Good morning, ladies and gentlemen, and welcome to the audio conference call that will review Embraer's second quarter of 2020 results. Thank you for standing by. [Operator Instructions]. 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 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 the other things, general economic, political and business conditions in Brazil and other markets where the company is 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 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 Neto, President and CEO; Mr. Antonio 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 Neto. Please go ahead.

Good morning, everyone, and thank you all for joining our call today. I am Francisco Neto, 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 the business intelligence in 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 cost 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 spending 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 aircraft. Through where we structure 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. Through the COVID-19 pandemic, in the current market…

Thank you, Francisco. Now moving to the financial highlights at Slide 5. Embraer is operating during an unprecedented aviation market slowdown caused by the COVID-19 pandemic. The impact of COVID were meaningful during the second quarter and were mostly concentrated on Commercial Aviation. The Commercial Aviation business has experienced low volumes with only 4 deliveries that generated excess capacity and a cost that were recognized in our financial results instead of going to the inventories, adding to the one-off impairment of $90 million and onetime depreciation of $100 million related to 2019 when Commercial Aviation business was booked as available for sales. Putting all together, we have a nonrecurrent 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 defense business were much lower and our guidance for 2020 remains suspended, even though we already start to see initial improvement signs and expect much better performance, in particular, for the fourth quarter of 2019. Despite of all challenge faced during the first half, our performance in Executive Jets and Defense & Security had a meaningful improvement when compared to 2019. As we promised last year, several initiatives such as cost-control price discipline, rightsized production and to enter into serve new products such as Praetor and C-390 Millennium 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 0 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,…

As you saw in the presentation, we had a very difficult first half, heavily impacted by the COVID-19 crisis and the redundancies in the Commercial Aviation business. At the same time, as I mentioned earlier, we are already taking the necessary actions to regain synergies and adjust the company to the COVID-19 scenario and to guarantee the execution of our '21, '25 strategic plan. We may still face some challenging months ahead but I am very confident that we will get at the end of this year much stronger and well prepared for a sustainable future. I'm really proud of all the efforts made so far as the Embraer leadership team is united and focused to do what needs to be done to allow this great company to succeed. That, together with the continued support of our customers, suppliers and investors, will make Embraer to emerge even stronger from these turbulent times. Thank you.

Could you maybe go over a little bit about the cash in the second half. You previously talked about wanting to maintain $2 billion of liquidity at all times. And you're always taking out some debt here. As you look to the second half, is it still a burn in the second half on the order of a low number? Or is it a positive in the second half from here?

Myers, thanks. It's a good question. And we -- I do believe we are going to stay in the same level at the end of this fiscal year, because historically, the seasonality of our business is always very hot in the third and especially the fourth quarter, where we have our revenues and the cash inflows. I would say, more or less stable to the end of this fiscal year.

Okay. So breakeven free cash flow for the second half?

Yes.

Okay. And then in terms of the operating margins in the segments, I imagine commercial was the largest drop here. But can you give us some more color on operating margins of executive and defense? And within defense, I think you took a charge on the KC-390 to reset the cost base. Can you just elaborate if that's -- or what size of that?

I'm going to pass this to Edu. Edu, please.

Yes. I can give some color, Antonio. Yes. On Executive Jets, Myles, we did very well in the first half. We had breakeven margins despite lower deliveries and as we show in the charts, the deliveries are picking up. So I would say second half should be quite interesting for Business Jet, so around breakeven margins in the second quarter and first quarters. So good numbers in executive, especially if compared to the previous years when we are suffering much more with the product mix. I think we're able to improve that a lot with the Praetors and also with price discipline, rightsizing the production, a lot of measures that Michael is implementing on Business Jets. In defense, of course, there is some seasonality, but we prefer to look at the first half as well. And defense margins in the first half were also breakeven, which we believe are good news. As we have highlighted in the past, there was a lot of focus to improve margins in executive and defense and we are really showing that. So the drag on the margins were -- they really came from commercial and now we had very few delivers and that affected the margins. So once commercial deliveries start to recover, the expectation is margins ready to pick up in the upcoming quarters.

Our next question comes from Mr. Ron from Bank of America.

I wondered if you could maybe characterize how the conversations are going with airlines. Like you mentioned, you said you haven't seen any cancellations. But how does deferrals look? And when do you expect some airlines to begin to take more commercial airplanes?

Ron, thanks for the question. I would say, we -- I guess, we have the conversation about deferral, it was highly concentrated between March and April. And still, I would say, the same situation right now. For sure, we are having a lot of conversation with the airlines. And for a lot of negotiations and a lot of discussions ongoing. I cannot assure that the market recovery is going only in favor of the regional jets. But again, we do have a lot of campaigns in the field right now. And also in regards to change models, changed setup of more regional domestic than, I would say, big airplanes, in summary, deferrals stop and we are just talk about new campaigns that, again, we are having a lot of requests. And I cannot make sure that's a trend, but I would say we do have a good feeling. I don't know if you got to answer your question as you want to but...

Yes. I think that's helpful. How is demand for the E1-175 been now that the E2-175 has been delayed? I mean have you seen demand for that pickup?

The main deferral was highly concentrated in 195 instead in the 175. 175, I would say most of the customers, they are still committed to take the aircraft, especially the U.S. customers.

Got it. Got it. And then maybe one last question, if I may. The business environment seems to be doing better, and you guys have alluded to that in the second half, we could see a pickup in deliveries. How are those conversations going? And what -- when you look at the customers, there's no reticence to get airplanes around the economy? Or are they looking at business aviation as a secure -- more secure way to travel given the pandemic, if you could maybe offer some more color around what those customers are thinking.

Yes, it's a good question. How you see today, the fleet owners, even the fractal flights, they are quite busy with their frac traffic today. And what we are seeing right now, I cannot say is a trend that we are having a lot of, I would say, private-owned jets being bought right now. And again, the fleet and the fractal owners, they are really reevaluating how to go forward. And I do see, I would say, stable with a slight positive trend, especially in the private-owned jets. But we cannot make sure 100% that because of the COVID, the pandemic that regional aviation is going to be bigger than last year, but I would say, if you see the graph we displayed, we are very close to the levels of 2019. But the replacement of the aircraft is still, I would say, under evaluation. What I can make sure, historically, our second half for the Executive Jet is very strong compared with -- on the first half.

Francisco speaking. Yes, maybe perhaps the COVID brings us more opportunity for the executive aviation in 2021 as well.

Our next question comes from Mr. Robert from Crédit Suisse.

Just on the last question that Ron asked on executive aviation. As you see opportunity perhaps in the second half, where do you see it? Is it at the Praetor level, at the Phenom? Any color on the interest levels?

Well, Robert, thanks for the question. The Phenom 300 continues to be our best seller and where we have, I would say, highest potential of sales. But also we are quite optimistic with the Praetors as well.

Okay. And you talked about stronger second half because of higher deliveries across the commercial portfolio, Executive Jet portfolio, how good is the visibility here? How reliable are these deliveries and the customers?

I would say, for the -- Robert, for the Commercial Aviation, again, we -- for sure, we have talks every day for customer. But what you see for the second half of the year is confirmed, okay? And there should be no change or no big surprise, maybe with even upside potation and the executive aviation, let's say, a big portion of the second half is already sold. It's just to deliver and we still have just a few white tails to be sold in the second semester. That's why we are confident about the -- what we are communicating to the market right now.

Okay. And then longer-term question on defense. Given the new areas that you're beginning to pursue and with the product portfolio that you currently have, if we look out a few years, how big do you see the business annually in terms of revenues?

We are now -- as I mentioned earlier, we are now finalizing our '21, '25 strategic plan. And we foresee a growth in all business units, including defense, especially in defense, we have now campaigns, open campaigns going with the KC-390 with different potential customers. So -- and we are now be working in all different segments in defense. So we are optimistic that all the business, especially defense will show important growth in the following years.

Our next question comes from Mr. Cai von from Cowen.

So if I could follow up with Myles' question. If we're looking for breakeven cash flow in the second half, does that assume a big deficit in the third quarter because your fourth quarter historically always has been huge. And maybe give us some color on some of the moving parts, for example, the inventories, the contract liabilities were down in Q2. I assume you paid off your suppliers. Is that an opportunity that maybe you could move back to more normal levels?

It's Edu here. I will take that question. Yes, fourth quarter will be, for sure, stronger than third quarter. We are not anticipating a big cash burn in third quarter. I think third quarter will already be good. But fourth quarter, for sure, positive. So maybe there is some room for -- to be positive in the second half, but to be more conservative, we're assuming breakeven, but definitely fourth quarter stronger and third quarter still more soft.

Just to complete it though -- Cai, just to be a just to complete it, in regards to the liability with supplier base, we still just really, really few discussions with one or other suppliers about renegotiation. But I would say the big guys we already discussed and agree how to move forward and with the new volumes, we are quite confident to not see any big liability in the second quarter or the second half of the year.

And then a second question, I know that you haven't completed your 2021 to '25 strategic plan. But if one looks at the history of Embraer, you've done an incredible job of developing high-performing products, both in regional and bizjet, now KC-390 and yet you pretty consistently have not generated substantial profits or cash flow for shareholders. As you think about that strategic plan, what kind of priority is there in terms of return to the shareholders? And what are you doing to assure that?

Good question, Cai. I mean, again, it's a combination of actions we are taking, right? I mean in the short term, we are -- as we mentioned before, we are focusing on the cash preservation with all measures mentioned before. We are also taking care to adjust the organization in the light of the COVID-19 impact and also to eliminating the duplications we had to do because of the deal with Boeing. We are recapturing all the synergies. And then we are also putting in place a lot of other projects like to reduce the production cycles of our aircrafts to put more focus on procurement activities to put more focus on material management to work with less inventory and reducing the working capital. And all of this, combined with this future growth that are included in the growth drivers of our '21, '25 strategic plan, we believe this will improve a lot our financial performance in the following years.

Our next question comes from Mr. Gabriel [ph] from Bradesco BBI.

I have two questions here on my side. I wonder if you could comment a little bit on the higher operational expenses in the Services & Support division? And also my second question there's been a lot of news in the media regarding layoffs. Could you comment a little bit on that? I mean how are negotiations with labor unions evolving?

Yes. Maybe I can take the first one regarding services. Yes, the service business, especially in commercial, were also affected in the second quarter, right, given lower activity as we show in the charts, especially April was a very soft month in terms of flight operations, April and May. And that affected the fixed cost dilution of service and that was reflected in the second quarter numbers. But as the activity is returning, we believe service will have better, better numbers in the second half. We also had some bad debt provisions, right, in services that affected the costs in the second Q.

Gabriel, could you please repeat your second question?

Yes, sure. Yes, it was regarding layoffs and negotiations with labor union?

Well, we are working this restructuring program. We have -- we decided to start in the upper level with the Vice Presidents. So we made some important changes there as I mentioned before. And we also did -- we went out to the second level of directors and managers and make some change in the adjustments in that -- those levels. And now we are studying the following levels. In parallel, we opened this PDVs, the voluntary dismissal program to help us in this process. So now we are going step by step, I mean, in this restructuring program, that's our plan.

Our next question comes from Mr. Noah from Goldman Sachs.

Is it possible to attempt to quantify or give a little bit more detail on your production and delivery mismatch? I assume you're producing ahead of deliveries as you field near-term deferrals. And so I'm just wondering how many aircraft built but not delivered that you end the quarter with? And how much of that will you flush through the inventory by the end of the year? Or how many will you end the year with in commercial?

Yes. For sure, we have higher inventories that we would expect, given the low volume of deliveries that we had in the second quarter. It's tough to give a number, right, but our total inventories are around $3.2 billion, and they could be above $100 million lower if we were delivering the planes as initially planned. So there is room. And the second half will show as we pick up the deliveries, we expect a good reduction, right, in terms of inventory that will translate in cash, but it's tough for us to quantify a number because sometimes the planes are really close to conclusion in the production line, but we still show them as work in progress. So we -- it's tough to give a number of how many planes are ready, but we have a good size of inventory in commercial for second half.

Just to complete, Noah, good question. We were, I would say, prepared before the crisis to produce around 100 aircraft. And with the slowdown and deferrals, we should not see more than half of this number, and that's impact our inventory in many cases. That's why we do have this $3.2 billion inventory that is our opportunity to continuously reduce to the second half of the year. And with the addition of deliveries that we do see historically for the second half of the year.

Okay. So would you expect to end the year with that production and delivery mismatch gone and everything lined up and then you just reset production for next year? Or will you move into 2021 with some lingering inventory from this year?

I would say we are moving a little bit inventory for next year. We are revising the supply chain and the material have on a daily basis, okay? But we should have some, especially in commercial side, some carryover for 2021, not huge because we did a great job to reprogramming all material, but some material have already in our inventory that is still continue to be to 2021. And with the new schedule for 2021, we are going to get rid of this excess material.

Got it. And then when do you expect to be able to pretty confidently set that 2021 production plan, both on the commercial side and the executive side. I mean are you kind of already there now because you've had enough of an evolution in your customer conversation? Or is it still so uncertain out there that you're not yet really that close to knowing where you want to put production for next year?

No, we do have already a number for next year that we set our production or material program. We have the, I would say, the latest revision change in late August to be done. But we set already, I would say, with some conservatism here, with some to be more to fit on the ground. We set our number for next year. And if there is a change, it can be only an upside potential. We are quite conservative for the numbers for 2021. Maybe Francisco want to comment in addition.

No, that's what we are doing, Noah. We are trying to be conservative for the plans for next year, but adjusting the organization to that -- to those deliveries we are playing for next year. This is what we are doing.

Is your -- that's helpful. What I'm trying to get at is your level of confidence in that right now, as you speak to us, substantially higher than it was when you last reported results to us because there's been enough firming up with the customers? Or is it still -- is it not really that different than the last time you spoke to us because there's so much uncertainty still out there?

No, we are much more confident when you have the latest call, however, we are still having this credit facility, which is not available for our airlines. I would say if I would see constraint is related to the credit, but in regards to the schedule for next year, the programs we have, we are much more confident than 3 months ago.

Our next question comes from Mr. Ron from Bank of America.

How has interest from China been? Have you seen a pickup in interest in commercial airplanes or even business aircraft from the Chinese market?

Ron, actually, we are working in several fronts, looking for potential partnerships to help us to introduce our state-of-the-art products in new markets and also to help us to develop specific projects is the turboprop. But to be very honest with you, we don't have yet any concrete result to be and to open to the market. But we are working very hard on those fronts. I'm personally involved in following those fronts up in a biweekly basis. But we don't have any concrete to share with you -- any concrete news to share with you so far.

This concludes today's question-and-answer session. That does conclude Embraer's audio conference for today. Thank you very much for your participation. Have a good day.