THE NAVIGATOR COMPANY 1
Highlights: 9 Months 2015 (vs. 9 Months 2014)
Turnover up by 5.8% to € 1,204 million on the strength of higher pulp and paper prices
EBITDA totals €294 million up by 23.2% to € 294 million, with EBITDA/Sales margin rising to 24.4%
Group makes progress on strategic development plan. Milestones during the period:
Start-up of new pulp capacity in Cacia, allowing for 20% increase in annual output
Completion and start-up of second tissue machine in Vila Velha de Ródão
Completion and official opening of Luá Nurseries, in Zambézia province, able to produce 6 million cloned saplings a year;
Decision to expand tissue segment, supported by an investment of € 121 million in a new integrated line, with annual capacity of 70 thousand tons (conditional on successful application for financial and tax incentives)
Debt ratio kept at conservative levels
Highlights: 3rd Quarter 2015 (vs. 2nd Quarter 2015)EBITDA up by 6.2%, to new record of € 109.5 million
Rising prices and positive cost evolution boost EBITDA/Sales margin to 26.7%
Group repays € 200 million in bonds and restructures debt, lowering borrowing costs
1st Sustainability Forum, devoted to Forestry Protection and fire-fighting/prevention
9M 2015 | 9M 2014 | |
Million euros | 1 204.3 | 1 138.0 |
Total sales | ||
EBITDA (1) | 294.0 | 238.7 |
Operating profits | 207.7 | 164.0 |
Financial results | - 44.9 | - 24.6 |
Net earnings | 141.9 | 133.1 |
Cash flow | 228.2 | 207.7 |
Adjusted Free Cash Flow (2) | 18.4 | 200.3 |
Capex | 113.1 | 12.3 |
Net debt (3) | 587.1 | 309.9 |
EBITDA / Sales (%) | 24.4% | 21.0% |
ROS | 11.8% | 11.7% |
ROE | 13.9% | 12.3% |
ROCE | 15.4% | 12.5% |
Equity ratio | 51.5% | 52.2% |
Net Debt / EBITDA (4) | 1.5 | 0.9 |
5.8%
23.2%
26.6%
82.2%
6.6%
9.9%
-90.8%
100.8
277.1
+2.0 pp
+0.5 pp
+2.1 pp
+2.0 pp
- 1.3 pp
Q3 2015 | Q2 2015 | |
Million euros | 409.4 | 406.1 |
Total sales | ||
EBITDA (1) | 109.5 | 103.1 |
Operating profits | 78.1 | 75.5 |
Financial results | - 27.1 | - 9.2 |
Net earnings | 41.5 | 58.7 |
Cash flow | 72.9 | 86.3 |
Free Cash Flow (2) | - 28.5 | 34.1 |
Capex | 35.9 | 64.4 |
Net debt (3) | 587.1 | 558.6 |
EBITDA / Sales (%) | 26.7% | 25.4% |
ROS | 10.1% | 14.4% |
ROE | 13.2% | 17.3% |
ROCE | 17.1% | 17.0% |
Equity ratio | 51.5% | 50.1% |
Net Debt / EBITDA (4) | 1.5 | 1.6 |
0.8%
6.2%
3.4%
195.4%
-29.3%
-15.6%
-183.4%
- 28.4
28.5
+ 4.5 pp
+ 3.7 pp
+ 5.9 pp
+ 4.6 pp
- 4.9 pp
Operating profits + depreciation + provisions
Var. Net debt + dividends + share buyback
Interest-bearing net debt - liquid assets
EBITDA corresponding to last 12 months
Percentage variation corresponds to figures not rounded up/down
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ANALYSIS OF RESULTS
9 Months 2015 vs. 9 Months 2014At the start of 2015, Portucel announced a strategic plan for a new cycle of growth, based on pursuit of three major goals: consolidating its core business as a manufacturer of printing and writing paper and eucalyptus pulp, diversifying into production of tissue paper, and expansion projects in new markets, including construction of a pulp mill in Mozambique and a pellets factory in the US. The Group's activities over the first nine months are the reflection of the implementation of this plan and the different stages involved.
Turnover in the period stood at € 1.2 billion, up by around 5.8% from the figure recorded for the first nine months of 2014, due essentially to rising pulp and paper prices (in the context of the dollar rising against the euro) and to the inclusion of tissue business in the Group's consolidated accounts. Paper sales accounted for 74% of turnover, with power sales representing 13%, pulp 8% and tissue around 3%.
In uncoated (UWF) printing and writing paper, the European market recorded a reduction in apparent consumption of approximately 1.6% whilst the dollar rose strongly against the euro. Both these factors contributed to growth in paper exports to markets outside Europe. To take advantage of foreign exchange trends, Portucel expanded its sales to USD denominated markets, recording growth of approximately 4.1% in overseas markets. As a result, the Group's average sale price evolved positively, rising by 5% in relation to the first nine months of 2014. Sales were up by 3.6% in value, although the volume of paper sales slipped by 1.5%. The slight reduction in sales volumes was due essentially to efforts to replenish stocks, which had fallen to a very low level, and to the increase in the volume in transit to clients. Over the same period, the benchmark index in Europe, PIX A4- Copy B, dropped by 1.3%.
Bleached eucalyptus pulp (BEKP) business maintained the positive performance recorded since the start of the year, with prices significantly better than in the same period in 2014. The dollar-denominated price index performed well, with an average price of 778 USD/ton, as compared to 749 USD/ton in the same period in the previous year. Due to the foreign exchange effect, this increase translated into a sharp rise in the price in Euros, with the benchmark PIX BHKP index pointing to an average of 698 €/ton, up by 26.3% year on year. The upward trend in pulp prices resulted in an increase of 15.8% in the value of sales, despite a reduction of approximately 8.1% in the quantity sold.
The reduction in the pulp sales volume in 2015 can essentially be attributed to the smaller quantities available for sale on the market, as a result of planned maintenance stoppages at the Group's production complexes, and also due to a stoppage at the Cacia mill to allow for work to expand the plant's capacity. This project, involving a 20% increase in installed capacity, has been successfully completed, and the Cacia mill went back into production at the end of June.
Output figures have been consistent with the anticipated learning curve as the mill moves towards stability at the new target output levels established for the expansion project: 350 000 tons per annum of BEKP.
Energy output and sales were also affected by the maintenance stoppage and a lengthy service of one of the turbogenerators at the Cacia mill, significantly affecting the energy balance at this unit. Even so, the Group's gross output in the first nine months was up by 0.1% on the same period in 2014, although power sales to the national grid were down by 4.9%. Lower prices for power from natural gas co-generation plants were influenced by falling Brent prices and the weakness of the euro against the US dollar.
In tissue business, AMS' sales of finished products grew by approximately 7.7% in the first nine months of 2015, thanks to increased converting capacity. The completion and start-up in September of the second reel production machine was a significant milestone, and will make it possible to double annual production capacity from 30,000 to 60,000 tons. The increase in quantities sold, combined with a 2.2% increase in the average sales price, resulted in growth of 10.1% in tissue sales.
On the production side, raw material costs improved significantly. In the first nine months of 2015, the Group's supply mix included an increasing proportion of wood sourced from within Portugal, and decreased supply from the Spanish market. This change, combined with optimisation of logistical costs, caused a downwards trend in the average cost of wood purchases.
In personnel costs, an increase of approximately € 13.4 million was due essentially to additional redundancy settlements under the workforce rejuvenation programme, adjustment of the cost estimate for the 2015 performance bonus, growth in the workforce for the project in Mozambique and inclusion of AMS' personnel costs.
In this scenario, consolidated EBITDA performed very strongly, rising by 23.2% to € 294.0 million. In addition to the results generated by the Group's traditional operations, the figure for EBITDA also includes a positive amount of € 5.5 on AMS' operations and also a negative figure of approximately € 3.4 million relating to the impact of future business operations - the project in Mozambique and the pellets project in the United States, both at the investment phase.
The EBITDA / Sales margin also improved, standing at 24.4%. Operating cash flow stood at € 228.2 million, up by 9.9 % on the same period in 2014.
Operating income also improved significantly, up by 26.6% to € 207.7 million.
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The Group recorded a financial loss in the period of € 44.9 million euros, as compared with a loss of € 24.6 million recorded in the first nine months of 2014. As previously disclosed, the financial loss for the 3rd quarter includes recognition of the costs relating to partial early repayment of a bond issue (Portucel Senior Notes 5.375%). The amount repaid was € 200 million (of a total issue of € 350 million), and the price paid corresponded to the face value of the notes repaid, plus the contractual premium for early repayment, totalling approximately € 14.6 million, together with the recognition of approximately € 2.3 million referring to issue costs for this loan, not yet reflected in results at the
repayment date. This repayment will allow for a significant reduction in borrowing costs, as the Group simultaneously renegotiated a bond issue for the same amount (€ 200 million), on more advantageous terms and a longer maturity. The financial results also include the cost of foreign exchange hedges contracted for 2015 (€ 4.8 million), which more than offset the reduction in borrowing costs.
As a result, consolidated net income for the period stood at € 141.9 million, representing growth of 6.6% in relation to the first nine months of 2014.
3rd Quarter 2015 vs. 2nd Quarter 2015The Group's performance in the third quarter of 2015 was again stronger than in the previous quarter, with turnover standing at € 409.4 million, up by 0.8%. Rising pulp prices and the reduction in certain production costs were the main factors affecting results in this quarter.
Paper sales in the 3rd quarter were around 1.1% down in volume on the 2nd quarter, as could be expected after the steep growth in the previous quarter. Paper sales to markets outside Europe remained high and the Group's average sales price stayed in line with the previous quarter.
In volume, pulp sales (BEKP) rose by 9.2% in relation to the 2nd quarter, and the Group's average price performed very favourably, in line with the FOEX BHKP index in euros, resulting in growth of 11.2% in the value of sales.
EBITDA for the quarter recorded outstanding performance, growing by 6.2% to € 109.5 million, the highest quarterly figure since 2010. The EBITDA/Sales margin improved significantly, rising 1.3 percentage points to 26.7%. Operating income also performed strongly, climbing by 3.4% to a level of € 78.1 million.
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MARKET ANALYSIS
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UWF Paper
In comparison with the same period in 2014, apparent UWF consumption in 2015 is estimated to have fallen by 1.6% (with a reduction in cut-size of approximately 1.3%), whilst the main benchmark index for UWF prices (PIX A4 - Copy B) dropped by 0.5%. In this environment, as already observed in the first half, the weakness of the euro against the dollar drove the European industry to look for more profitable opportunities, boosting the volume of exports and consequently reducing the volume sold to the European market. The capacity utilization rate stood at approximately 93% in the first nine months of 2015, 1.7 percentage points higher year on year. Order books in the industry in the same period were 2.9% higher than in the same period in the previous year, and up by 8.2% when comparing the third quarter with the same period in 2014.
In the US, apparent consumption of UWF paper dropped by 0.3% in the first 9 months of the year, and by 1.5% in the case of cut-size. The leading price index for the sector (Risi 20lb A4) fell by 1.6% in the first nine months of 2015 in relation to the same period in the previous year.
In this context, the Group achieved accrued growth in sales to export markets of 4.1%, with continued expansion into new regions and growing penetration in Latin America and the Middle East. Sales in Europe were cooler, as a result of slowing consumption and the search for higher returns in USD-denominated markets. As usual, the Group continued to operate at 100% of its capacity, with order books at fairly comfortable levels. The Navigator brand remained the Group's top performer, achieving growth of 1.9% and maintaining an impressive level of brand recognition and market share.
As previously reported, the Group implemented two price increases in Europe over the year (in late March and in July), and then successfully implemented a third increase at the end of September.
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BEKP Pulp
As was to be expected, the recovery which started in the fourth quarter of 2014 continued into this quarter, thanks to a combination of positive market factors, including a slowdown in the launch of new capacity and a reduction in supply due to the unexpected stoppage of two lines at the Rizhao mill in China, causing market demand to increase, especially in China.
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These market developments fuelled continuing price increases, and the average PIX benchmark index rose by 3.6% in relation to the same period in 2014, from USD 750 to USD 778 for the first nine months of 2015. In euros, due to the currency's weakness against the dollar, the price increase was even more significant, as can be seen from the following graph, rising from € 552 to € 698 over the same period.
Monthly PIX Price Europe - BHKP
USD / ton EUR / ton
BHKP USD / tonBHKP EUR / ton
850 750
800 700
750 650
700 600
650 550
600
2012 2013 2014 2015
500
As reported above, the Chinese market remains the main driving force behind demand. PPPC W-20 figures for pulp sales to this market up to August 2015 point to an overall increase of 10.1%, with eucalyptus pulp leading the way with growth of 16.3%.
The Group's BEKP pulp sales totalled approximately 185 thousand tons in the first three quarters of 2015, with an improved position in the decorative and special papers segment, which accounted for more than 76%.
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Operating indicators
Pulp and paperrd
nd
(in 000 tons) 9 Months 9 Months % 3 Quarter 2 Quarter %
2015
2014
2015
2015
BEKP Output
1,059
1,063
-0.4%
370
347
+6.8%
BEKP Sales
185
201
-8.1%
67
61
+9.2%
UWF Output
1,145
1,169
-2.1%
372
399
-6.9%
UWF Sales
1,130
1,147
-1.1%
382
387
-1.1%
Foex - BHKP Euros /ton
698
588
+26.3%
724
709
+2.1%
Foex - A4-B copy Euros / ton
818
829
-1.3%
826
814
+1.4%
Energyrd
nd
(in 000 tons) 9 Months 9 Months % 3 Quarter 2 Quarter %
2015 2014 2015 2015
Output (GWh)
1,784
1,783
+0.1%
611
580
+5.3%
Sales (GWh)
1,547
1,627
-4.9%
524
506
+3.5%
Tissue
er(in 000 tons)
9 Months 3rd Quarter 2015 2015
2nd Quarter 2015
1st Quart 2015
Reels Output
14
8
7
7
Output: finished products
17
9
8
9
Sales: finished products
17
9
9
8
9
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STRATEGIC DEVELOPMENT
Over the course of the year, the Group pursued the various alternatives for growth defined in its strategic plan, and made significant progress on its development projects. Capital expenditure stood at approximately € 113.1 million, including €
56.5 million on pulp and paper business (of which € 40.2 million related to the expansion plan at Cacia), € 34 million on expanding tissue capacity at the mill in Vila Velha de Rodão, € 11.2 on the project in Mozambique and €11.4 on building the pellets factory in the United States.
Tissue projectIn view of the Portucel Group's strategic option to diversify its business and move into the tissue segment, Portucel has approved (subject to acceptance of its application for financial and tax incentives to be submitted to AICEP) investment on a tissue production and converting line with capacity of 70 thousand tons per annum, representing estimated expenditure of € 121 million. As a result of this project, the Group will have total annual capacity in this sector of 130 000 tons.
The business model that the Group has adopted is based on a strategy of direct incorporation of pulp in tissue production, meaning that this capital project will be located at the Cacia industrial site.
Preparatory work has got under way in recent months, including market studies, feasibility studies and preliminary engineering, in order to identify the best technical solutions, the ideal location and the production and converting capacity to install, as well as identifying the target markets and segments with the greatest potential. Provided the necessary conditions are met for implementing this project, Portucel envisages that operation can start up as early as the first half of 2017.
PelletsThe project for a new pellets factory in the United States has continued to make good progress, in particular by consolidating the project team working in Greenwood, South Carolina. Contracts have been signed for phase 2 of the construction plans, with work starting in August 2015 and currently progressing on the foundations and the buildings to house the plant. Contracts already signed account for close to 90% of the planned investment, and work is due to start in the next quarter on fitting the main equipment, scheduled for completion in mid-March 2016.
MozambiqueForestry plantation operations have expanded significantly in 2015 with a view to supplying the future industrial complex.
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In an important breakthrough, Portucel Moçambique successfully obtained the environmental license needed for forestry operations in Zambézia and Manica provinces.
Work was also completed on the Luá nurseries, in Zambézia province, which will produce cloned saplings on an industrial basis, with capacity for 6 million plants a year, set to double in the near future. The nurseries were officially opened at the start of September, at a ceremony attended by the senior executives of the Portucel Group, and also by the President of Mozambique and representatives from the International Finance Corporation.
The Group is also building complementary nurseries (in Maquiringa and Mugulama) for strategic and logistical reasons, and also to ensure the necessary production capacity. Despite poor weather conditions, it was possible to continue plantation operations, albeit at a slower pace than originally envisaged.
The organisation continues to adjust to the increasing pace of local operations, and work is practically complete on the housing centre to provide accommodation for staff located in Zambézia (Nipiode).
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FINANCIAL
Over the course of the first nine months, Portucel continued to demonstrate excellent capacity for generating cash flow, with operational cash flow standing at approximately € 233 million. This cash generation capacity, combined with the Group's sound financial situation, allowed it to meet its considerable financial commitments maturing in the first nine months without any disruption.
In addition to repaying two bond issues, which matured in February and March 2015, with a total value of € 160 million, the Group distributed dividends and reserves totalling € 310.5 million in May, and completed the process of acquiring AMS, with a payment of € 41 million in June. Portucel also made an extraordinary allocation of € 9.2 million to its pension funds.
In addition, the Group recorded a large figure (approximately € 113.1 million) for capital expenditure in the period.
As a result of these disbursements, interest-bearing net debt rose to € 587.1 million. Gross debt stood at € 649.1 million, down by € 124.0 million in relation to gross debt at 31 December 2014.
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Considering the current strategic development plan, the need for a high level of financial flexibility and an appropriate level of liquidity, Portucel has contracted new credit facilities and renegotiated the terms on some of its existing borrowing.
In the first quarter of 2015, the Group contracted a commercial paper programme of € 100 million, underwritten by the bank over 5 years, and in the third quarter it contracted two further commercial paper programmes with a total value of
€ 125 million, also maturing in 5 years.
The Group also renegotiated the terms of a commercial paper programme of € 125 million, maturing in November 2015, extending the term until May 2020, on conditions more favourable than those previously existing.
In September, the Group made a partial early repayment on a bond issue (Portucel Senior Notes 5.375%), with a value of
€ 200 million. This operation reduced the value of this issue to € 150 million.
At the same time, the Group made a new bond issue, underwritten by two banks, also for a value of € 200 million. This new issue matures in 8 years and has a substantially lower interest rate than the loan repaid.
As a result of these operations, the Group has ensured a perfectly adequate level of liquidity at the same time as cutting the financial costs of the facilities available to it and extending the associated maturity.
At the end of June, financial autonomy stood at 51.5%, again reflecting a sound financial situation. The Net Debt/EBITDA ratio stood at 1.5 at the end of September, as compared with 0.8 at the end of 2014; this alteration was in line with expectations, considering the events reported above and the investment plan currently being implemented.
- CAPITAL MARKETS
The capital markets were again extremely volatile in the third quarter, especially in September, when most stock exchanges recorded significant downward adjustments in share prices. Some of the European indexes fell to levels lower than at the start of 2015: these included the FTSE (down 7.7%), IBEX 35 (down 7%) and GDAX (down 1.5%). The indexes most representative of the Portuguese and French stock exchanges fared more positively, with gains of 5.1% and 4.3%, respectively.
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