Embraer - Earnings Call - Q2 2025

Transcript

Speaker 1

Good morning, ladies and gentlemen, and thanks for standing by. As a reminder, this conference is being recorded. Its broadcast is intended exclusively for the participants of these events and may not be reproduced or retransmitted without the express authorization of Embraer. This conference call will be conducted in English, but please let me say a short announcement for Portuguese speakers. Essa conferência será realizada originalmente em inglês. My name is Guilherme Paiva and I'm the Head of Investor Relations and M&A for Embraer. I want to welcome you to our second quarter earnings conference call. The numbers in this presentation contain non-GAAP financial information to help investors reconcile Eve's financial information in GAAP standards to Embraer's IFRS. Remind you Eve's results will be discussed at the company's conference call. It is important to mention that our numbers are presented in the US Dollar as it is our functional currency.

This conference call may include statements about future events based on Embraer expectations and financial market trends. Such statements are subject to uncertainties that may cause actual results to differ from those expressed or implied in this conference call. Except in accordance with the applicable rules, the company assumes no obligation to publicly update any forward-looking statements. For detailed financial information, the company encourages reviewing publications filed by the company with the Brazilian Comissão de Valores Mobiliários or CVM. At this time, all participants are in a listen-only mode. We'll give instructions later on for participation in the two question and answer sessions. Participants on today's conference call are Francisco Gomes Neto, President and CEO of Embraer, Antonio Carlos Garcia, Chief Financial Officer, Luis Harrison, Corporate Communications Director, and myself. This conference call will have three parts. In the first part, top management will present the company's Q2 results.

In the second part, we'll host a Q&A session only for investors. Last but definitely not least, in the third part, we'll host a dedicated Q&A session only for the press. It is my pleasure to now turn the conference call to our President and CEO, Francisco Gomes Neto. Please go ahead, Francisco.

Speaker 0

Good morning everyone. It is a pleasure to be here with you to share our second quarter 2025 year results. We had another strong quarter, reinforcing the consistency in our sustainable growth journey. Embraer delivered the highest second quarter revenue in its history, totaling $1.8 billion. Our adjusted EBITDA margin was 10.5%, the highest level for the second quarter. Over the past decade, the backlog recorded a new $29.7 billion all-time high, driven by strong demand across all business units. Deliveries were up 30% year over year, a result of our focus on operational efficiency and on our production leveling initiative. The book to bill ratio was close to 2 to 1 in the last 12 months across all business units. U.S.

tariffs continue to be a major concern to our business, but with an important step forward last week highlighting the importance of our industry not only for Brazil but also for the U.S., we are confident about further progress in negotiations in line with other recent agreements in our sector that have set a positive precedent. Now the main highlights for the company during the quarter: Commercial Aviation performed very well across both E1 and E2 platforms. SAS ordered 45 E195-E2s with 10 additional options. At the same time, SkyWest purchased 60 E175s with 50 additional options. The division's backlog reached $13.1 billion with a strong 1.81 book to bill over the last 12 months. Executive Aviation delivered another strong quarter with record second quarter revenue of circa $550 million and a robust $7.4 billion backlog supported by 2.4 to 1 book to bill over the past 12 months.

In Defense and Security, Portugal confirmed its sixth KC-390 Millennium purchase including 10 additional options that may be used by other European countries to facilitate future acquisitions. Lithuania also became the seventh NATO country to select the aircraft. The division ended the quarter with a $4.3 billion backlog and a trailing 3.6 to 1 book to bill in the last 12 months. Service & Support continued its global expansion, signing eight new P.U. contracts, increasing its MRO capabilities with CommutAir, and launching full flight simulator partnerships with CAE in Montreal, Canada and Madrid, Spain. The division closed the quarter with a $4.9 billion backlog and a 2 to 1 book to bill. That means top off sales versus revenue in the last 12 months. We continue to work in our production leveling initiative to increase efficiency, productivity, output, and improve cash flow.

In the previous quarter we shared with the market the improvements in our Predator production line. This quarter we highlight the KC-390 line in the Defense segment where we have also seen significant operational gains over the past year. These improvements include double-digit increases in aircraft production, operational efficiency, reduction in production cycle time, and decreasing cost of poor quality. As you can see in the presentation slide about tariffs, let me share with you what we have been doing to manage this situation. We have been very active with high-level authorities in Brazil and in the U.S. to demonstrate the relevance of our company in terms of job creation, investments, services to passengers, and to support the development of a negotiated solution as we have seen with other countries. As you can see in this slide, our company plays a key role in the U.S.

regional aviation market as our aircraft transports approximately 100 million passengers every year. Our business currently supports 13,000 jobs in the country and should create another 5,500 jobs by 2030 with an impressive trade balance of $8 billion in favor of the U.S. Embraer is also willing to invest another $500 million in the U.S., which should create roughly another 2,500 jobs in the country. With a combination of our organic growth in the country and the potential adoption of our KC-390 platform by the U.S. Air Force before the end of the decade, we are excited to say we are in advance of the conversations with a relevant U.S. partner for this project. We continue to believe in Advocate Framework 4 in returning to the zero tariff rule for the global aerospace industry, which was the status quo over the previous 45 plus years.

We also continue to encourage a constructive dialogue between the Brazilian and the U.S. governments to reach an amicable resolution in the short term. As you know, we have taken measures to preserve this year's results. The impact of the current 10% tariffs is already considered in our forecast for the year. This means upside down if tariffs return to zero soon. I will now move on to operational results by segment over the next few slides. All figures are based on year-on-year comparisons. In Commercial Aviation, revenues increased 4% because of product and customer mix, and the adjusted EBITDA margin remained flat at 4.3%. In Executive Aviation, the top line soared 64% supported by higher volumes and product mix. The adjusted EBITDA margin increased to 14.5% because of operating leverage and cost containment initiatives.

Moving to Defense and Security, revenues grew 18% because of an A-29 Super Tucano production improvement of almost 10 percentage points in the adjusted EBIT margin to 9.2%. This reflects higher A-29 volumes and better KC-390 customer mix. In Service & Support, revenues rose 13% driven by the ramp up of OGMA's GTF engine shop. The adjusted EBITDA margin declined slightly to 15.5% mainly due to higher past due credit provisions. Eve achieved an important milestone in the second quarter with the announcement of its first binding order with Rivo for 10 vehicles and 40 options including aftermarket services. Let me pass it over to Antonio so he can highlight the main financial points of the quarter.

Speaker 1

Thank you, Francisco. Good morning and good afternoon to everyone. There are a lot of moving parts around the world, but let me present to you what we really control: our operational and financial results. Our performance in Q2 was brilliant and consistent, as you will see shortly. First and foremost, let me reiterate our 2025 guidance. We are confident we will achieve between $7 billion to $7.5 billion in revenues, 7.5% to 8.3% in adjusted EBIT margin, and more than $200 million in adjusted free cash flow from a financial perspective. Meanwhile, we expect to deliver between 77 and 85 aircraft in commercial aviation and 155 jets in executive aviation from an operational point of view. Turning to the quarter, all my comments will be based on year-over-year comparison unless noted. Let me move to slide 12, beginning with deliveries.

Embraer delivered 61 aircraft across all business units for a 30% increase in commercial aviation deliveries. Total 19 aircraft in line with the same period of last year. In the first half of the year, we delivered 26 commercial aircraft, which represents 32% of the midpoint of our full-year guidance of 81 aircraft, marginally below the five-year average of 35%. For the first semester in executive aviation, we delivered 38 jets, of which 21 were in the light segment and 17 in the midsize, for an increase of 41%. More importantly, in the first half of the year, we delivered 61 business jets, which accounts for 41% of the midpoint of our full-year guidance of 150 jets, well above the five-year average of 32% for the first semester. Slide 13. Our company-wide backlog recorded a new all-time high of $29.7 billion, up a significant 40%.

Looking at each division, the backlog for commercial aviation grew 16%, while for executive aviation it was 62%, reflecting the growing demand for our aircraft in both segments. In defense and security, the backlog doubled, supported by strong momentum in KC-390 Millennium and A-29 Super Tucano sales. In Service & Support, the backlog increased 55%, highlighting continued and consistent growth in the segment. Most revenue, our top line was $1.8 billion, the best second quarter in our history and 22% higher. In our breakdown by business, we can see commercial and executive aviation were responsible for more than 60% of the revenue, followed by Service & Support with 25% and defense and security with 12%. Moving to the next slide, slide 14, we generated $246 million in adjusted EBITDA in the second quarter with a 13.5% margin. Now adjusted EBIT for the quarter was $192 million with a 10.5% margin.

The best second quarter margin of the past 10 years. I'd like to highlight a key milestone. In the first half of the year, we achieved adjusted net margin of 8.7%, a remarkable step up from 1.1% average over the past five years. While this is a significant achievement, we are aware that the second half of the year will bring important challenges driven mainly by inflationary pressures, foreign exchange rate volatility, and ongoing tariffs dispersion. With this, now let's move to the next slide. Slide 15. In the second quarter, we consumed $162 million in adjusted free cash flow, mainly because of a $312 million increase in working capital in preparation for higher numbers of aircraft delivered in the next two quarters. For example, we have a handful of aircraft to be delivered in late June that moved to the right.

Looking now to our investments in the second quarter, excluding Eve, we allocated a total of $97 million, or 10% lower. It includes $53 million CapEx, $28 million in addition to intangibles, $9 million in research, and $8 million in the pool program to support new contracts. It is important to highlight our capital allocation remains focused and executive deviations support the segments with highest return rates, especially in U.S. markets. To complete this slide, there are two important points here. First, our reported net income was $79 million during the quarter with a 4.3% margin, which was roughly $100 million lower than our reported EBIT because of the negative non-cash impact of mark to market of Eve warrants and the losses associated with Yazzle restructuring. Second, our adjusted net income ended $5 million in the red with a margin of minus 0.3%.

The almost $85 million shortfall to our reported net income was because of negative $163 million in deferred taxes driven by stronger Brazilian foreign exchange rate and positive $79 million adjustment for Eve results. Let's move to Slide 16. I'd like to start by drawing your attention to the top right corner. Over the past 12 months, Embraer, excluding CG discounting, reduced both its gross and net debt position by approximately $560 million and $720 million, respectively. We closed the second quarter with a net debt EBITDA excluding ETH ratio of 0.7 times, a substantial improvement from 2 times a year ago. That said, the negative free cash flow of R$547 million per Embraer standalone in the first half of the year because of business seasonality has contributed to a temporary increase in leverage compared to end of 2024.

As part of our liability management strategy, we remain focused on extending debt duration and lowering our cost of capital. As a result, our average debt maturity has increased to 6.1 years, up from 3.7 years at the end of last year. On slide 17, to conclude my presentation, I'd like to talk briefly about shareholders and shareholder remuneration. Firstly, I would like to thank you all for your support and say that I'm proud to mention our company celebrated in July our 25 years listing anniversary at the New York Stock Exchange. Second, Embraer declared nearly R$143 million in interest on equity during the quarter, which translates to R$0.19 per share. This amount may be complemented by a top-up dividend if needed to meet the minimum 25% net income distribution required by Brazilian corporate law.

The full amount will be paid in a single installment after our 2026 annual shareholders meeting. With that, I hand back to Francisco for his final remark and thank you very much.

Speaker 0

Thank you, Antonio. In summary, our defense business brought good news from Europe with Portugal's new purchasing and Lithuania's selection of the KC-390 Millennium. SkyWest's order of our E175 aircraft consolidates our dominant position in the U.S. regional market. I will take the opportunity to say thank you to SAS, a long-standing partner of Embraer through the E1 jet family and now as a new operator of the E2 jet family. Our executive aviation maintains its strong performance in sales and deliveries. The second quarter of 2025 was another milestone for Embraer. We delivered record revenues, the highest second quarter adjusted EBITDA margin in a decade, and reached a new all-time high backlog with back-to-back significant orders year to date. We continue to work hard to generate value for our customers and our shareholders, and we are optimistic about a likely positive outcome for the current U.S. tariff overhang.

I will also thank all the support we received from our U.S. customers and suppliers like American Airlines, SkyWest, Alaska, United, Aircamp, General Electric, Honeywell, RTX Corp., Anything, and Eaton, among others, in the tariffs negotiation process. I conclude this presentation by reaffirming the foundation of our culture: safety first and quality always. Thanks for your trust in our company, and let's now start the Q and A session.

Speaker 2

We will now start the question and answer session. We remind you again that this conference is being recorded. Its broadcast is intended exclusively for the participants of this event and may not be reproduced or retransmitted without the express authorization of Embraer. We also highlight this conference call is being conducted in English with translation to Portuguese. Please let me say a short announcement. For Portuguese speakers, this conference is being translated into Portuguese. We request participants interested in asking questions to press the Raise a Hand button on the platform. When your name is announced, please make sure your microphone is on and start your question. To give everyone a chance to participate, we request to ask just one question per time. If you need assistance, please use the Q&A button on the platform. We will also answer questions sent via the platform chat.

The first part of the Q&A session will be exclusively for equity research analysts and investors. The second part of the Q&A will be only for the press. The first question comes from Marcelo Motta with JPMorgan. Please go ahead.

Speaker 1

Hi everyone.

Speaker 0

Thank you for taking the question.

Speaker 1

Regarding the outlook for the second half.

Speaker 0

During the conference call, Antonio Carlos Garcia mentioned about.

Speaker 1

You know, FX volatility, potential tariffs, inflationary pressure. I am just wondering how big could this challenge be? When we look at the historical EBIT margin for the second half, usually it is much stronger than what we see in the first half, given the seasonality.

Speaker 0

Just wondering if there is you.

Speaker 1

Know, what are the risks and opportunities to revise the guidance upward during the second half, given that the first half was very strong. Thank you. Good morning, Marcelo. And thanks for the nice question. I was expecting in the first place. You're right. Year to date we are at 8.7% and we all know our margins at 8.3%. Some comments here. We only have, I would say, 20% year to date tariff impact. The big amount of tariffs is still in our inventory to be invoiced in the second half of the year. That's already something that was not in our plan. The dollar gets weaker, reais get stronger. That's why when you do the translation, there are costs in realization. We have also a negative impact.

Also, the APCA in Brazil, the inflation that we put in our forecasts, it seems a little bit stronger than what's planned, more or less 1.3%. If you put in a nutshell, I would say be on the safe side. We are keeping the guidance as long as the next months and quarters evolve, then we could revise. We are not in position to do it. Nobody knows what can happen, it's still in the stratification. That's why I would say the guidance seems to be safe today, but we do prefer to be more waiting more months in order to tell the market a different story right now. Perfect. Very clear. Thank you. Thank you, Marcelo.

Speaker 2

The next question comes from Kristine Liwag with Morgan Stanley. Please go ahead. Good morning everyone, Francisco, Antonio and Guy. Wow, what a really strong operating quarter. I guess, you know, with U.S. customers facing the prospect that they would have had to pay 50% tariff on Embraer E jets if the aerospace exemption wasn't added, how's your conversations with those customers? Because now that for now these tariffs are gone and they're looking at their fleet, is it increasing the urgency for them to refleet? Could you see potentially more orders out of the U.S. and E175s as they evaluate their fleet needs?

Speaker 0

Hi, Kristine, Francisco here. Thanks for the question. Actually, Kristine, since the implementation of the first round of tariffs last April, we have been working to mitigate the impacts for us and for the customers. For our customers, especially the E175 customers, the final tariff is lower than 10% because of the U.S. content that we have in our aircraft. Since that time, we have been working with them and we were able to deliver a few aircraft since that month. Our focus is really to restore the zero tariff. We are happy that we are able to come from 50% to 10%, which reduces a lot of the impact for our customers, and we are working with them to deliver the aircraft. In parallel, we are working hard to restore the zero tariff and we see some precedents in the market.

About new orders, we are happy with the orders we had for E175 this year and we do not expect new big orders for E175 along this year.

Speaker 2

Great, thank you. I'll keep it to one.

Speaker 0

Yes, thanks.

Speaker 2

Next question comes from Myles Walton with Wolfe Research. Please go ahead.

Speaker 1

Thanks, Kimori. Maybe for Antonio, within Defense, obviously great performance. In the commentary, you talked about POC completion driving a lot of the margin accretion. I guess based on that, why wouldn't this level of performance continue if it's POC driven and not A-29 Super Tucano unit deliveries? Thanks, Mayo, for the question. In fact, as you could see, we are improving the performance, and for sure the Super Tucano helps a lot. I would say for me, Defense and Security is a straight line to move to the higher single digit in the coming quarters. I don't know if it's going to happen this year, but we are going there because the majority of our POC customer right now is shifting from local contracts to export contracts, including Super Tucanos.

By doing that, I would say it is accurate even for a higher single digit, even double digit margin, but not yet. I would say let's wait, probably next year. You could see the progression here crystal clear about our margin wave for the fest. Everything we are doing is on the POC. When you revise the baseline, assuming the production level and the efficiency we are showing here, I would say we have more chances than risks. Just to be clear, the A-29s also follow the POC method. Yeah, it's a mix of both the A-29s and the KC-390. Yeah.

Speaker 0

Okay. Just a clarification.

Speaker 1

Those deliveries that moved to the right, were those moved to the right because of tariffs, were they moved to the right because of supply chain? Any color on that? No, we are talking about just for measure aviation miles and I would say everybody knows about the Azure situation and we are waiting the lessor to give us the authorization to issue the, to revise the aircrafts and we have to end of June some commercial if issue or other customer. I would say nothing that is going to compromise the guidance of this year. It is really that the paperwork was not finished to invoice the aircraft. In regards to production output, we produce much more than what we deliver for commercial aviation. Let's say continues to see effects of production leveling but not invoicing those aircraft at least for commission. Okay, thanks so much. Thank you.

Speaker 2

The next question comes from Ronald Epstein with Bank of America. Please go ahead.

Speaker 1

I follow the data web. Hey, good morning Des, can you hear me? Yes, Rome. Great.

Speaker 0

I'm not sure if you can answer this, but I'm going to ask it anyway.

Speaker 1

If you look at the relative valuation of Embraer compared to, say, Joby.

Speaker 0

Joby's $16 billion today. You guys' market cap in the U.S. is $10 billion. Archer's market cap is $6 billion. Would you consider cutting Eve loose? Because it seems like maybe there would.

Speaker 1

Be more value there as a separate company than as part of Embraer, given.

Speaker 0

That Gobi and Archer are in that.

Speaker 1

Same market and other considerations. Ron, thanks for the question. Difficult to be answered. I would say our evaluation picked up a lot in the last years from one side, and we do see a lot of value, a premium for being together. When we talk about synergies, when you talk about efficiency, when you talk about product development, that's why we didn't change our strategy to be one conglomerate of our business unit. I'd say seeing also Joby and we have Eve. Eve still needs more liquidity in order to pick up. As I would say, let's see how Eve is developed. We don't have any thoughts to change the way we are structured today as a full corporation with all units and really enjoy the premium.

Speaker 0

For being together, and remember that Eve is a separate company.

Speaker 1

That's why. As long as we have more liquidity for Eve, we are going to see those effects. For the overall Embraer, I would say legacy Embraer, we are so happy with what we are doing right now.

Speaker 0

Got it, John.

Speaker 1

If I may, as a follow on along that same.

Speaker 0

Line of questioning, do you guys have?

Speaker 1

Any update on the thoughts on product development?

Speaker 0

What's going on there?

Speaker 1

Is there anything you can share with the market regarding potential new aircraft?

Speaker 0

Thank you. You always come with a question. We keep investing in new technologies as we mentioned before. We don't have any other news in that to share with the market at this point of time.

Speaker 1

Got it.

Speaker 0

Thank you very much. You're welcome. Always.

Speaker 2

The next question comes from Andre Ferreira with Bradesco BBI. Sorry, please go ahead.

Speaker 1

Good morning. Thanks for the space here, and congrats on the results.

Speaker 0

I have one question.

Speaker 1

You mentioned in the second quarter service segments there were higher credit provisions. Just wanted to check if those are related to the $9 million in the income statement, and if not, if you could please explain what do they mean and the impacts they had on the service EBIT margin.

Speaker 0

Thank you. Hi, and thanks for the question.

Speaker 1

We know that there is a customer going through a restructuring process. The charges are related to the process. Just to complement, from Q2 onwards we have almost zero effect from this restructuring as well. Everything we booked already in Q2. Thank you. The specific impact on service was a specific effect on service on the EBIT side when we booked that provision for bad debts. That was the main impact on services from the restructuring standpoint.

Speaker 0

Just reclaim Andrea.

Speaker 1

Clients buy aircraft, but they also buy services and parts. That's related to that. What's the latest lesson? Write off with this. Very clear. Thank you.

Speaker 2

The next question comes from Lucas Esteves with Santander. Please go ahead.

Speaker 0

Good morning, guys. Thanks for the opportunity here, and congratulations for the results. I have a question, as Ron said. I don't know if you can answer.

Speaker 2

I will ask anyway.

Speaker 1

On the Polish potential order for defense for the C-390, do you have any updates? Also on that, would it make sense for you to build a new.

Speaker 0

Line of a new assembly line for the C-390 in Poland even if you don't get the order from them to build the aircraft for NATO countries? Thank you for your question. Francisco speaking. We continue working with Poland in that campaign. We have, as another campaign, we have a positive review about our opportunities to win. We have a plan to increase production of KC-390s from now to 2031 per year. This year we should produce five, and we are now to achieve 10 units per year by 2030. At this point of time, I mean we are working with big campaigns as India and the U.S. Those campaigns for sure would require a localization of the production of the aircraft. In case of Poland, this will depend on other deals in the region for us to use Poland as a hub.

We had this plan with them, I mean combining with commercial jets. Unfortunately, they decided to go to the competition. This changed a little our total plans for the country. We still have plans for the KC-390 to do some more localization if we win the order. Thanks, Francisco. If I may make a follow up on tariffs.

Speaker 1

Just a quick one. Reading how the U.S. Trade Representative writes on their website about the World Trade Organization agreement on civil aircraft.

Speaker 0

They say the agreement requires signatories to eliminate tariffs on a non-discriminatory basis to other signatories. What do you understand about the need for the U.S. to sign out of this agreement if they keep the 10%?

Speaker 1

Tariffs for Brazil on aircraft?

Speaker 0

This question is difficult for me to answer. You should answer the officials in the U.S., but we are working hard. We are advocating the restoration of the zero tariff, and we see this as part of other agreements. You see agreements between the U.S. and U.K. and more recently the U.S. and Europe. We believe we can be the next in a bilateral negotiation between Brazil and the U.S. or even the U.S. recognizing the importance of our industry to generate jobs and make investments in the country.

Speaker 1

That's pretty clear.

Speaker 0

Francisco, thanks for that and good luck. You are welcome. Thank you.

Speaker 2

The next question comes from Andrea Mazlini with Citi. Please go ahead.

Speaker 1

Yes, thanks Francisco, Antonio and Guilherme.

Speaker 0

You mentioned in the prepared remarks that the U.S. capital allocation is going to be focused on executive aviation. Why don't you confirm if there will be no commercial aviation in the.

Speaker 1

Expansion of the Melbourne, Florida facility.

Speaker 0

Guys put out there? If you could see some family jets coming out up there. Particularly as the A220 does have an.

Speaker 1

Assembly line in Mobile, Alabama. Right, they have U.S. production.

Speaker 0

How are you thinking about the Melbourne, Florida facility?

Speaker 1

Thank you, Andrea. Bom dia, thank you for the question and welcome. By the way, for investments we are doing right now in the U.S., we have two big initiatives. Firstly, it is to set up capacity in our Melbourne facility for the business aviation. We are talking about $90 million. We are more or less almost finalizing those investments. We are also investing more than $70 million in Texas to expand our Service & Support facility. Those are the two big investments we are doing right now and about new relocation, about production going to pass procedures for any remark here.

Speaker 0

Thanks for the question. Again, for commercial jets, we have a hybrid line in the San Jose campus where we assemble the E1s and the E2 jets, the same line. It is a very, very efficient line for the volume we intend to make every year. We believe that our business plan for the U.S. is also very attractive for both sides. Almost 40% of our aircraft is already aided by U.S. equipment, U.S. parts. If you look at the next five years, according to our production planning, in the next five years we expect to buy $21 billion in U.S. equipment and parts and we will export only $13 billion. In five years, we will generate an impressive $8 billion surplus for the U.S.

We have a very good business model already for both countries. That is why we are advocating for the restoration of the zero tariff and other changes in the footprint. Yes, we are making studies, but again we believe that we have a very robust economic proposal, economic value for the U.S. with the footprint we have today.

Speaker 1

Very clear.

Speaker 0

Thanks, Francisco. Antonio, good to be here.

Speaker 1

Thank you.

Speaker 2

The next question comes from Daniel Gasparete with Itau BBA. Please go ahead.

Speaker 1

Hey, thank you very much for the opportunity. The first question would like confirmation about something that Antonio Carlos Garcia said in the first question. I'm not sure if I understood correctly, but he said that 20% of the tariff impact expected for the year happening on this quarter. I'm not sure if I got that correctly. I would like him to confirm if possible, please. The second question would be if you guys could provide us some timetable on the test flight of Eve. It's expected now, right now for the second half of this year. When you guys are expecting that to happen, it could provide us with some outlook for that. Thank you very much. Thanks for your question. Firstly, about the tariffs year to date we have around 20% of the tariff impact already in our profit and loss and cash flow.

That's why we do expect a bigger hit in the second half of this Q3 and Q4. That's why we are a little bit, I would say, moderate by just reaffirm my guidance. For sure you are performing better, but that's why it's going to hit more our profit and loss in the second half, 80%. We said 90 bps, so you could calculate we have 20% right now year to date and the remaining 80% is going to flow to Q3 and Q4. For Eve, I'm going to pass.

Speaker 0

Reference useful here for Eve. We are now working the final assembly of parts in the prototype, and the plan for the first flight is for December this year.

Speaker 1

Sorry, December, is that correct?

Speaker 0

December? Yes, correct.

Speaker 1

Okay, thank you very much. Thank you very much, guys. Have a nice day. Thank you.

Speaker 2

The next question comes from Lucas Laghi with XP Investimentos. Please go ahead.

Speaker 0

Hello, good morning everyone.

Speaker 1

Francisco, Antonio, congratulations on the strong results. I have one question regarding working capital. I mean we're seeing a lot of production leveling initiatives on the executive division already bearing fruits regarding the delivery base that we're seeing on the defense. Francisco showed on the presentation some initiative bearing fruits as well in terms of efficiency gains for the KC-390. My question is regarding the potential room that you guys see for working capital optimization following all of your production level initiatives going forward. How is the space that you see for some free cash flow improvement regarding these initiatives going through the working capital in the upcoming quarters? Some free cash flow discussion on your working capital would be very insightful as well. Thank you, guys. Lucas, and thanks for the great question.

I would say in the short term we are continuing to fight for cash flow steering, which is we are not happy because we accumulate negative cash flow Q1, Q2, then balance a little bit in Q3, then move highly positive in Q4. We are not there yet, but I would say we reiterate our guidance. That's one of the indicators that we are quite at most because still the highest portion of the revenue is going to happen Q3, Q4. For the long term, I will pass to Francisco to give some ideas about what we could monetize under working capital, especially inventories.

Speaker 0

Lucas, thanks for your question. Actually, we have a lot of good initiatives to reduce inventory and to increase the inventory turn for the next years. It is true that in the past years we have suffered with the inventory levels because we planned for a certain amount of aircraft arranged. Because of the supply chain issues, we are not able to deliver all the aircraft we planned, we put in the production process. We are now year after year improving this process and we want to improve further in 2026 onwards. The combination of a more accurate production planning with this production leveling initiatives and other initiatives we have in place, we expect to increase our inventory turn from currently 1.6 to closer to 3 times a year. This will release almost $1 billion from our inventory in three years.

Speaker 1

Perfect. Very clear. Thank you, Francisco. Antonio, have a nice day. Thanks. Thank you.

Speaker 2

The next question comes from Ronald Epstein with Bank of America. Please go ahead.

Speaker 1

Hey guys, I'm back. Maybe one more question, and this was asked, but just want to maybe peel back the onion a little bit on it more. When you think about the production footprint.

Speaker 0

Why wouldn't it make sense to move more executive aviation production to the U.S.?

Speaker 1

Given that so much of the market's here anyway?

Speaker 0

Rome, we have an important part of our production office activities in the U.S. already on top. As I said before, our aircraft, you know, they have a content of exposed to 40% of U.S. equipment. We believe we have a good combination today, I mean, to allow us to be very competitive. We are always making studies what else we can do in terms of footprint, but trying to be as in as possible to offer good and competitive products to our customers.

Speaker 1

Got it.

Speaker 0

The one question that nobody's asked yet, surprisingly, is how are sales campaigns going on for the.

Speaker 1

For the big airplanes, you know, in.

Speaker 0

You know, for the E1 jet family and the E2 jet family.

Speaker 1

You guys do have a market outside the U.S., right? You know what's going on there.

Speaker 0

If you can give some color around that. Oh, absolutely. Very good question, Rome. Yes, we had a good start this year with the two important wins. I mean, ANA in Japan, you know how important is that airline globally in our SAS. Both orders, ANA is up to 20 plus 15, and the SAS 45 plus 10. Very good, important orders. We are working in many other campaigns that we expect to see the results in the next month. We are optimistic that we announce new orders for E2s, especially E1. We got to this 60 plus 50 from SkyWest, big order. We do not expect more orders for E1s for the U.S.

Speaker 1

Go ahead. Thank you very much. Around for the one we are seeing also some movement outside the U.S. as well for campaigns, not big numbers, but some interest from other customers on the new E2 ones for outside the U.S. Got it. Thanks. Thank you.

Speaker 2

The next question comes from Alberto Valerio with UBS. Please go ahead.

Speaker 1

Hi, good morning.

Speaker 0

Francisco, Antonio, Guy, thank you for taking my questions.

Speaker 1

I would like to congratulate you guys for the efforts that we did for mitigating this tariff with the authorities, Brazil, U.S., and also the American companies. My question is regarding tariffs. I would like to know if for the new E2 jet family orders you guys are able to put this higher price already to mitigate these tariffs. Also, negotiations between the current book backlog that you guys have in place.

Speaker 0

If there is any negotiations between the clients on business jets that you guys.

Speaker 1

Are paying for this tax, and also if the airlines, they ask you some support to Embraer, because if I understand, they are the importers, they are paying taxes. Those stats.

Speaker 0

Thank you very much. Thank you for your question. About tariffs in general, we are positive that we'll come to a good resolution for this issue because of our, we believe we have a robust, very robust economic thesis with the U.S. as I said before, $8 billion in surplus in the next five years. I mean 13,000 jobs currently in the U.S. plus 5,000 will be created in the next five years. Half a billion dollars of new investments in the U.S. and this was also based on the zero tariff. That's why we believe we have a robust economic basis to restore the zero tariff as we have seen with other countries. Commercial jets, we don't have any plans to increase price because of tariffs because the tariffs will be paid by the customers and business jets will keep our price competitive in the U.S.

to support our continued growth in the market. Again, all the impact this year is already including the projections. We are maintaining our guidance for this year with an upside if the tariffs are removed soon. Thank you very much, Francis.

Speaker 1

Very clear. Alberto, sorry for not corroborating your sell recommendation to our share. We continue to improve our performance here. Thank you. Okay, thank you, Antonio.

Speaker 2

Thank you. This concludes the question and answer session for equity research analysts and investors. Now we'll start the Q&A session dedicated to the press. First, we'll answer questions in English, and then we'll answer questions in Portuguese. We'll also answer questions sent via the platform chat. Please hold while we collect questions. The first question comes from Jonathan Hammerdinger. Please go ahead.

Speaker 1

Hi everyone. Thanks for doing this. I guess I'd want to touch on the tariff issue again.

Speaker 0

You mentioned that you think you have a good case to remove the 10%.

Speaker 1

I'm wondering if you could give us.

Speaker 0

Any guidance on to what else you might?

Speaker 1

Be willing to do to get rid of that 10%. Touch again on any more operations in the U.S. Any commercial operations in the U.S. would be possible.

Speaker 0

Anything else?

Speaker 1

Any collaboration with the U.S. aerospace company.

Speaker 0

Are you negotiating on this issue right now? Because the 40% was already removed.

Speaker 1

What's next?

Speaker 0

John, thanks for your question. Just make sure that the impact for our customers in the U.S. for commercial jets in the parts we send to the U.S. is lower than 10%. Right. Because of the high U.S. content we have in our products. Even then, we have been working to mitigate the impacts, optimizing logistics, putting in place free trade zones, temporary imports, doing a lot of things that have helped us to reduce the impacts. We continue making studies to do that, footprint, more collaboration with U.S. companies. The U.S. is a very important market for Embraer, and we do the best we can to ensure that we will continue having a strong presence in that market. What else? That's it. Okay, but we also, what would be, what are your next steps?

Speaker 1

Are you involved in discussions right now?

Speaker 0

Thank you. Next step, important one, would be the localization of the KC-390. We have been working hard in the country with the U.S. Air Force. We have reinforced our team in the U.S. We are advanced in conversation with a relevant partner, you know, to localize the production of the KC-390 whilst we succeed selling, introducing the KC-390 in the U.S. Air Force.

Speaker 1

Thanks for taking my question.

Speaker 2

Thank you. The next question comes from the live chat. It is from Juliana Rocha from Red. Could you give more details on Azul impact on the results and future results? How many aircraft will you deliver to Azul that is waiting to be invoiced? The Embraer jets Azul is returning to lessors will have any impact on Embraer results.

Speaker 1

Juliana, thanks for the question. First of all, I'd like to highlight that Azure is a very important customer for Embraer for our E2 platform. We know that it is very important for Azure, and we are continuous to support this customer through the restructuring process. All impacts on the restructuring have been read book into second quarter results. All write-offs have been made. Now we need to wait for the procedures about the Chapter 11. From the aircraft we have in our backlog, we are currently on a renegotiation with Dan, and we cannot anticipate any change right now. Good discussions are ongoing, and we are going to find a solution.

Speaker 2

Thank you. The next question comes from the live chat as well from Chad Trottwetter. Can you please address tariffs on executive jets?

Speaker 0

I think again executive jets, we have an important part of our production already in the U.S., in part in Brazil with the aircraft and components that we send to the U.S. We have a good balance, and again for us the impact is less than 10% because of the U.S. content we have in our aircraft. We are trying to find ways to reduce this even further by optimizing the process and also making studies about further collaboration with the U.S. aerospace industry.

Speaker 2

Thank you. Another question from Mr. with AAI N Media. Also, what is the specific purpose of the investment in the Melbourne exact jet production plant? Increase Phenom production, extend to final assembly of craters there, or something else.

Speaker 0

We are investing to expand our production capacity for Phenoms. Also, our flight preparation area to receive and do the final deliveries of the Praetors and doing some local activities as well. Yes, painting booth, we are implementing a new painting booth that can paint both Phenoms and Praetors. As you see, we have already activities with the Praetors in the U.S. as well on top of the production line of the Phenoms.

Speaker 2

Thank you very much. The next question comes from the live chat as well. From Simone Cellini, thank you for the presentation and congratulations on the great results. I would like to ask what is the progress on the E175 cabin improvements and when is the first aircraft scheduled for delivery?

Speaker 0

Good question, Simon. Yeah, we are very excited about this improvement. This will bring more comfort for the passenger, and for sure this will help us to continue selling the E195-E2. We are at this point of time working with the suppliers in the new luggage bins and seats, as well as in lighting. We expect to deliver the first one by the end of 2026, beginning 2027.

Speaker 2

Thank you very much. Please hold while we collect further questions. This concludes the question and answer session in English for the press. Now we'll start the question and answer session in Portuguese. This question and answer session is now being conducted in Portuguese. To switch to English, please press the interpretation button on the platform and then select English. Now we have a Q&A session in Portuguese. Please hold while we gather questions. Our first question is from Marcelo Hochasin with Portal Vale 360 News. Please go ahead, Senhor Hochasin. Mr. Hochasin, you are muted. All right. Our next question is from Rebecca Krapowji from Izami. Please go ahead, Rebecca. Ms. Krapowji, you're also on mute. We can't hear you. Our next question is from Rebecca Krapowji with Izami. Please go ahead. Okay, you are still muted. Now we're going to move on to a question in the chat.

Our next question is from Bruno Mora. Hi, my name is Bruno Mora. I am a journalist at Agência Brasil, a vehicle by Empresa Brasil de Comunicação. Thank you for taking my question. How are you tackling the negotiation to go back to zero tariffs? Is this negotiation performed through the Brazilian government or are you dealing directly with the American government? Thank you for your question, Bruno. Both. We are still working on both fronts. We acknowledge the effort that is made and we embrace the change that was mentioned by the American government last week. We are still working with the Brazilian government and with the American government talking about our economic hypothesis of how advantageous this is to that country. We want them to find an option to go back to zero tariffs in aviation. This is what we've seen for the past 45 years. Thank you.

I see that Marcelo Hochasin says his question in the chat. We now see announcements of tariffs on Brazilian products by the U.S. government. People were worried about layoffs in Brazil in manufacturing, like in São José dos Campos in the countryside of São Paulo, in addition to leaving aviation out of the tariff trends. What do you think about jobs? Is it possible that we're going to have layoffs in our industry? Right now we have a more manageable situation. Our tariffs, the 10%, or Fedor said the impact of these tariffs have been incorporated into our financial forecasts. We're keeping the guidance for this year and we're going to deliver every single aircraft that we planned to deliver. Right now we have no plans whatsoever to reduce our workforce because of a reduction in production. Thank you. Our next question is also in the chat.

It's from Shandou Alvis from the O Globo newspaper. Francisco Gomes Neto, you made a personal effort in negotiation with members of the U.S. government regarding tariffs. Was this decisive to eliminate aircraft from the list of these tariffs? What is going to happen right now with an increasingly complicated situation with former President Bolsonaro? Do you think that Trump could increase tariffs for Brazil and include aircraft in that? Thank you very much for your question. Embraer is about engineering. We focus on data and things that are under our control. This is what we've done from the get-go. We did careful research on the contribution that we've had towards the United States. We saw the jobs that we created and we laid it out very clearly.

We have a good impact on jobs there, not only for Embraer operations, but also for the American suppliers from which we buy lots of equipment. We put that together, we added information on investments. We added information on the importance of our aircraft in their country because our regional aircraft are the only ones that are approved for up to 80 seats. We compiled this information and we took it to the right people who had to see it. As I said, we have a very, very strong economic hypothesis here. We did the same with the Brazilian government. We showed them how we contribute to Brazil and how risky it is for us to be subject to a 50% tariff. We're keeping course. We see other deals with other countries and aviation is going back to a zero tariff.

We have high hopes this is going to happen to us as well. This will allow us to keep the journey that we had before. We're not going to be discussing politics here. We're going to be focusing on the economy. As I said, we have a very, very strong case to make here. Thank you. We have an audio question now from Raquel Brendon with Invest in Euro Invest Muse. I apologize. Please unmute so we can hear you. Please go ahead, Mr. Kelper. Now you're muted.

Speaker 1

Please go ahead.

Speaker 2

Next question. Invest News. Please go ahead. You're still muted. You have to unmute so we can hear you. Ms. Brendan, we can't hear you. Hakao. Could you please ask your question in the chat? I believe we have some kind of technical issue because apparently people are unable to unmute. Please ask your question in the chat. Thank you. Our next question is also coming from audio with Mauricio Martins from Global News. Mr. Martins, please unmute. Go ahead. Hi, good morning. Can you hear me? Yes, we can hear you. Excellent. Good morning. I also have a question about tariffs. I think this is the hot topic right now. My question is related to the supply chain. What could be the impact here? Right. Regarding Brazilian exports, we have lots of suppliers for Embraer in the U.S. but with the current 10% tariffs.

Speaker 1

And.

Speaker 2

If we have other tariff wars, what could be the impact on the supply chain and how much does Embraer rely on suppliers of inputs and parts who are located in the U.S.? How are you dealing with these suppliers so that you have a harmonious relationship, so that you don't run into issues regarding production? Thank you for your question, Mauricio. Please ask away. Regarding tariffs, we were ready for it. We knew that we'd have lots of questions on tariffs. We're here for that, so please feel comfortable to ask questions about this, even though we have uncertainty about it. At the beginning of this journey, there was a lack of clarity on tariffs for suppliers. However, we've made progress in our relationship with them. We're understanding this impact or that impact, and so far we haven't seen big impacts from tariffs on the cost of inputs.

We buy lots of parts from the U.S. but also from Europe, in Asia, and Brazil. I think we are managing this well. So far we haven't seen any impact. We still have a good relationship with them, a harmonious relationship with our main suppliers. Thank you. Our next question is from Raoul Gamarski. Please go ahead. Good morning. Can you hear me? Yes, we can. Good morning, Francisco. On tariffs, do you have any other investments that you are planning or negotiating for the U.S. to get to a zero tariff base? The investments that we saw in the presentation, were they in your plan or were you negotiating them because of this exception list? The investments that we announced had already been previously announced. Please remember these are investments to expand our capacity in our operations in Melbourne.

This includes production of aircraft, the finishing of aircraft in the U.S., major investments in Dallas, in Texas, so that we're able to expand our capacity to work with commercial jets. These investments are a foundation to support our thesis of a zero tariff for our industry. We did the math based on a certain volume of trade with the U.S. This is what we've been sharing with them. If they have additional tariffs and we sell fewer aircraft in the U.S., first, we're going to buy fewer parts, we're going to make fewer planes, we're going to create fewer jobs, and we're also going to have a limited ability to invest in the future. This is going to be damaging for the American market. This is why I'm doubling down on the thesis of economic robustness.

If you have tariffs for Embraer, this is going to harm the American market too. Are you negotiating any additional investments in the U.S. to reach a zero tariff? What we do have for the U.S. is the possibility of assembling KC-390 locally. This is a big investment. This is half a billion dollars. With this investment, we could create an additional 2,000 jobs in the U.S. Yes, we mentioned this as an opportunity of local investments if we have zero tariffs. Thank you. Our next question is from Rebecca Krapowdi with Izami. Please go ahead. Hi, can you hear me? Yes, we can hear you now. Hi, good morning. Congratulations on these results. I'm still a bit confused. I apologize. I think you mentioned this over and over again. If you could go over this once again, I'd appreciate it. Could you please talk about the 20% impact?

Because you just said that there's no impact whatsoever on the cost of inputs. However, at the same time you said that 20% of impacts coming from tariffs are felt in your cash flow and that you expect bigger impacts in the last second half of the year. Could you please explain that? What is the actual impact of tariffs on your results? Hi, Rebecca, this is Antonio. Good morning. Let's go over this again. In our last earnings release presentation, we said that we had around 0.9% of our revenue being impacted. It's $65 million a year. 20% of that happened in the first half of the year and the rest of that is going to happen in the second half of the year if we have 10%. For business aviation, we pay tariffs, we don't for commercial aviation and we haven't seen impact with suppliers.

The 10% has been levied. The good news is that we have a number of initiatives to mitigate these effects with other cost reduction initiatives. This is why we're keeping our guidance for this year. Rebecca, let me make this clear. We have around $65 million in impacts this year. This is what we expect. We have realized 20% of that so far. This comes from what we pay when we export parts into the U.S., not from when we buy parts from suppliers. Is this clear now? Yes, it is perfectly clear. Thank you. Of course. Our next question is in the chat. We have Raquel Brendon from Infast News. I'd like to confirm the guidance for margins. I understood that you're being very cautious when it comes to the impact of the 10% tariff, inflation, and the FX rate. Should we see any changes here?

Also, I would like to understand the impact of this 10% tariff throughout the years. Without American content, this is not going to be exactly 10%. How much should we expect in the second half of the year? Hi, good morning. This is Antonio speaking. Second question first. We just told Rebecca that we have $65 million expected for this year. 20% already happened. The rest is going to be realized in the third and fourth quarters if we see a continued 10% tariff. For us, this is the impact that we expect regarding IR guidance. We're doing really well until Q2. We're a bit above it. Our margins have been confirmed. We think that our expenditure base is going to be a bit worse in the second half of the year because of the 80% that we are still going to have to absorb from the tariffs.

We're also going to have higher inflation compared to our forecast and a worsened dollar. We have costs in reals, so when we convert them into dollars, we have higher costs in our functioning currency. What I would say is that we try to be consistent with our numbers. It would be risky for Embraer through so much volatility to share different numbers with our industry. We have a good forecast if we see sustained conditions. Thank you. Our next question is from Jacin Nascimento with Portal Vale 360 News. Hi, good morning, Francisco. Good morning, Antonio. Morning, Francisco. Let me change gears a bit. We have been talking about tariffs, but you have been announcing so many investments in the U.S. because of tariffs also.

I was curious regarding the types of investments that we could see in São José dos Campos and Taubaté, our area, or perhaps other cities in the Paraíba Valley. Let me also take this opportunity to talk about Eve to please go into details regarding the maiden flight that you should have in December. Should we see the maiden flight in our region too? Thank you for your question, Jacin. Most of our investments are made in Brazil. You might recall that a few months ago we announced that Embraer was going to invest R$20 billion by 2030. R$20 billion. If you divide it by five and some, it will be almost close to $4 billion. You can compare this number with the number that we refer to when we talk about the U.S.

Most of the investments are in Taubaté, in Gavião Peixoto, investments in São José dos Campos in terms of many enhancements, capacity expansion. Most of the investments are localized in Brazil because the bulk of our operations are in Brazil. Eve is a separate company. The plan is to have the initial flight in December. About Eve, I think you should get further information during the conference call conducted by Eve. There is another investment that came to mind and that has to do with return to work. We are making robust investments to renovate the facilities in São José dos Campos, Eugênio de Mello to welcome our people back starting in January. Another important investment is in Portugal for the maintenance of the GTF engines. This will pay an important contribution to our service revenues.

Just to give you a general idea, these are the investments, but as you can see, the U.S. is part of that. This is also an important part that we are now telling those that have the decision-making power regarding tariffs. If you allow me, I have another question. At the beginning of the presentation in Portuguese, you said that you do not anticipate any dismissals in Brazil, mainly because of the initial adjustments referring to the quotas or the tariffs. Is there any possibility going forward in case there is no change in the world economic landscape, do you think that you would hire more people for your Brazil operation? Our plan envisions growth in the coming years. We are growing at a rate of 2 digits year on year and we are increasing production every year.

The plan still stands, unless there is any drastic change to the macroeconomic scenario. Just like, you know, 50% tariff in Embraer's biggest market. Now we are back to a more reasonable level, and our production plan and our revenue this year remains unchanged. If you look at the years post-pandemic, we hired more than 5,000 people. The vast majority of them were hired in Brazil. Therefore, Embraer continues to grow and this is the plan going forward. Eventually, if there is any drastic change in the scenario, this will not only apply to Embraer, but to all of the other companies. We have a very positive outlook. Thank you and congrats on your results. Thank you, Jaslene. Thank you. With that, we conclude the Q and A session and also we conclude the conference call of Embraer.

Thank you very much for joining us and we wish you all a very good day.