THE NAVIGATOR COMPANY, S.A. (NVG) Q2 2026 Earnings Call Transcript

Ladies and gentlemen, welcome to the Navigator Company's conference call and webcast covering our second quarter and first half year results. Joining us today are Antonio Redondo, Fernanda Roujo, Nuno Santos, João Le, Dorival Noeda and Antonio Quirinho Soares. As usual, we will begin with a brief presentation followed by Q&A session. The presentation is available on our website, and questions may also be submitted using the webcast platform. I will now hand over to Antonio, who will take you through the main highlights of the period.

Good afternoon, and thank you for joining us. The first October of 2026 was characterized by a challenging external environment. Despite geopolitical uncertainty, cost inflation, and temporary operational disruptions, Navigator continued to execute its strategy with discipline and focus. While short-term performance was affected by largely non-recurring operational factors, the underlying performance of the business continued to improve. Pricing recovery gained momentum across our core businesses. Our efficiency problems deliver tangible results, and we continue to make significant progress in the execution of strategic investments that are enhancing competitiveness, reducing our cost base, and supporting long-term growth. I will begin with slide number five with an overview of the key highlights. There are six key messages we would like you to take away from today's presentation. First, H1 performance was impacted by a combination of adverse weather conditions and planned industrial interventions aimed at improving efficiency and competitiveness. Second, pricing momentum continued to improve across businesses. In Uncorpombe 3, June average prices were up 10% versus December 11th. And in Europe, on a quarter-on-quarter price increases of Pace the Peaks benchmark by more than three times. In packaging, June average prices were 13% above December 11th. Third, cost optimization and innovation continue to support margins, with cash costs improving year-on-year across all standalone businesses, paper, packaging, and tissue in both Iberia and the UK. Fourth, our strategic investments and diversification initiatives continue to strengthen navigators long-term driving creation potential and future earnings capacity. While the Middle East crisis negatively impacted H1 results and cost pressures are expected to persist in 2H2, Navigator has proactively launched a specific mitigation program focused on logistics optimization, product engineering, operational efficiency, and energy management. These initiatives are expected to offset around two-thirds of the additional cost impact, while strengthening competitiveness and generating structural benefits from 2027 onwards. Certain details will be provided later in the presentation. Finally, we are funding this transformation from the back of the strong financial position. During the first half, we reduced net debt by 10 million euros while investing 127 million euros in strategic growth and efficiency initiatives. Our strong balance sheet gives us the flexibility to continue investing in the future, accelerating our transition towards a more diversified, innovative, and higher value-added business. I will now end talking to my colleagues. We will walk you through the results in more detail and share some insights on how our different business areas have been doing. I will now end over to Fernand to walk you through our financial evidence.

Thank you, Antonio. Now turning to slide six. A BTA increased by 20% quarter on quarter, confirming a clear earnings recovery, driven by strong prices and continued cost discipline as operational conditions progressively normalize. For the first half, turnover reached 869 million euros, while IBTA stood at 143 million euros. For the year-on-year cooperation, it was affected by reduced operational availability, lower production availability, and historically low inventory levels, which limits our ability to fully meet demand. We also continue to invest in our strategic transformation program. Several projects supported by next-generation EU funding are now in their final stage and unexpected to be fully completed this quarter. In the first half, CapEx totaled 127 million euros, with 57% allocated to value-added sustainability and ASG investments. The Rival will provide further detail later in the presentation on these strategic investments and how they support Navigator future growth and competitiveness. The level of CAPEX and temporary operational constraints affect H1 free cash flow. As our main strategic projects move closer to completion, CAPEX is expected to progressively normalize, with H2 investment below H1 levels. Despite the PM3 rebuild, the UK transformation project, and the new tissue machine in Aveiro, Planet CapEx over the next two years is expected to remain below 2026 levels, supporting stronger cash generation and providing greater flexibility for the group next phase of growth. Turning to slide 7, we can take a closer look at the key drivers behind the year-on-year ABTA evolution. The year-on-year ABTA cooperation was mainly affected by reduced operational availability during the period, while historically low inventories limit our ability to fully meet demand. Lower pulp and paper volumes, together with higher energy and CO2-related costs, wage unshortened performance. Part of the lower paper volumes reflects preparation for the PN3 flexible packaging launch in Q3. One of our largest uncoated weed-free paper machines was used to produce lower grammage packaging papers, reducing output and consequently the volume of uncoated weed-free available for sale. These effects were partially offset by improving price trends and lower production costs, resulting from our efficiency programs and operational optimization initiatives. Importantly, several factors affecting H1 profitability are already behind us, while the strategic investments and initiatives escorted during the period are expected to support efficiency and competitiveness. Turning to slide eight, with debt, maturity, and liquidity. As Antonio mentioned, Navigators maintain a robust financial position by securing new long-term debt, ensuring we have no significant payments due within the next five years. Over the past two years, we have successfully increased our average debt maturity to more than five years with a well-staggered repayment schedule. We continue to live in sustainable finance, with 95% of our total debt now indexed to sustainability indicators. This directly aligns our financial strategy with our environmental targets. In a volatile global rate environment, our balance sheet remains well protected. 60% of our total debt is at fixed rate, supported by a combination of fixed rate debt and interest rate edging instruments. Despite the general rise in market rates compared to the previous financing cycle, our proactive treasury management has kept our average cost of finance highly competitive at approximately 2.9%. We closed the quarter with ample liquidity of approximately 590 million euros, combined with a conservative net debt ratio of 2.29 times. This is more than enough to provide navigators with agility to fund our short-term CAPEX requirements, namely the conversion of 3M3 to packaging and the new tissue mill in Aveiro, as well as to consider further expansion while navigating market volatility with total confidence. Dorival will now comment on our CAPEX execution.

Thank you for having me. Turning to slide nine to discuss the evolution of our strategic APEX execution. Responsible investment remains central to our status. Across all business areas, we continue to invest in projects that improve efficiency, reduce our environmental footprint, and strengthen the long-term competitiveness of our operations. Recent investments in renewable power generation, biomass-based and solar energy solutions, and industrial modernization have significantly reduced fossil fuels consumption and related fossil CO2 emissions, while improving energy efficiency, energy self-sufficiency, and operational performance. A key milestone during the quarter was the start-up of the Oxygen Identification Line Institute. This project enhances water efficiency, improves effluent quality, reduces chemical consumption, supports product quality, and reduces operational risk, while contributing to the overall modernization of our industrial base. Alongside these sustainability-driven initiatives, we continue to advance strategic growth projects that will further strengthen navigators' market position and future earnings potential. One of the most important projects currently underway is the conversion of the PM3 paper machine in Setubo. The M3 will expand our packaging capabilities with innovative eucalyptus-based products, increase flexibility and efficiency, and support our growth in attractive, flexible packaging. This investment positions Navigator to capture growing demand for sustainable packaging solutions and further expand the Jeepcraft brand, while providing greater flexibility to optimize production between packaging and printing and writing paper according to market conditions. In tissue, we took the final investment decision in early 2026 to install a new tissue machine at the Aveiro Industrial Complex. With annual production capacity of 70,000 tons, the project will support the growth of our UK operation with an innovative logistics concept. Currently, the UK operation has converted capacity exceeding 100,000 tons per year, excluding UF wipes, but no integrated real production. The new machine represents a total investment of approximately €115 million, with €48 million in 2026, €53 million in 2027, and €14 million in 2028, supported by Portugal 2030 funding. Scheduled to start operations by Q2 2028, the new machine will strengthen vertical integration, improve competitiveness, and support profitable growth in a high-value segment. We have already started project implementation during the last quarter. Together, these investments are reinforcing navigators' competitiveness, diversification, and long-term earnest capacity, while reinforcing the resilience and sustainability of our operations. Importantly, innovation, sustainability, and competitiveness go hand-in-hand. Beyond their environmental benefits, these recent projects are lowering our structural cost base, reducing energy dependence, and improving operational efficiency. Without the implementation of our decarbonization plan, launched in 2019 and implemented since 2020, our CO2 and fossil fuel-related costs in 2025 would have been more than 50 million euros higher than in the 2018 baseline year. reflecting reduced emissions, fuel-free CO2 allowances, and significantly higher CO2 and fossil fuel prices. António Quirino will now comment on bulk and paper prices.

Thank you, Dorival. Turning to slide 11 to discuss the pricing environment in our core markets. Pricing conditions improved during the semester, particularly in bulk markets and progressively across paper markets. This provides a supportive backdrop as we move into the second half of the year. Looking at the bulk market, we have moved past the significant pressure seen in 2025. The downward cycle that began in China in April last year finally signaled a turnaround And that momentum continued to improve throughout the first half of 2026, although market conditions remained mixed across regions. As a result, the PICS BHKP benchmark for hardwood pulp in Europe closed the first half at $1,409 per tonne, representing an increase of approximately 27% in Europe. compared with the first week of 2026. Meanwhile, in China, prices ended the period at $605 per ton, reflecting a more moderate increase of 7%. Turning to the European office paper market, the PIX A4B copy index stood at 938 euros per ton at the end of June versus 926 euros per ton at the end of March. Since the start of the year, the index has edged up by around 1%. Over the course of the first half, Navigator announced and applied three price hikes in Europe, contributing to growth in prices from December to June of 5% in Europe, 8% in overseas, and 2% in the United States, and 10% overall in uncoated-free on average. The competitive environment held down the increase in the market index just to 1%, as mentioned, and this compares with the 5% achieved by Navigator in Europe. This meant that Navigator's average uncoated-free prices remained on an upward trajectory during the first half, And average prices in June were about 90 euros per ton above those recorded in December, an increase above 10%. Between June and December, our economy range of office papers saw a price increase of 14%, 12% in Europe, reflecting the company's strong ability to implement price increases and reposition the market towards healthier levels of profitability. At the same time, our ongoing commitment to differentiated brand management enabled us to maintain, in Europe, a price premium of 30%, 3-0% over the peak, say, for CopyB benchmark in the premium cut-size segment, in line with the best levels achieved historically by the company. Moving, please, to slide 12, we have summarized the main developments in Uncoated with Free Market. Apparent global demand for printing and writing papers saw a slight decrease of 0.8%. However, Uncoated Wood Free remains the most resilient grade in the industry. While coated papers and mechanical pulp products saw a sharper decline of up to 4%, Uncoated Wood Free remained resilient, increasing by 0.4% versus last year. To be noted that Uncodedut free rate represents now 65% of global printing and writing market demand. In Europe, while Uncodedut free demand was down by 1% only in the first half of the year, the industry is maintaining healthy order books supported by a strong inflow of export orders. Supply side shifts are also providing support. The discontinuation of production by a leading manufacturer late last year removed 185,000 tons of annual capacity from the European market. While no further closures have been announced for 2026, many of our competitors continue to face intense margin pressure, which may lead to further announcements of consolidation in the future. A key highlight for us this quarter is our operating rate. Despite the disruptions experienced during the semester and the output reduction resulting from producing flexible packaging in one of our largest uncoated-free machines, Navigator achieved 90% operating rate, tons-based, compared with our competitors' average of 85% in the period. But regarding the United States, the reported 7% decline in apparent consumption through May seems to be largely a supply-side distortion. We believe real consumption remains relatively stable, but the figures have been skewed by the anticipated shutdown of a major U.S. plant and the correspondent preparatory stock buildup, and also the gradual destocking of the high import volumes from 2025. This creates a temporary statistical dip rather than a shift in long-term demand. Finally, we continue to see robust order books outperforming the industry average by eight days and 31% above the industry average over the last 12 years. Also, our inventory levels at the end of the first half reached a historical low for this time of the year, standing 18% below the average of the same period of 12 years. Now, Nuno will give some more market context on pulp.

Thank you, Kirino. Turning to slide 13 with the pulp market. As previously mentioned, after challenging 25, the stock market entered a recovery phase in the latter part of last year. This positive momentum continued to build during the first half of 26, supported by tighter supply conditions and ongoing downtime across the English. Market conditions were influenced by capacity reductions from a major Indonesian producer, following the cancellation of forestry licenses on the grounds of deforestation, as well as by limited hardwood pulp supply resulting from the strategic conversion of certain pulp lines to dissolving pulp, particularly in Latin America. In Europe, inventory levels at ports remain below both 25 levels and a five-year average. Combined with delays in shipments to the region, these tighter supply conditions provided producers with the opportunity to implement successive price increases throughout the semester. At the same time, geopolitical uncertainty and trade tensions continued to generate volatility in global markets. The conflict in the Middle East contributed to higher energy, chemicals, and logistics costs, creating additional inflationary pressure across the pulp value chain. Overall, tighter supply conditions, disciplined capacity management, and low inventory levels supported the recovery in pulp prices throughout the first half of 26. Turning to demand, global demand for market hardwood pulp remained relatively resilient, declining by 2% year-to-date through May. China recorded growth of 2%, while Europe saw a marginal decline of 0.6%, broadly reflecting softer consumption trends in unquoted with free paper and tissue. Looking now at tissue performance on slide 14. The European tissue market remains resilient. As of April, global apparent demand grew by 1.6% year-on-year. Tissue remains one of the key pillars of Navigator's diversification strategy. The business continues to grow, supported by international expansion and increasing operational scale. Tissue sales volumes remain broadly in line with the first quarter, while average selling prices improved, increasing by 2% quarter-on-quarter. In the UK, transformation initiatives are progressing as planned. We are currently streamlining UK assets, optimizing locations, and exiting in profitable client contracts. This project is on schedule for completion by middle 27, aimed at restoring operational efficiency and segment margins. Our UK business currently operates on a converting-only model, and like our fully integrated Iberian operations, where one of the three mills is even integrated with our own pulp, the UK operation currently offers significant margin enhancement potential through the addition of integrated reel production. The improved strategic tissue expansion, as highlighted by Dorival earlier, will provide in-house real supply for our UK operations, structurally enhancing margins through greater vertical integration. Project implementation already started last quarter. Our diversification strategy has successfully rebalanced our geographical exposure. Finished products now account for 99% of sales. The at-home or consumer segment represents 84% of our mix. We continue to strengthen our premium positioning through the launch of innovative products resulting from an intense R&D activity and partnerships with the leading FMCG brands, Procter & Gamble. The first half, we reached the final development stages for a series of high-impact innovations in the toilet paper category, with launches focused on consumer experience, sustainability, and product differentiation. These advancements reinforce our position as a leader in tissue innovation. By delivering high perceived value and sustainability-led differentiation, we are effectively insulating our premium offering in an increasingly competitive global market. The extension of the processor and gamble licensing agreement is reflected in the strengthening of navigators' position in the Iberian tissue market through the rollout of Don Limpio range in Spain, alongside the preparation for entry to France with Monsieur Proprembrand in the coming quarters. Joao will now comment on the main developments in packaging. Thank you, Nuno.

If you now turn to slide 15, please. Flexible packaging market growth in line with expectations with European deliveries up 2.8% year-to-date made, with Navigator outperforming the market. The packaging business delivered another strong performance in the first half. The business now represents 6% of group sales, with turnover up 41% and pay-per-area sales in square meter, increasing 66%. Average price in June were around 13% higher than in December. This growth has been achieved largely through the repurposing of existing uncutable free assets with limited capital investment, highlighting the strength of navigator asset plays and commercial execution. Performance was led by flexible packaging, particularly applications serving the food and personal care markets, where Eucalyptus Fiverr offers a compelling combination of performance, sustainability, and cost competitiveness. We also saw an encouraging momentum in the box segment, one of the first users of our Eucalyptus paper, which represented 11% of G-Graft sales during the first half, underlining its growing relevance within our portfolio. This segment is focused on high-value applications, including food contact packaging, premium consumer goods, and e-commerce solutions, where demand for high-performance virgin fiber products continues to expand, supported by increasingly stringent food safety and quality requirements. Having invested several years in developing expertise in consumer relationships in these markets, we believe they offer significant long-term growth potential and further highlight the unique characteristics of Eucalyptus Globus Fiber. As a result, G-Craft continues to strengthen its position in attractive value-added segments, supporting both profitable growth and portfolio diversification. Overall, the packaging business continues to execute strongly, reinforcing Jeepraft as a growing packaging brand with increasing international reach and exposure to attractive value-added applications. I will now end over to Antonio for a wrap-up.

To conclude, let me leave you with four key messages on the slides that we would like you to take away. First, despite the challenging operating environment, the business demonstrated a strong recovery in the second quarter. ABTA increased by 21% quarter and quarter, as pricing recovery gained traction across our businesses, and cost discipline continued to deliver results. Importantly, the maintenance shutdowns carried out during the period were also used to accelerate strategic industrial innovation projects that will enhance competitiveness. Second, our strategic investments and diversification agenda continue to strengthen long-term value creation. In packaging, the rapid growth of G-Craft's brand demonstrates our ability to create new growth avenues by leveraging existing assets with limited capital investment. With issue, we continue to scale operations and capture the benefits of integration, positioning the business for further profitable growth. Third, we remain focused on transforming the company for the future. Our value-added CAPEX program is progressing well and is expected to deliver meaningful structural cost reductions. As discussed during this presentation, without the decarbonization initiatives implemented since 2020, our CO2 and fossil fuel-related costs in 2035 would have been more than 50 million euros higher than in the 2018 baseline year. Additionally, another series of cost mitigation initiatives focused on product engineering, logistics optimization, operational efficiency, and improvements in energy, raw material, and consumable usage are expected to generate additional 19 million euros of savings in 2026, increasing to 20 million euros on an annualized basis from 2027 hundreds. These measures are expected to offset nearly two-thirds of the estimated 2026 cost impact arising from the Middle East continent. In parallel, we have initiated organizational adjustments affecting 136 positions by the end of 2026, comparing with the end of the first half of 2025 in support of a more agile operation model. Finally, all of this is being achieved while maintaining a conservative financial profile, giving us the flexibility to further increase investments, to grow and continue creating new value throughout the cycle. The next slide showcases how we are leveraging our Eucalyptus expertise to create new products, applications, and growth opportunities. In the first stop of the year, beyond strengthening our core businesses, we continue to make progress in developing innovative products and new growth business areas that leverage Navigator's unique fiber base, industrial capabilities, and R&D expertise. In tissue, our focus remains on differentiation through higher-value weather and functional tissue products, supported by a growing portfolio of innovative hygiene solutions, driving enhanced consumer performance and sustainability. Also, through a strategic partnership with Prater & Gamble, a leading global FMCG player in the household cleaning category. In Uncutable 3, we continue to expand our range with differentiated products that address evolving customer needs, including products for pharmaceutical leaflets, premium cream offset grades for the growing food publishing sector, and enhanced surface inject papers, the fastest growing product in Uncutable 3, all reinforcing our competitive positions in attractive, higher value settings. In packaging, we are developing solutions tailored to specific end-use applications, including flexible packaging for food service, carrier and shopping bags, industrial, release-based, medical, and e-commerce, combining product performance with sustainability conventions. These innovation efforts is being further supported by the work carried out under the NextGen New Program, where advanced barrier technologies have now reached the stage of industrial testing on packaging applications, including paper and molded home solutions. We hold our existing businesses, and we continue to evaluate opportunities in biomaterials, bio-based chemicals, and renewable flows. Among the opportunities within our innovation pipeline, the Renewable Biomethanol Project has progressed in the final pre-engineering stage for our industrial-scale plant, accelerating its path towards industrial deployment, initially as a fossil fuel substitute within our operations and, over time, as a biochemical platform for higher-value downstream applications. These initiatives illustrate how Navigator is combining innovation, sustainability, and the national know-how to create new growth avenues, diversifying its business portfolio and further strengthen the resilience of its business model over the long term. In spite of being the European leader in the production of nucleotus pulp and then cotton-free papers, we are becoming much more than that, transforming ourselves in a diversified, profitable company with several growth options. Let's move on to slide 19 with a few comments on the market topic. While the macroeconomic backdrop remains uncertain and volatile, supply-side discipline and limited new capacity continue to support market conditions across our businesses. In Europe, coal prices are expected to continue to strengthen, while market conditions in China remain mixed in the near term. Despite near-term price pressure in China, higher wood and wood shift costs, increased logistic costs, wood supply constraints manually in Indonesia, potential typhoon-related disruptions, and the delay of Indonesian capacity expansion should provide downside protection. Together with the recent $15 per ton price increase announcements by a leading Asian player. These sectors may help limit further price erosion and support the recovery towards year-end. On the supply side, no significant capacity additions are expected this year. The startup of the Indonesian project is now expected to be delayed until Q1, 2022, while the Brazilian project is not anticipated to impact supply before the second quarter of 2028, supporting a favorable supply-demand balance in the near term. In printing and writing paper, we successfully implemented a multi-stage pricing strategy across Europe, international markets, Latin America, and the United States, supported by strong order books and the need to upset rising production costs. As a result, pricing momentum continued to build throughout the quarter, and we expect average prices in Q3 to be higher than those achieved in Q2. Although consumption trends remain challenging in some regions, our growing capacity rationalization in Europe and North America is contributing to a progressively more balanced market and improved industry fundamentals. In the U.S. specifically, supply is tightening rapidly. We estimate a structural shortfall of around 1.2 million tons, equivalent to approximately 25% of market consumption. While no further cuts have been announced for the remainder of the 26, high margin pressure persists across the industry, maintaining a very tight operating environment. In the tissue segment, demand remains resilient, with an estimated annual growth rate of 1.6%. We continue to extract significant value from the integration of Navigated Tissue Arraya and Navigated Tissue Cranket. To protect margins, last quarter we have announced the price increase of 5% to 7% across all markets that will impact Q3. Our packaging business continues to perform strongly with growth quarter and quarter in both volumes and prices. On the price side, we have already moved prices upwards by 5% to 10% as of vehicles, with an additional increase in June that will also impact free treatment. Supported by stronger pricing, strategic investments nearing completion, structural cost reductions, and a robust policy shift, Navigator is converting its transformation efforts into stronger competitiveness, enhanced earnings capacity, and a long-term value creation. Thank you.

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

Ladies and gentlemen, we will now begin the Q&A session. If you'd like to ask a question, please press Start 5 on your telephone keypad. If you change your mind, please press Start 5 again. Please ensure that you devise and mute it locally before proceeding with your question. Our first question comes from Max Michin from GB Capital. Now your line is open.

Good afternoon. Thank you very much for the presentation and taking our questions. Two questions from me, please. One is a follow-up on the cost efficiency plan. I was just wondering if it involves any upfront investment you have to make to generate the savings. And then also a follow-up on CapEx. Just if I missed it, apologies. What kind of capex you expect in the second half of 2026 and any caller in 2027 would be super helpful. And then just a quick one on pulp. Sales volumes went down notably in the second quarter. You mentioned restocking. When do you expect it to finish and get back to normalized sales volumes?

Thank you for your questions. I'm not 100% sure if I understood the last one, but I understand the first one is a follow-up on our cost initiatives and if this requires and the additional CAPEX. The second one is what kind of CAPEX we will expect for H2 2026 and 2027. The last one I understood is about restocking, but I'm not 100% sure.

Or if sales will, when you hope sales will be normalized.

Exactly. Exactly. Thank you.

Can you please specify what normal sales are referring to? what kind of sales well I mean historical in terms of tons like 70-80 thousand tons per quarter according to my estimates he did 45,000 in the second quarter which is significantly below the historical average so I was just wondering what we should expect for the next quarters you are referring to normal sales of bulk market bulk yes yes yes yes okay I will make some introductory comments and and our last colleagues to follow up on that and regarding the cost the cost initiative as as you most sure know following our our conference calls uh this is another initiative because we have always ongoing initiatives on cost reduction this one is is geared uh towards the offsetting of the impacts of the Iran war conflict and the resulting costs of energy, logistics, and some chemicals, namely oil-based chemicals. And this particular initiative, as I think it was mentioned in the cold, is looking through things like logistic optimization, product engineering, operational efficiency, energy management, and they do not require any significant capex at all. I'm not sure if any of my colleagues want to follow up on this.

Just a quick comment. We have in our initiatives for cost reduction in the industrial area We are developing the advanced process controls, and it requires minimal investment, and our savings are related to that. Thank you, Dorico.

Regarding the CAPEX, as you probably know, we won't give any specific guidance on that. But as it was explained, we anticipate that the CAPEX, in spite of all the projects that we are on doing, the CAPEX on the second half of the year will be below the CAPEX on the first half of the year. And at the same time, in spite of the fact that in 2027, we are picking the capex of the tissue machine, the new tissue machine, we expect the overall capex in 2027 to be below the capex of 2026. In broad figures, we expect APEX by the end of this year to be on the region of €220 million, and we expect 2027 to be below that level. Regarding the top suns, as it was expressed, we had two impacts, one unplanned and one planned. One unplanned on the first half of the year were the results of the storms, which significantly affected our bulk capability in Q1. And we ended up last year with a tight stop on all our products. And this year, we had a significant number of the shutdowns, mainly shutdowns to restart projects that we have initiated in the last few months. So this also affected our capability to produce pulp. And as it was mentioned, we have increased our paper and packaging sales. So we have integrated a bit more pulp in paper and packaging. The large majority of the projects and the shutdowns are over. The last one, we are actually ending now in our figure that was real. We had a very long shutdown in July because of the mid-age of our recovery boiler, which requires special attention. So as we speak, we are starting at the pulp line. So we expect a normalisation towards the next five months, so August until December, and growing volumes already in Q3 and the normalised volumes in Q4.

The next question comes from Cole Hawthorne from Jefferies. Now your line is open.

Good afternoon. Thanks for taking my question. I'd just like to follow up on the commentary that you made around your kind of office paper business. I mean, you mentioned some impressive statistics around your operating rates being at 90%, industry below 85%, you've got stronger order books versus industry, lower inventory versus industry, and you're also able to achieve higher pricing versus industry. Can I just follow up on the pricing point? Considering you're already more premium, how were you able to push through more pricing versus the industry? Just some color there would be helpful.

Thank you for the question. This is an easy one. because we are much better than our competitors. Look, we have... Let me try to get more call, and I was kidding also to follow up on this one. First of all, we have, over the course of the last quarters, we have clearly valued price more than volume, although in the last quarter we have both it was volume and price. We have a very strong value proposition to our customers. We rely strongly on our brands. 70% of our sales in Q2 have been based on our brands, which helps pricing. And about 60% of our sales have been based in premium products, which also helps pricing. Having said that, we are aware and concerned that selling our navigator offset 30% above the peaks is probably stretching a bit too much. And we expect, of course, as well, our competitors to do their part and will be more in a position to stabilize the prices that we have achieved on the first half of the year. But unfortunately, we are facing very weak competition and although this has been helpful so far, it's obviously dangerous for the future. I don't know if you want to add something more.

Nothing really relevant, so I think you touched everything. It's really centered around 30 years of building brands on top of extremely high quality a very complete range typically these products these branded products have historically a 10-15% price premium indeed as Anthony mentioned today with a 30% we are stretching historically high levels for this kind of products so therefore the strategy for this last two quarters on the price increase that we have made was actually to push stronger on the economy products. I mentioned we increased 14% the price of economy products so that we try to guide the market so that the commodity rates are on a higher level of price. And therefore, the price premium on our head-size premium products start to go down to a more adequate level.

And then maybe just following up on the office paper, I mean, you've got, you always mention the supply rationalization point and office paper is one where there is more supply and we haven't seen the closures like we've seen in some of the other grades. And I'm just wondering, what do you think is going to be the trigger to finally see these closures come through? Because the closure costs, the cash closure costs are quite high to close a mill. So I'm just wondering, you know, is it realistic to assume that we see closures sooner rather than later? Or is this going to take a long time?

Well, that one is very hard. It's very hard to guess. But when we look to the past quarters and the results of some of our competitors, it's difficult to believe that they can continue to perform in this fashion for the near future. On top of that, and as we explained, and in spite we did this effort to reduce costs, which was shown in the presentation, there are significant cost pressures. Many, but not only, and still persist in logistics, in energy, in chemicals. So either some of these competitors that have posted very weak results, if not negative results, are able to turn around their businesses in the coming quarters, or probably will accelerate their agony. But it's guesswork, and I don't even dare to share names.

It's still helpful, so hopefully we see some closures. And then I do have a difficult question, and I understand if you don't want to answer this, But I completely understand your strategy to consolidate and grow in tissue. And hopefully as you build on this transformation and you get more synergies out of that business, it's going to be helpful. But I just wondered, do you see benefit from doing selective M&A? And, you know, if I was to point to Essity as an example, with some UK operations and some Iberian operations, you know, there would be sites that geographically and from a commercial standpoint, I think would offer, navigate a lot of synergies. But I'm just wondering, you know, would there be challenges with, you know, brand issues or, you know, market share issues? I'm just wondering if within tissue, M&A at the right price is on the table for you.

Thank you for the question. I'll make an interjecting comment and then I will ask Nuno to complement the thoughts. Actually, our development issue is more M&A-based than organic growth-based. So we started the tissue business by acquiring a company. Then we developed or concluded the project of doubling capacity that company had. We installed a greenfield tissue machine in Casilla. Then a few years later, we bought the company in Spain. One plus a few months later, we bought in UK. Now we are building again a new tissue machine in Casilla, and this is our priority, for sure. And we are always, particularly in tissue, we are always very attentive to M&A, and M&A is not only a viable strategy, but something that we have in our rather permanent. We are not pressured to grow and buy if we are not convinced it's a good business or buy up whatever price, But definitely, and not only, but particularly in geographies that were already present, M&A is for sure a viable strategy.

Okay, I think just to add a couple of thoughts on your questions on synergies. Yes, I mean, I guess you're right in the sense that we see value creation in consolidating in the regions where we are present from several angles. So, indeed, we learn when we acquire and consolidate new industrial operations. There's always room to learn from the new operations, but also to improve the operations that we acquire. There is also some commercial synergies in the sense that we're able to serve better our clients. Most of our largest clients are present in the region across many markets and countries. And this way, we're able to supply and give them an offer that is, you know, present in all the regions where they are. In addition, as well as we get bigger, economies of scale in some areas of important fixed costs can also be leveraged. So as we get bigger, if the asset and the operations are good operations and have potential to grow or potential to perform very good operationally, Operationally, we have found so far that the history over the last 11 years when we started, we have been able to successfully lead this M&A, let's say, position that we have undertook, as Antonio mentioned.

You probably noticed that during the call we mentioned one of the reasons we want to maintain a conservative financial profile is exactly to give us the flexibility to further increase the investment. So if the right opportunity arises, for sure, we will take a very serious consideration.

Thank you for the helpful color.

Ladies and gentlemen, I would like to remind you that in order to ask a question, please start by from your telephone key part. The next question comes from Antonio Celadas from AES Independent Research. Now your line is open.

Yes, thank you. Hi, good afternoon. Thank you for the presentation and thank you for taking my questions. First one is on wood prices. So if you could provide more color for the coming quarters related regarding wood prices, so compared with current prices. My idea is that wood prices in Iberia should have room to come down. But up to now, I don't see it or I didn't see it from my understanding. so it can provide some color on this this topic and second second one is related with external supplies and services on costs so figures have been ranging on a quarterly basis between 120 millions and 140 million i think so quite volatile uh i don't know if can provide more color for the second second half of the year you you mentioned about 19 million savings um should we see it on On this line, external supplies and service. Thank you very much.

So, if I understand correctly, but I'm going to repeat the questions. The first one is about wood prices in Porsche or in Iberia. How do we expect them to evolve in the coming quarters?

Exactly.

And the second question is you say that there is a certain level of volatility in external supplies and you'd like to have a kind of explanation for that and some comments on the way for you.

Absolutely. Thank you very much. Okay.

Let me start with wood prices. I will then pass to João Le and on the second one, I'll ask Fernand Therese. Wood prices. Actually, our wood prices, both in Portugal, if you will, in Iberia, our average Iberian wood price, And our overall wood prices in Q2 have already been able, we have already been able to reduce them vis-à-vis Q1. So we had a reduction from Q1 to Q2. Also, to be fair, in Q1, wood prices were also quite affected by Christine and costs associated with Christine. And Q2, we didn't have Christine. But still, we will further down than the impact of Christine alone. So my expectation, our expectation is that our peak wood prices have been in Q1, or if you will, in H1, and we have announced a couple of months ago, more or less two months ago, we have announced initiatives to reduce the wood cost in Portugal, which is in parallel with what's happening across Europe. So if you look to wood prices in Scandinavia or even in Eastern Europe, wood prices have been increasing significantly, actually more than in Portugal, in the last few years. And since probably second half of last year, wood prices have started to decrease. So this will happen as well in Portugal. We will see that already happening again in Q3. So Q2 was below Q1 and Q3 was going to be below Q2. And eventually wood prices in 2027 will keep on decreasing. We need to be careful, however, to make sure that the wood producers, which are mainly small and medium-sized farmers, have enough price to justify and to guarantee they keep interest in planting and developing their forest plots. But yes, I think the big wood prices in Portugal is behind us.

Yes, I think Antonio said the most of it. Some measures were announced in May, mainly regarding top-ups that we have introduced in the recent years for the second semester. And particularly for Q3, we recently announced also a redraw of support for some origins of the embarked route, and we believe that we would have maybe some adjustments more to introduce, but that's something too early to anticipate and to disclose, because we are We are also concerned about, as Antonio said, about the small wood producers and the sustainability of the forestry model that we are pursuing.

And also important, we mentioned that in previous calls, we need to make sure there is no link in the evolution of wood prices and the impacts, the natural or as obvious impacts on forestry, namely by storms and by forest fires. So we have been always very, very careful in separating boutiques. We don't benefit from storms. We don't benefit from forest fires. So we need to be careful to separate the events from this trend of price reduction. Regarding external supplies, I was going to comment.

Okay. The first statement that I want to stress is the fact that on the fixed costs, we are well. This means we are below in what concerns payroll and labor costs. We are below last year, mainly, to be honest, because of the bonus to be paid related to our performance. Our performance is lower than last year. This means the bonus premium is below that amount. In addition, on function costs, we are also below the budget and we are below the normal increase of the inflation. This means we have a slight increase in the figure, but it's really below what is the inflation costs. What we cannot control is the stability in what concerns geopolitical. This means there are some costs that manage or are very sensitive to the politics and now the confrontation in almost threats, namely what concerns logistic costs. That depends a lot on that. And natural gas costs. In addition to that, natural gas costs implies also in what concerns chemicals. But fortunately, we were able to negotiate a fixed price in many of our chemicals in the pulp and the paper sector. And I would say that it's a slight difference. I would say the main instability, it's on logistics and on gas. If that will continue on the next quarters, I cannot make a guess because like we see, there is no war, there is a war. There is no war, there is a war. And I cannot make a bet on that.

OK, thank you very much. Just a third question on terms of your transformation project in UK. I think that now you are pointing to first of all, 2027 to be concluded, while before, I think it was by the end of the current year. So I don't know if you want to comment on this topic.

In fact, we had anticipated first that it could be by the end of this year, and now we are anticipating that it's going to be first off of next year. A couple of reasons for that. First, we are doing this at the same time that we are supplying our customers. So we cannot dismantle one line to re-eract that line in the different location without being sure that we have enough product to supply our customers. So it's not starting a greenfield operation, it's moving existing machines that are busy supplying the market from one location to the other. Secondly, during the process, we have decided to buy new equipment. So we are going to install two new lines, particularly for wet wipes, which is a growing and interesting business. And this implies also the installation of lines that originally were not fully anticipated.

Okay, just to add that in any case, by the end of the year, we should be able to exit all sites that are to be exited and actually to, let's say, reduce all costs that are to be reduced. As Antonio mentioned, we will cautiously need the first half of next year to finalize the transfer of some lines. But most of all cost reduction and all the sites that are to be exited should be done before year ends. Including HR costs.

That's right. It's a significant part of the cost savings is HR, so this includes HR costs.

Okay, thank you very much. So just on the equipment that you mentioned that you decided to buy, to replace the current equipment or is new capacity? Sorry, can you repeat the question? It's very bad going. you you mentioned that you decide to to buy in the process in the transformation process you decide to buy new equipment so i'm asking if it's replacing capacity or it is new capacity to to wear to your uk operation and so actually both we are speaking about two lines uh one line is two new lines.

One line will help us to get rid of older, less efficient lines and another one is a line for a specific type of product that we want to grow.

So we have most. Okay. Okay, thank you very much. Thank you.

The next question comes from Cole Hawthorne from Jefferies. Now your line is open.

Thanks for taking the follow-up. I'd just like to ask on the current fires that are ongoing in Spain and France, is there any potential impact on mills in the area that you're aware of that might kind of tighten the office paper markets? I mean, I know Smurfit Capper has got their virgin container board mill and potentially there's, you know, Gascon might have some procurement issues, but nothing material that I can see on the uncoded fine paper. I'm just wondering if I've missed something or any kind of wood cost increases to your business?

No. Directly in NCO2.3 fine papers, basically in Spain, you have one NCO2.3 producers in the Basque country and the fires are, as you know, in the Avila Madrid region and there is no any significant wood-based the production there. In France, as you rightly said, there are at least two companies affected, both in the packaging, one more in container board and the other one more in flexible packaging, which is one of our competitors in flexible packaging. From the news, we access the same news that you access. On the news we are able to access, it seems that the impact might be relevant. As far as I understand, the closest end quote to the free mill is about 200 plus to 300 kilometers from the center of the forest fires. So, although I don't see a direct impact, I will not rule out the possibility to have indirect impact because the radius of supply for the existing effective mills needs to increase so this might have an impact on wood costs even for that and go to the free mill in spite of being 300 kilometers away from the forest fires region.

Thank you and then just because you've been so helpful in other answers I've got a another one which you might not be able to answer as well but it's it's on Russian pulp and office paper and general supply globally. I mean, we've had now a number of years of the Russia-Ukraine war. We probably haven't had the machine suppliers and the service providers being able to get to those mills and maintain them. And no one's asked the question, as far as I can see, over the last two and a half years from your key competitors on the pulp side, whether there's increased risk of one of these Russian pulp or paper mills going down um just from you know extended downtime and i'm just wondering have you heard anything based on your industry discussions you know is this a risk that people raise or is the russian pulp and paper industry just not really in discussion because people don't have the visibility no the the visibility we have is is very very limited And since the invasion of Ukraine is even less.

Having said that, we have some anecdotal evidence. Some of that paper appears in the Middle East, Turkey, Middle East region, and China. And some of the Pope appears more in China than in the Middle East region, not surprisingly. me. Having said that, I probably read the same reports that you read. People are commenting about the lack of maintenance, the lack of spare parts, the lack of support. So it's not impossible that going forward, the productivity or efficiency of those mills will be seriously affected. But I don't know more than this.

I understand. Thank you very much.

There are no further questions at this time at the conference school. We will start now with the writing questions. The first question comes from Bruna Besa from CaixaBank. About pad prices, you expect some recovery until the end of the year. But prices in China witnessed another relevant decline this week. Why do you expect a price recovery under a backdrop of new pad capacities in China and Indonesia at the end of the year? There have been growing concerns about natural gas, with industry sources suggesting further price inflation and potential shortage of gas in Q4. If euro goes through an aggressive winter, how protected are you against this? What is your stance about merge and acquisition? Should we expect new moves in the short term and what will be the kind of company you might be targeting? Okay.

Regarding price of China, I'll make a comment and my colleagues can obviously follow up. Regarding gas and protection, I'll ask Nunu to comment. Regarding M&A, I think we have already covered this. I don't think we have anything else to add on the previous question on M&A. Prices in China. Yes, we understand and we reckon that last Friday prices achieved about 570 US dollars. And I think it's not even impossible that they will further drop another 10 or 20 US dollars. But we are positive about the recovery on the following basis. The cost of wood in China, both local wood and imported wood, is increasing. So 550 might be most likely the absolute floor, because I don't think at prices below 550, the Chinese producers, the margins of producers will be over and the third quartile will not make any money. On top of that, we understand, and this is one of the reasons why the price of wood is increasing, we understand that there are six severe limitations of wood in Indonesia and most likely these severe limitations of wood in Indonesia are not only the explanation for the increased cost of wood in southeastern Asia, but also on the announced delay of the Indonesian startup from Q4 to Q1. So they are now largely looking to start up somewhere in the middle of Q1. And following that announcement, which also happened last Friday, one, I understand, is another question that has been asked. One Asian player, in this case it was April, announced last Friday formally a $15 price increase on pump. So equating everything together, we expect that the prices will recover and have a continuous recovery towards the year-end. And we also know that even if the new investment in Indonesia will start up by the middle of Q1 2027, it will take some time before new production reaches the market and it's doubtful how much wood they will have available to start up. I'm going to ask any of my colleagues if they want to add anything on this one. complete answer.

The only thing is that stock levels, we are told that stock levels by Chinese, let's say, clients and paper producers are low so they cannot actually afford too much time with arm wrestling with the pulp producers. So that's also a relevant element here.

Actually, it's a very good point because probably one of the reasons, probably, and I'm entering it to a more speculative manner, mostly, probably one of the reasons why prices dropped is because the Chinese buyers were looking to the possibility to buy the startup tonnage from these Indonesian mills, and now they realize that they are not able to buy the startup tonnage and they need to restore their stocks, and they need to buy from existing suppliers. Nuno, do you have to comment on gas, our view on gas evolution and how protected we are?

Yes, I mean, our view on gas evolution and our own gas prices is not that relevant. We have futures on natural gas. They do not look nice, as we know, as of today. Maybe if the conflict eases again, as Fernando was mentioning, we will have maybe better news next week or so. But that's not so relevant for us. I think what we can say is that we are at this moment 60% covered on our natural gas needs in terms of prices. So we're edged 60% fixed price. And so we're not fully edged, but for the majority of our needs, we have our price settled and closed. The same for electricity prices. In fact, it's even higher. The level of edging we have there is around two thirds. So we're basically relatively comfortable with our position. Of course, if there's a huge crisis on energy prices, both natural gas and electricity, the open position that we still have will suffer from them. But we're sure that all the industry will also be affected. And if there's persistence of very high energy prices, we will soon see them reflected on our end product prices, paper, pulp, et cetera.

The next question comes from Jaume Rey from GVC Gasco and his question is after all the operational impact during the first half with the current market conditions is it possible to achieve a bit that margins near average navigator posted in the last decade in the second part of the year?

Well, this is definitely the ambition and the goal towards which we are all working every day. Let me just put here a couple of caveats. First, our EBITDA margin over the last 10, 15 years is about 25 percent without the UK operation, the UK operation being a converter and having the margin of a converter. And because of the size of the operation, this takes 1% to 1.4% every tier margin on our average basis. So let's say that we work towards 23.5% to 24%, 24% on a comparable basis. As we mentioned, we expect a normalization of volumes towards the rest of the year. We expect prices in Q3 in both tissue paper and packaging to be above Q2, but also a very important driver for having significant paper prices, tissue prices, and packaging prices is the price of pork. If the price of coal does not move above $650, $700, it's going to be very difficult to keep on increasing paper prices. Therefore, it's going to be very tough to achieve this 23.5% to 24%. But this is obviously our goal is to be as long as possible for that. Anyhow, we expect in H2 to deliver stronger at the margin in H1.

This concludes today's session. Thank you for joining us. Should you have any further questions, please contact us through the usual channels. We wish you a pleasant afternoon.

Bye.