Navigator Company SA

ELI:NVG

Earnings Call Transcript

[Operator]

Welcome to The Navigator Company conference call. I will now hand over to Joana Appleton. Please go ahead.

[Joana Lã Appleton]

Hello. Good afternoon, ladies and gentlemen. Welcome to Navigator Company Earnings Conference Call for Q3 and for the First 9 Months of 2018. We will start as usual with a presentation on our results. Our CEO, Diogo da Silveira, will make some brief remarks on the main achievements of the period and it will be followed by the pulp and paper market comments from Antonio Redondo. The main financial figures will be addressed by Fernando de Araújo, and we will finish with a Q&A session where the audience can ask questions to the whole executive committee present here today. The presentation can also be accessed through the links available on the website, and questions may be addressed through the webcast platform as well. I will now hand over to Diogo da Silveira. Diogo, please?

[Diogo António Rodrigues da Silveira]

Good afternoon, and thank you for joining us today. The third quarter has been impacted by several factors, and I'm glad to have the opportunity to update and clarify the market on the main issue. So let's start and go over to Slide 3. The company's results for the first 9 months of 2018 reflect the considerable improvement in pulp and paper selling prices, which was partially offset by a reduction in sales volume. The reduction in volumes sold was due to production stoppages, mainly in pulp, which did not occur in the same period of 2017. This happened throughout the first semester, impacting both the first and second quarter. The fact that we started the year with very low pulp inventories as well as the length of those stoppages and the need to build up stocks in the previous months had a severe limiting effect on the quantities of pulp available for sale. Paper volumes were also impacted by low inventories at the beginning of the year and some production stoppages, mainly in Figueira da Foz. Despite these operational issues, the group achieved a record EBITDA figure of EUR 341 million for the first 9 months, an improvement of 14% over 2017 and an EBITDA over sales margin of 27%. Even considering the adjusted EBITDA figure, net of the impact of the pellets business sale as well as the negative impact of the antidumping duties, even though these are record levels. So the antidumping duty rate was one of the main issues that impacted this third quarter. As you know, in August, Navigator was notified by the U.S. Department of Commerce that the final rate on sales made during the first period of review would be 37.34%. This came as a total surprise as we were informed in March 2018 by the very same authority that in accordance with its preliminary assessments, the antidumping duty to be applied would be 0%. There was actually no change on the information provided. Neither any additional requests were made, and yet the rate went from 0 to 37.34%. So of course, we reacted immediately against this decision, pointing to administrative errors in the ruling and took all the legal measures at our disposal to demonstrate that the new rate for the period in question was wholly unfounded. After approximately 2 months, the Department of Commerce reexamined the calculations and decided on the new final rate of 1.75%, quite a change. This, of course, were excellent news as it confirmed that the previous rate was an error and supports our claim that The Navigator Company does not engage in antidumping practices in its commercial activity, neither in the U.S. nor anywhere else. Unfortunately, this had several consequences for the company. We believe the impact of this rate was clearly overestimated by at least some investors, and the share price suffered quite significantly. Also, it brought us additional commercial challenges in the quarter that has typically lower paper activity from a seasonal perspective. In terms of impact in our accounts, this final duty of 1.75% will imply the recognition of a one-off impact of EUR 3.6 million related to the retracted application of this rate of 1.75% on sales for the first period of review, that is to say from August 2015 to February 2017. It will also imply an additional accumulated amount of around EUR 6 million relating to the registration of the duty for the second and the third period of review so far. So the global impact so far is around EUR 10 million and has, of course, been fully registered in our 9 months accounts. The EBITDA for the third quarter was particularly penalized by the negative impact of this antidumping. EBITDA reported was EUR 115 million. But if we do not consider the impact of the antidumping, we would have registered a figure of EUR 123 million, another quarterly record level and an EBITDA over sales margin of 28%. Another significant factor that occurred during Q3 was the start up of production of tissue reels in the Cacia mill site. We're still in the ramp-up phase, of course, but we think this is a very important step in our growth strategy mapped out back in 2015. With this new capacity, The Navigator Company is now the third largest tissue manufacturer in Iberia with total production capacity of, on the reel side 130,000 tons; on the converting capacity side, that's to say finished products, 120,000 tons. The new mill, equipped with a large-scale, sophisticated industrial assets, is integrated upstream with our production, giving it competitive advantages in terms of production costs, use of the high-quality Eucalyptus globulus pulp manufacturer in Cacia, and an excellent location near the Port of Aveiro, which will allow it to sell its products to more distant markets. The fact that the mill is backwards integrated into pulp is a quite distinctive feature of our investment and a very relevant one, namely considering the current market situation of very high pulp prices. As you know, most tissue players in Europe are not integrated into pulp, actually all but 3, so they need to buy the pulp in order to produce the tissue. That is also our current situation in our plant at Vila Velha de Rodão. And the cost of fiber was one of the main items that impacted the tissue business unit results. So one of the other aspects I would like to stress regarding the quarter is that in the context of growing costs in raw materials such as chemicals, fibers and transportation, we recognize that cost efficiency is key to maintaining competitiveness; and, therefore, we've continued to pursue our efforts around cost reduction and operational efficiency embedded in our M2 Programme. The results achieved during the quarter are very encouraging as we have captured an additional EUR 8 million, which do represent almost a double of the amount achieved in the previous 2 quarters, bringing, therefore, the total figure year-to-date, that's to say for the first 3 quarters, to EUR 17 million positive impact on EBITDA. Another aspect that also accelerated as expected was capital expenditure. With the conclusion of the 2 main development projects, CapEx increased to EUR 148 million to date, of which almost half, EUR 71 million, were in Q3. I will end here my main comments on the results. I will be back, but right now, I will hand over to Antonio Redondo, who will give you an update on the markets. Antonio, please?

[Antonio Jose Pereira Redondo, Member of Executive Board & Executive Director]

Thank you, Diogo. Going to Slide 5, we can see that continuing the upwards trends initiated at the end of 2016, prices for hardwood pulp increased an impressive 32% in U.S. dollars and 24% in euros in the first 9 months mainly year-on-year. As a result, hardwood pulp prices in Europe in this period were, on average, USD 233 per ton higher than in 2017. Prices have been spread out since early May for hardwood and since July for softwood. And hence, list price for hardwood pulp in Europe has remained at a level of $1,050 per ton. On Slide 6, we tried to provide a view of what we believe impacted mostly the pulp market during Q3. During the first 8 months of 2018, the global hardwood market pulp demand grew 4% year-on-year, driven mainly by eucalyptus with 4.7%. China demand for hardwood increased 9.1% year-on-year with eucalyptus growing at 10.2%. In a more global context, we saw an increase in available pulp due to the ramp-up of new capacity that started last year, namely last quarter -- or the third quarter of last year in Latin America. And at the same time, there have been planned and unplanned stoppages and output reductions that decreased once again total availability in the market, and this allowed prices to remain at a very stable level throughout the quarter. Also, with softwood prices growing significantly since the beginning of the year, increasing 23% year-to-date, the gap between the 2 fibers has grown, currently standing at approximately USD 100 per ton in Europe, giving further support to hardwood prices. We have also seen some slowdown in activity in China, yet we believe results from a combination of factors impacting Chinese economy. The trade wars between China and the U.S.A. have created a major uncertainty and instability in the business climate, which together with the seasonal activity decline, has resulted in slowdown of economic and investment activity in China. The Chinese currency devaluated 6% between June and September, which has made pulp imports even more expensive in the moment when it was not possible to push paper prices upwards. These are, in our view, temporary issues that might impact the pulp markets, but we believe the fundamentals remain very strong. There is no significant capacity coming to the market in the next 2 years at least, and demand is estimated to continue to increase at current levels or above. There was new paper capacity starting all over the world and in China in 2018, both in tissue and uncoated woodfree, in a total that we estimate to be close to 4 million tons, which impact on demand for pulp and will be felt mainly in the second half of 2018 and beginning of 2019. We also anticipate more production stoppages in Q4 than the ones we had in Q3. Issues around wood availability have also been imposing some restrictions in pulp production, both in softwood and hardwood and will likely continue to see conversions of hardwood capacity into other grades such as dissolving pulp and softwood, which will impact the market shortly. Going now to the paper market on Slide 7. We will show that uncoated woodfree paper continued to be the most and best-performing printing and writing grade globally. The slight decrease of 0.2% year-to-date August is, by far, the lowest percentage decline among printing and writing grades. Now if you go to Slide 8, we summarize what we believe are the specific conditions of the uncoated woodfree market, and we can say that the global market conditions continues stable, even though with some differences amongst regions. Europe, our main regional market, experienced some cool-down in demand for office papers during the first 8 months, which we attribute mainly to [ percentage high ] stocking to the pipeline earlier in the year. Actually, the performance of paper for graphical applications was better than that for office applications. In the U.S., consumption continues to decline but at a much lower pace than in previous periods. Despite this apparent consumption decline, mills operated at high levels -- 91% year-to-date -- and carried solid order books. In other regions in the world, North Africa and Middle East, mainly, are experiencing some difficulties due essentially to recent currency devaluations, credit availability and political stability, pressuring paper imports. Taking a closer look at prices for uncoated woodfree on Slide 9. We can see that the main index, A4 copy B, continues to perform very positively, gaining 7.2% on average versus the same period last year and ended the quarter at EUR 890 per ton. Back to you, Diogo.

[Diogo António Rodrigues da Silveira]

Thank you, Antonio. Following on Antonio's words, I would like to go over the group's performance into more details. So let's go over to Slide 11. During the first 9 months, we sold 1,137 [ thousand ] tons of paper, recording a 2% year-on-year decline on volume, which was mainly due to operational issues. Still, we managed to improve our product mix with not only higher share of premium products, gaining 6 percentage points year-on-year; as well as mill brands with an additional 7.4 percentage points. We also led 3 price increases in Europe and several in international markets and in the U.S. These actions translated into a net increase of 7.8% year-on-year on our paper price, even considering the negative impact that the exchange rates and especially the U.S. dollar had on our profitability, maybe around EUR 30 million. If we had stayed at constant exchange rate as last year, the price increase would have been around 10%. Our pulp business, now on Slide 12, had a more considerable impact on the production stoppages that occurred during the first and second quarter. Pulp mills lost a significant amount of day due to maintenance downtime as well as the expansion project at Figueira da Foz. And with very low inventories at the beginning of the year, we haven't been able yet to recover the lost production. This reduction in volume was partially offset by the increasing sales price with Navigator's average sales price improving 24% year-on-year. Our pulp sales were focused on our regular clients and the greater weight of sales directed to the highest contribution segments of decor and special papers, which together went from 57% to 76% of our total sales. This was achieved during the first 9 months. Going now to the tissue business on Slide 13. We managed to increase global volumes sold by 9.2% year-on-year with mainly a growth of almost 24% in the sale of converted products. This already includes the output from the new converting lines installed in Cacia. The reduced weight of reels and the increased percentage of finished products allowed for an improvement in our average selling price, which together with the price rise we also implemented, translated into a figure of 7% growth in the average tissue price for Navigator. Nevertheless, the higher average tissue prices is still not enough to absorb the increase in production costs, in particular, the price of pulp, both hardwood and softwood as well as of chemicals. So in this context, our EBITDA in the first 9 months totaled EUR 341 million which do compare to EUR 300 million in 2017, as you can see on Slide 14. This increase was essentially due to the significant price improvement of both pulp and paper prices. As we mentioned previously, volumes had a negative impact on EBITDA, and some costs also evolved negatively during the period. Production costs have again been pushed up by negative trends in chemicals, impacting our variable unit production costs of both pulp, paper and tissue. We would say a global estimate of EUR 8.3 million of impact. Also fiber costs increased approximately EUR 9.1 million, essentially due to the acquisition of hardwood fiber for the tissue operations at Vila Velha de Rodão as well as the prices of softwood pulp in our other plants. Logistic costs also increased by EUR 2.1 million, largely due to higher Brent prices. In fixed costs, payroll costs produced the most significant increase, plus EUR 14.4 million as a result of workforce expansion associated with the new tissue project in Cacia; associated to the rejuvenation program underway; and an increase in our estimate of performance bonuses, which are indexed to our quite healthy results. So we experienced an increase in these cost items that would have had a greater negative impact if we hadn't also worked, as we mentioned, on the cost-reduction measures that we do explain on the next slide. Contributing positively to EBITDA is the sale of the pellet business already reported. This was partially offset by the negative impact of the antidumping duties, which we registered in the third quarter accounts. So EBITDA figure for 9 months 2018 would have been EUR 338 million if these 2 key impacts would not have occurred. Going to Slide 15 now. I said previously, with the results of our M2 cost reduction program where we achieved a positive impact of roughly EUR 17.2 million year-on-year on EBITDA. This is the result of roughly 143 new initiatives that have been launched since the beginning of the year to cut costs. We have around 85 of those initiatives already yielding a positive impact. Just to give you some flavor of this program, we have included projects such as improving efficiency at our new PM4 in Setúbal, representing the outcome of an area of continuous improvement initiatives with a year-to-date savings of close to EUR 1 million; or optimization of chemicals consumption, namely in chlorine dioxide production in Cacia by upgrading sulphates filtering with a year-to-date impact of again almost EUR 1 million. Third example, reduction in consumption of bleaching agents at the Figueira da Foz industrial complex with a year-to-date impact of around EUR 700,000. In addition to all those initiatives that are reflected in the P&L, the renegotiation of power and natural gas contracts resulted in an estimated avoided costs of close to EUR 28 million versus market prices. I will now ask Fernando to comment on the next slides.

[Jose Fernando Morais Carreira de Araújo, Member of Executive Board & Executive Director]

Thank you, Diogo. On Slide 16, we have some detail on the evolution of our free cash flow, which stood at EUR 161 million. Free cash flow was positively impacted by a strong operating cash flow as well as an inflow from sale of the pellet business, totaling EUR 68 million and negatively affected by capital expenditure over the period of EUR 148 million, largely associated with the construction of the new tissue mill in Cacia. In the third quarter, generation of free cash flow, EUR 8.5 million, was significantly constrained by the concentration of CapEx dispersal in the period, EUR 71 million, combined with a sizable corporate tax prepayments totaling EUR 24 million. So at the end of our third quarter, as you can see on Slide 17, the group net debt stood at EUR 732 million, up by EUR 39 million from year-end 2017, which stood at EUR 693 million; as a result of payment of dividends around, or in fact, EUR 200 million exactly in June and capital expenditure of EUR 148 million during the period, as already mentioned. Net debt-to-EBITDA stands at 1.65 ratio, which is already reduction from the peak level of 1.7 at the end of June and should reduce even further by year-end. Just a couple of additional details for your benefit regarding our debt profile on Slide 18. At the end of September, our total debt had an average maturity of 2.9 and an average cost of 1.5%. A significant portion of the debt is fixed: 63% versus 37%. And there are no significant reimbursements scheduled before 2020. Going now to Slide 19 with financial results. Navigator recorded a financial loss of EUR 16.5 million, up from a loss of EUR 6.5 million last year. Even though we registered a reduction in the cost of funding in our operations, results evolved negatively mainly due to the following points: a drop of EUR 5 million against currency hedged, taken out by the company in a rising dollar scenario, with a positive impact on operating results; the recognition at the end of the first quarter of a negative amount of approximately EUR 3.3 million, resulting from the difference between the nominal value and the current value of the amounts to be received in the coming years from the sale of the pellets business around EUR 45 million; and at last, a loss of EUR 1.5 million from application of surplus liquidity, in opposition to a [ seemingly ] positive performance in 2017. Finally, our CapEx as we turn on Slide 20. The group recorded capital expenditure of EUR 148 million in the first 9 months, with EUR 71 million in the third quarter versus EUR 49 million in the second quarter. With a value of EUR 75 million, the Cacia tissue project represent around half of the total investment; the capacity expansion in Figueira da Foz, around 19%, EUR 28 million; and investment in regular pulp and paper business, around EUR 46 million. Back to you, Diogo.

[Diogo António Rodrigues da Silveira]

Very good, Fernando. Now just a few words on our outlook for 2018 on Slide 22. As Antonio said earlier, there are no significant new increases in production capacity for market pulp being announced for the next 3 years. So capacity utilization rates can be expected to increase and allow hardwood pulp prices to stay above the USD 1,000 per ton mark in those 3 coming years. In the short term, demand continues solid. And supply disruptions, due to planned and unplanned stoppages, are cushioning the impact of the new capacity that started up last year. In uncoated woodfree paper, order books remained at a high level. After leading a series of price rises in Europe and also, increasing prices in the U.S. and in international markets during the first 9 months of the year, The Navigator Company implemented a further price increase from October in our European markets. In the tissue markets, manufacturers have been under very heavy pressure from increasing pulp prices and in the cost of chemicals and energy. Navigator announced new price increases of between 8% and 12% for its products in November. At the same time, the company's new tissue mill in Cacia started producing reels in September. A strong commercial performance in recent months allows us to anticipate a successful placement of the new output with clients. However, this positive context may be affected by increasing certain costs, especially for energy. And there are also continued concerns about the evolution of exchange rates, namely euro to U.S. dollars. Operations in the fourth quarter will be constrained by some production stoppages programs for November and December at our Setúbal mill site. The most significant one is related to the heavyweights project, which will imply 10-day production stoppage at our PM 3. The Navigator Company continues to develop its business model successfully, acting proactively in relation to factors under its control, seeking to achieve continuous improvement in its performance and reducing its cost structure. Furthermore, we believe to have proven to be able to successfully overcome several adversities with which we have been confronted. The last such event occurred on October 13 after the end of the reported period with the impact of Hurricane Leslie, which caused damage at our Figueira da Foz production center, forcing to suspend temporarily operations. With the efforts and remarkable performance of local teams combined with support and engagement from various multidisciplinary teams within the group, the work on repairing the damage started immediately and allowed to minimize production stoppage, with the top line and PMs 1 and 2 quickly going back into operation. Nonetheless, this stoppage will cause an estimated production loss of approximately 9,000 tons of pulp and circa 10,000 tons of paper. Thank you.

[Joana Lã Appleton]

Thank you, Diogo. This concludes our comments on results. We are now ready for the Q&A.

[Operator]

[Operator Instructions] The first question comes from Maksym Mishyn from JB Capital Markets.

[Maksym Mishyn, Vice President]

I have 3. First one is are you happy with the current inventory levels because they've been low in the end of 2017 and you have been restocking through the first 3 quarters, or you plan to continue restocking in the first quarter 2018? The second question is could you talk a little bit more about the outlook for the paper market, particularly -- I'm particularly interested in first half results. You mentioned that some of nonintegrated producers were operating at negative margins. Do you see this trend continuing in the third quarter? And finally, the third question is with the tissue expansion and debottlenecking investments are now complete, do you have anything in mind for the future? Should we expect CapEx to converge to the levels of maintenance next year? And particularly, will the Leslie hurricane impact have -- will increase the CapEx in the first quarter?

[Diogo António Rodrigues da Silveira]

Very good. Thank you for the 3 questions. So Antonio Redondo will address the first 2 ones, the one on our level of happiness related to our inventory level and also our happiness as regards the outlook on paper. I'll then take the question on any additional new projects. Antonio?

[Antonio Jose Pereira Redondo, Member of Executive Board & Executive Director]

Thank you for your questions, and we are yet at a level of stocks that is not totally comfortable to make sure we service the market properly and without any disruption. So I don't know how do we find happiness in stocks. It's a new measure that I'm not yet fully acquainted with, but I think we can still accommodate more stocks because we are not at the level -- we usually operate with very low stocks. We are not at a level that is completely easy to operate with, in a stressed supply chain environment. Regarding to your question number two, I believe that the prices of pulp have been stable in the last few months and is -- the trend is very clear. Paper prices have been improving, and have been continuously improving, and the last price increase was in October. So this for sure has given some at least temporary relief to the nonintegrated paper producers. Thank you.

[Diogo António Rodrigues da Silveira]

So on the new projects, currently, as far as growth is concerned, we have no new big project underway. We have projects related to environmental constraints that we have to clear that we are always looking at, and we might have some coming up. But as far as new growth projects, there is nothing. However, we will be starting soon some strategic thinking, I would say over the course of the coming 3 to 4 months to revisit our strategy and see whether there are opportunities that appear that we should be considering. So we potentially would have some more news on this during Q1 next year.

[Operator]

The next question comes from José Rito from Caixabank BPI.

[José Manuel Rito, Analyst]

So my first question related to these pulp prices. So pulp prices stand at USD 1,050 per ton. But we have been seeing some new signs that some discounts have been applied in China. How do you see this? Have you noticed also some of your clients in Europe asking for discounts? Or this is only a specific issue in China, and you don't think that this will basically spill over to other markets? That will be my first question. My second question relates to paper volumes. Considering the hurricane and the stoppages that are expected for the last quarter of the year, should we assume a further 20,000 tons decline year-on-year for the last quarter of the year? This is a good reference. Thirdly, on the tissue business, if you could provide a little bit more visibility in terms of margin evolution for this year and for 2019. We have been witnessing some prices -- price increases announcements recently. Do you expect in 2019 margins to be at least the same level as in '17? So basically offsetting this recent increase in pulp prices. How do you see this evolving? And also, because we know that we have these increased capacity in Iberia and the fact that pulp price has been increasing, so pressuring the profitability of some of the players. Do you see some M&A possibility in Iberia?

[Diogo António Rodrigues da Silveira]

Very good. So on the pulp prices and impact on sales coming on from -- potentially from -- lastly, we will have Antonio addressing that issue. I will then take the questions on tissue, trying to give you some more visibility there. So Antonio?

[Antonio Jose Pereira Redondo, Member of Executive Board & Executive Director]

Thank you for your questions. As you know, we are not a big maker of pulp sales into China. However, from the market reading we have and from the customers we work with and discuss with, we believe that most likely, the evidence about discount has been somewhat largely resurrected. We see prices and for list prices in China more stable than what some market analysts explained. Although we recognize that particularly in the month of August and probably early September, same discounts have been applied, mainly not directly by mills selling to China; but by traders that were piling up stocks because of the fact that we have explained, the slowdown of economy activity in China, the slowdown of the investing activity. And this pile up of stocks of pulp led them to destocking and offering higher stocks. This is already in China, which is not totally coincidence, I believe you have said. Regarding Europe. Obviously, customers are always asking for higher discounts. But always as well, our answer is typically the same. We are not equipped to discuss higher discounts. So we don't see the risks of a spillover effect if this effect in China is really as clear as some people mentioned, which we don't believe being the case. Regarding your second question about paper volumes affected by hurricane, by the hurricane. We expect this to be, ballpark figure, around 10,000 tons...

[José Manuel Rito, Analyst]

Yes, but on hurricane plus the stoppages for the conversion of paper into heavyweight, you mentioned that you should also have some hiring part in terms of production. So combining the 2, 20,000 tons could be a good reference?

[Antonio Jose Pereira Redondo, Member of Executive Board & Executive Director]

Yes, sorry. I thought that you're commenting on hurricane level. I think the ballpark figure for the 2 might be then closer to 20,000.

[Diogo António Rodrigues da Silveira]

Yes. I was starting to answer the question on tissue margins and consolidation and M&A. I mean, the very high pulp prices have clearly depressed our margins in tissue, so I mean, I was like any other tissue player. We have, of course, to see that because this is a market where over 95% of the production is nonintegrated. So we will have clearly an EBITDA margin that, at the end of the year, that will be below 10% of our sales, which is, of course, not our objective. But we clearly believe that next year, we should be able to recover, if not all, part of what we have lost during this year, thanks mostly to the price increases that we are now implementing. So a tough year, 2018, for the tissue; certainly a much better year, margin-wise, 2019. As far as M&A and consolidation is concerned, for sure, the tissue market is a very fragmented market. You have 2 industrial steps in tissue: the jumbo roll production just like in uncoated woodfree paper; and the converting facility, which is not so relevant in uncoated woodfree paper because you just cut in tissue. You cut, you emboss, you roll, you do a lot of things. So certainly, there will be consolidation, at least among the converting facilities. There are lots of them and potentially among rolls, jumbo roll production. But this is higher investments issue. Overall, we believe, yes, that it is a market that will certainly go through consolidation. There are currently many -- at least, several industrial tissue assets up for sale, even groups of them; that's to say, some companies or parts of tissue companies are up for sale. So yes, it is expected to -- we expect to see consolidation. What could be our role there? For the time being, none. But by -- as I said before, by Q1 next year when we'll be clearer on the different investment opportunities in our different businesses, we will be able to prioritize and make decisions. Until then, I don't see anything happening on our front.

[José Manuel Rito, Analyst]

Just a clarification. So at this point, you are not considering because you are not -- you have not decided to move forward with potential M&A? Or because of pricing? So you still see these assets available-for-sale as full pricing, let's say, versus organic growth...

[Diogo António Rodrigues da Silveira]

Yes. As we have said, one of the interest of being in tissue is that it allows for a very modular approach. So we have to go step-by-step. I would -- before we do any additional big move in tissue, I would like to see the result of the current move, which is quite sizable. This greenfield investment means doubling the capacity. So I would like to be sure that we are -- that we know how to be a player in tissue before we do an additional move. So currently, it's mostly an internal perspective. We have to prove ourselves that we know how to be a profitable player in tissue before moving further in this market.

[Operator]

The next question comes from Nuno Estácio from Haitong Bank.

[Nuno Estácio, Equity Research Analyst]

Just a couple of questions. The first one would be if you see room for you to keep increasing both on uncoated woodfree and tissue prices, although pulp prices are not stable. And as you've mentioned, paper prices are still going up. So do you think these trends can continue for a couple of quarters more, even if pulp prices stay stable? Second question would be on your strategy regarding U.S. paper sales. Considering all that happens with this antidumping taxes in the U.S., are you more cautious now into the U.S. because eventually, the U.S. Department of Commerce becomes more harsh again? What is your view on this? And what are you doing internally to defend or to protect yourself from this? The third question would be in terms of CapEx. First, I would like to ask you what is this paper heavy-weight investment. And what -- essentially, what will be the impact of this? And if you could give us the CapEx budget for fourth quarter and for 2019, it would be helpful.

[Diogo António Rodrigues da Silveira]

Very good. We'll do our best, even though I'm sure we'll not be able to answer all your questions. But I would also ask, if I would be in your shoes. So first, we'll start with Antonio trying to share our thoughts on uncoated woodfree price evolution even with stable pulp prices; as well as what we've been considering for the U.S. because, of course, we have been thinking quite a lot about this. I'll then take the -- share the views on tissue and address the CapEx issue as much as I can. Antonio?

[Antonio Jose Pereira Redondo, Member of Executive Board & Executive Director]

Thank you for your question. Indeed, we still see room for improvement on uncoated woodfree paper prices. Even in a scenario of pulp, or even milder decline pulp prices, which we don't consider, but is not an impossibility. The papermaker's margin is today, still very low even if it's better than it was a couple of months ago because of the last paper price increases. But we do believe that there are still more room to increase prices. And I'm not sure if it's going to be as quick and as timely as it was during this year, which was basically once per quarter. But for sure, the room is there. Regarding U.S. paper sales, we have always been extremely cautious with our U.S. paper operation. Not because of the antidumping, which, by the way, we keep on explaining and denying: we don't do any kind of dumping into our U.S. paper sales. And the exercise that we were exposed since early August until early October was actually quite interesting because our largest -- we have a fresh look into the U.S. market. And even with the new antidumping rates, we have decided to keep a lot of the actions that were defined during these 2 months' period between August and October. So we will keep being cautious, as we have been so far, and keep looking to the U.S. market. We don't have an intention to abandon the U.S. market. We didn't have that intention, even with 37.34%. But of course, if you'll oblige us to do some fine tuning, now we have the luxury of having more time and more room to maneuver for this fine tuning.

[Diogo António Rodrigues da Silveira]

On the tissue prices, I am not sure that in 2019, we'll be able to again introduce price increases. But for sure, the -- we will be recognizing the impact of the very significant price increases that we have been applying in October, November and December. Clearly, those tissue price increases did come, I would say, late. It was not possible to get them through before. But as they came later, they came higher. So the clearly average price in 2018 -- 2019 will be much higher than in 2018 even though I don't see additional price increases, namely in the consumer segment. I see this difficult. On the CapEx issue, so first question you mentioned was about heavyweight. As you know, among our range of uncoated woodfree products, you have what we call heavyweights. These are grammages above, say, 120 grams. That goes up to 300, even 400 grams. We mostly outsource, currently, those papers in 2 plants. And we -- this is quite an interesting market segment. And we want now to be able to produce most of it in our own facilities. Therefore, in one of our PMs in Setúbal, we will be investing between EUR 10 million and EUR 12 million to adapt the machine to be able to produce heavyweights. Then you asked our numbers for Q4 and for 2019 CapEx. It's tough for us to say as we don't give, as you know, those forward-looking statements. But we have no big growth project currently for 2019. So if it stays so, the total CapEx will certainly be lower than it was in 2018.

[Operator]

[Operator Instructions] The next question comes from Antonio Seladas from InterMoney.

[António Seladas, Analyst]

The first question is related with the energy, with your energy policy and hedge policy. If you're comparing on the press release about energy prices, so when are we going to feel the impact of the higher energy prices on your figures? If you can explain. As far as I understand also, you are net buyers of energy, but do you also sell energy? So if you could provide some color on this. Regarding the tissue prices, to confirm that on the consumer market, you cannot increase prices. So that was, I think, the [ switch ] is to confirm it. And in terms of working capital, working capital also went up from the second to the third quarter sequentially. If you can explain the reasons for that. And lastly, the last question is related with a couple of minutes ago, you mentioned that when you talk about the investment on tissue and the market is fragmented and needs to be a consolidated. From my point of view, I think that maybe in the future, you're able to buy some converters, but I'm not expecting that you buy -- the tissue mill is not integrated. Could you provide us some color on this? Okay, that's it.

[Diogo António Rodrigues da Silveira]

Sure. So the first question was on energy. So I'll try to address all the questions, except working capital, where I will ask Fernando to address it. So energy, yes; I mean, the current energy prices are clearly on the high side. So we expect our 2019 figures to be quite impacted by higher energy prices. So I cannot yet share with you by how much, but it will be significant. Second question was on consumer tissue prices. Maybe I was not very clear. We have been able to increase prices even in the consumer segment. That's to say at the key retailers, both in Portugal, in Spain, in France, in the U.K., and quite significantly. But I don't think we will be able to add an additional price increase unless pulp prices move up. But as we don't see pulp prices moving up, we see tougher to introduce a new significant price increase in tissue. So as I said, I will leave working capital question to Fernando. So -- then you had a question on the M&A opportunities and the fact that there could be nonintegrated opportunities, and that is not our current strategy. So you are right. But in tissue, to be an integrated player or a fully integrated player, you have 3 production steps. First step, the pulp; second step, the jumbo reel; the third step, the converting lines. I can be integrated, pulp to jumbo reel, but I can then transport my jumbo reel and get it converted in the local market. So we could potentially -- we are not considering any, but we could potentially acquire some converting facilities, given that our -- the way currently we see our model, our business model, to go further into Europe would be exactly this one. If the jumbo reel production in Portugal so as to benefit from the backward pulp integration, but get converting lines in the local markets so that we don't transport too much air. And finished goods of tissue have lots of air in it. So we would be transporting jumbo reels and having them converted locally. With that local conversion, we can either consider greenfield or we can buy a converting line. So we could be looking into those options potentially in the future, not before Q1 next year. So now I hand over to Fernando to be more explicit on the increase we had on working capital.

[Jose Fernando Morais Carreira de Araújo, Member of Executive Board & Executive Director]

On the working capital, in what concerns operating cash flow, the income of the cash gains of the third quarter was EUR 83 million, less EUR 9 million than the average of the previous ones. But the main difference, it's on the investment because our CapEx in the period was EUR 71 million, and the CapEx part on the 2 previous quarters was EUR 77 million. This means almost the same. In addition to that, we have 2 main amounts related with corporate income tax. On one side, we applied EUR 24 million on prepayments on accounts on the corporate income tax. And we have to receive more or less EUR 11 million from the corporate income tax related to last year. This should have been reversed -- reimbursed by the state in August. But we are nearly November and we didn't receive it yet. I would say, to summarize, more CapEx and more taxes. On clients and inventories, it's more or less the same difference it's been in years.

[Operator]

The next question comes from Alberto Sanchez from Fidentiis.

[Alberto Sánchez Salazar, Equity Analyst]

I've got a question on capital allocation. It looks that the pricing environment would remain favorable next year and you would face lower CapEx requirements. So my question would be: what do you think about the ways to deploy that capital? You mentioned about potential new opportunities. How do you think about your leverage targets have the potential to reduce that further, the possibility of increasing dividends? How do you think about that?

[Diogo António Rodrigues da Silveira]

Very good. Not an easy question, but I'll try to give a simple answer. I mean, we have been having over, the last years, I would say, a policy that features the following 2 aspects. First, trying to have a net debt-to-EBITDA below 2; so we are currently comfortable below that, and clearly don't expect to cross that barrier. Second, we have been -- we are now used to having the general assembly of shareholders go for a reasonable dividend that over the last years, has been around EUR 200 million. So we would be ready to cope with such a figure. So if we have low CapEx needs, we'll just be decreasing that. We don't believe we'll be suggested to increase the dividend, but we don't know. As you know, the executive team does not make a decision there. And on the other side, we don't anticipate currently to have such a high CapEx that would question the net debt-to-EBITDA level. Again, as I said, we will know a lot more on that by the end of Q1 next year as we are embarking on this strategic thinking; the same one we did, in a way, now 4 years ago; and that's yielded in namely in entering the tissue markets. This time, let's see. The context has changed. The environment, there are certainly opportunities. There are also threats. So we will know a lot more in a couple of months.

[Operator]

Ladies and gentlemen, there are no further questions in the conference call. I now give back the floor to the company. Thank you.

[Joana Lã Appleton]

Thank you. This now concludes our conference call for today. Thank you very much.