Good morning. Thank you very much for waiting. We would like to welcome you all for the conference call for Q2 2018 for Tupy. All the participants are connected only in the listen mode, and later we will have the Q&A session, when new instructions will be supplied. If you need the help of an operator during the conference call, please dial asterisk zero. It is being recorded, this conference. The company would like to remind you that this event is also being transmitted simultaneously by internet, by webcast, can be accessed at www.tupy.com.br/ri, where you will find the slide presentation. The slide selection will be controlled by you. The company clarifies that any declarations made during this conference call on perspectives, projections, and operational goals concerning the business of Tupy are based on the expectations of management in relation to the future of the company.
These expectations are highly dependent on the conditions of the domestic and international markets, and also the sector and the country, and therefore are subject to change. We have with us Mr. Fernando Cestari de Rizzo, Chairman of the company, and Mr. Thiago Struminski, Vice President of Finance, Administration, and Controls. Mr. Fernando, you may proceed.
Good morning. Thank you for the interest and trust in the company. In this conference call, I will share with you, apart from the operational financial highlights, our positive vision concerning our markets where we are present, and the improvement of the company's indicators. In spite of the impact of the truck driver strike in May, we still are showing strong growth in all our lines with a highlight for growth in margin and strong cash generation, and also return on capital invested.
The net revenue reached BRL 1.2 billion, the highest in the company's history. We would like to say that we had growth in all the markets and segments where we are present. Adjusted EBITDA in the period was BRL 181 million, a growth of 71% in comparison with Q2 2017, and the margin in the period was 14.8%. The truck driver strike represented an impact of BRL 14 million in the quarter, corresponding to 1.2 percentage points in the margin. In other words, excluding these effects, the margin would have reached 16%. Other positive highlights, the operational cash generation, BRL 162.4 million in the quarter. Second-best result of the company in its history. I would like to say that we have discipline in capital allocation, CapEx of BRL 36 million, or 3% of the revenue in the period.
As a consequence, the return on capital invested reached once again double- digits, 10.2%, with expressive result in comparison with last year and a great satisfaction for us. This improvement is due to many actions carried out by the company. Acquisitions in Mexico, the choice to diversify high added value products, investments in technology and quality, a superior standard of service delivered to our clients, and the benefits of projects to reduce costs, improve efficiency, and better usage of assets. Finally, on the 24th of August, we will distribute interest on capital, BRL 37.5 million, corresponding to the second phase of the minimum dividend of BRL 150 million for the year. Well, slide number three, I would like to comment our diversification and markets where we are present. Our business is related mainly to the global demand for cargo vehicles, and agriculture.
Our products are used in heavy and light trucks, agricultural machinery, construction material, machines, mining, and other machines in oil and gas industry, forklifts, port, and airport facilities. With these many markets, we can say that our products are present on a day-to-day basis where you are. For example, the buildings where we work in certainly have generators for emergency and also diesel engines for fire systems, and many of them use our products. Our clients are leaders in their segments, and they have benefited from the global growth. On slide number four, we like to detail that while the Brazilian GDP has had a growth inferior to other emerging countries and developed countries, the global indicators that affect the performance of our clients, and therefore our demand, continue to be very robust and showing that the global economy continues to grow. Our portfolio of orders is growing.
We have received also requests for proposals for new products we will launch in the next few years, and also to increase participation in existing projects. The U.S. economy is growing at high rates, the highest rate since 2014, showing the demand for mid-size and large trucks. Its production increased 14%, and also utilitarian vehicles that represent 62% of light vehicles. The U.S. have become the largest provider of oil with shale gas. The government has reduced the cost of energy for U.S. industry. This results in more competitiveness and investments in industrial activities. Thus, the home construction and non-home construction indicators are still solid and contributed the need for pickup trucks, construction machinery like generators, paving machines, et cetera. Other markets also contributed for the increase in our demand.
Apart from the growth in sales in the domestic market, also the exporting of motors, engines, and the gradual recovery in Brazil. For example, commercial vehicles in Europe, small and large engines for generation and equipment in general. C onstruction in China have consumed some products that we produce, and thus, we also benefit from new investments in the mining market around the world. Going on to slide number five. I would like to approach the initiatives of the company in the last 12 months in order to increase our operational efficiency. The end of the operations in the Mauá unit, the Mauá plant, that represented 16% of our production for engine heads, resulted in a reduction in fixed costs in BRL 10.5 million per quarter. Also, we improved the usage of our lines located in Brazil and Mexico.
Even with the reduction of our assets in operation, closing the plant, we increased the volume by 10% in comparison with Q1 last year. Also, the sale of our unit for tailings, which was a small part of our billing, but consumed cash and gives a little synergy to the other businesses of the company. In the last 12 months, we implemented many actions to have a better cost control, both in operational areas and also managerial areas, administration areas, improving purchasing, and also the management of benefits. We adopted a more selective posture in capital allocation, both in our investments and also proposals for new projects. Finally, the improvement of working capital is improving, helping all the areas of the company. We increased significantly our operational cash generation, margin, and return on invested capital.
On the other hand, we understand that we have many opportunities to improve even more our indicators and generating additional value for our shareholders. Now, I will pass the floor to our CFO, Thiago. He will talk about the main indicators in the quarter.
Good morning. We have the volume of 152,000 tons, 8.4% higher than Q2 2017, a reduction in the domestic market and 10.6% in the foreign export market. In transportation, agriculture, 21% were partially or totally machined. On slide seven, the revenue increased by 32%, reaching BRL 1.2 b illion, surpassing the record of last semester. In the domestic market, a growth of 25.5%, export market, 37.5%. 65% of the revenue had origin in NAFTA. As you know, a lot of it is exported from NAFTA, 18% South American, Central America, especially Brazil. 11% Europe. 6% Asia, Africa, and Oceania.
In terms of, for example, the application, 81% off-road and commercial vehicles, 14% passenger cars. In this category, we sold not only engine blocks and heads, but also other parts, 5% in hydraulics. Slide number eight, we present the evolution of the revenue in transportation, infrastructure, and agriculture in the domestic market, especially in direct exports and also recovery of the economy in relation to the quarter in the previous year. Passenger cars, the sales went up 9%, commercial vehicles 47%, and machinery and off-road equipment 19%. Slide number nine, revenue in the export market. We had an impact due to the U.S. market and also the exchange rate, resulted in increase of 23% in passenger cars, 34% in light trucks. These have a very strong demand, especially from small businesses like construction repair and some projects.
Also an expansion of 34% in mid-size and heavy trucks as a result of the performance in the U.S., as a result of the boom in the economy of the U.S. market, and the demand for cargo transportation infrastructure in North America. 38.1% off-road due to the good performance of the oil and gas mining markets, infrastructure market too. Slide 10 shows the performance of sales in hydraulics, 4.8% of the revenue. In the domestic market, we had an increase of 5%, in spite of the discontinuity of the tailings business, and this was compensated by profiles and also connections and some new lines of products. The exports grew 32% due to the strong demand from the U.S. market and an improvement in the European market. Also due to the favorable impact of the exchange rate. On slide 11, the operational cost.
CPV totaled BRL 1,009 million, 28.1% higher than Q2 last year, resulting in a gross margin of 17.1%, an improvement in relation to the previous year, 14.4%. The increase in volume had an impact on the cost, 42% more in the cost of raw materials. Also an increase in the price of raw materials and also the depreciation of the Brazilian currency. These increases are passed on to prices as time goes by. We had a variation also in labor due to the usage of overtime, due to the strong volume produced, a reduction of 2% of the cost with maintenance materials and third parties. We had other projects, implementation of a new control for budgets. Operational expenses went up 4%, especially due to more expenses with commissions, freight, and labor due to the increase in volume.
Slide 12 highlights an increase of 71% in relation to Q2 last year. An increase in margin, 11.1% to 14.8%, in spite of the increase of the price in raw materials and the truck drivers' strike. The strike had a negative impact of BRL 14 million, 3.9% as a result of the sales volume we believe we will recover. 4.5% dilution of fixed cost, 3.2% labor, 1.8% materials. BRL 0.9 million was a residue due to energy. Thus, margin 16%. On the bottom part, net profit BRL 48 million, BRL 16 million in Q2 2017. EBITDA, we would like to stress the effect of BRL 9 million in net profit due to the truck drivers' strike. Here on slide 13, the main accounts for working capital and thus looking at Q1 2018 as a comparison, an increase of BRL 93 million in accounts receivable, which represents four days of sales.
This increase, especially due to the growth in sales and devaluation of the Brazilian currency. We have 85% of our receivables are in foreign currency. Inventory, BRL 41 million, and an increase of BRL 46 million in accounts payable. Also due to the volume produced, which presents a significant improvement in relation to Q2 2017. Nine days as a result of actions to change this through supply. On slide 14, the investments in intangibles, BRL 36 million, a 12% drop if you look at Q2 2017. Investments related to the development of new projects, f or example, machining, other improvements, operational improvements, and revamping of machinery and also safety investments, BRL 86 million. This represented 2.9% of net revenue in relation to 3.4% in Q2 2017. Half of the depreciation and amortization of the period.
It is in line with the strategy to allocate in a more efficient way the assets and increase the return on capital invested, and always looking at projects that have a good return. Slide number 15, our cash generation, BRL 162.4 million. An amount that represents the second-best result in the history of the company. On the next slide, 16, we show also here 1.4x the Adjusted EBITDA of the last 12 months. Obligations in foreign currency, 92%. It is in line with the profile of our business. We would like to stress that most of the debt in foreign currency is represented by our bond, which will mature in 2024. In relation to cash, 45% is in local currency reais. Finally, I would like to talk about dividends. Last year, we already had one of the highest dividends in the stock market.
Two payments were made, the first BRL 50 million in March, concerning the residual amount for 2017. The second payment, in this case, refers to the first part of 2018, BRL 37.5 million. Yesterday we approved the distribution of JCP BRL 37.5 million, which will be paid on August 24th. This amount corresponds to the second phase. We announced we will pay BRL 150 million, reminding you that this happens every quarter. From now on, I pass the floor to Fernando, and he will comment on perspectives.
Thank you, Thiago. On slide 18, I would like to highlight the vision of some clients, large global players, leaders in their segments, and that have a relevant role in the global economic recovery. Many of them showed their results for Q2 2018, showing solid growth and improvement in profitability. Apart from this, and even more important, they have a guidance with growth for 2018.
We would like to stress our belief that our volume is solid and the trend is to continue to grow. These companies had publicly a positive vision concerning global growth, with also a highlight for infrastructure construction in the U.S. and China, oil and gas exploration, and the recovery of mining due to the recovery of the price of some commodities. On slide 19, we present our perception of the progress in each market. This is the company's perception. We can see the many stages of demand for our applications. On the upper part of the slide, we highlight applications that have had a good historical demand. Pickup trucks and trucks in the U.S. continues to be strong, and we see growth in 2019. Construction markets have a healthy backlog.
Investments in oil and gas in the U.S. are intense, and the company will soon become the largest producer in the world for oil. Other segments have also had a recovery in the case of investments. Agricultural machines, low renovation of fleets in the last few years, together with good harvest during the last years, resulted in high levels of usage and depreciation of this equipment. The mining segment, the sales to change the equipment, strong activity, many clients asking for proposals, and this can be seen in the indicators of the largest mining companies in the world concerning investments. In Brazil, the truck market is recovering gradually on a very depressed basis, and it benefits from the high volume of exports of engines from Brazil. On slide 20, our vision for the short and medium term.
We are very optimistic due to the orders of our clients and positive scenarios in the segments that buy our products, and also new projects. Concerning the Brazilian economy, we have a conservative scenario due to low growth of the economy and the uncertainties in relation to the elections and the impact of the truck drivers' strike in May. One of the consequences was the higher cost in Brazil, especially due to payroll and a decrease in the benefits of the Reintegra program. Although we have a favorable exchange rate, we are adopting many measures to rationalize our production lines for the domestic market and many automation projects and also the projects to gain efficiency. In terms of capital allocation, we will continue to be committed to improve the return on capital invested.
Apart from the management of working capital, we are looking at the sale of assets which have no synergy with the company. For example, some plots of land that the company has. Slide 21, we see the drivers for growth in the long term for the company. We understand that our markets are cyclic, but until now, we have not seen any reversal of the growth trends. We are very active in developing new projects, and we are committed to take care of the strong demand on the part of clients. Our portfolio of orders is very solid. In terms of the long term, in terms of cycles, there is an irreversible trend of our population getting older. This will result in growth in urbanization, commerce, and the demand for food. More logistics operations, more infrastructure with investments in roads, airports, also wastewater treatment, and others.
For example, in agriculture mechanization will have a fundamental role in increasing productivity, which will be necessary to take care of a growing population and the increase in consumption by the poor population. Also, global commerce will be more complex in terms of logistics and demand for light and heavy trucks, construction of logistics plants and distribution centers. These will need diesel generators, forklifts, and other machinery. Finally, the deficit in infrastructure has been the main bottleneck for global growth, especially in emerging markets, and also the need for new equipment in the U.S. In the U.S., the amounts necessary to recover, to build bridges, roads is in excess of $4.5 trillion. New bridges, roads. And also we believe this will grow at expressive rates in the next few years, and the investments will be very important.
The last slide I would like to reinforce, we are looking at opportunities for continuous improvement through projects to gain efficiency or opportunities for automation. We have an innovation area in manufacturing. We created this department for innovation, and we have a pipeline of initiatives that is very robust for continuous improvement of our indicators. Tupy has a large number of employees in activities that can be automated. Finally, we are always committed to the good allocation of capital through organic investments, new contracts or increase of efficiency in current operations, acquisition of strategic assets or distribution of dividends to our shareholders. While the uncertainties in Brazil can be seen in the exchange rate, the other markets are solid and Tupy is an interesting company because it helps global growth. Thank you. Once again, I thank you all for the attention. Now, we will 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. Murilo Freiberger, Bank of America.
Good morning. Thiago. Two questions. Your cash flow was relevant. Here, we saw also the free cash flow. In our opinion, this continues. I know that for dividends, you have a guidance of BRL 150 million, but if we do not have any extraordinary events, could you increase this? Second question, profitability. Margin of 16% due to the effects of the truck drivers' strike. In the next quarters, do you see any event that could affect margin on this level? These two points. Please talk about dividends and margin.
Thank you, Murilo. Thiago speaking. I will answer the first question concerning dividends and operational cash flow.
We observed, in fact, a strong rhythm, BRL 162.4 million in cash generation. In the first semester, we were close to BRL 6.7 million. So it is a good rhythm, far superior to what we had in the previous years. But the trend is to get to this robust level. With stabilized CapEx, we have 2.9% of revenue. We invested more in the past. So we have a lot of space to become an attractive company in terms of dividends. Last year, we had one of the largest dividends, 7.6% in the stock market. We announced the cash generation. We announced how much we would distribute, BRL 150 million. It is not common. Other companies do not announce this in advance. And at the time, we said if cash generation were much stronger in the last quarter, we would review this proposal to bring more dividends to the shareholder. So we continue with this proposal.
If we don't have M&A or other investments, we may increase the amount to be distributed as dividends.
Thank you, Thiago.
Murilo, your second question. We continue pursuing the margins that we announced. We believe that we will have a higher revenue. We have some negative effects ahead of us. Also materials. We're looking at Q2. There's the effect of the truck drivers' strike, the uncertainties in the Brazilian economy, and also payroll and Reintegra programs. We're satisfied with demand. We are launching new projects in Mexico. These should give more margin. The exchange rate should continue favorable. There are some important cost reduction initiatives. We believe we have excess manpower. We're making changes to become more efficient. We have also some arrangements with the labor reform that may give us benefits. The labor reform law was approved in Mexico.
Although it's much better than when we acquired, they haven't reached the level of Brazil. We believe we're working on this, but most of the indicators are solid, long-term solid indicators. For 2018, we continue pursuing the perspective that we offered in December.
Thank you.
The next question comes from Viviane Silva, Banco do Brasil.
Good morning. I have two questions. I'd like to know what the company is planning.
Sorry, we're having trouble listening to the question. We had a lot of difficulty to understand what was said. Operator, can you help us?
I will repeat. I have two questions. The first in relation to ROIC. What are your expectations for second semester ROIC, and also export market? How can it impact your numbers? You had a very good result in production, in sales. If these levels will continue in the next cycles. That's it.
Thank you. Let's answer the first one concerning ROIC. The export market I will pass to Fernando. We have worked on this. We should celebrate even that we reached this goal, double- digit, but we're not satisfied. We're continuing. We must continue on an ascending curve like the industry 14%, 15%, which is reasonable for capital goods, and we will continue controlling the variables, and we plan to reach these numbers. Volume is strong. The cost is stabilized. This helps. CapEx too. Still, we have many growth projects and the working capital. Although we export a lot, it has reacted in a balanced way. We trust we will continue this way to get to 15% in ROIC. This is our goal.
Concerning demand. We're seeing strong demand in some markets. This should continue during next year, especially pickup trucks in the U.S. markets and also work vehicles that use diesel engines. Commercial vehicles in general have very good orders. We're looking at the indicators, the portfolio of orders of our clients. Very strong portfolios for even deliveries in 2019. Construction and infrastructure is booming. We believe there will be also action from the government for heavy construction. On slide 19, we explain all of this. Oil and gas too has reacted very strongly. A lot of demand through vehicles and equipment for engines, for fracking, also for gas compression and movement in pipelines. Now, we see two interesting sectors beginning to grow, which are agriculture coming back, recovering. Our clients in the agricultural sector, agricultural engines, they are beginning a good cycle. These are long cycles, normally three to five years in agriculture.
This is very favorable to sell harvesting machines, which use diesel engines and mining too. We see the need for aftermarket parts, and also we see investments to increase capacity. This is generating demand for our company. We have a favorable market ahead of us. Some uncertainties in hydraulics is strong in Brazil. The demand dipped a little in Brazil for hydraulics, but not important drops. We are seeing a good year for the company, 2019, a good year, yes, for the time being.
Concerning the commercial war between the U.S. and China, could this have a negative effect? Just concerning the commercial war between the U.S. and China, could it have a negative impact on the company's business?
There are some effects, important effects. First, we are a traditional export company, and these sales in foreign currency protects us. Our contracts are for four, six years, most of them six-year contracts, and these contracts protect us during the period of the contract. First, if we have higher tariffs, our contracts protect us. Second, we supply U.S. companies. Our demand comes from U.S. companies, and we believe they will benefit from this dispute. U.S. companies will sell more. For example, machinery in the U.S., 35% are imported. If there is a commercial war, this will favor the demand from Terex, Caterpillar, or other equipment manufacturers. For example, blocks, heads. In terms of lower growth in the world, we do not see any signs of this. Things are getting organized according to recent news. It is important, once again, the guidance of our clients, and they are being affected, but they continue with a very positive vision in the long term.
We are following these events. The need for the product exists, and it is strong.
Thank you. Congratulations for the results.
The next question comes from Marcelo Motta, JP Morgan.
Good morning. Two questions. First, could you comment on capacity usage? We see that there is a good outlook for the rest of the year 2019. Until when can you continue increasing production without CapEx? Also the outlook for M&A, what you have seen, if it makes sense. Even with the commercial war, can it make this attractive? We would like to know what you are thinking about CapEx, capacity, and M&A.
Hello, Marcelo. Good morning. First of all, two effects in terms of capacity. We are operating where it is more economical in Brazil. We are operating here, we are working at 95% capacity in engine blocks and heads. Smaller parts and hydraulics, 50% capacity.
In Mexico, we have an occupation of 75% of the capacity. But, Mexico still has an efficiency that is lower than in Brazil. We have surplus capacity in Mexico. We have contracts that limit our capacity, and we have this well-organized in our relationship with the clients to take care of their needs. If there is an increase in demand in the next 12, 24 months above current numbers, our best choice would be for M&A and not organic CapEx. We do not believe it makes sense. We also understand that we have a great dispersion in terms of efficiency. With M&A, we can reduce the total cost of the company, removing equipment with less efficiency and substituting by equipment of other companies with greater capacity. We are not concerned right now. We still have capacity for our orders in our portfolio.
If we had a new business, also there is a cycle for the project to become mature, and we have time to invest. Finally, Mauá plant continues intact. The plant continues to be a reserve plant. We do not intend to use the Mauá plant. It is better to invest in better efficiency in other plants. I believe that our numbers have shown this. I would like this to give you trust that our strategy, everything we did in Mexico, improving the efficiency in Mexico, the capacity to have to transfer the foundry for Mauá. We want to continue with this strategy. It is working in the medium and long term to have a company that is larger than today. Now, concerning M&A, it is important in our strategy. We believe in the long-term capacity of our markets, and this is the most profitable way to grow, in our opinion.
We have a lot of discipline to use this solution, M&A. We need, at the same time, to have adequate multiples, and we cannot forget our commitment with ROIC. We are very cautious to guarantee that the return on invested capital will be delivered to shareholders through our work.
Thank you.
If there are any questions, please dial asterisk one, star one. Once again, to ask questions, please dial asterisk one, star one. Our next question is in English from Mr. Jorge Contreras.
Hi. Hello? Did you hear me?
We hear you.
Tupy is a company with higher exposure to international market. Tupy has clients in the United States, Europe, and China. In that line, I want to know how the company controls the potential problems related with the trade war, especially in terms of the tariffs that the United States implemented in the exportations.
Well, we understood that the question has to do with the impact of the commercial war. Is that correct?
Yeah, that's it.
Yes, we approached this issue. Most of our contracts have protection if any tariffs are placed on our business. This would be transferred. This would be included in the price, these additional amounts. Part of this production is not that important in the U.S., these products. The barriers are high to develop. We believe it's not easy. We have a very long-term relationship with our clients in the West, many of them more than 20, 30 years, due to the trust in the engineering processes that were developed in the past. It would not be easy for our clients to switch. Neither geography nor other vendors. We believe we are protected from the impacts of a commercial war.
It's important to stress that development cycles, building new plants, developing products, this is a very long process. It would take at least two years to build a plant and another 18 months to have a product. These are long-term projects. In reality, we're discussing alternatives, but right now, there is no intention on the part of our clients to switch. We're working with them. Of course, we're following the facts together with the clients to minimize the effects of a possible commercial war. We believe it doesn't make sense.
Tupy is a Brazilian exporting company with products that were normally exempt from tariffs. NAFTA, we bought a foundry in Mexico. I n NAFTA, it didn't bring any benefit for this sector. In other words, there was no reduction in tariffs between Mexico, the U.S., and Canada. This product was always exempt. It's important for industry. We have links for tooling. These are complex products. They are not simple products. We will always be following the discussions. We have talked to clients. Right now, there is nothing that would alarm us here at the company. Naturally, if the global CapEx drops, evidently, we will suffer in terms of demand, of course, yes.
Reminding you to ask questions, please dial asterisk one, star one . Once again, to ask a question, please dial star one. We would like now to pass the floor to Mr. Fernando for his final comments.
Well, I would like to thank you all for participating. We'd like to stress, reinforce what the company represents. We work hand in hand with global growth. The company is, in many sectors, very diversified. Also, we have better margins. We have a better exchange rate situation. It's important, we have an interesting combination of growing volumes. Also the exchange rate that favors the company. Once again, we'd like to thank you all. Thank you, shareholders. We'd like to thank all the actions on the part of the company, the acquisition in Mexico. We have many benefits that we can generate. There, we also have many new things to do. We must improve the efficiency in Mexico. We have intensive use of labor, many opportunities to use automation.
We're exploring new technologies which will really help us in our capacity to have benefits with robots, artificial intelligence, cameras. We're studying all these. We have projects. We have found interesting applications. This should happen during the next quarters. Finally, the quality and improvement of our results. The volume grew 8%, our revenue grew 32%, and EBITDA 71%. This shows a robust company cash generation, more and more solid. A great focus on working capital, accounts receivable. We believe we will have an excellent future for the company. Thank you. We continue working with enthusiasm to make the company grow.
The conference call of Tupy is now ending. We'd like to thank you all, wish you a good day.