Navigator Company SA

ELI:NVG

Earnings Call Transcript 2017-Q4

[Operator]

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

[Joana Lã Appleton]

Thank you. Ladies and gentlemen, welcome to The Navigator's Company Conference Call and Webcast for the Q4 and Full Year 2017 Results. Participating in the call, Diogo da Silveira, the company's CEO; Fernando Araujo, our CFO; and António Redondo, our CTO. Also present in the room are the other members of the Executive Committee, Nuno Santos and João Paulo Oliveira, which will be available for the Q&A session at the end.So we would like to start with a brief presentation of the 2017 main achievements. But as we have -- are experiencing some difficulties uploading the file, we will start ahead just with our comments. And as soon as the presentation is uploaded, I will ask the participants to reconnect -- to exit and then reconnect again to the webcast platform. So Diogo will start with the highlights for the year, and António Redondo will follow with an overview of the pulp and paper market in 2017. Fernando will also focus on some of the main financial issues. I will now hand over to Diogo. Diogo, please?

[Diogo António Rodrigues da Silveira, Vice Chairman, CEO & Chairman of Executive Board]

Good afternoon, and thank you for joining us today. I'll try to be brief on my comments on the results for the year and take the opportunity to share with you some key messages. I will start with what you will see later as of Slide 3. And in that slide, which is the key highlights, we say that 2017 has been a very positive year for the pulp business, with market conditions improving since the end of 2016, allowing for successive price increases throughout the year. This was done on the back of strong demand mainly in Asia, low inventories, careful management of new capacity as well as unexpected production curtailments. As for paper, market conditions also improved, although more gradually, with strong order books in Europe and overseas. The group led a total of 4 price increases along the year even though the average price year-to-date still remained below last year's. But we will go over this crucial topic with some more detail later on.Third, the group registered strong sales volumes for all of its products. Uncoated woodfree papers stood at 1,578,000 tons, almost in line with 2016. Pulp sales grew by 7% year-on-year, and tissue and energy both did grow by 9%. In parallel, we continued with the process of improving operating efficiency through sustained reduction in production costs, with our M2 program delivering very interesting results as we estimate an impact of around EUR 27 million on EBITDA this year. We continue to expand the scope of the initiatives and have managed to capture additional efficiencies. We will also come back to this.So in this context, Navigator increased its EBITDA in 2017 by 2%, reaching a total of EUR 404 million and a ratio of EBITDA over sales of 25%, similar to 2016, but clearly improving over the last 3 years, and of course, as you know quite above market average in the sector.Our financials continued to be quite strong and improving over last year. We recorded significantly lower financial costs, thanks to, on one side, lower interest expenses but also gains on ForEx hedging operations, which helped to partially offset the negative effect of the weaker dollar on our sales. Our CapEx level stood at EUR 150 million, accelerating in Q4 versus the rest of the year, as we continue to progress along our 2 major investments currently underway: the construction of the new full-fledged tissue mill in Cacia with capacity both to produce jumbo reels and to convert products; and the debottlenecking of pulp capacity at Figueira da Foz.Finally, after a strong finish in 2017, the momentum for the pulp and paper sector continues into 2018 as we see it. We see new price hikes for both pulp, paper and tissue. All have already announced price increases. I will now hand over to António Redondo to share his views on the pulp and paper markets. António?

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

Thank you, Diogo. Good afternoon. Going to Slide 4 if you can. I think it gives us a very clear picture on how the pulp market evolved over the last year. Prices for hardwood pulp increased an impressive 51% in dollars and 33% euros during the year, with successive price increases being announced both in China and in Europe. Actually, we have witnessed a monthly price increase every month of the year with exception of reels.As you can see on Slide 5, we believe this is the result of a combination of factors. First, pulp benefited from a series of several developments and adjustments, which kept supply down even in a context where significant new capacity from Indonesia and Brazil came into the markets. These adjustments on the supply side, which resulted from expected and unexpected events such as the forced stoppage of a large Brazilian mill and other maintenance and commercial stoppages affecting Latin America and Asian producers, actually more than offset the new capacity, and the net result on pulp supply was actually negative. This was combined with a very vigorous demand on BHKP, which grew 1.6 million tons significantly above last year, which the growth was 1.25 million tons, and out of this 1.6 million tons, almost 1.4 million tons coming from China.In the paper market though, the evolution was different. If you could follow on Slide 6, we have the graph for the paper price benchmark evolution during the last years. Of course, paper is a much less volatile product than pulp. And although it evolved positively as well, it was at a more moderate pace, gaining about 4% since the beginning of 2017. If you can move to Slide 7, we try to give you a short picture of the paper market last year. In terms of world demand, we actually saw a slight 0.2% increase based on year-to-date November figures, which clearly point to a stability trend in terms of consumption rather than a declining one. I'm talking specifically, of course, of demand for uncoated woodfree papers. And this trend seems to be quite different as we look at Europe, Asia and U.S. Europe, still our main market, also saw a slight growth in demand of about 0.1% over the year, mainly for cutsize with almost 1% and folio with 2.4% but falling in reels about 2.8%. There was also some adjustments in supply in paper this year as machines in both Finland and Italy were stopped during part of the year and have just restarted.So prices have come up 4% since the beginning of the year in the context of a very steep increase in pulp prices and other raw materials. And the gap between pulp and paper prices is actually at the lowest level ever, representing a huge pressure and a challenge on nonintegrated mills. This has led to another price hike in paper at the beginning of 2018 between 4% and 8%. Conditions in the paper market in the U.S. were actually quite different, with demand declining almost 6% year-to-date November. Apparent consumption was negatively impacted by sales from local producers, about 5% as well as the steep reduction in imports into the U.S. of approximately 13% year-to-date November. The large U.S. producers increased their exports worldwide also 13% and mainly in the second half of the year, in particular to the Middle East, Africa and Asia but excluding Western Europe.There were some price increases in October and November in the U.S. and further announcements for January and February 2018. And another set of capacity closures was announced, totaling approximately 700,000 tons for Q4 2017 and the whole 2018, out of which we believe [indiscernible] 200,000 tons already happened. In Asia and China, demand for uncoated woodfree is estimated to have grown 2.6% last year. Major Asian players announced significant price increases of more than USD 200 in the last months. Some new capacity is expected for 2018 but will probably be offset by the closures from the ongoing policies to shut down floating capacities. Now back to you, Diogo.

[Diogo António Rodrigues da Silveira, Vice Chairman, CEO & Chairman of Executive Board]

Thanks, António. So with this market context -- Joana, would you like to say something?

[Joana Lã Appleton]

Yes. We now -- the -- we have the upload of the presentation available on the webcast. So I would ask participants to exit and then reenter the webcast login, please. Thank you.

[Diogo António Rodrigues da Silveira, Vice Chairman, CEO & Chairman of Executive Board]

Very good. So while some operate the exit and reenter, I follow with Slide 8 where we see the performance evolution from 2016 to 2017. And we see that our EBITDA totaled EUR 404 million, as I already said, which meant a EUR 6.4 million increase, mainly explained by the positive impact of prices and cost reduction. So as we do hope you do see on Slide 8, the net price effect was positive -- almost EUR 13 million. This results from a slight negative impact from the paper prices and the very positive impact from the pulp prices. The net impact is positive EUR 12.9 million. The volume effect, as you see, is slightly negative EUR 2 million, but the cost contribution was quite positive, over EUR 8 million. This is net of, on one side, the huge cost reduction program that totaled EUR 27 million and net of some cost increases, the net result being a cost decrease of EUR 8.2 million, even though, as you've seen, we have more volume. The main item contributing to this cost performance were wood costs, which were lower than in 2016 mainly due to an improvement in the supply mix; meaning, more wood coming from local producers and lower imports. But also within the imports, there was a cost decrease, thanks to the U.S. devaluation versus the euro. The usual impact -- the overall impact of the U.S. devaluation is negative on our P&L, but on the wood that we do purchase in dollars, it's, of course, positive.The other main item, as you do see on the graph, to explain the evolution from '16 to '17, is energy, which improved in 2017 on the back of having all our power-generating assets working under normal circumstances and therefore producing full -- at full capacity. On the negative side, EBITDA was impacted mainly by the so-called mega forest fires, which occurred at 2 points in time last year in Portugal and did represent a loss, in our case, of EUR 7 million accounted for in biological assets. Then other nonrecurring items, including positive impacts from insurance indemnities related to last year's fires at namely Vila Velha de Ródão and for our turbo-generator at Setúbal but also negatives from products that we have still in the U.S. I will come back to that.So looking closer at the paper performance on Slide 9, which is, of course, still the core of our business. Paper delivered another solid performance. We have volumes sold, as previously said, at 1,578,000 tons, 8,600 tons below 2016. We led 4 price increases, even though, as I said, average price still remains in line with 2016. This was mainly due to foreign exchange impact of the U.S. dollar as well as the British pound. Those 2 devaluations contributed negatively to our average price. However, the geographical mix also did not help. Our prices in the U.S. are quite high. Lower [indiscernible] also impacts the average price.On the positive front, there was the improvement in mix quality. We have the sales of premium products increasing again by 57,000 tons as well as mill brands edging up by 45,000 tons. At the end of the year, the group remained with a very comfortable order book of 35 days, which compares favorably to the rest of the industry usually at 31.On Slide 10, we can see the distribution of paper sales by geography. We have expanded our client base and have actually opened new offices -- new sales offices this year in Mexico and in Dubai.On Slide 11, we have an overview of the performance of the pulp business. We sold 7% more in volume than last year, up to 311,000 tons, and our price increase, on average, 12% year-on-year. But actually, within the year, so from December 2016 to December 2017, in 12 months, pulp price gained 35%, 3-5. We have continued to grow in the high-quality segments, decor and special papers, which, as you know, do represent more than 60% of our total pulp sales, which is very different from our other friends in pulp. Unfortunately, the quantity of pulp available to the market during the fourth quarter was significantly constrained by the annual maintenance shutdown at the Cacia pulp mill and the need to replenish stocks in advance of the production stoppage planned for late March, early April at the Figueira da Foz mill due to capacity expansion projects currently being prepared and implemented at that stoppage.Going now to the tissue business on Slide 12. Navigator recorded an increase in its output of reels and finished products. Sales volume was up by 9% with a reduction in the share of reels in total sales; therefore, an increase in finished goods. This improvement, combined with progressive implementation of price rises that did start in October and continued in January this year, enabled the group to record an increase in its average sales price of 1.4%. Therefore, sales in value did total EUR 74.4 million, up 10.3%. Nevertheless, operating margin for the tissue business was quite impacted by the sharp pulp price increase registered throughout 2017.Slide 13 is a quick overview of our industrial performance. Few words on our industrial performance, I mean, on our industrial performance. And you see first that we are happy with the progress we're making on our safety indexes. Still far from the objective but moving in the right direction. Quite several record productions both in Cacia pulp, Figueira pulp, but also paper at ATF and also tissue at Vila Velha de Ródão. So of course, we have been progressing with our [ creep ] capabilities in our industrial assets.A few words on our cost reduction program on Slide 14 that I did touch upon already. So as mentioned in previous calls, we have set in motion an ongoing process of improving operational efficiency through sustained reductions in production costs. This takes the form of a wide-ranging program, known as M2, in Portuguese, [Foreign Language] or more and better in English. This program was launched back in 2015 and achieved results, not only of course already in 2016, but again in 2017 where we did exceed our targets and did impact EBITDA by around EUR 27 million. There were, during the course of 2017, over 120 initiatives launched and implemented, most importantly negotiations for wood chemicals, both pulp chemicals and paper chemicals, energy and product packaging. Quite some significant efforts in product packaging. The overall program has a 5-year target of achieving a total of EUR 100 million of cost reductions. And out of 2016 and 2017, we have already achieved EUR 43 million out of this overall EUR 100 million objective.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, Diogo. Going to Slide 16. We have some detail on the evolution of our free cash flow, which stood at EUR 198 million, a strong figure considering the amount of CapEx expenses during the year, about EUR 115 million. Working capital evolved positively with a reduction of EUR 20.3 million in inventories due to a sharp drop in stocks of finished products, and conversely, we have seen a negative variation in balance net payable to the State in the amount of EUR 43 million, which is essentially due to the fact that no corporate tax payments on account were made during 2016, but occur in 2017.Financial results also improved significantly as we can see on Slide 16. [ reduction ] of roughly EUR 13 million in financial cost was achieved essentially by bringing down borrowing costs, which continue to evolve very positively. Interest expense in 2017 was down by EUR 4.9 million in relation to 2016, including interest during part of the year on the high-yield loan whose payment premium amounted to EUR 6.5 million. In a scenario in which average gross debt was higher than in the previous year. Results from currency hedge operation also improved significantly, due to the weaker dollar, with gains up by EUR 6 million on 2016, partially offsetting the negative effect on the top line sales. Actually, it is interesting to see our cost of debt has evolved over the last year.On Slide 17, we have an overview of our average gross debt since 2012. And we can see that our cost of debt has come down sharply. And it is currently externally competitive.Finally, regarding CapEx detail on Slide 18. Of a total of EUR 115 million, the project to expand capacity in Figueira da Foz represents investment nearly EUR 40 million and the new tissue mill in Cacia another EUR 30 million. Recurring investment in pulp and paper business amount to EUR 41 million and the current tissue operation in Vila Velha de Ródão, that's about EUR 4 million. Back to you, Diogo.

[Diogo António Rodrigues da Silveira, Vice Chairman, CEO & Chairman of Executive Board]

[Audio Gap] in 2017 and announced a fresh price rise for the North American market early this year. Order books remain at comfortable levels, and a positive year can be expected for the sector, nevertheless, the evolution of the exchange rate will be, as always, a key factor for 2018 profitability. In the tissue business, the continued high level of pulp price, combined with new capacity coming on to the market will, we worked out, keep the tissue producers under strong pressure again, especially in the case of non-integrated manufacturers. In our case, this is too far, a mill at Vila Velha de Ródão, but should not be affecting our new tissue mill in Cacia and it is backward-integrated into pulp.The project for the new tissue line, Cacia, which is expected to start-up producing its first tissue mills in August, will most definitely be one of our main challenges for 2018. This along with the additional pulp capacity in Figueira da Foz is due to start-up in April, May.We can now go to Slide 20, where a couple of comments on our Pellet business. After a tough startup year, which led to quite negative contribution to our EBITDA as reported. We were presented with an attractive opportunity to divest from this business. So at the end of the year, the group announced that it had signed a contract, to a joint venture, managed and operated by an associate of Enviva Holdings, LP, for a total transaction value of USD 135 million, which was still subject to adjustments. This sale is currently subject to a number of [ president ] conditions and clearance by the regulatory authorities, usual in this type of transactions. As reported, the process is expected to be concluded during the first half of 2018.Some words on Mozambique, on Slide 21. There are not really any big news regarding our last call. So as a brief reminder, we have stated that we decided to proceed with this project at a more moderate pace and phased over time. Thus, this more conservative approach meant that at the end of December 2017, the balance sheet value of our Mozambique investment is residual. During the year, we did incur in expenses a net amount of EUR 8.8 million with operations in Mozambique. This is the current pace of expenses for the Mozambiquan operation. We remain of course very much engaged in this project and would like to proceed further with all our forestry plans as soon as we are consensus in the country, most of which are under discussions with the Mozambique authorities due permit. As we have mentioned, Cacia tissue project is progressing as expected both on time and on budget.Slide 22 for a quick update. You see that 92% of CapEx is already committed and 60% of civil works executed, the picture is an actual picture taken a couple of days ago. Currently, we have on-site for this project, just for this project almost 360 workers were involved.On Slide 23, a quick update on the Figueira da Foz top capacity increase. As we have shared, this is an optimization and eco-efficiency project, which includes significant environmental investments, naming reduction of orders, waste, air and liquid emissions, as well as investments in innovative manufacturing process, linked with oxygen improving both equipment efficiency and product differentiation. Here, currently 50% of the global CapEx is commissioned, most of the rest will happen at the moment of the stoppage of course.Now I would like to end our 2017 results presentation and before taking your questions we have a slide that tries to address key sustainability issues, which will be at the cornerstone of Navigator. So on Slide 24, you see that sustainability is in our DNA and is the only possible path for a company such as Navigator. We experience this commitment on a daily basis throughout our operations, our people, our relationships with the local community, and with all of our stakeholders.Let me report the milestones we achieved during 2017. First, we participated for the very first time in the CDP project, Carbon Disclosure Project, we were waiting in climate change and achieved an A-minus leadership score. Second, we were selected as the web summit carbon offsetting partner. So with this initiative, Navigator is planting 95,000 pine trees in the Centre of Portugal that we offset all of the CO2 emissions of the events, mainly the traveling of 60,000 visitors. At the web summit, we did also replace plastic cups by biodegradable and 100% recyclable paper cups during the aforementioned summit.Finally, we have a new R&D project, which I would like to speak about. The name is Inpactus and it's a project focused on innovative products and technologies prepared over the course of 2017. The aim is to set up a platform of excellence, combining the resources of industry and several universities to develop different areas of biorefinery, train human resources and generate business opportunities. The project brings together a consortium comprising several Navigator plans, the R&D center, [ RAIZ ], universities of Coimbra and Aveiro and several others. This altogether in the partnership with organizations both in the scientific and technological system both in Portugal and elsewhere, Germany and Sweden mainly.This Inpactus project is structured around 15 activities. It has 42 projects, and for instance, it will have over 50 scholarships developed over 4 years. This will represent a total investment of over EUR 15 million and will benefit from a total incentive of almost EUR 9 million. In addition to ensuring international competitiveness in the areas of pulp, uncoated woodfree printing and writing paper, and tissue paper, with a view to developing distinctive and innovative products in these 3 segments. We see the challenges of the Inpactus project as taking advantage of changes associated with the new bio-economy paradigm, developing emerging business areas in biorefinery and exploiting the added value that bioproducts can offer, the economy and society.

[Joana Lã Appleton]

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

[Operator]

[Operator Instructions] The first question comes from José Rito from CaixaBank.

[José Rito]

My first question on paper prices evolution in 2018. I know that you maintain a positive tone regarding evolution of paper prices in Europe, could you provide a little bit more color, namely where prices could stand in 2018? And also related to this, if the current fixed already reflects the old price increases announced last year in 2017. That will be my first question. Second question regarding the [ WEX ] market, do you think it is possible to fully offset ongoing [ WEX ] dollar devaluation this year through price increases in these markets. That will be my second question. Then on in terms of cost-cutting initiatives. Just to clarify, in the presentation, you have EUR 100 million cost savings expected until, I think it is 2019, just to confirm the date, and also related to this to clarify if this is already adjusted by OpEx inflation. Basically, I want to understand what will be the net run rate impact from this cost initiatives, those they are fully implemented. And finally, small question on the Cacia from the pellets business. If this could be used for a potential extra dividends, if you could provide any color on these will be great.

[Diogo António Rodrigues da Silveira, Vice Chairman, CEO & Chairman of Executive Board]

So thank you for your questions. I will ask António Redondo to address the 2 first ones that I will briefly rephrase to be sure that we got them. So the first one you would like to understand is that is why we are positive on paper prices for 2018. And the second one was mainly if we are positive enough in the U.S. so that the increases could make up for a potential dollar devaluation. So I hand over to António, I'll then take the other questions on cost cutting and on the pellets.

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

Thank you, José, for your questions. So we are actually quite positive for the price evolution for 2018. As I referred, we have just implemented in January our first price increase for the year, which fully implemented and accepted, and that is a high likelihood of price increase in Q2, not only in Europe but in international markets and discussions are starting to be taking place with customers and from one side the demand is positive. We still have a very large order books, actually larger than we had by the end of last year. And the cost pressure is high by no means only on pulp. The cost structure applies to other raw materials and this combination of a positive demand, cost pressure and last but not least, we don't see the pipeline full. So we see stocks relatively modest through the pipeline on the paper side, we do believe that our old ingredients for a likely price increase somewhere on Q2. Further from that is soon to comment and it will, of course, depend very much on the evolution of the pulp. I am not quite understood your comment on [ fixed ]. So if you don't mind to try to clarify the comment on fixed and I'll try to help.

[José Rito]

Yes. Basically, if the current value that we have today, so the last report is from this week, if already reflects the four price increases from 2017 are if eventually because some of the contracts are only revised each 6 months. So if the 4 increases in '17 will lead current price that we have right now to a higher value that we have this week.

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

Actually, [ fixed ] in paper, we do believe, does not reflect not now in January, not over the year of 2017 reflected what actually do happen in the market, does not reflect at all our prices. So the fixed today does not in our view incorporate what is already happening in the marketplace, there is a lag between fixed and transaction prices. Regarding the U.S. market, the challenges are basically the same with very important new factor, which is a significant reduction of capacity that, in our view, will overcome the reduction in demand. So we do believe that in the U.S. market, we saw you probably know that we have announced the price increase in January and another one in February. So we see the market strong. There is a very high level of demand. The balance in between supply and demand is positive. So we also see high likelihood of a better price development in 2018 than we saw in 2017. Thank you.

[Diogo António Rodrigues da Silveira, Vice Chairman, CEO & Chairman of Executive Board]

So just to round up and turn your comments, I know that some of you guys have a quite positive stance on the paper prices for 2018. We have to be cautious because these things can always change, but we are on balance positive as António clearly expressed. So as for the cost, so we did start this program, this M2 program, we prepared it in 2015 and it started to impact in 2016. So at that time, we made a plan 2016 through 2020 and we said let's try to get EUR 100 million of cost reductions, then there are always topics in the cost do increase, so the net impact on the P&L is this net of what does increase. So in 2016, we reported EUR 16 million cost decrease, this year EUR 27 million, so that's a total of EUR 43 million. The main topics for you to get some feel are wood, for instance, this year EUR 5 million come out of wood, EUR 3 million come out of energy, if we are able to purchase at a lower cost and to play -- and to arbitrage in a way between gas and fuel for instance; packaging almost also EUR 3 million. Two more -- above EUR 2 million, maintenance, we have decreased maintenance cost by over EUR 2 million in addition to last year's reduction and chemicals -- mainly chemicals for paper. If we have chemicals for paper and chemicals for pulp, the total cost reduction is EUR 3.8 million. So that you get a feel for what we have done. So we still have, in our program, almost say around EUR 57 million of cost reduction to find. The last question, I understand, was on the pellets and on whether the proceedings from the pellets could go for the dividend or some additional dividend, of course, as you know dividend decisions lay with the shareholders, but our understanding is that the dividend policy will be independent from the proceedings of our pellets operation.

[Operator]

The next question comes from Nuno Estacio from Haitong Bank.

[Nuno Estácio, Equity Research Analyst]

Some -- 2 questions. The first one is on CapEx outlook. In 2017, there was -- the investments was a little bit below what you have foreseen 1 year ago. Can you give us what are your indications for '18 and after these 2 projects, what are you thinking about in terms of CapEx for '19 and '20? Do you have any new projects that you think could go ahead? Are you -- will you wait to invest more in tissue depending on the results of this new mill, what are your more long-term plans or medium-term plans? The second question would be on the political noise, there has been several worth comments from politicians in Portugal regarding, first, it was the forest fires; now, it's the pollution on the river and with a negative [ down force ] for pulp producers. Do you fear that some legislation could be underway that could affect your pulp production activity? Do you have any view on this, do you think this is just noise and nothing to worry about, so and comment on that would be appreciated. Third point would be on the profitability of tissue, you have mentioned lower margins in tissue, if you could indicate us what was the EBITDA margin in '17 and how much do you expect it to go down again in '18 or if you expect that with the price increases that have not been announced and have impacted fourth quarter. EBITDA margins would actually stabilize in '18.

[Diogo António Rodrigues da Silveira, Vice Chairman, CEO & Chairman of Executive Board]

Very good. So I understand your first question is on CapEx going forward after the 2 current investments, the pulp debottlenecking in Figueira and Cacia mill. So currently we have no other investment approved at Board level, but we have a couple of ideas. So let's just see that we are able to keep having those, is good cash flow generation and we will certainly find additional opportunities to invest, but currently we have nothing else approved. Your second question, I understood was on the -- those issues raised couple of months ago on the fires and the potential impact on our forest and now also these issues, we've environmental concerns following the Tagus river issue and your question is whether we are concerned? So the answer is yes, we are concerned, of course, as you know on the forest area there has already been unbelievable legislation trying to limit and even to reduce the amount of eucalyptus existing in Portugal. We believe this is, of course, a complete nonsense. But we have to live with the legislation in place and are actively looking for alternative areas to have more eucalyptus, namely in Spain or elsewhere, besides, as you know, Mozambique, where we already have planted in over 10,000 hectares. As well, we believe that there could always be some more stringent regulation on environmental issues. When that does happen for good reasons, that is fully acceptable and we, of course, being at the European Organization of Pulp and Paper actually Navigator sits on the Steering Committee of the European Commission of the European Association and we have been working on having those legislations evolve. Therefore, we will point in certainly invest in 2019 several ten's, millions of euros in further improving our environmental numbers. But sometimes it is just based on the other reasons and issues those are sometimes less acceptable, but if they come up, we will have also to cope with them. We are very comfortable, as you know the analysis made clear for instance that in this case Vila Velha de Ródão, all the numbers from the Navigator plant are well within the limits. So we are quite comfortable. Let's hope that the [indiscernible] doesn't take over the regulators here. Last but not least, you mentioned EBITDA on tissue, actually we see increased competition that does not mean that we see lower EBITDA as a percentage of sales. This year, we were impacted by the increase of the pulp prices, but as you know, pulp price has a lower effect on tissue than it has on uncoated woodfree just because prices of the finished products are different. So we don't anticipate a deterioration of our EBITDA tissue margin for 2018. We will just have to find the right mix, geographical product and keep on managing the cost base so as to be able to net whatever negative impact additional pulp price increases could have.

[Nuno Estácio, Equity Research Analyst]

Just -- sorry, to clarify on CapEx 2018, can you tell us what is your amount you have budget and in -- regarding this impact on the tissue margin, in 2017 how much did the tissue EBITDA margin fell?

[Diogo António Rodrigues da Silveira, Vice Chairman, CEO & Chairman of Executive Board]

Your question was not clear enough, sorry, but from a sound [ viewpoint ] can I ask you once more to ask?

[Nuno Estácio, Equity Research Analyst]

Yes, if you could tell us how much do you expect to spend in CapEx in '18 and the second clarification is on the tissue EBITDA margin, if you could tell us how much it fell in '17 versus '16.

[Diogo António Rodrigues da Silveira, Vice Chairman, CEO & Chairman of Executive Board]

So CapEx for 2018 has nothing new to report. I mean, we have our traditional maintenance CapEx plus the ongoing project. So it could be around say EUR 200 million CapEx for 2018. So that's the view for the CapEx. On the tissue EBITDA, I would not share with you the EBITDA as a percentage of sales, but I can give you 2 information. First one is that the pulp price increase did "still" 2 percentage points out of our margin. So EBITDA of tissue versus sales due to the increased pulp price was 2 percentage points lower than if the price would have remained the same. The second thing is that the difference we have roughly versus our competitors in tissue is the same as we do have in uncoated woodfree. So that's to say as you know, our EBITDA margins in uncoated woodfree is clearly above our competitors' average EBITDA on sales. The same ratio applies to tissue. Our EBITDA on sales in tissue is clearly much above the average EBITDA of tissue.

[Operator]

The next question comes from Antonio Seladas from Intermoney.

[Antonio Seladas]

I have 2 questions. One is related with staff costs from third quarter and fourth quarter went up by -- to double-digit. Is that structural or it was just [ let it be ] the quarter's? And the second question is related with the pollution event at Tagus river, you've already talk about it, but I would like to know or we would like to know if -- what are the consequences for your mill there if your main supplier -- well, right now it just working at 50%. If your main supply will continue to work at 50% for the year, let's say, for instance, taking consideration that we are over a dry period.

[Joana Lã Appleton]

Antonio, please, we can't hear very well your questions, can you repeat them?

[Antonio Seladas]

Sure. The first one is related with staff cost over the third and fourth quarter double-digit figure increase. So what were the explanation and is it structural or not? And the second question is related with Tagus river pollution event, taking consideration that the supplier, you are the main supplier, is now working at 50%, what could be the consequence for your mill and taking consideration that we are over a dry period?

[Diogo António Rodrigues da Silveira, Vice Chairman, CEO & Chairman of Executive Board]

Very good. So I'll answer the second question first because that one was clear to me -- was crystal clear just like the fluent our plant in Vila Velha de Ródão sends to [indiscernible]. So I'll the second one just to be sure. Your question is, if the -- our pulp supplier keeps on having to reduce its production, is this an issue for us? So the answer is no, it is not an issue for us. The contract we have with them is for pulp, so either we get fresh pulp or we get dry pulp. And as you know, they have other plants. So we are comfortable and we rely on them. We will have the pulp either [ slush ] from there or dry from probably the Figueira da Foz. So the first question was on the cost evolution. I mean, there was not -- there was nothing specific to report between the third and the fourth quarter. We just had several initiatives ongoing and of course, at the end of the year, we always try to synthesize and to recognize so that might be why there is quite some difference between the third and the fourth quarters, but there is nothing special that I would like to mention or that I would like to emphasize. I mean we have -- it's a very large program as you -- as I've shared with you. It covers over a hundred initiatives enclose for all the plants through the central and shared services. So we have actually pointed in the lean part of the project, which is a key supplier of cost reduction initiatives to the M Square program. We have one say which is the name given to the [ lean guys ] in each plant. We also have one in for central services, but nothing specifically happened, those things are not always [ line here ], that's why you may see a difference between the third and the fourth quarter, but nothing special to report.

[Operator]

The next question comes from Jose Martins Soares from JB Capital Markets.

[Jose Martins Soares, Managing Director]

They were follow-up questions, actually. First one is on market outlook, you've touched on the sustainability of pulp pricing at these levels and what are you seeing in terms of capacity closures from non-integrated competitors? Do you see any further sustainability from -- for prices from those closures if there are any? That's the first one. Second one is clearly the year was headed about a strong start of the year and that's good to make your first quarter numbers very tough on a comparison basis and at what level do you think the euro-dollar rate become worrying and what you have in place to hedge yourself in that situation? And then finally, you've mentioned that the tissue market remains tough, but you also mentioned in the past that you would be interested in consolidation opportunities, have that changed?

[Diogo António Rodrigues da Silveira, Vice Chairman, CEO & Chairman of Executive Board]

Okay. So the first question on the ARPU and the potential capacity closures, so as to decrease supply and keep a good equilibrium. I will hand over to António and then I'll try to answer your comment on the U.S. dollar-euro evolution hedging as well as on the consolidation appetite. António?

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

Well regarding capacity closures with what we have witnessed in the last few years is that continues slow of mills getting out of business and both in U.S. and in Europe. At this very moment what we can say is that speaking about Europe about 30% of the European capacity is non-integrated. The European and [indiscernible] free market cannot bear 30% of specialties, meaning that those mills would be or they are extremely exposed to the pulp prices. So our expectation is that, in the coming years or in coming months, more closures might happen in Europe. The same way that I just referred, they have happened in the U.S. end of last year and during 2018 we expect 700,000 tons of closures. Having said that, the majority of the closures have been by exiting to other grades, so it will be depending also on the capability of those mills, financial capability and market capability of their being able to reconstruct their machines to develop new businesses.

[Diogo António Rodrigues da Silveira, Vice Chairman, CEO & Chairman of Executive Board]

So on the U.S. dollar. As of today, we are 100% hedged. We did not hedge actually everything at the same time, that's a detail, but for you to know, but by now 100% of our U.S. dollar exposure is hedged. So I mean, even though it's hedged, of course, we would -- we are very sensitive and would be happy to not have further devaluation, but if we do have, as you know it impacts in a negative way the EBITDA and then we will cover the hedging results through the financial results because we are supposed to recognize those in the P&L, but we have no specific worry, no specific knowledge. So given that we don't buy on forex, we did hedge 100%. As for the consolidation, yes, we are still of course listening and we are in the market. Actually last December, we looked at the potential opportunity, but we then concluded that it was not interesting enough. So if something interesting pops up, we will certainly look at it. Currently, we are not looking at anything.

[Operator]

The next question comes from Alberto Sánchez from Fidentiis.

[Alberto Sánchez Salazar]

I've got a follow-up on tissue profitability. It seems clear that the EBITDA margins and returns of the tissue business are unsatisfactory probably due you to the high level of pulp prices. So I would like to know your thoughts about the future prospects of this business whether you believe that the industry would have to increase tissue prices due to mix improvements, or any other measures or whether pulp prices should be reasonable to I mean to correct from current levels to enable some satisfactory profitability for this business.

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

So the EBITDA that we have on tissue over sales is very similar to what we had anticipated, actually in 2017, to what we had budgeted actually, because it took -- first the impact of pulp prices is a bit lower as I said in the call, because given that the average price of tissue is 50% roughly, 50% above the average and quoted with the prices in the percentage of pulp in price is much lower. Second, this is, of course, unsustainable mainly for smaller players, though prices did start to increase at the end of last year. And currently, we expect to see several price increases, so not only last year, beginning of the year, we believe in April, there will be additional tissue price revisions. The current base is not sustainable for smaller players. For us, it's just a little bit more profitability, for some, it's moving from being profitable to unprofitable as we have seen recently with the converter in the U.K. listed in the stock market. Then, this of course as always forces us to look into other opportunities and we have currently a story of initiative in the tissue as well, so as to minimize the other costs and make-up for the lost margin to pulp prices. We are not over-concerned, I would say, given the current efforts both to price increase and to cost decrease.

[Operator]

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

[Joana Lã Appleton]

This ends our conference call for today. Thank you very much.