- Key financial highlights from the quarter: Revenue marginally increased by +1% q-o-q (-29% y-o-y). EBITDA also ticked up slightly by +1% q-o-q (-40% y-o-y) with the Group EBITDA margin stable at 25.7% (Q3 23A: 30.5%). Gearing remains well controlled with net debt/EBITDA now 0.98x. We estimate a 12m rolling ROIC of 23%, slightly down from 25% in the previous quarter.
- Downward trend on market prices across all segments, yet tissue remains above 2022 price levels: Navigator believes this is driven by the PIX BHKP deterioration.
- Volumes improved across all segments: Pulp and paper Q3 demand started to gradually recover, in line with destocking phasing out.
- Sharp drop in cash costs in all segments compared to Q3 22A: Between 20% and 28% in the Pulp and Paper segments and close to 17% in Tissue. Cash costs are now trending to Q1 22A levels, with wood and energy costs still above 2022.
- UWF sales improved during the quarter: UWF sales volumes improved by 7% q-o-q but remain down 31% y-o-y. However, destocking was slower than expected due to the economic activity deceleration. Navigator’s average utilization during Q3 was 76%.
- Strong pulp volumes with more availability of pulp for sale due to lower paper and packaging integration: Pulp volumes sold were up 191% y-o-y and +24% q-o-q. China was the main driver with restocking after prices fell to their lowest level in May. Pulp stocks in China are in line with the last 5-year average (1.8Mt).
- The Tissue segment continues to perform well: This is largely driven by the integration of Tissue Ejea, with better-than-expected synergies, and significant price resilience (although slightly weaker q-o-q). A strong performance for tissue finished goods saw tissue volumes sold increase by 52% y-o-y and +11% q-o-q.
- Packaging expansion on track: The new eucalyptus-based moulded pulp products project, designed to substitute single use plastic packaging continues to progress with the production planned to start up in the H1 24E.
- For Q4 and Q1 2024, the pulp market is expected to recover gradually: Although it is not known whether this recovery cycle is sustained through all 2024 (new capacity vs. the continued restocking in the Chinese market for new P&W mills).
- UWF Paper segment likely to gain further traction: Order books are expected to improve in Q4 and at least in Q1 2024, which has historically been a seasonally strong season. In Europe, paper prices are likely to benefit from a balanced market structure, driven by improved demand and the reduction of supply (almost 600kt annual capacity, equal to 12% of installed capacity in Europe) and stronger pressure on costs. Navigator views the current UWF price as unsustainable and accordingly confirmed a price increase of 5-7% for all UWF papers in Europe from 1 December. This is driven by the structurally higher price of most input costs (pulp, energy, and chemicals). Coupled with rising wood costs, limited UWF imports into Europe and improving demand, Navigator appear comfortable that the increase will be successful.
- Mixed outlook for the Tissue segment: Navigator’s 2024 demand expectation for Southern Europe is between 1% to 2%. However, there is growing pressure on tissue margins due to the recent hikes in pulp and energy prices.
