Good morning, and thank you for waiting. We would like to welcome you to the conference call for the earnings of Q3 2018 for Tupy. All the participants are connected in the listen mode only. Next, we will have the Q&A session. If necessary, please get in touch with the operator by dialing asterisk zero. This conference call is being recorded. The company would like to remind you that this event is also being transmitted through the internet via webcast at www.tupy.com.br/ri, where you will find the slide presentation. The selection of the slides will be controlled by you. The company clarifies that any declarations made during this conference call concerning perspectives, projections, or operational and financial goals concerning the business of Tupy are based on the expectations of the company's management concerning the future of the company.
These expectations are highly dependent on conditions in the domestic and international market, and 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 Controls. Mr. Fernando, you may proceed.
Good afternoon. First of all, I would like to thank your participation and your interest in our company. We will present here the financial and operational highlights of the period, and also the main initiatives in 2018 that have an impact in this and in the next few years. We had a strong growth in all the lines of results with a highlight for strong cash generation, which I tell you will allow a payment of extraordinary additional dividends.
On slide number two, as you can see, our net revenue reached BRL 1.3 billion, the largest value reached by the company, with expressive significant growth in the domestic and foreign market. The third consecutive quarter with record revenue. We increased physical sales by 7.7% and revenue 36.7% in relation to Q3 2017. Adjusted EBITDA in the period was BRL 197 million, which means a growth of 20.4% in comparison with Q3 2017. The margin in the period was 15%, confirming the growth trend we saw during the year, in spite of many transient effects that had an impact on margin in this period, with the consequences of the truck drivers' strike, additional taxes in payroll, decrease in Reintegra, and also the change in work hours in the plant in Joinville. Another positive highlight was the generation of operational cash, which reached BRL 200 million in the quarter.
Together with the last two quarters totaled in the last nine months, BRL 368 million, and thus 60%. With this strong cash generation and our permanent commitment with our investors, the company decided to distribute this quarter dividends worth BRL 50 million, upwards of the BRL 37.5 million announced previously. Apart from this, with another step with our strategy to increase the return on invested capital, we continue to divest assets with low return or non-strategic. Thus, we have a partnership with a real estate group for a housing program on one of our plots of land, non-operational plots of land in Araquari, next to the city of Joinville. It is a long-term project. We estimate the value to be BRL 58 million for the company. A down payment will be paid, BRL 10 million, in June 2019. Now, Thiago will give us the highlights. Thiago is the CFO.
Good afternoon. On slide three, we see the sales volume, 153,000 tons, 7.7% higher than Q3 2017. Reduction of 1.3% in the domestic market, especially due to the performance in hydraulics and the growth of 10.2% in the foreign market. Of the volume of transportation infrastructure and agriculture, 13% produced in CGI. Slide number four, revenue increased by 36.7%, reaching BRL 1.3 billion. This is over the historical record of revenue in the previous quarter. In the domestic market, a growth of 22.3%. In the foreign market, the growth was 40.1%. 65% of the revenue had origin in the NAFTA region. We'd like to stress that many of our clients in this region use these plants as an export platform for our products. 18% South America and Central America, mainly Brazil; 11% Europe; 6% Asia, Africa, Oceania. In terms of application, 82% commercial and off-road vehicles, 13% passenger cars, 5% hydraulics.
On slide five, here we see the evolution of the revenue in transportation, infrastructure, and agriculture in the domestic market. Here, we had exports and a recovery of the economy. Passenger cars sales increased by 5%, commercial vehicles are in an increase of 38%, applications in machines and off-road equipment, 44%. Here, the foreign market had an impact, especially to the good performance in the U.S. market and the devaluation of the real in relation to the dollar. An increase of 26% in passenger cars. A growth of 50% in light commercial vehicles, a growth, very strong demand in the U.S., strong demand for this type of vehicle for small businesses, phase-in projects. Expansion of 41% in average and heavy commercial vehicles resulting from the good performance in the U.S., especially Class 8, due to savings and demands for cargo infrastructure.
An increase of 38% in applications off-road due to a good performance, especially oil and gas, mining, and infrastructure. Slide number seven. Here, we see the performance in sales in the segment of hydraulics, 4.5% revenue. We see here, slide number eight, a more complete mix of components to CPV, total BRL 1,086 million. We had the truck drivers' strike, also higher taxes in payroll. All this will be compensated in commercial conditions and through the internal initiatives to reduce costs. All the cost lines had an impact due to the increase in volume produced and exchange variation.
We can see in this quarter an increment of 57% in the cost with raw materials and processed materials, 12% with maintenance materials, 28% growth in expenses with labor due to social benefits, because of the increase in headcounts, the use of overtime hours, and due to other items of payroll. Operational expenses went up 26%, especially due to higher expenses with labor, freight, and commissions on sales due to the higher volume. All the categories really have suffered an impact due to the minimum freight prices. Here, slide number nine, highlight for Adjusted EBITDA BRL 197 million, an increase of 20.4% in comparison with Q3 2017, reaching a margin of 15%. We'd like to highlight that the same period last year, EBITDA had an impact for non-recurring revenues worth BRL 11 million coming from services in the past.
In relation to Q3 2018, EBITDA had an impact due to factors related to the truck drivers' strike, BRL 8.5 million, higher taxes on payroll, of which BRL 4.5 million have to do with a provisional accrual for vacation or 13th salary. This is non-recurring. BRL 9.2 million related to the reduction in benefits for export companies, the Reintegra program, and an increase of BRL 6 million in freight expenses due to a new minimum freight price list. The company has worked with the objective of compensating these effects in the next quarters. When excluding the effects, we would have reached a margin of 16.6%. On the bottom part of the slide, the net profit shows BRL 89 million in comparison with BRL 76 million in Q3 2017. Like EBITDA, it is important to highlight the impact of approximately BRL 16 million in the net profit due to the truck drivers' strike.
Slide number 10, we show the variations in the main accounts of working capital, analyzing the previous quarter, Q2 2018, as the base for comparison. Reduction of BRL 29 million in the line accounts receivable with a drop of eight days of sales. This effect is due especially to the change in the terms for accounts receivable and the payment of tooling. Also, elevation of inventory, BRL 19 million, but with a drop of two days in relation to CPV, despite the growth in volume and the cost of raw materials and exchange variation. An increase of BRL 26 million in accounts payable, especially due to an increase in the volume produced. Here, we highlight an improvement, this indicator in relation to Q3 2017 by seven days due to many actions, longer payment terms for vendors.
Despite the volume, all the evolution that we had in materials and exchange variation, we were able to stabilizing the working capital accounts. Slide 11. Here, we see the investments in assets intangible worth BRL 48 million, especially linked to projects to increase productivity. These investments represented 3.6% of revenue, 65.9% depreciation and amortization in the period. This is lower than that presented in previous years and in accordance with the company's strategy to optimize its investments with focus on the return on invested capital, which reached 10.6% in the period, and a significant improvement in relation to Q2 2018 and Q3 2017. We have a commitment with shareholders, and we're here to improve these indicators. Now, slide number 12 with cash flow. The operational cash generation in Q3 2018 was BRL 200 million, an amount that represents the second-best result in the company's history.
In year to date, first nine months, we had a better cash flow, the best cash flow in the history of the company. On the next slide, number 13, we see net debt BRL 781 million, corresponding to 1.19x Adjusted EBITDA in the last 12 months. Our obligations in foreign currency, 92%. This is due to our business profile. Most of this debt is in foreign currency and represented by our bond, which will become mature only in 2024. In relation to cash, 50%. 54% is in reais, local currency, with a better interest rate. Now, I'd like to pass the floor to Fernando, and he will talk about our strategy and expectations for the next quarters.
Thank you, Thiago. On slide 14, I'd like to say that we have strived to create an organizational culture to be a more efficient company and better at paying dividends. Our strategy has the following focus on three things: strategic growth, operational excellence, and consistent return to shareholders. Our growth is linked to segments with solid fundamentals in the long term, with attractive margins in cargo transportation, infrastructure, construction, energy generation, and agriculture. All these segments will benefit from the growth of wealth and world population, expansion of consumption, urbanization, and the need for more food. We continue investing in R&D in order to offer economical and creative solutions that will be used today and the next few decades. We have had success in new contracts with high added value, new projects, and we have an increase in the participation of CGI and machining with a highlight for the operations in Mexico. Our diversification stimulates new knowledge and brings stability and resilience in margins, because of the cyclic behavior of the many segments where we are present.
In parallel, we are alert to opportunities to buy assets, and we believe that we can offer our services to other companies and the efficiencies that we have generated in our production system. To sustain the growth, operational efficiency is a fundamental part of our strategy. We have an internal agenda that is intense with the use of new technologies, new projects for automation, and in many of the steps of our production process, thus bringing more quality and more productivity. We continue adopting many measures to control and reduce costs, such as the implementation of budget control tools, and currently, we are reviewing our purchasing process in Brazil and in Mexico with the support of an international consultancy company. Our business is based on people management and process management, therefore, training our employees is an essential part of our strategy. Thus, we have this commitment.
We have the Foundry School of Tupy, Escola de Fundição Tupy. Another fundamental pillar is the consistent return to shareholders. Tupy is essentially a company that pays dividends due to its business model that is resilient with growth and profitability. We have also tried to have a better utilization of our assets. A good example of this was the closing of the operations, our foundry in Mauá, which reduced by 16% our capacity to produce engine blocks and heads. Today, we produce in Joinville more than what we produced when we had two plants. Now, I would like to show some of the results that we obtained in the first nine months of this year.
The strong growth of revenue, the discipline in costs, and many actions in working capital allowed an operational cash generation of BRL 368 million, the highest value in the history of the company, with this index in relation to Adjusted EBITDA, higher than 70%. This indicator had a growth superior to 35% in spite of the truck drivers' strike, the impacts of the change in working hours in Joinville, and the strong increase in the price of raw materials in the period. These factors were mitigated due to the rigid cost control in all the lines, and excluding the cost with raw materials, the cost of merchandise sold increased by 5%. Here, concerning ROIC, as in the previous quarter, we had a significant growth from the factors made here. We also have other things. We built a process to evaluate each item.
As I said in the beginning, on November 5, we signed an agreement with a company called Irineu Imóveis, a well-known company in the real estate sector, to develop a housing project in one of the non-strategic plots of land of our company called Casa III . We evaluated the potential of value generation, and based on the offers we received, we thought we would receive very well. That is why we decided to have a partnership. This area for a housing project is located in the city of Araquari, close to Joinville. It is strategically positioned close to ports, roads, and railway, apart from many plants installed there and investments that have already been announced. With the agreement, Tupy will receive 34% of the cash flow of the project, and also a down payment of BRL 10 million to be paid by June 2019.
The VPL of the project for us is approximately BRL 58 million. Here on slide 17, I would like to talk about dividend payments. The company has a business model with good cash generation, having one of the best dividend yields in the stock market in 2017. In 2018, we had made three payments. The first BRL 50 million in March, the second in May, and the third in August, both worth BRL 37.5 million concerning the first and second installments of BRL 150 million approved by our management council. Yesterday, we approved dividend distribution of interest on own capital worth BRL 50 million, of which BRL 12.5 million in the way as extraordinary dividends. In other words, additional dividends to the BRL 37.5 million already approved for this period. The date for the next distribution, also worth BRL 37.5 million, will be announced together with the results of Q4 2018.
Here, we would like to stress that this amount may receive extraordinary dividends, depending on the cash generation and the leverage of the period, and if we do not have other strategic investments. Here on slide 19, I would like to talk about the world situation, which has shown expressive growth. We can say this for the U.S., Europe, and China. We are dedicated to the challenges of the present and looking at the future, and maintaining our commitment to generate value for our shareholders, with focus on profitability and sustainability of the business. Finally, I would like to invite you for the Tupy Day. This meeting will be held in São Paulo on December 11. We will discuss long-term issues for our markets and also perspectives for next year, 2019, and we will detail the initiatives mentioned here.
I would like to thank you all for your trust, our shareholders, counselors, and all our team in Brazil, Mexico, Germany, and the U.S. We are very satisfied with the result, cash generation, payment of dividends, but we understand we could have done much better. Apart from some external factors, we understand that there are many opportunities internally that we must explore. Every quarter, we are improving our organization to carry out our intense internal agenda, and thus reach a better operational efficiency, use new technologies, improve the usage of asset, cost of quality, and services to the clients. I would like to thank your attention. Now, we will begin our Q&A session. Thank you.
Ladies and gentlemen, we will begin the Q&A session. To ask a question, please dial asterisk one. To remove the question, please dial asterisk two. This conference call is exclusively for investors and professionals. The first question, Murilo Freiberger, Bank of America.
Thank you for the call. In reality, two questions. First, concerning the working capital, I believe this contributed a lot for the cash generation in this quarter. I would like to understand, what are the main initiatives, and can we believe this is sustainable, structural? Will this continue? T he second, the cash generation was more robust than expected. If we don't have other investments in M&A, would it be reasonable to imagine that this would continue and reach BRL 150 million?
Thank you for the question. Beginning with working capital, there is a strong effort which goes through reducing delinquency and billing of tooling, longer payment terms, reduction in receivables time. We operate in an environment where not only the volume grows at relevant rates, but materials have a higher price, and this brought some problems in our margin.
The exchange rate also puts pressure on these purchases. We believe we're working reasonably, not only to stabilize or even improve working capital in relation to the previous quarter. It will be difficult to take this higher. We're trying to improve, but we believe that working capital will continue at the level it is today. In terms of M&A, our strategy is public. We believe in the future to have blocks and engine blocks. We have nothing relevant to announce. We are looking at this. There is no risk for the dividends already announced. So we announced in advance BRL 150 million. Now, we added this amount. The risk would be if there is a transaction to increase this value. Today, we have a controlled debt in the long term, so cash generation is very adequate.
If there isn't any M&A, we could even increase the amount of dividend we announced. But there is no risk for the amounts already announced.
The next question comes from Marcelo Inoue, Citibank.
Good morning. Thanks for the opportunity. Question on CapEx. CapEx went up a lot in this quarter in relation to the previous quarters. I would like to understand the reasons, and I would like to hear from you how you see the CapEx next year. Do you need additional investments to support the growth, which is strong?
Thank you, Marcelo. First relevant point. For many years, 2008 until 2014, we invested 8%, 9% of revenue with 120%, 130% depreciation. We have a rhythm now of 4% or 5% of revenue, and we stabilized on a healthy level in terms of return, 3.5%, 3.6% of revenue.
Even with this increase that you mentioned, we're still talking about 65%, 66% depreciation. So the focus is we have launched new machining projects. We have two new clients this month in Mexico's plants. We have new operations and investment for regeneration of sand with a good return. And some projects focused on improving productivity, both in Brazil and in Mexico. We understand that there is potential to automate in a selective way some areas in the plants. Since we have more trust now, we will be investing these resources, always looking at the return on invested capital and in a very cautious way.
We improved the efficiency in Brazil. When we say that we closed the plant and we moved the production to another plant, and the production now is higher than when we had two plants. The plant in Brazil, in Joinville, they are operating very well. We have opportunities in Mexico. Mexico has a lower efficiency. Our focus is to improve the performance of our assets and automate in a selective way some areas where we have opportunities. We grew very rapidly. Contracts grew rapidly, and thus we needed a lot of labor. Many new technologies are now available: vision, automation, imaging, collaborative robots. We have a group focused on projects. We are running prototypes. We plan to begin the implementation in 2019 with gains. But we are not talking about high exaggerated CapEx. Levels should be the same because these new technologies will allow some gains.
Thank you.
The next question comes from Werner Roger, Trígono Capital.
Good afternoon. Congratulations for the results. I have two questions. The first, the cost of raw materials, especially scrap prices and iron. Contractually, can you pass these costs on to the prices in Q4 or next year? Will we have margin recovery passing the raw material increases to prices? Also, will there be a positive impact from Rota 2030 government program for OEMs? OEMs will have to invest in new technologies with more efficiency and fuel.
Good afternoon . First, yes, we continue working in Q3, Q4. We expect an increase. In the last three quarters, we were losing margin because of these issues, and these costs will be passed on to prices according to contract rules we have. Concerning Rota 2030, the government program for OEMs, the impact would be investments in R&D. We believe it is very similar to what we had in the previous program. We believe this impact will be small. Some R&D projects.
In our clients, this government program, especially for passenger cars, maybe we have some projects in the lab for hybrid vehicles, and therefore we can act more strongly in passenger cars. But we do not see anything that would have great effects. We would like to see more fleet renovation. In Brazil, we have more than 1 million trucks, and it would be important that the government program focus on renewing the fleet of trucks in Brazil.
Concerning the CGI and machining, a point here in Q3, the increase. You mentioned next year it will increase. Please explain why this drop in these two items in the quarter.
There were some changes. As of this month, there should be a growth with two new projects being launched. We have a robust growth in some categories which are not CGI and are not machined, especially off-road, which grows very strongly.
That is why we have this dilution. But the contracts are there the same, with the exception of two that are increasing the participation. There is a lot of expectation for growth in machining in Mexico. We inaugurated the first center in 2015. Two new projects were signed and are ready, and there are expectations to convince OEMs to outsource this process to us both in Brazil and in Mexico.
Thank you.
The next question comes from Marcelo Motta, JP Morgan.
Good afternoon, two questions. But first, could you comment, are there other initiatives to amortize non-core assets, especially plots of land? We saw the partnership to sell the plot of land. Also, the plant in Mauá that was closed, can it be sold? Can we expect other announcements? And when we look at margin, especially the impact of minimum freight price list, could we gain efficiency? Many companies are now buying their own fleets of trucks to decrease the cost of freight. How do you see in this area?
Marcelo, t he minimum, the freight price list is already in force. Many companies are being notified like our case, because we are already using this. There is a commitment with our partners that if it is canceled, they will return the amounts to us. We are evaluating today the issue of having our own trucks. It makes sense on some routes, not all. It is a decision to be analyzed by routes. We are evaluating, and also there is a negotiation to understand how we will pass the extra freight cost to clients in the next quarters. In terms of non-core assets, we made this first effort in Mauá, Fernando mentioned.
The next plant was still shut, and we are studying everything that is in our report and the potential to sell these non-core assets. This includes also credit, an effort to convert things to cash. We have other plots of land in Joinville. They are smaller than this one. We have other plots of land. Mauá plant, probably we will not leave that plant, so we should begin a process to close and sell the land. The group is evaluating the best potential for each asset, and we will choose the best.
Thank you.
The next question comes from Gabriela Noro, Eleven Financial.
Good afternoon. Two questions. I would like to know first, how are you considering the margin level for next year? With a lower exchange rate than in Q3. In other words, what is the level of exchange rate you need to maintain profitability. Concerning the new NAFTA, do you see any practical changes concerning sales from Mexico to the U.S. with the new agreement?
Concerning the new agreement, we do not see any change. Our contracts protect us from this. The whole production chain, we understand these measures will affect directly our industry. Next year, we would like to highlight that we have continuous effects. We have contract agreements to pass these new costs on to the contracts. This is a continuous process. We expect that when material prices, Tupy will benefit. So it is a continuous process. Our demand are strong indicators in the U.S. for construction, the forecast for sale of trucks in the U.S., machinery in the U.S., infrastructure, mining. They all indicate that we should have a booming market in the U.S.
Thank you.
If you have a question, please dial asterisk one. Once again, to ask a question, please dial asterisk one, star one. If you have a question, please dial star 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.
Well, thank you once again for your trust. We have had a lot of growth. We are seeing a strong demand. We understand that our agenda, we had gains in efficiency. We grew very rapidly. The market reacted. There are great opportunities for Tupy to improve the efficiency of our assets, especially in Mexico, better opportunities for automation in the plants, the use of new technologies, image, vision, collaborative robots. We believe that we will be working strongly in this direction in the next year. We would like to invite you for Tupy Day.
We will discuss our expectations for next year. We will also give more details about these projects that we have and when they should happen during next year. We would like to close. Thank you, and we hope to see you on December 11th on Tupy Day. Thank you.
The conference call of Tupy is concluded. We thank you for participating. We wish you a good day.