Navigator Company SA

ELI:NVG

Earnings Call Analysis

Navigator Achieves Record Q1 Results and Expands in Tissue Market

Navigator Company reported a strong start to 2024, achieving a record Q1 turnover of €536 million, up 9% quarter-on-quarter and 7% year-on-year. Its EBITDA stood solid at €133 million, maintaining a 25% margin. The company raised uncoated woodfree paper prices by 3% in Europe and 9% in overseas markets, while reducing cash costs by up to 16%. Navigator announced a strategic acquisition of Accrol, a leading UK tissue converter, expected to double its tissue segment turnover to €580 million. Despite market volatility, Navigator remains confident in sustained demand and further price increases through 2024.

Strong Start to 2024

The Navigator Company reported an impressive start to the first quarter of 2024 with total turnover reaching EUR 536 million, marking a 9% increase from the previous quarter and a 7% year-on-year rise. This notable performance reflects the resilience of Navigator's business model amid improving market conditions. The surge in pulp and paper demand, combined with effective pricing strategies, has contributed significantly to this growth.

Exceptional EBITDA Performance

The company's EBITDA for the quarter amounted to EUR 133 million, maintaining a robust EBITDA margin of 25%. Noteworthy is the year-on-year reduction in cash costs across all segments, falling between 9% to 16%. This reduction exemplifies Navigator's focus on cost efficiency while enhancing profitability.

Pricing Power in the Market

Navigator successfully implemented price increases for uncoated woodfree paper, with an average hike of 3% in Europe and 9% in overseas markets, contributing to overall sales mix improvements of approximately 5%. The ability to raise prices is largely attributable to substantial demand and a tightening supply chain exacerbated by logistical issues and production constraints.

Accrol Acquisition: Doubling Tissue Segment

As part of its diversification strategy, Navigator announced an acquisition offer for Accrol, a prominent player in the U.K.’s consumer tissue market. This acquisition, already approved by Accrol shareholders, is set to double Navigator's tissue turnover, projecting consolidated revenues in this segment to reach around EUR 518 million. The integration of Accrol will broaden Navigator’s market presence and operational capabilities in tissue products.

Strong Future Outlook

Looking ahead, Navigator expects the second quarter to maintain volume levels similar to the first quarter, with prices anticipated to stabilize. Additionally, the company has indicated plans for further price increases in the third quarter, leveraging the overarching trend of rising pulp prices and overall industry demand. Furthermore, Navigator anticipates a 2.6% growth in tissue demand across Europe throughout 2024.

Sustainability and Investment Commitments

Navigator remains committed to its sustainability efforts, with EUR 41 million spent on capital expenditures in the first quarter, including a portion earmarked for environmental initiatives. This commitment ensures not only compliance with regulatory frameworks but also enhances operational efficiencies through sustainable practices.

Debt Management and Financial Health

The company’s financial health remains robust, characterized by a net debt to EBITDA ratio of 0.88% and a liquidity position of approximately EUR 150 million. This solid balance sheet positions Navigator well for future investments and the integration of Accrol without needing immediate external financing.

Sector Dynamics and Strategic Positioning

The paper market is witnessing fluctuations, notably a narrowing of the price gap between paper and pulp. Given these dynamics, potential capacity shutdowns in the U.S. and Europe may help stabilize the market. Navigator's strategy to adjust production according to market conditions is an integral part of its operational model, ensuring responsiveness to industry volatility.

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon. We welcome you to The Navigator Company First Q '24 Results Presentation. [Operator Instructions] I now hand the conference over to Ana Canha, IR Officer at the Navigator Company. Please go ahead.

[Ana Canha, executive]

Ladies and gentlemen, welcome to The Navigator Company conference call and webcast for the first quarter results. Joining us today are the following Directors, Antonio Redondo, Fernando Araujo, Nuno Santos, Joao Le, Dorival Almeida, and Antonio Quirino Soares.As usual, we will start with a brief presentation, and we will have a Q&A session at the end. The presentation can be accessed through the links available on the website, and questions may be addressed also through the webcast platform. Antonio, we will start by commenting on the main highlights of the quarter. I hand over to Antonio.

[Antonio Redondo, executive]

Good afternoon, and thank you for joining us once again today. I'm very happy to be here and to share with you our first quarter results. As we will see in today's presentation, the resilience of Navigator's business model and our strong financial position has enabled to present the highest result for a first quarter in the company's history.I will start with Slide 4 for a global overview of the year. The first quarter of 2024 got off to a very positive start. As pulp and paper demand continued to improve, a trend already seen in the second half of last year.Pulp and paper prices increased quarter-on-quarter, driven by dynamic demand, a relatively slim pipeline, significant backlogs from key pulp suppliers and several supply constraints. For example, logistical restrictions in the Red Sea and other areas of the globe, strikes in Finland and several incidents and limitations of supply around the world.Navigator recorded a total turnover of EUR 536 million, the highest result achieved in the first quarter, up 9% from the last quarter and up 7% year-on-year. EBITDA stood at EUR 133 million, keeping a strong EBITDA margin of 25%. Navigator has implemented price increases for uncoated woodfree paper. And actually, from November when prices in Europe and in overseas markets started to move upwards again to April. Navigators and uncoated woodfree price increased by around 3% in Europe, actually 4% outside Iberia and 9% in overseas markets and the total of 5% for our sales mix.Regarding cash costs, we again recorded a significant reduction year-on-year in all segments from 9% to 16%. While staying focused on our diversification plan, the first quarter Navigator launched and offer to acquire Accrol, a leading independent converter in the U.K.'s consumer tissue market.The bid is already approved by Accrol shareholders and will become effective this week on May 24. With the integration of Accrol, we anticipate consolidated turnover in the tissue segment of around EUR 518 million, doubling the segment's turnover. We will give further details later in the presentation. Fernando will start with the main financial highlights. Fernando, please go ahead.

[Jose de Araujo, executive]

Thank you, Antonio. Turning to Slide 5. As mentioned, turnover stood at EUR 536 million a result for the first quarter, 9% quarter-on-quarter and 7% year-on-year. CapEx totaling EUR 41 million, similar to the 2023 figure of which approximately 32% was certified as a value environment or sustainability invested.We maintain a consistent conservative financial policy with a net debt EBITDA ratio at 0.88%. Once again, the flexibility of our business model, adjusting production to demand, fixed and various cost mentioned, commercial performance and activity adjustments business with 4 diseases in protecting margins and stabilizing results.Actually, if we turn to Slide 6, you can see that in the last 9 quarters with the exception of the refinery T2 to T4 set period. Our EBITDA margin varies between EUR 122 million BRL 133 million. Is remarkable for a cyclical industry in an increasing volatile work. Focused on Slide 6. This quarter, we recorded higher sales volume.The volume of better sales stood at 355,000 tonnes, up 10% under the first quarter with sales in value growing by 12%. Year-on-year, we received an increase of 29% in dollar and 9% in [inaudible] up sales reached 110,000 tonnes, up 30% quarter-on-quarter and year-on-year, while the value of the sale was 28% quarter-on-quarter and down 2% year-on-year.To be noted that Navigator is not only a very efficient paper producer, but also one of the most efficient of provision in the year. The volume of tissue sales stood at 38,000 tonnes, down by 6% quarter-on-quarter due to lower production available, which affects sales and up by 59% year-on-year, driven by the integration of Navigator Tissue Ejea.In values, sales grew by 41% year-on-year and there was a downward correction of 12% in relation to the previous quarter. My colleagues will be more [Inaudible] on the performance subsidies individual business.Turning now to Slide 7. We can take a good look as the main impact on [Inaudible] in a year-on-year comparison. This quarter, the downward cost of price reputed by the dynamics of the post market was more than offset by increase in volumes and a reduction in cash costs.We remain focused on managing cash by improving purchase price indication and optimizing consumption, especially of fiber, including wood and chemicals as well as logistic but also on continued efforts to contain fixed costs. As a result, as Antonio mentioned, this quarter, we have recorded again a reduction in cash costs in relation to the same period in 2023 by between 9% and 16% or 4.5%, breaking and writing tissue and paper.Total fixed costs ended the period 5% higher than the same period in 2023 due to the inclusion of the tissue at a higher unit and renewal of the [Inaudible] program. In this context, Navigator exceeds an EBITDA of EUR 133 million in the first quarter.Turning to Slide 8. We have an announced quarterly EBITDA versus last quarter. Quarter-on-quarter, box-sales volumes and market price increased, driven by a strong order book and the positive evolution of BHKP, which roughly leads, Nuno will comment on later session.In the paper and tissue segment, downward rent cost per month with reductions between 4% and 5% following the top segment costs remain stable. It should be noted that first quarter of 2024 was impacted by the grid in the Red Sea personal change to Latin American notes and proving freight rates to buy worldwide.Despite these constraints, Navigator managed to keep maritime track [Inaudible]. Quirino will now comment on both prices. Quirino, please?

[António Soares, executive]

Thank you, Fernando. Moving to Slide 10. We have the evolution of pulp and paper. The first quarter of 2024 ended with a benchmark index for hardwood pulp, PIX BHKP, rising to USD 1,242 per ton.Since the start of the year, pulp prices have grown by approximately 22%, and everything suggests they will continue upwards at least over the next quarter, currently at USD 1,381 per ton, which is the highest nominal value ever reached and an increase to EUR 1,440 , which has been announced, which should be reached in the next few weeks.Prices in China mirrored the development in Europe, reaching a net USD 684 at the end of the quarter, up 5% since the start of the year 2024. The benchmark index for office paper prices in Europe, PIX A4 B-copy ended the quarter at EUR 1105 per ton, up by 1% from the start of the year, which was EUR 1,093 per ton.Moving to Slide 11. We have summarized the main developments in uncoated woodfree. The upward course of demand observed in the second half of last year continued during this first quarter. The pulp global demand for printing and writings grew by 0.3% in the first quarter at March with stronger demand for uncoated woodfree papers, which was up by 0.8% in contract contrasts to coated woodfree papers, which were down by 1.2%.Demand for paper produced from mechanical pulp grew by 0.3%. In Europe, in particular, the pulp demand for uncoated woodfree paper grew significantly up by about 10% this quarter, with the folio segment as the top performer at 20% growth. But also the office paper segment, which, in principle, would be more vulnerable to the trend towards digitalization, presented also office paper, a growth of 10%, while realms grew by 5% year-on-year.As a result, the positive trend in the pace of new orders in the second half of 2023 continued in the first quarter of this year with an order-to-capacity ratio, reaching 90% versus 70% in the first half of last year and 80% in the second half of 2022.Moving to the U.S., demand dropped by about 1%. the parent uncoated woodfree consumption in other world regions grew by 1% in February with China recording an impressive 12% year-on-year, which compares to the compound annual growth rate historically of 5.8% since '21 to '24.As just mentioned, the benchmark for office paper prices in Europe recorded the modest increase. Nevertheless, the average sales price in navigates paper segment to show strongly, up by around 2% quarter-on-quarter.Significantly, as Antonio mentioned, from November to April Navigator's uncoated woodfree price increased by around 3% in Europe, 4% outside Iberia in Europe and 9% in overseas markets, which gives a total of 5% increase for the total sales mix.It should be noted that paper total turnover for Navigator continues at a high-level this quarter. In challenging markets, own brands and high-value segments provide extra protection for Navigator's results. Nuno will give some market context. Nuno?

[Nuno de Araújo Dos Santos, executive]

Thank you, Quirino. Turning to Slide 12. As Quirino mentioned, the first half of '24 witnessed a significant and rapid increase in pulp prices. Supply and demand dynamic was decisive for the increase in prices.China remains the driving force behind the recovery, thanks to new paper, packaging and tissue capacity, which started in the second half of '23, around close to 1 million tonnes of printing and writing paper, 1 million tons of virgin fiber-based packaging and 1 million tonnes of tissue. Focal, the developed economies have also presented growth in hardwood demand due to the performance of downstream markets, especially in Europe, up 4.2% in February versus last year.Performance at end consumers in Europe was better than expected, especially in the printing and writing paper industry, where order books grew substantially. On the supply side, logistical constraints in the Red Sea, constraints on supply in Canada, the strike in Finland and the unavailability of output from one of the largest pulp mills of a leading player, METSA, also in Finland due to an incident at the production unit, put upwards pressure on long fiber prices, adding further to the substitution of long fiber by short fiber.This situation was aggravated already this quarter with supply limitations in Latin America due to port strikes in Chile and floods in Brazil and in Asia with a boiler explosion as well.At the same time, further pressure on prices has stemmed from the structural increase in pulp production costs, which continue to incorporate very significant increases in wood, chemicals, freight and labor in relation to pre-pandemic levels. These rising costs are having a more severe impact in Latin America, Scandinavia and Canada than in Portugal.On the other hand, the year started with stocks at low levels, above all at ports in Europe, but also at manufacturers. The level of stocks at European ports remains below the average for the past 5 years. In China's stocks at ports increased over the quarter, explained mostly by the fact that much of the volumes traded in the second half of '23 arrived only in the first quarter, somewhat behind scale.These late deliveries have also helped sustain higher prices and price increases. Looking now at Slide 13, the tissue performance. Demand for tissue paper showed positive dynamics at the start of '24. After a period of destocking in the first month of '23, the first 2 months of '24 saw growth of 2% in Europe.Navigator's International sales outside Portugal accounted for 71% of turnover. The Spanish market took the largest share with 42% of our tissue sales followed by France with 23% in the U.K., which accounted for roughly 4% of sales.Finished goods represented 94% of our total versus 87% in the first quarter last year. And [indiscernible] of course, represented the remaining 6% versus the 13% last year. In terms of client segments, at home or consumer retail business, has grown in importance currently accounting for around 80% [Inaudible] while away from home and Cash & Carry account for the remaining 20%.In 2016, the split was actually 36% for consumer and 64% for the remaining segments. Navigator's focus on innovation and differentiation continues to be welcomed by [indiscernible] with sales of Milbrands growing by 11% year-on-year in the first quarter of '24, strongly driven by our retail business, where growth of these brands stood at 25%. To be noted that versus 2006 Milbrand doubled in volume, more than doubled in volumes.Dorival will now comment on the main development in packaging.

[Dorival de Almeida, executive]

Thank you, Nuno. After a challenging year in 2023 with a drop in business in several segments, European market has started to show signs of recovery in 2024. Segments where we operate grew by 14% year-on-year.In this context, Navigator's packaging business enjoyed stronger and more consistent demand in the main segments. At the same time, as a positive impact can already be seen from the move into several new segments, above all within flexible packaging.The process of trials and market placement is still underway, consists of a large-scale approach to new clients backed up by more than 250 market trials to date in a commercial operation, 100% based on Navigator's on brand, J-Craft.In addition, with regard to the project for integrated production of eucalyptus molded pulp products designed to replace single-use plastic and alumin packaging in the food service and food packaging market continues to progress, and production is planned to start up in the second half of '24 under the J-Craft, Beer Shield brand.The new industrial facility will have production capacity for approximately 100 million units a year, making it the largest integrated unit with 100% eucalyptus fiber in Europe, moving to a fast-growing, high potential market.Operations will start with 4 products for the food sector and the new mill offers production flexibility and scalability in order to exploit the various opportunists opening up for replacing plastics.Moving on to Slide 15 to comment briefly on CapEx. This first quarter, the CapEx investment reached EUR 41 million as Fernando mentioned, of which approximately EUR 13 million were ESG investment accounting for 2% of the total.The CapEx amount focused mainly on project for decarbonization, production capacity maintenance, plant modernization, efficiency improvement as well as the structure and safety projects.The main projects include the new high-efficiency recovery boiler in Setubal, the new bleaching tower in Washing presses in Aveiro pulp mill, the new fossil free line kiln in Fiera using biomass as fuel, the conversion of the Setubal and kiln to burn biomass and the new solar energy plant in Federados.As already mentioned in last quarters, Navigator will continue with a high level of value-added investment in order to improve the environmental performance of our sites and implement our strategy for developing a packaging business. Taking advantage of the next-generation funds that is mandatory to be completed by the end of 2025.For eligible investments, there is an incentive rate of around 40%. Thus Navigator will receive over EUR 100 million in gains, EUR 24 million already received of which EUR 3 million this quarter. To conclude, these investments embrace our sustainability commitment, but also our innovation and diversification efforts to increase efficiency, improve and sustain our results. Fernando will comment on our financial position.

[Jose de Araujo, executive]

Thank you, Dorival. On Slide 16, the debt maturity profile. Group debt profile remains positive. Navigator has well balanced there remain 5% of total debt issue on the state enabled to maintain growth and anchor in a scenario of slightly rising in U.S. be.Also, it is worth noting that the company has a solid balance sheet of close to EUR 150 million of liquidity, both a long-term and use credit lines and cash on main, allowing us to [indiscernible] from one. After the disbursement resulting from marginal equation operation mentioned, in addition to the long-term finance agreement with European investment and of EUR 115 million, which can be drawn in 3 renting in 12 years.New long-term green financial operations have already been signed in order to maintain enables financial CA with balance maturities and wanted to sustainable impact. We will now hand over to Joao.

[João Cabete Gonçalves Lé, executive]

Thank you, Fernando. Turn to Slide 17, please. Navigator is fully committed to sustainability. And in this slide, we highlight some of our 2023 numbers, dedicated not only to environmental but also social and governance business transformation, innovation and diversification.My colleagues have mentioned during the presentation, a few actions taken that demonstrate our continued work in all sustainability dimensions. In particular, Dorival just mentioned sustainable investments, but also Michael League highlighted our focus on optimizing consumption and innovation across all segments.We are committed to creating sustainable value for our shareholders and for society in the world. Leading future generation is a better planet through natural recycled volume via the ratable social products and solutions that contribute to government segregation, oxygen production biodiversity protection, so information and an climate.Turn to Slide 18, please. The different initiatives and projects undertaken of the year include the Navigator forestry processes club, a pioneering and unique scheme for strengthening the relations with its partners and making an important contribution to a significant increase in port forestry yields and [indiscernible] by disseminating sustainable and active management practices in the country's woodlands.With the slogan, working together for the forest, Navigator forestry pores plus set up to support our forestry sectors partners on a collaborative basis in implementing active and responsible forestry management.The technological platform is used to provide agent acceleration solutions, a central purchasing unit and Pari range and benefits in addition to direct access to programs supporting production, provision of forest management tools, training and also co-investment opportunities.By increasing the area of land in Portugal on which best forestry are applied in all certification requirements are complied with the project will bring benefits that extend well beyond a stronger eucalyptus sector. It will also contribute to lower fire risk less CO2 emissions increased biodiversity with more conservation areas and to a more dynamic economy in inland regions of Portugal.Since November 2023, that [indiscernible] grown to more than 100 members, representing around EUR 400 million and EUR 1,845 direct crops, creating value planned in the future. I will now hand over to Antonio.

[Antonio Redondo, executive]

Thank you. Let's please turn to Slide 19 with a wrap-up of the Q1 results. It's not enough to underline that we again achieved solid results despite market volatility, in fact, the highest results for the first quarter.As mentioned, 2024 got off to a positive start with a significant increase in demand for pulp, paper and tissue. We registered strong order books and positive evolution in prices across all segments.Also, Navigator encore paper prices increase has been implemented and a significant drop in cash costs was achieved, thanks to purchase price negotiations and better consumption efficiency, especially for fiber, chemicals and logistics.We also continue to proceed with our diversification plan. This quarter, we launched an offer to acquire Accrol, a leading independent tissue converters in U.K. approved by Accrol shareholders that will become effective this week by May to 24. This acquisition will enable us to roughly double our tissue business. And in the Packaging segment, the molded pulp project proceeds as planned.In the meanwhile, we have again demonstrated the consistency of our conservative financial policies, maintaining our sustainability and investment commitment. Let's turn to Slide 21 with a glance of new business opportunities. Going forward, our sound financial position allows us to consider opportunities for debottlenecking in our core business, investing in efficiency and innovation, as already mentioned by Dorival.Navigator remains committed to sustainability investment and innovation plans in all segments in which it operates. As already mentioned, in the second half of 2024, we will start up an innovative unit for the integrated production of molded eucalyptus savino designed to replace single-use plus packaging and aluminum in the foodservice and food packaging market with the start-up scheduled as mentioned for the second half of this year.For a medium to long-term perspective, we are still looking into the attractiveness of investing in Greenford, both be of full in the shorter term and if or synthetic falls afterwards. And our R&D program is moving forward to explore and develop new bioproducts from eucalyptus waters with a vast range of applications in different industries, such as the automobile sector, textiles, pharmaceuticals and cosmetics and the food industry and actually even for the defense segment.In particular, in the tissue business, this quarter, we took a step forward in our diversification strategy, as already mentioned. I will now hand over to Nuno to comment exactly this Accrol acquisition.

[Nuno de Araújo Dos Santos, executive]

Thank you, Antonio. Let's then turn to Slide 22. As Antonio just said, Accrol represents a step forward in our strategy for sustained expansion of our tissue business, namely in the Western European market.Accrol has a strong alignment and convergence of values with Navigator, namely with sustainability, product quality and innovation and service level excellence. With a leading position in the U.K. private label market with 12% market share in the overall consumer tissue market and 22% market share in the private level segment and operating on an import parity market based on reels. This acquisition will enable us to grow, providing greater scale in the business and more diversification.With 2 new tissue segments, wet wipes and facials, as well as providing synergies with our tissue business. With the integration of Accrol, we anticipate consolidated turnover in the tissue business of around EUR 580 million, close to EUR 600 million with the U.K. market expected to contribute to around 50% of total tissue turnover. I will now hand over to Antonio, who will wrap up with a few words on the outlook.

[Antonio Redondo, executive]

Thank you, Nuno. Let's please turn to Slide 24. The current geopolitical tensions, which have created high complex situation in industrial and logistical operations are leading to increased volatility in international markets, reducing at the same time visibility.That said, for Q2 2024, the favorable evolution of demand in pulp business is expected to continue in spite uncertainties. The new capacity coming online, 2.6 million tons per year is expected to have a relatively slow ramp-up.Having said that, we expect a long cycle of above average pulp prices due to the increase in the industry's cost base in relation to pre-pandemic levels as well as increased CapEx, both in new forest plantations and investor development and no further relevant increase in supply during at least a good part of 3 years.In the paper segment in Europe, paper prices could benefit for a more balanced market structure that, combined with strong pressure on costs, is so far resulting in paper price increases. In fact, capacity reductions, restrictions on imports from outside Europe, which will continue both for logistical reasons and due to compliance with PSC regulations and structural increases in the cost base will certainly lead to price increases even in scenarios of reduced demand.To highlight that, Navigator announced a price increase for all uncoated free papers by up to 5% in Europe that has been fully implemented in the lease prices since the beginning of April, and this will be followed in May and June by upward revisions of deals with fixed monthly costly price.Additionally, as a result of the continued rise in oil prices, it is likely that we will implement another increase during Q3. The second quarter started with stronger prices, but a slowdown in order book growth, which is '23. Q2 started with stronger prices. However, the recent decrease in order inflow and above all, the seasonal sold-down in Q2 and especially Q3, will bring likely volumes down, but paper volumes at Danvers are expected to be clearly above 2022 levels.In the tissue segment, demand continues to rise at interesting levels and growth of 2.6% is estimated for Europe during 2024. Tissue prices should continue to reflect the evolution of input cost. Example for the pulp price solution and in fact, Navigator announced an 8% to 10% price increase for May.In this segment, Navigator continues to leverage synergies driven by business growth, particularly with the acquisition of Navigator Tissue Ejea and growing with the new acquisition of Accrol.Business and diversification to tissue, operational flexibility between paper and pulp market mix at the [Inaudible], production adjustment and efficient merci strategy, combined with rigorous programs to control costs as well as the company's strong financial position have enabled us to deliver consistently strong and stable results in changing and volatile market context.We are confident that all these factors in parallel with the continuous development of both our packaging and energy businesses will continue to point to the resilience of Navigator's model. Thank you.

[Ana Canha, executive]

Thank you. And to this ends our presentation. We are now open for the Q&A session.

[Operator]

[Operator Instructions]. Our first question comes from the line of Enrique Parrondo from JB Capital.

[Enrique Parrondo, analyst]

I have 3. The first one on the outlook for paper specifically on this slowdown that you're expecting, sequential slowdown from high levels into the second quarter and the remainder of the year.Maybe could you give us some color on what volume expectations and what sort of declines are you seeing? And what makes you so confident on price increases for the third quarter based on this declining order books?Second one is on Accrol's acquisition. I know it's still early in the process, but you even mentioned in the presentation, leverage synergies for the group. If my understanding is correctly, I believe that these will be largely cost focused, yet they will rely on CapEx investments to boost tissue reel production later than be integrated into our gross converting capacity.Maybe you could give us some sort of guidance on CapEx expectations. Is this correct? And what sort of synergies could we expect? That will be helpful. And the final one on financing. How should we think of the 2024 and 2025 maturities and your liquidity position after the acquisition of the Accrol Group?

[Antonio Redondo, executive]

Okay. Thank you very much, Enrique, for your interest for the sake of clarity, I'm going to repeat the 3 questions just to make sure that we fully understood them, okay? So, your first question is about outlook for paper slow down. How do we see this slow down? How confident we are with the volumes and the price increases that we are either implementing or considering to implement.

[Enrique Parrondo, analyst]

That's correct, yes.

[Antonio Redondo, executive]

Your second question is about leveraging Accrol synergies. So, the basis for those synergies and you'd like to have communication of potential CapEx investment to produce other rules to convert at Accrol?

[Enrique Parrondo, analyst]

That's right.

[Antonio Redondo, executive]

And the third question is about financing and how do we see our maturity position in '24 or '25 solving across acquisition?

[Enrique Parrondo, analyst]

That's right, yes.

[Antonio Redondo, executive]

Okay. I'm going to give comments for the first 2 questions. I'd like Quirino to complement the first, Nuno to complement on the second, and I'll ask Fernando to answer the third question.Regarding the first question, we actually see this slowdown. This slowdown is also somewhat related to the summer that is approaching, and there is always seasonality over the summer. Anyhow, we have assisted on that in previous calls and in this call once again. The visibility is shorter and shorter. So, there is not a huge visibility that we can share, but we can share and we, of course, not change guidance that we can share with you what we see.We anticipate that Q2 will not be volume-wise materially different from Q1, but will be significantly above Q2 last year. And hopefully, prices on Q2 also will not be very different from what we have been achieving so far. Eventually, we have mentioned implementation of another price increase in Q3.Why are we confident? Because the cost base of the industry has significantly increased on the pulp, and we can touch that around. We have already alluded to that during the call on pulp, but also on paper. So, even in a scenario where the market is eventually not as buoyant in Q2 and in Q3, like it was in Q4 last year and Q1 this year, the pressure to increase prices through all the producers is increasing.So, we are confident that the prices will go through as they have been going through at least for us and as we mentioned, an action in this situation. Quirino, do you want to add something, please?

[António Soares, executive]

Just a note on imports. So, we continue to see a reduction in the form on units, which also is part of the equation. So, we see up to March, the latest figure is a reduction of around 12% in imports. So, this comes with the trend from last year, so it adds to the reduction of last year and goes in the same direction of, let's say, creating better condition for the price increase as well.

[Antonio Redondo, executive]

Regarding Accrol, a couple of comments. Of course, this acquisition is different from the acquisition we did last year in Ejea in terms of synergies. But we believe that we will have some operational synergies. And on top of that, you have 2 basic synergies that will be relevant. One is, this is a listed company that we will obviously consider to delist.And on top of that, we have synergies by reducing the management of Accrol. Indeed, Accrol opens the opportunity and the possibility to develop further materials capacity to convert into a coal. There is no decision yet if and when to do this CapEx investments. And, of course, there are synergies on this investment also depending where we will do the investment.Investment can be done in Portugal or it can be done in one of the other 2 locations we have today, we have tissue assets. So, yes, it opens a possibility. Yes, this is something that we will study, but we are far from taking a decision and any kind of CapEx amount and synergies coming from this investment will very much depend on where the investments will be.

[Nuno de Araújo Dos Santos, executive]

I mean I just can reiterate basically what Antonio said. In fact, as you said, it's too early yet to estimate synergies, so I will not contradict you, and I will not share any numbers at this stage.On the cost synergies, yes, Antonio mentioned 2 examples, the delisting of Accrol and the top management, of course, that we can also make shorter in terms of our overhead of Accrol's business. In terms of the new paper machine that we can build, you know that Accrol sources entirely, it's model. It does not have any production of paper machine of paper of mother reels.So, it sources 100% of its needs. We, of course, one possibility, as Antonio mentioned, is to build a new paper machine. And this will have relevant synergies. I can illustrate some of them. So, if we do it next to an already existing paper machine of hours, it will have natural synergies of operating next to an existing machine. If we will do it integrated with one of our pulp mills, it will have the integration together with the pulp operations.So, not needing to dry the pulp not to transport a pulp. And if we will build it here, we will have a dedicated logistics operation fully dedicated to the U.K. and to Accrol, which also we estimate will have relevant synergies.We also understand that by having a fully dedicated paper machine, not only we will have higher efficiency and output in our machine, but also we will be able to improve the output and the efficiency of the Accrol converting line because we'll be able to have to source and to use wider paper. So, there's a series of synergies that I just illustrated associated with building a new paper machine, our paper machine together integrated with our pulp mills.Finally, there's also some relevant potential synergies on the sales commercial side. Accrol is present in 2 segments that we are not facials and wet wipes, and we will obviously try to explore that and see if we can have and find some cross-selling opportunities related especially to these 2 product segments.

[Jose de Araujo, executive]

Investments and commercials, I think, as you can see on Slide 16, our average maturity is 3 years. We expect by the end of the year to be even above these 3 years, at least 3.3 years for instance. At the end of 2025, we expect to be in the same 3 years. I want to stress that we have used our liquidity to buy Accrol. This means we didn't go to the market to have extra funds for that. Nevertheless, we have signed several agreements.One is already communicated to the market since last December. This one with the European Investment Bank with a maturity of 12 years. And we have recently signed but not issued yet more bank agreements and between 5 and 7 years. This means that in our size, maturity, it's not an issue, liquidity neither. And in what concerns net to EBITDA ratio, we do not expect never to in the next time to exceed the 2x, but we expect to be below that in [Inaudible].

[Operator]

Our next question comes from the line of Bruno Bessa from Caixa Bank BPI.

[Bruno Bessa, analyst]

I have 3, if I may. The first focuses on the paper price evolution and the gap to hope. So, what we have been seeing is a relevant reduction in terms of the price gap between paper and pulp in Europe already below the historical average.My question here is trying to understand if you see room for capacity shutdowns in the short term? And if there are any kind of rumors of the potential new shutdowns being announced over the coming quarters because of this. So, this will be the first question.The second question, if you could explain a bit the numbers of Accrol because if I'm not wrong, I think that in 2024, there will be some sales decline when compared to 2023 but margins will be significantly higher. I think that from slightly more than 6% to around 11% on your projections.So, it will be interesting to understand what are the drivers behind this evolution?And the third question, it's true that margins apparently will improve significantly in 2024, but they will still be according to my calculations below those margins of Navigator's tissue business. My question here is, if you believe that Accrol could reach those margins of Navigator's current tissue business in the short term, meaning before any additional CapEx to build a new paper machine to vertically integrate this company. I don't know if you hear my questions.

[Antonio Redondo, executive]

Yes. I'm trying to repeat them, just to make sure that we fully understand. The first question was about paper price evolution gap to pulp. You noticed the gap being reduced. And consequently, you'd like to know if we believe there is room for further capacity shutdowns in the short term? Or actually, if there are some market rumors on that?

[Bruno Bessa, analyst]

Correct.

[Antonio Redondo, executive]

Second question is about the numbers for Accrol. You believe that sales declined vis-a-vis 2023, but margins increased vis-a-vis 2023?

[Bruno Bessa, analyst]

Correct. If you could explain.

[Antonio Redondo, executive]

Okay. And the third question is that, although margins have improved in 2024 in your view, vis-a-vis 2023, if we see that the bridge to Navigator's margins will be reduced without further CapEx?

[Bruno Bessa, analyst]

That's correct.

[Antonio Redondo, executive]

Okay. So, I will make introductory comments for the first 3 questions. I will ask Quirino to comment further on the first, and Nuno to comment on the second and the third.Regarding the gap, yes, indeed, the gap is linked with the fact that pulp has a more nervous commodity typically react quicker to increases and decreases of prices and paper and tissue probably even slower. They react slower than pulp. So, it's normal that during at least a period of time, those margins sometimes are amplified when the cycle goes down and they are reduced when the cycle goes up.And, yes, indeed, there are not only rumors, but I believe already an announcement of a shutdown in U.S.A. of 1 mill. Actually, a mill that was already shutting down and due to a very good demand in the recent period started up again, but the mill is likely noncompetitive, and it will be again shut down. Quirino will know the figures better than I do, but I think we are speaking about short of 200,000 tonnes, 170,000 to 180,000 tonnes.Further than that, to be honest, and, of course, the reduction that happened in Germany end of last year, beginning of this year, I don't have any further indications from the market of any capacity shutdowns, but probably K&S.

[António Soares, executive]

Well, we have the same information. So, the gaps, yes, they tend to be high with some that will move on the pole side. Today's situation is not the first time it happens in such a narrowing of the gap. So, we have seen it in previous cycles, like '18 or even '21, '22. So, this is not a new situation.Concerning the capacity reductions, indeed, the U.S. yield that Antonio mentioned, indeed, 170,000 tonnes, reducing capacity in the U.S. So, this is an important contribution to balance the market over there.And in Europe, indeed, there was a shutdown, in Germany, relevant shutdown, particularly affecting the region, Central of Europe and one specific product, portfolio sheets. It was relevant in that segment. But other than that, there is no news, and I would not do any comment on that.

[Antonio Redondo, executive]

Regarding the second and third question, I'll try probably to answer them more or less in conjunction. We cannot comment the numbers of Accrol for the year 2024. The year ended in April figures are not yet published and comments, so, I cannot comment that. I can comment based on the first 6 months results that are public.Regarding margins, yes, it's normal that in 2024, margins are higher than in 2023 because in 2023, remember, Accrol a converter. They buy mother reels. Mother reels prices are very much linked with pulp prices.Pulp prices have been reducing through 2023 and actually increasing again in the last part of 2023 early 2024. So, it's normal that they bought mother reels at a better price in 2024 fiscal year than in 2023. So, margins have consequently improved.And as you know, this is very much linked to the gap in between selling price of tissue, which is, again, as we said before, more stable than the commodity price that is linked to the mother reels.Regarding the evolution of margins into Accrol, again, we cannot provide you any guidance. But don't forget, Accrol is a converter. And even the best of converters, and we believe Accrol is one of the best, if not the best converter is typically your margin that is somewhere between 50% to 100% smaller than a margin of an integrated producer with the tissue machines.So, if we have a margin, let's say, of 16% for an integrated producer of tissue machines and converted, might have probably 8% to 12%. So, Accrol has the margins of a converter, not an integrated producer. So, I think it's very difficult to anticipate that without further CapEx in tissue machine, those margins will approach the merge of an integrated producer like ourselves.

[Nuno de Araújo Dos Santos, executive]

I just confirm what you said. I mean 1 or 2 notes here? Yes, indeed, '24 numbers in terms of sales top line will most likely be reduced versus '23, but be aware that they will be much higher than what happened in '22 and '21 their top line.And again, as Antonio mentioned, this is due to a better management, let's say, of the equation of price reels, price of sale. What happened is that Accrol was able to have a wider margin and not passing through to downstream, again, it was able to achieve upstream in terms of mother reels sourcing.So, this optimization of margin in terms of price of sales versus price of mother reels will be key, and we hope to continue to do a good management of this margin.And again, this is the number. Normal tissue EBITDA margins in converting are around 8%. Accrol for sure, will present soon higher margins than that. It actually had presented the most recent EBITDA margins were higher than 8%.As Antonio mentioned, typical integrated, integrated, meaning not both, meaning the paper machine and converting operations. EBITDA margins of these type of players are around 16%. You can only do that because you invested in CapEx and you are producing your own mother reel, your own paper.So, it is not possible to ask for a converting operation to present the same EBITDA margins that you can have with a paper and converting operations as it is not possible to ask a tissue operation to present the EBITDA margin with the pulp operation integrated. So, basically, this is it.Of course, if we follow what we have discussed earlier about integrating and building a paper machine, we will, for sure, increase the EBITDA margins of overall our tissue business.

[António Soares, executive]

Let me just add something on I think we have mentioned that in previous calls, but I think for the sake of the discussions we are having it might be interesting to remember. When we speak about an integrated margin of tissue of 16% and when you compare this with an integrated margin of graphic paper coaters and coats, you name it, of course, 16% on tissue in terms of euros per ton of margin is significantly above the same 16% in uncoated woodfree just because the pricing between uncoated woodfree or coated woodfree and tissue is almost 1% to 2%. So, the same percentage margin equates in much higher euros per ton in tissue than in printing and writing papers.

[Operator]

The next question comes from the line of Antonio Seladas from AS Independent Research.

[António Seladas, analyst]

So, I just have 2 and one clarification. First one is related with your gross margin that went down sequentially, I guess, costs probably would cost. I don't know if you provide more color on this issue, that is the first question.Second question is related with pulp prices, your sales pulp prices went slightly down, your average price from the fourth quarter to the first quarter, which is weird because we know that pulp prices went up. So, can you explain the reason? And the last question is just a clarification. I understood that uncoated woodfree volumes should be more or less flat from the first to the second quarter.

[Antonio Redondo, executive]

Okay, let me try to refresh your questions to make sure they were fully understood. The first question is about gross margin sequentially Q4 '23, Q1, '24, where you noticed a slowdown. And you'd like to see if this slowdown is related with the cost, namely, the cost of raw materials, namely the cost of woods.Your second question is that you believe average pulp prices were slightly down from Q4 '23 to Q1 '24. So, you'd like to confirm that. And your last question is to confirm as well if we believe that volume-wise uncoated woodfree will be more or less flat Q2 to Q1.

[António Seladas, analyst]

Exactly. Thank you very much.

[Antonio Redondo, executive]

Let me try to give some quick answers and ask my colleagues to complement. So, Quirino will complement 1 and 3 and Nuno will complement 2.The gross margin, discretionary reduction of gross margin in between Q4 last year and Q1 this year was, of course, not related with prices was, of course, not related to cash cost. Cash cost and I think we mentioned that during the call have been reduced sequentially less than, of course, year-on-year.Year-on-year, we mentioned 9% to 16% quarter-on-quarter, I'm quoting by memory was 4% to 5% transaction with pulp more or less flat and note it was not also wood that has increased. It was actually extraordinary results that affected EBITDA margin in Q4 last year, and they were not in Q1 this year.Regarding your comment about pulp prices, I don't think your comment is right. I don't think the prices were slightly down, but Nuno afterwards will comment on that. I think they actually went up.Obviously, it's always difficult to compare when mix are different, but I don't think it they went down. Last comment or last question about uncoated woodfree being more or less flat, yes, we expect uncoated woodfree in terms of volume to be more or less flat vis-a-vis Q1. I'd like Quirino to comment question 3, probably Fernando question 1 and Nuno question 2.

[António Soares, executive]

Starting with the uncoated woodfree volume, we have just confirmed our expectations today for Q1 is pretty much aligned with the volumes of Q1 both actually uncoated packaging sales in both segments, of course, volume-wise and continuing. And actually, with the explanation we provided on price evolution, actually, on the buy side, we see an improvement on Q2 versus Q1. So, we look at the same ballpark on [Inaudible]

[Nuno de Araújo Dos Santos, executive]

On the pulp price. I only have here now in front of me the net mill price is not exactly the net prices, the net new prices, the price acted from logistical costs. But from Q4 last year to Q1 this year, it actually went up by 7%, EUR 37 per tonne. So, either we made some confusion in our communication or there's some confusion on your side, but prices went up EUR 37 per tonne, 7% from Q4 2023 to Q1 '24.

[Jose de Araujo, executive]

That made in the last quarter has been is was 5%. It's not a big issue. But as already mentioned, it's related with non-recording and it's related with some mentions that we received in the last quarter.

[António Seladas, analyst]

Just a follow-up. So, no recurring costs that was accounted on the gross margin, yes, on the cost.

[Jose de Araujo, executive]

[Inaudible] That's why increase the EBITDA margin[Inaudible]

[António Seladas, analyst]

Regarding the third price, pulp surprise may be a bit of confusion on my side.

[Antonio Redondo, executive]

Sorry. I'm sorry, we missed your last comment. Will you be so kind to repeat, please?

[António Seladas, analyst]

I was just saying that on the sales price on pulp sales price, I made some confusion on my side.

[Operator]

[Operator Instructions] And we have a follow-up question from the line of Enrique Parrondo from JB Capital.

[Enrique Parrondo, analyst]

Just 2 follow-ups. Well, one follow-up and another new question. On the question my colleague asked on the gap between pulp prices and paper prices in Europe. Is it correct to think that we should look at this, I mean, I guess that we should look at this gap from a net pulp price perspective, right? And I've been doing some math and if we look at pre-COVID levels, paper prices have been, on average, 70% above net pulp prices in Europe. Currently stand at close to that level. Is that the right way of thinking?And my second question would be on the molded cellulose capacity expected to ramp up in the second half of the year. What sort of contribution, economic contribution can we expect from this business line on a recurring basis? Is there a unitary economics that we can track? Or if you could give us some color on this, it would be helpful.

[Antonio Redondo, executive]

Okay. So, your first question is, you believe computing net versus net, the actual gap is not very different from pre-COVID levels. It is what you say?

[Enrique Parrondo, analyst]

That's right. Yes around 70%

[Antonio Redondo, executive]

The second question is about if we are able to provide some color on unitary contribution of the molded cellular business?

[Enrique Parrondo, analyst]

That's correct. Yes.

[Antonio Redondo, executive]

Those are actually very quick to answer. The first one, to be honest, we don't have here in front of us the historical data, I'm sure you have. So, if you have the right discounts on net, which is always doubtful, if we know the exact net discounts, you can do the math yourself, and I'm sure you're right to the conclusion better than ourselves.But it's not easy to track what are exactly the discounts or what were exactly discounts pre-COVID, during COVID and today. But I agree with you, the gap should be done more net-net than gross.Don't forget as well that big for paper is also not net, it's gross. And we should take into consideration discounts on paper as well. Nothing to do with the amount of discount on pulp, but they are also subject to discounts.On model cellulose, it's also very easy and quick to answer. We cannot provide you anything because we are, first of all, shattering completely new territory. This is the first integrated unit of molded cellulose with eucalyptus-based pulp in Europe. Is the largest one, is a completely novel product for us and for the South of Europe.We just want to make sure that the advantages of sustainability that we provide are well priced by our customers. As mentioned before, this is a project that is relatively small for the size of our business. So, it's an introduction to a new business segment that will hopefully help to reinforce our packaging strategy.

[Operator]

There are no further questions from the conference call at this time. So, I will move to the webcast one. A question on the webcast is from Gil Domingos Mavens and he asks, regarding your energy sales, going forward, is the price levels in the Veria market remains at levels. The Q1 revenues is what we should expect? And another question is, why is the EBITDA impact of this fall in the energy level?

[Antonio Redondo, executive]

Sorry, I'm not sure if I fully understood the question. Can you please repeat them?

[Operator]

Yes. Regarding to our energy levels, going forward, if the price levels in the Veria market remains at levels, the Q1 revenues is what we should expect? And the other question is, what is the EBITDA impact of this fall in the energy level?

[Antonio Redondo, executive]

Okay. I will ask Nuno to comment but please understand that we cannot give this kind of guidance. We can give you a generic view of the question, but we cannot give you any specific answer.

[Nuno de Araújo Dos Santos, executive]

Okay. So basically, in fact, I don't know if you are aware, but today, our sales are basically energy sales resulting for biomass cogeneration plants. Most of these have feed-in tariffs. So, in fact, our average price of energy sales should remain constant for the rest of the year. The fact that full prices, spot prices in energy are going down, they have actually a positive impact in our EBITDA level.So, as I said, I repeat, our top line, our energy sales are mostly done out of feed-in tariffs with constant prices. They do not reflect spot prices. We have, of course, purchases of electricity in the market that, of course, are lower cost at this stage. They positively impact our EBITDA.

[Operator]

There are no further questions at this time. I hand the conference back to you.

[Ana Canha, executive]

We will now end session, thank you for your time. As always, we are available for additional clarification through our usual contact. Have a nice evening.