Good day, and thank you for waiting. Welcome to Tegma Gestão Logística S.A.'s conference call to review fourth quarter 2019 earnings results. Today we have Mr. Marcos Medeiros, CEO, and Mr. Ramón Pérez, CFO and IRO. We would like to inform you that this event is being recorded and that all participants will be in listen-only mode during the company's presentation. After Tegma's remarks are over, there will be a question and answer session, and further instructions will be provided. Should any participants need assistance during this conference call, please press star-zero to reach the operator. A replay of this event will be available right after the end of the conference call for a period of seven days.
Before proceeding, let me mention that forward-looking statements that might be made during this conference call relative to Tegma's business prospects, projections, and operating and financial goals are based on the beliefs and assumptions of Tegma's management and on information currently available to the company. Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties, and assumptions because they relate to future events and therefore are dependent on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Tegma and could cause results to differ materially from those expressed in such forward-looking statements. Now I'll turn the conference call over to Mr. Marcos Medeiros, Tegma's CEO, who will start the presentation. Mr. Medeiros, you may begin.
Good day, everyone. First of all, I would like to introduce myself.
I am Marcos Medeiros, the new Tegma CEO. As explained in our formal advisory, I was hired in July of 2019 to start Gennaro Oddone's succession process. In March of this year, the process was completed, and here I am with a mission to lead our growth and consolidation as one of the largest Brazilian logistics operators. My intention is to maintain our usual focus on Tegma's clients and on our main resource, our people. I believe that a fundamental component of a logistics operator's success is to invest in improving processes through operational excellence, projects, and digital transformation, making our day-to-day more agile to delight our clients and to ensure growth. My goal is to further integrate the vehicle logistics with integrated logistics with tegUp, thus strengthening more and more the Tegma brand. With that, I begin this conference call to review Tegma's results.
Thank you for your interest in our company. In this presentation, we will focus on the most important points for Q4 in an attempt to shorten the time spent presenting information in this call that is already available in our earnings release and so as to leave more time for your questions. Let's go to slide two. We speak about the highlights for the quarter. The first item has already been explained, that is, the important factor regarding Tegma's succession in the CEO. The second bullet point has to do with COVID-19 pandemic at Tegma. Fortunately, none of our employees has tested positive. From the early start of this pandemic, we adopted preventive measures such as home office for our staff. From the other start of this pandemic, we adopted preventive measures such as home office for our staff who could work from home.
We brought forward our immunization scheduling and monitoring of symptomatic cases by our occupational physicians. As explained in our official communications, the first impact of the federal and state governments declaring disaster emergency was felt in the end of March when we stopped our vehicle logistics operations on account of car makers halting production and dealers closing their doors all around the country. Our business areas are subject to the same restrictions and may be halted. Although some which are exposed to personal care markets and e-commerce are operating at even higher levels. We are taking action to mitigate the effects of the pandemic on Tegma's financials in keeping with fiscal and labor measures announced by the government.
In addition, we suspended all cash disbursements by the company, and the management team submitted yesterday to the general shareholders meeting to be held on April 30th, the cancellation of 2019 supplementary dividends. The third bullet point refers to PIS/COFINS tax credits booked in the third quarter of 2019. In the beginning of January, these tax credits were officially enabled, and we could use them to offset payments of federal taxes, thus reinforcing our cash. This is particularly important now given the period of uncertainty that the economy is facing right now. The fourth item is an update on Operação Pacto. In December of 2019, Tegma was subjected to an injunction issued by the Supreme Court suspending the impact of Operação Pacto as regards the work of the independent committee. These are still underway.
As for the fifth item, in March of 2020 the board of directors decided to replace our independent auditor by BDO. The reasons leading to such a decision have to do with disagreements between the parties regarding the extent and scope designed for the investigation by the independent auditors, technically called shadow investigation of the independent investigation, but as determined by our board, has been taking place, referring to the accusations raised by Operação Pacto. After this change and once consensus was reached regarding the shadow investigation process and having confirmed BDO's total independence, we could quickly regularize the pending item in our Q3 2019 quarterly statement, as well as after its first adjustment of the original deadline to publish our 2019 income statement in due time with no remarks or provisions.
Last but not least, we were granted a renowned certification in 2019, which reflects Tegma's commitment to our people. The Great Place to Work certification conducted a survey with 75% of Tegma's employees and achieved a score of 81 points out of a total of 100. This achievement reinforces our commitment to promoting a work environment which values human capital as leveraging our ability to deliver the best services with innovation and competence. On slide three, we show the highlights of the vehicle logistics division, always comparing Q4 2019 against Q4 2018 and excluding IFRS 16 effects and other non-recurring events explained in our earnings release. In the left box, we can see distinct signaling coming from the auto market.
The 4.8% increase in domestic sales of vehicles was fundamental to explain the 2.7% growth of wholesale sales, despite a 3.5% reduction in imports. We almost reflect production in the 13.3% contraction of exports in the quarter. Inventories grew by 4%. Now talking about our operating indicators. You can see that we grew more than the market in quantity, number of vehicles transported, up 12.6%, which led to a 2.5% gain in market share, in addition to a 1.7% increase in average consolidated systems. Moving on, speaking about the automotive division's revenue, several factors pushed our revenue to grow 3.4% in Q4. Among these factors, we highlight, number one, revenue growth of the yard management operation.
Two, price adjustment for the vehicle transportation operation in May of 2019. Three, growth of the transportation operation itself resulting from increased total distance traveled. And four, a negative impact stemming from the change in the port of entry of imported vehicles of a major client, significantly reducing our yard transfer revenues. In the highlight on the right, relating to the auto division's margin, we would like to remind you that this regretted a temporary effect of tax credit on deductions from 2018 gross revenue. 2019 gross margin remained stable versus 2018, given higher fixed costs of the new yard's operations, which contributed with no revenue.
On the other hand, a 2.6 percentage point reduction in the adjusted EBITDA margin in the quarter at 15.6% resulted from a rise in provision for lawsuits related to supplement updates and resolution of civil claims and higher expenses related to lawyers' fees. On the next slide, on the left, we show some indicators which we deem important for the integrated logistics division, such as manufacturing of home appliances in the country, up 10% in the quarter. And a 1% improvement in the Industrial Entrepreneur Confidence Index of the personal care sector. This outlook drove the 7.3% revenue increase of the industrial logistics operation in 2019, given the growth of both operations. Our warehouse operation was down 12.7% in the quarter, stemming from one major client lost a new addition in the beginning of the year.
As a result of these facts and the better dilution of industrial logistics fixed costs, the division's gross margin and adjusted EBITDA margin grew by 3.7 and 5.1 percentage points, respectively. And our operating margin was 13.7% in the quarter. In our earnings release, we point out that in this quarter, we experienced demobilization of warehouse operations, leading to a loss of BRL 4.8 million. Net of this event, our margins would have remained at Q3 2019 record levels. I now turn the floor to our CFO, Ramón Pérez, to present our net income, cash flow, and debt, in addition to return on invested capital, ROE, and dividends.
Thank you, Marcos, and good afternoon. An analysis of our numbers confirms the continuous improvement of our financial and economic indicators.
The improved operating performance, coupled with reduced financial expenses and the recovery of equity income from our subsidiary, GDL, resulting in a recurring net income of BRL 43.4 million, up 24.3% over 2018. As regards to the company's cash flow, our cash CapEx totals BRL 11.3 million. With more than half this amount being spent with investments on real estate linked to the vehicle logistics division of, or to the vehicle logistics of one equipment client, including the acquisition of additional land, as well as improvements made to an existing area, all in the region of Sorocaba. Our free cash flow, excluding IFRS 16, was BRL 3.4 million, almost 130% higher in the yearly comparison. I should highlight that in Q4 2019, we prepaid 50% of the Q3 2019 earnings in the form of dividends and interest on capital during this quarter in the total amount of BRL 45 million.
As we can see next, this earnings payment temporarily impacted our cash, mainly because you will remember that in Q3 2018, we had posted an extraordinary tax credit of BRL 91.4 million, which had not yet been turned into cash. A process which has been occurring, in practice, since January of 2020. In addition to the impact of this earnings distribution, some temporary delays in payments by clients also contributed to reduce our cash to BRL 67 million. It increased our net debt to BRL 70.1 million, equivalent to 0.3x the adjusted EBITDA. It is important to highlight that this is not the company's recurring cash level, mainly when compared to the total debt maturing in mid-2020, totaling BRL 78 million.
After the end of the quarter, and with the inflow of the previously mentioned held back payments by clients, coupled with the effective use of tax credits that began, as previously noted, which were duly enabled, the company's cash improved markedly and is, at this point, at levels over BRL 100 million. I take this moment to stress that as disclosed to the market through advisories and material facts, the current scenario of the COVID-19 pandemic and its resulting impacts on the company with interruption of an important part of our operations, we are adopting all necessary measures to strengthen our cash even more, either through debt rollover and additional funding or through the postponement of disbursements of all sorts. We are also revisiting all of our investments.
Again, focusing on 2019 results, we highlight that our average cost of debt remains at CDI + 1.14%, and our national rating by Fitch remains flat at A. As regards on our return on invested capital, net of the effects of the extraordinary PIS/COFINS tax credit in Q3 2019, our ROIC dropped compared to Q3 2019, 33% versus 35%, mainly due to a reduced growth rate of the vehicle logistics division and to compulsory investments which did not bring additional revenue and relative to existing contracts, and which we explained in the CapEx section previously. Q4 2019 Return on Equity of 28.6%, also disregarding the effects of Q3 2019 PIS/COFINS tax credit, was slightly lower quarter-on-quarter on account of a higher equity base in this quarter.
Speaking about 2019 dividends, we should highlight that in the management proposal submitted with our financial statements, we proposed not to pay supplementary dividends and interest on equity. This decision fits the set of measures adopted aimed to strengthen the company's cash to face the impacts of the COVID-19 pandemic. Still, worth of note is that the proceeds already paid during the year 2019 will correspond to 43% of our net income. Lastly, as regards the performance of Tegma's shares I would like to point out that in 2019, our shares appreciated 34% compared to 27% of Ibovespa index. When we consider only the first quarter of 2020, our shares depreciated 49% against the 41% of the Ibovespa index, again, as a result of the COVID-19 pandemic. Our average daily trading volume has been BRL 13 million in the period.
I turn the floor back to Marcos for his final remarks.
Again, I would like to thank all of you for participating in this call, particularly in this very difficult moment. I think we can begin the Q&A session now.
Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star one on your touch-tone phone now. If at any time you would like to remove your question from the queue, please press star two. Mr. Medeiros will read the question. I have a question from Lucas Marquiori, BTG.
Hello, everyone. Thank you for the call. I hope you're all well. Again, I would like to welcome Marcos in his new role with CEO of the company. I have two questions.
First, Marcos, could you share with us what you have heard from the car makers in terms of the halted operations? What can we expect in terms of volume reduction for the second half of the year? Can we expect a reduction of total vehicles transported? Is this what you're expecting in terms of demand? That's my first question. My second question, Ramón. Of the PIS/COFINS tax credit, amounted to close to BRL 100 million. How much do you expect to cash in? How much will you be able to post in the balance sheet this year? I just want to have a sense of the cash reinforcement coming from the PIS/COFINS tax credit. These are my two questions.
Thank you. Lucas, thank you, and thank you for the nice words.
Well, your question is important, and we ask ourselves the very same question every single day, morning, afternoon, and night. We've been in permanent contact with the main auto makers, through the company's contact and my own. About 10 days ago, what they told us is that all of the auto makers would halt operations. On average, they would stop for 19 days, some more, some less. One of them, and a very important one, recently increased the time. We were expecting to stop for around 13 days, but now the different scenario, they're increasing to around 20 days. So every day, they're kind of gauging what's happening and the measures to be taken. Because on one hand, we have production. On the other hand, we have the car dealers receiving these automobiles.
It's no use if they manufacture the cars, Tegma transports the cars, but when we get to the dealers, we cannot unload our trucks. That would create even other types of problems and additional costs to Tegma. It's a daily assessment, and we assess this more than once a day, and they have a lot of questions. Many of the automakers are just waiting from decisions from their own headquarters. They see what's happening abroad, and then they kind of apply it to what's happening here. It's a daily assessment and an assessment that takes place many times a day and in constant contact with them. We adjust the scenario day by day. We use a strategy of many scenarios, and we adjust our management accordingly. I will turn the floor now to Ramón to answer your second question.
Hi, Lucas.
Regarding the use of PIS/COFINS tax credit. Regardless of COVID-19 pandemic and how this is going to impact our performance this year, we had already the possibility of using 100% of what corresponds to the calculation by ICMS already paid. I guess you will remember. I guess most of you are aware of this discussion. We had a tax credit that was posted. Millions of BRL. All of that was calculated, and it was enabled and calculated according to ICMS. We calculate by ICMS rate. It amounts to about BRL 80 million. We were considering to use these BRL 80 million along 2019. In principle, this is what we are going to do. Now, why am I highlighting this? Because we still have some fat that we can decide to use or not, these remaining BRL 20 million.
Initially, we were waiting for the ruling by the Supreme Court. But as you probably know, this has been postponed. So BRL 8 million, we're going to use all of that, and we have a buffer of BRL 20 million. It takes this moment to say that in addition to this, as we have adopted all of the possible strategies, we will also benefit from some delays in the withholding of federal taxes. I can postpone for a couple of months the payment of income tax, PIS and COFINS. That will not bring me immediate cash effect because I was going to use my tax credits to offset that. But that improves even further my ability eventually to have more time to use these credits. I don't know if I answered your question.
Clear. Very clear, Marcos and Ramón, for the answers. Have a good day. I have a question.
I will press it. Could you comment on the outlook of industrial logistics in this new scenario?
Well, here we have more positive news. In this division, we have two major clients. They are in the segment of essential products. So it's personal care products and e-commerce. Since these are essential services, at this point, the volume is actually increasing. We are reinforcing our teams in this division in a partnership with our two major clients. We had very little impact in terms of halting production. It was just one segment, which was not considered essential, and they stopped production for a few days. Now looking forward, the positive news is last week we received a request to take part in three bidding processes, which for the short-term, mid-term. It's hard to define what short-term and mid-term, given the instability of COVID-19.
But that is a sign that Tegma is better positioned as a logistics operator because we are being actively sought by our clients. Secondly, it's a positive perspective that there will be work ahead. So for this division, we are somewhat more optimistic considering the whole situation. Another point that is helping us is that in the last three to four months, I was dedicated to designing the growth strategy of this division. We completed this strategy, the design, and now we'll be able to take advantage of the competencies and attributes included in this strategic design.
There's another question here by Marcelo. What is the quarterly CapEx of the company? What about the agreements with third party or outsourced drivers?
I'll turn the floor to Ramón to start answering, and then I'll add to that.
Thank you, Marcos. This is Ramon.
Coming back to the first part of the question, fixed OpEx, fixed monthly OpEx. You can multiply it by three, but monthly, it's about BRL 25 million- BRL 27 million. I'm referring to cash outlays involving costs and expenses in terms of accounting classification. Of these BRL25 million- BRL27 million, about BRL15 million refer to personnel. So it would be cost and administrative expenses included there. So it's BRL25 million- BRL27 million, that's the OpEx. Of these BRL25 million- BRL27 million, BRL15 million refer to personnel expenses. Let me take this moment to emphasize that we are acting strongly on this topic and led by Marcos. So we have an internal committee which was formed, and it's equivalent to a crisis committee, and it is deliberating on all of our expenses, costs, et cetera.
In addition to disbursements, as I quickly mentioned during the presentation, we are revisiting our investments, our CapEx. So these are the numbers. This BRL25 million- BRL27 million is the OpEx prior to the cost reductions that we are implementing. Marcos, over to you.
Thank you. Just to add, Marcelo, in the last part of your question. We didn't have anything different. The only thing that came from our service providers is that they're concerned about their health. But of course, with lower volume, in a way, that tackled that concern that they had. One thing we want to avoid, and I think I touched on that in Lucas' question. We want to avoid having the trucks carrying vehicles, and when they want to unload the trucks at the dealers, the dealers are closed. So we want to avoid those kind of wasted trip.
We didn't have any problems with our outsourced drivers or our own drivers.
There's a question by Marcelo. "Any idea of how the automotive industry would rally after this?" Well, I imagine that they're going to sell a lot less. There will be unemployment, and there will be less income.
So Marcelo, I touched on that in Lucas' question, but let me add to that. We don't know exactly what's going to happen after the pandemic. We don't know what's going to happen during the pandemic. But when we look at the latest information by the central banks, they talk about a negative GDP for this year. Still keeping interests low at 4.50%, and inflation about 2.94%. Then looking at next year, the signaling is positive. But it really depends on how long the crisis will last. Because we talk about COVID-19 pandemic crisis.
But post the COVID-19 and all of the health problems, we'll have different waves of crisis, an economic crisis, and eventually social crisis. So it's hard to tell now how consumers will behave. But it's possible there will be a pent-up demand. As soon as people feel safer and go back to consuming, we might rally. But again, looking at central bank numbers, I envision vehicle consumption recovery. You see, this is strong. To give you an idea, in March, until March 20, car sales were above average, and after that, the numbers started to fall because of the automakers that halted their production. I hope I have answered your question, Marcelo.
Ladies and gentlemen, as a reminder, if you want to ask a question, please press star one.
Again, ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one on your touchtone phone now. This concludes today's question and answer session. I would like to invite Mr. Medeiros to proceed with his closing statements. Go ahead, sir.
Well, again, I would like to thank all of you for joining us on this call, particularly in this very difficult moment that we're all living. I'd like to say that our investor relations team remains available if you have further questions later on. If there were webcast questions that were not answered, we remain available. I am personally available to all of you. So have a good rest of day. Stay safe. We shall overcome. Thank you.
That concludes Tegma's conference call for today. Thank you very much for your participation.
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