ENCE Energía y Celulosa, S.A.

Good afternoon, ladies and gentlemen. Welcome to the ENSYS second quarter 2020 results presentation. I now hand over to Mr. Ignacio Colmenares, Executive Chairman, and Alfredo Avello, CFO. Gentlemen, please go ahead.

Good afternoon, ladies and gentlemen. Thank you for joining ENSYS first half 2020 results conference call. Our CFO, Alfredo Avello, and our head of IR, Alberto Valdez, are also connected. After the presentation, we will be pleased to answer any questions you may have. Let's start in slide number four with the main highlight of the quarter, which has been marked by the international spread of the coronavirus. I'm proud to tell you that our early reaction to the threat from this virus on February 24th and the rigorous application of our protocols to prevent and minimize the risks of the spread of the virus have allowed us to keep our people safe and to continue to operate. All ENFES activities, from forestry and biomass operations to part production and the generation of renewable energy, were classified as essential and have therefore continued during this health crisis. Our first health results show a strong operating improvement in both businesses. following the strategic plan investments made last year, and despite the difficulties caused by the pandemic. Firstly, our renewable energy sales increased by more than 50% in the second quarter, following the commissioning of two new biomass plants in first quarter 20. Secondly, our power production increased by 12% in the first half of the year, and cash cost was reduced by 5%. Pulse sales improved by 19% year on year with a better commercial mix. Despite this operational improvement, first half financial results continue to be affected by the low pulse and electricity prices with an EBITDA of 9 million in the pulse business and 27 million in the renewable energy business. Pulse prices remain at the minimum of the last 10 years. due to the temporary imbalance resulting from the lockdown measures implemented worldwide during the second quarter. In order to ensure the resilience of our business in any scenario, we have increased our liquidity by 51%, up to 342 million. Remember that our two businesses enjoy long-term financing with no relevant maturities in the next two years, and with no cabinet in the PALP business. Our top priority now is the health and safety of our staff, the continuity of our operations, and the reduction of costs and leverage in the PALP business. Moving now to slide five, we can see some of the early measures we took against the coronavirus and which have proven to be effective preventing the spread of the virus in our workplaces and enabling us to the continuity of our operations. We boosted teleworking in our functions wherever possible and in all cases of particularly sensitive people. We also reduced onsite work to the minimum. Shifts were adapted. Isolated work teams were appointed for each process and replacement teams were organized to remain in preventive quarantine at their homes. Annual maintenance shutdowns have been delayed to the third quarter. We have successfully applied our prevention protocol since February 24th throughout our organization, including subcontractors and logistic services. This protocol has been periodically updated with best practices and more as more became known about this pandemic. We continuously monitor the evolution of the pandemic. Since the end of June, we are progressively returning to our workplaces. Sixty percent of those who were teleworking are already back. Our reactive action protocols are implemented whenever new outbreaks occur in areas near our workplaces. we have also taken measures to reinforce our liquidity. Firstly, we have drawn the revolving credit facility of 70 million in the PAL business, maturing in March 2020. Secondly, we have closed long-term backup credit facilities with no cabinets for an additional 67 million. Thirdly, we have pushed back to next year CAPEX payments for an amount of 37 million. And finally, we continue to optimize the use of our factoring and confirming lines. Moving now to slide number six, I would like to mention the highlights of our sustainability performance. Last year, we defined our sustainability plan, which constitutes our roadmap to excel in sustainability and create value for all our stakeholders. Companies that care for the environment, for the staff and for the communities, companies with a strong corporate governance, and companies which are also more efficient, more flexible, and more competitive in the long run. ENCE is at the forefront in circular economy, sustainable forestry, social commitment, and gender equality. Our best practices are being recognized by independent ECG analysts, such as Sustained Analytics. In the last assessment, ENCE attained a total score of 80 points, placing us as leaders in our industry. In addition to all the measures that we implemented to protect the health of our staff during the first half, I would like to highlight, firstly, the successful development of our differentiated and more sustainable products, which already account for 10% of our power sales. Secondly, the 41% year-on-year reduction in the auto impact of our Navia BioMeal to 1.5 minutes per day. Thirdly, we continue to reduce water consumption levels in Navia and Pontevedra year after year. And last but not least, we have substantially reduced NOx and SO2 emissions in our biomass plants at Mérida, Jaén and Ciudad Real. Moving now to slide seven and our renewable energy business. We commissioned two new biomass power plants in Huelva on January 31st and in Ciudad Real on March 31st. Our renewable energy sales increased by 51% year-on-year in the second quarter despite the difficulties caused by the pandemic. The scheduled ramp up of our two new biomass power plants and the fine tuning of equipment was delayed by the mobility restrictions and the absence of external technicians caused by the pandemic. The repair in Germany of the turbine of Welbach 41 megawatt power plant is already taking three months longer than expected, also due to the pandemic. We now expect to generate 1.4 gigawatts this year, 34% more than in 2019. This regulated business is adding stability to the group, as you can see in the following slide number eight. Our renewable energy sales price is supported by its regulated minimum. It has declined by just 7% from its regulatory cap to its regulatory floor, compared to a 44% drop in the market energy price. Additionally, the regulated annual return on investment of our power plants was confirmed at 7.4% for the next 12 years. This implies an annual amount of 63 million with no costs and subject to a minimum operation of just 3,000 hours per power plant. The next slide, number nine, illustrates our renewable energy pipeline. Firstly, we have eight new projects with a combined installed capacity of 405 megawatts. All of them already have grid connection permits and location security. Administrative authorization are being processed. We expect the public options required to implement the National Renewable Energy Plan before Christmas. We expect to begin the construction between the third quarter 2021 and the first quarter 2022. In addition, we have other projects at an early stage of development. Turning now to the pulp business in slide number 10, we have recorded a strong operating improvement in the first half of 2020, following the 100,000 ton capacity increase carried out in 2019. Our pulp production increased by 12%. The lower transformation costs resulting from this capacity increase, together with lower corporate expenses and wood costs, has enabled us to reduce our cash costs by 5% compared to the first half last year. This production increase was achieved despite the difficulties caused by the pandemic. Foreign technicians required to commission the new part dryer and digester in Navia and the new turbine in Pontevedra were unable to work in Spain. We have delayed our annual maintenance shutdowns at both biomills to the third quarter due to mobility restrictions during the health crisis and to minimize the risks for our staff. The delays caused by the lockdown could entail a slight adjustment to our initial production target up to 2% and a minimum adjustment to our initial cash cost target up to 1%. Our part sales improved 19% year on year with a better commercial mix, as you can see in the following slide number 11. Almost all of them went to the European market where ENCE has significant logistical and service advantages. More than half went to the growing tissue market. Our differentiated products, which are more sustainable and are better adapted to replace softwood pulp in specialty segments already account for 10% of pulp sales. In the following slide, number 12, we can see the evolution of global pulp shipments and pulp producers inventories over the last five years. Global pulp demand recovered by 8% compared to the first five months of 2019. which was affected by the restocking of pulp in the paper industry. Its restocking in the first quarter, together with higher demand for tissue paper and hygiene products, has offset lower demand for printing and writing papers, particularly during the lockdown. The spread of the coronavirus has forced pulp producers to postpone maintenance shutdowns to the second half of 2020. together with the impact of lockdown measures, has caused a slight upturn in producers' inventories since the beginning of the year. As you can see in the following slide, number 13, pulp prices have remained at the minimum level over the last 10 years. These prices have remained below the cash cost of many pulp producers for three quarters, even worse. they have remained below the free cash flow break-even point of most PAL producers for three quarters. This situation is unsustainable for most of the industry, and we have started to see some market-related downtimes of high-cost mills. In our case, our free cash flow break-even point, including recurrent capex and financial expenses, is $440 per tonne. which is below current market prices. In slide number 14, we summarize our views on pulp supply and demand. Our demand could decrease this year due to the impact of the lockdown measures, particularly on printing and writing paper consumption for as long as schools and offices are closed. We expect demand for tissue and hygiene products to remain strong during the second half of the year while demand weakness for printing and writing will gradually fade as economic activity recovers. Park prices should start recovering after the summer supported by printing and writing demand recovery and by annual shutdowns. In the longer term, park demand will surely outgrow supply. Urban population growth and improving living standards in emerging countries together with increasing plastic substitution will continue to support park demand growth. On the supply side, there are only two major paper grade park projects being executed, Araucos Mapa and the UPM project in Uruguay. Let's continue in slide number 15 with a summary of our first half financial results. Pulp business EBITDA reached 9 million. Renewable business EBITDA reached 27 million. Lower pulp and electricity prices complicate the comparison with the same period last year, despite their stronger operating performance. Turning to slide number 16, you will find the main cash flow components and our net debt position at the end of the period. Free cash flow before growth capex and dividend payments amounted to 29 million, while carryover payments from investments implemented in 2019 amounted to 42 million. The group's net debt increased by 27 million, up to 540 million, including 55 million related to lease contracts. It is important to highlight once more that our two businesses enjoy long-term financing with no relevant maturities in the next two years and without any covenant in the part business. And that our cash balance at the end of the quarter amounted to 342 million. Finally, let's look at slide 17 concerning Pontevedra's biomeet concession. We have been expecting a first ruling by the national court in the next few months. that this could be delayed until the end of the year due to the coronavirus. I will now invite Alfredo to review the financial figures in more detail.

Thank you, Ignacio. Let me start with our PAL business results, which you will find in slide 19. PAL sales increased by 19% year on year, up to 520,000 tons, thanks to the higher production levels achieved. after the capacity expansions carried out in 2019. During the second quarter, these increases were some lower due to the inventory buildup ahead of our annual maintenance shutdowns planned for the third quarter. As our chairman has previously explained, the higher fixed-cost dilution derived from the capacity increases, together with lower corporate expenses and wood costs, allowed us to reduce our cash costs by 5% down to 378 euros per ton compared to the first half of 2019. On the other hand, and in line with a sharp drop in the reference price, our average sales net bulk price decreased by 29%, resulting in an EBITDA of 9 million euros. This figure includes negative effect settlements of 9 in the first half compared to the 15 million euros recorded in the same period last year. Moving forward onto the Pulse Business P&L in the next slide. After ABDA, depreciation amounted to 34 million euros. This figure represents a 15% increase driven firstly by the biomass capacity expansion investments carried out in 2019, and secondly, by a larger wood depletion figure mainly related on the higher wood sales coming from our southern plantations under our long-term contracts signed at the end of 2018. Next to the right, we show the recording of the provisions for 2.5 million related to ENFES Environmental Pact in Ponte Vedra, with no cash outflow effect. All these resulting in a negative EBIT figure of 27 million for the period. Finally, the negative financial results for 5 million, together with a positive tax effect of 8, added up to a net result of minus 24 for the first half of 2020. If we continue to slide 21, we can analyze our appalled business cash flow generation. Normalized free cash flow after working capital changes, maintenance capex, financial payments, and taxes attained 13 million euros, which after the carryover capex payments coming from 2019 investments, resulted in a free cash flow figure of minus 15 for the period. As our chairman highlighted earlier, we continue actively managing our cash outflows related to these carryovers, both postponing some of them into next year and canceling some others not yet incurred. Up to today, we have postponed carryover payments in the Pulse business amounting to $35 million, and we have reduced other investments by another five. As a result of this, our initial CAPEX payment guidance of 115 million years for 2020 is now reduced by 40 million down to 75, including maintenance CAPEX. Let me update you now on our ongoing FX hedging program in slide 22. As we mentioned in the first quarter's result presentation, we have returned to our standard policy consisting on hedging 50% of our PAL business sales using average cycle prices and limiting the period to 12 months. This program had a negative impact of 9 million in the first half of the year compared to 15 in the same period last year. If the U.S. euro exchange rate remained an average of 1.14 in 2020, the full year impact in our P&L should total approximately 10 million euros. If we continue to slide 23, you will find our PAL business balance sheet. Net debt increased only by 16 million during the first half up to 322, including 46 million related to IFRS 16. At the same time, cash imbalance increased by 128 million, reaching 234 at the end of the period in this business. Within our plans to maximize liquidity, and help shielding our operations against any adverse scenario in the framework of this pandemic. We have firstly drew down our evolving credit facility of 70 million and expanded our long-term backup credit facilities by another 67. Secondly, and as we previously said, we have negotiated the postponement to 2021 of carryover payments amounting 35 million and reduced overinvestments by another five. we are increasing the use of our factoring and confirming lines available. As you already know, this business is government-free and denotes long-term authorities releasing our balance sheet from short-term pressures. The debt to EBITDA ratio in this business is affected by the minimum part prices and the negative EBITDA recorded in 4Q19 due to NAVYAS storing energy shutdown. Let's now focus on the renewable energy business in slide 24. The energy volume sold increased by 27% in the first half of the year, thanks to the contribution of our two new biomass plants commissioned in the first quarter, and despite the delay caused by this pandemic. To the real 16 megawatt biomass plants performed well after the repowering work carried out in the first quarter, which couples with the enhancement performance of our well above 50 megawatt and high-end 60 megawatt biomass plants, following the repowering last year. On the other hand, as we mentioned in the first quarter results presentation, our Worldwide 41 megawatt biomass plant suffered a failure in this turbine in March. Its repair in Germany has been delayed due to the pandemic, and we expect to resume operations very shortly. Regarding prices, the average selling price in the first quarter was 7% lower in the same period last year. As a consequence, of the fall in the electricity market price. Current market prices are below the floor set by the regulator, and therefore, we have recognized an income of 15 million for the period related to this regulatory fallout. All in all, high energy sales increased by our EBITDA by 5%, up to 27 million, offsetting the decline in the average sales price. In slide 25, you can find the breakdown of our renewable energy business P&L. In OABDA, the depreciation and others column increased by 60% up to $22 million as a result of the commissioning of the two new biomass plants, together with the transfer of the remaining assets from the pulp business to the renewable business in Huelva during the first quarter. Net financial cost of $8 million implied a 14% reduction compared to first half 2019, which included certain one-off expenses related to the 50 megawatt CSP project financing with maturity in March 2031. Following a 1 million tax income contribution, the attributable net result of the energy business after minorities shows a negative figure of 3 million in the first half of the year compared to a positive balance of 1 in the same period last year. Let's follow the next slide, 26. with our renewable energy business cash flow generation. After taking into consideration changes in capital, maintenance cap tax, interest, and taxes, normalized free cash flow amounted to 16 million euros. Following the 15 million adjustment related to the regulatory quarter, which we will cash in in the future, the strategic plan cap tax figure of 8 million represents pending payments of the two new biomass power plants commissioned in the first quarter of the year. We have also negotiated the postponing into 2021 of certain carryover payments in the energy business amounting to 2 million euros. As a result, our initial capex payment guidance of 50 million for 2020 is now down to 48, including maintenance capex. All these drives our renewable energy free cash flow figure for the period to minus 5. Please note that our royal decree was published in June regulating certain aspects of the pandemic and specifically reviewing the electricity prices of people during this period. We foresee that this review will have an extraordinary positive cash flow impact within this year of approximately 11 million in our energy business, plus another 2 million in our health business. In any case, we need to wait for this final regulation under administrative order that we expect to be released in the coming weeks. Let me conclude this review in slide 27 with our renewable energy business debt situation. Net debt increased by 10 million up to 218 at the end of the period with cash imbalance of 108 million euros. As you can see, this business also enjoys very long-term maturities and ample liquidity. Our financial leverage of multiple of four times will decrease moving forward with the contribution of the two new guidance plans commissioned in Q1. Let me please return the lead of this presentation back to our chairman for the closing remarks.