Good day, and thank you for waiting. Welcome to Tegma Gestão Logística S.A.'s conference call to review third quarter 2019 earnings results. Today we have Mr. Gennaro Oddone, CEO and IRO, and Mr. Ramón Pérez, CFO. 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 when further instructions will be provided. Should any participant need assistance during this conference call, please press star zero to reach the operator. The 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 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 dependent 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. Gennaro Oddone, Tegma's CEO and IRO, who will start the presentation. Mr. Oddone, you may begin.
Thank you. Good day, everyone. We will start another conference call to discuss Tegma's results. I thank you for your interest in our company.
In this presentation, we will focus on the most important points about Q3 in an attempt to shorten the time spent presenting information that is already available in our earnings release and to leave more time for your questions. On slide two, we present the highlights for the quarter. The first item refers to the credit resulting from a final court decision in a claim filed by our parent company, Tegma, in which ICMS exemption of PIS/COFINS base was questioned. In this quarter, as a result of this ruling, we recognized tax credits amounting to BRL 91.4 million, restated by Selic interest rate with a BRL 55.3 million impact on our net income. We also highlight that on October 18, the company was subjected to a search-and-seizure joint operation by the Brazilian Federal Police and GAECO special group to fight organized crime in collaboration with CADE, the Brazilian Antitrust Agency.
This was due to an investigation until then unknown to the company. This investigation was triggered by a partial leniency agreement signed by one of Tegma's competing companies in the brand-new vehicle transportation market. Considering the information already disclosed to the market and following governance best practices, the company formed an independent committee made up of three members and advised by a specialized law firm to conduct an in-depth and thorough investigation of the facts attributed to the company. This committee will report directly to Tegma's Board of Directors. Considering the preliminary stage of the investigation and the need for the independent auditors to study the theme in depth and the need for some necessary previous legal authorizations, the review report by independent auditors is not yet available. The company shall continue to spare no effort for the independent auditors to finalize their review procedures as soon as possible.
The company underscores that we do not expect any relevant changes compared to the results disclosed today. The third item on the slide refers to the second investment made by our startup accelerator, tegUP. This year, we identified a fleet management automation company called Rabbot. This company solves operational fleet management challenges faced by rental companies, carriers and insurers, industrial facilities, and companies with historically high costs and analog processes. tegUP will invest BRL 3.2 million through convertible debentures in three tranches. Lastly, we have the pleasure to announce that for the second consecutive year, Tegma's IR team received nominations by IR Magazine Awards Brazil. This award, myself, Gennaro, and our CFO, Ramón, were nominated among the five best CEOs and CFOs in investor relations profession in the small caps category.
Ian, our head of IR, was nominated one of the five best IR executives of Brazil's small caps. We believe that such awards reflect all the effort that our investor relations team has put into improving transparency and mainly the work developed by all Tegma employees. This award increases our responsibility to improve even further Tegma's communication with the market. on November 12, the award ceremony will take place to announce the winners of each category. On slide three, we show the highlights of the Automotive division, always comparing Q3 2019 with Q3 2018, and excluding IFRS 16 effects and other non-recurring events explained in our earnings release. Despite growth this year falling a little below our initial expectations, we expect the domestic market growth for the automotive industry between 8% and 9%, as shown by the market indicators presented here.
Exports, as expected, continue their downward trend and should end the year with a 30% reduction. Talking about our operational indicators, the numbers are in line with the market. Lastly, we highlight the expansion of our yard management activities in the city of Araquari, state of Santa Catarina, for vehicles imported for one major client. Moving on, speaking about the Automotive division's revenue, several factors pushed our revenue to grow 1.3% in Q3. Among these factors, we highlight: revenue growth of the yard management operation, price adjustment for the vehicle transportation operation in May 2019, the growth of the transportation operation itself resulting from increased total distance traveled, and finally, a negative impact stemming from the change in the port of entry of imported vehicles of one major client.
On the right, talking about the division's margins, stable numbers of vehicles transported and revenue stability were responsible for a flat gross margin in Q3. On the other hand, a 1.6 percentage point reduction of adjusted EBITDA margin in the quarter at 15%, resulted from a rise in provision for lawsuits related to settlements, updates, and resolution of civil lawsuits. Operational margin was also 1.6 percentage point lower for the very same reasons. On the next slide, we see the Integrated Logistics division, and we show some indicators that we consider to be important for the divisions sector, such as manufacturing of home appliances in the country, up 14% in the quarter, and a 23% improvement in the Industrial Entrepreneur Confidence Index of the personal care sector.
Next, we announced a new industrial logistics operations for a client in the chemicals sector, for whom we started to handle a complementary logistics flow of another product with a potential to add BRL 11 million to the annual revenue of this division. This new operation helped grow the chemicals operation revenue by 3.5% in the quarter, which has a high comparison base with Q3 2018 revenue due to higher client inventories in the aftermath of the truckers strike in May of 2018. Our other warehouse operation retracted 18% in Q3, resulting from one major client lost in Rio de Janeiro in the beginning of the year. These facts, coupled with better dilution of fixed costs, led this division to post increased gross margins and adjusted EBITDA, both growing more than 4 percentage points, with operating margin reaching 18.7% in the quarter, a record mark.
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, return on equity and dividends.
Thank you, Gennaro. Good afternoon. A qualitative analysis of our numbers confirms the continuous improvement of our financial and economic indicators. A reduction in financial results, coupled with lower leverage and the recovery of equity income of our parent company, GDL, contributed to a recurring net income of BRL 36.9 million, up 19%. I should remind you that this excludes the PIS/COFINS tax credit and the effects of IFRS 16. Actual net income was BRL 91.4 million. As regards to the company's cash flow, our operational cash generation was up 15% in Q3, also excluding IFRS 16, coupled with a lower CapEx of BRL 4.1 million against BRL 15 million year-on-year.
Together, this operational cash generation and this lower CapEx contributed to a significant increase of our free cash flow in the quarter, which totaled BRL 34.4 million. Regarding our indebtedness and cash in this third quarter, we paid BRL 28.5 million in dividends and interest on capital, referring to the first half of 2019. Our capital structure remains very unleveraged. Our average cost of debt remains at 1.44% per annum. Despite a better national rating by Fitch, as there was no new debt issued recently. This cost that I mentioned is in addition to CDI. Speaking about return on invested capital and return on equity, we did not see any substantial changes when we exclude the effects of PIS/COFINS credit.
It is worth mentioning that recently, our board of directors approved payment of BRL 0.69 of a real per share in dividends and interest on capital to be made on November 26th. This amount corresponds to 50% of Q3 2019 net income. Considering the last 12 months, we had dividend yield of 5%. Lastly, as regards to the performance of Tegma's shares, I would like to stress that our shares appreciated 8% in 2019 against 19% of Ibovespa Index. Average daily trading volume of our shares has been BRL 7 million, and we are currently trading at multiples of 14.4x price earnings and 8.6x enterprise value over EBITDA. On the next slide, please.
We would like to inform that because of restatements due to accounting changes such as IFRS 16, and also the magnitude of the non-recurring event in this quarter, we included in our historical series spreadsheet in the annexes tab, an income statement with events and restatements highlighted, so analysts and investors can have a better understanding of our results. We hope this will help you. Now I turn the floor back to Gennaro.
Thank you, Ramón. Again, thank you for participating in one more Tegma's conference call. We would like to begin the Q&A session.
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. Oddone will read the questions coming from the webcast. Our first question comes from Lucas Marquiori, BTG Pactual.
Hi, everyone. Hi, Gennaro, Ramón. Thank you for the presentation. I have some questions on my end. I think a little sensitive topic, Gennaro, but no one better than you guys to explain and make things clear. I think my questions have to do with the independent committee. I would like to understand exactly the mandate of this independent committee. Will they be investigating specifically this claim against you triggered by the leniency agreement? Do they have the limited mandate to investigate only this claim, or will they look for other things? I think it would be nice to understand if the company now is the target of any other type of investigation. I think I would like to know more on that. And about the composition, three members, as you mentioned, and three independent members.
I would like to know if you have a deadline for this independent committee to end. Do you know how long they will be working? So these are my questions I would like to hear from you and to make it clear for everyone.
Hi, Lucas. Thank you for the question. I think it is important to clarify things. So the independent committee is formally formed. It was approved by our board of directors, and we communicated this to the market on Wednesday, and they will start working immediately, possibly in the beginning of next week. Most likely, they will start working. The committee is formed by three independent members. One independent member of the board, Décio Carbonari, the coordinator of our auditing committee, independent auditing committee, Vanessa Lopes, and will be coordinated by Dr. Paulo de Tarso Ribeiro, a very renowned jurist.
He was a former Minister of Justice, General Secretary of the Ministry of Justice. So somebody very renowned and knowledgeable. In addition, they will count on the specialized law firm to do the forensic analysis. The committee was formed specifically for this event. As mentioned before in our prior advisories, we feel very comfortable. We are sure, we are convinced that we do not have any problems. But given good governance practices, the company decided to form this independent committee, so that they could do an in-depth assessment and investigation of this specific event. To strive for transparency. Regarding the deadline, we are estimating that this activity will extend for around 90 days.
Excellent. Thank you, Gennaro. If you allow me a second question, more regarding the operation. Could you explain Rabbot? Because I was in doubt. They provide a management solution for current rental companies. I just want to understand the specificity of this investment. Could you explain? Could you give us some color on that?
Lucas, yes, but before I speak about Rabbot, you had asked whether there are other processes. Everything is in our reference form in item 4.7. This is already communicated to the market, okay?
Okay. Thank you.
Now, let's speak about Rabbot. Rabbot is a startup. Basically, they optimize fleet management, as we said. They automate processes which are currently very manual. Just to give you some examples. They automate control of vehicle washing, vehicle maintenance, tire changes. They can automate the processes of rental companies, carriers, companies with large fleets. These companies that normally have manual procedures, Rabbot can automate all of them and more.
Rabbot monitors the time spent in each one of these activities to ensure that these activities will be performed in the least time possible. Let's say a vehicle wash. Sometimes the vehicle would stay waiting for a whole day or two days. Now, with Rabbot, in a matter of few hours, the vehicle is washed and is returned to the fleet. This is the main focus of Rabbot.
Excellent. Very clear. Thank you, Gennaro.
As a reminder, if you want to ask a question, please press star one on your touchtone phone now. The reminder, if you would like to ask a question, please press star one. Next question comes from Lucas Marquiori with BTG Pactual.
Well, if I can ask another question. I was a little curious regarding the industrial logistics result, this margin expansion quarter-on-quarter. Could you explain what caused this? Is this a recurring level for industrial logistics? If there is more room to expand a contract with a client that could add another BRL 11 million to the revenue. Is there more space to improve industrial logistics?
Well, yes. The margins are consistent. Now, we have a very mature and stable operation. Obviously, by adding new services, considering that we have a fixed cost structure that allows us to expand services, not only to our current clients, but to new clients as well. We end up diluting our costs, and we have the potential to improve our margins even further. In a nutshell, what I can tell you is the margins are very consistent. As we add new services to current clients and to new clients, we can improve the margins even further. We very much focus on that, and we are reinforcing our commercial department, aiming to be more aggressive in the market.
Excellent. Thank you, Gennaro.
Ladies and gentlemen, as a reminder, if you want to ask a question, please press star one. All right, next question comes from Rafael [Maldonado].
Hello, Gennaro, Ramón. How are you?
Hi, Rafael. Everything is good. Thank you.
Regarding monetization of these PIS/COFINS credits, do you have any visibility in terms of how long it will take to use these tax credits?
This is Ramón speaking. Well, actually, we are in the process now of enabling the tax credit. This can take some days, 30-60 days, give or take. Once this is enabled, and this is a simple formality because we've had a final ruling, as we said.
We are thinking that we will be using this credit along 12 months by the end of 2020, and we will use the tax credits for other federal taxes, basically payment of PIS, COFINS, income tax, and social contribution.
Okay, excellent. Thank you.
Next question is from the webcast.
Question by Alexandre. He asks what the car makers are expecting in terms of growth for 2020. Well, Alexandre, we are trying to hear more from our clients. What I can tell you is that, as I mentioned, ANFAVEA is talking about a domestic market growth between 8% and 9%. Considering that credit conditions are improving, interest rates are dropping, and the approval of the pension reform, what we have perceived is that the car manufacturers are more optimistic now, particularly because this year's growth was very much driven by direct sales.
We expect that end consumers will gradually come back. Although I cannot give you a number, what we have felt is that they are expecting higher growth than what was seen this year. This is all I can tell you for now.
Ladies and gentlemen, if you would like to ask a question, you just have to press star one. This concludes today's question and answer session. I would like to invite Mr. Gennaro Oddone to proceed with his closing statements.
Well, again, I would like to thank all of you for participating, for your questions, and we remain available with our IR team if you have further questions. I wish you all a great rest of day and an excellent weekend. Thank you very much.
That concludes Tegma's conference call for today. Thank you very much for your participation. Have a good day. Thank you.