Navigator Company SA

ELI:NVG

Earnings Call Analysis

Navigator Q3 Shows Market Recovery Amid Cost Control

Navigator company's Q3 reflects a recovering market as paper and packaging destocking aligns with demand, causing a 6% quarterly increase in paper volumes. Despite a challenging economic climate, Navigator executed rigorous cash cost control, leading to a 20-28% cost reduction in Pulp and Paper, and 17% in Tissue over the last quarter of 2022. Year-on-year, the EBITDA margin fell slightly to 25.7%, with a 1% increase in EBITDA to EUR 124 million. Turnover rose to EUR 481 million with EUR 23 million in positive cash flow, despite a net debt of EUR 550 million due to significant investments, including over EUR 140 million in CapEx, 61% ESG-related. Pulp market prices saw a sharp drop, with a 49% decrease year-on-year, but paper prices remained relatively resilient, showing a slower 6% decrease in Q3.

Market Context and Company Performance in a Difficult Environment

The company has faced a slower-than-expected recovery as paper and packaging destocking along the distribution chain lagged, leading to historically low order inflow levels. However, as predicted, Q3 shows signs of stabilization with the destocking trend phasing out and a gradual market recovery. Despite geopolitical turmoil and a global economic slowdown, Navigator has continued investments in innovation across Tissue, Packaging, and Energy sectors. In Q3, the company experienced a slight EBITDA growth by 1% to EUR 124 million and an improved EBITDA margin of 25.7%, marking a 1 percentage point increase over the previous quarter. The drop in cash costs has been substantial, between 17% for Tissue and up to 28% for Pulp and Paper, coupled with substantial CapEx, particularly geared towards ESG initiatives, indicating healthy financial resilience.

Financials and EBITDA Analysis

In a year-on-year comparison, EBITDA fell by 4.5%, or 12 points, to EUR 377 million reflecting a slight year-on-year fixed costs increase and downward pressure on market prices, especially for pulp. Yet, there is a commendable reduction in cash costs and robust performance in the Tissue segment which is up 12% compared to 2022. The volume increases across all segments due to improved order inflow as the third quarter saw phasing out of destocking, contributing to the strong quarter results despite a challenging market.

Pulp and Paper Prices Evolution

The pulp market saw a sharp decline from peak levels at the start of the year, later partially rebounding. Despite this volatility, the paper index maintained a degree of resilience, averaging 6% higher in the first 9 months of 2023 compared to 2022. This relative stability in paper prices is promising given the drastic drop in pulp prices, demonstrating Navigator's ability to sustain value in their paper products amidst market fluctuations.

Global Demand for Eucalyptus Pulp

Global demand for eucalyptus pulp improved significantly in Q3 2023, bolstered by China's restocking activities. Despite a decline in European demand, China's appetite for pulp following price drops has led to an overall market upturn. The pulp stock levels in European ports have started declining, hinting at a more balanced supply-demand situation moving forward.

Performance in the Uncoated Woodfree Papers Market

Navigator has maintained a high market share in Europe for Uncoated Woodfree papers despite a global decrease in demand. The company adjusted production without compromising its premium products and new brand developments, sustaining an average operating rate higher than industry competitors. This strategic focus on premium segments and innovative brands should bolster the company's performance even as the broader market experiences challenges.

Achievements in the Tissue Segment

The Tissue segment exhibited considerable year-on-year growth due to the successful integration of Navigator Tissue Ejea, leading to increased sales volumes and revenue, primarily in the At Home channel. The company's focus on innovation and brand differentiation has effectively expanded its market position and will likely continue to contribute positively to the company's performance.

Developments in the Packaging Segment

Navigator faced a downturn in the packaging market, influenced by economic slowdown and changing packaging consumption trends. However, the company continues to innovate and has introduced sustainable, paper-based packaging solutions, finding success amid regulatory shifts and increasing sustainability concerns. As the sector shows signs of recovery, Navigator is poised to capture growth with its commitment to high-value opportunities in the packaging space.

Capital Expenditure and Investment Projects

Navigator's ambitious investment projects have hit EUR 142 million in CapEx, targeting decarbonization, environmental improvements, and packaging sector development. Notably, 61% of these investments are connected to ESG initiatives, demonstrating the company's commitment to sustainable growth and innovation.

Advancing Decarbonization

The company is fast-tracking its decarbonization efforts, shifting its intermediate targets three years forward. With the construction of new solar power facilities, Navigator is set to increase its self-generated solar energy capacity, reflecting a decisive step towards its sustainability goals.

Free Cash Flow and Financial Strength

The company's free cash flow generation was affected by the Tissue acquisition and other outflows but showed signs of improvement by the end of the quarter. Navigator has a net debt of EUR 550 million, with an enduring financial strength characterized by a low net debt/EBITDA ratio of 0.98x and a solid liquidity position. This resilience is critical in funding ongoing projects and managing the robust investment cycle.

Resilient Business Model and Market Outlook

Despite uncertainties fueled by the unsettled geopolitical situation, the company anticipates gradual recovery for pulp as the recent upswing in order inflow for printing and writing papers hints at a brighter outlook into Q1 2024. Navigator's price increases across various markets reflect the need to address rising input costs and sustain financial health. The strategic focus on diversified products, rigorous cost control, and financial solidity confirms confidence in the resilience of Navigator's business model throughout market shifts.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon. We welcome you to The Navigator Company Q3 results presentation. [Operator Instructions] I now hand the conference over to Ana Canha. Please go ahead.

[Ana Canha, executive]

Ladies and gentlemen, welcome to The Navigator Company conference call and webcast for the third quarter and 9 months results 2023.Joining us today are the following members of the Board: Antonio Redondo, Fernando de Araujo, Antonio Quirino, Dorival Almeida, Joao Le and Nuno Santos. As usual, we will start with a brief presentation and we will have Q&A session at the end.The presentation can be accessed through the link [indiscernible] on the website. And questions may be addressed also through the webcast platform.Antonio will start with a comment on the main highlights of the quarter. We will now hand over to Antonio.

[Antonio Redondo, executive]

Thank you, Ana. Good afternoon, and thank you for joining us today. I am very happy to be here and share with you our third quarter and the first 9 months results. Over the course of the first half of this year, destocking of paper and packaging along the distribution chain was slower than expected. As a result, the order inflow in these segments stood at historically low levels.In the third quarter, and especially in the second half of the third quarter, as we have anticipated in the previous call, the market is showing signs that the destocking throughout the supply chain is now gradually phasing out with normalized inventories.However, there is some outlook and predictability due to the current geopolitical environment and global economic slowdown. In this context, rigorous cash cost control measures, namely by increased efficiency in specific consumption of key cost inputs as well as by renegotiating their acquisition prices, combined with production planning management have been crucial in delivering Q3 operational results.We remained committed to our plans for investment and innovation in all segments where we operate and continued to explore growth opportunities with differentiation in Tissue, Packaging and Energy.The resilience of Navigator's business model and our strong financial position enables us to present consistent results even under very adverse market conditions.I will start with Slide #4 for a global overview of the quarter. As mentioned in my introductory comments, in this last quarter, demand subset to gradually recover in line with the destocking phasing out. Tissue segment continues to perform well with growing sales driven by the integration of Tissue Ejea that is delivering better-than-expected synergies and as well significant market price resilience.The cash cost evolution we previously committed to, continued its downward trend. In fact, the evolution of cash costs was quite significant with a sharp drop in costs in all segments between 20% and 28% in the Pulp and Paper segment and close to 17% in Tissue when compared with last quarter of 2022.EBITDA increased by 1% to EUR 124 million, with an EBITDA margin of 25.7%, up 1 percentage points on the previous quarter. To highlight also is the strong CapEx over the first 9 months, more than EUR 140 million, of which 61% ESG-related, aiming at both decarbonisation targets and efficiency gains.Strong financial position with a net debt/equity ratio stood below 1. And in spite of the first 9 months outflows, namely with the acquisition of Tissue, the payment of EUR 20 million, the tax outflows owing to the 2022 results and the strong CapEx, summing up strong results in a quite difficult context.If you now also try to turn to Slide #5 with third quarter financial results. Navigator recorded an increase of turnover to EUR 481 million, positive cash flow of EUR 23 million, impacted mainly by strong CapEx investment and the tax outflows based on the 2022 results I just mentioned.Net debt stands at EUR 550 million, reflecting, as expressed before, the tissue acquisition in the first quarter, the EUR 200 million distributions in dividends in May, a strong CapEx of EUR 140 million -- EUR 142 million and the tax outflows.If we turn to Slide 6, we have an overview of the quarter evolution. This quarter we recorded an increase of paper volumes at 6% on Q2 on the back of the first signs in demand improvements aligned with the stabilization in the destocking movement. The decrease in paper volumes from 2022 levels is partially compensated by higher pulp volumes that were up 25% on Q2 and up 191% on Q3 2022.As mentioned in previous quarters, the decreased integration to paper and packaging in 2023 resulted in more pulp being available for sale, which was quickly absorbed, thanks to its reputation and distinctive properties highly valued by the market.Regarding Tissue volumes, they have increased by 11% on Q2 and that 54% on Q2 -- on Q3 2022 driven by the new capacity added by Navigator Ejea.My colleagues will give more detail on the different business performance. Fernando will start with an [ outlook ] of EBITDA evolution. And Fernando, the floor is yours.

[Fernando Araujo, executive]

Thank you, Antonio. Turning to Slide 7, we can take a closer look at the main impacts on EBITDA on year-on-year comparison. Despite downward trend on the pulp and Uncoated Woodfree market price, Uncoated Woodfree has been significantly more resilient than pulp and Tissue continues above 2022, [ up ] 12%.The cash costs are also [ comparing ] well with those recorded in the same period last year, with an average reduction of 4% in both Pulp and Paper segments and close to 2.5% in the Tissue segment.Total fixed costs grew by approximately 1% year-on-year due in part to lower personnel costs and modest rise in running and maintenance costs, which increased well below inflation in the last 2 years.In this context, Navigator achieved EBITDA of EUR 377 million in the first 9 months and an EBITDA margin of 25.7%, down 4.5%, 12 points year-on-year.Turning to Slide 8 with the EBITDA quarter-on-quarter now. On a quarter-on-quarter basis, the downward trend on market price was offset by the increased volumes and the significant reduction of cash costs in all segments. As Antonio mentioned, we recorded a sharp drop in cash costs, again, in all segments. We managed cash costs in both Pulp and Paper segments, directing 6% to 12% and Tissue reducing 9%.This quarter, we also increased sales volumes across all segments due to an increase in order inflow with destocking gradually phasing out.Turning to Slide 9. We have an EBITDA analysis versus last year. Comparing quarter 3 with the same quarter last year, downward trend on market prices is evident, particularly in pulp with a 49% drop in average price. But it's also evident, a significant cash cost positive evolution, with a sharp drop in costs in all segments, a decrease between 16% and 18% in the Pulp and Paper segments and close to 13% in Tissue.Nuno Santos will now comment on pulp evolution. Nuno, please?

[Nuno de Araújo Dos Santos, executive]

Thank you, Fernando. On Slide 11, we have pulp and paper prices evolution. The benchmark index for short fiber, hardwood, in Europe, PIX BHKP in dollars rose to record levels in '22, $1,380 per ton, and started to adjust downwards in the first quarter of '23, falling more sharply in the second and third quarter, reaching in August the lowest $800, that represents a drop of 42% from the peak of $1,380 reported in January this year. By the end of September, it recovered back to $820. The benchmark index in China for hardwood pulp fell to their lowest levels in May, $475 per ton, down by 45% from the level of $866 per ton recorded in September last year. This quarter, it rose 9% in relation to the end of June, standing at $553 per ton at the end of September.The benchmark index for office paper in Europe stood at EUR 1,127 per ton at the end of September versus EUR 1,204 per ton at the end of June. Despite the downward trend over the first 9 months of '23, the benchmark price index for paper has proved resilient with the average price in the first 9 months of '23 still 6% higher than in the same period of '22.Also significantly, the reduction in the index since the start of the year has been 16%, while the pulp index has dropped by more than 40%. To be noted that since the beginning of '23 until June, paper prices dropped 10%. In the third quarter, prices started to drop at a slower pace, dropping 6% from the end of the quarter.On Slide 12, we have an update on the pulp market. As I've just mentioned, the first 9 months of '23 witnessed a significant price reduction in pulp, down from the all-time highs of '22. This was driven by the downturn in global demand, in particular in Europe, the rising stocks along the supply chain in late '22 and early '23, the easing of the logistical constraints experienced during '22, and finally, the new capacity in Latin America for short fiber.Mapa in Chile had added 1.3 million tonnes, which started up in December '22 and Paso de los Toros in Uruguay, which added 2.1 million tons and started up in April this year.In the third quarter of '23, global demand for eucalyptus pulp performed better than in the first half of the year, up 11% this quarter. China has been the main driver with restocking after prices fell to their lowest level in May, making demand increase by 20%. The strong performance of the Chinese market more than compensated for the reduced demand in Europe, 19% lower than the same period in '22.This fairly positive movement in the pulp market was due to the effect of restocking in China, but also to an apparently strong upturn in printing, packaging paper and tissue production in China. August was the second best month in the past 3 years in terms of output of paper and tissue from virgin fibre.The upswing explains the increase in prices for November in China, which reached $630 per ton, up 33% from May, and in Europe, which reached $980 per ton in November, announced by Suzano, peaks at 24 of October was at $847.Pulp stocks in Europe -- in European ports increased reaching 1.8 million tons in May, starting to decrease in July, reaching on September 1.4 million tons, already below the average of the last 5 years, which is 1.5 million tons.While in China, the pulp stocks are in line with the last 5 years' average, 1.8 million tons.Antonio Quirino will now give some market context on paper.

[Antonio Quirino, executive]

Thank you very much, Nuno. If we move to Slide 13, we have summarized the main development in Uncoated Woodfree market. In a global context of sharply falling printing and writing apparent demand, which was down 11%, and Uncoated Woodfree papers remains the most resilient papers with a reduction of 6% year-on-year compared to a reduction of 18% in total Woodfree papers and a reduction of 21% in [ mechanical pulp ]. Specifically in Europe, the current demand for Uncoated Woodfree papers fell by 21% in the first 9 months. In the U.S., apparent demand fell 13% and in other regions of the world decreased by 2% year-on-year, while in China posted a growth of 3% year-on-year, slightly down from the 4% annual growth in recent years.As Antonio mentioned, 2023 is marked by a slower-than-expected destocking and restocking process, essentially due to the economic slowdown. But in late third quarter, we recorded an line with the decrease in inventories, as already anticipated in our last call for the Q2 results.If we now turn to Slide 14, we have a few remarks on our group's paper performance. Despite challenging market conditions, Navigator was able to maintain its high market share in Europe. Navigator succeeded to maintain the focus on new brands and premium segments.Specifically, our new brands accounted for nearly 80% of our sales in the start of the year. That compares with an average of 65% in the period of 2012 to 2021. Our premium products also continue to represent a large share of our business with 58% share compared to historical revenue of 53% in the same 10-year period referred above.The operating rates in the industry have fallen sharply during 2023. Navigator also [ just ] pace of production, although we maintained an average operating rate this year at 75%, which compares with an average of our competitors of 66%.As already mentioned by Nuno, the paper industry mainly by [ holding ] prices and working on cash costs, also induced better in the cycle, managing to protect margins.Let me turn over to Nuno to comment on the Tissue, please. Nuno, [ please ]?

[Nuno de Araújo Dos Santos, executive]

Thank you, Quirino. Looking into Tissue performance on Slide 15. As Antonio mentioned, the Tissue segment continues to perform well, driven by the integration of Tissue Ejea with better-than-expected synergies and significant price resilience. The growth of finished products was achieved above all in the At Home channel, thanks to new clients and a stronger position in the pre-existing client base and through increased sales mostly to France and Spain.The volume of Tissue increased 32% year-on-year and driven by the price level and improved mix sales presented growth of approximately 51% year-on-year. This increase was driven by the integration of the new tissue mill, Navigator Tissue Ejea, in the second quarter, starting April 1, bringing the company a diversified client base and platform for growing sales.The focus on innovation and product differentiation, especially through the exclusive use of these innovations in our mill brands continues to enable Navigator to expand its position with customers.In the first 9 months, our mill brands accounted for 24% of the total value of sales of finished products, resulting from growth of 26% year-on-year in the sales volume. It should be noted that this ratio now includes Tissue Ejea sales, which had historically a very low percentage of mill brands.Antonio Quirino will now give some color on Packaging.

[Antonio Quirino, executive]

Thank you, Nuno. Now moving to Slide 16, we have an update on our Packaging. Packaging segment saw a sharp downturn in demand during this year, as mentioned in the last quarter, in the context of a wider economic slowdown, high inflation and destocking justifying this trend. In addition, consumption of retail packaging impacts has been hit by new ways of [ flexi ] packaging across the board, failing to take into account the sustainability of products and applying the same rules natural, renewable, biodegradable, compostable paper products as to other packaging products obtained from fossil and/or the finite resources.Even though we take back the flexible package posted so far this year, apparent demand declines overall 40%. There have been encouraging signs of some recovery in recent months. And the Packaging segment continues to hold promise for Navigator's future results.Therefore, Navigator remains committed to packaging papers, essentially in the paper-based retail, flexible packaging and food and beverage packaging markets, where its innovative introduction of quality offered by eucalyptus fibres has proved very successful for these end users. As well as other projects in progress to expand its smart offering, Navigator has been working since early 2023 on developing new product ranges, and not only at the food industry, but also in the other industries and a variety of consumer products.These are currently being trialed and launched on the market and will soon open the doors to other segments with potential for high added value. The project for integrated production of eucalyptus-based moulded [ cellulose ] products designed to substitute single-use plastic packaging in the food service and food packaging market continues to progress as planned.The project is now 75% executed and production is planned to start up by the end of first half of 2025.Dorival will now comment on the CapEx. Dorival, [ please ].

[Dorival Almeida, executive]

Thank you, Quirino. Let's go to Slide 17. In the first 9 months, CapEx reached EUR 142 million. And among the investment projects to highlight, The new Recovery Boiler in Setubal, the new Wood Yard in Figueira, the wastewater treatment plant revamping Setubal, the new moulded pulp production unit in Aveiro, fibre line adjustments for the production of [ hike ] pulp for packaging and the treatment of fly ash from the Aveiro Recovery Boiler. As already mentioned in the last quarter, we are starting an ambitious investment cycle over the next 3 years in order to anticipate our decarbonisation targets, improve the environmental performance of our sites and implement our strategy for developing and packaging business, taking advantage of the European Union next generation funds that is mandatory to be completed by the end of 2025.Joao Le will give further detail on our achievements and our roadmap for carbon neutrality. To give more color on our investments on decarbonisation, they are the result of obtaining more than EUR 67 million incentives from the next-generation funds with the approval of 5 environmental projects at Navigator, representing total investment of EUR 158 million.This will be spread over 14 initiatives at the Figueira da Foz mill, Setubal and Aveiro over the next 2 years. One large project is the new high-efficiency Recovery Boiler in Setubal with investment in incineration of non-condensable gases, but also the investment in converting lime kilns to biomass at the Setubal, Figueira and Aveiro sites and a new high-efficiency biomass cogeneration plant in Aveiro and Figueira da Foz.Equally significant is the project to replace fuel oil with hydrogen and natural gas in all 3 Recovery Boilers and Setubal biomass boiler. The fuel oil currently used has environmentally significant emissions, meaning that this is an important step towards reducing our environmental footprint.To be noted as well that the solutions adopted for more efficient use of energy reserves between 2018 and 2022, with a total CapEx of circa EUR 8 million have yielded an annual savings in energy costs in order of EUR 6 million.The change has been made in different areas of it's 4 industrial complex, in particular, to improve efficiency in production of compressed air, optimization of cooling systems, LED, lighting, industrial buildings and thermal efficiency.This is an important breakthrough in the company's sustainability policy as well, that has resulted in energy savings in the order of a 100 gigawatt hour per year, avoiding the emission of approximately 23,000 tons of CO2.To conclude, these investments embrace our sustainability commitment, but also our innovation efforts to improve efficiency and deliver better results.Joao Le will give some color on this impact in our sustainability [Technical Difficulty].

[João Cabete Gonçalves Lé, executive]

Thank you, Dorival. Let's go to Slide 18, please. Dorival just mentioned the strong CapEx delivered in this first 9 months, of which EUR 86 million, which represents 61% of total CapEx, are dedicated to ESG investments. One of our ambitious goals is the accelerating towards decarbonisation. In fact, Navigator has brought forward by 3 years its interim target for direct emissions and expects to achieve by the end of 2026 the goals initially set for 2029 in its road map for carbon neutrality.This means that by 2026 the company aims to achieve a level representing less than half of the emissions recorded in 2018. The optimization of production processes resulting from implementation of energy efficiency measures has also made it possible to optimize energy consumption from primary sources per ton of output.By signing up to the science-based target initiative, SBTi, Navigator has strengthened its commitment to reducing CO2 direct emissions now encompassing the company's Scope 2 and 3 emissions inventory.Regarding Scope 2, gradual elimination of consumption of fossil-based energy and investment in alternative and renewable energy sources [indiscernible] such as photovoltaic solar.If we turn to Slide 19, we can see the energy generation through renewable energy sources constitutes one of the company's strategic [ exits ]. And this shows -- this is shown through a relevant investment in solar plants in a self-consumption regime. The current solar energy capacity reaches 12 megawatts.Turning to Slide 20. This quarter we started the building work of the new solar power facilities for the group's self-consumption at the industrial site in Figueira da Foz, Aveiro and Vila Velha de Rodao. This will triple the solar capacity installed on our sites from 12 megawatts at present to close 38 megawatts.As part of its 2030 agenda, the responsible business strategy designed by Navigator to address the challenges of the decade and increase its creation of sustainable value, the company has committed itself to promoting efficient use of resources, minimizing our ecological footprint.We are a bioindustry in the right side of the future. Fernando will now comment on our financial position.

[Fernando Araujo, executive]

Thank you, Joao. Let's go to Slide 21 with overview of free cash flow evolution. Free cash flow generation in the first half stood at approximately EUR 33 million, reflecting the impact of Tissue position in the quarter -- in the first quarter. The amount of CapEx expressed before and the amount in corporate tax payments versus 2022, reflecting the exceptional level of profits in the previous year.The level of investment in working capital was again contained, and at the end of the quarter, the value of inventories which had been rising, began to fall, accompanied by a reduction in the balance of accounts receivable.On Slide 22, we have the net debt evolution. Net debt stands at EUR 550 million, reflecting the outflows already mentioned regarding the Tissue acquisition in the first quarter and the tax payments as well the distribution of EUR 200 million in dividends in the second quarter. As a result, the ratio of net debt/EBITDA stood at 0.98x, confirming our financial strength.On Slide 23, the debt maturity profile. Group's debt profile continued conservative. Navigator has well balanced debt maturities with 94% of the total debt issued on a fixed rate basis, allowing the average cost of debt to remain low.Also worth noting that the company has a solid balance sheet of more than EUR 250 million of liquidity, both as long-term unused credit lines and cash [ demand ].I will now return the floor to Antonio.

[Antonio Redondo, executive]

Thank you, Fernando. Let's please turn to Slide 24 with a wrap-up. As you can see, we recorded again solid quarter results despite the very challenging market conditions. In this quarter, we registered a gradual recovery in demand, in line with destocking phasing out, as we have previously anticipated, as well as a significant drop on cash costs once again. The company reinforced cost control measures, namely by optimizing production levels, reducing the specific consumption of main raw materials by further renegotiating prices of key inputs with supplying partners and by tight management of our fixed cost base.While continuing to proceed with our [indiscernible] plan, Navigator Tissue Ejea integration has been so far successful with growing sales and better-than-expected synergy results. And we kept innovating in packaging with ongoing development projects on new types of paper applications and proceeding as planned with moulded pulp projects as we continue to demonstrate the consistency of our conservative financial policies while keeping our sustainability and investment commitments.Finally, a few words on the outlook on Slide 26. The increasingly and stable geopolitical situation and the noticeable global economic slowdown make market outlook particularly uncertain. That said, in the fourth quarter and at least into Q1 2024, Pulp business is expected to continue to recover gradually as already observed particularly during the third quarter.Although -- and this uncertainty is not known in what extent is [ that ] recycle is sustained through all 2024, mainly due to the difficulty in forecasting variables such as energy prices, inflation, the pace of economic recovery and central bank [ multi ] policy, also due to the difficulty to understand how the past volatility in the Chinese market will evolve, and this has been the main driver of pulp consumption, which also brings increasing uncertainty.Although it's introduced, the duration of the recent order [ improvement ] for printing and writing papers across the world is difficult to anticipate. And this overall market [Technical Difficulty] work, the new capacity entry of 2.6 million tons by middle next year will have an unknown impact.Having said that, we remain cautiously positive for the medium term due to the availability of pulpwood that will likely limit the number of new projects for at least 3 to 4 years after the start-up in Brazil next summer, the continued increase on the consumer class at the range of 120 million to 140 million new consumers per year until 2030. Particularly in Asia, we will increase the demand on cellulose-based products.They absolutely need to fight against single-use plastic that will also support cellulose-based products. The decrease in paper consumption in the Western world will also reduce the amount of and quality of paper waste available, that may lead to increase demand for virgin fibre in packaging and other grades that traditionally use recycled fibres.Altogether, this will likely support higher operating rates for the industry beyond 2024. In the short term, in the Paper segment, order books are expected to improve in the fourth quarter and at least in the first quarter of 2024, in line with the trend we have observed as from late August, early September. In addition to growing orders, delivery times from mills to distributors have also increased standing at 2021 levels.Although, the economic slowdown in Europe, paper price will benefit from a more balanced market structure, with improvement in demand and reduction of supply. That combined with a strong pressure on costs will likely results in a reversal of the fall of paper prices in Europe and even in international markets.In fact, temporary and definitive reductions in capacity have been announced in the paper sector in Europe. In 2023 and 2024, Europe has and will lose almost 600,000 tons of Uncoated Woodfree production capacity.Some manufacturers have announced the permanent closures of operations, whilst others have announced the conversion of capacity to some packaging grades. To highlight that Navigator just announced a price increase for all Uncoated Woodfree papers by 5% to 7% in Europe from the 1st of December onwards, following the previous announcement already implemented of USD 30 to USD 50 in the Middle East and North African region.These price adjustments are necessary due to the structurally higher price of most input costs essential for paper manufacturing that makes current price levels unsustainable. Additionally, and more recently, pulp and energy have experienced significant increases.The recovery in demand visible in the global markets also contributed to this price adjustments. In contrast, China has recorded a net increase of 3 million tons in 2023 and a further 2.8 million tons of net Uncoated Woodfree capacity is expected to come online in the next few years.Although 2 million tons of this are still uncertain. This movement could be positive for the pulp market. But it will nonetheless put pressure on the paper markets, not so much in Europe, but also but mainly in overseas regions.In the Tissue segment, demand is forecasted to present interesting rates of growth. The group continues to leverage changes driven by business growth, in particular, the acquisition of Navigator Tissue Ejea.However, there is growing pressure on margins as a result of recent significant hikes in pulp and energy prices that I just, alluded, the main costs in the Tissue segment. The responsible production planning management, the assertive sales strategies focused on diversifying products and geographies, combined with the rigorous programmes to control costs and achieve efficiency in specific consumption levels as well as the company's strong financial position have enabled us to deliver consistent, strong and stable results in the changing market context.We are confident that all these factors will continue to point to the resilience and Navigators business model. Thank you.

[Ana Canha, executive]

Thank you, Antonio. This ends our presentation. We are now open for the Q&A session.

[Operator]

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

[Enrique Parrondo, analyst]

I have 2, if I may, although the first 2 are mainly related to this morning's announcement on price increases. So the first one on this announcement. I was wondering if you could comment on your view for midterm and long-term prices? Should [ we ] think that EUR 1,000 per ton as the new normal? And what are the drivers behind this?Second one, and as I commented related to the first one, you mentioned on the -- or at least news related to this article mentioned that this increase in prices was partially driven by rising costs of paper production.Yet peers of yours are commenting decreases in variable costs and consequently food in Iberia. So I was wondering if you could comment your view on this driver behind the price increase?And finally on volumes, you commented you have seen an increase in demand and an uptick in [ order ] goods. Maybe could you guide us for the outlook in the fourth quarter of the year in terms of volumes by division?

[Antonio Redondo, executive]

Thank you, Enrique, for your questions. For the sake of quality, I will try to rephrase them and repeat and just make sure that we fully understood them. Your first question refers to prices and to our price increase. And you would like to understand if we can share with you where is the new normal that, if I understand correctly, you believe to be at around EUR 1,000.

[Enrique Parrondo, analyst]

Yes, that's correct.

[Antonio Redondo, executive]

Your second question is about the cost, which has been one of the reasons why we have announced this price increase and specifically how we see wood prices in Iberia evolving.

[Enrique Parrondo, analyst]

Yes, that's correct.

[Antonio Redondo, executive]

And the third question is about the -- what we have recently witnessed as order inflow increases and how do we expect this to follow in the near future.

[Enrique Parrondo, analyst]

Correct.

[Antonio Redondo, executive]

Okay. I'm going to give first elements of -- to answer to question number 1 and number 2 and number 3. Then number 1 and number 3, Antonio [indiscernible] [ Araujo ] will further develop -- sorry, number one, number two. And number three -- sorry, we were saying right, number 1 and number 3. And number two, Joao Le will comment. So starting on number 1 and then moving to number 3, price.I think it's extremely difficult to forecast what is the new normal. I think what we can say with a certain degree of certainty is there is a new normal. And the prices that we have witnessed pre-pandemic levels will be very difficult to reach again, just because the cost base of the industry -- I'm not referring to ours, the cost base of the industry has significant increase in all costs that you can think about.The cost of raw materials, chemicals, energy, I will comment later on. The cost of logistics that although being reduced vis-a-vis the peak in late 2021 and through all year of 2022. The cost of logistics, particularly in Europe is higher than the pre-pandemic levels.So overall, the cost base of the industry is higher than it was before. So we cannot expect prices to converge for what were the pre-pandemic prices, the level itself. I wish I knew. I don't know. I'm pretty sure that your figure is more educated than mine. Vis-a-vis Uncoated Woodfree volumes.We have witnessed a significant increase in the last probably 8, 10, 12 weeks. We see a significant demand in the coming weeks still. And typically, Q1 is a very strong quarter in Europe.So we would expect at least until the end of Q1 -- hopefully more than that, but at least until the end of Q1, we will see a rebound of volumes that is becoming, I would say, not far from normal if we take into consideration orders coming from Europe and outside Europe.I will stop here just to say if Quirino wants to add something else.

[Antonio Quirino, executive]

Just to add that I agree we cannot really try to have an estimation of what is the new trend pricing. So in Europe, we're just announcing a 5% to 7% increase as from December. I recall that it was mentioned by Nuno, currently, the index -- that [ EUR 1000 ] --- [ EUR 1100 ] [indiscernible]. So we see this as structurally non-sustainable. And today, we face energy and pulp price increases. So that -- this means we need to readjust to make the business more sustainable to the future.And on volumes, I would just add that if we look at the last 8 weeks or the last 2 months, we are getting -- we and the industries of the sector, in Europe we are getting basically the same volumes as we have [ giving ] an average of 16% to 21% in the same period of line. So we don't know how sustainable this is going to be forward.But of course, as Antonio mentioned, typically, Q1 is a strong seasonal period. So we expect this good momentum to us [ recently ] or at the end of Q1.

[Antonio Redondo, executive]

Regarding your question about cost and particularly cost of woods, we saw already a slight decrease of wood costs in Iberia. Unfortunately, this follow the same part and the same pattern of our total cash cost reduction. We mentioned that we have cash cost reductions above 20% for pulp and paper, [ growth ] that [ will ] -- below 20% for Tissue. All other costs have decreased significantly. Cost of wood started to decrease, but not -- by no means at the same level that we saw the [ decrease ] a lot of cost.I remember that [Technical Difficulty] would particularly watch [Technical Difficulty] here previously. The cost of wood in Portugal in between '16 and early 2023 increased over 40%. So they have now just a bit, but by no means a significant adjustment.And it remains to be seen that -- I wouldn't expect cost on wood to adjust at the same level that the other costs have been adjusting so far. Nuno?

[Nuno de Araújo Dos Santos, executive]

Yes. In line with what Antonio said, we assisted in some price adjustments in Portugal. But mainly we are talking about top-ups and not the base price at the pulp mills. But now what we see some is kind of stabilization of wood prices in Portugal. In Galicia, we assisted the downward trends in terms of prices. I believe we are also going to see some stabilization of those prices in the following months. So no, we are not expecting further decreases in terms of total cost of wood, as Antonio mentioned previously.

[Antonio Redondo, executive]

Just to complement, part of this cost is logistic-related. So that is the part that probably will adjust quicker, depending, of course, on the cost of energy and particularly the cost of diesel.

[Operator]

The next question comes from the line of Bruno Bessa from Banco BPI.

[Bruno Bessa, analyst]

So 3 questions from my side. The first one regarding the price increase that you announced. I understand the reversion of the destocking trend and the improvement that you are seeing in terms of demand until at least the end of Q1. But my question here is, it seems like pulp prices are at least close [ to ] [ work cap ], if you can say like that, considering the evolution of the new capacity that will come to the market.So my question here is how easy do you expect to implement these price increases which might come in counter-cycle to the evolution of the [ pulp ] rate? So this will be the first question.The second question, when looking to the earnings [ evolution ] in Q3, and according to my calculations, it seems like the average price for Tissue went down on a quarter-on-quarter basis in Q3.I'm just wondering what is the reason behind it, if there was for instance a longer maintenance shutdown from the new company acquired that led you to towards a bit of the mix during the quarter, or if there is any kind of falling trend in terms of prices [ increases ] [ you're getting ] against the previous quarter? So some color on this would be much appreciated.And the last one, if I may. If you could just make an update on the capacity closures or conversions in the UWF paper in Europe? And I remember you mentioned in past [indiscernible] paper. So if you could give us an update on the timing for this? When the shutdowns [indiscernible] will also be appreciated?

[Antonio Redondo, executive]

Bruno, thank you very much for your questions. Again, for sake of quality, your first question is related to the price increase over [indiscernible] Q3. And you would like to understand how easy we expect to implement this price increase in light what we have said to be a downward trend on pulp prices. Did I got it right?

[Bruno Bessa, analyst]

That's correct.

[Antonio Redondo, executive]

Second number -- question number two is average prices for Tissue. You believe the Q3 average prices for Tissue has been slightly lower than Q2. And you would like to understand what are the main drivers for that mainly if this is mix related?

[Bruno Bessa, analyst]

Correct.

[Antonio Redondo, executive]

And third question is about update of closures or conversions on the European Uncoated Woodfree market.

[Bruno Bessa, analyst]

That's correct.

[Antonio Redondo, executive]

Okay. So I will start with question number one and number 3, and I will pass to [ Quirino ]. I will answer then question number 2, and will pass to Nuno for further clarification. So regarding the price increase, it's never easy to pass the price increase in whatever business, in whatever sector, I mean, within pulp and paper.However, I don't think we share your view that we are seeing pulp prices going down. I think we are seeing pulp prices going up. We are seeing energy prices going up, and both will be important drivers to sustain a price increase on Uncoated Woodfree.On top of that, we are seeing an increase in demand -- a recent increase in demand in the -- mainly in second part of Q3. And we don't see an increase in supply.On the contrary, we see a decrease in supply. Probably, I won't comment imports, which is something that has been always a part of our conference call, the questions regarding imports.And what we see is that imports year-to-date -- Uncoated Woodfree imports year-to-date August '23, they are significantly below imports year-to-date August 2022. And annualized, we do believe that 2023 is going to be below the last few years, with probably the exception of 2021.And very often we analyze imports looking to Asia and Asia has been growing from 2021 to 2022. But it's not growing from 2022 to 2023. And on top of that, all the other sources, name it, from Latin America to North America to Middle East, and of course, to Russia have significantly decreased.So on top of the reduction of capacity in Europe, the pressure of imports has significantly eased. Of course, we know that when imports with Europe -- they reached with a total different price. So the price reference is there, but the volume of imports was significantly reduced.I think we mentioned the capacity conversions of the exits in Uncoated Woodfree. There are top of mind 2 large mills that have been exiting the market. One announced over the summer in Austria, which is quite relevant, because it's a historical paper machine for the development of office papers in Europe, and more recently the one that you referred in Germany, and there are a couple of few others.So in total, top of my mind -- but Quirino will correct me. We are seeing an impact of -- full impact probably in 2024 of 600,000 tons. Quirino?

[Antonio Quirino, executive]

It happens. So with some public information we expect it still to impact the market going forward. We see a [ closure ] [Technical Difficulty] of Europe and Germany, quite specialized in graphical products. So after the consultation period, now it's confirmed the closure during Q1 next year. So on top of this, another one in the eastern part of Europe, Poland is expected still to be converted during next year, although timing more than certain away from Uncoated Woodfree papers and to packaging papers.So in total, annualized impact when fully implemented will be around in 2024.

[Antonio Redondo, executive]

And Bruno, this is quite relevant because again, top of memory, this will be easily 12% of the installed capacity in Europe. So it's rather relevant. And if on top of that, I insist, we don't see an increase, rather a decrease on imports. These ingredients together with the pressure on the cost side will help to implement the must-needed price increase.Regarding your question on Tissue, our average price of Tissue on Q3, yes, was slightly below our average price of Tissue on Q2. This was done both by price negotiations with our customers. Let prices down, but also a mix evolution that didn't favor a price.Then, I'll pass Nuno to complement and comment.

[Nuno de Araújo Dos Santos, executive]

Just as Antonio mentioned, in fact, we sold a bit more [ mills ] in Q3 versus the last -- the first [indiscernible]. I think we almost sold the same volumes in terms of [ mills ] in the third quarter then versus the second semester, but this is not the main information. I think it basically [ solved ] the natural normal trends and dynamics of the market. You had a question on if this was the influence by the operation in [ Spain ]. It was not [ in fact ] the Spanish operation.They have an average price that is slightly higher, 4% or 5% than our historical operations. And you said that our historical operation has sales in Spain is basically more or less the same average price that we have in Spain.So in fact, if anything, the Spanish operation helped us raise slightly our prices -- our average price. And we basically -- and what you've seen when you -- in the market is basically the result of the market dynamics.Having said that, we should say that our margin -- EBITDA margin in the [ July ] -- in the third quarter, the Tissue was actually slightly higher than in the first semester, so that would be okay [indiscernible].

[Operator]

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

[António Seladas, analyst]

It's 2. First one is relating with the price increase, sorry, to come to this issue again. But my surprise was because your operating rates are still below historical terms, 75% nevertheless, even after price increase. I guess that your operating rates will increase in the coming future, or at least to the first quarter 2024. However, I think in consideration that are so low, should we start to see navigate, working with low operating [ rate ] standing between 80% and 85% instead of 95%? That is the first question.And second question is related with packaging. You have mentioned that the sector has been in a negative phase. So it is [indiscernible] over or there are some signals of improvement or not?

[Antonio Redondo, executive]

Thank you, Antonio, for your questions. Again, trying to make sure that we have fully understood them. Your first question is regarding -- you mentioned price increase, but I think the main point is operating rates. You said they are too low, and you'd like to understand if we intend to keep on operating with low operating rates or returning to more normal operating rates?

[António Seladas, analyst]

Exactly.

[Antonio Redondo, executive]

Your second question is on packaging. If the same signs of improvement that we are seeing on Uncoated Woodfree, if we are seeing those signs of improvement on packaging as well?

[António Seladas, analyst]

Yes.

[Antonio Redondo, executive]

Yes. Thank you. So first question, I think this is rather easy to answer. No, we don't intend to keep on this operating rate. We intend to improve our operating rates. If the market allows that, we will, for sure, improve our operating rates. We will do it in a responsible way to make sure that we manage correctly and adequately our margins and that we don't allow stocks to build up on our -- on the pipeline.So there's always an equilibrium between the margins, the volumes of output and the stocks on the pipeline. But our expectation is that we will gradually become to a more normal level of operating rates.Regarding your second question on packaging, indeed, and I think we referred that, we also saw improvements on packaging. But I'd probably say that -- I'm not referring now to us, Navigator, I'm referring to the market.The most surprising effect we saw during 2023 was exactly the evolution of packaging. All grades of packaging, name it in Europe, in the States, in Latin America and few recently in Asia, also Asia [ showed signs ] of improvement.Packaging saw a significant decrease. And we believe this was -- the drivers of this situation were mainly 2. Again, a huge amount of pipeline stock that was accumulated during the last 1.5 years, so from the second half of 2021 to the end of 2022. And at the same time, very severe, probably more severe.Now it's visible. But it was probably more severe than what people anticipated 6 months ago as there is real economic downturn in major economies. So these things together decreased the packaging consumption significantly.Packaging was over, but wood, pulp and paper was always the star performers in terms of growth. And for the first time, I remember, we saw a negative growth, and it's not a small negative growth. We saw a negative growth of 10% to 15%.And actually in the segments where we are more present. And I think we have also alluded to that, retail bags and flexible packaging, decrease of 30% to 40%. Hopefully, with the pipeline stocks being more normalized and the economy recovering going forward, this will also allow growth in climate, also on packaging in the coming future.

[Operator]

The next question comes from the line of Luis de Toledo from ODDO.

[Luis de Toledo Heras, analyst]

2 questions from my side. The first one referring to the reduction of a specific consumption in different raw materials. I mean, I would like if you could elaborate? And basically, the question would be, those savings, do you consider them sustainable, structural? Or are more the result of the production planning that you've been applying lately?The second question would refer to the investments on decarbonisation. And if you could provide some clues regarding the potential future impact on margins, the return on the investments -- of those investments? And we assume that, obviously, they're aimed at decarbonisation and environmental and bringing forward your decarbonisation goals. But I don't know if you could provide some economic impact as well?And I would also like to understand the degree of public funding that you're aiming for? You mentioned those EUR 158 million of investment projects.But you also mentioned another amount. I don't know if that was referred to the financial support that you are expecting.

[Antonio Redondo, executive]

Let me try to rephrase to make sure we understood. Your first question is to try to understand the drivers of specific consumption reduction and if they are sustainable going forward. Your second question is about the decarbonisation and the future impact of margins. And your third question is about the funding for this EUR 158 million of decarbonisation projects that we have referred to. Is that correct?

[Luis de Toledo Heras, analyst]

That's correct.

[Antonio Redondo, executive]

Okay. Regarding the reduction of the consumption of different raw materials. As we mentioned 2 impacts. One impact was specific reduction. The other impact was a price negotiation with our supplying partners. Referring to the first one, specific reduction. I would say that some are sustainable, some -- and therefore, are structural. Some are [ conjunctural ] because we have reduced the output of our paper machines. I'll probably give you 1 or 2 examples.We have worked on the specific consumption of wood, mainly because of some investments we did in our Wood Yard plant and some that we'll keep on doing in our Wood Yard plants. They are very much dependable on the mix of growth.But if for the same mix of goods we believe that the level that we achieved today, that is significantly lower than what we had 5, 6 years ago for the same amount of wood, they are probably sustainable.The other example I can give you is, for instance, using long fibre in high-speed machines. Long fibre in high speed machines is easy to decrease. Although we have been working in decreasing on the last 4 or 5 years, regardless of the speed. Not easy to sustain when the speed is low or more difficult to sustain when the speed is high.On top of that, all the starts -- PCC, OBA so brightening agents, dyes, this is an ongoing project at our mills to make sure that we are more efficient year-by-year and we have progress to this efficiency year-by-year regardless of the speed of the paper machines.I'd like to know if Dorival wants to add something before moving to the other questions?

[Dorival Almeida, executive]

I don't have much to add. But basically is what I said, we are reducing chemicals and fibre and working to improve our efficiency. And some of these initiatives are sustainable, and some of them are related to the low paper machines [ being there ]. When we have [ order ] [Technical Difficulty] normal condition, we will have some adjustments [ to make ].

[Antonio Redondo, executive]

Regarding your second question about the decarbonisation and future impact on that, I cannot, and I will not give you any specific guidance regarding the future impact of these projects. Probably, I can share with you something that is from the past. We initiated our investments on decarbonisation on 2020 with the start-up of a large biomass boiler in Figueira da Foz. And when starting up this boiler, we have [ cutting] by memory 2 main drivers to improve margins. One was reduction, the improvement of the floor mix. So we will cut more expensive woods and use biomass, which in spite of -- require a higher quantity of volume for the same calories.It was less expensive. So one driver was this reduction of the fuel, the combustible cost. The other one is -- was CO2. And on CO2, we have one figure in mind that we will be able to reduce in terms of euros per year because of the elimination of the CO2 emissions.I can tell you that when we compare the figures of 2020, that were supported in our decision -- [ negative ] decision. And the figures that we have actually achieved in 2022, only on CO2, we have multiplied by 5 the savings.So we strongly believe that all these projects are justifiable -- economically justifiable and the impact in this specific case was very, very significant. So we expect the other one also to be quite significant.Regarding your third question about public funding. So what we referred to in decarbonisation is that we have applied for the first call of -- what we call the C11 -- the component C11 of the Portuguese Recovery and Resilient Plan.We have applied with EUR 158.3 million of CapEx. And we have been granted with [ EUR 67.3 million ] grants, which implies an incentive of 42.5%. We have also applied for a second call, but we have not yet resolved.And we expect on second call -- if the second call is granted to be in line or even slightly above the value that just give you for the tax -- the rate of [ it ].

[Dorival Almeida, executive]

Absolutely. At the end of September, the net of these [ rents ] were resilient. [indiscernible] nowadays at the end of September [Technical Difficulty].

[Operator]

[Operator Instructions] There are no further questions from the telephone at this time. So we move to the webcast ones. The first one comes from [indiscernible] from NPV. And he asked, on the ESG investments, which is the 9 months amounted to EUR 86 million, what is typically paid by Navigator and how much from the EU funds?Going forward, on the ESG investments till end of 2025, what will be -- roughly be the percentage of the CapEx paid for EU funds? Are they all grants or some are of favorable finance?

[Antonio Redondo, executive]

Thank you. I think the question was basically answered on the previous question from ODDO. I can repeat the figures. So this [ sale ] level, which was the first call for decarbonisation, we have submitted project on a total CapEx of EUR 158.3 million. And we have -- they are all grants. And we have grants that represent a rate of 42.5%. And this covers all the projects on the first call of decarbonisation from 2023 to 2025. But probably, Fernando can complement with a different angle of announcements.

[Fernando Araujo, executive]

Only to say that at the end at September we have already used more or less EUR 60 million [indiscernible] on this line. And we intend to engage in -- being investment bank need to get it done. I would say, good interest rates on the [indiscernible]. And as you can see to the moment, despite the lack of investment, we have generated funds to support this and we will do publicly [Technical Difficulty].

[Operator]

There are no further questions from the webcast at this time. I'll hand back to you.

[Ana Canha, executive]

This ends our discussion. Thank you for your time. As always, we are available for additional clarifications to our usual contact. Have a great evening. You can disconnect.