than last year and has been seeing stronger demand for our planes.
Moving to Slide 10, net revenues. We reported second quarter revenues of $1,379,000,000 broken by: Commercial Aviation, $631 million; Executive Jets, $297 million; Defense & Security, $196 million; and Services & Support, $255 million. The total in the first half of the year amounts to USD 2.2 billion. With the exception of Commercial Aviation, where we have lower deliveries, we presented good revenue expansion, especially on the Executive Jets and Defense. On Slide 11, SG&A expenses. We reported a total of SG&A at $119 million with G&A expenses amounting to $46 million and selling expenses to $73 million. Our SG&A expenses this year has been affected by the activity related to the separation of Commercial Aviation business. Moving to the operating results at Slide 12. We reported second quarter EBIT of $27 million with 1.9% EBIT margin. The first half EBIT was $11 million with 0.5% margin. The operating results are in line with our guidance of breakeven margin for the year. It is important to highlight that the separation costs associated to the Boeing transaction are all included, affecting the EBIT. Year-to-date, we had separation costs of around $30 million. Breaking our 2019 EBIT margins per business, we have: services, 12%; commercial, 2.7%; executive around 0; and defense, minus 7%.
Moving to Slide 13, we show our EBITDA. The same impact that we explained for the EBIT also applies here for the EBITDA. We reported in the second quarter $67 million EBITDA, with 4.9% margin. Year-to-date, EBITDA is $98 million, with 4.4% margin.
On Slide 14, we present our earnings. Embraer reported a net loss of $14 million in the second quarter with margin of negative 1%. Again, here, our earnings have been impacted by the low operating results and also higher financial expenses, given our increased leverage.
As far as investments on Slide 15, we reported total investments year-to-date of $200 million broken by: research, $21 million; development, $127 million; and $52 million in CapEx. Our investments this year remain concentrated on the E2 program as we enter into service with the 195-E2 and continue the development of the 175-E2.
At Slide 16, we show our free cash flow. Embraer reported a positive free cash flow of $2 million at the second quarter and a free cash flow consumption of $664 million year-to-date. As we have been saying, we expect a positive cash flow generation in the second half of the year because of the higher deliveries, especially in the fourth quarter.
Finally at Slide 17, we show our indebtedness profile. We ended the second quarter with a total cash position of USD 2.48 billion and a total debt position of USD 3.57 billion, implying a net debt of USD 1,090,000,000. Our debt maturity remains comfortable, with an average of 5.1 years.
With that, I conclude the presentation. And I will pass to our new CEO, Francisco Gomes for closing remarks before we open for Q&A. Thank you. Francisco, please go ahead.
Thank you, Nelson, and good morning, everyone, from my side as well. It is a great pleasure to become a part of this highly skilled team in the year that Embraer is celebrating its 50th anniversary of challenges and achievements.
In my first 3 months at Embraer, I have visited all of our sites around the world. And I'm greatly impressed with the levels of engagement, ethics and teamwork that our Embraer team shares. I am convinced that Embraer is very well positioned for a promising future through the combination of its state-of-the-art products, continued progress in becoming a more efficient company, the continued support of our customers and the consummation of the strategic partnership with Boeing.
We continue to work on several fronts to ensure that the strategic partnership between Embraer and Boeing is successfully concluded and all of our employees, regardless of whether they will remain with Embraer or eventually work in Boeing Brasil - Commercial, are fully engaged with the necessary processes to complete this important transaction.
After what I have experienced in Embraer in these initial months, I'm convinced that the company will return to its growth path. With our team working in a lean manner with ethics, unity and oriented by results, we believe Embraer will recover and even surpass its current market value. Our executive, defense and services businesses are stronger than ever after a long period of investment and combined with the maturing of innovative programs will bring value for our shareholders. I have no doubt that working hard will build a strong, solid and sustainable future for Embraer in the next decades.
So thank you very much. And, operator, now we move to the Q&A session.
[Operator Instructions] Our first question comes from Cai von Rumohr, Cowen and Company.
Cai, can you hear us?
Yes, this is Jeff on for Cai. Can you hear me?
Yes, very clear.
Okay. And welcome aboard, Francisco. I'd like to ask about the Boeing partnership, specifically how the separation activity is progressing. And what is the current view on major milestones, dates and cost?
So thank you, Cai. The conclusion of the deal has 2 big fronts. One relates to the work with the regulatory authorities of several jurisdictions for [ to get ] E-Jet approval. [indiscernible] on the front, we are not talking about specific regions, but we are moving according to what we planned. The other big front is associated with all the steps that we have to do to separate the Commercial Aviation business. And here, most of the activities are associated with the duplication of the IT systems, with the separation of the people that will go into the company, the preparation of infrastructure that we will need in 2020.
After the separation, for example, we will move a lot of people from the main site of Embraer today in [ Brazil ], which is the existing site, to Eugênio de Melo. That will be the main site of Embraer [indiscernible]. And for that, we need to accommodate people there. We are also moving the final assembly line of the Praetor jets to Gavião Peixoto because today, it is done at São José dos Campos. So many different activities. But we are confident that we are moving ahead as planned to target the transition by the end of the year.
Okay. That's helpful. And is there any update on the actual -- the cost, whether for the tax and the separation costs? I think it was previously supposed to be $1.2 billion combined. [indiscernible]
Of course, for now, we're not changing that number that we were expecting. Related to the separation activities themselves, which will add up to the first part of the year, $30 million, that we mentioned would be impacting our EBIT.
Understood. And then one more question, if I can, on a different subject here on the Executive Jets. It looks like the book-to-bill was quite strong. But it's difficult to tell exactly what it was, although it looks like it's about 1. What was the book-to-bill in the quarter? And any color on what geographies were strongest and what type of buyers are most active?
[indiscernible] has a strong book-to-bill in executive aviation. As we mentioned, the certification of the Praetor aircraft and first delivery of the Praetor 600 in Europe and the first delivery of the Praetor 500 already coming. These are having a very good response from the markets. Our book-to-bill was actually around 8.5, but we are not able yet to provide details of where this growth come from.
The next question comes from Myles Walton, UBS.
Welcome, Francisco. I was hoping maybe you could start around the cash flow of the business and kind of what your expectation is for free cash flow for the year and/or maybe where you think the balance sheet is on a pro forma basis on the deal closing if there's [ the event of ] any adjustment.
So we are working towards the outlook that we gave you at the beginning of the year regarding 2019, which is to pay $1.6 billion in extraordinary dividends to shareholders and stack the Embraer with a net cash position around $1 billion. For this year 2020, we expect the free cash flow to be breakeven -- sorry, for 2020, for next year, we expect cash flow to be breakeven. And as we reported in January, we had projected revenues of $2.5 billion to $2.8 billion and EBIT margin from 2% to 5%.
And so, Nelson, sorry, did you say what the free cash flow was for 2019? I understand the cash position. But I just wonder, is this year a free cash flow breakeven? Or will you be able to recover what's been consumed in the first half?
Yes. Generally, the second half is looking stronger than the first. That's typical in our cycle. Both executive and commercial, they have a -- and defense, they have a stronger second part of the year in terms of cash generation. And we expect that these results for the first quarter especially will be recovered. And with that, we remain in line with our guidance of a $1.6 billion dividend and to stack Embraer with around $1 billion net cash position. We did not give expense guidance to 2019.
And then in terms of the delivery of KC-390 to the Brazilian Air Force, what are the milestones ahead? Is there any required further testing? Or is it generally paperwork at this point just in terms of getting that delivered?
Actually, the first KC that we delivered to the Brazilian Air Force was the aircraft that we presented in the Paris Air Show. And as soon as it came back from the Paris Air Show, the delivery process for the Brazilian Air Force started. This is the first delivery of a brand-new type to its first customer. So the processing takes long, so -- because there are lots of things that have to be verified by the customer. And we expect that the delivery will happen in the third quarter of 2019.
Our next question comes from Ronald Epstein, Bank of America Merrill Lynch.
This is Kristine Liwag calling in for Ron. My first question is on Commercial Aviation. Can you walk us through the moving pieces in margin for that aircraft? In your press release, you mentioned that there are weakness because of shift in mix. So can you discuss what's driving the margins lower for that segment?
Well, we, for some time, anticipated that this transition year, when we start ramping up the 190-E2 deliveries or the E2 deliveries [indiscernible], are products that traditionally has a worse gross margin, right? So I think this, as we grow the number of the E2s in the mix, that tends to drive margin down. We are also delivering aircraft in the U.S., the E75. In contrast, we knew also that we'd have worse margins than we have previously indicated. So that's basically what is affecting the margin. So it's a bit of higher cost on the E2 relatively to what we expected in the future because of the learning curve and more tight margins because of sales prices on the E75.
Yes. One important thing, Kristine, too [indiscernible] if I may add, it's important to say that the margins we mentioned about commercial, it includes the separation costs there. So if you remove the separation cost, the margins in commercial would be like 3 percentage points better. So besides what Nelson mentioned that we're going to have [indiscernible], the decline is also related to the separation costs.
Yes, [ at the interest level ]. I was talking more about the gross margins.
That's very helpful. And when you think about the learning curve on the E2, at what unit delivery do you expect incremental E2 margins could be closer to parity to what your legacy E-Jet margins were?
Well, it's very difficult to say. We work very hard every day to try to anticipate the reduction of costs. But I would not take the risk of saying a consistent amount of aircraft, right? But it's very normal. There is, generally in this learning curve in the first 50 to 80 aircraft, we have a faster reduction and then a slower reduction up to 150, 200 aircraft. So that's more or less the profile that we're looking at.
And in executive aviation, can you discuss the demand environment and also the pricing? Are you starting to see pricing improve in executive?
Well, the market is better generally speaking, not spectacularly, but it seems better. All these publications in executive aviation are mentioning that, so we have a more positive environment coming from that. And with the introduction of the Praetors, we believe we differentiated our offer in the segment even more with a much bigger range than any other competing aircraft [indiscernible] the Praetor 500 and also the Praetor 600. And we expect that this positioning will allow us to practice a better price that we'll be working [ with the value of ] the offer we are providing to the market.
Great. And lastly for me, if I could squeeze one more. For the Boeing deal, are there termination costs if the deal doesn't close?
There are. I don't know the details here. But depending on the reason for a potential [indiscernible], we have [indiscernible] part. It's important to emphasize that this is a scenario we don't even consider. We are working very hard to get regulative approval [indiscernible] and internally working very hard to make all the activities that we have to make and complete before the separation starting in the end of the year.
The next question comes from Josh Milberg, Morgan Stanley.
Nelson, my first question is a follow-up on the question about your cash flow. In the first quarter call, you had highlighted that the $100 million of delayed payments from the Brazilian government. And that apparently did not reverse in the second quarter. So I just wanted to see if you could give us a little bit of a better understanding on what's your basis for anticipating a normalization in the second half of this year. That's the first out.
Yes. The budget problems that the Brazilian government have been facing, they are affecting our results. But we have great confidence that the Brazilian Air Force will manage to sort it out before the end of the year.
Okay. That's helpful. And then my second question is on the KC. We recognize that the sales to Portugal did represent a big milestone for you guys. But we had thought that deliveries might have started a little earlier. Could you guys comment on the timing -- that timing and on what penalties could apply if a future Portuguese government decided to cancel or delay the orders? And then if we also think about other potential KC orders from abroad, do you think that 2023 is a reasonable assumption for the earliest when those other orders might start delivering?
Well, I'm not sure I understood the question completely. Let's go part by part. Regarding the contract with Portugal, it is indeed a very important milestone because it's the first export customer for the product. And this is always a very important achievement for these products. But the time for the delivery of the first aircraft is more driven by the need to develop the latest version of the aircraft. So there is some product development associated with this contract, which may just delay the first -- not delay, but it will mean that the first delivery will not happen before 2023 and with the other deliveries happening up to 2027.
Because parallel to those deliveries, we knew we have already a delivery of around 2 aircraft per year by the Brazilian Air Force. So that's the delivery time for the KC. I think the piece that you're missing is that there is this product development so that we have an aircraft that is ready to operate in the meantime in that environment, which, by the way, is very good because we will have opportunities to look customers in all that have the same needs after that.
Okay. That was the exact explanation that I was looking for, just a better understanding of what was behind the 2023 timing. But the other doubt I had raised was if you could just comment -- and maybe this is something that you don't disclose, but what the contract with the Portugal government stipulates with respect to eventual decisions to either cancel or delay the order.
Well, every contract has provisions if obligations are not fulfilled by either party. But again, we're not contemplating that. We simply have a very strong contract. We have everything in line. We have the product development that we have to do and the first delivery in 2023.
[Operator Instructions] The next question comes from Gabriel Cavalcante, CTM Investments.
And just about the dividends. We know that in the United States, dividends are taxed differently from what they are in Brazil. I just want to know if there's any type of initiative coming from Embraer, maybe working with somebody else to maybe put a different situation for the American investors that are receiving this dividend. And it's just about if they're going to be taxed the same way they're taxed on regular dividends or there's something that are going to help these investors to get taxed differently.
No. There is no different treatment for any investor. We will pay the dividends to everyone the same way.
This concludes today's question-and-answer session. Sorry, the next question comes from Cai von Rumohr. Sorry.
This concludes today's question-and-answer session and concludes our Embraer's audio conference for today. Thank you very much for your participation. Have a good day.