Ladies and gentlemen, welcome to The Navigator Company conference call and webcast for the first quarter. We first apologize for this slight delay. We have, unfortunately, some technical issues. Joining us today are the following directors: António Redondo, Fernando Araújo, Nuno Santos, connecting from Milan, Dorival Almeida, and António Quirino Soares. As usual, we will start with a brief presentation, and we will have a Q&A session at the end. The presentation can be accessed through the links available on the website, and questions may be addressed also through the webcast platform. António, we'll start with a comment on the main highlights of the quarter. I will now hand over to António.
Thank you, Ana. Good morning, and thank you for joining us today. I am pleased to be here to share with you our first quarter results. As you'll see in today's presentation, the resilience of Navigator's business model, combined with our strong financial position, has enabled us to deliver solid results in a quarter marked by rising geopolitical tensions and increased protectionism, with economic activity slowing down in Navigator's main markets. This quarter, once again, highlights our ability to adapt to evolving market dynamics with a continued focus on value creation, growth, and diversification. I'll start with slide four for an overview of the quarter. Despite this troubled environment, Navigator's business pointed to a positive trend quarter- on- quarter, with increased sales and healthier order books for uncoated woodfree packaging and tissue.
The quarter also saw a rise in the benchmark index for pulp prices, while packaging and tissue paper prices remained resilient, in contrast to the drop in the benchmark index for printing and writing papers. Navigator achieved a total turnover of EUR 529 million, at 2% quarter- on- quarter. Significantly, non-uncoated woodfree businesses now represent 45% of sales, with uncoated woodfree revenues relatively stable and better margins. Navigator has been strategically diversifying its business, particularly into the Tissue segment, where we have, as in all other products, a differentiation strategy offering high-quality products, and also in an innovative packaging business. Navigator's foray into sustainable packaging solutions exemplifies its long-standing culture of innovation and dedication to environmental stewardship, contributing to the reduction of single-use plastics.
Our expansion and diversification investments are yielding positive results, with the Tissue segment successfully scaling operations and leveraging synergies from last year's acquisition, Tissue UK, and also with the previously acquired mill in Spain. Also, the Packaging segment, 100% based on our gKraft brand, is performing strongly, recording a 31% year-on-year sales increase in tons and 41% year-on-year sales increase in square meters of packaging paper. Additionally, during the quarter, in line with our strategy of diversification, we started the pre-engineering for the conversion of our PM3 paper machine at the Setúbal integrated pulp and paper mill into the production of flexible packaging paper in low basis weights, whilst retaining the possibility of using the machine as well for printing and writing papers if and when needed.
The final investment decision for this conversion project has been taken, and startup is planned in a record time for the end of the third quarter next year. Consequently, Navigator becomes the fourth largest producer of flexible packaging in Europe and the largest in the south of Europe, strengthening its position in a growing market. The converted machine leverages Navigator's vertical integration and the cost efficiency of Eucalyptus globulus fiber to produce high-quality, differentiated craft papers at a structural cost advantage. These papers, recognized for their smoothness and low permeability, have already been validated by customers, particularly in the food sector, reinforcing our position in high-end markets. At this point, I will hand over to my colleagues who will walk you through these achievements in more detail and share insights into the performance of our different business segments. Fernando will start by the main financial highlights. Fernando, please go ahead.
Thank you, António. Now turning to slide five with the main financial highlights. Navigator records healthy results thanks to the faster pace of new orders for printing and writing paper, p ackaging, and tissue, as well as the resilience of price for packaging and tissue paper. EBITDA stood at EUR 116 million, keeping an EBITDA margin of 22% in line with the previous quarter. Quarter- on- quarter sales volumes grew by 17% in the Paper segment, recovering from the sharp drop in orders in Q4. The downward trend in uncoated woodfree and pulp market price, driven by declining benchmark index, shifts in product mix and geographical region sales, had a negative impact. We maintain a strong focus on managing variable costs, which remain under pressure due to the elevated energy prices. Increasing market index significantly impacts both energy and chemical costs, contributing to higher overall expenditure.
On the other hand, we have seen improvements in logistic costs. Fixed costs were down year- over- year, with a reduction in real terms of around 2.4%, considering the same operations. In other words, excluding the new Navigator Tissue UK. Value-added CapEx totaled EUR 36 million, of which approximately 60% was allocated to environmental or sustainability investments. These investments are expected to enhance future cost savings and drive business transformation, as the equivalent past investments did so far. Net debt increased by only EUR 43 million, despite substantial outflows of EUR 100 million in dividends and EUR 36 million in CapEx. We have kept to a conservative financial policy with a net debt/EBITDA ratio of 1.25x. Cash flow generation remained strong despite ongoing investments totaling EUR 57 million in the quarter.
As shown in past quarters, the flexibility of our business model, fixed and variable cost management, commercial performance, and actively adjusting the business mix were decisive in protecting margins and results. On slide six, we will see the debt maturity profile. The group's debt profile continues conservative. Navigator has well-balanced debt maturities. Average debt maturity, therefore, remains appropriate, with rationally staggered repayments close to 73% of total debt tied to sustainability and 89% for total debt issued on a flat rate basis, directly or using interest rate hedge. Also, it is worth noting that the company has a solid balance sheet of close to EUR 308 million of liquidity in both long-term and new credit facilities and cash on hand.
We ended the quarter with net debt at EUR 660 million and EUR 660 million, up by EUR 43 million in December, despite the increased dividend payout of EUR 100 million during the quarter, as already mentioned, and the strong investment currently underway. António Quirino will now comment on pulp and paper prices.
Thank you, Fernando. On slide eight, we have pulp and paper prices evolution. Looking at pulp first, after the sharp fall in prices in the second half of 2024 in China and in Europe, mostly in the third quarter, the first quarter of this year saw a notable price rebound, especially in Europe. The benchmark index for hardwood pulp, the PIX BHKP in dollars, ended the quarter at $1,160 per ton, which is up by approximately 16%. The price difference between China and Europe started the year in China's favor but turned around over the course of the quarter, ending as favorable to Europe.
In China, after benchmark prices hit their lowest point in the first week of 2025 at the point of $544 per ton, ending the steepest and fastest downward cycle in recent years, the market started to move in the opposite direction, rising to $588 per ton at the end of the first quarter of 2025, which is up by 8% from the lowest point at the start of the year. The benchmark index for office paper prices in Europe, PIX A4B copy, stood at an average of EUR 1,058 per ton, down by 4% on the previous quarter and year- on- year, still 25% above the average from 2015 to 2021 price level. Moving to slide 11, we have summarized the main developments in uncoated woodfree markets.
The first two months of 2025 brought a downward adjustment of 1.9% in global apparent demand after a year of modest recovery last year. uncoated woodfree paper proved to be the most resilient grade again, with a fall of 1.9%, which compares to coated paper's demand drop of 4.5%. Demand for paper produced from mechanical pulp, coated and uncoated, dropped by 4% in these two months. In Europe, apparent demand for Uncoated Woodfree paper fell this quarter by 8% year- on- year. In the U.S., demand for uncoated woodfree edged down by 2% in the first quarter, and installed capacity fell by 11% year- on- year. On the supply side in Europe, the first quarter was impacted by the closure of two mills, which removed 430,000 tons of annual uncoated woodfree capacity, which is equivalent to 7% of total European installed capacity.
Order books in the European industry increased throughout the first quarter, with a 6% growth compared to the last quarter of 2024, registering an upward trend during the quarter, with the month of March closing 5% higher than the same month of last year. The mix of products and geographical regions in Navigator's total sales this quarter resulted in lower average prices, as Fernando mentioned. It should be noted that Navigator's prices for premium and standard products have evolved in line with the market, but increased penetration of economy products this quarter caused our average price to drop further than the PIX A4B copy dip. Navigator's sales of printing and writing and packaging papers totaled more than 325,000 tons in the first quarter, which is up by 17% on the previous quarter. However, the quarter was down on the good performance of the same quarter last year.
It should be noted that the first quarter of 2024 was the best quarter in terms of volumes in the last nine quarters. On a different note, Navigator Hub, our e-commerce platform launched in 2021, expanded in 2024 with direct sales by pallet without intermediation to smaller customers in selected European regions. In Q1, online orders made up around 30% of total volume across paper, packaging, and tissue businesses. Nuno Santos, we'll now give some market context on pulp. Nuno.
Thank you, António. On slide 10, we have an update on the pulp market. The dynamics of supply and demand were crucial in sending prices upwards. Up to February, demand for hardwood pulp in China rose by 13.5% compared with the first quarter of 2024, which had been marked by severe restocking. Despite the growth, demand cooled compared with last quarter when lower prices had driven restocking. In Europe, pulp demand remained stable, namely in the packaging and tissue sectors, though overall consumption declined 2.2% year- over- year, reflecting a strong comparison base from early 2024.
In this context, global demand in the first two months of 2025 grew year- on- year by 4.6% in bleached chemical pulp, 6.7% in hardwood pulp, and 6.1% in eucalyptus pulp, most strongly in China, where growth rates were between 11% and 13%, in contrast to Europe, where growth rates were actually negative between 2% and 3%. Hardwood pulp stocks at producers, ports, and consumers remain relatively in line with the patterns observed in recent years. Looking now at tissue performance on slide 11. In Europe, demand for tissue paper had a softer start to 2025, with a slight decline of 0.1% in January and February compared to the same period last year. This contrasts with the strong growth of 6% in early 2024, driven by restocking activity and increased household purchasing power.
Navigator's tissue sales increased by 62% year- on- year, supported by sustained growth in market demand for Navigator's finished products and the new acquisition in the U.K. International sales accounted for 81% of turnover, up from 51% in the first quarter in 2023, prior to the acquisitions of Ejea in Spain and the Tissue UK operations. The U.K. now leads with 36% of sales, followed by Spain at 28% and France at 15%. Finished products represent today 98% of total sales. In terms of client segments, at-home or consumer retail business has grown in importance, currently accounting for around 83% of sales, while away-from-home and wholesalers account for the remaining 17%. To be noted that Navigator was selected for the International Investment Award at the 15th UK-Portugal Business Awards held in Lisbon this April.
Continued international expansion is a major part of Navigator's strategy, and the acquisition has clearly shown this to be the way forward. Navigator Tissue UK positions the group as one of the top four players in the tissue paper market in the U.K. Dorival will now comment on the main developments in packaging.
Thank you, Nuno. Now turning to slide 12. The beginning of 2025 was marked by a robust start in the European market. European deliveries of craft papers for flexible packaging, white and brown, were up by 13% year- on- year. Navigator's business was strong, with the sales volume growing 31% year- on- year in tons and increasing 41% in paper, lower grams, as António already mentioned. Essentially, as the result of an upturn in demand and development of new product ranges in the flexible packaging sector, making it possible to diversify our packaging business and to continue to grow our market and client base that now exceeds 375 active clients. Our commercial strategy will press ahead with efforts to establish ourselves in these new segments, developing new products and carrying out a substantial number of market trials.
In particular, we release liners designed for products such as labels, stickers, or feminine hygiene. In the building and construction sector, remote laminating is associated with products for thermal, acoustic, and electrical insulation. In form fill, with a view of film industries, especially the food industries with papers for use in packaging, sugar, flour, rice, and pasta. The diversification strategy into flexible packaging has been successful, significantly reducing the resilience on back, decreasing from 84% in 2021 to 48% in Q1 2025, while flex has seen substantial growth, rising from 15% to 48% over the same period. Additionally, as part of the diversification of packaging business, progress has continued as planned on the project for integrated production of eucalyptus-based molded fiber products designed to replace single-use plastic packaging in the food service and food packaging market under the gKraft BioShield brand.
The startup of four production lines was completed in the first quarter, and these are now operating around the clock, whilst work is proceeding to consolidate the market of five new products for the food sector. Turning to slide 13, on the final investment decision to rebuild PM3. As António already mentioned, this first quarter, we began the engineering for the conversion of PM3 paper machine located at the integrated pulp and paper mill in Setúbal, with the aim of directing its production towards low-basis-weight flexible packaging paper. The final investment decision for converting this machine has been taken, and investment of approximately EUR 30 million is planned for this project over the period from 2025 to 2027.
This investment figure is modest and offers low risks in comparison with a greenfield project for a new machine, which would entail investment estimated at close to EUR 200 million for the capacity of 100,000 to 120,000 tons per year. The new operation is due to start up in relatively short term, the third quarter of 2026, with annual production capacity of 100,000 tons. This conversion will enable Navigator to respond flexibly and efficiently to increasing demands in the flexible packaging market, as well as offering more flexible management of industrial assets, with the machine migrating between production of printing and writing paper or packaging paper, depending on the state of the market. As mentioned, the PM3 machine leverages Navigator's vertical integration and the cost efficiency of Eucalyptus globulus fiber to produce high-quality, differentiated craft papers with structural cost advantage.
These papers, recognized for their smoothness and low permeability, have already been validated by customers, particularly in the food sector, reinforcing our position in premium markets. With this move, Navigator becomes Europe's fourth largest producer of lightweight packaging paper, with strategic consolidation of its presence in a segment with strong demand growth, 2.8% a year, in line with global trends towards replacing plastics and increasing demand for sustainable packaging. I now turn over to António.
Thank you, Dorival. Let's please turn to slide 17 with a wrap-up of the Q1 results. Navigator achieved solid results despite market uncertainty and volatility and proved, once again, to be in a unique competitive position in Europe in terms of the efficiency with which it manages its mix of businesses and, within each business, its mix of products and markets.
We remain focused on core operations, business transformation, and innovation, with value-added CapEx of EUR 36 million. Our ongoing CapEx is expected to deliver significant cost reductions over time, while supporting scalable growth and operational efficiency. We are successfully diversifying our business model. By the end of the quarter, our diversification strategy raised the share of non-uncoated woodfree paper business to 45% of sales, with uncoated woodfree paper revenues relatively stable and better margins. Notably, uncoated woodfree paper represented 75% of sales in 2017, now reduced to 55%, reflecting a successful shift with about the same revenue, but with a significant increase in margins. This diversification into higher growth and less cyclical markets, such as tissue and packaging, which now account approximately for 30% of total turnover, strengthens the company's value creation and resilience in the long term. We remain focused on our strategy.
This quarter, we have taken the final investment decision for the rebuild of the PM3 paper machine, repurposing from purely uncoated woodfree to flexible packaging. With this strategic move, Navigator, as already mentioned, becomes the fourth largest producer of lightweight packaging papers in Europe, strengthening its position in a high-growth segment, expanding at 2.8% annually, as Dorival commented, driven by global trends in sustainable packaging demand and plastic substitution. In packaging, we leverage our vertical integration and efficiency of Eucalyptus globulus fiber, which requires significantly less use, hence allowing us to be very well positioned on the first quartile of the flexible packaging cost curve. Producing high smoothness, low permeability craft papers, already validated by customers, especially in food applications, will support open packaging at premium positioning. Startup is expected within about 16 months, with an annual production capacity of up to 100,000 tons.
At the same time, we again prove the consistency of our conservative financial policies, maintaining our sustainability and investment commitments. Let's turn please to slide 22 with a few words on the outlook. Increasing geopolitical instability and the rise of protectionist policies are anticipated to play a significant role in shaping the global economy landscape in the coming quarters. Escalating trade tensions are contributing to increased risks of a global economic slowdown and heightened deflationary pressures, particularly in our key markets. In fact, the upsurge of protectionism involving new tariffs will lead directly to higher costs, while at the same time bringing important changes in market dynamics. Nevertheless, in the printing and writing market, the U.S. is currently not self-sufficient, and we believe we'll have to continue to import some of the products it needs.
North America faces—by North America, I mean U.S. and Canada together—faces a structural capacity deficit in uncoated woodfree paper, estimated somewhere between 200,000 to 650,000 tons per year, 4% to 13% of current demand, depending on the evolution of trade flows, namely the possible repatriation of the existing exports from the region and demand trends. In spite of recent tariff decisions, the region's third-largest producer surprisingly announced the closure of its largest mill, about 350,000 tons, by the end of this year. It finally confirmed it will further tighten supply in the region. If North American producers shift focus to domestic markets, this also may open opportunities in their current export destinations. Navigator is front-loading stocks proactively, positioning inventories during the 90-day window ending July 8 to cover Q3 and part of Q4 demand, although we remain optimistic about the constructive outcome in the EU-U.S. negotiations.
Chinese and Indonesian producers, many of which are currently subject to high anti-dumping duties and with relatively small volumes of sales to the U.S., are likely to play a minor role. In particular, China and Indonesia, which currently have little presence in the U.S. market, will not feel the need to repatriate large volumes of exports. This evolving, very fluid, and uncertain environment presents considerable challenges for forecasting both demand and pricing trends. In light of these conditions, adaptability will be essential for maintaining operational flexibility and financial robustness. Navigator has consistently demonstrated resilience in similarly volatile market contexts, reinforcing its capacity to navigate complex macroeconomic scenarios. Thank you. Ana?
Thank you, António. This ends our presentation. We are now open for the Q&A session.
Thank you. Ladies and gentlemen, we will now begin the Q&A session.
If you'd like to ask a question, please press star five on your telephone keypad. If you change your mind, please press star five again. Please ensure that your device is unmuted locally before proceeding with your question. We already have the first question from the line of Cole Hathorn Jefferies. Please go ahead.
Good morning. Thanks for taking my question. I'd like to start with uncoated woodfree markets. I'd just like your thoughts on how the top of the cost curve is managing, particularly up in the Nordics with higher wood costs. Are you seeing any further capacity rationalization announcements within Europe? Secondly, on your flexible packaging business, as you slowly convert PM3, I'm just wondering, would you consider moving further downstream, or strategically, are you focused purely on the upstream kraft paper production?
You're not necessarily going downstream into any converting on the kraft paper side. I'm just wondering how you think about strategically where to position in craft paper. Thank you.
Okay. Thank you for your question. And just to make sure we understand them, I'll try to rephrase them. Your first question is about how we expect the evolution of the European woodfree market on the top of the cost curve and if we expect any capacity rationalization in the near future?
Yes. Correct.
Your second question is about flexible packaging. Basically, it's to understand if we are considering at this stage paper production purely at paper machines or if we are considering already moving into converting capacity.
Yes. Thank you.
I will ask António Quirino Soares to answer both questions, and we'll comment shortly if needed.
Hi. Thank you for both questions.
I will try to answer both. On the first one, indeed, we saw over the last quarters and years a cost escalation in many items, particularly wood. This is pressuring the cost base of some of our competitors. Indeed, it has concluded—remember, I mentioned this a while ago—in the closure of a couple of machines in Europe alone, one in Italy and another one in Germany late last year. This removed 7% of the capacity. Still, the operating rate of the industry in Q1 was an estimated around 85% in Europe. I cannot speculate on further moves, but these are the elements. The operating rate is not on the top of what it should be, although uncoated woodfree with the 85% is significantly above what we see in uncoated woodfree, which is, let's say, a sister market close to uncoated woodfree .
Encore-to-do probably is around 70%. These are the elements that we see, and any further comment is speculative. What we see—and this is Europe—in the U.S., there is already an announcement, as I mentioned, an announcement of a closure towards the end of the year. This was actually delayed because after the deliberation day announcement, not because of the announcement, but it was after this event. Despite this event, I would say, it was announced by the third-largest producer in North America, the closure of their largest asset. This relates also to profitability and to cost of production. We see also this in the U.S. On the second question, indeed, the investment we mentioned is to manufacture the paper to sell to converters, as we do today, and as many competitors of us do today, for our customers to convert into final products.
Today, as we speak, there is no planning, no idea, no decision, of course, to move and integrate further downstream. I pass to António so we can complement.
I think it's perfect. Nothing else. Nothing to add. Thank you.
Thank you. Maybe, if you'll allow me, a follow-up on continue on the uncoated woodfree market. I'd just like to understand how you think about the lower gas prices impacting the industry. My perception is lower gas prices across Europe, it generally flattens the cost curve in general, the lower gas prices for uncoated woodfree. I'm just wondering how you see that dynamic impacting Navigator through 2025 and how it might impact the industry. Any thoughts on how gas pricing might impact the industry? Thank you.
Just a very generic comment, obviously. Gas prices will lower the cost structure of the industry.
I will not, for sure, completely agree with flattening the cost curve because the efficiency in which each company uses energy is quite different. As you know, some companies are more advanced in decarbonization than others. We are one of the companies that is very well advanced in decarbonization. We will be a bit more probably isolated from gas price evolution. Even if we will use the same gas as others, the fact that we are significantly more modern, integrated with pulp, and with a higher efficiency, I do not think our competitors will see the same benefit. Again, if we keep on operating with gas, they will see the same benefit as we will see.
Thank you.
Our next question comes from the line of António Seladas from AS Independent Research. Please go ahead.
Hi. Good morning.
Thank you for the presentation, and thank you for taking my questions. Still on the energy prices and the operating expenditures, we noticed over the last two quarters an increase in operating expenditures, and I think it is related with energy prices. Now that energy prices are lower over the current quarter, my question is, should we expect better—well, lower costs? Basically, that is it. That is the first question. Second question, is it possible to have any idea on average price on flexible packaging? The third question is related with uncoated woodfree prices for the coming—for this quarter, the current quarter, the second quarter, if you could provide some idea how you expect prices to move because all prices are, again, under pressure. I guess that uncoated woodfree prices should also suffer some pressure. Thank you very much.
Okay.
António, thank you for your question. I'm going to try to rephrase them quicker just to make sure that we fully understand them. Your first question is, how do we expect our cash costs to evolve, assuming, like you are assuming, that gas prices will be reduced in the coming quarter?
I mentioned not just gas, but energy prices. So the mix because—okay. And electricity is also lower, so electricity prices.
Okay. Assuming gas and electricity energy goes down or keeps down in the second quarter, how will this affect our cash costs? Your second question is that you have some kind of broad indication on average prices for flexible packaging. Please understand that we cannot give precise prices and guidance.
Also, please appreciate that contrary to uncoated woodfree, that we sell mainly in sheets, we sell flexible packaging purely in reels, and part of these reels are brown, not white. You should take this into consideration when we share with you some broad ideas. Your third question is about what we expect to happen to uncoated woodfree prices during this quarter in light of your view that pulp prices will go down. Correct? For second.
Exactly.
Okay. I will ask Fernando to give you some insights on the first question and Quirino on the second and third question. Fernando?
Okay. The first question, it is easy to answer. Unfortunately, the share in external service and supplies concerning electricity and gas have increased. Normally, they represent one-third of the total amount, and in the first quarter of 2025, they represent 50% of that amount.
That is the reason why we can see an increase in the external service and suppliers. We hope that this will change. It depends on the stability and volatility of the world at the moment. If that, we think we can recover back to the previous figures or ratios that we had before. Because even with the Navigator Tissue UK included, now we are a different animal. We have Navigator Tissue UK, but it's far below this ratio. This means the question, the increase, is not due to the inclusion of Navigator Tissue UK, but only for the fact that we have volatile prices in what concerns energy and natural gas. If this changes, for sure, we'll recover to the previous ratio.
To be honest, we would expect that in the end of Q4, you remain more or less the same question, and I answer that we expect to recover to the last trend. It is not in our hands, in fact.
Okay. Thank you.
Okay.
Just to follow up, do you think that doing some coverage—by coveraging, you avoid the volatility? Obviously, it probably increases your—it will be vendor prices that we do not like, if I am understanding you.
Yes. In the first quarter, we have less coverage than normally we did. By the end of March, we have made some coverage, and the impact was lower. For the second quarter, we are covered, and for the remainder of the year, less covered, but nevertheless, covered as well.
This does not mean that we'll make the target because if the price decreases more than the forward that we fixed, we are losing comparing with the spot market. To be direct, yes, we are more covered in the following quarters than in Q1.
Okay. Thank you very much.
Okay. Moving to the two other questions. The second question was on the price of the flexible packaging business. As we mentioned, we cannot really disclose the precise figure, even approximate. António already gave a preliminary view on the differences between the two businesses in terms of cost and in terms of cost to serve, let's say. Flexible packaging, we do sell all in reels. Do not forget, we have a strong mix in sheets on uncoated woodfree business. We have production on the flexible packaging side of brown qualities.
Also on the production side, it is different than to produce white. Even within white, we have what we call the natural shades, which is without brightness. In terms of cost of production, it is different. As a general guidance, I would say it is a very similar price to the average uncoated woodfree prices. This is what I can mention on this. On the last question, uncoated woodfree pricing views for Q2, I would say it is more towards stability versus Q1. It depends. You have several moving pieces, like the dollar-to-euro equation. On the other side, we are anticipating an interesting Q2 in the U.S., which typically also protects our average price. It depends on the mix of everything, but we see a quarter of stability in terms of pricing. I will just add two quick comments. First, on energy.
Typically, we tend to hedge about 70% of our needs, both in electricity and gas. As Fernando explained, for the first quarter of this year, particularly for January and February, during the period where we were preparing the coverage, we never found coverage prices, the spot prices that were, in our view, interesting to cover. In the end, the volatility happened that the prices in January and February were even above what were the spot prices when we tried to cover. Typically, we tend to cover about 70% of our costs. Again, without giving any specific guidance on prices, I think we can share that our flexible paper prices, in reels, are above the same prices of reels of uncoated woodfree. We have a positive gap when we sell flexible papers in reels compared with reels of uncoated woodfree.
I think we also can share that in spite of the fact that we are producing flexible packaging in the two smallest machines mainly, so the machines that are less competitive, the overall margin of standalone flexible packaging is the same order of magnitude of uncoated woodfree.
Okay?
Ladies and gentlemen, please be reminded that if you wish to ask a question, you may press star five on your telephone keypad. Our next question comes from the line of Luis Toledo from ODDO. Please go ahead.
Good morning. Thanks for taking my questions. Both refer to margins. The first one would be if you could provide some order of magnitude of the reasons behind the margin compression. I mean, we know that volumes and prices both are lower compared to previous quarters.
I don't know if you could attribute in percentage this decline to specific issues with regards to regional split. Also, when you refer to the more economic products exposure, I don't know if you could elaborate a little bit mentioning the reels or owned branded products or premium products, if you could provide more detail on that and also the impact on the regional split. The second question referring also to margins, but more looking forward, considering that you are increasing your share of e-commerce sales, direct sales, if you could make a reflection about the impact on margins, if what you could save in logistics or in wholesalers' commission fees and so on offsets the potential impact on maybe a lower added value in the mix. I don't know if that's a fair question. Thanks.
Thank you, Luis, for your questions.
Again, I'll try to rephrase them to see if we fully understand them. Your first question is if we can give you any kind of guidance on the orders of magnitude for the margin reduction in between the different components that have contributed for the margin reduction.
Exactly.
Your second question is more looking forward, what we expect e-commerce to bring in terms of margins of our businesses going forward.
Perfect.
Okay. I'm going to give some introductory comments, and then my colleagues will complement. We cannot, of course, as you understand, give specific guidance on the exact magnitudes of what were the percentages that influenced the margin decrease. I think we can share with you some broad views. We have, of course, a cost increase, like it was mentioned before. This cost increase was mainly driven by energy.
Besides energy, but with a significantly less impact, chemicals. Those were the two main drivers to compress margins across the board, actually, in basically all the businesses. In the sales front, we have as well an impact of margin deterioration by mixes. By mixes, we can speak about two different things. The fact that we have a higher level of sales of low-end products, which, of course, adds volume, but they do not enjoy the same margins that we have with premium products. This was an impact. A mix deterioration that, in fact, was on purpose because we basically kept the volumes that we were forecasting and aligned with our recent trends. We kept the volumes even slightly higher on premium and standard uncoated woodfree. We added some low-end products.
The low-end products are mainly office papers, a bit of folio papers, and a bit of reels. The second element, also I can only share qualitative data. The second element that pushed for the compression is that we saw prices on overseas markets, outside the U.S. and outside Europe, decreasing faster, significantly faster than prices in Europe and prices in the U.S. They both contribute to this margin compression. Let's not forget, and we mentioned that in previous calls, that today in tissue, about 35%, a bit more than around 35% of our volume is in the U.K. In the U.K., although we have better average prices than in continental Europe, we have a purely converter for the time being. This purely converter, of course, has the margin of a converter, not the margin of an integrated producer.
With the sheer size that this business already has, this also has an impact on our overall tissue margins and our overall EBITDA margins. Regarding your second question about e-commerce, basically, today, we use e-commerce, still, as it was explained by my colleague Quirino, in an exploratory way. We use it to disintermediate sales in some regions of our mill brands. We do not expect, in the end, to have a significant increase of logistics, but we will have some increase of logistics. At the same time, we know that the margins of the distributors are not huge. Probably what we gain in margin because we disintermediate, we spend more in logistics. This is basically a way to disintermediate and disengage from some distributors that we believe, and we saw that last year, have a difficult future ahead.
We are securing our future by having access to larger end users. I will pass to Quirino and Fernando. They will direct them.
Okay. Not a lot. Very complete answer, António. Just to add on this Navigator Hub portal, just one thing. This is also to give access, disintermediate for sure, but also to give access to more market. It is more market share growth than margin capture, if you will. Just this comment.
Thank you very much, António .
Thank you.
Thank you.
We have a follow-up question from the line of Cole Hathorn from Jefferies. Please go ahead.
Good morning. Thanks for taking the follow-up. I have just got two more on my side. The first one is on paper order trends from your customers. I am just trying to understand, particularly in Europe, how order patterns developed through Q1.
Was there any changes to the order pattern through Q1, considering the volatility? The U.S., I understand you've been quite clear that you're building inventory for 3Q and 4Q, just in case. The second question is a bigger question on your capital allocation from here. When you think about the CapEx for your business and the needs, you've talked a lot about investment in your mills to reduce the cost structure, and that's always welcomed. I'm just wondering, where would you be allocating capital beyond that? You've talked about your PM3 conversion in kraft paper. Where are you potentially on doing an investment into maybe a mother reel tissue investment in your business? Just wanting to understand how are you thinking about CapEx investments outside of cost savings. Thank you.
Okay.
A very brief comment, and then I will ask Quirino to give you further details on the paper or the books for both Europe and the U.S.A. I will do a very introductory comment on capital allocation, and I will ask Fernando and then Nuno to speak a bit more about Fernando about overall capital allocation, Nuno about tissue. Starting on your first question, I think it was explained, but we will reinforce it. Two things. We saw over the first quarter, March much better than February, February much better than January, but there is a lot of volatility. One week and the other are completely different. The trend is positive, but the volatility is so high and the certainty is so high that it's very difficult to anticipate what is going on. Quirino will give you more insights on this, also on the front-loading.
We are doing some front-loading stocks into the U.S., and there we can say that April was our best month of the last few months and probably the best month of many months. We see also some of our customers being concerned with making sure that they have access to paper because of what we explained, the U.S. needs to import paper. On capital allocation, a very generic comment. Obviously, we need to keep on making sure that our pulp mills, which is the origin of the fiber for whatever business we want to develop, our pulp mills are well kept, are efficient. We are investing in packaging. We did it with molded fiber packaging last year that started up early this year. We are doing now with paper and, of course, with tissue. With tissue by acquiring, and we are studying the installation of a tissue machine.
I will ask Quirino to complement the first question and Fernando and Nuno to complement the second question.
Thank you. Let me give you some figures to, let's say, to populate the reasoning of António. Indeed, very volatile, but if we look at Q1 as a whole, as I mentioned, European industry got a positive 6% growth in paper orders. In our case, we also compared favorably against both Q1 last year with plus 10% in all regions. Europe growing, overseas as well. Compared to Q4 last year, which you may remember was a very low period in order intake, we got 30% more orders in Q1 than Q4 last year. It was a positive progression with a lot of ups and downs in the middle, as António mentioned. Importantly, since April, we see since Easter, we see a slowdown from this pattern.
Overall, we are still in positive. The industry ended April, actually, with a comfortable order book, with a level of historical average. The industry is operating, let's say, at normal levels in that sense. In the U.S., we decided to take this 90-day period to do stock replenishment locally. We expect to be positioned in the beginning of July to have a very interesting coverage of stock over there. Be prepared for a good period of sales and to anticipate any scenario. As António mentioned, indeed, April was the best month since actually end of 2022. Customers are approaching us to get their supplies. Do not forget the pre-announcement of a closure that we did mention. North America is deficit as a whole, U.S. and Canada. They are in a deficit of capacity, as we mentioned. This pre-announced closure is even adding more pressure.
We are today prepared for that scenario.
On capital allocation, it's hard to add something more that António has said. I will leave something to Nuno to comment on tissue because, as we have started saying in this conference call, the diversification is paying off. This means that we have now 45% of our turnover coming out from the non-uncoated woodfree business. In addition, this means that we'll continue investing in this diversification, and Nuno will add more information on that. Besides that, we should say that normally we invest EUR 120 million in CapEx. For the moment, we are investing more than that because we are taking advantage of next-generation funds, PRR in Portugal. This will continue up to, especially to the first semester of 2026. Further on, we'll return to our level of EUR 120 million.
On this EUR 120 million, more or less, it's on keeping the good parts of our mills and safety. We have announced recently that we are investing a lot in safety, and fortunately, this is paying off. In addition to that, we want to be a good investment for our shareholders. This means that we'll continue to have a payout ratio that is fair and that will give the shareholders a good interest rate, if you can say, in this way. On the next investments on tissue, I think Nuno could help with more knowledge. Nuno, please.
Thank you, Fernando. At this stage, I will not add much more, but for you to know, I think I refer to an earlier comment from António. He mentioned that our business in the U.K., tissue business in the U.K., is today still, as he said, a pure converting business.
We are actually not producing the paper that we sell and we convert and then sell. We are, at this stage, in advanced analysis and studies about building a potential new tissue mill, double with paper machine, that if we make a positive decision, we should make the decision during this year. We are in advanced stage of studying the potential investment. This will, of course, reduce our external dependence on paper. This would be an investment, if we make a positive decision, that will increase our margins. It will not increase the sales, the turnover of the group, because this would be an investment to basically source the U.K. tissue business with our own paper. On a more, let's say, medium to long term, I echo on tissue. I echo what Fernando and António have said.
We have a commitment to grow and diversify our company in a value-creating way. You have seen the track record over the last 10 years that we have been doing on the market, both Greenfield and some acquisitions. We do not set deadlines nor specific CapEx envelopes to what we are going to do next, but it is our objective to continue the growth trajectory in tissue and in packaging, as you have been seeing over this conference call. Thank you very much.
This ends our session. Thank you all for your time. If you have more questions or need further clarification, feel free to reach out through our usual channels. Have a good day.