Welcome to The Navigator Company conference call. I will now hand over to Joana Amorim. Please go ahead.
Hello. Good afternoon, ladies and gentlemen. Welcome to Navigator's Company earnings conference call for Q3 and for the first nine months of 2018. We will start, as usual, with a presentation on our results. Our CEO, Diogo Silveira, will make some brief remarks on the main achievements of the period. It will be followed by the pulp and paper market comments from António Redondo. The main financial figures will be addressed by Fernando de Araújo. We will finish with a Q&A session where the audience can ask questions to the whole executive committee present here today. The presentation can also be accessed through the links available on the website. Questions may be addressed through the webcast platform as well. I will now hand over to Diogo Silveira. Diogo, please.
Good afternoon, and thank you for joining us today. The third quarter has been impacted by several factors. I'm glad to have the opportunity to update and clarify the market on the main issue. Let's start and go over to slide three. The company's results for the first nine months of 2018 reflect the considerable improvement in pulp and paper sale prices, which was partially offset by a reduction in sales volume. The reduction in volume sold was due to production stoppages, mainly in pulp, which did not occur in the same period of 2017. This happened throughout the first semester, impacting both the first and second quarter.
The fact that we started the year with very low pulp inventories, as well as the length of those stoppages and the need to build up stocks in the previous months, had a severe limiting effect on the quantities of pulp available for sale. Paper volumes were also impacted by low inventories at the beginning of the year and some production stoppages, namely in Figueira da Foz. Despite these operational issues, the group achieved a record EBITDA figure of EUR 341 million for the first nine months, an improvement of 14% over 2017, and an EBITDA over sales margin of 27%. Even considering the adjusted EBITDA figure, net of the impact of the pellet business sale, as well as the negative impact of the antidumping duties, even though these are record levels. The antidumping duty rate was one of the main issues that impacted this third quarter.
As you know, in August, Navigator was notified by the U.S. Department of Commerce that the final rate on sales made during the first period of review would be 37.34%. This came as a total surprise, as we were informed in March 2018 by the very same authority that in accordance with its preliminary assessment, the antidumping duty to be applied would be 0%. There was actually no change on the information provided, neither any additional requests were made, and yet the rate went from 0 to 37.34%. Of course, we reacted immediately against this decision, pointing to administrative errors in the ruling, and took all the legal measures at our disposal to demonstrate that the new rate for the period in question was wholly unfounded. After approximately two months, the Department of Commerce re-examined the calculations and decided on the new final rate of 1.75%. Quite a change.
This, of course, was excellent news as it confirmed that the previous rate was an error and supports our claim that The Navigator Company does not engage in antidumping practices in its commercial activity, neither in the U.S. nor anywhere else. Unfortunately, this had several consequences for the company. We believe the impact of this rate was clearly overestimated by at least some investors, and the share price suffered quite significantly. It brought us additional commercial challenges in a quarter that has typically lower paper activity from a seasonal perspective. In terms of impact in our accounts, this final duty of 1.75% will imply the recognition of a one-off impact of EUR 3.6 million related to the retroactive application of this rate of 1.75% on sales for the first period of review. That is to say, from August 2015 to February 2017.
It will also imply an additional accumulated amount of around EUR 6 million relating to the registration of the duty for the second and the third periods of review so far. The global impact so far is around EUR 10 million and has, of course, been fully registered in our nine months accounts. The EBITDA for the third quarter was particularly penalized by the negative impact of this antidumping. EBITDA reported was EUR 115 million, but if we do not consider the impact of the antidumping, we would have registered a figure of EUR 123 million. Another quarterly record level and an EBITDA over sales margin of 28%. Another significant fact that occurred during Q3 was the startup of production of tissue reels at the Cacia mill site. We're still in the ramp-up phase, of course, but we think this is a very important step in our growth strategy mapped out back in 2015.
With this new capacity, The Navigator Company is now the third largest tissue manufacturer in Iberia, with total production capacity of, on the reel side, 130,000 tons. On the converting capacity side, that's to say finished products, 120,000 tons. The new mill, equipped with a large scale, sophisticated industrial assets, is integrated upstream with pulp production, giving it competitive advantages in terms of production costs, use of the high-quality Eucalyptus globulus pulp manufacturing Cacia, and an excellent location near the port of Aveiro, which will allow it to sell its products to more distant markets. The fact that the mill is backwards integrated into pulp is a quite distinctive feature of our investment and a very relevant one, namely considering the current market situation of very high pulp prices. As you know, most tissue players in Europe are not integrated into pulp, actually all but three.
They need to buy the pulp in order to produce the tissue. That is also our current situation in our plant at Vila Nova de Famalicão, and the cost of fiber was one of the main items that impacted the tissue business unit results. One of the other aspects I would like to stress regarding the quarter is that in a context of growing costs in raw materials such as chemicals, fibers, and transportation, we recognize that cost efficiency is key to maintaining competitiveness and therefore did continue to pursue our efforts around cost reduction and operational efficiency embedded in our M2 program.
Thank you, Diogo. The results achieved during the quarter are very encouraging as we have captured an additional EUR 8 million, which do represent almost the double of the amount achieved in the previous two quarters, bringing therefore the total figure year to date, that is to say, for the first three quarters, to EUR 17 million positive impact on EBITDA. Another aspect that also accelerated as expected was capital expenditure. With the conclusion of the two main development projects, CapEx increased to EUR 148 million to date, of which almost half, EUR 71 million were in Q3. I will end here my main comments on the results. I will be back, but right now I will hand over to António Redondo who will give you an update on the market. António, please.
Thank you, Diogo. Going to slide five, we can see that continuing the upwards trend initiated at the end of 2016, prices for hardwood pulp increased an impressive 32% in US dollars and 24% in EUR in the first nine months, meaning year-on-year. As a result, hardwood pulp prices in Europe in this period were on average $233 per ton higher than in 2017. Prices have been stable since early May for hardwood and since July for softwood. Hence, least price for hardwood pulp in Europe has remained at a level of $1,050 per ton. On slide six, we tried to provide a view of what we believe impacted mostly the pulp market during Q3. During the first eight months of 2018, the global hardwood market pulp demand grew 4% year-on-year, driven mainly by eucalyptus with 4.7%.
China demand for hardwood increased 9.1% year-on-year with eucalyptus growing at 10.2%. In a more global context, we saw the increase in available pulp due to the ramp-up of new capacity that started last year, namely last quarter or the third quarter of last year in Latin America. At the same time, there have been planned and unplanned stoppages and output reductions that decreased, once again, pulp availability on the market, and this allowed prices to remain at a very stable level throughout the quarter. With softwood prices growing significantly since the beginning of the year, increasing 23% year-to-date, the gap between the two fibers has grown, currently standing at approximately $100 US per ton in Europe, giving further support to hardwood prices. We have also seen some slowdown in activity in China that we believe results from a combination of factors impacting China's economy.
The trade wars between China and the USA have created a major uncertainty and instability in the business climate, which together with the seasonal activity decline, has resulted in a slowdown of economic and industrial activity in China. The Chinese currency devaluated 6% between June and September, which has made pulp imports even more expensive in a moment when it was not possible to push paper prices upwards. These are, in our view, temporary issues that might impact the pulp market, but we believe the fundamentals remain very strong. There is no significant capacity coming to the market in the next two years at least, and demand is estimated to continue to increase at current levels or above.
There were new paper capacities starting all over the world, namely in China in 2018, both in tissue and uncoated free, in a total that we estimate to be close to 4 million tons, which impact on demand for pulp and will be felt mainly in the second half of 2018 and beginning of 2019. We also anticipate more production stoppages in Q4 than the ones we had in Q3. Issues around wood availability have also been imposing some restrictions in pulp production, both in softwood and hardwoods, and we'll likely continue to see conversions of hardwood capacity into other grades, such as dissolving pulp and softwood, which will impact the market shortly. Going now to the paper market on slide seven, figures show that uncoated free paper continued to be the most and best performing printing and writing grade globally.
The slight decrease of 20% year-to-date August is by far the lowest percentage decline among printing and writing grades. If you go to slide eight, we summarize what we believe are the specific conditions of the uncoated free market, and we can say that the global market conditions continue stable, even though with some differences amongst regions. Europe, our main regional market, experienced some cool down in demand for office papers during the first eight months, which we attribute mainly to some
With very low inventories at the beginning of the year, we haven't been able yet to recover the lost production. This reduction in volume was partially offset by an increase in sales price. With Navigator's average sales price improving 24% year-on-year. Our pulp sales were focused on our regular clients and a greater weight of sales directed to the highest contribution segments of decor and special papers, which together went from 57% to 76% of our total sales. This was achieved during the first nine months. Going now to the tissue business on Slide 13. We managed to increase global volume sold by 9.2% year-on-year. We have namely a growth of almost 24% in the sale of converted products. This already includes the output from the new converting lines installed in Cacia.
The reduced weight of reels and the increased percentage of finished products allowed for an improvement in our average selling price, which together with the price rise we also implemented, translated into a figure of 7% growth in the average tissue price for Navigator. Nevertheless, the higher average tissue prices is still not enough to absorb the increase in production costs, in particular the price of pulp, both hardwood and softwood, as well as of chemicals. In this context, our EBITDA in the first nine months totaled EUR 341 million, which do compare to EUR 300 million in 2017, as you can see on Slide 14. This increase was essentially due to the significant price improvement of both pulp and paper prices. As we mentioned previously, volumes had a negative impact on EBITDA, and some costs also evolved negatively during the period.
Production costs have again been pushed up by negative trends in chemicals impacting our variable unit production costs of both pulp, paper, and tissue. We would say a global estimate of EUR 8.3 million of impact. Also, fiber costs increased approximately EUR 9.1 million, essentially due to the acquisition of hardwood fiber for the tissue operations at Vila Velha de Ródão, as well as the purchase of softwood pulp in our other plants. Logistic costs also increased by EUR 2.1 million, largely due to higher brand prices. In fixed costs, payroll costs registered the most significant increase, plus EUR 14.4 million as a result of workforce expansion associated with the new tissue project in Cacia, associated to the rejuvenation program underway, and an increase in our estimate of performance bonuses, which are indexed to our quite healthy results.
We experienced an increase in these cost items that would have had a greater negative impact if we hadn't also worked, as we mentioned, on the cost reduction measures that we do explain on the next slide. Contributing positively to EBITDA is the sale of the pellet business already reported. This was partially offset by the negative impact of the antidumping duties, which we register in the third quarter accounts. EBITDA figure for nine months 2018 would have been EUR 338 million if these two key impacts would not have occurred. Going to Slide 15 now. As said previously, with the results of our M2 cost reduction program, where we achieved a positive impact of roughly EUR 17.2 million year-on-year on EBITDA. This is the result of roughly 143 new initiatives that have been launched since the beginning of the year to cut costs.
With around 85 of those initiatives already yielding a positive impact. Just to give you some flavor of this program, we have included projects such as improving efficiency at our new PM4 in Setúbal, representing the outcome of an area of continuous improvement initiatives with a year-to-date saving of close to EUR 1 million. Or optimization of chemicals consumption, namely chlorine dioxide production in Cacia by upgrading sulfates filtering with a year-to-date impact of, again, almost EUR 1 million. For example, reduction in consumption of bleaching agents at the Figueira da Foz industrial complex, with a year-to-date impact of around EUR 700,000. In addition to all those initiatives that are reflected in the P&L, the renegotiation of power and natural gas contracts resulted in an estimated avoided costs of close to EUR 28 million versus market prices. I will now ask Fernando to comment on the next slide.
Thank you, Diogo. On slide 16, we have some detail on the evolution of our free cash flow, which stood at EUR 161 million. Free cash flow was positively impacted by a strong operating cash flow, as well as an inflow from the sale of the pellet business totaling EUR 68 million and negatively affected by capital expenditure over the period of EUR 148 million, largely associated with the construction of the new tissue mill in Cacia. In the third quarter, generation of free cash flow, EUR 8.5 million, was significantly constrained by the concentration of CapEx dispersal in the period, EUR 71 million, combined with sizeable corporate tax prepayments totalizing EUR 24 million.
At the end of the third quarter, as you can see on slide 17, the group net debt stood at EUR 732 million, up by EUR 39 million from year-end 2017, which stood at EUR 693 million, as a result of payment of dividends around, or in fact EUR 200 million exactly in June, and capital expenditure of EUR 148 million during the period, as already mentioned. Net debt to EBITDA stands at 1.65 ratio, which is already reduction from the peak level of 1.7 at the end of June and should reduce even further by year-end. Just a couple of additional details for your benefit regarding our debt profile on slide 18. At the end of September, our total debt had an average maturity of 2.9, an average cost of 1.5%.
A significant portion of the debt is fixed, 63% versus 37%, and there are no significant reimbursements scheduled before 2020. Going now to slide 19 with financial results. Navigator recorded a financial loss of EUR 16.5 million, up from a loss of EUR 6.5 million last year. Even though we registered a reduction in the cost of funding in our operations, results evolved negatively, mainly due to the following points. A drop of EUR 5 million in gains on currency hedge, taken out by the company in a rising U.S. dollar scenario with a positive impact on operating results. The recognition at the end of first quarter of a negative amount of approximately EUR 3.3 million resulting from the difference between the nominal value and the current value of the amounts to be received in the coming years from the sale of the pellet business around EUR 45 million.
At last, a loss of EUR 1.5 million in yields from application of surplus liquidity in opposition to extremely positive performance in 2017. Finally, our CapEx is detailed on slide 20. The group recorded capital expenditure of EUR 148 million in the first nine months, with EUR 71 million in the third quarter versus EUR 49 in second quarter. With a value of EUR 75 million, the Cacia tissue project represent around half of the total investment. The capacity is expansion in Figueira da Foz around 90%, EUR 28 million, an investment in regular pulp and paper business around EUR 46 million. Back to you, Diogo.
Very good, Fernando. Just a few words on our outlook for 2018 on slide 22. As António said earlier, there are no significant new increases in production capacity for market pulp being announced for the next three years. Capacity utilization rates can be expected to increase and allow hardwood pulp prices to stay above the $1,000 per ton mark in those three coming years. In the short term, demand continues solid and supply disruptions due to planned and unplanned stoppages are cushioning the impact of the new capacity that started up last year. In the uncoated wood-free paper, order books remained at a high level.
After leading a series of price rises in Europe and also increasing prices in the U.S. and in international markets during the first nine months of the year, The Navigator Company implemented a further price increase as from October in our European markets. In the tissue market, manufacturers have been under very heavy pressure from increases in pulp prices and in the cost of chemicals and energy. Navigator announced new price increases of between 8%-12% for its products in November. At the same time, the company's new tissue mill in Cacia started producing reels in September. A strong commercial performance in recent months allows us to anticipate the successful placement of the new output with clients. However, this positive context may be affected by increasing certain costs, especially for energy, and there are also continued concerns about the evolution of exchange rates, namely EUR to USD.
Operations in the fourth quarter will be constrained by some production stoppages programmed for November and December at our Setúbal mill site. The most significant one is related to the heavyweights project, which will imply 10-day production stoppage at our PM3. The Navigator Company continues to develop its business model successfully, acting proactively in relation to factors under its control, seeking to achieve continuous improvement in its performance and reducing its cost structure. Furthermore, we believe to have proven to be able to successfully overcome several adversities with which we have been confronted. The last such event occurred on October 13th, after the end of the reported period, with the impact of Hurricane Leslie, which caused damage at our Figueira da Foz production center, forcing to suspend temporarily operations.
With the efforts and the remarkable performance of local teams, combined with support and engagement from various multidisciplinary teams within the group, the work on repairing the damage started immediately and allowed to minimize production stoppage, with the pulp line and PMs one and two quickly going back into operation. Nonetheless, this stoppage will cause an estimated production loss of approximately 9,000 tons of pulp and circa 10,000 tons of paper. Thank you.
Thank you, Diogo. This concludes our comments on results. We are now ready for the Q&A.
Ladies and gentlemen, the Q&A session starts now. If you wish to ask a question, please dial 01 on your telephone keypad or use the webcast platform for written questions. There will be a short silence while questions are being registered. Thank you. The first question comes from Maksym Mishyn from JB Capital Markets. Please go ahead.
Hi. Good afternoon. Thank you for taking my question. I have three. First one is, are you happy with the current inventories level? Because they've been low in the end of 2017, and you have been restocking through the first three quarters. Or you plan to continue restocking in the first quarter 2018? The second question is, could you talk a little bit more about the outlook for the paper market? I'm particularly interested in first half results, you mentioned that some of non-integrated producers were operating at negative margins. Do you see this trend continuing in the third quarter? Finally, the third question is, with the tissue expansion and the bottlenecking investments are now complete, do you have anything in mind for the future?
Should we expect CapEx to converge to the levels of maintenance next year? Particularly, will the Hurricane Leslie impact will increase the CapEx in the first quarter? Thank you.
Very good. Thank you for the three questions. António Redondo will address the first two ones, the one on our level of happiness related to our inventory level and also our happiness as regards the outlook on the paper. I will then take the question on any additional new projects. António?
Thank you for your question. We are yet at the level of stocks that is not totally comfortable to make sure we service the market properly and without any disruption. I don't know how to define happiness in stocks, it is a new measure that I am not yet fully acquainted with. I think we can still accumulate more stocks because we are not at the level. We usually operate with very low stocks, and we are not at a level that is completely easy to operate with in a stressed supply chain environment. Regarding your question number 2, I believe that the prices of pulp have been stable in the last few months, and the trend is very clear. Paper prices have been improving and have been continuously improving, and the last price increase was in October.
This for sure has given some at least temporary relief to the non-integrated paper producers. Thank you.
On the new projects. Currently, as far as growth is concerned, we have no new big project underway. We have projects related to environmental constraints that we have to clear, that we are always looking at, and we might have some coming up. As far as new growth projects, there is nothing. However, we will be starting soon some strategic thinking, I would say over the course of the coming three to four months, to revisit our strategy and see whether there are opportunities that appear that we should be considering. We potentially would have some more news on this during the Q1 next year.
Thank you very much.
Thank you. The next question comes from José Rito from CaixaBank BPI. Go ahead.
Yes. Hi, good afternoon. Thank you for the presentation. My first question related with pulp prices. Pulp prices stand at $1,050 per ton, but we have been seeing some news saying that some discounts have been applied in China. How do you see this? Have you noticed also some of your clients in Europe asking for discounts? This is only a specific issue in China and you don't think that this will basically spill over to other markets? That will be my first question. My second question related with paper volumes, considering the hurricane and the stoppages that are expected for the last quarter of the year, should we assume a further 20,000 tons decline year-on-year for the last quarter of the year? Do you think this is a good reference?
Thirdly, on the tissue business, if you could provide a little bit more visibility in terms of margin evolution for this year and 2019. We have been witnessing some price increases announcements recently. Do you expect in 2019 margins to be at least at the same level as in 2017, so basically offsetting this recent increase in pulp prices? How do you see this evolving? Also because we know that we have this increased capacity in Iberia and the fact that pulp price has been increasing, so pressuring the profitability of some of the players. Do you see some M&A possibility in Iberia? Thank you.
Very good. On the pulp prices and impact on sales coming on potentially from Hurricane Leslie, we will have António Redondo addressing that issue. I will then take the questions on tissue, trying to give you some more visibility there. António Redondo.
Thank you for your questions. As you know, we are not a big maker of pulp sales into China. However, from the market reading we have and from the customers we work with and discuss with, we believe that most likely the evidence about discount has been somewhat largely exaggerated. We see prices, and for sure list prices in China, more stable than what some market analysts explain. Although we recognize that particularly in the month of August and probably early September, some discounts have been applied, mainly not directly by mills selling to China, but by traders that were piling up stocks because of the effect that we have explained, the slowdown of economy activity in China, the slowdown of industrial activity. This pileup of stocks of pulp led them to destocking and offering higher stocks.
This is our reading in China, which is not totally coincident with I believe you have said. Regarding Europe, obviously, customers are always asking for higher discounts, but obviously as well, our answer is very typically the same. We are not equipped to discuss the higher discounts, so we don't see the risks of a spillover effect if this effect in China is really as clear as some people mentioned, which we don't believe being the case. Regarding your second question about paper volumes affected by the hurricane. We expect this to be ballpark figure around 10,000 tons. I will pass to you for the follow-up question.
Yes. On hurricane plus the stoppages for the conversion of paper into heavyweight, you mentioned that you should also have some higher impacts in terms of production. Combining the two 20,000 tons could be a good reference?
Yes. Sorry. I thought that you were commenting only Hurricane Leslie. I think the ballpark figure for the two might be then closer to 20.
Okay. Thank you.
Thank you. Sorry, go ahead.
Yes. I was trying to address question on tissue margins and consolidation and M&A. The very high pulp prices have clearly depressed our margins in tissue. Ours like any other tissue player, we have of course to see that because this is a market where over 95% of the production is non-integrated. We will have clearly an EBITDA margin at the end of the year that will be below 10% of sales, which is of course not our objective, but we clearly believe that next year we should be able to recover, if not all, part of what we have lost during this year, thanks mostly to the price increases that we are now implementing. A tough year 2018 for the tissue. Certainly a much better year margin wise, 2019.
As far as M&A and consolidation is concerned, for sure the tissue market is a very fragmented market. You have two industrial steps in tissue, the jumbo reel production, just like in uncoated wood-free paper and the converting facility, which is not so relevant in uncoated wood-free paper because you just cut. In tissue, you cut, you emboss, you roll, you do a lot of things. Certainly there will be consolidation, at least among the converting facilities. There are lots of them, and potentially among also jumbo reel production. This is a higher investment issue. Overall, we believe, yes, that it is a market that will certainly go through consolidation. There are currently many, at least several industrial tissue assets up for sale. Even groups of them, that's to say some companies or parts of tissue companies are up for sale. Yes, we expect to see consolidation.
What could be our role there? For the time being none. As I said before, by Q1 next year, when we will be clearer on the different investment opportunities in our different businesses, we will be able to prioritize and make decisions. Until then, I don't see anything happening on our front.
Okay. Thank you. Just a clarification. At this point you are not considering because you have not decided to move forward with potential M&A or because of pricing? You still see these assets available for sale as two prices, let's say, versus organic growth.
As we have always said.
As we have said, one of the interests of being in tissue is that it allows for a very modular approach, we have to go step by step. Before we do any additional big move in tissue, I would like to see the result of the current move, which is quite sizable. This greenfield investment means doubling the capacity. I would like to be sure that we know how to be a player in tissue before we do an additional move. Currently it's mostly an internal perspective. We have to prove ourselves that we know how to be a profitable player in tissue before moving further in this market.
That's very clear. Thank you.
Thank you. The next question comes from Nuno Eustáquio from Haitong Bank. Please go ahead.
Hi. Good afternoon, everyone. Just a couple of questions. The first one would be, if you see room for you to keep increasing both uncoated wood-free and tissue prices. Although pulp prices are now stable, and as you have mentioned, paper prices are still going up. Do you think this trend can continue for a couple quarters more, even if pulp prices stay stable? Second question would be on your strategy regarding U.S. paper sales. Considering all that happens with this anti-dumping taxes in the U.S., are you more cautious now into the U.S. because this eventually the U.S. Department of Commerce becomes more harsh again? What is your view on this, and what are you doing internally to defend or to protect yourself from this? The third question would be in terms of CapEx.
I would like to ask you what is this paper heavyweight investment and essentially what will be the impact of this? If you could give us the CapEx budget for fourth quarter and for 2019, it would be helpful. Thank you.
Very good. We'll do our best, even though I'm sure we'll not be able to answer all your questions, but I would also ask if I would be in your shoes. First we'll start with António trying to share our thoughts on the uncoated wood-free price evolution, even with stable pulp prices, as well as what we've been considering for the U.S., because of course we have been thinking quite a lot about this. I'll share the views on tissue and address the CapEx issue as much as I can. António?
Thank you for your question. Indeed, we still see room for improvement on uncoated wood-free paper prices, even in a scenario of pulp or even mildly declining pulp prices, which we don't consider but is not an impossibility. The paper maker's margin is today still very low, even if it's better than it was a couple of months ago because of the last paper price increases. We do believe that there are still more room to increase prices. I'm not sure if it's going to be as quick and as timely as it was during this year, which was basically once per quarter. For sure, the room is there.
Regarding U.S. paper sales, we have always been extremely cautious with our U.S. paper operation, not because of the anti-dumping, which by the way, we keep on explaining and denying, we don't do any kind of dumping into our U.S. paper sales. The exercise that we were exposed since early August till early October was actually quite interesting because oblige us to have a fresh look into the U.S. market. Even with the new anti-dumping rate, we have decided to keep a lot of the actions that were defined during these two months period in between August and October. We will keep being cautious as we have been so far. We keep looking to the U.S. market. We don't have any intention to abandon the U.S. market.
We didn't have that intention even with 37.34%. Of course, this will oblige us to do some fine-tuning. Now we have the luxury of having more time and more room to maneuver for this fine-tuning.
On the tissue prices. I am not sure that in 2019, we'll be able to again introduce price increases, but for sure we will be recognizing the impact of the very significant price increases that we have been applying in October, November, and December. Clearly, those tissue price increases did come, I would say late. It was not possible to get them through before. As they came later, they came higher. Clearly, the average price in 2019 will be much higher than in 2018, even though I don't see additional price increases, namely in the consumer segment. I see this difficult. On the CapEx issue. First question you mentioned was about heavyweights. As you know, among our range of uncoated wood-free products, you have what we call heavyweights. These are grammages above, say, 120 gram that goes up to 300, even 400 grams.
We mostly outsource currently those papers in two plants. This is a quite interesting market segment. We want now to be able to produce most of it in our own facilities. Therefore, in one of our PMs in Setúbal, we will be investing between EUR 10 million and EUR 12 million to adapt the machine to be able to produce heavyweights. You asked our numbers for Q4 and for 2019 CapEx. It's tougher for us to say, as we don't give, as you know, those forward-looking statements. We have no big growth project currently for 2019. If it stays so, the total CapEx will certainly be lower than it was in 2018.
Okay. Thank you.
Thank you. Ladies and gentlemen, just a reminder. In order to ask a question, please press 01 on your telephone keypad. The next question comes from António Seladas from Intermoney. Please go ahead.
Hi, good afternoon. The first question is related with the energy, your energy policy and the hedge policy. If you complain on the press release about the energy prices, when are we going to feel the impact of the higher energy prices on your figures, if you can explain? As far as I understand, also, you are net buyers of energy, but do you also sell energy? If you could provide some color on this. Regarding the tissue prices, to confirm that on the consumer market, you cannot increase prices. That was what I understood, just to confirm it. In terms of working capital, working capital also went up from the second to the third quarter sequentially. If you can explain the reasons for that.
The last question is related with a couple of minutes ago, you mentioned that when you talk about the investment on tissue and the market is fragmented and needs to be consolidated. From my point of view, I think that maybe in the future you go to buy some converters, but I'm not expecting that you buy tissue mills not integrated. Could you provide some color on this? Okay, that's it.
Sure. First question was on energy. I'll try to address all the questions except working capital where I will ask Fernando to address it. Energy, yes, the current energy prices are clearly on the high side. We expect our 2019 figures to be quite impacted by higher energy prices. Cannot yet share with you by how much, but it will be significant. Second question was on consumer tissue prices. Maybe I was not very clear. We have been able to increase prices even in the consumer segment, that's to say, at the key retailers, both in Portugal, in Spain, in France, in the U.K., and quite significantly, but I don't think we will be able to add an additional price increase unless pulp prices move up.
As we don't see pulp prices moving up, we see tougher to introduce a new significant price increase in tissue. As I said, I will leave working capital question to Fernando. You had a question on the M&A opportunities and the fact that there could be non-integrated opportunities, and that is not our current strategy. You are right. In tissue, to be an integrated player or a fully integrated player, you have three production steps. First step, the pulp, second step, the jumbo reel, third step, the converting lines. I can be integrated pulp to jumbo reel, but I can then transport my jumbo reel and get it converted in the local market.
We could potentially, we are not considering any, we could potentially acquire some converting facilities, given that the way currently we see our business model to go further into Europe would be exactly this one. Keep the jumbo reel production in Portugal so as to benefit from the backward pulp integration, but get converting lines in the local markets so that we don't transport too much air and finished goods of tissue have lots of air in it. We would be transporting jumbo reels and having them converted locally. That local conversion, we can either consider greenfield or we can buy a converting line. We could be looking into those options potentially in the future, not before Q1 next year. I hand over to Fernando to be more explicit on the increase we had on working capital.
On the working capital, in what concerns operating cash flow, the income of the cash-ins of the third quarter was EUR 83 million, less EUR 9 million than the average of the previous ones. The main difference, it's on investment because our CapEx in the period was EUR 71 million and the CapEx on the two previous quarters was EUR 77 million. This means almost the same. In addition to that, we have two main amounts related with the corporate income tax. For one side, we have paid EUR 24 million on prepayments, payments on account on corporate income tax, and we have to receive more or less EUR 11 million from the corporate income tax related to last year. This should have been reimbursed by the state in August, we are nearly November, and we didn't receive it yet. I would say to summarize, more CapEx and more taxes.
On clients and inventories, it's more or less the same difference, it's EUR 3 million.
Okay. Thank you very much.
Thank you. The next question comes from Alberto Sánchez from Fidentiis. Please go ahead.
Hi, good afternoon. I've got a question on capital allocation. It looks that the pricing environment would remain favorable next year, you would face lower CapEx requirements. My question would be, what do you think about the ways to deploy that capital? You mentioned about potential new opportunities. How do you think about your leverage targets, the potential to reduce debt further, the possibility of increasing dividends? How do you think about that?
Very good. Not an easy question, I'll try to give a simple answer. We have been having over the last years, I would say, a policy that features the following two aspects. First, trying to have a net debt to EBITDA below two. We are currently comfortable below that and clearly don't expect to cross that barrier. Second, we are now used to having the general assembly of shareholders go for a reasonable dividend that over the last years has been around EUR 200 million. We would be ready to cope with such a figure. If we have low CapEx needs, we'll just be decreasing debt. We believe we'll be adjusted to increase the dividends, but we don't know. As you know, the executive team does not make a decision there.
On the other side, we don't anticipate currently to have such a high CapEx that would question the net debt to EBITDA level. Again, as I said, we'll know a lot more on that by the end of Q1 next year as we are embarking on this strategic thinking, the same one we did in a way now four years ago, and that yielded namely in entering the tissue market. This time, let's see, the context has changed, the environment. There are certainly opportunities. There are also threats. We'll know a lot more in a couple of months.
Okay. Thank you.
Thank you. Ladies and gentlemen, there are no further questions in the conference call. I now give back the floor to the company. Thank you.
Thank you. This now concludes our conference call for today. Thank you very much.