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Edited Transcript of NVG.EP earnings conference call or presentation 12-Feb-20 8:00am GMT

Full Year 2019 Navigator Company SA Earnings Call

Setubal Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Navigator Company SA earnings conference call or presentation Wednesday, February 12, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* António José Pereira Redondo

The Navigator Company, S.A. - CEO, Member of Executive Board & Executive Director

* Joana de Avelar Pedrosa Rosa Lã Appleton

The Navigator Company, S.A. - Head of IR & Market Relations Officer

* João Nuno de Sottomayor Pinto de Castello Branco

The Navigator Company, S.A. - Chairman of the Board

* João Paulo Araújo Oliveira

The Navigator Company, S.A. - Member of Executive Board & Executive Director

* Jose Fernando Morais Carreira de Araújo

The Navigator Company, S.A. - Member of Executive Board & Executive Director

* Nuno Miguel Moreira de Araújo dos Santos

The Navigator Company, S.A. - Member of Executive Board & Executive Director

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Conference Call Participants

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* António Seladas

A|S Independent Research - Analyst

* Bruno Filipe Bessa

Banco Português de Investimento, S.A., Research Division - Analyst

* Carlos de Jesus

Caixa - Banco de Investimento, SA, Research Division - Analyst

* João Calado

Banco de Investimento Global, S.A., Research Division - Analyst

* João Filipe Pinto

JB Capital Markets, Sociedad de Valores, S.A., Research Division - Associate of Equities Research Portugal

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to The Navigator Company conference call. I will now hand over to Joana Appleton. Please go ahead.

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Joana de Avelar Pedrosa Rosa Lã Appleton, The Navigator Company, S.A. - Head of IR & Market Relations Officer [2]

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Thank you. Ladies and gentlemen, welcome to The Navigator Company conference call and webcast for the full year 2019 and Q4 results. Participating in the call today are the following members of the Board: João Castello Branco, António Redondo, Fernando de Araújo, Nuno Santos and João Paulo Oliveira.

As usual, we will start with a brief presentation of the main highlights of the period, and we will have a Q&A session at the end.

The presentation can be accessed through the links available on the website, and questions may be addressed also through the webcast platform.

João will start with a comment on the main figures reported in this period, and António will follow with an overview of the pulp and paper market. Nuno Santos will comment on the tissue business, and João Paulo Oliveira on CapEx. Fernando will address the main financial issues. António will close the presentation with the outlook for 2020 and his priorities for The Navigator Company.

I will now hand over to João. João, please?

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [3]

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Good morning, and thank you for joining us today. I will start by making some brief comments on the overall results of the year. As discussed in previous quarterly results presentations, 2019 has been a record year in terms of pulp prices and therefore, results for the industry, and Navigator has been no exception, with record results as well. Unfortunately, in 2019, market context turned around and has been particularly difficult with a significant decrease in pulp prices throughout the year, depressed demand in Europe and the severe destocking process across the paper supply chain. In parallel, economic conditions were also unfavorable with high geopolitical instability, severe increase in major cost factors and softening of economic growth, this last aspect being of particular importance for the consumption of paper.

So external conditions have been very difficult, and on top of this, our operating performance also experienced some issues. We had several strikes across the year in several mills, some prolonged stoppage and some nonrecurring issues that affected our production levels and costs. We believe most of the issues that are within our scope have been identified and dealt with. As to market conditions, we expect to be at the lower end of the price cycle, but we cannot, at this point, anticipate how fast the market will recover. That said, we remain very confident that Navigator's integrated business model will continue to prove its strong resilience and sustainability in these market conditions.

So let's start with the presentation and go over to Slide 4, where we have an overview of the main figures for 2019. Navigator registered a stable turnover over the period of EUR 1.688 billion of sales. Decline in pulp prices and reduction in paper volumes were partially offset by higher pulp and tissue volume. EBITDA totaled EUR 372 million, declining 18%. And margin, EBITDA sales -- over sales stood at 22%, reflecting a market context of higher production costs and declining pulp price. As you will be able to notice, these developments are not uncommon to the rest of the industry and again, reflects a market of record pulp prices in 2018 and quite the reverse towards the second half of 2019.

We maintained a strong generation of free cash flow in the period with EUR 186 million comparing to an adjusted free cash flow without pellets of EUR 143 million in 2018. Over the course of the year, we paid dividends in the amount of EUR 200 million, a similar amount to the one paid in 2018. And we have also proceeded with a share buyback of approximately 5.5 million own shares, investing around EUR 18 million, a clear sign of confidence in our stock.

If we turn now to Slide 5. We have a summary of the main highlights for Q4 2019. The Navigator Company registered a turnover of EUR 414 million in the quarter, 1.6% below turnover registered in Q3 2019. The increase in pulp volumes was not enough to offset the reduction in tissue volumes and the decrease in pulp price. Also, industrial performance was particularly impacted in this quarter by a series of operational issues that I will detail on the next slide. EBITDA in the quarter totaled EUR 72 million, reflecting a context of continued lower pulp prices and especially higher costs and fixed cost booking.

Let's, therefore, turn to Slide 6 with a little bit more detail on Q4 performance. The market conditions remained tough during the -- throughout the quarter with weak European demand for both pulp and paper. Pulp prices continued their descending trend and declined 14% over Q3 2019. And the benchmark for paper prices also came down, but of course, in a more contained manner, declining 2% in Q4 versus Q3. In this context, we have also experienced a 9% lower than the market decrease in pulp prices and a practically stable paper price, with a slight decline of 0.8% Q-on-Q. In terms of volumes sold and in spite of the adverse market conditions, we have actually experienced a 10% Q-on-Q increase in pulp volumes and stable paper volumes.

Beyond pulp prices, therefore, Navigator's Q4 performance was essentially hampered by 2 short-term cost effects: operational instability due to the global strike that impacted our pulp and paper mills in Figueira da Foz and Setúbal as well as the tissue mill at Vila de Velha de Ródão and the prolonged maintenance at the Aveiro tissue mill, around 22 days. This situation explains adverse Q-on-Q cost effects associated with higher specific consumption of energy and chemicals. Additionally, fixed cost booking effects also had a relevant impact on Q-on-Q EBITDA evolution. Free cash flow generation over the quarter was actually quite strong, backed by our sustained working capital management efforts.

Let us go now to Slide 7, where we have some detail of the EBITDA evolution over the year. As mentioned, we had -- we registered EUR 372 million of EBITDA versus EUR 455 million last year, for 2018. When looking at the delta between these 2 periods, we see that the overall price impact was negative and explains more than 60% of the EBITDA decline year-on-year. This was mainly due to the severe decline in pulp price, minus 20%; not so paper prices, which have actually remained stable versus 2018, actually a slight increase of 0.4%. This, of course, reflects an average number on a declining trend, which has, nevertheless, remained remarkably resilient in spite of market conditions.

In tissue, price for converted products and tissue reels evolved positively by 3% and 2%, respectively. But due to product mix effects impacted by an expected increase in sales of reels, average price for tissue products presented a 4% reduction year-on-year, though overall volume performance had a positive impact, namely from pulp and tissue, which helped balance the impact of decreased paper volume. We registered strong volumes in pulp, plus 24%; and tissue, plus 52%, sustained on the capacity increases completed in 2018 for both businesses. These increases outbalanced the reduction in paper [and pulp] volumes in the period of around minus 4%, and the overall volume impact, as said, has been actually positive.

The other element that relevantly explains Navigator's EBITDA evolution year-on-year are costs. Most of these have to do with the market context of some of our main variable cost factors. A lesser factor, however, has also been related with the cost impact of operational instability and labor-related stoppage in some of our plants. More specifically, the cost of acquisition of electricity and natural gas has significantly increased in 2019 compared to 2018, about 17% in the unit cost of electricity and 25% in the unit cost of natural gas, essentially resulting from the increase in Brent prices and COT -- CO2 emission license, with a strong impact on electricity prices. CO2 licenses increased from EUR 16 to EUR 25 per ton over the period.

Also in 2019, there was a drastic price increase for the main raw material required for OBA production, DAS. These are optical brighteners used in production of paper. Since early January 2019, the price of this material has increased by around 300%, dragging the prices of different OBAs up to 90% as DAS is incorporated into each type of OBA. The reasons for this increase are related to measures taken by the Chinese government as well as the opportunistic behavior of the main suppliers of this raw material. Navigator's product mix, biased towards high-bright premium products, is more impacted than others.

The U.S./euro rates also impacted -- was at 1.12 comparing with 1.18 in 2018. Considering that several input costs are purchased in U.S. dollars, non-Iberian wood and certain chemicals, the valuation of U.S. dollar against the euro also contributed to cost inflation. There were some positive evolutions in terms of costs, namely in external fiber related to purchases of softwood pulp and also hardwood pulp in Vila Velha de Rodão for tissue. Fixed costs evolved negatively with an increase of approximate 3%, with negative performance in operating and maintenance costs offsetting improvements in personnel costs.

So just to wrap up, 2019 was a year when we were faced with several challenges internal and external to the group. Externally, we and the industry have had a period of quite challenging market conditions following a record year, with seriously declining pulp prices and weak demand in our core markets. Yet, we managed to have a good commercial performance, particularly in paper, where we were able to manage the impact on prices and partially offset declining volumes. Internally, we had to deal with operational instability and labor issues and the repercussion of this production instability in terms of costs. We also had to deal with external factors that impacted our profitability, such as higher prices for wood chips, energy and chemical.

Moving forward, we expect 2020 to remain a demanding year, although, on the internal front, a lot of the groundwork has been laid out. We have been working on the labor issues, and we have identified and are dealing with the operational issues. We are also undertaking an even stronger focus on cost reduction measures, and we expect to see some results already in 2020, as will be explained later. Regarding market conditions, we also expect a challenging year, albeit witnessing currently some favorable signs in terms of our order book.

So I will end my presentation now and hand over to António Redondo who, as you all know, is, from January 1, 2020, the new CEO of the company. I believe António needs no introduction. He has been with the company for many years working in different areas, in the industrial side, in marketing and sales as well as in supply chain and logistics, product development and revenue management departments. He has a deep knowledge of the company and a deep knowledge of the pulp and paper industry and has been a member of the Board of Directors of the company since 2007.

I know that António and the ex-CO to a great start this year and I'm sure will be up to the challenges that are facing all of us. I wish him and the whole team the best of luck. António, please.

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António José Pereira Redondo, The Navigator Company, S.A. - CEO, Member of Executive Board & Executive Director [4]

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Thank you, João, and good morning, everyone. I would like to start by saying a few words on pulp prices and take a look at the PIX graph for BHKP euros and U.S. dollars, shown on Slide 9, right? You all have seen this graph before, and you can see that the index for U.S. dollars has declined to approximately USD 680 at the end of December, a 34% correction versus a price of USD 1,024 reached at the end of last year -- or actually end of 2019.

Fuel average prices in 2019 for both U.S. dollars and euros in Europe is above the average pulp price in the last 5 years. The average pulp prices between 2014 and 2018 in U.S. dollars was around $820 while the average price in '19 was $855. The PIX index for hardwood in China actually started to decline significantly in Q4 2018 and then experienced another significant fall in Q2 and Q3 last year, which forced a correction in European prices as well. So this index for hardwood in Europe corrected significantly in Q3 last year and continued to decrease throughout Q4, stabilizing in December.

So let's take a closer look at what has happened in the last month in the pulp market by going please to Slide #10. We believe that the intensification of trade war tensions, coupled with higher uncertainty, was reflected in a slowdown in economic activity in China, which led to a significant reduction in consumption. In Q4 '18 alone, demand for global bleached chemical market pulp decreased 1.7 million tons year-on-year, with China representing 91% of this reduction and Western Europe following suit, about 0.2 million tons of reduction in Q4 2018. With Chinese buyers reducing pulp purchases, prices began to fall and producers' stocks start to build up at Chinese and actually, European ports.

In the first quarter of '19, Chinese chemical pulp buyers reduced significantly their purchase, reducing about 0.4 million tons, and used a significant part of their own inventories while producers' stock continued to increase. In Western Europe, the first quarter demand drop was even worse with demand dropping almost 0.5 million tons versus Q1 2018. With high level of stock mainly sitting in Chinese and European ports and this demand drop, big producers have to limit production and ultimately were forced to significantly decrease price. As mentioned before, from the peak in '18, short fiber declined about USD 370 in Europe, 35% from the peak of USD 1,050 and USD 315 in China, [41%] from USD 717 in mid '18 to USD 457 at the end of last year.

From Q2 onwards, demand in China strongly picked up, and from January to November, we saw softwood demand increasing 18% or about 1.3 million tons and hardwood growing 8%, around 900,000 tons. China hardwood demand should have ended '19 growing somewhere between 1.2 million and 1.4 million tons year-on-year. That means that its average growth between 2017 and 2019 is actually 10% to 15% higher than what was from 2012 to 2016. Hence, there is no reason to believe that there is some kind of structural problem with Chinese demand.

In Europe, there was a demand decrease for hardwood in the first 3 quarters of '19, but with some improvement throughout the year. In the second half of last year, producer's inventories decreased in face of stronger demand and production cuts, mainly from major top suppliers in Latin America and Asia. Still, at the end of '19, stock levels at producers remained above normal. And stock levels at the port, from which it is not known if the producers are buying stock, remained very high when compared to normal levels, totaling 3.3 million tons in Europe and China at the end of December versus 1.5 million tons average levels in between 2015 and 2017, although we remain positive that the bottom of the price cycle has been reached.

Benchmark prices in Europe are stable for some weeks now. In China, benchmark prices already show some positive signs as well, about $5 increase from week 52 last year to week 5 this year. Also, since early Q4, we are seeing some upward price adjustments in our own pulp operations. Of course, this recovery is subject to Chinese and the rest of the world economic activity pickup, and at the moment, we don't know yet how the coronavirus will impact in terms of economic activity.

So wrapping up on the pulp market and looking to the current and future market situation, we will say, on the supply side, we are seeing some unexpected events getting pulp available to the market related with strikes, capacity shuts, grade swings and environmental constraints, and this adds to the fact that there is no new relevant capacity coming to the market before the second half of next year. On the demand side, we believe medium-term fundamentals remain sound. Market pulp demand will continue to be driven by ongoing tissue investments and underlying demand growth, with industry consultants forecasting a net increase in tissue capacity of about 1.4 million tons during this year. Half of this growth is occurring in China where fine paper printing and writing grades seem to have recovered production levels in the last month.

Let's go now to Slide 11, please, with an update on the paper market. Global demand for printing and writing papers decreased 4.6 million tons year-on-year, representing over 6% fall year-to-date November, with uncoated woodfree falling 2.6%, although significantly less than remaining paper grades. 2019 demand decline is clearly above the trend for the past 5 years, when average reduction was 2.3% for global printing and writing papers and only 0.3% for uncoated woodfree. Besides the global cooldown in economic activity, we have observed a significant destocking movement in key markets for Navigator mainly due to uncertainty regarding pulp and paper prices.

In the case of Europe, there are indications of a strong pipeline destocking of ships during 2019 after the opposite movement in 2018. This brought extra negativity to the print demand figures we saw this year -- actually last year, but it's also positive to the extent that real end-user demand in Europe may not have been as bad as figures show. Also, we are currently seeing a need to build up some stocks across the supply chain, which is very positive for the mills. Let us also point out that the foreign demand in the second half of last year was particularly harsh in U.S.A. and also in some international markets, but with some recovery as well at the very end of last year.

So let's take a look at paper prices on Slide 12 now. As you can see, the index for A4 B-copy price fell to EUR 820 at the end of December, declining less than EUR 20 during Q4. Still, average price for 2019 was EUR 903, 3.4% growth from average price for 2018. This average price is well above the average for the last 5 years, which stood at EUR 832, and is also above the average of the last 10 years.

Let's go please to Slide 13 now, with a wrap-up of uncoated woodfree market conditions. Starting with pulp, we have seen that prices have stabilized in China and Europe since the end of last year and beginning of this year. And as said before, there are some early signs of price increases. As you all know, paper prices follow pulp prices with a certain lag in time and present much less volatility with a more stable and constant evolution. Paper prices have eased from the high level at the start of '19 and have adjusted downwards over the last months. Still, prices remain high, and this stability is a clear reflection of the resilience of the uncoated woodfree paper.

Paper supply has been growing in Asia and Middle East, but closures and conversions are occurring or have been announced at the same time in other regions of the world, namely in U.S., Europe and Asia. From 2018 to 2020, the net balance between increases and decreases in paper supply is actually neutral based on consultants' and companies' announcements. Even though the average price in '19 for the paper benchmark was EUR 903, at the end of the year, the price stood at EUR 808, and we have continued to see some pressure on the benchmark price index in the beginning of 2020, with the index standing currently at EUR 865.

Going now to Navigator's performance in the paper and pulp business. Please turn to Slide 14. Paper sales in the period totaled 1.447 million tons, down 4.4% year-on-year and was hampered by deteriorating market conditions and by a drop in output. Also, the group's performance reflects a sales strategy which was sought to protect prices in Europe and U.S., regions where the group records most of its sales, with active control over both price and total quantity supplies with some volumes being redirected out of these geographies. Accordingly, the group's average sales price in Europe evolved in line with the benchmark, meaning actually increased, and the average price in U.S.A. also evolved positively, with initial tailwinds from U.S. dollar exchange rate.

In other markets, what we call overseas, the product mix reflects an increase in sales of reels and standard and economic products linked with a normal market evolution in this period of time. In this context, the group managed to increase its market share in Europe and increased the weight of all brands sold. Actually, last year, our [new] brands progressed a little more and represented 70% of our sheeted product sales. So in 2019, the group's global average sale price remained EUR 3 above the average price in 2018, and sales in value stood at EUR 1.198 billion versus EUR 1.248 billion.

Total paper output by Navigator during '19 was down 6% versus '18 due to a series of factors, including the strike in the first half at PM4 in Setúbal and in November at both Setúbal and Figueira da Foz mills as well as due to a careful management of production levels in view of current market conditions. Over the course of '19, Navigator has optimized operations and quality for new products on its paper mill in Setúbal, PM3, in order to ensure it offers heavyweight products that meet the highest global quality standards. Notwithstanding, this process optimization requires a series of planned trials and tests, which necessarily entailed reduction output from PM3.

As João mentioned previously, Q4 last year was particularly difficult with a drop in uncoated woodfree demand in Europe and an even greater fall in U.S.A. as a result of a significant reduction in stock across the supply chain. In this context of intense pressure on prices, Navigator recorded a volume of paper sales slightly higher than in the previous quarter, about 0.6%, which when combined with a sales price similarly under pressure, resulted in sales in value of EUR 293 million, in line with Q3 2019. During Q4, pulp business continued to see significantly worsening of market conditions, reflected in a drop of almost 14% in the standard BHKP price index and sharp contraction in demand in European market. Sales of pulp were, therefore, marked by a drop in the average sales price, which was nonetheless offset by the substantial increase in volumes, which stood at 990,000 tons, up 10% and value of sales was EUR 44 million, in line with the previous quarter.

In 2019, pulp production was down about 2% on output vis-a-vis 2018, constrained by major maintenance shutdown at the Setúbal and Cacia plants in April and May and in Figueira da Foz in September. The strike that occurred in November at both Setúbal and Figueira, which stopped production at both mills during 4 days would also have affected that limited pulp output. Even so, the production output available for sale was greater than in the previous year due to the capacity expansion completed in 2018 and the smaller volume of pulp incorporated into paper, making it possible to record an increase of pulp sales of 24% to 314,000 tons. It is important to point out that this increase in volume was then considering a careful management of pulp supply to the market as the group would have registered even higher sales.

I will now let Nuno make some comments on the tissue market. Please, Nuno.

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Nuno Miguel Moreira de Araújo dos Santos, The Navigator Company, S.A. - Member of Executive Board & Executive Director [5]

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Thank you, António. Going to Slide 15. The tissue business sales in 2019 were EUR 132 million and represent currently 8% of the group's turnover. There was a significant increase of 52% in the sales volume to 96,000 tons as a result of the start-up of the new tissue plant in Aveiro.

This growth in volume reflects 2 distinct changes to the business. On the one hand, sales of finished products grew by around 22% to 75,000 tons. And on the other hand, the group sales of mother reels, which had been negligible in the same period of 2018, increased 11x to 21,000 tons, in line with current installed capacity and balanced between mother reels production and converting capacity. As a result, there was significant increase in terms of the weight of reels sold in '19 -- 2019 versus 2018.

In terms of geography, we have now increased considerably the weight of sales outside Portugal and Spain to other markets, such as France. Both finished products and reels benefit from price rises in 2019 versus 2018, which was vital to offset the increase in costs especially in terms of chemicals, logistics and energy. However, the faster growth in the reel business changed the mix of products sold, which had an impact on the average sales price.

João Paulo will now comment on the next slide referring to investments.

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João Paulo Araújo Oliveira, The Navigator Company, S.A. - Member of Executive Board & Executive Director [6]

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Thank you, Nuno. Let's go to Slide 16, where we have an overview of the CapEx registered in 2019.

Navigator recorded total investment of EUR 158 million. This figure includes EUR 118 million in maintenance and efficiency improvement, EUR 16 million for completion of the new tissue plant in Aveiro and the pulp capacity increase in Figueira da Foz and the final stage of investment in heavyweight products as well as EUR 24 million in environmental CapEx. In the latter category, the main project currently underway is the construction of the new biomass boiler at the Figueira da Foz site to replace the existing boiler and the natural gas combined-cycle power plant, which will make it possible to reduce fossil CO2 emissions at the mill site. This project is linked to our aim to have an industrial operation carbon-neutral that I would like to address on Slide 17.

The environmental CapEx projects mentioned are part of a wider program of improvement to the environmental performance and sustainability of the group's yields and are in line with Navigator's commitment to achieving carbon neutrality in 2035 in our industrial operations. This makes the Navigator Company the first Portuguese corporation and one of the first in the world to make a commitment to attaining carbon neutrality 15 years early, which will enable all industrial operations to be carbon-neutral by 2035.

In order to support this mission, Navigator has announced a total investment of EUR 158 million. The challenge of climate change is a priority, and Navigator has, therefore, drawn up its own road map to carbon neutrality, involving an additional series of CapEx projects in renewable energy and in new technology which will allow it to cut CO2 emissions as well as forest planting to offset residual emissions which cannot be eliminated. It is important to stress that the forest under The Navigator Company management in Portugal represent a carbon stock equivalent to 5.3 million tons of CO2, excluding carbon retained in the soil. This is equivalent to the emissions generated by 1.5 million cars driving a distance equivalent to the circumference of the planet.

I will now ask Fernando to comment on the next slides regarding financials.

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Jose Fernando Morais Carreira de Araújo, The Navigator Company, S.A. - Member of Executive Board & Executive Director [7]

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Thank you. On Slide 18, cash flow from operations generated in 2019 was EUR 307 million, which compared to EUR 377 million in 2018. Free cash flow totaled EUR 186 million comparing to EUR 143 million, net of EUR 68 million inflow from the pellets business sales in 2018. This improvement in free cash flow reflects a relevant reduction in CapEx from EUR 216 million in 2018 to EUR 158 million in 2019 and also a strong improvement in working capital management as well a reduction in inventories. So the group's operational performance enabled us once again to record a robust capacity to generate funds that it has displayed consistently over recent years.

So now on Slide 19. As a result, at the end of September -- at the end of December, sorry, Navigator interest-bearing debt totaled EUR 715 million, up by EUR 32 million in relation to year-end 2018, in a period when the group paid EUR 200 million in dividend and acquired EUR 18 million in treasury shares. The net debt-to-EBITDA ratio remains at the conservative value of 1.92x without IFRS 16 effect.

I would like to spend some minutes on Slide 20 and go over the debt restructuring accomplished in the period. In view of the approaching maturity of a substantial portion of our debt, which was due in 2020, we decided to undertake a restructuring process. Following this restructure where we managed to increase our average tenure and diversify our source of funding, average term of the group's debt was 3.5 years at the end of December, with a cost of debt of 1.70% and with a proportion of fixed debt of 85%.

To finish the comments for the quarter, I will give the floor back to António.

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António José Pereira Redondo, The Navigator Company, S.A. - CEO, Member of Executive Board & Executive Director [8]

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Thanks. Just a few words on the outlook for 2019 (sic) [2020] on Slide 22. I think we can all agree that 2019 has been dominated by severe geopolitical and significant trade tensions globally with Eurozone affected in particular by instability regarding Brexit and slow economic growth. In pulp, 2019 started in a very difficult market environment with depressed demand and a significant buildup inventories.

In 2020, there are signs of some pickup in pulp prices in some producers and also already price increases for softwood and hardwood in China, Europe and North America. We believe the fundamentals of the industry are strong as demand for pulp will be sustained by this new tissue and somehow new uncoated woodfree capacity in 2020 in China. Still, uncertainty remains over economic impact of coronavirus and the trade wars' evolution.

In paper, the downward pressure on prices seen at the end of last year may continue through Q1 in some regions and in some specific product areas. Yet, we estimate at the end of '19, the pipeline stocks at some key markets for Navigator were at very low levels, and we have seen a very relevant growth in order books across the industry at year-end and beginning of this year. Another fact that may have an impact in paper supply this first quarter is the strike at the pulp and paper mills in Finland that stopped on January 26 and just ended on February 10, stopping production during about 14 days. According to our estimates, this will represent approximately 40,000 tons of production loss in uncoated woodfree and 180,000 tons in market pulp. Still, global geopolitical uncertainty remains a concern as political instability in Middle East and market disruption via trade wars may impact negatively demand.

In tissue business, demand continues to grow at interesting levels, albeit against a backdrop of new production capacity coming online in the Iberian Peninsula. For Navigator, 2020 remains a year of consolidating recent investments with a view to increasing total sales. The main aim is to achieve sizable gains in sales of finished products as industrial operation matures and our share of target market grows.

Before ending this presentation, I would like to take this opportunity to recap the current priorities of Navigator's executive committee. So I will ask you to go to Slide 23, please. First and foremost, we will refocus on the core, and by this we mean improve operational efficiency and implement [universal] cost reduction programs; also enhance forest protection and productivity; develop a CapEx program geared to process optimization, asset performance and environmental protection; further develop commercial excellence programs to protect margins; promote a digital agenda on both corporate and operations; and enhance labor climate at our mills.

While focusing on our core business, we also ensure the pursuit of growth [upward]. We will not only strive to consolidate, optimize and further develop our tissue business as a natural growth option but we are also evaluating other synergetic possibilities related with our core business. Additionally, we want to refocus our R&D and innovation capabilities to support the existing operations and sustain new product development. Because we know that sustainability is part of our nature and has always been at the very core of our business, we will continue to reinforce our sustainability agenda, namely by promoting the following objectives: define and implement a sense of purpose that matches social impact with shareholder return; pursue sustainability as a source of competitive advantage aligned with our business positioning; continue to protect forest and biodiversity; promote the role of forest on both climate change and wealth creation for rural communities; and pursue our goal to become carbon-neutral by 2035 in all sites and develop initiatives that address health and safety and environmental impact minimization throughout all our operations.

With this, I end the presentation for today.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from João Pinto from JB Capital Markets.

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João Filipe Pinto, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Associate of Equities Research Portugal [2]

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Starting with margins. Is it possible to quantify an estimated impact for the -- from the strikes in full year results? Just to have an idea of this abnormal effect. Also on margins, could you give us some color on how much you aim to get from efficiency programs in 2020? Also regarding the effects from coronavirus outbreak in China. I understand this is still in the early stage. But do you expect more competition in Europe from international players? Could this impact volumes in Europe for Navigator? And finally, could you repeat your estimates for the impact from the strike in Finland? I understood 40,000 in UWF paper. Is that correct?

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [3]

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Let me just rephrase to make sure we understand all your questions because the connection is far from great. Starting from the last one, you would like us to estimate the impact of the strike in Finland to repeat our own internal estimates. Correct?

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João Filipe Pinto, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Associate of Equities Research Portugal [4]

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Yes.

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [5]

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Then you would like to understand if we expect further competitiveness in Europe for uncoated woodfree during 2020.

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João Filipe Pinto, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Associate of Equities Research Portugal [6]

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Yes. Because of the coronavirus.

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [7]

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Okay. The other question was about efficiency programs. If we could estimate a ballpark figure for efficiency programs.

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João Filipe Pinto, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Associate of Equities Research Portugal [8]

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Yes, in 2020.

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [9]

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And the first question was about estimating the impact of the strike?

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João Filipe Pinto, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Associate of Equities Research Portugal [10]

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That's correct.

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [11]

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Okay. So I will address the strike in Finland and the volume impact and I will ask Fernando to speak about efficiency programs impact and João Paulo to estimate the impact on the strike, okay? So starting with the strike in Finland, our own estimates based on the capacity and normal operating rates is that this should have impacted about 40,000 tons of production loss in uncoated woodfree and 180,000 tons in market pulp. Regarding the impact in Europe related to the coronavirus. And I would say that is yet too soon to anticipate any significant impact but we are not considering this impact to be of any relevance because also in Asia -- China and outside China, this quarter is typically a seasonally strong quarter. So we don't anticipate any significant impact. I will ask now Fernando to speak about efficiency programs, please.

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Jose Fernando Morais Carreira de Araújo, The Navigator Company, S.A. - Member of Executive Board & Executive Director [12]

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Okay. In efficiency programs, we expect to have in 2020 a savings around in excess of EUR 10 million, and we expect a similar figure for 2021. I want to recall that we have launched into in 2016, where we are aiming to achieve EUR 100 million savings during the following 5 years. At the moment, we have achieved more or less 50% of this amount, and we intend to continue with this program. Regarding the strikes, I think, João Paulo is in the best place to give you the figures.

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João Paulo Araújo Oliveira, The Navigator Company, S.A. - Member of Executive Board & Executive Director [13]

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So the impact on the total woodfree production was approximately 30,000 tons, and in pulp was approximately 15,000 tons.

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João Filipe Pinto, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Associate of Equities Research Portugal [14]

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Just a follow-up. In terms of the last question, not about tons, but about the impact on costs. Do you have any estimate that you could give us?

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João Paulo Araújo Oliveira, The Navigator Company, S.A. - Member of Executive Board & Executive Director [15]

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No. We did not calculate that information specifically.

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Operator [16]

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The next question comes from João Calado from BIG.

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João Calado, Banco de Investimento Global, S.A., Research Division - Analyst [17]

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I would like to start with the production. So regarding strikes, I thought this was a problem behind us. Apparently, there's still some strikes. What is your outperforms with this? What is the main question that is being asked by the workers that you cannot fulfill or that they keep asking for more and doing strikes? And as far as thinking to that, can you explain this a little bit more in detail, the decrease in the total amount of salaries from 2018 to 2019? And maybe also linked to this, if you think the production will get back to the levels of 2018 in 2020? Or if these levels will...

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [18]

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Just to try to rephrase just to see if we understand to get the answers to the questions. The first question, to try to understand the nature of the labor dispute.

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João Calado, Banco de Investimento Global, S.A., Research Division - Analyst [19]

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Yes. That's right, yes.

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [20]

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The second question is to understand why the total salaries decreased '19 vis-à-vis '18?

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João Calado, Banco de Investimento Global, S.A., Research Division - Analyst [21]

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Yes.

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [22]

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And the last question is if we expect production to return to normal levels, the levels of 2018 year?

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João Calado, Banco de Investimento Global, S.A., Research Division - Analyst [23]

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Yes.

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [24]

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So I will take the last question. And Fernando Araújo will take the first 2 questions. Regarding the production gets back to 2018 levels, what we can tell you is that we have done during 2019 and [already a portion] here, a lot of work to recover, as I explained before, a good part of our CapEx program is geared to asset performance within operational efficiency. So we do expect to return to normal levels, and we have a considerable level of ambition in our budget for 2020 on total loss. Fernando?

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Jose Fernando Morais Carreira de Araújo, The Navigator Company, S.A. - Member of Executive Board & Executive Director [25]

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Okay. In what concerns the strikes and the reason for the strikes, in fact, what the unions and the labor's -- the labor people are asking, it's a career plan. And the fact that we have the last career plan, the career plan that is in place, based from back in 2008, then years after they want to -- we're going to see they have a new career plan. We have started that in April last year, but it's a tough discussion. And because the discussions took more time than the labor unions were expecting, this gets us to a strike. After that, we try to improve and to put more fire in this. I think our plan in the beginning is to finish the conversations by the end of February. At this time, we think that we will not finish those conversations before the end of the month, but -- and it seems that they are progressing quietly and in the interest of [both sides]. And in the first quarter, for sure, we will be ever planning to be discussed between the Board as well between the planning of the people. In what we have in the reduction on payroll, it seems that it's all -- more than 50% is related to our variable remuneration. In fact, we have a program, where we distribute to our employees part of the profit. This is based on a target EBITDA. And because the target EBITDA for the 2019 was not achieved, the variable remuneration regarding the rules for this year is 0. That's why there is a significant reduction on the payroll. In addition to that, we have what we call a remuneration program which means that we allow, in the interest of the company, if the people want to retire early, which is important in a company where we have people working 20 hours per day, this means that they, when they achieve 61 years old, they are very tired and we allow for them to retire early and we substitute for the [old] people. I want also to stress in the first question, the fact that we are taking some problems we talked in the past, we have done an insourcing problems. This means the people that are outsourced, we have incorporated in our payroll. And because the difference of salaries are higher comparing to the people that are within -- with us for more years, there is a difference, a gap that it's also something that is being in building in the conversation. And that's one of the reasons why our EBITDA for the quarter was lower because we have to improve some salaries for those people in order to reduce that gap.

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João Calado, Banco de Investimento Global, S.A., Research Division - Analyst [26]

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Just a follow-up on the strike details. Can you give us a little bit more visibility on what is the real issue? The summary question.

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Jose Fernando Morais Carreira de Araújo, The Navigator Company, S.A. - Member of Executive Board & Executive Director [27]

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I think I gave you all the entire why -- I think, I talked about the gap in salaries. I talked about the career plan. I have nothing more to add.

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Operator [28]

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The next question comes from Bruno Bessa from CaixaBank BPI.

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Bruno Filipe Bessa, Banco Português de Investimento, S.A., Research Division - Analyst [29]

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So some questions from my side. The first on the cost savings plan that you have announced with the reduction in terms of, say, fixed and variable costs. My question is, if this could exacerbate the social unrest that you are seeing at your plants at this stage? And also related with this, if you could provide us an estimation of one-off costs related with the implementation of this cost savings plan. This will be my first question. My second question, regarding CapEx, if you could provide the visibility on your expectations in terms of CapEx for 2020, it would be appreciated. And the third question, well, with the paper prices at relatively high levels during 2019, margins reached the lowest level of the last 5 years. So my question will be, what would be needed for the company to get back to historical levels of 24%, 25% EBITDA margin over the coming years? And last question, if I may, regarding your dividend policy. If you are comfortable with your balance sheet in order to maintain the current level of dividends paid over the last couple of years.

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [30]

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Okay. Thank you for your questions. I will take the question regarding the -- what we see on prices and margin evolution. And I'll ask Fernando to comment on dividend and the cost savings related to the social unrest and as well as the one-off costs, and then I'll ask as well João Paulo then to speak about the CapEx plans for 2020.

So regarding margins, let's not forget that we have a general confidence here. We have a confidence on pulp price as pulp prices averaged the lowest or one of the lowest levels over the last decade or so. So the pulp price recovery will be key to push the margins to the right direction. Secondly, on the cost side, as it was explained, we have impact on costs on both wood, energy and chemicals. We are working on these 3 components. And we do believe that both organic and energy, we might have a better environment in 2020. On paper prices. The margins are also very much related with the mix of sales, both geographical and product mix, and the first indications we have for 2020 as well is the possibility that we believe we will have to implement both product mix and the geographical direction. So all together, this is what will help us to go for that margin. We are not forgetting as well, and this relates to the question that Fernando will answer, not forgetting as well our focus on reducing fixed costs. Fernando?

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Jose Fernando Morais Carreira de Araújo, The Navigator Company, S.A. - Member of Executive Board & Executive Director [31]

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Okay. The first is easy one, it's about the dividend. This is a shareholders' decision. It's not related to us, it's related to them. But I would say that our guess, it's the dividends will not be maintained at this level in the following years. This means that the EUR 200 million, it's not our goal for the next years or at least it's what we expect to be a reduction, taking in consideration the profit of this year. In what concerns the potential impact on social side, I would like to say that on ZBB, we considerate our efforts on corporate side. And we have a baseline of EUR 100 million. We expect to save like I have said, EUR 10 million, but those savings are more in something that is not related with the headcount or to salaries or related issues. This means it's more on consultancy fees. It's more on travel and other supplier -- external suppliers and not payroll. Nevertheless, I would say that this could impact on the well-being or impact on the perception of the persons but I would say that it's not related for sure with the strikes because on the strikes, we are dealing more with issues, more contacts, more dialogue and with impact to come on strikes, we really do not expect.

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João Paulo Araújo Oliveira, The Navigator Company, S.A. - Member of Executive Board & Executive Director [32]

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Okay. Concerning your CapEx question, we will invest more or less the same amount as we invest in 2019. As we said before, most of our investments are concerning improvements and maintenance of industrial facilities with the aim to increase the performance of our assets. And additionally to that, we have a strong focus on environmental investments as well.

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Operator [33]

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The next question comes from António Seladas from Independent Research.

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António Seladas, A|S Independent Research - Analyst [34]

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I have 3 questions. First one is related with costs. You already talked about -- a lot about margins. So if you can provide us some color on what kind of increase the external supplies and service will have in 2020, a low single-digit increase, mid-single-digit increase, double digit as it was in 20 -- last year? Second question is related with CapEx. Just to clarify, if you mentioned some amount as 2019, it means EUR 150 million, EUR 160 million? And third question is related with your priorities for Navigator on Slide 23, you mentioned a few growth outlook, you talk about tissue and R&D. If you can be more precise what will be the measures that will take to -- or to offset, compensate the decrease on demand on paper.

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [35]

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I'm going to ask you, if you don't mind, to repeat the first 2 questions, which was not very clear on this side of the call.

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António Seladas, A|S Independent Research - Analyst [36]

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Okay. So costs, I think you do the problem in 2019 last year were costs on chemicals and energy. So external supplies and service costs, if you can provide some guidance and color, some guidance for 2020, what should we expect in terms of increase, low single-digit, mid-single-digit or higher? And the second question is related with CapEx. If you could clarify, you mentioned in the prior question -- on the prior answer that it will be the same as 2019, if that means EUR 150 million, EUR 160 million? And the last question is related with strategy. Issued a growth outlook on Slide 23. If you can be more -- it can be more -- if you can provide more color because you mentioned about tissue R&D, but if you can provide more color on it.

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [37]

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Okay. I'll try to answer the 3 questions. On the cost side, actually, what we were saying is that we intend to decrease costs, not to increase costs. So it's not an increase that we are foreseeing and preparing for 2020 isn't an increase. The year will tell us how it will be, will it be a decrease, definitely a decrease, not an increase. On CapEx, your ballpark figure is probably not far from reality. Regarding the growth priorities, what we said and what we mean is the following. We have a growth rate which is tissue. As it was explained, there are still room for improvement as well in our tissue operations to make sure that we have our tissue operations at the level that they can be a growth platform for the future. On top of that, we have, as you probably know, quite an increased R&D and innovation facilities with a large group of people working on our new innovations and we want to refocus them on our existing -- these was the lessons that we have today, so meaning at pulp, paper and tissue. Regarding the further developments on our growth plan, yes, we are studying other possibilities. As I said that in this (inaudible) related to our (inaudible) assets, but it is yet too soon to give you more color on this.

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António Seladas, A|S Independent Research - Analyst [38]

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Okay. So just to confirm, so external supplies and services in 2020 should come down versus 2019.

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [39]

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That's the plan.

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Operator [40]

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(Operator Instructions) The next question comes from Carlos de Jesus from CaixaBI.

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Carlos de Jesus, Caixa - Banco de Investimento, SA, Research Division - Analyst [41]

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Just to come back to the dividend policy question. Can you -- or are you able to give us just a bit of more clarity on how much of a reduction we should expect, if there is any guidance in terms of goal, in terms of payout ratio or something like that, just for us to have a more clear idea of the magnitude of the reduction. Sorry if there is any information on the presentation, but I'm not able to access it. I have -- I'm having some problems here in my firewall. But anyway, I would just like to note this issue about the dividend. And my second question was a bit -- was already somehow, somewhat answered. It was about the growth bets that you get. You are focusing on in the future, from my understanding, just to confirm, you're focusing on your core business, on reductions of costs or more efficiency. Is there any idea or any more material focus on the Mozambique issue still? Is this still on your idea for the coming years? Or is it been completely put on hold for the foreseeable future?

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [42]

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Well, I'll probably take the last question and then I'll ask Fernando to answer you on the first question. Regarding Mozambique, they [don't have the growth] in Mozambique. I mean, I think we have proven that the possibility to develop a productive forest in Mozambique. I think we have proven that the growth of the forest is equal to what we can see in improved locations in Latin America. I think it's very clear that Africa will be in the future on the supply of wood raw materials to the world. This is an area that's geographically well located. And this was very clear. There is an increased demand, increased gap between the [pipeline in focus]. So all these are positive signs for particular for Mozambique. Although this project cannot work alone and cannot [be approved] without this -- an infrastructure bank. So the issue that we have to keep on discussing with the local government is exactly the plan for infrastructure. So as soon as the infrastructure plan, mainly the ports, are clarified, we will be able to reenergize the project. I would not say the project is on hold, but the project is being slowed down, matching the present situation of the [entity's] government. I'll ask now Fernando to speak about dividend policy.

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Jose Fernando Morais Carreira de Araújo, The Navigator Company, S.A. - Member of Executive Board & Executive Director [43]

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Okay. About dividend policy, even though that's based on financial companies' code, what the Board can decide is on the profit of the year. This means the profit here is [EUR 168 million]. Outside that, we will -- cannot distribute more than that, unless the shareholders want to distribute return reserves like they have done this year. The policy of the group is to distribute 50% -- 50% of the profit. This means that I would expect there to be a reduction of 200 million AROs for the coming years but are not expected a drastic reduction because the shareholders mentioned also need some cash. But that question should be not addressed to us. It should be addressed to the main shareholders.

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Carlos de Jesus, Caixa - Banco de Investimento, SA, Research Division - Analyst [44]

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Okay. Just if I may, just a follow-up on Mozambique. So as I understand, one of the hypothesis, one of the ideas is to make Mozambique -- if all else fails in terms of infrastructures and the conversations with the Mozambique government to make Mozambique a source for fiber, a source for wood in order to export? Is that it?

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [45]

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A pulp and paper project always starts by being a wood project.

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Operator [46]

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The next question comes from João Pinto from JB Capital Markets.

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João Filipe Pinto, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Associate of Equities Research Portugal [47]

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Yes, very quick one. I recall that UWF paper demand in Europe fell 5% in -- year-on-year in third quarter. Do you have the figure for the fourth quarter?

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João Nuno de Sottomayor Pinto de Castello Branco, The Navigator Company, S.A. - Chairman of the Board [48]

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I have to be completely -- I don't have it in front of me. I don't have by heart. I will tell you the following: The reduction of demand in Europe in the second half of the year, so third and fourth quarter, was much aligned with the first quarter, okay? And more important is the following: We speak about apparent consumption. This has nothing into consideration pipeline effects. We do believe that the pipeline effect was very strong, both in the first and the fourth quarter. So the real decrease in demand, we believe, in Europe was much less than what the planned consumption figures show. Proving this is the fact that we have, as we speak, one of the highest order books ever for our company. So the customers are restocking again. Cost has increased slightly but demand will be better and confident most likely prices will have a different evolution in 2020.

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Operator [49]

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Thank you. I will now give the floor to the speakers.

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Joana de Avelar Pedrosa Rosa Lã Appleton, The Navigator Company, S.A. - Head of IR & Market Relations Officer [50]

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Thank you very much. This will end our conference call for today. Thank you.