Ladies and gentlemen, welcome to The Navigator Company conference call. I will now hand over to Joana Appleton. Please go ahead.
Thank you. Ladies and gentlemen, welcome to The Navigator Company conference call and webcast for the full-year 2019 and Q4 results. Participating in the call today are the following members of the board, João Castello Branco, António Redondo, Nuno Santos, and João Paulo Oliveira. As usual, we will start with a brief presentation of the main highlights of the period, and we will have a Q&A session at the end. The presentation next can be accessed through the links available on the website, and questions may be addressed also to the webcast platform. João will start with a comment on the main figures reported in this period, and António will follow with an overview of the pulp and paper market. Nuno Santos will comment on the tissue business, and João Paulo Oliveira on CapEx. Fernando will address the main financial issues.
António will close the presentation with the outlook for 2020 and his priorities for The Navigator Company. I will now hand over to João. João, please.
Good morning. Thank you for joining us today. I will start by making some brief comments on the overall results of the year. As discussed in previous quarterly results presentations, 2019 has been a record year in terms of pulp prices and therefore results for the industry. Navigator has been no exception, with record results as well. Unfortunately, in 2019, market context turned around and has been particularly difficult, with a significant decrease in pulp prices throughout the year, depressed demand in Europe, and a severe destocking process across the paper supply chain. In parallel, economic conditions were also unfavorable, with high geopolitical instability, severe increase in major cost sectors, and softening of economic growth, this last aspect being of particular importance for the consumption of paper. External conditions have been very difficult, and on top of this, our operating performance also experienced some issues.
We had several strikes across the year in several mills, some prolonged stoppage and some non-recurring issues that affected our production levels and costs. We believe most of the issues that are within our scope have been identified and dealt with. As to market conditions, we expect to be at the lower end of the price cycle, but we cannot at this point anticipate how fast the market will recover. That said, we remain very confident that Navigator's integrated business model will continue to prove its strong resilience and sustainability in these market conditions. Let's start with the presentation and go over to Slide four, where we have an overview of the main figures for 2019. Navigator registered a stable turnover over the period of EUR 1.688 million of sales. Decline in pulp prices and reduction in paper volumes were partially offset by higher pulp and tissue volumes.
EBITDA totaled EUR 372 million, declining 18%, and margin EBITDA over sales stood at 22%, reflecting a market context of higher production costs and declining pulp prices. As you will be able to notice, these developments are not uncommon to the rest of the industry, and again reflect a market of record pulp prices in 2018, and quite the reverse towards the second half of 2019. We maintained a strong generation of free cash flow in the period, with EUR 186 million comparing to an adjusted free cash flow without balance of EUR 143 million in 2018. Over the course of the year, we paid dividends in the amount of EUR 200 million, a similar amount to the one paid in 2018. We have also proceeded with a share buyback of approximately 5.5 million own shares, investing around EUR 18 million, a clear sign of confidence in our stock.
If we turn now to Slide five, we have a summary of the main highlights for Q4 2019. The Navigator Company registered a turnover of EUR 414 million in the quarter, 1.6% below turnover registered in Q3 2019. The increase in pulp volumes was not enough to offset the reduction in tissue volumes and the decrease in pulp prices. Also, industrial performance was particularly impacted in this quarter by a series of operational issues that I will detail on the next slide. EBITDA in the quarter totaled EUR 72 million, reflecting a context of continued lower pulp prices and especially higher costs and fixed cost booking. Let's therefore turn to Slide six with a little bit more detail on Q4 performance. Market conditions remained tough throughout the quarter, with weak European demand for both pulp and paper.
Pulp prices continued their descending trend and declined 14% over Q3 2019. The benchmark for paper prices also came down, but of course, in a more contained manner, declining 2% in Q4 versus Q3. In this context, we have also experienced a 9% lower than the market decrease in pulp prices and a practically stable paper price with a slight decline of 0.8% QoQ. In terms of volume sold and in spite of the adverse market conditions, we have actually experienced a 10% QoQ increase in pulp volumes and stable paper volumes. Beyond pulp prices, therefore, Navigator's Q4 performance was essentially hampered by two short-term cost effects. Operational instability due to the global strike that impacted our pulp and paper mills in Figueira da Foz and Setúbal, as well as the tissue mill at Vila Nova de Famalicão, and the prolonged maintenance at the Aveiro tissue mill, around 22 days.
These situations explain adverse QoQ cost effects associated with higher specific consumption of energy and chemicals. Fixed cost booking effects also had a relevant impact on QoQ EBITDA evolution. Free cash flow generation over the quarter was actually quite strong, backed by our sustained working capital management effort. Let us go now to Slide seven, where we have some detail of the EBITDA evolution over the year. As mentioned, we registered EUR 372 million of EBITDA versus EUR 455 million last year, or 2018. When looking at the delta between these two periods, we see that the overall price impact was negative and explains more than 60% of the EBITDA decline year-on-year. This was mainly due to the severe decline in pulp prices, - 20%. Not so paper prices, which have actually remained stable versus 2018. Actually, a slight increase of 0.4%.
This, of course, reflects an average number on a declining trend, which has nevertheless remained remarkably resilient in spite of market conditions. In tissue, price for converted products and tissue reels evolved positively by 3% and 2% respectively. Due to product mix effects impacted by an expected increase in sales of reels, average price for tissue products presented a 4% reduction year-on-year. Overall volume performance had a positive impact, mainly from pulp and tissue, which outbalanced the impact of decreased paper volume. We registered strong volumes in pulp, + 24%, and tissue + 52%, sustained on the capacity increases completed in 2018 for both businesses. These increases outbalance the reduction in paper volumes in the period of around - 4%. The overall volume impact, as said, has been actually positive. The other element that relevantly explains Navigator's EBITDA evolution year-on-year are costs.
Most of these have to do with the market context of some of our main variable cost factors. A lesser factor, however, has also been related with the cost impact of operational instability and labor-related stoppage in some of our plants. More specifically, the cost of acquisition of electricity and natural gas suffered significant increase in 2019 compared to 2018, about 17% in the unit cost of electricity and 25% in the unit cost of natural gas. Essentially resulting from the increase in Brent prices and CO2 emission licenses, with a strong impact on electricity pricing. CO2 licenses increased from EUR 16 to EUR 25 per ton over the period. Also in 2019, there was a drastic price increase for the main raw material required for OBAs production, DAS. These are optical brighteners used in production of paper.
Since early January 2019, the price of this material has increased by around 300%, dragging the prices of different OBAs up to 90% as DAS is incorporated into each type of OBA. The reasons for this increase are related to measures taken by the Chinese government, as well as the opportunistic behavior of the main suppliers of this raw material. Navigator's product mix bias towards high bright premium products is more impacted than others. The U.S. EUR rates also impacted was at 1.12, comparing with 1.18 in 2018. Considering that several input costs are purchased in U.S. dollars, non-Iberian wood, and certain chemicals, the valuation of the U.S. dollar against EUR also contributed to cost inflation. There were some positive evolutions in terms of costs, namely in external fiber related to purchases of softwood pulp and also hardwood pulp in Vila Nova de Famalicão on tissue.
Fixed costs evolved negatively with an increase of approximately 3%, with negative performance in operating and maintenance costs offsetting the improvements in personal costs. Just to wrap up, 2019 was a year when we were faced with several challenges internal and external to the group. Externally, we and the industry have had a period of quite challenging market conditions following a record year, with seriously declining pulp prices and weak demand in our core market. Yet, we managed to have a good commercial performance, particularly in paper, where we were able to manage the impact on prices and partially offset declining volumes. Internally, we had to deal with operational instability and labor issues, and the repercussion of this production instability in terms of costs. We also had to deal with external factors that impacted our profitability, such as higher prices for wood chips, energy, and chemicals.
We expect 2020 to remain a demanding year, although on the internal front, a lot of the groundwork has been laid out. We have been working on the labor issues, we have identified and are dealing with the operational issues. We are also undertaking an even stronger focus on cost reduction measures, we expect to see some results already in 2020, as will be explained later. Regarding market conditions, we also expect a challenging year, albeit witnessing currently some favorable signs in terms of our order books. I will end my presentation now and hand over to António Redondo, who, as you all know, is from January 1st, 2020, the new CEO of the company. I believe António needs no introduction.
He has been with the company for many years, working in different areas in the industrial sides, in marketing and sales, as well as in supply chains and logistics, product development, and revenue management departments. He has a deep knowledge of the company and a deep knowledge of the pulp and paper industry, and has been a member of the board of directors of the company since 2007. I know that António and the ExCo are off to a great start this year, and I'm sure we'll be up to the challenges that are facing all of us. I wish him and the whole team the best of luck. António, please.
Thank you, João, and good morning, everyone. I would like to start by saying a few words on pulp prices and take a look at the PIX graph for the BHKP Euro and U.S. dollar shown on Slide nine. You all have seen this graph before. You can see that the index in U.S. dollars has declined to approximately $680 at the end of December. 34% correction versus the price of $1,034 reached at the end of last year, or actually end of 2018. Still, average prices in 2019 for both U.S. dollars and euros in Europe is above the average pulp price in the last five years. The average for pulp prices between 2014 and 2018 in U.S. dollars was around $820, while the average price in 2019 was $855.
The PIX index for hardwood in China actually started to decline significantly in Q4 2018, and then experienced another significant fall in Q2 and Q3 last year, which forced a correction in European prices as well. PIX index for hardwoods in Europe corrected significantly in Q3 last year and continued to decrease throughout Q4, stabilizing in December. Let's take a closer look at what has happened in the last month in the pulp market by going please to Slide number 10. We believe that the intensification of trade war tensions, coupled with higher uncertainty, was reflected in a slowdown in economic activity in China, which led to a significant reduction in consumption.
In Q4 2018 alone, the demand for global bleach chemical market pulp decreased 1.7 million tons year-on-year, with China representing 91% of this reduction and Western Europe following suit, about 0.2 million tons reduction in Q4 2018. With Chinese buyers reducing pulp purchases, prices began to fall and producer stocks start to build up at Chinese and actually European ports. In the first quarter of 2019, Chinese chemical pulp buyers reduced significantly their purchases, reducing about 0.4 million tons and used a significant part of their own inventories while producer stock continued to increase. In Western Europe, the first quarter demand drop was even worse, with demand dropping almost half a million tons versus Q1 2018. With high level of stocks, namely sitting in Chinese and European ports, and this demand drop, big producers had to limit production and ultimately were forced to significantly decrease price.
As mentioned before, from the peak in 2018, short fiber declined about $370 in Europe, 35% from the peak of 1,050, and $315 in China, 41% from 772 in mid-2018 to 457 at the end of last year. From Q2 onwards, demand in China strongly picked up, and from January to November, we saw softwood demand increasing 18%, or about 1.2 million tons, and hardwood growing 8%, around 900,000 tons. China hardwood demand should have ended 2019 growing somewhere between 1.2 million-1.4 million tons year-on-year. That means that its average growth between 2017 and 2019 is actually 10%-15% higher than what was from 2012 to 2016.
Hence, there is no reason to believe that there is some kind of structural problem with Chinese demand. In Europe, there was a demand decrease for hardwood in the first three quarters of 2019, but with some improvement throughout the year. In the second half of last year, producers inventories decreased in face of stronger demand and production cuts, mainly from major pulp suppliers in Latin America and Asia. Still, at the end of 2019, stock levels at producers remained above normal, and stock levels at the ports, from which it is not known if they are producers or buyer stock, remained very high when compared to normal levels, totaling 3.3 million tons in Europe and China at the end of December versus 1.5 million tons average levels in between 2015 and 2017. Although we remain positive that the bottom of the price cycle has been reached.
Benchmark prices in Europe are stable for some weeks now. In China, benchmark prices already shown some positive signs as well, about $5 increase from week 52 last year to week five this year. Also, since early Q4, we are seeing some upward price adjustments in our own pulp operations. Of course, this recovery is subject to Chinese and the rest of the world economic activity pick up, and at the moment, we don't know yet how the coronavirus will impact in terms of economic activity. Wrapping up on the pulp market and looking to the current and future market situation, we will say on the supply side, we are seeing some unexpected events cutting pulp availability to the market related with strikes, capacity shuts, grade swings, and environmental constraints.
These add to the fact that there is no new relevant capacity coming to the market before the second half of next year. On the demand side, we believe medium-term fundamentals remain sound. Market pulp demand will continue to be driven by ongoing tissue investment and underlying demand growth, with industry consultants forecasting a net increase in tissue capacity of about 1.4 million tons during this year. Half of this growth is occurring in China, where fine paper, printing and writing grades seem to have recovered production levels in the last month. Let's go now to Slide 11, please. With an update on the paper market. Global demand for printing and writing papers decreased 4.6 million tons year-on-year, representing over 6% fall year-to-date in November, with uncoated wood-free falling 2.6%, although significantly less than remaining paper grades.
2019 demand decline is clearly above the trend for the past five years, when average reduction was 2.3 for global printing and writing papers, and only 0.3 for uncoated wood-free. Besides the global cool down in economic activity, we have observed a significant destocking movement in key markets for Navigator, mainly due to uncertainty regarding pulp and paper prices. In the case of Europe, there are indications of a strong pipeline destocking of ships during 2019 after the opposite movement in 2018. This brought extra negativity to the apparent demand figures we saw this year, actually last year, but is also positive to the extent that real end user demand in Europe may not have been as bad as figures show. Also, we are currently seeing a need to build up some stocks across the supply chain, which is very positive for the mills.
Let us also point out that the foreign demand in the second half of last year was particularly harsh in USA and also in some international markets, but with some recovery as well at the very end of last year. Let's take a look at paper prices on Slide 12 now. As you can see, the index for A4 copy price fell to EUR 820 at the end of December, declining less than EUR 20 during Q4. Still, average price for 2019 was EUR 903, 3.4% above average price for 2018. This average price is well above the average for the last five years, which stood at EUR 832 and is also above the average of the last 10 years. Let's go please to Slide 13 now with a wrap up of uncoated wood-free market conditions.
Starting with pulp, we have seen that prices have stabilized in China and Europe since the end of last year and beginning of this year. As said before, there are some early signs of price increases. As you all know, paper prices follow pulp prices with a certain lag in time and present much less volatility with a more stable and constant evolution. Paper prices have eased from the high level at the start of 2019 and have adjusted downwards over the last months. Still, prices remain high and this stability is a clear reflection of the resilience of the uncoated wood-free paper. Paper supply has been growing in Asia and Middle East, but closures and conversions are occurring or have been announced at the same time in other regions of the world, namely in U.S., Europe, and Asia.
From 2018 to 2020, the net balance between increases and decreases in paper supply is actually neutral based on consultants and companies announcements. Even though the average price in 2019 for the paper benchmark was EUR 903 at the end of the year, the price stood at EUR 808 and we have continued to see some pressure on the benchmark price index in the beginning of 2020, with the index standing currently at EUR 865. Going now to Navigator performance in the paper and pulp business, please turn to Slide 14. Paper sales in the period totaled 1,447,000 tons, down 4.4% year-on-year, and were hampered by deteriorating market conditions and by a drop in output.
The group's performance reflects a sales strategy which was sought to protect prices in Europe and U.S., regions where the group records most of its sales, with active control over both price and total quantity supplied, with some volumes being redirected out of these geographies. Accordingly, the group's average sales price in Europe evolved in line with the benchmark, meaning actually increased, and the average price in U.S.A. also evolved positively, with initial tailwind from U.S. dollar exchange rates. In other markets, what we call overseas, the product mix reflects an increase in sales of reels and standard and economy products linked with the normal market evolution in this period of time. In this context, the group managed to increase its market share in Europe and increase the weight of own brands sold.
Actually, last year, our own brands progressed a little more and represented 70% of our shipped product sales. In 2019, the group's global average sales price remained three euros above the average price in 2018, and sales in value stood at EUR 1.198 million versus EUR 1.248 billion. Total paper output by Navigator during 2019 was down 6% versus 2018 due to a series of factors, including the strikes in the first half at PM4 in Setúbal, and in November at both Setúbal and Figueira da Foz mills. Due to a careful management of production levels in view of current market conditions. Over the course of 2019, Navigator has optimized operations and quality for new products on its paper mill in Setúbal, PM3, in order to ensure it offers heavyweight products that meet the highest global quality standards.
Not extending this process optimization requires a series of planned trials and tests, which necessarily entailed reduction output from PM3. As João mentioned previously, Q4 last year was particularly difficult, with a drop in uncoated wood-free demand in Europe and an even greater fall in U.S.A., as a result of a significant reduction in stock across the supply chain. In this context of intense pressure on prices, Navigator recorded a volume of paper sales slightly higher than in the previous quarter, about 0.6%, which, combined with the sales price similarly under pressure, resulted in sales in value of EUR 293 million, in line with Q3 2019. During Q4, both businesses continued to see significantly worsening of market conditions, reflected in a drop of almost 14% in the standard BHKP price index and sharp contraction in demand in European markets.
Sales of pulp were marked by a drop in the average sales price, which was nonetheless offset by the substantial increase in volumes, which stood at 990,000 tons, up 10%, and value of sales was EUR 44 million, in line with the previous quarter. In 2019, pulp production was down about 2% on output vis-à-vis 2018, constrained by major maintenance shutdowns at the Setúbal and Cacia plants, in April and May, and in Figueira da Foz in September. The strikes that occurred in November during Setúbal and Figueira, which stopped production at both mills during four days, were also another factor that limited pulp output.
Even so, the quantity of pulp available for sale was greater than in the previous year due to the capacity expansion completed in 2018 and the smaller volume of pulp incorporated into paper, making it possible to record an increase of pulp sales of 24% to 314,000 tons. It is important to point out that this increase in volume was then considering a careful management of pulp supply to the market, as the group would have registered even higher sales. I will now let Nuno make some comments on the tissue market. Please, Nuno.
Thank you, António. Going to Slide 15, the tissue business sales in 2019 were EUR 132 million and represent currently 8% of the group's turnover. There was a significant increase of 52% in the sales volume to 96,000 tons as a result of the startup of the new tissue plant in Aveiro. This growth in volume reflects two distinct changes to the business. On the one hand, sales of finished products grew by around 22% to 75,000 tons. On the other hand, the group sales of mother reels, which had been negligible in the same period of 2018, increased 11 times to 21,000 tons, in line with current installed capacity and balance between mother reels production and converting capacity. As a result, there was a significant increase in terms of the weight of reels sold in 2019 versus 2018.
In terms of geography, we have now increased considerably the weight of sales outside Portugal and Spain to other markets such as France. Both finished products and reels benefit from price rises in 2019 versus 2018, which was vital to offset the increase in costs, especially in terms of chemicals, logistics, and energy. However, the faster growth in the pellets business changed the mix of products sold, which had an impact on the average sales price. João Paulo will now comment on the next slide referring to investments.
Thank you, Nuno. Let's go to Slide 16, where we have an overview of the capital registered in 2019. Navigator recorded total investment of EUR 158 million. This figure includes EUR 180 million in maintenance and efficiency improvement, EUR 60 million on completion of the new tissue plant in Aveiro, and the pulp capacity increase in Figueira da Foz, and the final stage of investment in heavy weight products, as well as EUR 24 million in environmental CapEx. In the later category, the main project currently underway is the construction of a new biomass boiler at the Figueira da Foz site to replace the existing boiler and the natural gas combined cycle power plant, which will make it possible to reduce fossil CO2 emissions at the mill site.
This project is linked to our aim to have an industrial operation carbon neutral that I would like to address on Slide 17.
The environmental CapEx projects mentioned are part of the wider program of improvement to the environmental performance and sustainability of the group's mills, and are in line with Navigator's commitment to achieving carbon neutrality in 2035 in our industrial operations. This makes The Navigator Company the first Portuguese corporation, and one of the first in the world, to make a commitment to attaining carbon neutrality 15 years early, which will enable all its industrial complex to be carbon neutral by 2035. In order to support this mission, Navigator has announced a total investment of EUR 158 million.
The challenge of climate change is a priority, and Navigator has therefore drawn up its own roadmap to carbon neutrality, involving an additional series of CapEx projects in renewable energy and in new technology, which will allow it to cut CO2 emissions, as well as forest planting to offset residual emissions which cannot be eliminated. It is important to stress that the forests under The Navigator Company management in Portugal represent a carbon stock equivalent to 5.3 billion tons of CO2, excluding carbon retained in the soil. This is equivalent to the emissions generated by 1.5 billion cars, driving a distance equivalent to the circumference of the planet. I will now ask Fernando to comment on the next slide regarding financials.
Thank you. On Slide 18, cash flow from operations generated in 2019 was EUR 307 million, which compared to EUR 377 million in 2018. Free cash flow totaled EUR 196 million, comparing to EUR 143 million net of EUR 68 million inflow from the pellets business sales in 2018. This improvement in free cash flow reflects a relevant reduction in CapEx from EUR 216 million in 2018 to EUR 158 million in 2019, and also a strong improvement in working capital management. As well, a reduction in inventories. The group operations performance enable it once again to record the robust capacity to generate funds that it has displayed consistently over recent years. Now on Slide 19.
As a result, at the end of December, Navigator interest-bearing debt totaled EUR 715 million, up by EUR 32 million in relation to year-end 2018, in a period when the group paid EUR 200 million in dividends and acquired EUR 18 million in treasury shares. The net debt-to-EBITDA ratio remains at the conservative value of 1.32 times without IFRS 16 effect. I would like to spend some minutes on Slide 20 and go over the debt restructuring accomplished in the period. In view of the approaching maturity of a substantial portion of our debt, which was due in 2020, we decided to undertake a restructuring process.
Following this restructure, where we managed to increase our average and diversify our source of funding, average term of the group's debt was 3.5 years at the end of December, with a cost of debt of 1.73% and with a proportion of fixed debt of 85%.
To finish the comments for the quarter, I will give the floor back to António.
Thanks. Just a few words on the outlook for 2019 on Slide 22. I think we can all agree that 2019 has been dominated by severe geopolitical and significant trade tensions globally, with Eurozone affected in particular by instability regarding Brexit and slower economic growth. In pulp, 2019 started with a very difficult market environment, with depressed demand and a significant build-up of inventories. In 2020, there are signs of some pickup in pulp prices, with some producers announcing already price increases for softwood and hardwood in China, Europe, and North America. We believe the fundamentals of the industry are strong as demand for pulp will be sustained by this new tissue, and somehow new and uncoated wood-free capacity in 2020 in China. Still, uncertainty remains over the economic impact of coronavirus and the trade wars evolution.
In paper, the downward pressure on prices seen at the end of last year may continue through Q1 in some regions and in some specific products in Europe. We estimate at the end of 2019, the pipeline stocks at some key markets for Navigator were at very low levels, and we have seen a very relevant growth in order books across the industry at year-end and beginning of this year. Another factor that may have an impact in paper supply this first quarter is the strike at the pulp and paper mills in Finland that started on January 26th and just ended on February 10th, stopping production during about 14 days. According to our estimates, this could represent approximately 40,000 tons of production loss in uncoated wood-free and 180,000 tons in market pulp.
Global geopolitical uncertainty remains a concern as political instability in the Middle East and market disruption via trade wars may impact negatively demand. In tissue business, demand continues to grow at interesting levels, albeit against a backdrop of new production capacity coming online in the Iberian Peninsula. For Navigator, 2020 remains the year of consolidating recent investments with a view to increasing total sales. The main aim is to achieve sizable gains in sales of finished products as the industrial operation matures and our share of target market growth. Before ending this presentation, I would like to take this opportunity to recap the current priorities of Navigator's Executive Committee. I will ask you to go to Slide 23, please. First and foremost, we want to refocus on the core, and by this we mean improve operational efficiency and implement transversal cost reduction programs.
Also, enhance forest protection and productivity. Develop a CapEx program geared to process optimization, asset performance, and environmental protection. Further develop commercial excellence programs to protect margins. Promote a digital agenda on both corporate and operations, and enhance labor climate at our mills. While focusing on our core business, we also ensure the pursuit of growth alternatives. We will not only strive to consolidate, optimize, and further develop our tissue business as a natural growth option, but we are also evaluating other synergetic possibilities related with our core business. Additionally, we want to refocus our R&D and innovation capabilities to support the existing operations and sustain new product development. Because we know that sustainability is part of our nature and has always been at the very core of our business, we will continue to reinforce our sustainability agenda, mainly by promoting the following objectives.
Define and implement a sense of purpose that matches social impact with shareholder return. Pursue sustainability as a source of competitive advantage aligned with our business positioning. Continue to protect forest and biodiversity. Promote the role of forest on both climate change and wealth creation for rural communities, and pursue our goal to become carbon neutral by 2035 in all sites, and develop initiatives that address health and safety and environmental impact minimization throughout all our operations. With this, I end the presentation for today. Thank you.
Ladies and gentlemen, the Q&A session starts now. If you wish to ask a question, please press zero one on your telephone keypad or use the webcast platform for written questions. There will be a short silence while questions are being registered. The first question comes from João Pinto from JB Capital Markets. Please go ahead.
Hi. Good morning, everyone. Thanks for taking my questions. Starting with margins, is it possible to quantify an estimated impact from the strike in full-year results, just to have an idea of this abnormal effect? On margins, could you give us some color on how much you aim to get from efficiency programs in 2020? Regarding the effect from coronavirus outbreak in China, I understand this is still in the early stage, but do you expect more competition in Europe from international players? Could this impact volumes in Europe for Navigator? Finally, could you repeat your estimate for the impact from the strike in Finland? I understood 40,000 in UWF paper. Is that correct? Thank you.
Let me just rephrase to make sure we understand all your questions because the connection is far from great. Starting from the last one, you'd like us to estimate the impact of the strike in Finland to repeat our own internal estimates. Correct?
Yes.
You would like to understand if we expect further competitiveness in Europe for uncoated wood-free during 2020.
Yes, because of the coronavirus.
Okay. The other question was about efficiency programs. If we could estimate a ballpark figure for efficiency programs.
Yes, in 2020.
The first question was about estimating the impact of the strikes.
That's correct.
Okay. I will address the strike in Finland and the volume impact, and I will ask Fernando to speak about the efficiency programs impact and João Paulo to estimate the impact on the strike. Okay? Starting with the strike in Finland. Our own estimate based on the capacity and normal operating rates is that this should have impacted about 40,000 tons of production loss in uncoated wood-free and 180,000 tons in market pulp. Regarding the impact in Europe related to the coronavirus, I would say that is yet too soon to anticipate any significant impact, but we are not considering this impact to be of any relevance because also in Asia, China and outside China, this quarter is typically a seasonally strong quarter, so we don't anticipate any significant impact. I will ask now Fernando to speak about efficiency programs, please.
Okay. In efficiency programs, we expect to have in 2020 savings around in excess of EUR 10 million, and we expect a similar figure for 2021. I want to recall that we have launched M2 in 2016, where we are aiming to achieve EUR 100 million savings during the following five years. At the moment, we have achieved more or less 80% of this amount, and we intend to continue with this program. Regarding the strikes, I think João Paulo is in the best place to give you the figures.
The impact on uncoated wood-free production was approximately 30,000 tons and in pulp was approximately 15,000.
Just a follow-up, in terms of the last question, not about tons but about the impact on costs. Do you have any estimates that you could give us?
No. We did not calculate that information specifically.
Okay. Thank you.
Thank you.
Thank you. The next question comes from João Galvão from BIG. Please go ahead.
Hello. Thank you for taking my question. I would like to start with the production. Regarding strikes, I thought this was a problem behind us. Apparently, still seeing some strikes. What is your outlook on this? What is the main question that is being asked by the workers that you cannot fulfill, or that they keep asking for more and doing strikes? Apart linking to that, can you explain us a little bit more in detail the decrease in the total amount of salaries from 2018 - 2019? Maybe also linked to this, if you think the production will get back to the levels of 2018 in 2020, or if these levels will.
Just to try to rephrase to see if we understand the question. The first question is try to understand the nature of the labor dispute.
Yes, the strikes. Yeah.
The second question is to understand why the total salaries decreased 2019 vis-à-vis 2018.
Yeah.
The last question is if we expect production to return to normal levels, the levels of 2018, you mean?
Yeah.
I will take the last question, and Fernando will take the first two questions. Regarding the production get back to 2018 levels, what we can tell you is that we have done during 2019 and already, of course, this year, a lot of work to recover. As I explained before, a good part of our CapEx program is geared to asset performance and operational efficiency. We do expect to return to normal levels, and we have a considerable level of ambition in our budgets for 2020 on total output. Fernando?
Okay. In what concerns the strikes and the reason for the strikes, in fact, what the unions and the labor people are asking for a career plan. The fact we have the last career plan, the career plan that is in place dates from back 2008. 10 years after, they want to initiate a new career plan. We have started that in April last year. It's a tough discussion. Because the discussions took more time than the labor unions were expecting, this give us to a strike. After that, we try to improve and to put more fire on this. I think our planning, in the beginning, is to finish the conversations by the end of February. At this time, we think that we'll not finish those conversations before the end of the month.
It seems that they are progressing quietly and in the interest of both parts, and in the first quarter for sure, we'll have a planning to be discussed between the board as well between the planning of the people. Regarding the reduction on payroll, it seems that more than 50% is related to our variable remuneration. In fact, we have a program where we distribute to our employees part of the profit. This is based on a target EBITDA, and because the target EBITDA for 2019 was not achieved, the variable remuneration regarding the rules for this year is zero. That's why there is a significant reduction on payroll.
In addition to that, we have what we call a rejuvenation program, which means that we allow, in the interest of The Navigator Company, if the people want to retire early, which is important in a company where we have people working 20 hours per day. This means when they achieve 61 years old, they are very tired. We allow to be retired early, and we substitute for newer people. I want also to stress in the first question the fact that we are taking some problems because in the past we have done an insourcing problem. This means the people that are outsourced, we have incorporated in our payroll. Because the difference of salaries are higher compared to the people that are with us for more years, there is a difference, a gap that is also something that is being dealing in the conversation.
That's one of the reasons why our EBITDA for the quarter was lower because we have to improve some salaries for those people in order to reduce that gap.
Just to follow up on the strike detail. May you give us a little bit more visibility on what is the real issue? Is it the salary question?
I think I give you all the detail. I think I talk about the gap in salaries. I talk about the career plan. I have nothing more to add.
Okay. It's the gap in salaries. Thank you very much.
Thank you. The next question comes from Bruno Bessa, from CaixaBank BPI. Please go ahead.
Hello. Good morning. Some questions from my side. The first on the cost savings plan that you have announced with a reduction in terms of fixed and variable costs. My question is if this could exacerbate the social unrest that you are seeing at your plants at this stage. Also related with this, if you could provide us an estimation of one-off costs related with the implementation of this cost savings plan. This will be my first question. My second question regarding CapEx. If you could provide the visibility on your expectations in terms of CapEx for 2020, it would be appreciated. The third question. With paper prices at relatively high levels during 2019, margins reached the lowest level of the last five years.
My question would be, what would be needed for the company to get back to historical levels of 24%, 25% EBITDA margin over the coming years? Last question, if I may, regarding your dividend policy. If you are comfortable with your balance sheet in order to maintain the current level of dividends paid over the last couple of years. Thank you very much.
Okay. Thank you for your questions. I will take the question regarding what we see on prices and margin evolution. I will ask Fernando to comment on dividend and the cost savings related to the social unrest.
I want João Paulo to speak about the CapEx plans for 2020. Regarding margins, let's not forget that we have several components here. We have a component of pulp price. Pulp prices have reached the lowest or one of the lowest levels in the last decade or so. The pulp price recovery will be key to push the margins to the right direction. Secondly, on the cost side, as it was explained, we have impact on costs on both wood, energy, and chemicals. We are working on these three components. We do believe that both on chemicals, on energy, we might have a better environment in 2020. On paper prices, the margins are also very much related with the mix of sales, both geographical and product mix.
The first indications we have for 2020 as well is the possibility that we believe we will have to implement both product mix and the geographical mix. All together, this is what will help us to go for a better margin. Not forgetting as well, and this relates to the question that Fernando will answer, not forgetting as well our focus on reducing fixed costs. Fernando?
Okay. The first one, easy one, it's about the dividend. This is shareholders' decision. It's not related to us. It's related to them. I would say that our guess, the dividends will not be maintained at this level in following years. This means that EUR 200 million, it's not our goal for the next years, or at least it's what we expect to be a reduction, taking in consideration the profit of this year. In what concerns the potential impact on social side, I would like to say that on ZBB, we concentrate our efforts on a corporate side, and we have a baseline of EUR 100 million. We expect to save, like I have said, EUR 10 million. Those savings are more in something that is not related with the head count or to salaries on related issues.
This means it's more on consultancy fees, it's more on travel, and other external suppliers and not payroll. Nevertheless, I would say that this could impact on the well-being or impact on the perception of the person. I would say that it's not related for sure with the strikes, because on the strikes, we are dealing more with issues, more contacts, more dialogue, and with impact to come on strikes, we really do not expect. Concerning your CapEx question, we will invest more or less the same amount as we did invest in 2019. As we said before, most of our investments are concerning improvement and maintenance of industrial facilities with the aim to increase the performance of our assets. Additionally to that, we have a strong focus on environmental investments as well.
Thank you. The next question comes from António Seladas from Independent Research. Go ahead.
Hi, good morning. I have three questions. The first one is related with costs. You already talk a lot about margins. If you can provide us some color on what kind of increase the external supplier and service will have in 2020, low-s ingle- digit increase, mid-single- digit increase, double digit as it was last year. Second question is related with CapEx. Just to clarify, if you mentioned same amount as 2019, it means EUR 150 million-EUR 160 million. Third question is related with your priorities for Navigator on Slide 23. You mentioned a growth outlook. You talk about tissue and R&D. If you can be more precise, what will be the measures that will take to offset, to compensate the decrease on demand on paper. Thank you very much.
I'm going to ask you, if you don't mind, to repeat the first two questions, which were not very clear on this side of the call.
Costs, I think the problem in 2019 last year were costs on chemicals and energy, external supply and service costs. If you can provide some guidance, some color, some guidance for 2020, what should we expect in terms of increase, low single- digit, mid single- digit or higher? The second question is related with CapEx. If you could clarify, you mentioned on the prior answer that it will be the same as 2019. If that means EUR 150 million-EUR 160 million? The last question is related with strategy issue, growth outlook on Slide 23. If you can provide more color, because you mentioned about tissue R&D, but if you can provide more color on it.
Okay. I will try to answer these three questions. On the cost side, actually what we were saying is that we intend to decrease costs, not to increase costs. It's not an increase that we are foreseeing and preparing for 2020, it is a decrease. The year will tell us how big will be this decrease. It is definitely a decrease, not an increase. On CapEx, your ballpark figure is probably not far from the reality. Regarding the growth priorities, what we said and what we mean is the following. We have a growth place which is tissue. As it was explained, there are still room for improvement as well in our tissue operations. We need to make sure that we have our tissue operations at a level that they can be a growth platform for the future.
On top of that, we have, as you probably know, quite an equipped R&D and innovation facilities, with a large team of people working on R&D innovation. We want to refocus them on our existing business that we have today, so meaning pulp, paper, and tissue. Regarding this further development on our growth plan. Yes, we are studying other possibilities. As I said, that will be synergetic and related with our existing businesses and assets, but it's yet too soon to give you more color than this.
Okay. Just to confirm, so external supplies and services, in 2020, should come down versus 2019?
That's the plan.
Okay. Thank you very much.
Thank you. Ladies and gentlemen, just a reminder, in order to ask a question, please press zero or one on your telephone keypad. The next question comes from Carlos de Sousa from CaixaBI. Please go ahead.
Hello, good morning. Just to come back to the dividend policy question. Can you or are you able to give us just a bit of more clarity on how much of a reduction we should expect? If there is any guidance in terms of goal, in terms of payout ratio or something like this, just for us to have a more clear idea of the magnitude of the reduction. Sorry if there is any information on the presentation, but I'm not able to access it. I'm having some problems here in my firewall. Anyway, I would just like to know this issue about the dividend. My second question was already somewhat answered. It was about the growth paths that you are focusing on in the future. From my understanding, just to confirm, you are focusing on your core business, on the reductions of cost from more efficiency.
Is there any idea or any more material focus on the Mozambique issue still? Is this still on your idea for the coming years, or is it been completely put on hold for the foreseeable future? Thank you.
Well, I'll probably take the last question, and then I'll ask Nuno to answer you on the first question. Regarding Mozambique. There is no further news on Mozambique. I think we have proven that there are possibilities to develop a productive forest in Mozambique. I think we have proven that the growth of the forest is equal to what we can see in good locations in Latin America. I think it's very clear that Africa will be, in the future, a supplier of wood, raw materials to the world. It's very clear that it's geographically well located, and it's also very clear there is an increased demand and increased gap between supply and demand for wood. All these are positive signs for a project like Mozambique. Although this project cannot work alone and cannot work without an infrastructure bank.
The issue that we are keep on discussing with the local government is exactly the plan for infrastructure. As soon as the infrastructure plan, mainly ports, are clarified, we will be able to reenergize the project. I won't say the project is on hold, but the project is being slowed down matching the present situation of the country's development. Right now it's Nuno to speak about the report.
Okay. About dividend policy, you know that based on international companies code, what the board can decide, it's on the profit of the year. This means the profit of the year is EUR 168 million. I would say that we cannot distribute more than that unless the shareholders want to distribute retained reserves like they have done this year. The policy of the group is to distribute 50% of the profit. This means that I would expect there to be a reduction on EUR 200 million for the following years, but I will not expect a drastic reduction because the main shareholder also needs some cash. That question should be not addressed to us, should be addressed to the main shareholder.
Okay, thank you. Just, if I may, just a follow-up on Mozambique. As I understand, one of the hypothesis, one of the ideas is to make Mozambique, if all else fails in terms of infrastructures and the conversations with the Mozambique government, to make Mozambique a source for fiber, a source for wood in order to export. Is that it? Thank you.
A pulp and paper project always starts by being a wood project.
Yeah.
Thank you. The next question comes from João Pinto from JB Capital Markets. Please go ahead.
Yeah, a very quick one. I recall that UWF paper demand in Europe fell 5% in year-on-year in third quarter. Do you have the figures for the fourth quarter? Thank you.
To be completely clear, I don't have it in front of me. I don't have by heart. I will tell you the following. The reduction of demand in Europe in the second half of the year, so third and fourth quarter, was much aligned with the first quarter. Okay. Probably more important is the following. We speak about apparent consumption. This does not take into consideration pipeline effects. We do believe that the pipeline effect was very strong, both in the first and the fourth quarter. The real decrease in demand, we believe in Europe was much less than what the trend consumption figures show. Proving this is the fact that we have, as we speak, one of the highest order books ever for our customers. The customers are restocking again.
Consequently, it's likely that demand will be better, and consequently, most likely, prices will have a different evolution in 2020.
Thank you.
Thank you. I will now give the floor to the speakers.
Thank you very much. This will end our conference call for today. Thank you.