Good afternoon, and thank you for waiting. Welcome to the conference call of Tegma Gestão Logística S.A. to discuss the earnings for Q2 2018. We have with us Mr. Gennaro Oddone, Chairman and Investor Relations, and Ramón Pérez Arias Filho, CFO. We inform that this event is being recorded, and all participants will be in the listen mode only during the presentation. Next, we will begin the Q&A session when further instructions will be supplied. If you need any assistance during the conference, please request help from an operator by dialing asterisk zero. The replay will be available right after the end for seven days. Before proceeding, we would like to clarify that any declarations made during this conference call concerning the business perspectives of Tegma, projections, operational and financial goals are based on beliefs and assumptions of the company's board, as well as based on information currently available.
Considerations about the future are not guarantees of performance. They involve risks, uncertainties, and assumptions. They refer to future events and depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions, and other operational factors may affect the future performance of Tegma and lead to results that will differ materially from those said here. Now we'd like to pass the floor to Mr. Gennaro Oddone, Chairman and Investor Relations of Tegma, who will begin the presentation.
Thank you. Good afternoon. We would like to begin another conference call to present the earnings of Tegma. We thank you for your interest in our company. I'd like to begin with slide number two with an agenda of our presentation.
During the first part, we will show the highlights of the quarter, then the performance of the market and some operational indicators of Tegma, and then we will focus on results of the period and also cash flow investments debt during Q2 2018. Finally, we will talk about capital markets and expectations. On slide three, we have the highlights of the quarter. We began with the impact of the truck driver strike in May 2018, which paralyzed the country for 11 days and affected our operations during the month of May in a significant way. We identified that the replenishment of inventory that happened in June partially compensated for the losses in May. Furthermore, we're analyzing the presidential decree MP 832/2018 that approved the minimum freight prices, a measure taken by the government to interrupt the strike.
The topic will be judged by the Supreme Court on the 27th of this month, and depending on the decision, this may impact our operations in a way that we cannot yet measure. It depends on the methodology that will be used. The second point covers the announcement of the distribution of dividends and JCP on the invested capital for the first semester of 2018. The distribution of BRL 0.31 per share corresponds to 50% payout, and the dividends in the last 12 months already represent a dividend yield of 5%. The payment will be made on August 22nd for those shareholders who have the shares on August 10th. Ex-date August 13. The third highlight has to do with the acquisition of a plot of land in the city of Sorocaba in the interior of São Paulo.
The acquisition was foreseen in our budget approved in August and has to do with improving logistics of the operation of the Toyota plant. It should begin operating at the end of this year, and the investments will add up to BRL 21 million. Some conditions need to be carried out yet. The fourth highlight has to do with hiring a new financing loan to lengthen even more our debt. We took BRL 50 million in Type 4131 in US dollars with 100% swap, which will mature in two years at the cost of CDI index + 0.89% a year. We will use the disbursement of this loan to pay in advance a CCB worth BRL 40 million, which was costing us CDI + 2% and would mature in June 2019. The remaining BRL 10 million will be used as a reinforcement for our cash position.
Finally, we announce a new important client in the operation joint venture GDL, which includes general storage, and bonded storage in the state of Espírito Santo. In the new installation, 7,000 square meters, we will inaugurate next, will really manage the networks of drugstore. Drugstore networks, Drogarias Pacheco and Drogaria São Paulo with a contract for four years. On slide number four, we see the performance of the automotive market and indicators of Tegma. Beginning with the graph on the left, we can see that domestic car sales were 13% superior to Q2 2017 in spite of the strike during the month of May. This result was influenced in a positive way by the improvement of the domestic economy, the increase of credit to purchase vehicles, and recovery of trust on the part of the consumer.
On the other hand, the exports that grew almost 50% in 2017 had an inferior performance and remained stable in Q2 2018 when compared with Q2 2017. Looking at the graph in the middle, we can see that the growth of production and imports are in line with the performance of domestic sales already explained. Additionally, there was the end of the benefits of the Inovar-Auto program from the government, which ended in December 2017, thus making imports more competitive. Finally, on the graph on the right, we see that in Q2 2018, we transported 194,000 cars, 6% more than in Q2 2017. The growth below the market is due to the loss in market share, which was 25% in Q2 2018, especially due to the loss of participation in the market with two relevant clients. The average distance in Q2 2018 was 980 km.
It continues to grow and is influenced mainly by the continuous growth in domestic trips and the reduction in participation of the exports in our volumes. On slide number five, we show the evolution of the results of the divisions. The revenue on the left and the profitability, EBITDA and EBIT in the graphs in the middle, and the consolidated net profit on the right. We remind you that the numbers shown here do not include the operation of storage in Cariacica in 2017 and in January 2018. We can see that the automotive logistics revenues in Q2 2018 had a growth of 19% due to the increase in the number of vehicles transported, the average distance, and the price increases made in 2018. The net revenue of integrated logistics grew 11%, reflecting the increase in volume and new clients in the storage operation.
Talking about EBITDA in the graph in the middle, the growth of the automotive EBITDA in blue of 43% and the gain of 2.6 percentage points versus Q2 2017 shows cost control together with growth in revenue. The growth of 125% of EBITDA for integrated logistics in orange and the margin that almost doubled was due to cost control and expense control and the implementation of new contracts in storage and reduction of expenses with accruals for labor lawsuits. On the right, we can see the evolution of the EBIT margin of the divisions. The EBIT margin for vehicle logistics had a positive evolution in the period, although still impacted in Q2 2018 by non-recurring adjustments due to depreciation. The evolution of the EBIT of integrated logistics, in part due to expenses with accruals for court cases in Q2 2017, and also part of the improvements.
The net profit of Q2 2018 in the graph to the right, BRL 28 million, if compared to BRL 9 million in Q2 2017, corresponding to the net profit without the non-recurring events in the period in red, will be 3.3x greater due to the improvements in operations explained and additionally, lower balances of net debt and lower interest rates. Now I would like to pass the floor to Ramón. He will talk about cash flow and debt.
Thank you, Gennaro. On slide six, we show on the graph on the left the evolution of our return on assets in blue, equity, and on the capital invested in orange.
The growth of ROIC in Q2 2018 versus Q1 2018 shows apart from the improvement of operational results, the reduction in capital used as a result of the cash generation, which reduces the net debt, which is the basis for calculation of ROIC. In our methodology, it is the one of 12 months ago. The drop in ROI when compared to Q1 2018 is influenced by eliminating non-recurring events in financial results and a positive income tax by BRL 24 million in the last 12 months. In the graph in the middle, we can see that the operational cash generation in blue was lower in Q2 2018 when compared to Q2 2017. Mainly due to the increase in the consumption of working capital, a consequence of the renegotiation of terms with an important client.
This inferior result came in spite of the better operational results and also the usage of BRL 12 million of the BRL 38 million of tax credits that we have for PIS tax and COFINS tax. The CapEx in orange in Q2 2018 was at BRL 4 million, lower than the BRL 7 million in Q2 2017. Since in this last, we had included the investments concerning the renewal of a commercial contract. As a result of this, the free cash flow, represented by the gray line, had a drop from BRL 11 million to BRL 8 million. Now talking about leverage on the graph on the right, the reduction of gross debts, here in blue, is due to the payment in advance of a loan we took from the BNDES Finame.
The reduction in cash, in orange, between Q2 2018 and Q1 2018, is explained by the payment of BRL 39 million in dividends and interest on own capital, JCP. Also, we paid this, we paid the debt that we mentioned, and the cash flow already explained. The increase in net debt in gray is a consequence of the same events. Now, going on to slide number seven, talking about capital markets and expectations. We show an evolution in the price of the shares of Tegma, which dropped 11% in 2018, although they had an increase of 20% until April. This is due to the uncertainties after the truck drivers strike and the recovery of the domestic economy. In line with this performance, the daily volume had an improvement of almost 50% since the beginning of the year.
In the middle, we see that our rating remains at B1 by Moody's, given in December 2017. Also, we show the relationship with our analysts on the sell side, with an average estimated price by them for the end of 2018. With this, I'd like to pass the floor back to Gennaro.
Thank you, Ramón. Well, to conclude our presentation, I would like to comment that in spite of the impact due to the truck drivers strike, as in the Q2, we also see a deacceleration of the economy in Q2, but we trust that we will have a second semester that will be positive in terms of expectations and volumes this year. With this, we'd like to conclude our presentation, and operator, we would like to begin the Q&A session.
Ladies and gentlemen, we would like to begin our Q&A session. To ask a question, please dial asterisk one. To remove the question from the queue, dial asterisk two. Mr. Gennaro will also read the questions sent by webcast. The first question comes from Mr. Felipe Matsumoto of Santander.
Good afternoon. In Q1 automotive, we saw a drop in market share due to an interruption in the activities of a client. You expected in Q2 a recovery, but it did not happen. What are your expectations to normalize this market share during this year or 2019?
Good afternoon, Felipe. In reality, in Q2, due to the truck driver strike, two important clients of ours also had vacations, and paralyzed for a longer period than that of the strike. So we have this impact in the quarter. Also, another client of ours also had a stop that was planned due to a stoppage in the plant.
So the combination of these facts resulted in two clients with relevant participation losing market share in the quarter. The information we have now, we will have a second semester that will be stable. There is a stop program to adjust assembly lines. As I said, we have an expectation to have a second semester of stability in terms of production and growth in the market. So our expectations are that we begin to see a recovery during the next months.
Thank you.
Our next question comes from Mr. Lucas Marquiori, Safra Bank.
Good afternoon, Ramón, Gennaro. Gennaro, question: you mentioned the issue of the government's freight price list. Nothing is certain. We don't know much, but we heard that this may result in companies forming their own fleets. I have two questions, and if you can shed light on this, it will help.
You can help us better than anyone else. The first is, you are operating at a high level with outsourced fleets. If we have minimum price lists, would this make you really work with your own fleets? With this minimum price list, do you believe your clients could once again buy their own fleets and transport their own vehicles?
Good afternoon. Thank you. I believe we must understand a little, at least in our analysis, the reason, the motivation for this strike. The reason is, first of all, related to freelance truck drivers, most of them transport grains and also linked to agribusiness because of seasonality and due to the characteristic of the product, which is low added value grain soybean. These are the reasons, the backdrop for the truck drivers strike being much longer than everyone imagined.
The issue of a minimum price list for freight, there is no consensus yet. It depends on approval by the president, and they are also discussing if it is constitutional. This will be judged on August 27 by the Supreme Court. Now, our characteristics. First, although we have an outsourced fleet, we work with small companies, not freelance truck owners. Our transportation services, almost all of them are linked to logistics services. Our logic is a little different. We also supply logistics services. We believe, of course, as I mentioned in the beginning of the presentation, we have to see what will happen. But certainly, we are in a position that is a little different from this scenario I just described. For the time being, we understand that it does not make sense to have our own fleet, but let us wait. We do not have all the answers yet.
Thank you.
Our next question comes from the webcast. We have a question from Alfonso. You mentioned new programs to cut costs and expenses, and it seems that we can already see the results with the numbers of Q2 being at the level of the years 2012, 2013. What can we expect for the future concerning expenses, costs?
Well, Alfonso, when we made our program to reduce costs and increase productivity, we tried to rethink the company for the company to become more lean, more light, and more efficient. But we had the concern, we did not want to cut costs that could hurt the company's capacity to grow. We are seeing a certain recovery. Last year, we had some recovery, this year too. What do I mean by this?
With the growth that we expect to have over the next quarters, we will not need to make any additional investments to handle a greater volume. We have a company that can grow, can support this growth, physically in systems, information technology, and also fixed cost installations, facilities. Of course, when you grow, you have variable costs, and that is linked to volume. So answering your question, our expectation is that, yes, with a growth in volume, we will have to adjust variable costs, some fixed costs maybe, but we hope that fundamentally, the current fixed cost structure we have will be enough to handle the growth that we expect to see from now on.
A question from Alexandre. Gentlemen, good afternoon. Please comment the worsening in the cycle of financial days due to the stoppages at clients. What are your expectations concerning cycle from now on and cash?
No, the worsening of some numbers is not linked to the stoppages. It is linked to a specific negotiation with a client. We had an increase of the number of days in accounts receivable only once. It will return not to the same levels, but we are negotiating. During two, three months, accounts receivable was longer, and then it would go back. There should be some recovery, I would say. An estimate, half of what went up should come back in terms of consumption for working capital, but it should stop at this new level.
A question from Bruno. I imagine that it was already answered. Please, if you need further clarification, Bruno, please send us another question. It is not very clear.
Our next question comes from Mr. Lucas Marquiori, Safra Bank. Thank you.
Please talk more about the two new operations, the new plot of land for Toyota plant and GDL. What is the size, revenue, some metrics about return on investment and the impact on consolidated numbers.
Lucas, the yard, the additional plot of land, we also always say that they are strategic plots of land. To us, it is fundamental for us to give a better and more efficient service to our client, in this case, Toyota, in the automotive industry. The aim of this investment is linked to the new plant in Sorocaba. This new plant is the one that is producing a new model that was launched called Yaris. It should begin to operate a third shift.
A growth and in market share, and we will benefit by improving logistics, and we will benefit from this additional volume from the third shift in the Toyota plant with the new launch of the Yaris automobile. Another issue concerning the new operation within our joint venture, Gennaro mentioned in the beginning that we can say. He mentioned it is a long-term contract, four years. Due to confidentiality issues, we cannot divulge the numbers. We can guarantee that we have minimum volumes guaranteed in the contract, and based on these minimum volumes that we expect will be higher, they pay for the investment made, these minimum volumes, considering the cost of capital. As we have demonstrated in recent results in integrated logistics, the same metric was used. We hope we can demonstrate these results in the second semester of 2018. As Gennaro said initially, the inauguration should happen next week.
Thank you, Ramón. Just a follow-up. Since it is a GDL project, will it be an integrated logistics or it will be in the result of GDL, we will see this as equivalents?
Ladies and gentlemen, reminding you to ask a question, please dial asterisk one, star one. Once again, if you have a question, please dial asterisk one. We would like to conclude the Q&A session. I would like to pass the floor to Mr. Gennaro for his final comments.
Well, once again, I would like to thank you all for participating in our conference call, and we are available through our investor relations department. Please send us your questions if you need clarification. Thank you. We wish you good afternoon.
The conference call of Tegma Gestão Logística ended. Thank you. Good afternoon, and thank you for using Chorus Call.