Good morning. Thank you for waiting. We'd like to welcome you for the conference call for the earnings of Q2 2019 for Tupy. All the participants will be connected in the listen mode only. Next, we will have a Q&A session when further instructions will be supplied. If you need any assistance from the operator during the conference call, please dial asterisk zero. This conference call is being recorded. The company would like to remind you that this event is also being transmitted on the web via webcast. You can access at www.tupy.com.br/ri, where you will find the deck of slides. The slides will be controlled by you. The company clarifies that any declarations made during the conference call concerning business perspectives, projections or operational goals and financial goals concerning Tupy's business are forecasts based on the administration's beliefs.
These expectations are highly dependent on international and national market conditions and the economic performance of the sector, therefore subject to change. With us, we have Mr. Fernando Cestari de Rizzo, Chairman of the company, and Thiago Struminski, Vice President of Finance, Administration, and Control. Mr. Fernando, you have the floor.
Good morning to all. I thank you all for your participation in our conference call for the earnings of Tupy. After a first semester marked by many operational instabilities in the months of January and February, our team delivered excellent results, reaching the highest adjusted EBITDA revenue of the company and also the highest physical sales in the last five years, independent of the suspension of our activities in the foundry in Mauá. We have been also able to execute our commercial strategy.
We increased prices, we increased our share in high value-added products and CGI from 14% - 21%. We expanded our machining operations from 21%- 25%. This new product mix, together with internal initiatives involving cost reduction and increase in efficiency, contributed to increase significantly our margins in relation to Q1 2019. In relation to last year, we had a growth in gross margin independently of the effects of the truck drivers strike last year, we had these good results. We also had the return of taxes on payroll and also a reduction in benefits for companies at exports. We also had the return of the freight price list adopted by the government, which totaled BRL 23 million and had an impact on our margins, 150 basis points.
In spite of these effects, it's important that the company was able to increase the volume and revenue on its asset base. So we saw significant growth and this superior to 23% higher net profit. In terms of capital allocation, we had a reduction of eight days in the cash conversion cycle in relation to the same period last year. The results presented in Q2 2019 show that we're on the right track, but we are seeing also many other opportunities to grow revenue and increase margins due to a better product mix, new contracts and internal improvements, especially in the operations in Mexico. This year, we were able to begin important projects with more CGI, and we began to ramp up the delivery of finishing with a total of 50 machines and the 20 that we already had, plus these 20.
Now, we would like to talk about the indicators. I would like to invite Thiago.
Thank you, Fernando. Slide number three. We have a volume of 154,000 tons, 1.7 higher than Q2 2018, the highest value in the last five years, especially in the internal market and also in terms of the volume of transportation infrastructure and agriculture. 25% of partially machined products and 21% CGI. In both cases, we observed an increase in the participation, both in comparison with Q2 2018 and also Q1 2019, with the launch and ramp of new products. On slide four, we see the revenue increasing 15%, reaching BRL 1,405,000,000 , the highest in the company's history. In the domestic market, we saw an expressive growth of 27%. In the export market, we grew 13%. It is important to highlight the recovery of the domestic market.
Many of our clients use our products as a hub for exports. Also, we had an increase to 64% of the revenue came from the NAFTA, 19% from South America and Central America, 11% from Europe, 6% from Asia, Africa, Oceania. In terms of application, 82% products for off-road vehicles and commercial vehicles, 13% for passenger cars, 5% for hydraulics. On slide five, the revenue coming from transportation infrastructure and agriculture in the domestic market were benefited by indirect exports of engines, as well as the growth of demand for heavy vehicles in the domestic market. We see that passenger cars represented 0.3%, reflecting phase out of products. Commercial vehicles had a growth of 51%. Machines and off-road equipment had a drop of 2%.
On slide six, the revenues from the export market were impacted by the phase-in and ramp-up of products, an increase in participation of high value-added products in CGI and machine products, an increase of 19% in passenger vehicles, 16% in commercial vehicles, especially 21% in medium and heavy commercial vehicles. Here on slide three, we see a volume of 154,000 tons, 1.7 higher in Q2 2018, much higher than in the last five years, with a highlight to the domestic market. Also here we see the volume of transportation infrastructure and agriculture, 25% were totally or partially machined. We have here again the numbers. We had a gross margin of 17.5%. In spite of the increase in margin, the comparison was also affected by the truck drivers strike last year, and also higher taxes on payroll with a negative impact of BRL 23 million in this quarter.
In this period, we highlight the increase of 14% in the cost with raw materials due to the price increase in relation to last year, including the minimum freight price list adopted by the government. Also, devaluation of our currency in Brazil. We have many expenses in our operations in Mexico in U.S. dollars. Also, an increase in the consumption of high price raw materials. A growth of 21% in the expenses with labor, also employees' participation in profits and social benefits. New programs, and also an impact of higher taxes on payroll. An increase of 15% in costs with maintenance materials and third parties due to the beginning of new operations in Mexico, and also maintenance that we had to do in the Joinville plant.
Operational expenses increased by 26%, especially due to greater expenses with labor, freight, and commissions on sales due to the increase in volume and also exchange rate. We also had an impact due to the minimum freight price list adopted by the government, and also higher taxes on payroll. Slide number nine, adjusted EBITDA reached BRL 204 million, highest value in the company's history. An increase of 30% in relation to Q2 2018 with a margin of 14.6%. A substantial increase of 390 basis points in relation to the margin observed in the first quarter of 2019, and when we had also some stops in the plants and ramp-up in Mexico. Unplanned stops. On the bottom of the slide, we see the net profit, BRL 59 million, in comparison with BRL 48 million in Q2 2018.
On slide 10, we see the variation of the main accounts of working capital, an increase of BRL 107 million in accounts receivable with a reduction of six days in sales. An increase in inventory levels, BRL 55 million, with a reduction of six days coming from more efficiency in the operations, and an increment of BRL 93 million in accounts payable with a reduction of four days. The next slide, number 11, we see investments totaling BRL 74 million, 5.3% of the revenue. This increase is related to new contracts that contributed for our growth, both in CGI and machining. Also, we allocated new resources in productivity increase and automation, but also new projects for the environment and safety. The investments made in the first six months of 2019 reached BRL 120 million and represent 4.5% of net revenue in the period.
This continues to be lower than our level of depreciation. Slide 12, operational cash generation, BRL 75.5 million. This was impacted by the increase in the consumption of working capital and also in the cash conversion cycle in relation to Q1 2019, especially due to the strong growth in sales and also some clients that will pay in the next quarter. This is a seasonal effect. On slide number 13, net debt, BRL 921 million, corresponding to 1.34 x adjusted EBITDA in the last 12 months. The obligations in foreign currency represent 98%, which is in line with our business profile. Most of this debt is represented by our bond with a maturity in 2024. In relation to cash, 36% are in local currency reals. Now, I'd like to pass the floor to Fernando. He will make his final comments on the quarter.
Thank you, Thiago. Since 2017, we carried out many initiatives to increase the return on capital invested. We began with the suspension of the operations of our foundry in Mauá. We sold another unit and also plots of land, reducing our assets and also making our lines more and more efficient. So in terms, we were able to have more new products that are more complex, and our total volume grew 10% since 2017, and the revenue more than 52%, in spite of removing 15% of our capacity for the production of heads and blocks. The strong sales also brought a lot of overtime and more expenses with energy and maintenance. In this sense, a slowdown will allow us really to decrease our costs. The result of this process in 24 months brought our ROIC to 11%. Historically, it was below this.
Still, we recognize that there are many opportunities for us to be more efficient. I am speaking about projects involving manufacturing and investments in automation and technologies in Industry 4.0, and also many improvements as in purchasing. This happened also in other areas due to improvement in our organization, and we have also hired new talent that will help us in the challenges in all the areas in the company. Many of these initiatives we mentioned, and they begin to deliver results now in Q2. As you have seen, the demand for CGI and machined products have contributed a lot for the company's revenue. Soon, this will also affect our margins, increasing our margins. So we have new products that we launched in 2019. Also, in relation to margin, we have seen an increase in relation to the previous quarter, especially in our operations in Brazil.
I must say the great impact of BRL 23 million in EBITDA in the semester due to the truck driver strike. If we were to compare our performance considering this loss, our growth would be even higher and the adjusted margin would reach 16%. In practice, this means that the company is much better, more efficient, and has many opportunities to add value in our installations. To conclude, I reinforce that we continue with a diversified portfolio, with many new clients, products and new geographies which have different cycles and different opportunities. This has helped us to navigate better in case we have a fluctuation in the future. Concerning geographies, the recovery of the domestic market is very positive for Tupy, considering the strong presence of our clients in agriculture, heavy vehicles and also structural components that have high value added.
For the second semester, we are expecting volumes to slow down a little, especially CGI and machine products. In terms of operations, this will contribute for a greater gain in efficiency with a better usage of the equipment and implementation of projects aiming at better productivity that we are carrying out. If necessary, we have many opportunities to defend ourselves. We are reducing fixed costs and preserving margins if we have a fluctuation in demand. We have said this in previous calls. We are well prepared for new situations. We trust in this fundamentals of our industry and global growth and also especially great needs in sanitation, food, transportation. Finally, a better quality of life. We continue to look for new opportunities to generate value to our shareholders with special attention to capital allocation and continuous evaluation of our assets, monetization of credits and opportunities for strategic projects.
I thank you all for your attention and now we will begin the Q&A session. Thank you.
Ladies and gentlemen, we would like to begin the Q&A session. To ask a question, please dial asterisk one. To remove the question from the list, dial asterisk two. We would like to stress that this session is for analysts and also investment professionals. Our first question, Lucas Marquiori, BTG.
Good morning. Thank you for the call. Two questions. The first, Fernando, we see 64% of the revenue coming from the U.S. We are concerned in the market with the increase in demand in the U.S. You mentioned that you expect slower volumes. How are you seeing demand, and do you expect a greater slowdown in other sectors? Please give us some details where you expect more of a slowdown. The second, some questions about the closing of the plant in Mauá. Will this continue? Do we have more accruals provisions?
Lucas, good morning. Thank you for the questions. Let's begin with the market. What do we see in our portfolio? In the domestic market, we see a higher level of sales and maintaining these higher levels of sales. All the effects of Argentina, which were felt in Q1, we had growth in Brazil, and production had a slower growth due to less exports, exporting vehicles from Brazil. In the U.S., as you asked, in off-road, we saw a reduction in Q1 already. If you look at the data that we presented for Q2, and the number that is not there, we had a reduction in volume of 11%. This has been happening since the Q1. This sector, we are looking at the demand, we're analyzing the demand, the availability in dealerships of construction equipment.
There is an expectation to sell this equipment because the equipment in the market is getting older. We believe that we should see this situation, which is lower than in 2018. Another factor, pickup sector. The pickup sector is still strong, very strong. The sector is less affected, and we hope a strong volume with this. We have a small share in the U.S. In terms of light trucks, sedans, and smaller cars, these are less relevant in this context. That's why we believe that there will be a slowdown, but we believe this has already happened. We have many mechanisms ready to defend ourselves. For example, movement of products between plants, and we are working to sell more complex and more expensive products. We have been operating since 2018. We have been working on weekends with higher costs of energy and labor and maintenance. This is not good.
This hurts the company's operation. We are very capital intensive, and the equipment has to work with high efficiency. In Brazil, we are improving efficiency. We had extraordinary results in our operations in Brazil due to the transfer of products from Mauá. We are capturing value. In Mexico, we have new products. We have not received the results of this. We believe that from now on, we will be able to capture the benefit of this portfolio, which brings us a better revenue, more CGI, but we have not captured all the gains we can capture in margin.
Concerning the second question, Thiago speaking. We have provisions, we had accruals due to labor court actions when we closed the plant in Mauá. We believe that the majority of the topics linked to Mauá have already been solved. We still have labor court processes involving employees in terms of Mauá. We have been working on this. What did we do? We adjusted the labor hours, the work hours in Joinville to avoid labor court actions, and this should reduce the labor contingencies in terms of 8%-12% in the next few years. These labor court actions, we have many labor court actions now. This can impact results BRL 8 million-BRL 11 million by quarter, lower than the concentration we had in this quarter due to some processes from the plant of Mauá.
Thank you.
Reminding you to ask a question, please dial asterisk one, star one. Our next question comes from Marcelo Motta, JP Morgan.
Good morning. Two questions. Could you comment on working capital? We saw that there was an improvement in relation to Q2 last year, but we see that it was higher than in Q1. How can you improve the efficiency in working capital and M&A? You always talk about discipline and maybe M&A becomes more attractive.
Marcelo, thank you for the question. In this quarter, we had a lower performance in relation to cash. We had an increase, seasonal increase, that will be solved in the next semester. We had delinquency problems, non-payment problems in this quarter. But we believe that we will be able to have a better situation in Q3. Inventory is in line, accounts payable also suffered due to some inventory issues. We believe we can capture more of the positive effects in the next quarters. Now, in terms of M&A, we continue searching for operations that are in line with our strategy, growing in blocks, engine blocks, and heads in CGI and machining, and we have nothing to inform. We're looking for assets that are in line with our profile and our strategy.
Thank you.
Our next question comes from Catherine Kiselar , Banco do Brasil.
Good morning. Congratulations for the results. My question is on cost. We've seen an increase in the quarter, and with an impact from the operations in Mexico. Could you talk about the cost in the first semester? Do we have anything different for the second semester? And the second question, a follow-up on the Mexican plant.
Could you repeat the two questions?
Yes. My first question on costs. This quarter, we have the non-recurring costs, the impact from Mexico. Cost in the first semester and for the next semesters, will we see changes? And the second question, the Mexican plant, the status of the operation, what we can expect in terms of margin from Mexico?
We had some difficulty in hearing, but we will try to answer. Mexico, due to the complexity that was added, both in terms of CGI and machining, with more complex than we would like, it can deliver much more margin. Brazil is doing well. We believe that for our standard of revenue, we see an important upside to be captured in the next semesters. I don't know if this is what you asked. In terms of inputs, there is a deflation. There is no pressure coming from commodities. This is good for us. We were able to benefit from lower prices. Now we have to produce more efficiently all these products that we sent to this plant.
When will the Mexican operation run normally, in a normal way?
This is Fernando. It is running now in a much better way than when we bought it. Efficiency is higher than when we bought it. But we have our standard in comparison with Brazil. We have great opportunities to grow there in Mexico. What we expect in two to three semesters, we hope to have an improvement at the same time as we are attracting new leaders for the operation, we're also producing new products with very high complexity. The company has to become more mature. We have great changes in preparing the metal equipment. Products are much more sophisticated than the ones that were produced in the Mexican plant in the past. Although we have a good margin in the quarter, we understand that there is an enormous potential for more margin because we have this experience in the company. So the operation delivered a lot of value.
We have new products. We built a third machining plant, and this combination of sophisticated products and the new plant, we believe we have good opportunities there. So we believe that in two, three semesters, gradually, we will see improvements in margin in the Mexican operation.
Did you comment cost in general? The cost in general.
We are observing, in general, a slowdown in the price of the main inputs, raw materials. This helps us. There is also the exchange rate that is helping. The exchange rate. So the trend is for better cost performance in the next semesters. There are opportunities with some. We have some things that can benefit us in the next semesters, so we have good expectations for the next semesters.
Thank you.
Our next question comes from Lucas Marquiori, BTG.
Thank you. Just a quick follow-up. Fernando, you mentioned that the ROIC is around 11% as a result of everything you did. Just to see, where do you believe you can get by the end of next year, the range?
We have our internal goal in auto parts. We have a very superior performance in relation to any other foundry. We understand that the standard of the companies that supply to OEMs for off-roading trucks, we would like to get to 13%. We could have reached this, going back to your previous question. We were running with a high volume. We had expressive growth in volumes in some projects, and we had to activate some processes in Mauá to help with the operations in Joinville. We used some assets we had in Mauá. The foundry worked in Joinville, but we could not finish the process. So we had some inefficiencies until recently using these things. Same thing happened in Mexico. We ran the operation with very high volumes, as mentioned, and we had to work on Saturdays, and all of this results in maintenance costs with the.
We saw that the higher volumes brought a marginal effect. So now we have a more balanced situation. This should improve the company's numbers, because these very high volumes really brought new costs. So especially in off-road, there was a drop. So now we will balance the production. We believe that with the balanced growth, we will be able to deliver better ROIC.
Thank you.
Reminding you to ask questions, please dial asterisk one, star one. We would like to conclude the Q&A session. I would like to pass the floor to Mr. Fernando for his final comments.
Once again, I thank you for participating in our conference call and also your trust as investors and analysts of the company. I would like to thank publicly our clients for the trust and partnership and opportunity to develop joint solutions that will be used in the next decades. Finally, I would like to thank all the team in Tupy for the excellent work done. I reinforce my commitment and the team's commitment to generate value to you, and we are available with our investor relations team to clarify points. Thank you. We wish you a good day.