Navigator Company SA

ELI:NVG

Earnings Call Transcript 2019-Q3

[Operator]

Welcome to The Navigator Company conference call. I will now hand over to Joana Appleton. Please go ahead.

[Joana de Avelar Pedrosa Rosa Lã Appleton]

Ladies and gentlemen, welcome to The Navigator Company's conference call and webcast for the 9 months of 2019 and Q3 2019 results. Today, participating in the call are the following members of the Executive Committee: João Castello Branco, CEO; Fernando Araújo, CFO; Antonio Redondo, João Paulo Oliveira and Nuno Santos, Executive Board Members. We will start with a brief presentation of the main achievements during the period and follow with 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. João will start with comments on the main figures recorded in the period, and Antonio will follow with an overview of the pulp and paper market. Nuno Santos will comment on tissue business and João Paulo Oliveira on CapEx. Fernando will address the main financial issues. I will now hand over to João. João, please?

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

Okay. Good morning, and thank you for joining us today. I will start by making some brief comments on the overall results for the period. Given the current context of economic conditions with high instability, severe increase in major cost factors, softening of economic growth and adverse market conditions in the pulp and paper industry, I would say that Navigator presented a resilient set of results with an EBITDA for the period above the average of the last 5 years even if below last year's record results. In fact, in a significantly more challenging market context, we have managed to achieve a strong performance due to an integrated business model that has been resilient through industry cycles and able to deliver consistently higher returns over the years. So let's start with the presentation and go over to Slide 3. Here, we have an overview of the main figures for the first 9 months of 2019. Navigator registered a 1.8% increase in turnover over the period to EUR 1.274 billion, [ obtained ] on higher paper price and higher volumes of pulp and tissue sold. Recurrent EBITDA, excluding the pellets transaction impact last year, declined 11.2%. And margin, EBITDA/sales stood at 23.6%, reflecting a market context of higher production factor costs, decline in pulp prices and paper demand. Still, EBITDA for the period totaled EUR 300 million, the third highest EBITDA recorded in a similar period. Also noteworthy is the strong generation of free cash flow in the period of EUR 125.4 million comparing to an adjusted free cash flow without the pellets transaction of EUR 93.5 million in the first 9 months of 2018. Over the course of the year, we paid dividend in the amount of EUR 200 million, a similar amount as the one paid in 2018. And we also proceeded with a share buyback of approximately 4.5 million own shares, investing EUR 18.2 million and a clear sign of confidence in our stock in the wake of the severe price corrections occurring in the whole pulp and paper sector throughout the first half of the year up until August. If you turn now to Slide 4. We have a summary of the main highlights for Q3 2019. The Navigator Company registered a turnover of EUR 420 million in the quarter, below turnover registered in Q2 2019 and Q3 2018 in spite of the increase in pulp and tissue volumes, which was not enough to offset the reduction in paper volumes and the decrease in pulp price. EBITDA in the quarter totaled EUR 93 million, again reflecting a context of lower pulp price, lower paper volumes and higher production costs. In a traditionally soft, slower period, Q3 2019 was particularly weak in terms of paper demand, namely in Europe, where we believe occurred a significant reduction in inventories throughout the entire supply chain. This, of course, has a reflection in terms of pressure in paper prices, and Navigator responded with careful adjustment in its production level and the redirection of sales to markets outside of Europe. There was a maintenance production stoppage instigated at Foz at the end of September for the pulp mill, and the group decided to anticipate the stoppage of the paper machines, which impacted production volume in Q3. Free cash flow generated during the second (sic) [ third ] quarter stood at EUR 25 million, lower than Q2 2019 but comparing favorably to Q3 2018. CapEx in Q3 was EUR 200 million (sic) [ EUR 20 million ] and included mainly maintenance and recurrent items related to pulp, paper and tissue. Going now to Slide 5. We have some details on our EBITDA for the first 9 months. We registered EUR 300 million versus a comparable amount of EUR 338 million, which is adjusted for the sale of the pellet business and anti-dumping taxes. When looking at the delta between the 2 periods, we see the overall price impact was almost flat, with a positive performance in terms of average paper prices, around 3% year-on-year, which was offset by the negative evolution of pulp price, around minus 13% year-on-year. In the tissue business, price for converted products and reels evolved positively by 5% and 4%, respectively. But due to product mix effects, mainly the increase in sales of reels, average price for tissue products presented a 4% reduction year-on-year. The overall volume effect was positive, which is mainly from growing volumes sold in pulp and tissue, which outbalanced the impact of decreased paper volumes. In fact, we registered strong volumes in pulp, 21% year-on-year; and tissue, 64% year-on-year, sustained on the capacity increases completed in 2018 for both businesses. These increases outbalance the reduction in paper volumes in the period, minus 5% year-on-year, as said, a consequence of a decline in paper demand strongly induced by destocking along the value chain induced, among other effects, by the prospect of declining pulp prices. Overall, the main negative element comes from cost increases, which [ were already ] difficult in last quarter's results, and that reflects 2 elements: some instability in our pulp facilities in Setúbal [ peninsula ] due to different technical reasons, which had an impact in energy and chemical-specific consumption. But most of all, these cost increases reflect an unfavorable market context for many of our key cost factors. More specifically, the acquisition price of electricity and natural gas suffered significant increases in the first 9 months compared to the same period of 2018, about 13% in the unit cost of electricity and 18% in unit cost of natural gas, essentially resulting from the increase in Brent prices and CO2 emission licenses with a strong impact on electricity prices. CO2 license fee increased -- also increased from EUR 14 per ton to EUR 25 per ton over the period. Also, in 2019, there was a drastic price increase for the main raw material required for OBA production, DAS. These are optical brighteners used in the production of paper. In early January 2019, the price of this material has increased by around 300%, dragging the price of different OBAs up by 40% to 90% as DAS is incorporated into each type of OBA. The reasons for this increase are related to measures taken by the Chinese government as well as the opportunistic behavior of the main suppliers of this raw material. Navigator's product mix, biased towards high-brightness premium products, is more impacted than others. Also, wood costs are also worth mentioning, with a 4% increase year-on-year. This stems essentially from 2 factors: a specific and deliberate policy by the company to incentivize certified wood [ from outdoors ] and therefore, pay for the difference, which went up from 41% to 52% for all our supplier group in Portugal; and the higher price from imported wood, which went up relative to last year because of supply and demand imbalances in Asia. Finally, it's also worth mentioning the U.S.-euro rate average for the first 9 months of 2019, which was 1.12 comparing to 1.19 in the first 9 months of 2018. Considering that several input costs are purchased in dollars, non-Iberian wood and certain chemicals, the valuation of the U.S. dollar against euro also contributed to cost inflation. There were positive evolutions in terms of costs as well, namely in external fiber of approximately EUR 7 million related to purchases of softwood pulp and also of hardwood pulp [ in Vila Velha de Rodão ] for tissue. Fixed costs also evolved positively with a reduction of approximately 3%. We had a decrease in personnel costs more than offsetting a negative performance in maintenance costs. When faced with these externalities, we have to work on the variables that we can have an impact on, and that translates essentially into continuing to implement cost reduction and efficient measures throughout the company. So let's go to Slide 6, where we have an overview of our M2 Programme, mainly geared towards optimizing our industrial and operational costs, which we have started in 2016 and where we continue to actively pursue these efforts. This year, we estimate it has potential impact on EBITDA of around EUR 14 million, thus mitigating the negative impact of the aforementioned external cost factors. In total, we have launched around 100 projects during the first 9 months. 76 of these with positive effects in operational costs and asset performance. Some examples are projects related to optimization of wood consumption, maritime and road logistics, internal management of containers, integrated negotiations for chemicals and improved energy efficiency in the paper machines in Setúbal. As mentioned previously, we have also launched Zero-Based Budget efforts to address non-industrial fixed costs. So far, more than 50 initiatives have been identified corresponding to at least EUR 10 million in savings, which we aim to fully capture in the coming years. Now I will ask Antonio Redondo to make a few comments on the market. Tony, please.

[Antonio Jose Pereira Redondo, Member of Executive Board & Executive Director]

Thank you, João, and good morning, everyone. I would like to start by saying a few words on pulp prices and take a look at the PIX graph for BHKP in euro and U.S. dollars shown on Slide 8. You all have seen this graph before, and you can see that the BHKP index in U.S. dollars has declined to approximately USD 750 at the end of September, a correction of almost 27% versus a price of USD 1,024 at the end of December last year. Still, average prices in 2019 for both U.S. dollar and euro -- in Europe is clearly above the average pulp price in the last 5 years. The average for pulp price between 2014 and 2018 in U.S. dollars was $817. Average price year-to-date '19 is USD 909. The PIX index for Europe corrected significantly although in July, August and September. So let's take a closer look at what has happened in the last months in the pulp market by going to Slide #9, please. New capacity coming onstream in China, both in tissue and printing and writing, severely increased competition and paper and tissue prices dropped severely in China from Q2 '18 onwards. In parallel, we believe that the cessation of trade war tensions and the consequent slowdown in economic activity in China led to a reduction in paper and board consumption, pushing prices further down. Hence, Chinese pulp consumers were suddenly faced with an increase in their stocks, but at record-high prices and swiftly stopped further pulp price purchases in Q4 2018 through the end of Q1 2019. In fact, during Q4 2018, market pulp demand experienced a significant decrease, falling 1.7 million tons year-on-year. China accounted for 90% of this reduction, and Europe followed 2 to 3 months later. With Chinese buyers reducing pulp purchases, prices quickly fall and producer stocks start to build up at Chinese and, by the way, European ports. During Q1 '19, Chinese pulp buyers continued to significantly reduce their purchases, forcing new price reductions in the pulp prices of circa 28%, and producer stock continued to increase while buyers used a significant part of their own inventories. There is little visibility on how much inventories have declined at Chinese end users, but we strongly believe a significant part of the stock increase at Chinese ports represents a stock transfer from consumers to producers. Notwithstanding that, since Q2, demand in China seems to be back to normal, and there are production cuts, maintenance and market-driven, for major pulp suppliers in Latin America and Asia announced for Q3 and coming in Q4 this year. Q3 demand likely stabilized year-over-year as a consequence of a difficult comparison with a record-high Q3 in 2018. Also important is the fact that pulp production costs are increasing due to higher wood prices especially and higher cost of chemicals. This means that high-cost wood producers in China are now significantly pressured by lower pulp prices, and with buyer stocks at low levels, restocking should occur soon upon price growth expectations. We remain positive that we are already at or very close to the bottom of the price cycle. We have adjusted our forecast for a rebound no later than the beginning of next year. Of course, this is subject to Chinese and rest of the world economic activity pickup. We have just seen our buyers react to uncertainty brought by trade tensions. This is also dependent on pulp producers' production discipline to balance stock level. We have seen some responsible attitudes from producers controlling supply, and we at The Navigator Company, in our small market pulp scale, have also made an effort in that supply discipline. So wrapping up on the pulp market. We believe medium-term fundamentals remain sound as there is no new capacity coming to the market before second half of 2021. And on demand side, market pulp will be mainly driven by tissue investments and demand growth as well as restocking of depleted stocks on the buyer side, with industry consultants forecasting an increase in tissue capacity of over 1 million tons in 2020. Half of this growth is occurring in China, where fine paper printing and writing grades seems to have recovered production levels in the last months. Let's go now to Slide 10, please. With an update on the paper market, global paper demand has been impacted by economic activity and significant destocking, mainly due to uncertainty regarding pulp prices. Global demand for printing and writing papers decreased 3.4 million tons, representing over 6% fall year-to-date August, with uncoated woodfree still showing its resilience but falling 2.6%. And this is clearly above the trend for the past 5 years so we believe that this is due to the global economic slowdown and the reduction of inventories through the entire supply chain in all main printing and writing grades. Actually, demand for uncoated woodfree in Q3 experienced a particular severe drop in Europe of over 5% and U.S.A. of almost 8% vis-à-vis Q3 2018, well above levels recorded in previous years. And remember, you, that the average for the past 5 years was less than 2% in Europe, making this quarter a particularly difficult one. As already mentioned, we estimate that this decrease was a result of a significant reduction in stocks across the supply chain in the last few months. Still, the average on the last 5 years is a reduction of 2.3% in demand for global printing and writing papers with uncoated woodfree showing, as previously mentioned, a significant resilience, adjusting only 0.3%. This resilience is clear when we look at paper prices on Slide 12. As you can see, the index for A4 price stood at EUR 900 per ton at the end of September after experiencing an increase in the beginning of the year and a mild decline afterwards, it is now flat with average prices standing at EUR 909 per ton. This average price is well above the average for the last 5 years, which stood at EUR 832 and is also above the average for the last 10 years. So let's go now to Slide 12 with a wrap-up of uncoated woodfree market conditions. Starting with pulp. We have seen that notwithstanding its correction, pulp prices remained high in spite of recent fall, and we are still optimistic that there will be a rebound no later than the beginning of next year. As you all know, paper prices follow pulp prices with a certain lag in time and present much less volatility with a more stable and constant evolution. Paper prices have eased from the high level at the start of the year and have slightly adjusted over the last months, but will remain high. This stability is a clear reflection of the resilience of the uncoated woodfree paper. Paper supply has been growing in Asia and Middle East, but closures and conversions are occurring or has been announced at the same time in other regions of the world, namely in U.S., Europe and Indonesia. In 2019, the net balance between increase and decrease in paper supply based on consultants' and companies' announcements is actually supportive to the paper price environment. Going now to Navigator performance in the paper and pulp business on Slide 13. We can see that paper sales in the period totaled [ 1.082 ] million tons, down 5% on the first 9 months of 2018 and we were hampered by deteriorating market conditions and by a drop in output. The demand for printing and writing paper has reflected not only a global economic slowdown, but also a sharp reduction in stocks within the supply chain, with falling pulp prices dragging down paper prices. In this context, the group's performance reflects a sales strategy which was sought to protect prices in Europe and U.S.A., regions where the group records most of its sales, with control over the total quantity supplied and some volumes being redirected out of these geographical regions. This management of sales resulted in a change in the product mix with increased sales of reels and reduction in premium products related to the current context of pressure on prices and stability in own brands that still stand for 70% of our total mix. Despite the evolution in the product mix, the group's average sales price remained 2.4% above the average price of last year and sales value stood at EUR 905 million. Total paper output by Navigator in the first 9 months of '19 was down versus last year due to a series of factors affecting production, including the strikes in the first half at our largest paper mill in Setúbal but also due to the management of production levels in view of current market conditions. The annual shutdown at the Figueira da Foz paper mill originally planned for October was accordingly brought forward to September to coincide with the shutdown of the pulp mill so that the supply could be managed more efficiently. Over the course of '19, Navigator has optimized operations and quality for new products on its paper mill in Setúbal, PM3, in order to ensure it offers heavyweights products that meet the highest global quality standards. Notwithstanding, this process of optimization required a series of planned trials and tests, which necessarily entailed reduction of output from PM3. As I've mentioned previously, Q3 '19 was particularly difficult with a drop in uncoated woodfree demand in Europe of over 5% and U.S.A. of almost 8%, well above the levels recorded in previous years, although it is estimated this decrease was a result of a significant reduction in stocks across the supply chain in the last few months, as I have previously mentioned. In this context of intense pressure on prices, Navigator recorded a volume of paper sales around 1% lower than in the previous quarter, which combined with the sales price similarly under pressure, resulted in sales in value of EUR 294 million. During Q3, pulp business was also hit by a significant worsening of market conditions, reflected in a drop of almost 13% in the standard BHKP price index and a sharp contraction in demand in the European market. Sales of pulp were therefore marked by a drop in the average price, which was nonetheless more than offset by the substantial increase in volumes, which stood at 91,000 tons, 48% up. As a result, pulp sales were 16% up quarter-on-quarter. In the first 9 months of '19, pulp production was down 1.2% on output vis-à-vis '18, constrained by major maintenance shutdowns at Setúbal and Cacia plants in April and May and Figueira da Foz in September. Another limiting factor was management of supply in a market environment characterized by slowing economic activity and shrinking demand in the pulp and paper sectors. Even so, the quality of pulp available for sale was greater than in the previous year, thanks to the capacity expansion completed last year and the smaller volume of pulp incorporated into paper, making it possible to record an increased total sales to 214,000 tons. I will now let Nuno make some comments on the tissue market. Please, Nuno.

[Nuno Miguel Moreira de Araújo dos Santos, Member of Executive Board & Executive Director]

Thank you, Antonio. Going to Slide 14. I will make some brief comments on the tissue market that it is increasing its weight on our turnover and represents currently 8% of our sales for EUR 102 million. Demand for tissue follows general economic activity. Euro area economic growth softened in the second quarter of 2019. Real GDP increased by 0.3% quarter-on-quarter on average in the first 2 quarters. Still, when looking in the medium term, tissue demand continues to present interesting growth rates. From 2017 [ to ] 2019, demand is estimated to grow 3.3% in Portugal and 3.7% in Spain. This demand growth has been followed by the start-up of new capacity. In Portugal, as you know, we started a new tissue machine in Aveiro. And in Spain, other players are also starting new production, namely SOFIDEL and [ Tronchetti ]. This brings additional commercial challenges, but we believe that Navigator's new tissue mill is particularly well positioned, quality- and cost-wise, to serve the Iberian market as well as the French and U.K. markets, the latter being the largest importer of tissue in Europe. On Slide 15, on the tissue business, we can see there was a significant increase of 64% in the volume of sales to 74,000 tons as a result of the start-up of the new tissue plant in Aveiro. The value of sales stood at EUR 102 million, up 60% versus the first 9 months of 2018. This growth in volume reflects 2 distinct changes to the business. On the one hand, sales of finished products grew by around 26% to 56,000 tons. And on the other hand, the group's sales of reels, [ mother reels ] which had been negligible in the same period of last year, increased 24x to 18,500 tons. Both finished products and reels benefit from price rises in relation to the first 9 months of 2018, which was vital to offset the increase in costs, especially in terms of chemicals, logistics and energy. However, the faster growth in the reels business, typical of the early stages of production in a new tissue mill, changed the mix of products sold, which had an impact on the average sales price of the tissue business, even though the group made significant price increases on both products. In terms of geography, we have now increased considerably the weight of sales outside Portugal and Spain to other markets, such as France. I will ask João Paulo to comment on the next slide

[João Paulo Araújo Oliveira, Member of Executive Board & Executive Director]

Thank you, Nuno. Let's go to Slide 16, where we have an overview of the CapEx registered until September 2019. Navigator recorded total investment of EUR 88 million. This figure includes EUR 59 million in maintenance, current and noncurrent; EUR 12 million on completion of the new tissue plant in Aveiro, the PO3 project, which was the pulp capacity increase in Figueira da Foz and the final stage of investments in heavyweights production; as well as EUR 17 million in environmental CapEx. In the last -- latter category, the main project currently underway is the construction of a new biomass boiler at the Figueira da Foz site to replace the existing boiler and the natural gas combined cycle power plant, which will make it possible to reduce fossil CO2 emissions at the mill site. This project is linked to our project to become carbon neutral that I would like to address now on Slide 17. The environmental CapEx project mentioned are part of a wider program of improvements to the environmental performance and sustainability of the group deals and are in line with Navigator's commitment to achieve carbon neutrality in 2035. This makes The Navigator Company the first Portuguese corporation and one of the first in the world to make a commitment to attain carbon neutrality 15 years early, which will enable all its industrial complexes to be carbon neutral by 2035. In order to support this mission, Navigator has announced total investment of EUR 158 million. The challenge of the climate change is a priority, and Navigator has, therefore, drawn up its own road map to carbon neutrality, involving an emission series of CapEx products -- projects in renewable energy and new technologies, which will allow it to cut CO2 emissions as well as forest planting to offset residual emissions, which cannot be eliminated. It is important to stress that the forest and the Navigator Company management in Portugal represent the carbon stock equivalent to 5.4 million tons of CO2, excluding carbon retained in the soil. This is equivalent to the emissions generated by 1.5 million cars driving a distance equivalent to the circumference of the planet. I will now ask Fernando to comment on the next slides.

[Jose Fernando Morais Carreira de Araújo, Member of Executive Board & Executive Director]

Thank you. On Slide 18, cash flow from operations generated in the first 9 months was EUR 248 million, which compares to EUR 268 million in 2018. Free cash flow totaled EUR 125 million comparing to EUR 94 million (sic) [EUR 93 million], net of the EUR 68 million inflow from the pellets business side. In relation to operating cash flow generated in 2019, free cash flow was brought down by capital expenditures of EUR 88 million versus EUR 148 million in 2018 and also by a significant increase in inventory, up by EUR 16 million, especially in wood, due to the replenishment of stocks to levels regarded as adequate, as well substantial growth in pulp stocks over the period. So the group's operational performance enables once again the record robust capacity to generate funds that is has displayed consistently over recent years. So now on Slide 19. As a result, at the end of September, Navigator interest-building debt totaled EUR 776 million, up by EUR 93 million in relation to year-end 2018. In the period when the group paid EUR 200 million in dividend and acquired EUR 18 million in its own shares. The net debt-to-EBITDA ratio remains at a conservative value of 1.87x. I would like to spend some minutes on Slide 20 and go over the debt restructuring accomplished in the period. In view of the approaching maturity of a substantial portion of our debt, which was due in 2020, we decided to undertake a restructuring process. Following this restructuring, where we managed to increase our average unit and diversify our source of funding, average term of group's debt was 3.7 years at the end of September with a cost of debt of 1.70% and with a proportion of fixed debt of 83%. Just a quick word regarding the end of the rating service from Standard & Poor's and Moody's agencies. Following the completion of this restructuring process, just mentioned, Navigator decided that in view of the associated cost, there was no correct [indiscernible] for maintaining the rating service and informed both national agencies of its decision to end their service. To finish the comments for the quarter, I will give back the floor to João.

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

Thank you, Fernando. And just a few words on the outlook for 2019 on Slide 22.I think we can all agree that 2019 has been dominated by severe geopolitical and significant trade tensions globally with the Eurozone affected by fears of a possible hard Brexit. These factors remained in play throughout the first quarter, culminating in September in the publication of the macroeconomic data that confirmed that the global economic is entering a period of deceleration. All these adverse events have impacted economic growth worldwide and have particularly affected the pulp and paper industry. In pulp, after a sharp reduction in demand from local purchases and a significant increase in stocks at manufacturers, which then pushed pulp prices down, prices in China are currently at very low levels. Pulp prices in Europe are currently showing significant reduction, and prices are now close -- now closer to those observed in China, which may suggest that the turning point will soon be reached. In the case of softwood pulp, there are signs that this might happen in the course of the fourth quarter. With a certain upturn in demand and the absence of any significant increases in supply until the second half of 2021, pulp price can be expected to perform moderately well as from early 2020.On the paper side, the third quarter also reflected worsening conditions in the global economy and also a degree of reduction in stocks along the supply chain, which has held down paper prices. As the [indiscernible] free market leader in Europe, the Navigator Group continues to present a resilient business model, the capacity to take market action that allows it to take current market conditions in its stride.The tissue business demand continues to grow at interesting levels, albeit, against the backdrop of new production capacity coming online in the Iberian Peninsula. For Navigator 2019 remains a year of consolidating recent investments with a view to increase total sales. The main aim is to achieve sizable gains in sales of finished products as the industrial operation matures and our share of the target market grows. After posting record results in 2018, the group's performance over the first 9 months of 2019 have been constrained by the market context and by a number of external factors, which have hampered global economic growth and have an impact on cost of production items. Essentially, the increase in [ taxes' ] costs could not be transferred into pricing or volumes in this particular market context. Even so, Navigator has recorded results that have compared favorably with those for the past 5 years, and is working actively on improving operational efficiencies by pressing ahead with its M2 Programme for cost reductions and operational excellence. This was [ shown ] in April by the Zero-Based Budget project, which sets out to design and implement the various initiatives at fixed costs, the benefits of which may be expected into 2020. We are confident that with these efforts and its superior investor and commercial model, the company will be ready to continue to deliver the strong results it's accustomed the market to, throughout a cycle, which will eventually [ turn back ]. Thank you.

[Joana de Avelar Pedrosa Rosa Lã Appleton]

Thank you, João. This concludes our comments on results. We are now ready for the Q&A.

[Operator]

[Operator Instructions] The first question comes from João Pinto from JB Capital Markets.

[João Filipe Pinto, Associate of Equities Research Portugal]

First one on paper market. Could you please give us some color on how demand in Europe has been performing since September? Is this [ stocking ] trend that occurred in Q3 remains? Or are you seeing some stabilization? Following this, what can we expect for paper volumes in the fourth quarter? Should we expect them flat versus this quarter? And also, if you could give us your view. Where do you see pulp volumes in 2020? It will be great. Also, on supply closures, could you give us an update on expected capacity, shutdowns and conversions in the use of U.S. paper market? And finally, on M2 Programme, you forecasted a potential annual impact of EUR 14 million, if I understood correctly. Could you please tell us how much of this has been already reflected in the first 9 months of the year?

[Joana de Avelar Pedrosa Rosa Lã Appleton]

João, can you repeat the last 2 questions.

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

No, the last one, I think I got it. The previous 2 to the last, I think you should repeat that. We got the one on paper volumes fourth quarter, and then we got the one on M2, on the M2 Programme. But the others in the middle, we, for some reason, we could not hear them well. Can you repeat, please?

[João Filipe Pinto, Associate of Equities Research Portugal]

Okay. So I will repeat everyone. So first one was on paper markets. How the market is evolving in Europe since September? Then I asked about paper volumes in fourth quarter and 2020. And then supply closures, if you could give us an [ upside ] on expected capacity shutdowns and conversions in the [ UWS ] paper markets? And finally, on the M2 Programme, how much of the efficiency gains are reflected in this set of results?

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

Do you want to address the one on the paper?

[Antonio Jose Pereira Redondo, Member of Executive Board & Executive Director]

Thank you, João, for your questions. As you know, we cannot and we will not provide guidance. And in true honesty, we don't know yet the numbers of October because the October month is not closed. And we don't know that, as you probably know, the statistics of the industry are typically 2 to 3 weeks delayed. So only by the second half of November, we will know the truth demand in October. Regarding the second question regarding -- about paper volumes in Q4 and paper volumes in 2020, we are relatively optimistic that Q4 is seasonally -- and it's always a seasonal pickup in Q4. So we expect to see a seasonal pickup in Q4 again this year. Regarding 2020, we do expect that with a rebound on pulp prices, pulp and paper prices will first stabilize and then rebound towards the Q1, Q2 2020. And hence, typically, the confidence of the supply chain is regained and people start to restock. So we anticipate 2020 with much more optimism than so far 2019. On the capacity shuts, I believe that you know them probably better than we do, but we're trying to list what we believe it will happen. We expect in Indonesia in total by the end of this year, beginning of next year in excess of 0.5 million tons will move from [indiscernible] to [indiscernible] and about 200,000 to 300,000 tons from [indiscernible] to packaging. We expect the reconversion in Mexico of [ Copamex ] also to packaging. We expect the conclusion of the shut of a mill in Japan. We expect the conclusion of the second shut that was announced by [indiscernible] in the U.S.A. And the only capacities that will come to market this year are in Middle East, which as far as we understand, didn't yet to fully materialize in production and a smaller capacity in India for the local market. Regarding 2020, we know because it has been already, so to say, announced, another shutdown in U.S.A., another shutdown in Japan and which quite interesting, the possible reconversion from containerboard to uncoated woodfree which is actually the opposite movement than the ones that I described before in China. But this also proves the strong view, these agents, these producers [indiscernible] on the Chinese and uncoated woodfree paper market by reducing capacity on containerboard and moving into uncoated woodfree.

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

On the M2 question, the answer is yes. The EUR 14 million are there. The question is that the way we compute this is this is against a baseline of constant factors. And unfortunately, this baseline has not evolved favorably, right? So if you keep volume productions -- production volumes, specific consumptions and prices of the main factors constant, then you could see this effect in the bottom line. But as I said, volumes specific consumptions and particularly the factor prices deteriorated during the period. And therefore, the pipeline corrected in a way that you cannot spot the EUR 14 million directly in our bottom line, but they're there.

[João Filipe Pinto, Associate of Equities Research Portugal]

Yes. Just a follow-up. Assuming that the baseline was the same, this EUR 14 million would be in the first 9 months or on an annual basis?

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

First 9 months.

[Operator]

The next question comes from [indiscernible] from [indiscernible]

[Unknown Analyst]

So I would like to start maybe by asking about your inventories on paper. If you may comment on that? And then secondly, on production. We saw the maintenance in Figueira da Foz. May you comment on the impact of this maintenance in this quarter? Because when we account, for example, for 10 days of stoppage in pulp and 5 days stoppage in paper, if we estimate those values, it will be a decreasing production of around 18,000 tons in pulp and 11,000 tons in paper. But since -- but comparing with the third quarter of 2018, we saw a decrease of 30,000 tons in both of them. So maybe if you can -- could comment on that? And the third question regarding the costs. May you please comment if you have seen any decrease in costs of wood due to the falling oil prices year-on-year?

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

Okay. Can you repeat the question, please? This last one.

[Unknown Analyst]

If you have seen a fall in costs due to the falling oil prices year-on-year in the third quarter of wood costs.

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

[indiscernible] Okay, okay, okay. Good. So on the stocks question, I would ask António to comment please.

[Antonio Jose Pereira Redondo, Member of Executive Board & Executive Director]

Thank you for your questions. So on the paper stocks by the end of September, we are actually with a low level of inventory. And we do believe, according to the statistics of the industry by the end of September, this is also the case of the majority of our competitors, but we have a very lean stock in our mills by the end of September. In U.S.A., according also to industry sources, we believe that stocks are a bit higher than in Europe at the production side.

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

Production, João Paulo will answer the question.

[João Paulo Araújo Oliveira, Member of Executive Board & Executive Director]

Okay. I'm not sure whether I understood everything, but we have planned to do the mill shutdown in October, and we decided to anticipate to September. Therefore, you might see some changes in the figures. We did take a little bit longer than we initially planned because we wanted to have a closer look to our recovery boiler, and we had some specialists coming from the manufacturer, and we decided to check on a few critical equipment that require our attention, and that's why it took a little bit longer.

[Unknown Analyst]

Okay. And maybe...

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

Yes, please?

[Unknown Analyst]

Maybe just on follow-up of that. Regarding the paper machine 3 in [indiscernible] is that already fully operational? Or do you still have [indiscernible] in production?

[Unknown Executive]

Yes, the paper machine 3 is in full operation. We are producing now the full range of paper that we planned. We have decided to run the machine a little bit slower because we want to stabilize all the different criteria. Just to recall, maybe of interest for you, this is the only machine in the world producing from 60 to 300 grams. And therefore, it requires our full attention.

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

So Nuno Santos will answer now the question on wood procurement.

[Nuno Miguel Moreira de Araújo dos Santos, Member of Executive Board & Executive Director]

Okay. So as you know, in Portugal, the wood cost is not dependent on pulp prices and so on. So it's pretty stable. And also, as you know, for the year, so for example, for this year, our contract -- supply contracts from outside Iberia are also predefined. And so during the year, we do not see any change of on the price on the wood cost on those extra Iberian contracts. Yes, indeed, in Spain, especially in Galicia historically, the market operates and the prices somehow fluctuate following the leader [ Ence ] the wood cost follows somehow there's indexation on the pulp price. So we are expecting this last quarter a slight softening of the wood costs in Galicia. Looking forward to the next year, we do expect that the average wood costs coming from Spain, mostly Galicia, and from outside Iberia to soften a little bit versus this year.

[Operator]

The next question comes from Bruno Bessa from CaixaBank, BPI.

[Bruno Filipe Bessa, Analyst]

So a few questions from my side. The first one regarding pulp demand. I believe you mentioned in the presentation that you have already been seeing signs of pulp demand recovering. And my question is, if you believe that this is an underlying improvement of demand in the industry, or if this might represent an opportunistic behavior from distributors in China as a response to Suzano's strategy of reducing the prices of pulp sold in China from Q3 onwards. This will be my first question. And my second question regarding paper prices and we have started to see paper prices posting more relevant declines over the last couple of weeks. You have already mentioned that the outlook for pulp prices seems to be better for 2020. My question is under a scenario in which pulp prices start to recover in 2020 and perhaps only after the Chinese new year festivities. And when would you expect paper prices to react to this potential positive evolution of pulp prices in the beginning of the year? So this would be my second question. And if I might, further 2 questions. The first one on your CapEx expectations, particularly for 2020 and particularly considering this environmental CapEx commitment that you have as of today, if you could [ operators ] on the CapEx expectations for 2020 would be good. And also related with CapEx, considering that you have a solid balance sheet and considering the depressed [indiscernible] that we see across the sector as of today. If you could consider any potential M&A opportunity, particularly in the tissue business for 2020. Last question, if you could give us any -- or if you have already any visibility on the final U.S. tariff, which I believe was expected to be announced between September and November this year.

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

So I will ask António to answer the question on pulp demand, paper prices and the U.S. tariffs, okay? And then, we'll move to the CapEx question.

[Antonio Jose Pereira Redondo, Member of Executive Board & Executive Director]

Thank you for your question. Let me start with pulp demand. So year-to-date in China and let's pick a bit about hardwood, year to date in China, the decrease has been 1.3%. But in the last 3 months and the last 3 months is June, July and August, we don't have yet the September figures, we saw a rebound of an increase of almost 5%. So if you look to this quarter-by-quarter, you'll see that last year, we have a record quarter of demand, which was Q3. And then, as I mentioned previously, we had a very severe decrease with the correction decrease in Q4 last year and Q1 this year. However, from April to July in China, the 4 months from April to July, they posted record sales in China already. And August was not a record sale. It was slightly below last year, only because last year was the strongest August ever. Most likely in September is going to be very difficult also to post a record because September last year was by far the highest month ever. So yes, we see a pickup in China. We expect -- we see a very strong period from April until July. We -- probably August and September will show on a comparison year-on-year will show a slight decrease just because it's a very difficult comparison with 2 strong months last year. Obviously, there is an element of psychology. And most likely, there is an element of speculation on the evolution of pulp prices and purchases in China. And we do believe with stocks available in ports and stocks of consumers, we believe depleted. We expect to see a strong rebound of pulp demand. Also, as far as we can see, on the paper side, the demand of paper in U.S.A. already started to pick up, and prices of paper -- sorry, I said U.S.A. I mean China. And prices of paper in China also increased from the beginning of this year onwards. Regarding the impact on the paper side. You need to speak probably about 3 different segments and 3 different speeds of reaction. If you look to U.S.A., I think prices in U.S.A. have been relatively stable. And we have no reasons to believe that prices in U.S.A. will have a dramatic drop on the coming months. Hence, we can also not expect a dramatic increase if there's not a dramatic drop. And this is very much linked to the question you have raised in the end, I will comment to that, the balance of supply/demand in U.S.A. and the role of imports and exports. I will come back to that probably a bit later. Europe, we know that there is a lag in Europe. It might be 10 weeks, it might be 12 weeks. So we might see paper prices still sliding a little down in the coming months. But after the bottom of pulp cycle is achieved, as we said, we believe it might happen in the beginning of next year. With the same lag, we expect paper prices to increase from that moment onwards. Regarding the international markets outside the 2 main regions, so Europe and the U.S.A., paper prices typically drop very fast, which occurred in Q3 this year, but also is the market where paper prices recover increase faster. So as soon as we see signs of pulp prices increasing, we expect the international markets outside Europe and U.S.A. to react faster than Europe. Regarding your last question, on the antidumping case, we don't have yet the decision regarding the second period of review. This decision is due latest by the middle of November. So we have a couple of weeks. As we said previously, we are quite confident and comfortable with the results that we are looking at, of course, bearing in mind that, in these cases, we might have surprises like we had last year that we were able to revert quickly. But we have something that is very positive is that the U.S.A. the same petitioners try to raise the case against the same countries, so Australia, Brazil, China, Indonesia and Portugal on [indiscernible] convention of reels, meaning that those countries who are selling reels to circumvent the measure on ships and to be able to supply and [ kept ] reels and to ship into U.S.A., and the ruling of the [ OC ] was that they will not perceive this case against Portugal, because once again, there is no evidence of antidumping from our case. So this is very positive news that was announced a few days ago. So we expect this to be a positive sign for us.

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

Okay. So Paulo, you want to address the CapEx question?

[João Paulo Araújo Oliveira, Member of Executive Board & Executive Director]

Yes. Okay. So concerning the CapEx, as I mentioned, we have, until now, invested EUR 88 million. I expect that we end up the year with EUR 120 million, EUR 130 million. And we are forecasting for next year, a decrease -- a slight decrease on this number.

[Nuno Miguel Moreira de Araújo dos Santos, Member of Executive Board & Executive Director]

Okay. So on the final question, you're right, we do have a solid balance sheet, but we want to be extremely prudent on how we deploy our resources and capital. We focus now on the tissue side is to consolidate our investment in this year and make sure that we have a [indiscernible] and winning business model which we think we will, but that is where our priority is right now. So we are not actively looking for any [ consideration ] opportunities at this point in time.

[Operator]

The next question comes from Luis de Toledo from BBVA.

[Luis de Toledo, Chief Analyst of Oil and Materials]

Just 2 questions for me on my side. The first one, maybe if you could elaborate on the raw material, pulp and paper integration rate optimization that you're looking. I mean, if you could detail and where is it coming from? If it's related with any productions in heavyweight tissue, or if you expect additional improvements in yields? And how much improvement can we expect? And there's another one also on CapEx on the environmental program you announced long-term EUR 158 million. If you could give us some hint on how we should expect that to be shared between the -- in the [indiscernible]?

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

Could we ask -- so we got the one on environmental CapEx. But the first one, if we could ask you to repeat -- you were speaking a bit fast and was not so...

[Luis de Toledo, Chief Analyst of Oil and Materials]

Sorry. Okay. You have referred to improvements in raw material integration in the amount of pulp that your paper [ and tissue ] paper production needs. I would like to know if that's related with a mix in paper, if there's improvements in yield that you were targeting? Or if there's, I mean, I would like to understand if that trend is -- has additional room for improvement. That will be then a question on raw material integration.

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

[indiscernible] your first question.

[Unknown Executive]

I don't know if I understood correctly the question. We have announced EUR 158 million over times 10 between 2020 and 2035. So I will not be able to tell you specifically how much we will be investing a year. But maybe as a reference, we have acquired a new biomass boiler for our Figueira da Foz mill. That's a total investment of around EUR 55 million. That's occurring between 2019 and 2020. So next year, the new boiler will go live.

[Antonio Jose Pereira Redondo, Member of Executive Board & Executive Director]

Okay, very good. I think on the first question, Luis, I, again, not totally sure that we understood it, but I'll answer, nevertheless, which is always a risky thing to do. But on the pulp side, we mentioned that we would have more pulp available for sale, but it is more related with the fact that we have produced less paper, and therefore, we have to integrate less pulp rather than specific consumption type of effect. And of course, we also invested in more pulp capacity. So it's the product of these 2 things rather than optimization in terms of specific consumption of pulp into paper. But again, I'm not sure if that was your question, if it wasn't, I'm happy to listen to it again and try to give you an answer.

[Luis de Toledo, Chief Analyst of Oil and Materials]

No, absolutely, that was the question. So it's not something that -- I mean, it's more on the mix and the lower production pulp that you have been more -- less paper -- sorry, more availability of pulp to sell to the market. It's not something about the specific consumption yields or new processes in which you're optimizing the production of paper? Although I know that, obviously, constantly [indiscernible].

[Operator]

The next question comes from [ Joel Collado ] from [ BIG ].

[Unknown Analyst]

I had one on CapEx, but it was already replied. But maybe if you can comment on buybacks. And if you expect them to continue going forward, given that you already have this extra CapEx of the environmental program.

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

Again, you asked a question on the environmental program.

[Unknown Executive]

No, buyback.

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

I know. I did understand the buyback, but then...

[Unknown Analyst]

No. No, on buyback.

[Joana de Avelar Pedrosa Rosa Lã Appleton]

Could you repeat again the question.

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

There were 2 questions, right?

[Unknown Analyst]

Yes. No the CapEx is already replied. I was asking regarding buybacks, if you have any comments on going forward? What your plans are?

[João Nuno de Sottomayor Pinto de Castello Branco, Chairman of the Board & CEO]

Okay. So we will remain attentive whenever we think the share is going to be -- is below its fundamental value, we will consider that possibility. I would -- I cannot say much more than this right now. Okay.

[Operator]

Thank you. Ladies and gentlemen, there are no further questions in the conference call. I now give back the floor to the company. Thank you.

[Joana de Avelar Pedrosa Rosa Lã Appleton]

Thank you very much. Ladies and gentlemen, this concludes our call. Thank you.