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 [indiscernible] not included 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…

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 three 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 this 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 [indiscernible] 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, there's two big fronts. One relates to the work with the regulatory authorities of several jurisdictions for [indiscernible] 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 [indiscernible] 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 Fort Lauderdale, 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 are expecting related to the separation activities themselves, which will add up to the first part of the year, $30 million, that we mentioned that are 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 big response from the markets. Our book-to-bill was actually around 8.5, but we are not able yet to provide details on 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 maybe 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 [indiscernible] 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 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 at the end of [indiscernible]. 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 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 of course, it 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 and 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 E2 [indiscernible], 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 that 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 price on the E75.

Yes. One important thing, Kristine, [indiscernible] that I may add, it's important to say that the margins we mentioned about commercial, they include 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 cost.

Yes. They decline. Well, 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 look.

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 [indiscernible] index, 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 that 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 [indiscernible] 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]. Important to emphasize that this is a scenario we don't even consider. We are working very hard to get regulatory 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 has 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 this product. 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 to 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 [indiscernible] of around two aircraft per year by the Brazilian Air Force. So that's the delivery turn for the KC. I think [indiscernible] aviation is that there is this product development so that we have aircraft that is ready to operate in the [indiscernible] environment, which, by the way, is very good because we will have opportunities to look customers 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 and concludes our Embraer's audio conference for today. Thank you very much for your participation. Have a good day.