Good morning, and thank you for waiting. We would like to welcome you to the conference call for the earnings of Q1 2019 for Tupy. All the participants are connected in the listen mode only. Then we will have a Q&A session when further instructions will be supplied. If you need any help during the conference call, please contact the operator by dialing asterisk zero. This conference call is being recorded. We would like to remind you that this conference call is being translated via www.tupy.com.br/ri, where you will find the slide presentation. The slides will be controlled by you. The company clarifies that any declarations made during this conference call concerning business perspectives, projections, and operational goals and financial goals for Tupy are based on the assumptions of the board in relation to the future of the company.
These depend on market conditions, both domestic and international, and also the economic performance of the country. Therefore, subject to change. With us, we have Mr. Fernando Cestari de Rizzo, Chairman, and Mr. Thiago Struminski, Vice President of Finance, Administration, and Control. Mr. Fernando, you may proceed.
Good morning. I thank you all for your interest in the results of Tupy. Our projections came true and we reached a strong revenue growth, which increased by 21% year-over-year, the second highest in the company's history. Our markets continued to show robustness in Brazil and abroad, and our dedicated lines to the production of blocks and heads had a high level of utilization. Also, we have strong growth. We increased our share in high-value-added products such as CGI from 14% - 20% and expanded machining from 20% - 23%. In spite of the demands above our expectations, we were not able to materialize during this quarter increases in margin. The period was marked by many operational instabilities, especially in January and February, which had an impact on the cost of the period. In the same way also, we made relevant changes in the operational process.
In spite of the themes obtained in 2019, we had significant challenges. We made significant changes in work hours in Joinville due to demands from the Public Ministry , and this will reduce substantially our labor contingencies and overtime. We are already seeing a better utilization of the plants on weekends, but this also allowed us less time for maintenance and with an effective performance of the equipment and also inventory, consumption of inventory. Due to the high demand in Q4, some plant maintenances that were planned for the end of the year had to be done in January and had to be extended due to the low level of intermediate inventory. These stops had an impact on all the production process with a long chain and sequential steps.
In this way, in spite of the lower volume produced and the impact on sales, which we will not recover, we had higher costs with materials for using non-ideal production routes, a smaller dilution of fixed costs, and greater expenses with maintenance and energy, apart from using special freight transportation. Still in relation to Brazil, we have a five-year plan in safety and environment, giving priority to investments in the risk classification system. We made a reevaluation of our diagnosis, and as a result, we anticipated some initiatives which generated a stop of 19 days in the profiles unit, and this reduced the sales volume for hydraulic products by 28%. This will be recovered in the next quarters. We began 2019 with the challenge of compensating new taxes on payroll, the minimum freight table, which implied in losses upwards of BRL 25 million per quarter.
The truth is we were not able to pass on these extra costs to the prices as we would like, at the speed we would like. In Mexico, we began importing new products with more CGI, and we began to ramp up the new machining units with a total of 60 machines in addition to the 20 we had. The activity is recent in our local unit, and we are one of the few players in engine blocks and heads made of iron to integrate foundry and machining. In spite of the difficulties inherent to the implementation of these initiatives with a negative impact on margins initially, these projects already contributed for an increase of share of our machine products from 20%- 23% in CGI and 14% - 20% in comparison with Q1 2018.
These products had higher margins and will contribute in the next quarters for a better margin. Most of these factors were overcome during the quarter, and in the month of March, margins went back to normal levels. For this, we are counting on a new structure of organizational contribution, which includes actually a new team of executives and reorganization of functions, thus making the company more dynamic and aimed at solving problems. With all these problems, this contributed for a drop in adjusted EBITDA in the period, reaching BRL 136.9 million, with a margin of 10.7%. On the other hand, we had a combination of a robust portfolio and also better machining and CGI, as well as other initiatives for greater efficiency. This puts us on a route to recover the numbers in the next quarter.
Good morning. On slide three, we see the volume 147,000 tons, 2.8% inferior to Q1 2018, reminding you that this drop is due to our operational problems in delivery. Our portfolio continues strong. Growth of 6.4% in the domestic market and a drop of 4.8% in exports. Of the volume of transportation infrastructure, agriculture, 23% were partially machined, 20% CGI. In both cases, we see an increase in comparison with Q1 2018 due to the launching of new products. On slide four, the revenues went up 21%, reaching BRL 1.2 billion, the second largest in the company's history, although seasonal volumes were weaker. In the domestic market, exceptional growth of 28.2%. In the export market, the growth was 19.5%. 63% of the revenues had origin in NAFTA. In this case, we would like to say that many of our clients are in this region using their plants for exports, 18.9%.
South America and Central America, 12.4%, Europe, 5.7%, Asia, Africa, Oceania. In terms of application, 83% of the products go to commercial vehicles and off-road, 12.6% passenger cars, 3.7% hydraulics. On slide five, the revenues of transportation, infrastructure, and agriculture in the domestic market were benefited due to indirect exports of engines, apart from the recovery of the sales and projection in other segments. Passenger cars had a drop of 4% due to phase outs of products. Commercial vehicles registered an increase of 54%. Applications and machinery and off-road, 17%. On slide six, the revenue from the export market had a good impact with the improvement of the mix and devaluation of our Brazilian currency. Increased 9% in passenger cars growth, 26% in light commercial vehicles, also expansion of 30% in medium commercial and heavy vehicles, and 9% growth in off-road.
Slide number seven shows the performance of sales in hydraulics, which corresponds to 4% of our revenue. Internal markets and export markets had, respectively, a growth of 9% and a drop of 29%. We will have a recovery in the next quarter. Slide number eight, here we see CPV and operational expenses. CPV totaled BRL 1.1 billion, 25% higher than in Q1 2018, reaching a gross margin of 13.4%. The variation of CPV was impacted by the delay in the implementation of new programs for machining in Mexico. We talked about this in the beginning with lower productivity and less dilution of fixed costs and a consumption of materials higher than we imagined in the beginning of the year. In relation to Brazilian operations, in January, we had longer than planned maintenance stops due to many changes in the production process.
These were necessary to take care of the strong demand from our clients, and consequently, higher costs with materials and logistics and a lower dilution of fixed costs, and also due to the loss of volumes. In this period, we have an increase of 26% in raw materials due to the increase, included here also the higher freight prices and also devaluation of the real since the cost in raw materials in Mexico are in U.S. dollars. We observe here an increase in the consumption of higher price raw materials due to the increase in participation in CGI and machine products. Growth of 21% in labor and also in social benefits. This variation had origin in headcount, especially for the new programs, and also the impact of new taxes on payroll.
An increase of 35% of costs of materials and maintenance and third parties due to the operations in Mexico, and also operations in Joinville, which had an increase in cost with services from third parties, temporary workers, logistics, and rework. G&A operational expenses also went up 26%, especially from a higher expense with labor, freights, and commissions. On slide nine, we see adjusted EBITDA reached BRL 137 million with a drop of 7.6%, reaching a margin of 10.7%, affecting the months of January and February, since in March we recovered and went back to normal numbers. At the bottom of the slide, we see the net profit, BRL 80 million, in comparison with BRL 57 million in Q1 2018. This result had an impact due to some items in cash backs, such as tax benefits of payment on own capital, and also due to credits from Eletrobras. Slide number 10.
Here we show the variation of the main working capital accounts. The high that goes to a drop of 11 days in cash conversion. An increase of BRL 123 million in accounts receivable with a reduction of five days in sales. This increase happened especially due to the change in the payments by some clients. Also, an increase of inventory worth BRL 86.2 million, with a reduction of four days. Also, an increase of BRL 173 million in accounts payable results from an increase of two days due to several actions promoted to lengthen the payment terms. Slide number 11, we see intangible, BRL 47 million. These investments represented 3.6% of revenue and are related especially to productivity projects, new products, and also some new projects for the environment. Slide number 12, consumption of operational cash, BRL 6 million especially, and seasonal factors.
We see that it is lower than other quarters in terms of cash generation. On slide 13, we see net debt of BRL 889 million, which corresponds to 1.34 x adjusted EBITDA for 12 months. Also, the obligations in foreign currency represent 98% of this amount. Most of this debt is in foreign currency, represented by our bond and a maturity period in 2024. In relation to cash, 37% is in local currency in Brazil. Now, slide number 14. On June 18, we will pay our shareholders dividends worth BRL 25 million. This, together with BRL 100 million distributed in March, as interest on equity or own capital, corresponds to a yield of 4.9%. We continue with our strategy to generate value for the shareholders, and on a quarterly basis, we will evaluate the possibility of paying additional dividends, bearing in mind other factors such as cash generation and M&A.
Now, we would like to begin the Q&A session.
Ladies and gentlemen, we would like to begin the Q&A session. To ask a question, please dial asterisk one. To remove your question from the list, please dial asterisk two. Our first question comes from Mr. Guilherme Mendes, JP Morgan.
Good morning. Thiago, thanks for the opportunity. Two points. First, CGI. We saw relevant points. Do you have any visibility of how much these products should represent for Tupy in the medium and long term? And also, we know that these are higher value-added products. Will this affect margin? How much more can we expect if CGI has a higher penetration? Also another question involving guidance. We see profitability a little lower than the guidance you had given us for this year. Will you be reviewing margin? The normalization you mentioned in March and April will keep things as they were before? Thank you.
Well, hello, Guilherme. First on CGI, I believe it's a good question because it's a relevant topic. During Q1, we operated in a ramp-up mode. CGI, this volume is being machined in the Mexico plant. We began the operation, all the fixed costs and variable costs, energy, labor, installed, but I was not able to produce a lot. We're improving the production during the quarter. This number is not a normalized number. With the portfolio we have today, we believe CGI should represent 21%, 22%, and machining close to 25% when we stabilize the production. This should happen as of Q3 and the end of the ramp-up of these projects. The good news, these products have higher margins, higher than the average margins. We are renewing our portfolio with new projects in the U.S. market. Long-term projects, and now we will be on a new level in 2019.
We did our homework to generate this production with great efficiency. This already happened in March and April. We believe it's difficult to reach the 15% at the end of the year, but we have changed the levels as of March and April. We believe we can have a better EBITDA than in 2018 at the end of the year, but the margin should be a little lower, maybe 14%, a little higher.
Okay, thank you.
Our next question, Mr. Lucas Marquiori, Banco Safra.
Good morning, Fernando, Thiago. Thank you for the call. Two points. Please comment. You mentioned about a new portfolio in the U.S., long-term contracts. How is demand in terms of volume for heavy vehicles off-road in the U.S. market? Maybe a short-term vision about volumes in the U.S. So volumes during 2019. Second point, you mentioned here strategic projects, investments in M&A. In M&A, we know your willingness to grow. I'd like to understand divestments. You left, for example, the unit in Mauá. So I'd like to know about the divestments.
Lucas, good morning. First, on demand, we're seeing a solid demand. We launched new products, so it's not the same portfolio as in 2018. We have new products in 2019. We updated some projects. The U.S. project is a product we used to manufacture in Brazil for an application of a U.S. diesel pickup truck. Now, it was launched in Detroit this year, and with a new engine, now we are producing in Mexico. There is a very strong demand for this application at this client. This space allows us to have more space in Brazil for the domestic market. You can see that domestic market also had a vigorous growth. Now producing this engine in Mexico, we have space to produce new products in Brazil. The off-road market continues strong.
We have some backlog to recover, especially in agricultural sector and also mining, some specific products in agriculture and mining. One of the projects that we have in machining, this is very important, manufacturing heads for engines, large engines, 15 L - 30 L, 32 L engines. These are very large engines for off-road applications, mining, oil exploration, large machinery for land leveling. These are heads that are ready. So we have very low risk. The structure is ready. We reached 25%-30% capacity in the quarter. Now we have a backlog to take care of. So we are supplying the manufacturer of this client and also aftermarket. The aftermarket for this client is very strong. So what do we see? The U.S. market, very strong growth in this market, which is the most important. Extraordinary growth, but we have a lower share in this sector.
In passenger cars, there is a transition. It continues. The transition to SUVs and sedans. We're producing some products for Ford. They are going from pickups to luxury brands, Lincoln. So this transition is happening in the next quarters. Also high value-added product, very sophisticated product. So a great effort that we made to rebuild the company's portfolio, improve the portfolio. We're using the same assets of the company and producing higher value products. This will bring an increase in revenue with the same assets. As we recover margins, we will generate much more value with the same base of assets. Now, on opportunities in the Brazilian market, a positive variation with a good level in Brazil. Brazil lost a lot of exports of vehicles, but the domestic market is strong for heavy vehicles, heavy trucks in Brazil, machines, agricultural machines.
So we continue with a good volume in these areas. Now, in terms of divestments, we have plots of land to sell. The one that we announced, we are working on for cash generation. We have other plots of land. We have the profiles unit, which we may sell, which we may divest. We do not see great growth in this area, and we will continue investing in foundry components, high complexity products, and machining. These are our initiatives and where we are searching for opportunities in M&A. Thank you.
Thank you.
Our next question comes from Mr. [Gabriel Cavalcanti], [CMP Investments].
Good morning. Thank you. I would like to know a little more your opinion about the agreements that the Brazilian government signed with Mexico. There was a free trade agreement between Brazil and Mexico, but they also had quotas. This year, you no longer have the quotas. So I would like to know from you, how do you see this? How can this affect auto parts and vehicles? Also about Tupy's operations, a vision about this topic. Thank you.
Well, concerning the impacts, for us, our product is not subject to tariffs. We have sales to Mexico. We supply from our plants to clients in Mexico, and sometimes we manufacture a product in Brazil, we transfer it to Mexico and do the machining there. So we will see if we can plan a better cost. When we have a lower cost, we do these things. In Mexico and Brazil, we are a large exporter from Brazil, and Brazilian products are developed here. For the company, for Tupy in general, this will not have any effect. With free trade agreement or without a free trade agreement, things are the same. For industry, it is good. I believe it is favorable, but I believe this will generate value for industry and competitiveness.
We are in favor of free trade. We are large exporters, and we support this initiative of free trade. Concerning our operations, it is important when we decide to allocate a product, we try to understand the cost in each location plus freight. That is how we make our decisions. In the high scale products, we try to approve them in the plant in Brazil and Mexico, so we can manage the capacity, the demand in a more efficient way to avoid special costs when we have a strong increase in demand in a short period.
Ladies and gentlemen, to ask a question, please dial asterisk one. The next question comes from Mrs. Gabriella Cortez.
Good morning. Thank you. First, will we see any non-recurring effects due to the stops in Q1, the stops in production, and also, what kind of margin can we expect? Now, concerning margin, you mentioned that in Q1, you were not able to pass on the price increases to the prices. Will we have a gain in margin in Q2? Also the safety project that you mentioned, please comment. It is a five-year plan. Please talk more about this, your expectations, and also confirm the CapEx for 2019, your guidance.
Hello, Gabriella. First, safety, which is an absolute priority in the company. We have a map of the company with all the risks, and there is an agenda to invest based on this risk map. Essentially, it is a five-year agenda we have. The higher risks are controlled. We have made all the investments, all the changes. Of course, safety is an issue, depends on perception. We bring specialists from outside to evaluate the risks in our operation. This is continuous. It is done continuously. We don't have any situation that would make us concerned right now.
Thiago speaking. In terms of margin, our expectation in the next quarters is to have better margins than in Q1 2019. We saw signs of this in March, higher margin than January, February, when we had these stops, then a favorable combination of exchange rates, a new mix with CGI and machining in Mexico. Our portfolio is very strong. As these costs related to these instabilities are already paid and solved, we believe we will have a better performance in the next quarters in a more stable way. As mentioned before, although we have more volumes, it will be difficult to surpass the guidance of 15%. We should end the year below 15% profit margin.
Concerning costs, the increase in cost that you were not able to pass on to your prices?
This affects margin in the quarters with the REINTEGRA program and new Social Security taxes. This represented more than BRL 25 million in expenses. We see stability in the next quarters. There are things that we were able to pass on to our prices. Others, there is still to be done. Also, the minimum freight table, we are trying to solve that with different types of contracts with our vendors. Although we are doing this, we are imagining stability in margin for the rest of the year.
And CapEx?
Well, our expectation for CapEx is close to BRL 200 million, reminding you that we have a rhythm of 3%-4% of revenue. We have a commitment of ROIC double- digit. In 2019, we are doing this.
Our next question comes from Mr. Werner Roger, Trígono Capital.
Good morning. More detail about costs. In relation to scrap, we saw the price of iron ore going up because from Vale, higher cost for iron ore. This can affect the cost of scrap iron and also electricity. We see the free market, spot market prices are low. Can Tupy benefit from lower electricity prices? In terms of the U.S. market, is there any sector that is leading? We saw that oil and gas was positive, construction too. Which sectors in the U.S. are favoring, for example, mining too? New investments will be made. This can benefit Caterpillar.
Werner, let me begin with costs, then I'll pass the floor to Fernando. What we see is that there was a strong acceleration in materials, higher costs. This is stabilizing. Scrap iron, prices dropped in Brazil. In Mexico, we have the exchange rate. Most of it is in U.S. dollars. The impact of the exchange rates, at least inflationary impact is not that high. Iron ore that we consume, a little different from other grades. It's a special grade of iron. But we had the closing of some mines that used to supply us. Internally, we're working to decrease the use of iron ore, but we still have an impact from the inflation. Electricity in Brazil, we're well-protected. We have very little exposure to LPD electricity. In Mexico, some contracts are in U.S. currency. Then we have the exchange rate impact.
Things are more controlled than last year. In some categories, we had more than 30% increase last year. This year, things are better.
Okay. Now, concerning the markets. At the beginning of the year, we saw a weaker oil market, products for oil and gas in the U.S. As of April, we saw a recovery for oil and gas products. We have a stronger portfolio. The portfolio for mining is also stronger. I do not know if this is linked to the Vale case or not. Especially the products that we machine. Also in the agricultural products, we have a robust portfolio, strong portfolio. Same effects. We talked to clients this week. In agriculture, they do not anticipate any problems. In the portfolio, they have benefits. The U.S. market will give support to farmers. The agricultural sector has a very positive vision in the U.S. Also, everything that is linked to U.S. consumption.
Trucks continue strong, wages improving in the U.S., we have a good portfolio, even some pressure in some cases. We have great trust in what is happening. We have a new team in the company with us to help us. In 2018, we made many structural changes in the company, and I believe things will be much better this year. We are seeing the good effects of this, and we hope to end the year much better than in 2018.
Thank you.
Thank you. Ladies and gentlemen, reminding you to ask a question, please dial asterisk one. We would like to conclude the Q&A session. Now I would like to pass the floor to Mr. Fernando for his final comments.
To conclude, I would like to talk about the year 2019. Looking from now on, how the company will recover. We are not happy with the things that happened in Q1. The markets continue very robust in Brazil and abroad. We are benefiting from a product mix with higher value-added products, with positive impact on revenue and margin. Domestic market continues stronger than last year. The domestic market is very interesting this year. Machining special alloys growing. The company with a new portfolio, new products, high-quality products. The great opportunity of value generation is inside the company. We have a new organizational structure, very solid, ready. We reinforced the management and operations. We reinforced our organization chart for operations, new vice presidents, new country manager for Mexico. We created also a corporate purchasing director. We have a different structure. We have assistance from an international consultancy company.
We found Mr. Erodes Berbetz , ex-Purchasing Director from Volvo and Mercedes-Benz. This team together, we are seeing a reduction in the variable costs of the company. This group is obtaining a better control. We have 40 initiatives to review in the purchasing process. The operations since mid-February are on stable and adequate levels. We have a new sand regeneration plant in Mexico in operation, full operation since May. Implementation of automation projects in Brazil and Mexico. These are happening gradually. We are capturing some benefits already. Of course, the conclusion of the ramp-up for machining, and with enormous operational leverage with new equipment. We have not obtained the adequate revenue in Q1. Now things have changed, and revenue is growing until the end of ramp-up, which should happen at the end of Q2. Our working capital accounts are also efficient and with discipline and management.
I would like to be very local about this. We are not happy with Q1. We are not happy with Q1, but we trust that we will have a 2019 that will be much better than 2018. We have volume, we have revenue, we have new talents, and a renewed portfolio. In March and April, even without the benefits of the projects that I just mentioned, and the impact of the truck drivers' strike, which represents BRL 8 million per month, we have results far better than in 2018, and we still have many opportunities to capture. I thank you for your trust in our company. It's a great company with solid results, and also thank you very much for your assistance.
This conference call is ended. We thank you all for your participation. We thank you and wish you a good day.