The Navigator Company, S.A. (NVG) Earnings Call Transcript & Summary

Good evening. We welcome you to The Navigator Company Third Quarter 2025 Results Presentation. [Operator Instructions] I'll now hand the conference over to Ana Canha. Please go ahead, madam.

Ladies and gentlemen, welcome to The Navigator Company conference call and webcast for the third quarter and nine-months results. Joining us today are the following directors, Antonio Redondo, Fernando de Araujo, Nuno Santos, and Antonio Quirino Soares. 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 links available on the website, and questions may also be submitted using the webcast platform. Antonio will start by commenting on the main highlights of the quarter. I will now hand over to Antonio.

Good afternoon, and thank you for joining us today. I'm pleased to share the results for our third quarter and first nine months of 2025. As you will see in today's presentation, Navigator once again demonstrated its ability to adapt swiftly to very challenging market conditions while maintaining its strong competitive position in Europe. We continue to focus on creating value and protecting margins while investing in diversification and reinforcing the foundations for sustainable growth. I will begin with Slide 4 with an overview of the key highlights. The first nine months of 2025 were marked by very significant volatility driven by geopolitical tensions and rising protectionism, adding to macroeconomic risks. Like others in global trade, Navigator felt the impact of slower demand in key markets. The pulp and paper sector has faced severe pressure visible in the sharp downturn in pulp prices in China since April, which also significantly impact Europe. As anticipated, the third quarter marked the lowest point in this downward cycle. Faced with falling prices across its markets, Navigator succeeded in positioning itself competitively. We are firmly established around the globe, which enabled us to seize opportunities, grow our sales volumes in all paper segments and increase our market shares. Focused on operational excellence, the company implemented initiatives to optimize its variable costs and streamline its operations. The downward course of production costs is already visible despite the temporary impact of cost categories such as energy and chemicals, the effect of which has tended to be diluted as the nine-months period progressed. Pulp and tissue cash costs dropped to near the lowest since mid-2021, with while paper cash cost reached a two-year low. As a result, the pulp and tissue cash costs fell at the end of third quarter to the second lowest level since mid-2021. The paper cash costs were the lowest of the last two years. Despite significant market volatility across all segments, our packaging and tissue businesses delivered solid year-on-year growth and already account for 32% of the EBITDA and 29% of the turnover. In tissue, we are successfully scaling up operations and following recent acquisitions, namely Navigator Tissue U.K. In packaging, our sales continues to show positive momentum with growth in volume, value and strategic positioning in lower basis points. We maintained a strong financial position after dividends and strong CapEx, keeping our net debt-to-EBITDA ratio at 1.85x. Now turning to Slide 5, please, with the main financial figures. Turnover totaled EUR 1,489 million. EBITDA stood at EUR 300 million with an EBITDA margin of 20.2%. Fernando will highlight the main impact on the period. The successful execution of our diversification strategy has strength resilience amid market volatility with tissue and packaging segments helping to offset the impact of subdued pulp and paper prices. In an uncertain macroeconomic environment, our EBITDA margin remains among the strongest in the industry, namely amongst those exposed to pulp, although below our historical average. I will now hand over to my colleagues, who will walk you through the results in more detail and share some insights on how our different business areas have been doing. Fernando will start by the main impacts on EBITDA. Fernando, please go ahead.

Thank you, Antonio. Turning to Slide 6. We can take a closer look at the main impacts on EBITDA in the year-on-year comparison. As already mentioned, EBITDA stood at EUR 300 million, down 30% year-on-year with an EBITDA margin of 20%. Year-to-date results were below last year's due to lower sales price and rising cash costs, mainly for energy and chemicals in the beginning of the year, which, as I mentioned, has since started to reduce. The downward trend in uncoated woodfree and pulp sales price were pressured by falling benchmark index. Change in our product mix also influenced our average sales price. Apart from pulp sales, all paper and tissue products saw a significant increase in sales volume over the nine months period. Turning to Slide 7 with a quarter-on-quarter EBITDA analysis. In this quarter, EBITDA stood at EUR 84 million, down 17% quarter-on-quarter, reflecting EBITDA margin of 18%. Quarter-on-quarter, the EBITDA decreased mainly due to the sharp price reductions, partially offset by strong volumes and variable and fixed cost savings. Navigator sales price fell across all segments quarter-on-quarter, following the drop in key benchmark index. We witnessed a strong rebound in pulp sales versus Q2, plus 31,000 tonnes, driven by the market recovery in Europe and overseas despite our selective sales strategy amid sharp price drops. In uncoated woodfree and packaging, we sustained volumes, offsetting the typical seasonality of the third quarter. We saw a good trend regarding production costs. Wood costs were down due to lower prices and lower extra Iberian purchase. Energy and chemical costs also decreased due to lower prices. External fibers were also down as a result of lower market prices. As Antonio already mentioned, pulp and tissue cash cost dropped this quarter to near their lowest since mid-2021, while paper cash costs reached a two-year low. Turning to Slide 8 with debt maturity and liquidity. During the first nine months, we repaid close to EUR 400 million in debt, including EUR 275 million early repayment, strengthening our debt profile and increasing the share of sustainability linked instruments. We also secured EUR 365 million in long-term facilities with EUR 140 million still available, including an European Investment Bank loan, EUR 40 million to support the decarbonization projects with no significant payments due in the next five years. We raised EUR 225 million new debt with a seven-year maturity, extending our average debt maturity to 5.2 years from 3.5 years in December. We also raised the weight of sustainability-linked debt to 79%. After this debt renegotiation cycle, Navigator reduced its debt repayment commitments to very low volumes over the next five years, hence ensuring the reduction of its average credit spreads and increasing the weight of the debt raise and the ESG requirements. At the end of the period, 78% of our debt was on a fixed rate basis. It should be noted that despite the rising interest rates in relation to our last financing cycle, our average cost of financing at the end of September remained low at around 2.6%. The unused long-term credit facilities currently totaled EUR 140 million. Turning to Slide 9 with an overview on CapEx. The high strategic CapEx cycle start in 2023, boosted by the NextGenerationEU and innovation funds is coming to an end and expect to be phased by mid-2026. In the first nine months of 2025, CapEx totaled EUR 160 million, of which approximately 61% of total corresponds to value creating environmental or sustainable investments. NextGenerationEU projects advancing on schedule, reflecting our strategic discipline and focus on delivering results with 77% executed by the end of September in time within the PRR calendar and in budget. Moving to Slide 10, which presents key performance indicators. Let me highlight our ongoing commitment to operational excellence and long-term value creation with a strong focus on decarbonizing our industrial process and investing in innovative technologies that improve resource circularity and cost efficiency. This quarter, we achieved a significant milestone in our decarbonization road map, namely with two biomass power lime kilns in the operation at our Aveiro and Setúbal sites and the third biomass power kiln at Figueira da Foz is now in the start-up phase. These projects are designed to reduce both greenhouse gas emissions from pulp mills and the dependence on fossil fuels. Notably, the new lime kiln in Figueira da Foz will also make a very significant contribution to simpler use of resource by enabling reclamation of carbonate sludge, reducing the quantity of this waste sent to landfill by around 90%. Thanks to this investment, the Aveiro and Figueira da Foz mill will operate in 2026, producing around 9% renewable energy. The conversion of lime kilns from fossil fuels to sustainable biomass will open the door to the innovative use of Eucalyptus globulus, a byproduct from wood preparation operation as a renewable fuel. At the Setúbal mill, the conversion of lime kiln to biomass as this energy source will lead to a reduction in carbon emissions of around 17,000 tonnes CO2 emission license per year. In Aveiro and in Figueira da Foz, the project will allow a reduction of approximately 10,000 tonnes CO2 per year in each site. In Setúbal, this groundbreaking project has attracted support from the Innovation Fund, the European Union Fund for climate policy, geared especially to energy and industry and working to bring to the market solutions for decarbonizing the European industry and helping it make the transition to climate neutrality. The Aveiro project and the new lime kiln in Figueira da Foz have been partially financed by the NextGenerationEU funds. Together, these three projects represent a total investment of approximately EUR 60 million. This innovation substitution of fossil fuels will improve the cost base of the pulp production process. It once again demonstrates Navigator commitment to operational efficiency and underlines how its actions are aligned with the principles of sustainability in transforming waste into value and taking real steps to consolidate the group's circular economy strategy. Antonio Quirino will now comment on pulp and paper price.

Thank you, Fernando. Turning to Slide 12 with pulp and paper prices. Between April and August this year, the hardwood kraft pulp price index in China sharply decreased, strongly influenced by overcapacity in the pulp and paper sector in view of the current situation of severe tensions in international trade and the reduction in demand in several paper segments in Western markets. The price dropping cycle bottomed out at a price of $493 per tonne, which is down by 18%, the lowest since 2021. Although this downward cycle has been shorter than previous cycles, it started from a significantly lower peak, reflecting a structurally weaker base than in previous cycles. In Europe, the benchmark index for hardwood pulp, the peaks hardwood kraft pulp in dollars rallied to $1,218 per tonne in April, up 22%, only to lose ground again in the months that followed, returning to $1,000 per tonne in August, down by 18% as well and remaining at that level until the end of September. In both regions, China and Europe, prices ended the third quarter on an upward trajectory. Moving to paper. The benchmark index of office paper in Europe, PIX A4 B-copy stood at an average of EUR 1,023 per tonne in the first nine months, which is 8% down on the same period last year, but 21% above the pre-pandemic average of EUR 847 per tonne in the period of 2015 to 2019, but below 25% from the 2022 peak. As we review Navigator's performance in Europe, I would like to highlight our approach to sales pricing, which closely track the evolution of benchmark indices. We pursued two different strategies. First, we placed greater emphasis on economy products. So this allowed us to increase our sales volumes, though it did have some impact on our overall product mix. This strategy enabled us to offset the decline in imports into Europe by offering products with superior quality and stronger environmental credentials compared to typically typical imported papers into Europe, particularly those from Asia, while maintaining a price point above imports, but below our premium and standard ranges. At the same time, it allowed us to continue supporting our most loyal premium customers with this economy offerings. Second, we maintained price premiums on our value-added product. This strategy ensured that our pricing on premium and standard products remained favorable compared to the market index and specifically for A4 B-copy PIX. It's important to note that in international markets, our prices were affected by two other factors, namely the weaker dollar and the decline in the pulp markets in China. This dual approach has helped us remain competitive and responsive to market dynamics, balancing volume growth with value retention. Moving to Slide 13 on printing and writing paper market, we see that the global apparent demand for these papers fell by 2.7% until August. Specifically, uncoated woodfree paper remained the most resilient, falling 1.6% this year, which is aligned with historical average market decline, and this compares with 5.1% decrease in coated woodfree papers and 4.2% decrease in mechanical fibers papers. In Europe, the apparent demand for uncoated woodfree paper fell by 6.4% until August, driven specifically by a reduction in imports that were 11% below the same period of last year. In the United States, demand slipped by just 1%, while the closure of a major mill drove import reliance at 31% year-on-year, leveraged by tariff expectations. With capacity cuts and duties adding pressure, prices have climbed and are likely to remain strong with more increases forecast through 2026. In the first nine months of 2025, Navigator grew its share of total deliveries from European mills by 1.2 percentage points year-on-year, reaching about 26%. This was driven by strong gains in international markets at 6 percentage points, while our European share remained steady at over 18%. Navigator's operating rate rose to 87% in the first nine months of the year, 7 percentage points above the same period last year. Meanwhile, the industry rate as a whole recovered slightly from 80% to 81%. These developments enabled Navigator to strengthen its order intake market share by 3 percentage points globally to 27% and by 2 percentage points in the European market to reach 19% year-on-year. Now moving to Slide 14 to discuss pulp market. As Antonio mentioned previously, from April through August, there was a steep downward adjustment in pulp prices. In terms of demand, global demand for hardwood pulp grew by 8% year-on-year until August. China remaining the main engine of growth with an impressive increase of 12% due to the continuous in new paper capacities in several grades followed by the rest of the world with a 9% increase. In contrast, demand in Europe continued to fall following the shrinking consumption of printing paper, as mentioned before, edging down by 1%. In the U.S., demand dropped by 1% as well after heavy restocking over the same period last year. The strongest global growth was for eucalyptus pulp, which was up by more than 10% in the first eight months of the year, with China growing impressive 14% and Europe in line with the same period of last year. This performance has consistently boosted Eucalyptus share in the hardwood reach segment on the chemical pulps. On the supply side, the ramp-up of projects on the pulp side that were brought online in 2024 increased the availability of market pulp in 2025, exerting pressure on operating rates. Even so, factors such as growing consumption, maintenance shutdowns and recently announced cuts in production helped to balance the market and sustain the activity of hardwood producers in the first nine months of the year. The global pulp market will continue to be influenced by China, where growth in domestic consumption and projects for new tissue, paper and board capacity have shaped the market balance. However, a significant proportion of these new lines are still at the initial start-up stage, which could mitigate the impact in the short term. Doubts also mounting as to the region's ability to supply wood sustainably for the new capacity. In Europe, stock levels remained relatively stable. In China, although stocks at ports have been building up since January, analysis of paper production suggests that this growth is proportional to the expansion of their industrial operations and not an anomalous accumulation. The ratio of stock of days of production has been stable in recent months, pointing to a balance between supply and demand. Our sustained competitive advantage is anchored in the uniqueness of Eucalyptus Globulus, eco-efficiency and fiber quality. On a positive note, as Antonio mentioned, our pulp cash costs ended Q3 at the second lowest level since mid-'21, down 20% from January to September and 19% quarter-on-quarter. Moving to Slide 15, covering the tissue market. We see that after a substantial growth of 6.3% in 2024, Western European demand for tissue was up year-on-year by 0.6%. Navigator's tissue sales volume, finished products and mills grew to 177,000 tonnes, a 14% increase compared with the same period of last year, with sales up 17%, boosted by the integration of Navigator Tissue U.K. in May last year. The recent acquisitions in Spain, '23 and the U.K., '24 have enabled us to balance our geographical mix and creating greater resilience in our tissue business. Finished products accounted for 98% of total sales, while wheels accounted for the remaining 2%. The at home or consumer retail segment has grown in importance and currently accounts for around 83% of sales. The away-from-home segment, wholesalers, the HoReCa channel and offices accounts for the remaining 17%. The highlight of the quarter in the Tissue segment was the business in Iberia, which recorded its best ever quarter in sales of finished products. We continued with the integration of the U.K. operation with increased collaboration between local and Iberian teams, aiming to boost cross-selling opportunities between markets, optimize the portfolio and identify and implement further cost cutting and efficient opportunities. Navigator also launched a strategic plan to consolidate its U.K. tissue rolled operations, building on an already efficient model to achieve even greater competitiveness and alignment with best practices. Moving to Slide 16 on the Packaging segment, we see that the global market for machine glazed and machine finished kraft papers grew by approximately 11% year-to-date August, reflecting its strong performance. In this segment, Navigator sales were up 7% year-on-year in volume compared to last year, thanks to a rise of 1% in price and a 7% increase in volume with a 10% growth in the area of paper sold due to an increased penetration in low grammage segments according to the strategy. Navigator has been developing and investing in the gKRAFT sustainable packaging segment, offering alternatives to fossil-based plastics and supporting the transition to renewable low-carbon products. gKRAFT brand has won market recognition, achieving a 15% growth in new customers opened during the period of year-to-date September with a presence now in more than 40 countries worldwide. The top performance in the period was the release liner products, together with solutions for food and nonfood packaging, which are strategic priority areas for our business. These segments benefit more significantly from the use of lightweight papers, where the Eucalyptus Globulus offer significant competitive advantages, both economically and technically. MG and MF kraft papers or machine glazed and machine finished kraft papers are used in similar applications such as bags, sachets and several flexible packaging items. Traditionally, machine finished is a slightly lower cost alternative with inferior surface quality in comparison with machine glazed. However, with the conversion of PM3 in Setúbal, production of machine-finished kraft papers in the gKRAFT range will be able to compete with machine glazed on quality. In Europe, machine finished kraft paper for packaging purposes is produced by paper suppliers who typically can only ensure products above 60 grams. The overwhelming majority of the paper machines able to produce below 40 grams are old, small and nonintegrated machines and aimed at the machine-glazed kraft papers. The rebuild of the PM3 machine in Setúbal takes advantage of Navigator's vertical integration and the cost efficiency of the Eucalyptus Globulus fiber for production of distinct top quality kraft papers. As a result of this project, Navigator will move up to fourth place in the European league table of low-grammage flexible packaging manufacturers, strategically consolidating its presence in the segment where demand is surging. In order to ensure that the asset maintains its flexibility and it is adaptable, the project has been designed to allow, if necessary, the production of different grades of uncoated wood-free paper, guaranteeing our capacity to respond to market dynamics and preparing us for future scenarios. I will now hand over to Antonio.

Thank you, Quirino. Let's please turn to Slide 17 with a wrap-up of the Q3 and nine months results. Our diversification strategy is paying off. The diversification to higher growth and less cyclical markets such as tissue and packaging, although more dependent on end user consumption, reinforces the company's long-term value creation and resilience. In tissue, we are successfully scaling our operations, expanding into new markets and positioning ourselves to further unlock long-term synergies that will drive sustained growth. In packaging, increased penetration in low-grammage segments confirmed the strong appeal of Eucalyptus Globulus fiber for the same, leading to a 10% increase in paper area sold compared to a 7% increase in sales volume in tonnes. By focusing on efficiency and cost management, we achieved a significant reduction in cash costs across all pulp and paper segment. We kept our focus on core operations, business transformation and innovation. We carried out value-added CapEx of EUR 160 million aimed at sustainable long-term cost efficiency, while keeping consistent conservative financial policies after high level of CapEx and EUR 175 million dividend payout. Let's turn to Slide 19 with a few words about the outlook. Let me now share our perspective on the current market environment and our outlook for the coming months. Globally, we are seeing a reduction in overall uncertainty and still moderate growth prospects. It's important to recognize the continued presence of risks, protectionism, economic fragmentation and financial vulnerabilities in major economies remain a concern. While a recession does not appear imminent, growth is still relatively subdued and ongoing uncertainty continues to weigh on investments and international trade. Despite the challenges and limited visibility, we are cautiously optimistic about short-term market development. We anticipate that conditions will improve, particularly in the pulp, tissue and packaging segments, where the printing and writing paper segment demand is expected to remain under pressure, although with uncoated woodfree presenting most likely again better perspective than other printing and writing papers. Regarding the pulp market, China continues to play a decisive role. Growth in domestic consumption and new capacity projects have shifted the market focus. That said, many of these new lines are still in the early stages, which should moderate the immediate impact. There is also increasing uncertainty regarding the region's ability to source wood sustainably for the expansions. As a result, we have seen pressure on global prices and a change in trade flows with China in growing. Notably, the third quarter of 2025 was the weakest since 2021 with prices averaging USD 500 per tonne in China. We believe this marks the bottom of the current price cycle as both China and Europe saw prices start to recover towards the end of the last quarter. In the printing and writing paper, the overall global outlook remains challenging amid a structural consumption downturn. Europe with strong uncoated woodfree demand contraction, while U.S. and remaining overseas markets with a more moderate fall. Global uncoated woodfree demand with minus 1.6% so far this year is in line with the last 10 years yearly rate. On the supply side, Europe has seen significant capacity reductions with recent closures removing around 430,000 tonnes annually, about 7% of the region's capacity. Another major European player is also facing financial difficulties, which could lead to further capacity cuts. European imports remain stable with no upward pressure. EUDR discussions continue and its implementation is expected to reinforce European pulp and paper market. Meanwhile, the U.S. market has shown great resilience. The closure of the country's largest mill accounting for 8% of total capacity has deepened the market shortfall with North American production estimated to lag 800,000 to 1.1 million tonnes versus North American demand. Another closure announced this quarter will remove 320,000 tonnes of uncoated woodfree capacity by Q3 next year, further increasing U.S. import requirements. Meeting this demand will depend on a select group of countries able to supply products meeting U.S. market stringent specifications, primarily manufacturers in Europe and Latin America. Latin American suppliers, however, are facing the prospect of higher tariffs, both antidumping duties and custom service than those currently imposed on European imports. In response, U.S. producers may focus on their domestic market, potentially creating opportunities for competitors in their existing export market. Despite this complexity, new opportunities are arising in the uncoated woodfree market. For example, Mexico's customs tariffs on Asian imports and Colombian tariffs on imports from Brazil are providing competitive advantage for Navigator in these countries, supporting sales and expanding our footprint. In tissue, demand has increased by an estimated 0.4% so far in 2025, with annual growth expected to hold steady at around 1% through to 2029. The integration of Navigator Tissue U.K. is progressing with stronger collaboration between the local and Nigerian teams, unlocking cross-selling, optimizing the portfolio for higher-margin products. To strengthen our market position and operational resilience, we have launched a strategic plan to consolidate our U.K. tissue roll operations in two sites, Leyland and Leicester, reducing sites from five to two, integrating production and storage for greater efficiency, scalability and cost competitiveness, building on an already efficient model to achieve even greater competitiveness and alignment with best practice. Regarding a new tissue machine, the final investment decision is anticipated by year-end 2025. Packaging continues to perform strongly with growth in sales and price. Our project to convert the PM3 paper machine at Setúbal is progressing as planned. This will elevate Navigator to fourth place among European manufacturers of low-grammage flexible paints, consolidating our presence in a segment with robust demand. Navigator's integrated management, sound financial position and our ability to respond flexibly to market demand from forest to finished products are enabling us to face these challenges and prepare confidently for the future. Continued development and diversification of our business base will further reinforce the resilience and sustainability of our business model. The next slide provides a quick update on our operational excellence initiatives. Amid the ongoing global uncertainty, Navigator is proactively strengthening its resilience through several targeted initiatives under a program called Operational Excellence Initiatives 2025, 2026 as already announced last quarter. Keeping its focus on high operational standards, the company has launched internal programs designed to act on different fronts to protect results. These involve programs for the optimization and reduction of variable costs by streamlining specific consumption of raw and subsidiary materials, seeking strategic negotiation with suppliers as well as logistic cost reductions. The company will also step up its commitment to Iberian wood, promoting local and sustainable fossil fuel. in this first quarter is already visible the impact of some of the measures implemented. As mentioned in our previous call, Navigator is advancing its operational excellence through a robust investment in AI, namely advanced process control solutions aimed at enhancing process stability, efficiency and product quality. The company has successfully deployed third-party APC systems, two in classification processes and value of breaching with two more in the pipeline, while it is also developing proprietary machine learning algorithm solutions internally. These include optimization of precipitated calcium carbonate incorporation and reduction of variability in tissue grammage control and integrated control of thickness, grammage and reference in uncoated woodfree paper production. This multipronged approach reflects Navigator's commitment to innovation and continuous improvement and across its industrial operations. We're also focusing on improving efficiency by cutting fixed costs, mainly freezing headcount and optimizing running costs. We continue to invest in reliability by speeding up implementation of the asset performance management, APM system and executing specific action plans to build up teams and improve systems for asset management, maintenance and reliability. Along CapEx -- alongside this CapEx plans will be subject to careful review, especially as regards to scheduling, seeking to reduce projects in 2025 by approximately EUR 40 million, prioritizing those under the resilience and recovery program and those offering higher rates of return. Lastly, we will address our commercial strategy and market diversification by relaunching economic products, being more aggressive with low-end products in the face of the current economic situation, while protecting the margins and volumes of premium products. With a positive perspective following the decisions of the European Commission on 24th of April 2025, the ERSE, the energy regulator in Portugal on 22nd of July, a revised third-party access tariff for less intensive customers has been set. Navigator installations in high and medium voltage will benefit from rant discussion on those tariffs between May and December '25. In addition, with approval of increased support for indirect CO2 costs in Portugal through the environmental fund. This support, we must say, has been both delayed and very modest, especially when compared to the more substantial measures provided to our competitors in several other European countries, notably in Spain, in France, in Germany, and in Finland. Business diversification and innovation in products remain at the heart of Navigator strategy, especially in the tissue and packaging segment, where there is still great potential for growth. Thank you.

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

[Operator Instructions] Our first question comes from Cole Hathorn from Jefferies.

I'd just like to follow up on your office paper business. In a challenging demand environment, you've done exceptionally well. So I'm just wondering on your commercial strategy, how did you maintain the stronger operating rates of kind of 87% versus the industry? Was this a real focus on the economic products to keep your operating rate elevated. I'm just wondering commercially how you drove the better operating rates in uncoated woodfree. And then I'm also just wondering, sticking to Europe, was there also something around one of your competitors or some of your competitors dropping the ball commercially? Just wondering if it's a bit of both.

Okay. Thank you for your question. And I'm trying to rephrase it just to make sure we fully understand them. I will give some elements to the answer, and then I'll ask Quirino to follow up. Your first question is focused on office papers. And you realize that our results are quite resilient under the present situation, and you would like to understand how this resilience can be explained vis-a-vis our European competitors. Is this right?

That's correct.

Okay? And the second question is if you believe that some of our European competitors have dropped the ball under the same context, I understand.

Yes.

Okay. I will give you some elements of answer and then Quirino will follow up with more details. For the first question, I think there is not a silver bullet. We didn't perform one single action that allow us to be significantly more resilient than our competitors. First and probably foremost, we have a unique product quality that is second to none to anybody else in the world. And we have very, very strong brands. And I think, again, this quarter, our quality has proven to be very differentiated from our competitors. And in an environment where people consume less products, they probably can afford to choose better products. At the same time, our brands have a very large recognition in the world, but particularly in the markets where we are in. The second element, I think, is related with our sustainability practices and our sustainability reputation. We didn't saw and we are not seeing any drawback any decrease on sustainability when choosing papers, namely office papers and filling and writing papers. And we have the sustainability credentials that we show, we prove, we demonstrate, again, second to none in the group. The third element is probably related with our geographic spread. We are very much present in the corners of the world, if you will, with a strong presence in Europe and a growing presence outside Europe, which I think also Quirino demonstrated. I will stop here on the first question. I will ask Quirino to complement what I've mentioned. And then we can also explain how economic products has helped us to support the high end.

Absolutely. Thanks for the question. So I think Antonio mentioned the key points. So we see a strong resilience on our premium and branded offering products in the market. And this is related with the fiber and the quality of the products, which is very appreciated in the market. So I think this is really, as Antonio mentioned, a strong element to the answer. The other one is in geography. Actually, our coverage of around 130 countries in the world provide contrary to some of our smaller competitors in Europe provide an insurance, let's say, because we're covering several regions, we take profit from local regional growth. We did see the Americas, both in North America and Latin America quite positive for us as well. Don't forget that we saw this year also a decrease in imports into Europe, which was also helping the European industry to find some space. But your question relates to our comparison to Europeans. So imports is not an element to answer this, but it helps everyone, I would say. And I would just comment on what I mentioned before on the dual pricing strategy where we continue to protect more the price -- decreasing less the prices on the premium and branded products. But we went more strongly into the economy market with our partners, supporting them on their needs of economy products now that imports are reduced. And so this increased penetration in economy products also boosted our operating rates compared to European mills.

Regarding your second question, I think we can -- sorry, regarding your second question, I think we can concur with you. What we have seen so far is exactly in a market where demand is shrinking in some regions more than others. We see a significant amount of competitors leaving this market, either leaving to other markets or just, as you said, dropping the ball. This was the case clearly in the States, as we mentioned, with one large mill announced for this year, actually already stopped and another one preannounced for next year. We had a sale towards the end of last year and early this year in Europe. And without naming competitors, I think we can keep on seeing the same pattern. If you just look to the results and keeping the geography around if you just look to the results of our European competitors in Q2 and Q1 this year, I think it's easy to understand that some of these companies will never be viable. So in a market that is going down in terms of demand and lacking strong elements of competitiveness, I think it's a question of time before we see others keep on reducing capacity.

And maybe just as a follow-up, your cash costs, you have on Slide 14, your cash cost going down 19% quarter-on-quarter. That's a very big reduction in cash costs. We've seen some of the Nordic players talk about lower wood costs. We've seen some easing of wood costs after a rally in wood costs, but most people are talking about an easing of costs into 2026. So I was just surprised to see cash costs coming down so much for Navigator. So I'm just wondering if you could give a little bit more color of what drove the lower cash cost. Is it wood? Is it just better operating rates? Is it your own self-help initiatives to reduce chemical energy consumption? Any color would be helpful.

Okay. So if I understand correctly, you'd like us to give a bit more color on the cash cost reduction, correct?

Yes, please.

So the cash cost decreased in all different segments. They have decreased in pulp, they have decreased in uncoated woodfree and packaging and they have decreased in tissue. The ones that you mentioned that are in our Slide 14 are specifically referring to pulp. And let me add the following. I think probably we have a couple of elements here. One, as we have seen, our cash costs are on top at the level of 2021. So it's a significant reduction on 2021. Having said that, we had an increase of cash costs in Q1. So we are comparing Q3 with the Q1 where we had higher cash costs. At the time we explained, this was mainly related with energy and chemicals. So the different elements that we have mentioned, they all play a part here in the reduction. I think we can also say that in between September and January this year, our total cash cost dropped 20%. So you see the big impact that we are trying to have on cash cost control. What are the main elements? For sure, energy and chemicals that have a bigger impact on the first quarter of the year. Also, wood is mainly by managing wood origins by managing the sources of wood. And also, we have managed to keep in control fixed costs. Of course, when your operating rates are improving, you have also an efficiency element on it. I will pass to Fernando if he wants to add something.

No. Perhaps on the fixed cost that is on the payroll side, at the beginning of the year, the expectations for the year were higher than the ones that we have now. And part of our payroll expenses are related with the performance of the company. This means it's also some justification for the declining in the cash costs in the period. Related to direct costs, it's like Antonio said, the energy, chemicals and the wood. Part of it is price and part of that is management, the proportion of wood available from different sources and trying to be more efficient on the operational side.

Following up the comments from Fernando,, let me just add one thing about HR, which is we took the decision on -- already on the second quarter. We announced it when we present second quarter results as a freeze in recruitment. So we are managing our operations with, I would say, a more limited number of people, which is a challenge because in some areas, we are building new equipment, we are building operations, we are growing. In some other areas, we are not. So we are balancing people between different operations to keep costs under control.

Our next question comes from Bruno Bessa from Caixa Bank BPI.

I have three, if I may. The first one, you mentioned an improvement in terms of your backlog for the Q4. Just wondering whether this is a pure seasonal effect or if there is an upturn in terms of demand that is above the usual pattern in Q4. This will be the first question. The second question regarding paper prices. In the last cycle trough, you control quite well the price level because you reduced you and your competitors reduced the average capacity utilization rate. My question is why aren't you doing the same this time around? What has changed in the market for you not to follow the same strategy this time? And the third question, we saw a relatively weak quarter on volumes in the tissue business following on a year-on-year basis. Just trying to understand what is behind this effect, if there is any kind of one-off impact in terms of production? And what are your expectations for the upcoming quarters?

Okay. Thank you. Again, for sake of clarity, I'm going to try to rephrase the questions and I will give some elements of answer. I will ask my colleagues to help on replying. So your first question is about the improvement of backlog. I think you are referring to uncoated woodfree and you'd like to understand if this is demand or purely a seasonal effect.

Correct.

Okay. Thank you. Your second question is that you believe that previously this industry a better discipline on pricing and we try to understand what is happening right now.

That's correct.

And the third question is about tissue. You saw coming to what you were expecting weaker volumes on Q3. And would like to understand if this is one-off impact or any issue regarding our mills.

That's it.

Okay. I will give elements over three questions. For the first two, I would then ask Quirino to follow up. And for the third, I will ask Nuno also to comment. So starting with backlog improvement. A very quick comment, and Quirino will detail much more than myself. This is much more than seasonal effects. We are actually conquering, if you will, market share. I think we have shown that in one of the slides. We are conquering market share in order intake. Quirino can elaborate a bit more why we are doing that, but some elements of that have already been given, namely by enlarging our product offer with adding new -- not new, adding products that we didn't have before. On paper prices, I think we agree with you. We see the same. We see that the discipline of the market this time was not at the level that was before. We, as a market leader, try to keep prices and provide actually an umbrella for prices where the majority of our competitors could protect themselves, but they choose not to do. They choose to -- in spite of that to lower prices and, of course, we are also reacting namely with low-end products. Look, I'm not sure if I mentioned this in one of these calls, but I mentioned this very often. There is a very famous sentence from Robert Crandall. Robert Crandall was the CEO of American Airlines after the liberalization. And he said the airline industry was run by the dumbest competitor. And I think this applies also to pulp and paper. I mean no matter the effort that we, as a market leader, do to protect prices, some of our competitors, I guess, out of the aspiration, I go back to the first question that was raised by our colleague from Jefferies. Out of the aspiration, they just give up drop wall, I think was the expression and decreased prices. Nuno, do you want to follow up, please?

Yes. So on the backlog on Q4 is a bit seasonal, but more than seasonal. So we see -- first, we are getting our market share in deliveries, in sales. But what you see in backlog is actually our ability more recently to progress more in market share in order intake, which is a bit more forward-looking because these are orders to be delivered in the next few months. So we are progressing on that. Again, in the Americas, a bit in Europe as well. And in what we call the overseas markets, the North African and Turkish market, which also are picking up a little bit due to the opening of the upward trend on the pulp prices that we mentioned. So this is bringing more activity to the paper market as well. On the prices, only to agree with what Antonio said, I mean, with low pulp prices in -- during the number of months in a row with a portion less now than in the past, but with a portion of players which are nonintegrated, operating on average. Our competitors were, on average, at a lower level. You listened for sure that on average, including us, the uncoated woodfree industry in Europe was operating at 81%, so slightly up from 80% last year, but we increased much more than the market. So our competitors are under severe pressure. So probably that's the explanation over there.

Regarding your third question on tissue, also an introductory comment and I'll pass to Nuno. First of all, no, we don't have any issue in our mills, so no operational issue, no one-off impact. The economic situation across Europe is not across the world, but particularly across Europe, and this affects tissue, obviously, that affects other brands, less tissue than other brands that also affects tissue. But also, we have been working on improving profitability and we have decided to net down some sales that we believe are not profitable for our objectives. Nuno, do you want to follow up, please?

Okay. Can you hear me? I hope so.

Yes.

Okay. No, basically, you said it all already. The market in tissue this year is slightly slower in terms of growth. I think we've said it versus last year, we were -- we have a 3%, 4% growth rate in the market. This year, European market, Western market has been growing at around 0.3%, 0.4% growth rate, which is relatively small, reflects the economy, some tendency for some consumers to trade a bit on specs. So instead of buying three or four ply products, they might choose a similar product, but with two plies or reduce a bit the kitchen rolls used at homes. But I mean, this reflects the overall economic sentiment on one side. And the second reason that Antonio also mentioned, we want to have sustainable and healthy relationships for both sides, always with our partners and clients and protect the long-term sustainability of the relationship. In some situations, it's better to drop a bit some volumes, but to protect the way we are able to serve those clients, and this is what we've been doing. But nothing that is concerning for others.

Okay. If I may, just a follow-up on the first question about the demand for -- and the backlog that you have. From what I understand, the improvement you are seeing is mostly driven by your market share gains more than an effective healthier end demand market at this stage, right?

Yes. The market in Europe in the latter part of the nine months is not significantly better than what it was in the beginning of the year. Of course, there is one positive impact is that imports are significantly increasing. And this, of course, also open space for long-term strategic suppliers to our customers.

[Operator Instructions] Our next question comes from António Seladas from A|S Independent Research.

I have three. First one is related with the different dynamics between Europe and U.S. regarding the printing and write paper. So U.S. is coming down by 1% and Europe about 6%. So what are the difference why the difference is so large, taking consideration that, I guess, the digitalization and all that stuff is more or less similar. Second question is related with saving costs at your U.K. tissue operation. If you can provide some color on it and when we should start to see the results on the profit and loss account. And last question is related with -- there were some provisions on the third quarter figures that you released last week. So I don't know if you can provide also some insight or explain why were these provisions.

António, sorry, I'm so sorry, but I think I can summarize the first two. I didn't at all got the third one. Can you please be so kind to say it again?

Sure. There were some provisions on your profit and loss on your third quarter figures in your third quarter results release last week. So if you provide -- if you can explain why were -- what was the reason for the provisions?

Okay. I'm going to rephrase the questions just to make sure that we fully understand them. First one, you'd like to understand the different dynamics between U.S. and Europe in terms of the downturn so far this year?

Yes, exactly. What explains the difference, so big, so large.

Okay. Okay? The second one, if I understood correctly, is about our tissue U.K. operation. And by saving costs, I'm not sure if you were referring about synergies or if you're referring about our project to consolidate into a smaller number of installations.

It's the second one, in fact.

Second one. And the third one are provisions on the third quarter results. Correct?

Correct.

I will give a quick comment on the first one and the second one, I'll pass then to Quirino or Nuno and the third one, Fernando will answer you. So the different dynamics. I think most likely, we cannot justify what is happening in the uncoated woodfree market no longer by digitalization because I agree with you, if it was purely digitalization, the conversion will be more or less the same, and it is quite significant. Having said that, let's not forget that the market downturn started in U.S. prior to Europe, a couple of years, three or four years prior to Europe. And in U.S. for probably quite some time, we see more an asymptotic behavior of demand. So I think the main explanation for the difference is the economic dynamics on -- between U.S.A. and Europe. But I will leave to Antonio to comment further.

I think just the same, if you think on the data between '19 and '25, if you compare 2019 with 25% and you average the average percent will increase in the market, the annual -- the compound annual growth rate is actually quite the same. It's 5.5% in North America per year from '19 to '25 with COVID in the middle and all of that and Europe as well, 5.5%. So as you mentioned, Antonio, there is a matter of timing where U.S. started to decline much before and now it's more an asymptotic with 1% decrease.

Regarding the cost savings in tissue by consolidating the operation, and before passing to Nuno, just to remember, we are doing this with an ongoing operation in five sites. and we are not buying new machines. So this process is a process that is relatively slow because we need to make sure that we do not let our customers down. So we can only migrate the machines when we are able to reach production in such a way that we keep on supplying our customers in a continuous way. Also, this implies a reduction of number of people and in some cases, a reduction, which is the most expensive. In some other cases, people moving from one side to the other. So if this takes people into consideration, you have from one side, our concerns with people like a company that is very much concerned with its HR. And also we have consultation processes with the employee representatives. So the process already started. It started around August to take significantly more than one year. Nuno?

Yes. I think it might be worth stating even though that's not exactly the objective of your question, but we are addressing both fixed costs and structural costs, but also variable costs in the U.K. operation. So we have -- since we acquired the company last year, we have been performing a revision and the redesign of all cost items. So our paper costs are going down significantly, but also, let's say, the packaging materials, logistics, et cetera. So that's one big element that we are working on. Second, as Antonio mentioned, we are working on the fixed costs. First, of course, Accrol, as you know, as you remember, was floated in the market. We took out a lot of PLC costs and cost -- excess costs that a company that was independent and directly floating in the U.K. market required. Now we have started as it was announced in the process of restructuring and consolidation of our sites. We've just started. It's planned to last until last year. We will again optimize the cost structure of the company, and we will do this in order to have one of the most competitive and most efficient operations in the U.K. In addition to that, something that we are working also in parallel, let's call it the third element of it is increasing productivity of our lines and our plants for you to have an idea, efficiency when we started and we -- the company joined Navigator one year ago, 1.5 years ago was around the OE of the operation was around 30%, 35%. And since then, we have already improved it to 45%. So this is a technical industrial measure KPI, but it's worth mentioning that productivity on the lines, the production lines has also increased significantly over the last 16 months. So overall, we're working on all of these elements.

About the provision, the provision has two elements. One element is the fact that we will dismiss some people at the U.K. and that represents more or less 30% of the value. The remaining value regards different with a supplier in our investment phase that is asking works and things like that, and it starts with process. And despite the fact if you lose this will increase only the amount of investment, we have accounted a provision because we have some tax benefits on that.

Okay. Just a follow-up question regarding the different dynamics between U.S. and Europe. Should we expect -- what kind of demand should we expect in Europe for next year? So I don't know if you can share with us your ideas.

This is the hundred million dollar question. Again, First of all, we cannot share what we have, but this is competitive information. But I think some of the elements that we gave you as an answer can provide you -- before I can provide you an answer now. If we believe this is very much linked to the economic situation across Europe, if we are positive that the economy next year is going to be significantly better, I think we will see a significantly lower decrease. If we believe that the economy is going to be more or less at the same level, we will probably see more or less the same type of decrease.

Ladies and gentlemen, there are no further questions from the conference call at this time. We will now proceed to read the first question from the webcast. The question comes from Jaume Rey Miró from GVC Gaesco. And the question is, do you expect CapEx linked to ESG projects to keep these high levels we have seen in the last three years until you achieve these CO2 targets in 2035? Can we have a forecast in absolute terms for CapEx in general next year?

Okay. I'm going to give an introduction and then Fernando will follow up. ESG is not only decarbonization, but I understand that the main concern and of course, also the main CapEx so far has been decarbonization. If you probably remember the slide in our presentation, Slide #10, and you see that the emissions will be stable from 2026 to 2030. So we will drop vis-a-vis the reference here, which is 2018. In '26, we expect to drop 55% out of 86%, and in 2030, 58% out of 86%. So I'd say the large majority of the emission reduction is done. So purely decarbonization, the large majority of the projects are behind us. is why we are able to keep this level of emissions in the next four to five years. Of course, we are always willing to look to opportunities to speed up the decarbonization provided we find that the projects are value added and they are value added by themselves or Europe makes available funds to increase decarbonization and we increase the value added by using those sites. So, in short, a large majority of the ESG investments dedicated to decarbonization, which is the largest part, I would say that will be concluded by 2026 when we conclude the PRR, the EU Next Generation funds.

This means 2026 despite lower than the amount that we are expected to spend in 2025, it's still above our average investment.

Our average CapEx is around EUR 100 million and EUR 120 million. This means from 2027 onwards is what we would expect. Of course, without expansion CapEx. So the PM3 expansion, which will mainly in 2026 and using again grants from next-generation funds will be concluded by September 2026, and we hope to be able to take the final investment decision on the tissue machine by the end of this year and also the impact of '26 and '27. Fernando was referring this ballpark EUR 120 million is outside the normal maintenance CapEx without expansion CapEx.

This ends our session. Thank you all for your time. As always, we are available for any additional clarification through our usual contact. Have a great evening.