Good morning. Thank you very much for waiting. You are all welcome to the conference call for the earnings of Q4 2018 for Tupy. All the participants will be in the listen mode only, and then we will have a Q&A session when further instructions will be supplied. If you need any assistance from an 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 simultaneously via webcast. It can be accessed at 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 on business perspectives, projections or operational goals, financial goals concerning Tupy's business are based on expectations of management and in relation to the future of the company.
They are highly dependent on conditions of the domestic and international market, and also economic performance of the country, therefore, subject to change. We have with us Mr. Fernando Cestari de Rizzo, Chairman, and Thiago Struminski, Vice President of Finance, Administration, and Controls. Mr. Fernando, you may proceed.
Good morning. I thank you all for your interest and participation. During the presentation, apart from talking about Q4, we will talk about all of 2018. We celebrated 80 years. The company celebrated 80 years, and this is a reason for pride for all of us. Tupy delivered exceptional results, transforming the strengthening of demand during the year, an opportunity to serve our clients in all the continents. In this context, we introduced new products with complex geometries, special alloys, and we expanded our machining services.
Yes, a strong sign confirming our strategy of growth based on technological innovation. Now, we are healthy and expanding our participation with partners and successful clients, universities, and research centers. Beginning on slide number two, we see the record results in spite of the political economic uncertainties in our country. We had no control over these, but we suffered the impact, such as the truck drivers' strike, the reduction of the benefits of Reintegra, and also new taxes, higher taxes on payroll, an increase in the price of raw materials. This year, we had strong operational results. Net revenue reached BRL 4.8 billion. EBITDA also grew 30% in comparison to the previous year, reaching BRL 677 million at a margin of 14%. This margin could have reached 15.2% if we excluded the effects related to the truck drivers' strike, which I mentioned, which penalized our result by BRL 59 million.
Net profit followed the growth trend, reaching BRL 272 million, 77% higher than 2017. Finally, the operational cash generation in the period was BRL 577 million, a growth of 121.8%. I would like to remind you that this growth happened in a scenario where we worked with one plant less and without the units of de-flashing in Mauá. All of this had a direct impact on return in capital invested. Now, slide number three, the return on invested capital reached 11.4%, a growth of 390 basis points in relation to 2017. Reminding you that we arrived at a ROIC that is double- digit due to commitments we have taken on in 2017. Operational profit improved very much with a higher volume and the expansion of products, in the number of products with more added value.
We were able also to improve the cash allocation of the company and reduction of the conversion cycle of cash and controlled investments. We continued to adopt a strong discipline of investments, allocation of capital, directing our efforts to the business that generate more value for shareholders and looking for opportunities to monetize assets in non-operational, non-strategic assets. Now, I'd like to introduce our CFO.
We had our revenue, BRL 1,235 million, increase of 27.7%. Adjusted EBITDA BRL 151.2 million, a growth of 14.3% versus 2017. Also here we see operational cash flow grew 92% with a reduction in the cash conversion cycle and gains in all the working capital lines. This will allow us to pay on March 29th, BRL 137.5 million as anticipating the BRL 147 million will be paid in relation to last year, and BRL 100 million in anticipation of 2019.
W e'd like to report in Q4 2018, we had a return on capital invested, grew 390 basis points, volume of transportation and in agricultural, 20%, totally or partially machined. On slide number six, revenue went up 28%, reaching BRL 2.1 billion. For the first time in history, in the domestic market, we had a growth of 32%. R evenue increased 27.7%, reaching BRL 1.2 million. I'd like to say that many of our clients use this region to export. We see here 18% went to South America and Central America, 15% to Europe, 6% to Asia, Africa, Oceania. In terms of application, 80% commercial and off-road vehicles, 15% passenger cars, and 5% hydraulics. Slide number seven, evolution of revenue in transportation, infrastructure, and agriculture in the domestic market. Passenger cars dropped by 10% due to 7% less production of passenger cars.
Commercial vehicles, a growth of 54%, off-road machinery, 96%. All this growth is due to growth in production and also indirect exports. On slide number eight, we see the revenue from the export market, especially due to higher volume and also better mix and appraisal of the Brazilian real. We see here an increase of 35% in passenger cars, 26% in light commercial vehicles, 23% in average in medium and also heavy vehicles, 27% in off-road. Here we see hydraulics on slide number nine. This revenue in domestic market and export market, an increase of 14% and 25%, respectively. The reduction in billing due to closing the de-flashing units. We had also new products that were launched that compensated this. Now, slide number 10, where we have the cost of product sold and operational expenses. CPV went up 29%, a margin of 15.1%. The variation.
For example, we had net adjustments in the work hours. We will have a positive effect in 2019, a ramp-up of new products, and a better mix, especially CGI. We also see, for example, higher prices for freight and an impact of more than BRL 20 million in the quarter. The increase in the volume produced had an impact, an increase of 40% in the cost of raw materials, the depreciation of the real, more expensive products. With a growth of 20% in labor, this variation is due to the increase in headcount to increase production use of overtime, and we observed direct impact of higher taxes on payroll. Reduction of 3% in costs with maintenance materials and third parties due to initiatives to cut costs. Operational expenses went up 26%, especially more expenses with labor, freight, and commissions.
Also, an impact on freight prices for finished products, semi-finished products, and higher taxes on payroll. Slide number 11. EBITDA, the highlights. Here, an adjustment of 152 million, an increase of 14% in relation to 2017. It had an impact with high costs of labor due to the higher volume and new products that we launched. We had a margin of 12.2%. We had an impact due to the higher cost of labor, and our contracts have included provision to increase prices due to the increase in these prices. Some effects due to readjustment of work hours. Concerning 2018, we estimate that the impact of the consequence of the truck drivers' strike was BRL 59 million and BRL 14 million due to sales non-recovered, loss of productivity, and less dilution of fixed costs.
We know the government took measures, but we know that we had a reduction in government programs, subsidies. On the bottom part of the slide, net profit was BRL 78 million in comparison with BRL 14 million in Q4 2017. Of this, BRL 56 million has to do with accounting postings that are non-recovering and impairments, recognition of tax credits, and due to a court decision for amounts to be received from Eletrobras. The cash effect of these initiatives was BRL +17 million in the quarter . On slide number 12, we see the main working capital lines, Q3 2018 as a basis. A reduction here, a drop of eight days of sales. This effect is due to seasonality and also changes in payment terms for some clients.
Here, we see your inventory, BRL 37 million, with the maintenance of number of days in inventory, an increase of BRL 45 million in accounts payable due to the higher volume and actions to lengthen payment terms with our vendors. On slide 13, we see investment BRL 71 million, 5.8% of revenue here. In relation to 2018, they represented 3.8% of the revenue, 66% of the depreciation, which is in line with our focus to increase the return on capital invested, reaching 11.4% in the period, an improvement in relation to Q3 2018 and also Q4 2017. The next slide, operational cash generation. This BRL 209 million, this is due to many initiatives. In 2018, a better cash flow, the best in the company's history, reaching BRL 577.5 million, and we can see the increase. Slide number 15, we see our debt 1x the Adjusted EBITDA.
We'd like to say that the net debt is BRL 682 million, corresponding 1x Adjusted EBITDA last 12 months. The obligations in foreign currency, 99%. The next slide, we see the announcements. We will distribute on March 29th, BRL 137.5 million, the last part of dividends announced for 2018. Due to the strong cash generation and leverage we had in the period, on the same date, we will pay interest on capital for BRL 100 million. This is for 2019, totaling a distribution of BRL 137 million corresponding to 5.1%. The other amounts distributed during the year will be approved every quarter, taking into consideration cash generation and leverage in the period, and also opportunities that may rise. I'd like to pass the floor to Fernando. He will talk about our strategy for the next quarters.
Thank you. As we said on other occasions, Tupy is characterized by the diversification of its revenue with many products, clients, and geographies. Our engineering solutions are used by many sectors: freight, infrastructure, agribusiness, generation of energy, amongst others. We continue with a strong portfolio of sales. We will have new products for pickups in the U.S. and many structural components for trucks in Brazil. This will result in a better usage of our capacity. In general, our clients have told us that there is a good scenario. Industrial production is on the rise, also the global GDP should grow 3.5%, U.S. 2.5%, Brazil 2% growth in the GDP. On slide 18, we have an indicator that really helps us see the general demand for freight in the U.S. has increased in all the models with growth during the end of 2018, beginning of 2019.
On slide 19, we see the domestic demand for light commercial vehicles has a favorable demand growth, and this will happen with heads and also new components, new businesses, and machining in lines where we still have capacity available. On slide 20, we want to demonstrate that in this scenario of favorable demand, our operational strategy aims at making us more efficient to take advantage of opportunities. Our sales and engineering areas continue exploring and bringing new opportunities with special alloys and machining. In 2019, we see growth in the U.S. and Brazil with new products being launched with machining. Thus, we want to continue with our operational excellence. During Q4 2018, Q1 2019, we have new projects with tremendous potential that will improve the results. Launching of new lines for machining in Mexico, the review of purchasing with international consultants, new products.
Also an increase in work hours in Brazil, a new regeneration unit for sand in Mexico, and mechanical finishing process. We also reinforced project management, intensifying the actions for us to have greater operational efficiency, and using other technologies. In this restructuring, we're directing our management to a model for high performance and cost reduction. We brought new professionals from different markets and with specific talents to improve our industrial activity, and this is critical for the changes we want. On slide 21, I show you the new organization chart. Two new vice presidents, one with focus on sales and the other on operations. This model was chosen to strengthen our position to reach goals, and to have discipline in the operation of the company, which is capital intensive and labor intensive. For this, it is fundamental that we have synergies and the use of technology.
All of this will be led by Fábio Pena, our ex-Engineering Director. Apart from this, we have another professional in Mexico with a lot of experience in manufacturing global organization. Adrian will be focused on improving the performance of plants in Mexico. We also have a director for machining because it is growing in the company, this activity. Cássio Andrade will be leading. Concerning business environment in Mexico, during the first months of the new government, we have seen the government fighting corruption. We haven't seen changes that will impact us, and we concluded the wage negotiations in a productive way with the unions. In the U.S., we see salaries, wages going up, people getting jobs, consumption, and people trusting in the economy. Even commercial relationships with China have improved. This reinforces our trust in 2019.
On slide 22, to conclude, I would like to remind you that in 2019, we will continue our strategy used in the last few years based on four essential pillars: strategic growth, excellence in production, and our values, a new culture for performance and sustainability. To have this, we will continue investing in technological innovation and also training our employees. These are our competitive edges. My commitment is to guarantee a disciplined execution in the allocation of capital and production, maintaining cash generation and the payment of dividends. All of this using the great opportunities that global growth is offering. Once again, I would like to thank you for your trust, the trust of our shareholders and counselors, and the engagement of our team in Brazil, the U.S., Germany, and Mexico. Thank you, and now we would like to begin the Q&A session. Thank you.
Ladies and gentlemen, we will begin now the Q&A session. To ask a question, please dial asterisk one. To remove your question from the list, please dial asterisk two. This conference call is exclusively for investment professionals and shareholders. Our first question comes from Mr. Werner Roger, Trígono Capital.
Good morning, Fernando, Thiago. Congratulations for the results. I have an issue concerning the market. We saw here a new market, Sweden, and growth in the U.K., in England. Could you talk about this new market, the new clients, new products? And please comment on the off-road market in the U.S., not only inside the U.S., but for U.S. companies that export, especially mining equipment and infrastructure equipment.
Werner, good morning. In the U.S., we continue growing in many sectors, especially equipment. We are closing new deals. We had expansion in passenger cars, a project for a gasoline engine that will have a long life. It is for a European car company installed in the U.S. In Europe, we have new contracts with truck manufacturers. These are projects that began in 2018, and now we hope to see an increase in the next five years, the extension of this contract. The company has contracts for modern engines, sophisticated engines. Due to our technology and machining, we are able to produce these sophisticated engines.
Reminding you to ask a question, please dial asterisk one. Our next question comes from Mr. Guilherme Mendes, JP Morgan.
Good morning. Two questions. The cash flow, we saw a strong cash generation in 2018, especially in Q4, and this was important. How do you see this in 2019? Do you see a strong cash generation this year? And also a second question. Leverage is at a comfortable level, and with additional cash generation. You mentioned opportunities in M&A or dividends. I would like to know about M&A. How are the conversations? If there is not an M&A, what would be the dividends that you believe could be reasonable? And also leverage. What is the level that you believe is adequate for the company? Thank you.
Guilherme, good morning. I will answer the first question. All the capital allocation of the company, we reviewed the processes with vendors, clients. We renegotiated with clients, the contracts. We also are managing closely the accounts payable, the cash inventory. We are very efficient in these areas. Part of this came from tooling, but a great part came from robust processes, more robust processes. We are having now a more efficient management of working capital as a whole. We hope the company from now on will have a better performance than it had in previous years.
Now, you mentioned about the quarter, we had some facts between operational cash and EBITDA, d ue to we received resources from court decisions. We are now looking at other areas and making an effort to recover some things that were outstanding. As a whole, we generated this cash flow, BRL 577 million. That is 121% more in relation to 2017, and without the effects of seasonality. Concerning M&A, for some time, we have been talking about our concern with capital allocation. We are concerned in finding a transaction that would have adequate returns for an M&A to present to shareholders. While we are not sitting on top of the money, while we do not have an opportunity, we want to guarantee that the flow will go to shareholders.
We anticipated BRL 100 million concerning 2019. We will anticipate the payment of BRL 100 million to shareholders, although the covenants are higher. The leverage, if it is more than 2x , it will be uncomfortable. If we do not have a strategic project coming up, the trend is to continue with a strong dividend payment policy. We are beginning the year with 5.1%.
Thank you.
Our next question comes from Mr. Eduardo Nishio, Brasil Plural.
Good morning. Thank you for the opportunity. My question has to do with margins. We see a strong compression in this quarter. Will you confirm your guidance of 15% EBITDA margin for 2019? Could you give us an update about projects to increase margin, automation, purchasing, automation projects? How is the progress? Is the plan the same? And t his increase in cost, the increase in cost of materials, 40%, well above the growth of revenue. Do you believe that this will change? Do you believe the price of raw materials will drop to help the margins?
Thank you for the question. In fact, we had a concentration of effects on margin in Q4. Q1 does not help much. We did not have the success we expected in really passing the increases in payroll and others to the contracts. We are observing here BRL 27 million, 2.2% effect on margin . We had other effects, for example, more work hours. Also, you said the higher price of raw materials. With the higher volume, we spent more on overtime. We lost some productivity, especially bearing in mind that we are having a ramp-up of some products in the company.
We talked about, for example, pickup parts for the U.S., two new projects for machining, and there were disbursements for these new projects. This will give us a payback in the future, but added costs now. We are seeing in the main categories some favorable effects as of February that will help. Reminding you, the price of materials going up, although we pass these prices on to the contracts, we lose some margin. We should recover this impact on raw materials.
Apart from this, there are some points. Adding to what Thiago said, we had some processes, more labor in Brazil, employees, reorganization of the plants. We are now recovering the efficiency for 2019. We have great projects, excellent projects, new launches, and we will begin to capture the benefits now as of Q2.
A new unit to regenerate sand in Mexico in operation, and we will regenerate all our sand, and this was a technical need. We always needed this in any product to have the adequate quality. We also began to review our purchasing area in Q4, and this will generate results, we believe, during Q2. We will now receive the benefits. The project is doing very well. The launching of the new machining unit, t his is a very large project for industrial engines and a new engine for diesel pickups in the U.S. market. We did this in Brazil. Now, it is being produced in Mexico, plus machining. In the beginning, it has higher costs, and in the future, it will have a payback. Now, there is a ramp-up. We are reaching, in the last few weeks, the levels we wanted in volume. It was a ramp-up.
We are supplying these engines. All of this, we are seeing a very positive scenario this year, 2019, especially with the new structure. Of course, we had a year where I became chairman. We had some gaps in the structure, so the follow-up, the discipline could have been better. Now, with all the positions, and an adequate process, and with people who are very well prepared, they will bring us the culture we want and the performance we need in the industrial part of the company. Everyone is focused. We believe this will improve a lot our performance this year.
The EBITDA margin of 15%. In the guidance, we can work with this margin, 15%?
Yes, the idea is to maintain the guidance, 15% EBITDA. Of course, there is seasonality. Q1 is a little slower, especially due to January. February, we have less workdays, but during the year, yes, with the new projects, we will maintain this margin.
Thank you.
Our next question comes from Mr. Werner Roger , Trígono Capital.
You mentioned now the regeneration of sand in Mexico. Could you give us an economic idea, the cost reduction that will be derived, and also the CGI and machining? Is there any perspective or percentage? For example, what do you believe will be the level of usage of these technologies or machining in the company's total?
Well Werner, this sand regeneration project, it is one of the projects with the highest return in the company. Conceptually, not only do you avoid transporting this specific sand. You avoid transporting, this includes a lot of freights, but when you regenerate the sand, what we do, we eliminate the cost of throwing it in the landfill.
As a rule, it is a project that pays for itself in the same year. It depends a lot on the performance and the ramp-up, but it is very attractive in terms of payback. When we look at machining, we have two new projects beginning. We should go from 20% today to close to 30%, depending on the mix, with these new products. In the short term, it will be close to 25%. There is a potential of upside. When the Brazilian markets recovers, yes, also. We have new products, but the growth in machine products is coming, so we believe we will have an increase during the year.
Also CGI?
CGI should also gain participation.
We have also products in Brazil, and it is a product with high volume, and also expansion of a project in Mexico, gasoline engine, which had a relevant increase in volume. I believe this should happen in May. That's why we believe that we're organizing the plant with changes, new products in Brazil and Mexico to be able to take off. We should get to a CGI a little over 20%. Right now it's 16%. And our belief that we're organizing all the steps, processes in the plants to launch these programs. These are programs especially for pickups, gasoline engine pickups, programs also for diesel engines. We're not linked to passenger cars. We're not depending on passenger cars. We are producing for pickups for companies, so it's important to adjust. Now, we adjusted the work hours.
We will have more hours available in Brazil without overtime operation during Saturdays. And now, we're also making maintenance studies. We had problems in Q4 2018, and now, we're taking off with strong volume and with a good added value portfolio of products.
Thank you.
Reminding you to ask a question, please dial asterisk one. Once again, to ask a question, please dial asterisk one. We'd like to conclude the Q&A session. Now, I'd like to pass the floor to Mr. Fernando for his final comments.
I'd like to thank you all for participating. I'd like to thank all the employees of Tupy for the excellent year, the dedication. We worked a lot in 2018 to serve the clients. We had a high demand and a growth of demand.
We were not able to serve them with the efficiency we wanted, but the adjustments we made will give us very good results during 2019. Cash flow close to 20% with this conversion of 85% of EBITDA into cash. This involved a lot of work reorganizing all the sales purchasing activities, also inventory management and manufacturing in order to have this better performance and improve the results of ROIC. This was our commitment to have a double-digit ROIC, and now we have new talents, new professionals with a very disciplined execution of our industrial strategy. Tupy is a company that has the best products in the industry, high volumes. We have grown in the last few years above all indicators. And I always say that Tupy is a leader in technology with ultra-modern processes.
And now the strategy we put together for 2019 is to take advantage of the strong portfolio of products, reducing costs and gaining efficiency in the plants, especially in Mexico, which is far from Brazil. We have great opportunities to grow there. I'd like to thank you for your trust, and we hope to have a great year in 2019 with growth projects. Tupy is ready to grow. This is very important. We have an adequate capital to grow. We're evaluating alternatives for growth, and obviously, we are working, and we will also be paying interesting dividends for our shareholders. Thank you very much. We wish you a good day.
The conference call of Tupy is concluded. We thank you all for participating. We wish you a good day.