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The Navigator Company Q2 2024 Results: Turnover up 11 percent From Year Ago
The first half of the year was marked by all-time highs in the pulp reference price and a positive trend in the paper reference price, underpinned by buoyant demand for pulp and paper and significant supply restrictions, namely low stocks at the start of the year, restrictions in the Red Sea, as well as supply pressures in Canada, Scandinavia, Latin America and Asia due to production unavailability, maintenance stoppages, capacity closures and other logistical constraints. Navigator has a unique competitive position in Europe in terms of the efficiency with which it manages its business mix. It has consistently shown flexibility in adapting to different market dynamics, focussing on results and protecting margins, as was once again the case this quarter. Navigator remains committed to sustainable investment, business diversification and innovation in all the segments in which it operates. As part of its diversification and growth strategy, during the 2nd quarter Navigator successfully completed the acquisition of Accrol Holdings Plc (Accrol), a leading player in the UK tissue market (4th in the ranking). We are also continuing to focus on diversifying our packaging business, with the innovative integrated production unit for moulded eucalyptus pulp products, intended to replace single-use plastic packaging in the food service and food packaging markets, expected to start up in the 2nd half of 2024. Commissioning of the plant has already begun, and commercial production is expected to begin at the end of the 3rd quarter of 2024, under the gKraft Bioshield brand. It is worth highlighting the recognition, this July, in the annual assessment by the Sustainalytics rating agency, which once again rated Navigator as a low-risk company for investors, placing Navigator in the 1st position of the list of companies with the lowest ESG risk, more precisely on the lower fringe of the ‘low’ risk level, with the vast majority of issues presenting negligible risk. Analysis 2nd Quarter (vs. Q1 2024 and vs. Q2 2023) Navigator recorded turnover of € 529 million (down 1 percent on Q1 2024; up 11 percent on Q2 2023); EBITDA stood at € 165 million (up 24 percent on Q1; up 35 percent on Q2 2023), reflected in an EBITDA margin of 31.2 percent (up 6.4 pp on Q1; up 5.7 pp on Q2 2023); Net income totalled € 95 million (up 48 percent on Q1; up 44 percent on Q2 2023);
Analysis 1st Half 2024 vs. 1st Half 2023
Analysis of results The focus on efficiency and cost management, with a significant reduction in cash costs of between 6 percent and 14 percent in all pulp and paper segments (printing and writing, tissue and packaging) in the 1st half of the year compared to the same period last year, the positive evolution of demand and sales growth, along with the commercial strategy and diversification of products and markets, led to the strong results recorded in the 1st half. The printing and writing papers industry Demand performed positively over the 1st half of 2024 (May), driven essentially by restocking along the distribution chain, especially in Europe. Globally, apparent demand grew in the 1st half (YtD May) by 1.3 percent across all segments, with demand for UWF paper strongest, up 1.6 percent, and CWF papers growing by 0.6 percent, whilst papers with mechanical fibre experienced growth in demand of 1 percent. In Europe, apparent demand for UWF paper grew by 14.8 percent over the 1st half (YtD June), with the folio segment as the top performer, at 20.6 percent, followed by cutsize office paper (up 14.8 percent) and reels (up 10.1 percent). Navigator recorded an increase in market share in Europe this half year compared to the same period last year. In the United States, demand declined by 2.6 percent (YTD May). Despite the drop in market demand, Navigator's sales in the United States grew again, as did its market share. Apparent UWF consumption in other world regions grew by 0.5 percent (YTD May), with China recording an impressive 7.1 percent (YtD May), compared to the trend of the last 5 years (CAGR 2.9 percent 19-23). The benchmark index for office paper prices in Europe - PIX A4 B-copy – stood at 1,112 €/ton at the end of June (vs. 1,105 €/ton at the end of March). Since the start of the year, office paper prices have increased by approximately 2 percent. Significantly, from November - when prices in Europe and in overseas markets started to move upwards again - to June, Navigator's UWF price increased by around 4 percent in Europe, 12 percent in overseas markets and 8 percent for the total sales mix. Implementation of the last announced price rise, which start in July, is expected to be concluded during the 3rd quarter. Capacity utilisation rates in the European industry (output/capacity) averaged 87 percent in the 1st half, with Navigator operating at above the industry average, at 92 percent. It should also be noted that we ended the 1st half with an appropriate level of stocks, enabling us to face the market conditions anticipated in the 3rd quarter, when the seasonal effects are expected to be felt more sharply than in previous years. Navigator's paper and packaging sales totalled 673 thousand tons in the 1st half, down by 26 percent on the same period in the previous year. The value of sales grew by 11 percent. Mill brands represented close to 77 percent of sales in the 1st half (vs. an average of 67 percent over the period 2012-2023), again pointing to the resilience of the company's branding strategy. The proportion of premium products remained high in relation to 2023, at 59 percent (compared to an average of 53 percent in the period 2012-2023). Of particular note is Navigator's robust business model based on differentiation, premium products and strong own brands in the different markets where we operate, which has allowed us to increase the price premium, as a result of the higher level of our value proposition, reiterating the resilience of the paper and printing and writing business model. When market conditions are more difficult, mill brands and segments with greater value added offer an additional safeguard for Navigator’s results. Pulp Market The benchmark index for hardwood pulp in Europe – PIX BHKP in dollars – rose to record levels in the 2nd quarter (1,440 USD/ton), and pulp prices have risen by approximately 41 percent since the start of the year. Prices in China mirrored the developments in Europe, reaching 741 USD/ton at the end of the quarter, up 14 percent since the start of 2024. The dynamics of supply and demand were crucial in sending prices upwards in the early months of the year. On the demand side, in Europe, the market of end consumers of cellulose pulp presented strong performance, especially in the printing and writing paper industry, where order books grew substantially, in contrast to the same period in 2023 (up 10.7 percent), but also for tissue (up 7.1 percent YTD April). In China, the strong demand for pulp in late 2023 continued into the 1st half of 2024 due to the new paper capacity installed. On the supply side, logistical restrictions in the Red Sea, as well as pressures on supply in Canada, Finland, Latin America and Asia, as a result of production unavailability, maintenance stoppages, capacity closures and logistical constraints, have sustained current price levels. It should be noted, however, that at the end of the 1st half of the year, demand for short fibre in China slowed down and, with the constraints observed during the first few months of the year being overcome, there was an increase in pulp availability, especially in Europe and the Mediterranean. Nevertheless, demand has been strong, and stocks are still below the historical average of the last 5 years. In May, stocks at European ports stood at 1.3 million tons, below the historic average for the past 5 years (1.5Mt). In China, pulp stocks stood at 1.7 million tons in June 2024, also below the historical average for the past 5 years (1.8Mt). In this context, global demand grew in the 1st half by 3.9 percent YoY in bleached chemical pulp (BCP), 6.3 percent in hardwood pulp (HW), and 10.3 percent in eucalyptus pulp (EUCA), most significantly in Europe (+13.6 percent BCP, +17.8 percent HW, +16.8 percent EUCA) and in China (-0.6 percent BCP, +3.7 percent HW, +11.2 percent EUCA). Pulp sales accordingly stood at 181 thousand tons, down by 16 percent on the same period in 2023, due to the smaller volume of pulp available for sale and the value of sales was down by 8 percent year-on-year, due to the positive price evolution. Growth and strong performance in Tissue business Demand for Tissue paper remained buoyant, with growth of 3.5 percent since the start of the year in Western Europe (Numera April). Positive effects have been felt from the recovery of household spending power (namely by lower inflation), accompanied by growth in region's tourism sector, boosting the away-from- home segment. Navigator recorded 1st half tissue sales of 94 thousand tons, up 54 percent year-on-year, with growth in the value of sales of approximately 41 percent, as a result of integration of Accrol on 1 May 2024 and of Navigator Tissue Ejea in the 2nd quarter of 2023. The decision to acquire Accrol, now called Navigator Tissue UK, is in line with the Group’s strategy of diversification. By acquiring a leading company in the tissue converting sector, with competitive advantages and values aligned with our own, Navigator has made its first move into the British market. International sales therefore accounted for 76 percent of turnover in Tissue business in the 1st half of 2024. The Spanish market took the largest share, with 35 percent of sales, followed by the UK, with 20 percent, and France, which accounted for 18 percent of sales. Sales broke down into 95 percent finished products and 5 percent reels, representing an improvement in the mix of 3pp when compared with the same period in 2023. In terms of client segments, At Home or Consumer (retail) business has grown in importance, currently accounting for 78 percent of sales, whilst Away-from-home and wholesalers account for the remaining 22 percent. Attention is drawn to the Group’s balanced and diversified customer portfolio, with 6 percent growth in the number of customers year-on-year (11 percent considering the integration of Navigator Tissue UK), with the largest client accounting for approximately 11 percent of total sales. Tissue Sales 1 2 H1 2024 (vs. H1 2023) Navigator’s focus on innovation and differentiation continues to be welcomed by customers, with sales of mill brands growing by 29 percent YoY in the 1st half of 2024. A strong contribution to this growth in mill brand sales has come from sales of innovative products (notably Multiusos Super Absorvente and Higiénico Aloe Vera) which again recorded excellent growth, up 16 percent. The portfolio of Tissue products has benefited significantly from integration of the industrial units in the UK, and now includes wet wipes, moist toilet tissue and facials. 1 ton 2 Q2 2023 and H1 2024 includes Tissue Ejea l May e June 2024 includes Tissue UK 3 Finished Goods and Reels Packaging - From Fossil to Forest – investment in sustainability, innovation and transformation Demand levels in 2024 had pointed to recovery and a return to normal for the packaging market. After a promising 1st quarter, the 2nd quarter confirmed the tendency for recovery, with robust and consistent demand. European deliveries of Kraft MF papers (white and brown) reported by CEPI (YTD May) were up by 25 percent on the same period in 2023. The packaging segment of Navigator recorded a 90 percent growth in sales volume this half year compared to the 1st half of 2023. In this context, Navigator implemented price increases in all its markets, justified by the rise in production costs and by improved market performance. This strong performance is firmly supported by the move into several new segments, above all in the area of Flexible Packaging, where the company launched products in the early months of the year and is now seeing more significant sales volumes. The 1st half of the year also saw a reduction in the dependency on the paper bag segment, with the tilt towards flexible packaging segments. Navigator has continued to broaden its customer base, which already numbers close to 300 clients in a sales operation 100 percent based on its own brand – gKraft. Navigator has based its offering of packaging papers on three gKraft macro-segments: BAG, FLEX and BOX, which subdivide into 12 segments for different applications. The innovative introduction of the properties of eucalyptus fibre has been crucial in securing the wide acceptance and recognition that these products already enjoy in the market. As part of the diversification of the packaging business, the project for the integrated production of eucalyptus moulded cellulose products, intended to replace single-use plastic packaging in the food service and food packaging market, continues to progress as planned, with the commissioning of the plant having already begun and commercial production starting at the end of the 3rd quarter of 2024, under the gKraft Bioshield brand. The plant will have a production capacity of around 100 million units a year, making it one of the largest in the world and the first integrated plant in Europe using eucalyptus fibre, entering a market with high potential and growth. The launch will be based around 7 products for the food sector: a 22cm plate, a 17cm plate (dessert), a 500ml bowl, 1 litre take-away packaging, a laminated tray for raw protein (beef, pork and chicken), a fruit basket and an espresso coffee cup. These 7 products offer production flexibility and scalability for exploiting the various opportunities opening up for substituting plastics. Alongside this, work has proceeded on developing new products, in partnership with national and international clients, and on developing new sustainable barrier property solutions, as well as trials of commercial products. Power Output of 745 GWh, of which 77 percent was from renewable energy sources In the 1st half, sales totalled € 65.1 million, representing a reduction of approximately 28 percent in relation to the same period in the previous year. This reduction is explained essentially by the fact that the combined-cycle natural gas power station in Setúbal is operating with only one generator set for self-consumption, with the sale of surplus power to the national grid, when last year all its power output was sold. These lower figures for power sales are matched, on the other hand, by lower acquisition costs for electrical power for the purchase volume indexed to OMIE. The Group's industrial units continue to participate in the Regulation Reserve Band Market, a system service provided to the operator of the power grid by qualified major power consumers, designed to contribute to the fundamental aim of safeguarding the security of supply in the National Electrical System, which has already proved to be decisive for protecting domestic consumers and critical users. Cost management, favourable demand trends and price levels led to EBITDA of €299 million The focus on efficiency and cost management, the positive evolution of demand and the price level of pulp, printing and packaging paper and tissue paper made it possible to achieve the results presented in the 1st half of the year. When compared to the same period in 2023, there was a significant reduction in cash costs of between 6 percent and 14 percent in all pulp and paper segments (printing and writing, tissue and packaging). It should be noted that the 1st half of the year was marked by restrictions in the Red Sea, which led to changes in maritime transport routes and an overall upward trend in freight rates. Despite this context, Navigator maintained its downward trend in maritime freight rates and thus saw a reduction in logistics costs in all business segments. Total fixed costs ended up higher than in the same period last year, due to the inclusion of Navigator Tissue Ejea and Navigator Tissue UK units and employee profit-sharing, as well as higher rejuvenation indemnity costs and non-recurring costs related to the Accrol acquisition. In this context, Navigator achieved EBITDA of € 299 million in the 1st half (vs. € 253 million in the same period in 2023), with an EBITDA margin of 28 percent (up 2.2 p.p. year-on-year) Financial Results Financial results showed a loss of € 10.5 million (as compared to € - 8.5 million in the same period in 2023), up by € 2 million year-on-year due to deterioration in foreign exchange results and other financial costs and gains, namely due to an increase in indebtedness as a result of the acquisition. For their part, financing costs remained stable, with an average cost of debt at the end of June of approximately 2.2 percent, despite the rise in interest rates, thanks to the policy of hedging interest rate risk. Pre-tax profits totalled € 215 million (vs. € 179 million in the same period in 2023) and the corporation tax burden for the period was € 56 million (vs. 42 million in H1 2023), with a tax rate for the period of 26 percent (vs. 23 percent). Net income stood at € 159 million (vs. €137 million in H1 2023). Generation of free cash flow Cash flow generation has remained at a high level as a result of operational performance, although free cash flow for the half year was around € - 25 million (vs. around € 10 million in the same period last year), as a result of the high level of Capex in the period (€ 93 million) and the investment in the acquisition of Accrol in Q2 (payment of € 153 million for the shares and consolidation of additional debt). New finance facilities, reaffirming Sustainable Financial Management Net debt stood at € 665 million, excluding IFRS16, at the end of the 1st half, impacted by acquisition of Accrol, by distribution of € 150 million in dividends and capex level. Even so, the Interest-Bearing Net Debt/EBITDA ratio stood at 1.2, further consolidating the financial strength displayed by the Group. Over the course of the 1st half, Navigator repaid debt of € 72 million, whilst also contracting a significant volume of new long-term finance. A long-term (7 year) facility of € 55 million was contracted in the 1st quarter, with financial terms tied to the company’s ESG performance; € 30 million has already been issued, and the remaining € 25 million can be issued until March 2025.
In the 2nd quarter, further long-term facilities - 5, 6 and 7 years - were contracted with a value of € 300 million, where the financial terms are again tied to attainment of three ESG indicators already included in our Sustainability Agenda, which are in turn aligned with the United Nations Sustainable Development Goals. Two of these facilities, bond issues with a value of € 50 million each, at 5 and 7 years (bullet), respectively, were issued in June at a floating rate, and financial instruments have in the meantime been contracted to hedge against interest rate risk. The remaining finance facilities, with a value of € 200 million, will be issued in the 2nd half. Navigator also has long term finance available from the European Investment Bank (EIB) with a value of 115 million euros, which can be drawn in 3 tranches over a period of 18 months after signing (in December 2023), with maturities of up to 12 years. Lastly, there are commercial paper programmes (more than one year), contracted but unused, with a value of € 128.25 million. Navigator has therefore preserved strong liquidity, with € 468.25 million available in long-term facilities, appropriate average debt maturity, with rationally staggered repayments, and close to 60 percent of total debt tied to sustainability and 93 percent of total debt issued on a fixed rate basis, directly or via financial instruments to hedge interest rates, enabling us to maintain low financing costs in a scenario of sharply rising interest rates. It should be noted that, despite interest rates rising across the market, our average cost of financing at the end of the 1st half remained low, at approximately 2.2 percent. Navigator is committed to carrying on its business while complying with principles and best practices related to the Environment, Society and Governance issues (ESG) and has established this Sustainability-Linked Finance Framework to support the financing and/or refinancing of its activities in general, through bond issues or loans indexed to sustainability indicators. These sustainability-linked financial instruments are effective tools for securing the funding for its operations, and at the same time bolster its commitment to sustainable practices. These principles are voluntary guidelines which foster transparency and credibility in the sustainability-linked bond and loan markets. The sustainability indicators selected for linking to the financial costs of the financial operations relate to the central goals of our sustainability strategy: i) reduction of CO2 emissions (Scope1, EETS basis); ii) purchases of certified wood; iii) consumption of energy from renewable sources. The indicators described are consistent with the Sustainability Performance Targets presented in timelines with annual targets from 2024 to 2030, and consistent with the planning horizon for the Company's 2030 Agenda. Capex of € 93 million In the 1st half of 2024, capital expenditure totalled € 93 million (compared to € 113 million in H1 2023), of which approximately € 41 million was classified as environmental or sustainability investment (ESG), with a positive contribution to reducing future costs, accounting for 44 percent of total. Capital expenditure consisted mostly of projects aimed at decarbonisation, maintaining production capacity, modernising plant and achieving efficiency gains, as well as structural and safety projects. The most significant capex projects include the new high efficiency Recovery Boiler in Setúbal, Moulded Cellulose in Aveiro, the new biomass-fuelled lime kiln in Figueira, conversion of the Setúbal lime kiln to burning biomass and the new solar facilities in Figueira da Foz and Vila Velha de Ródão. Navigator has continued to move forwards with projects under the Recovery and Resilience Plan (RRP), in particular projects addressing the Climate Transition and the Digital Transition. For eligible investments under the RRP, an incentive rate of around 40 percent is anticipated, corresponding to close to € 100 million, and the company received approximately 21 million in 2023 and 3 million in the 1st quarter. A bioindustry on the right side of the future 1st place in the Sustainalytics rating agency's Paper and Forestry ranking Navigator draws its motivation from a corporate purpose that involves sharing value with society and a commitment to generating a positive impact on people and the planet through its business. It accordingly pays keen attention to global developments, seeking to consolidate its strategy and its ability to steer its operations, successfully and sustainably, through uncertain future, building partnerships with various stakeholder groups and seeking to cooperate with organisations that share its values, creating a positive impact on Society, the Climate and Nature. Our commitment was recognised, in July, in the annual assessment of the Sustainalytics rating agency, which again classified Navigator as a low risk company for investors, placing it at the top of the list of companies with the lowest ESG risk, in the lower fringes of the “low” risk band, with most material topics presenting only negligible risk. Navigator was ranked in top place out of a total of 85 global companies in the Paper & Forestry industries cluster, and also top in the sub-group of 63 global companies in the Paper & Pulp cluster and top 5 percent in more than 16,200 companies worldwide in all business segments. A continuous commitment to improving practices relating to environmental, social and business governance issues has resulted in sound management of Navigator's exposure to ESG risks, assessed over more than 70 indicators in the Sustainalytics framework, and led to very significant improvement in this rating, since the last assessment, already top-rated. The indicators assessed encompass topics related to corporate governance, management of carbon emissions, waste and effluents, water management, community relations, products and services, human capital, occupational health and safety, land use and biodiversity, and stakeholder governance. Market outlook Economic prospects have improved worldwide since January, but even so trends in global growth remain at a historically low level in the medium term. In its last published report (July 2024), the IMF reiterated its projection for global growth, at 3.2 percent in 2024, with a slight upwards revision to 3.3 percent in 2025. In the short term, the economic outlook is only cautiously optimistic, as economic vulnerabilities remain in place, in a contest of persistently high interest rates and continued geopolitical tensions. In this context, and particularly for pulp and paper business, prudence is to be recommended as regards market evolution for the rest of the year. For pulp, demand is expected to slow and supply to increase, which will bring downwards pressure on benchmark prices for pulp, although these are expected to be slightly higher than last year. At the same time, it is anticipated that the effect of new capacity coming online in Latin America (2.6Mt/year) will be felt above all in 2025, which could ease the pressure expected for the 2nd half of the year. In the paper segment, the rate of growth in order books is expected to continue to slow down in the 3rd quarter, due to the usual seasonal factors. On the other hand, strong pressure is expected to remain on costs, which are anticipated to stabilise at a level well above that existing before the pandemic. With regard to capacity, there is still scope for further temporary or definitive capacity reductions in the paper sector, due to deteriorating profitability, as a result of the continued high level of variable costs. This possibility has been announced by a number of European players, with the closure of almost 200 thousand tons in the 1st quarter, followed by the closure of a mill in the USA in June, which will take some 170 thousand tons of UWF production capacity off the market. In the 2nd quarter of the year, a further closure was announced in Germany for the end of 2024, which will take another 280 thousand tons off the market each year. These movements, together with the aforementioned structural increase in producers' cost base, will continue to sustain paper price levels in Europe and in the international markets in which we operate at levels above pre-pandemic ones. In the tissue paper segment, demand continues to rise at interesting levels, and growth of 3.2 percent is estimated for Europe in 2024 (Numera), still lower than in the first few months of the year. The Group has moved to create synergies and economies of scale driven by business growth, in particular with the acquisition of Navigator Tissue Ejea in 2023 and the acquisition of Navigator Tissue UK in 2024. Navigator remains focussed on cutting costs, both by optimising specific consumption levels and by negotiating prices for logistics, raw and subsidiary materials and energy, although these costs remain above pre-pandemic levels. The current level of costs naturally puts pressure on the price of end products, meaning that they are not expected to move towards the levels recorded in the past. Navigator's product range, the quality of our brands and distinctive products, our sustainable business approach, the scale of our operations and our sound finances have all supported a resilient business model, enabling us to present consistent results, even in hostile market conditions. |
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