ENCE Energía y Celulosa, S.A.

Good afternoon, ladies and gentlemen. Welcome to the ENCE third 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 ENCE's third quarter 2020 results conference call. Our CFO, Alfredo Avello, and our head of IR, Alberto Valdez, are also connected. We are wearing masks. If you have problems understanding us, please let us know it. After the presentation, we will be pleased to answer any questions you may have. Let's start in slide number four with the main highlights of the first nine months of the year, which have been marked by the international spread of the coronavirus. I am proud to tell you that our early reaction to the threat from this virus, together with the regular updating and rigorous application of our protocols in order to prevent its spread, is keeping our staff safe. We have continued to operate even during the most recent virus outbreaks. All end-phase activities, from our forestry and biomass operations, to pulp production and the generation of renewable energy, have been declared essential. Our first nine months results show a good operating performance in both businesses, following the strategic plan investments made last year, and despite the difficulties caused by the pandemic. Firstly, we have further reduced our cash costs during the third quarter, down to 373 euro per ton, despite the annual maintenance shutdowns carried out at both of our biomills. Moreover, our pulp sales improved by 7% year-on-year with a better commercial mix. Secondly, our renewable energy sales increased by more than 27% year-on-year following the commissioning of the two new biomass plants in first quarter 20. This regulated business is adding stability to the group. Despite this operational improvement, our first nine months financial results continue to be affected by the extremely low prices of pulp and electricity, with an EBITDA of 7 million in the pulp business and 42 million in the renewable energy business. Pulp prices are at a 10-year minimum. For 2021, we have already hedged the price for 193,000 tons of pulp at $770 per ton, which is $90 per ton above the current reference price in Europe. We also hedged the price of 500,000 megawatt hour at 43 euro per megawatt hour. In order to ensure the resilience of our business in any future scenario, we have increased our liquidity by 59%, up to 360 million. Remember that our part of business debt has no governance at all, and we enjoy long-term financing with no relevant maturities in the next two years. Our top priorities now are the health and safety of our staff, the continuity of our operations, and the reduction of costs and leverage in the part business. Moving now to slide five, we can see some of the measures we took against the coronavirus, which have been effective and have prevented the spread of the virus in our workplace, allowing us to continue our operations. Our protocols have different degrees of safety measures according to the rates of infection in the different regions. All staff maintain two meter of distance. Everyone wears masks. Our officers and work areas are ventilated following an important investment in improved air conditioning. The regular disinfection of hands and tools is mandatory. Other measures are implemented according to the level of infection in the locality. These measures are the frequency and the kind of test, the percentage of teleworking, and the organization of shifts. We have successfully applied our prevention protocol since February 24th throughout our organization, including subcontractors and logistics services. This protocol has been periodically updated with best practices as more is known about this pandemic with the advice from the best scientists in space. We have also taken measures to increase our liquidity. Firstly, we have drawn the revolving credit facility of 70 million in the PAL business, maturing in March 2023. Secondly, we have closed long-term backup credit facilities with no cabinets for an additional 102 million. Thirdly, we have pushed back to next year capex payments for an amount of 51 million. And finally, we continue to optimize the use of our factoring and confirming lines. Moving now to slide six, I would like to mention the highlights of our sustainability performance. Companies that care for the environment, companies that respect their staff and their communities, and companies with a strong corporate governance are more efficient, more flexible, and more competitive in the long run. ENCE is already at the forefront in sustainable forestry, circular economy, social commitment, and gender equality. Our best practices have been recognized by independent ECG analysts such as Sustainalytics. In their latest assessment, ENCE attained a total score of 82 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 2020, I would like to highlight. Firstly, we have set a new target to reduce CO2 emissions by 25% in 2025, and we are preparing ENCE for different climate change scenarios following the TCFD recommendations. Secondly, the successful development of our differentiated and more sustainable products, which already account for 10% of our pulp sales. the 40% year-on-year reduction in the outer impact of our bio-meals, which is down to 1.4 minutes per day. And fourthly, the continuous reduction of water consumption levels of our bio-meals year after year. Moving now to slide seven and our renewable energy business. We commissioned two new biomass power plants during the current years. In Huelva, on January 31st, and in Porto Llano on March 31st. Thanks to their commissioning, our renewable energy sales increased by 27% year-on-year in the first nine months, despite the difficulties caused by the pandemic. The scheduled ramp-up of our two new biomass power plants and the fine-tuning of equipment were delayed by the mobility restrictions and the absence of external technicians caused by the pandemic. The turbine of Uelva 41 megawatt power plant is back on track since the end of August. Its repair in Germany took three months longer than expected due to the pandemic. This regulated business gives 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 only declined by 6% from its regulatory cap to its regulatory floor, compared to the 36% 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, only subject to a minimum operation of just 3,000 hours per power plant. The next slide, number nine, illustrates our renewable energy pipeline. We have eight projects with a combined installed capacity of 405 megawatts. All of them have already grid connection permits and locations secured. Administrative authorizations are being processed. we expect the public options required to implement the National Renewable Energy Plan in the coming months. This business is able to finance its own growth, and we expect to begin the construction of the new projects between the fourth quarter 2021 and the first quarter 2022. On top of that, we have other projects at an early stage of development. Turning now to the PAL business in slide number 10, we have recorded a good operating performance in the first nine months of 2020, following the 100,000 ton capacity expansions carried out in 2019. We have further reduced our cash costs during the third quarter, down to 373 euros per ton, despite the annual maintenance shutdowns carried out at both of our biomills. These annual shutdowns were delayed to the third quarter due to the pandemic. The one at Pontevedra took 15 days longer than initially planned, resulting in a production loss of 20,000 tons, mainly due to the strict safety measures. We have implemented several energy efficiency improvements at this bio-mill and fine-tuned the second pulp dryer at Navia, which should be reflected in higher production rates in the future. Our pulp production increased by 2% year-on-year, and we stick to our target of reaching 1,025,000 tons in 2020, with a cash cost of 375 euros per ton, 22 euros per ton below 2019 cash costs. Our pulp sales improved 7% 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. Moreover, almost 60% 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. PPPC updated its statistics in August, including data from Brazilian producers, which revealed stronger demand in 2020 than initially expected. It has recovered by 5% versus the first eight months of 2019, which were affected by the destocking of pulp in the paper industry. Restocking, together with 5% higher demand for tissue paper, has offset the 18% drop in demand for printing and writing papers, particularly during the lockdown. Producers' inventories remained fairly stable during the first eight months of the year, despite the postponement of most maintenance shutdowns to the second half of the year due to the coronavirus. and the impact of lockdown measures on demand for printing and writing papers in the second quarter. As you can see 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 one year. This situation is unsustainable for the industry, and we have started to see some markets related downtimes of high-cost mills. As you know, a price increase for October of $20 per ton was announced in China for BHKP. Looking to 2021, we have already hedged the price of 193,000 tons at $770 per ton, which is $90 per ton above the current reference price in Europe. In slide 14, we summarize our views on pulp supply and demand. Underlying pulp demand will decrease this year due to the impact of the lockdown measures, particularly on printing and writing paper. We expect demand for tissue and hygiene products to remain strong, while demand weakness for printing and writing is fading as economic activity recovers, mainly in China. Market conditions should tighten in the coming months as demand improves and supply is constrained by delayed maintenance shutdowns and production cuts from less efficient producers. In the longer term, park demand should add growth supply. Urban population growth and improving living standards in emerging countries together with increasing plastic substitution will continue to support pulp demand growth. On the supply side, there are only two major paper-grade pulp projects now underway, Araújo's Mapa and the UPM project in Uruguay. Remember that lead times for new projects are close to four years, meaning that no further supply will come on the stream over the next few years. Let's continue in slide number 15 with a summary of our first halved financial results. Pulp business EBITDA reached $7 million. Renewable business EBITDA reached $42 million. Lower pulp and electricity prices complicate the comparison with the same period last year, despite the better 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 the effect of regulatory collar amounted to 50 million. Carryover payments from investments implemented in 2019 amounted to 62 million, and the effect of the regulatory collar was 32 million. The group's net debt increased by 43 million, up to 556 million. including 54 million related to lease contracts. It is important to highlight once more that our part business is cabinet-free, that our two businesses enjoy long-term financing with no relevant maturities in the next two years, and that our cash balance at the end of the quarter amounted to 360 million. Finally, let's look at slide 17 concerning Pontevedra's biomil concession. We expect the first ruling by the national court in the next few months. It will be the first step in a legal case that could last for another four years, including appeals to higher courts. I will now invite Alfredo to review the financial figures in more detail.

Thank you, Ignacio. Let me start with our pulp business results, which you will find in slide 19. The first nine months of the year, pulp sales increased by 7% year-on-year, up to 756,000 tons, thanks to the higher production levels achieved after the capacity expansions carried out back in 2019. In quarterly figures, sales were 11% lower with respect to 2019 due to the maintenance shutdowns executed at both of our biomass during the month of July. As our chairman has previously explained, the higher fixed cost dilution deriving from the capacity increases together with lower corporate expenses and wood costs allowed us to reduce our cash cost by 3% down to 376 euros per ton. This was possible even with a longer-than-usual shutdown at our Pontevedra biome. On the other hand, and in line with the sharp drop in the reference price, our average sales price decreased by 26%, resulting in an EBITDA of 7 million euros. This figure includes negative FX settlements for 10 million euros in the first nine months compared to the 24 million recorded in the same period last year. Additionally, we have provisioned 1.5 million euros in the third quarter due to the effect of lower pulp prices in the value of our pulp inventories. Moving forward onto the pulp business P&L in the next slide, after EBDA, depreciation amounted to 49 million euros. This figure represents a 5% increase, mainly driven by a larger wood depletion figure related to a greater use of wood from our own southern plantations. Next to the right, we show the recording of provisions for 3.8 million euros related to ENCE's environmental pact in Pontevedra with no cash add flow effect. All these result in a negative EBIT figure of 45 million euros for the period. Finally, the negative financial result of 9 million together with a positive tax effect of 13 added up to a net result of minus 41 for the first nine months of 2020. If we continue to slide 21, we can analyze our pulp business cash flow generation. Normalized free cash flow after working capital changes, maintenance capex, financial payments, and taxes attained 9 million euros, which after the carryover capex payments, all coming from 2019 investments, resulted in Africa's flow figure of minus 31 for the period. As our chairman highlighted earlier, we continue to actively manage the cash-add flows related to these carryovers, both postponing some of them into next year and cancelling some others. Up to now, we have postponed carryover payments in the PAL business amounting to 40 million euros, and we have reduced other investments by another five. As a result, in our pulp business, we expect capex payments of $70 million for the year, including $10 million from maintenance. Let me update you on our ongoing FX hedging program in slide 22. As we mentioned in the first quarter's results presentation, we have returned to our standard policy, consisting in hedging 50% of our pulp sales using average cycle prices and limiting the period to 12 months. This program had a negative impact of $10 million in the first nine months of the year compared to $24 million in the same period last year. Currently, ENCE has secured an average cap of $119 and an average floor of $112 for 50% of its dollar exposures until September 21. If we continue to slide 23, you will find our Power Business Balance Sheet. Net debt increased by 45 million euros during the nine months, up to 350 million, including 45 related to the lease contracts. At the same time, cash imbalance increased by 132 million, reaching 237 at the end of the period. 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 euros and expanded our long-term backup credit facilities by another 102. Secondly, we have negotiated the postponement to 22 of carryover payments amounting to 40 million euros and reduced other investments for another five. And thirdly, we're increasing the use of our factoring and confirming lines available. As you already know, This business is covenant-free and enjoys long-term maturities, releasing our balances from short-term pressures. Net debt to EBITDA ratio in this business is affected by minimum cycle prices and the negative EBITDA recorded in 4-4-19 due to NAVIA's extraordinary shutdown related to the 80,000 tons expansion. When considering average net cycle prices of $600 per ton, Its leverage comes down to approximately two times. Let's now focus on the renewable energy business in slide 24. The energy volume sold increased by 27% in the first nine months of the year thanks to the contribution of our two new biomass lands commissioned in the first quarter and despite the pandemic. We were able to resume operations at our Welba 41 megawatt biomass plant after it suffered a failure in its turbine in March and its repair in Germany took more than expected due to the pandemic and mobility restrictions. Regarding prices, the average selling price in the first quarter was 6% lower than in the same period last year as a consequence of the fall in electricity market price. Current market prices are below the floor set by the regulator, and therefore, we have recognized an income of $22 million for the period related to this regulatory quarter. In all, higher energy sales increased our EBITDA by 2% up to $42 million, offsetting the decline in the average sales price. In slide 25, you can find the breakdown of our Renewal Energy Business P&L. The depreciation and others column increased by 61% up to 32 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 costs of 12 million imply a 6% reduction compared to the first nine months of 2019, which included certain one-off expenses related to the 50-milliwatt CSP project financing, with maturity in March 2031. All in all, following a 1 million tax income contribution, the achievable net result of the energy business after minorities shows a negative figure of 3.5 in the first nine months of the year, compared to a positive balance of 4 in the same period last year. Let's follow in the next slide, number 26, with our renewable energy business cash flow generation. After taking into consideration changes in working capital, maintenance capex, interest, and taxes, normalized free cash flow amounted to 41 million euros. The 60 million reflected in the other collection and payments and non-cash adjustments column includes the effect of the regulatory corral recorded as an income for an amount of 22.4 million euros that will be collected over the coming years. The strategic plan capex figure of 23 represents pending payments of the two new biomass power plants commissioned in the first quarter of the year. We have also negotiated the postponement into 21 of certain carryover permits in the energy business amounting to 11 million euros. As a result, our initial capex payment guidance of 50 million for 2020 is now 39, including maintenance. All these drive our renewable energy free cash flow figure for the period to 2 million. Let me conclude this review in slide 27 with our renewable energy business debt situation. Net debt decreased by 12 million down to 206 at the end of the period, with cash imbalance of 122 million. As you can see, This business also enjoys very long-term maturities and ample liquidity. Our financial leverage, multiple of 3.9 times, constitutes a very low figure for regulated business and will continue decreasing moving forward with the full contribution of the two new biomass plants commissioned in the first quarter. Let me now please return the lead of this presentation back to our chairman for the closing remarks.

Thank you, Alfredo. With the backdrop of the pandemic, it is important to highlight that all our activities have been declared essential and we continue operating safely. The capacity expansions we made in 2019 have resulted in a better operating performance this year, despite the difficulties caused by the coronavirus. We maintain our annual operating targets for both businesses, which are a 13% improvement in pulp production, a 6% reduction in cash costs, and a 34% growth in renewable energy sales. This regulated business adds stability to the group. Our 405-megawatt pipeline awaits the upcoming public auctions of the National Renewable Energy Plan before we can begin its construction. For 2021, we have already hedged the price of 193,000 tons of pulp at $770 per ton. And we have also hedged the price of 500,000 megawatt hour at 43 euro per megawatt hour. Prices of both pulp and energy have already started to rise. The price hike of $20 per ton was recently announced in China. We have increased our liquidity to face any continuing adverse scenario. Our two businesses enjoy long-term financing without any covenant in the PAL 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 PAL business. Thank you. We will be pleased to hear any questions you may have.

Thank you. Ladies and gentlemen, the Q&A session starts now. If you wish to ask a question, please press 01 on your telephone keypad. You will have the opportunity to make all the questions that you might have. In order to keep it as clear as possible, we kindly ask you to make one question at a time instead of listing multiple questions to our speakers. Thank you. The first question comes from Joao Pinto from JB Capital. Please go ahead.

Hi. Good morning, everyone. Thanks for taking my questions. I have three, if I may. The first one, regarding these new hedging agreements for POP prices, Given this is the first time, can you explain to us how these instruments work in pulp?

Yes, thank you very much, Joao. We have hatched the price of 193,000 tons of pulp, as we said, at $770 per ton with two top American banks. Well, that means it's like the hedging of the energy or the hedging of the chemicals is the same or the hedging of the fuel is the same. That means that we have already sold this volume at this price for next year. Is that enough or do we need more?

Is it split throughout the year or?

Yes, it is 12,000 tons per month throughout the year. Sorry, sorry, sorry, it's more. It's this amount divided by 12 during the year, yeah, in equal quantities.

Okay.

Yeah, 16,000 tons per month.

Thank you. My second question, regarding pulp prices, do you have any feedback about how paper players are reacting to the price hikes announced in China?

Well, I think that regarding part prices, we have to differentiate very much what is happening in Western world and what is happening in China. In China, the economy has started to grow again sooner than in Europe. Consumption is also growing. It's not only investment or industrial activity. Consumption is also growing in China. the paper industry is booming in China today. Paper mills are buying pulp, paper distributors are buying paper, and consumers are buying paper. What means that the market is happy with this announcement of $20 in China, which is following announcement in Southwood, as you know. Regarding Europe, it's a different situation. The economy has growth a bit during a certain quarter. We still have to know what is happening during the third quarter and the fourth quarter. And here the economy is not so strong, as you know. Here, while prices are stable, but they are stable at historical minimum levels. You know that the market is 60 million tons per year. Out of these 60 million tons, it's important to know that 40% goes to China, which means that 40% of the market is normalized in terms of consumption, in terms of growth, which is good for the industry. And that's since July, August. It's very recent. And these 60 million tons, if you differentiate not by geography but by market segments, 55% is tissue. TCU has no problem at all. It's growing at 5% worldwide. In some countries, like in the States, even at higher rates. We have 25% of these 60 million tons who goes to printing and writing. And in this segment, we have a problem. This segment, during the hard lockdown of second quarter, the reduction was almost 40%. It was 38%. And in the accumulative first nine months of the year, we are at minus 19%. That means that we have two different situations. In China, I would say today, fortunately, normalized situation of a market growing. In Europe, a soft market. And by segments, we have tissue market, 55% of the market. which is growing at 5%. We have no problem to sell any single ton. And we have the segment of printing and writing, which is suffering a lot. As you know, ENFE is not a big player in printing and writing. We are selling less than 10% in this segment. We are selling over 60% in tissue. And therefore, during third quarter, we were forced to substitute tons who were agreed to go to paper mills in Europe, we send them to tissue mills in North Africa and Middle East. What means that we don't have any problem to sell any single ton we produce, but we are, for the time being, sending some tons to the third countries because the printing and writing industry is suffering in Europe. There is... And there is a third market, which is also very important, 15,000 tons per month, same size than the printing and writing, is specialities. And in specialities, you have many industrial products, like filters, but you have a lot of tons of decor paper. Decor paper for furniture, and this market is booming. In all Europe, the families are investing in renewing their houses and their kitchens, and this market is booming. We have a good market, tissue, good market, specialities, and the market, who is not good at all, that is printing and writing. And we have, and I finished, by areas, a good market, China, 40% of the demand, since the last two months going up, and we have a soft market in Europe and the States. Thank you.

Just to confirm, this $20 price hike, you are referring to hardwood pulp in China, right? Could you repeat your question? The $20 price hike that you mentioned that producers were announcing in China is regarding hardwood.

Yes, it is regarding hardwood, yeah, yeah. Okay. Yeah, yeah. And other Latin Americans have announced $20 for October for China. Sorry, for November.

My final question. Okay. My final question, if I may, in energy, are there any developments on the sale process of a minority stake or the plan remains suspended?

No, for the time being, I cannot give you further information.

Thank you.

Thank you very much, all.

Thank you. The next question comes from Jaime Cribano from Banco Santander. Please go ahead.

Hello, good afternoon. So a few questions from my side. So following up on this new hedging on pulp prices. My question would be what happens if the pulp price goes above $770 per ton? So how should we think about from an accounting perspective?

We will be extremely happy because we will sell over 900,000 tons at a fantastic price.

Okay. And what you have hedged, you have to work like a negative difference.

Yes, yes, yes. But that will be A dream.

Yeah, it would be less of a problem. Okay. And in terms of the discount, are you hedging the discount or the discount is not hedged?

No, no, no, no. It's not the discount. The discount is the relationship between us and our customers. It's the gross price of the apparel.

Okay, okay. So, okay. Perfect. So, okay. Okay. And my second question is regarding, well, I'm following up on this. Would you be willing to hedge more or can you hedge more? Are the banks willing to hedge you more times?

Well, it's a small market, yeah. We did that a few weeks ago and we may do that in the future if there is market for that. I'm not pretty sure if we are going to find more market. It's not a liquid market.

Okay, okay, very good, very good. And yeah, my second question is regarding a little bit of outlook regarding November, December. Could you tell us how are you feeling the order intakes, the orders from your customers for November and December? Just to have an idea in terms of volumes, how should we think about this Q4 in terms of volumes?

Now, in terms of volume, it's going to be a good quarter because it is important to remember what I told you before. We have no problem to sell. Then we will sell over 280,000 tons on the quarter. I would say 284,000 tons, the more probably. We will reduce 6,000 tons further, our stock. The problem comes from the price. Then we are selling, let's say, 85% in Europe to our normal customers. And on the last four months, we always have the same problem during the month. We start the month with a good order book for printing and writing, around 7,000 to 8,000 tons, which is not a lot. And during the month, the big paper mills cancel the orders because the market is not supporting. And then we are forced on the last two weeks of the month to sell this volume to tissue makers in the south part of the Mediterranean Sea. Then we don't have any problem in selling, but the discounts who should be in the area of 32, they are in the area of 34, because the price in third market is a bit lower than in Europe. Well, October is almost done, yeah? It has been from operations and from sales in volume a good month, yeah? And we don't see any problem regarding November or December.

Okay, very good.

Thank you very much. The problem is price. It's the price. That's the only problem. And it's a major problem.

Okay, well, I'm following up on this. Do you see with a positive dynamic scene in China, the spreads widening a little bit, inventories going down in September in Europe a bit? Do you... Do you see the resilience increase in prices in Europe or not yet?

Well, they haven't done any announcement yet. I think that, as I said before to Joao Pinto, we have two differentiated situations. A good market with good demand, with good consumption, with optimism in China, where there is no anymore coronavirus. And we have this daddy problem in Europe, as you know. which is affecting consumption of printing and writing. It is not affecting consumption of tissue paper. It is not affecting consumption of paper or filters. But all these lockdowns are seriously affecting the consumption of printing and writing. It will not be as strong as on the second quarter for sure, but the situation is not normalized. And it is 35% of the market, yeah. And when you have 35% of the market, reducing by 19%, well, it's hard. And that is the situation. But if we see 2021, well, the pandemic will be there, but it will be less aggressive in terms of lockdowns, in terms of actions. In the second quarter than on the first quarter, in the third quarter than on the second quarter, then we see the situation normalizing Quota by quota.

Okay. Very good. In terms of cash cost, what is behind of this decline? Because in my opinion, it was better than expected with the maintenance, the strong maintenance you did in Q3. And still, I see that transformation cost was down and commercial and logistics were down significantly. But maybe you can give us more color and And what could, again, what could we expect in Q4? Because if we are at 373 with two maintenance stoppage in Q3, in Q4 more volume sold, where do you see the cash cost heading?

Well, we are on the third quarter at 373, despite not only these long maintenance shutdowns and very inefficient, because, you know, on a normal shutdown at our bio mills, It takes 15 days, and during 15 days you have over 1,000 persons working on the mill. Then to do that with safety measures has been a nightmare, and it took us longer. But we've been able to do that, which is very important. Secondly, we had 373, despite 5 euros per tonne we have from the beginning of the year, in extraordinary costs due to the coronavirus. All the number of tests we are performing, all the disinfection of the meals, the different way to work with the shifts, all the masks, all the filters for the air, all the expenses in ventilation with new systems, all that is five euros per ton in nine months. What means that without that, Despite the long maintenance shutdowns, we would have been below 370. And that's where we want to be on the fourth quarter and where we are pretty sure we are going to be. Then the main difference between second and third quarter has been wood. We had a reduction in wood. During the harder lockdown in second quarter, People buying pine wood in northwestern Spain for plywood were shut down, and then there were more people able to harvest wood, there were more offers of wood, and we were able to reduce a bit the price of the wood. That's the main component of this reduction between second and third quarter. What we see for the fourth quarter is the wood to continue stable at the price we had on the third quarter. And we see, by volume, a slightly better dilution. We forecast that we are going to stay on these 5 euros per ton of the expenses of the COVID, and that is why we see a cash cost around 370 on the fourth quarter, which will give us to an average cash cost for the year of 375. Okay. Thank you, Mr. President.

Okay, and one question, sorry because I'm making many. I remember in Q2 you said that because of COVID lockdown, there was some efficiencies that you were doing that you couldn't do it because the German specialists had to return back to Germany. And my question basically is if you have been able to finalize all these efficiencies or is this something that we are going to see in following quarters?

95% is already done. The turbine of Pontevedra, who was installed in December 2019 and was starting at the beginning of the lockdown, now is working at 95%. And it will take several months, these 5% more, but we are happy. The digester of Nadia and the new drying line of Navia, who also was installed in December 19. I was starting with the pandemic, the pandemic arrived. Now it's doing pretty, pretty well. Yeah, we are very satisfied with this investment and we have been able to manage that and that is solved. And regarding the two new biomass power plants, one in Huelva, who started in January this year, and the one in Porto Llano, who started at the end of March this year, then just in the middle of the pandemic, Well, we still are, let's say, at 80%. We are not at 100%. Then there is still six, seven months of improvement in front of us. And we have been suffering a long stop of the turbine of 41 megawatts in Huelva, the old one. We had a problem at the beginning of the year, and it took, as I said before, three months more than normal, to repair the turbine in Germany because of the pandemic, and now it's working at 100%. That means that all in all, we still have some improvement on the two new biomass power plants in Huelva, in Navia, and in Pontevedra. Everything now is normalized. Thank you, Jaime. Thank you.

Thank you. The next question comes from Alvaro Lence from Alantra Equities. Please go ahead.

Hi, thanks for taking my questions. I have a follow-up on the question from Jaime regarding cash costs. You said that you expect 270 euros per ton cash costs for Q4, which is roughly in line with the guidance you are providing for 2021. Could you explain the maintenance of cash costs, even though you are expected to have more volume in 2021 than you are likely going to have, I assume, in Q4?

Yeah, I will answer this question. Thank you. Well, we expect, as I said, 375 for the year with 370 on the last quarter. We are working now. We have engaged one year more BCBG. We have reduced, as you know, last year we were on the first nine months in 389. We have been on these nine first months of 2020 in 376. That means that we have reduced by 22 euros per ton our cash costs. We did that because of the investments we made at the end of last year and also with the support of Boston Consulting Group. We have engaged them for next year. We are now doing the budget and today the only thing I can do is that we will we will have for sure a cash cost below 370. But please give me some time in order to finish the budget, and I will give you a more precise figure for next year on the next meeting.

Okay, thanks. And another question, if I may. Regarding the CAPEX spending from the 2019 capacity increases in pulp and energy, if you could provide some split of how much of that you expect in Q4 and how much in 2021?

Yes. Well, may I? I am wrong, Alfredo, if I say that we are going to pay carryover capex from next year of 23, 24 million during fourth quarter. You're right. Yeah. Something below 25 million. That's what we have to pay during fourth quarter. And we have a figure of $51 million for next year. It's payment was supposed to be during this year, and we have agreed with the suppliers to pay next year.

Okay, perfect. And last question from my side. Regarding the capex for the strategic plan that you have not yet made, I understand that investments in pulp are on hold as long as pulp prices remain so low. But how should we think about the investments for the energy business? If you were to win the auctions on renewable capacity, would you make the investments despite the overall group leverage being too high, or would you continue the investments?

I think that we have to do a comparison with what is happening in part with China and Europe. China is shining, and Europe is very quiet. And in ENCE, it's the same. Energy is shining, and then we will invest as much as we can. Then we have this pipeline, which is ready to start to build with all the permits and everything in three quarters. What is the most important is that we have security connection point and the land, and we have the support of all the authorities in the area. And as we don't want to be merchants, we are waiting these auctions and these auctions will be around the end of the year or in December or in January. Our idea is to start construction of two biomass power plants at the end of last year if we win the auction and to start the 240 megawatt of PV also at the end of next year. the auction, or if we have a PPA. We are also working on PPA for PV. And as you are saying, in pulp, it's on hold. In pulp, we continue to the engineering, which is one million euros per year, no more. We continue with all the permits. We continue studying even better the flat market, doing trials. We continue studying better the dissolving pulp market. and let's say that once we will start, it will go quicker than expected because we know much more now and we have much more engineering already done.

I think that's very clear. Okay, thank you. Okay, thanks.

Thank you very much. The next question comes from Beltran Palazuelos from Santa Lucia. Please go ahead.

Hello, good afternoon, Ignacio, Alfredo, and Alberto. Thank you for taking my question. I only have one question. I think it was a direct question regarding, let's say, the minority stake sale or possibility of minority stake of the energy business. I think, well, seeing the uncertainty there currently is, it's not appropriate to say that we don't discuss about it. So regarding, well, the article that was on this weekend that you valued more or less your two divisions. I think it's appropriate to, if you don't want to divest, now there's a reasoning on when you will do it. So I think we should know a little bit more.

Yeah, Beltran, I cannot give you more information because I cannot give you more information. Once we will be able to disclose the information, we will disclose the information. And regarding this interview on this financial magazine, the journalist was asking if we were thinking in splitting both companies in several years, and we said yes, normally yes. But the fact of thinking that maybe in six, seven, ten years we will have two different companies is not saying that we are not going to do deal in energy before.

Okay, so the indirect question is you're working on it. It's not like in, let's say, in April or May you said it was impossible to do the due diligence. So currently you're, let's say, looking at all the options that are created for the shareholders. It's not that you're not doing anything.

No, no, sorry. I already answered that. Okay.

Thank you. Thank you for your answer and all the luck and the support in difficult times. Thank you very much, Bertrand.

Thank you. The next question comes from Jaime Escribano from Banco Santander. Please go ahead.

Hi. Just a couple of more questions. Regarding the energy division, the BDA margin in Q3 was around 28%. versus Q2, 31%, despite higher volumes this quarter and higher average selling prices. Could you tell us what is behind this performance?

Let me see if I understand your question, Jaime.

I mean, what you're saying is that you're questioning the performance between... In the energy division, the EBITDA margin was 28.4% in Q3 2020, and in Q2 2020, it was 30.6%. 30.6%, yes. And the volumes, you have increased the volumes quarter on quarter. And the average selling price is also slightly higher.

So I just want to understand... It's very easy, Jaime. You only have two reasons. And we will send to all of you a paper with the exact information. But there are two main reasons. One is that this problem we had on the turbine of Welva 41 on the third quarter... I think that there is between 1.5 and 2 million of costs who goes, costs about EBITDA for the repair of this turbine, and it decreases the margin. And the other is that it's a slightly higher cost of the biomass. And we will send you, to all of you, a paper with information.

Thank you, Jaime. In any case, yes, to add some more, there's some financial costs that we'll let you know about in the second quarter.

Okay. Yeah, no, it's just that I was a little bit surprised. But, yeah, this explains it. And in terms of next year, with Huelva at cruising speed with the contribution of the two new plants, How should we think about 2021 in terms of volume sold in the energy division? Where do you think you can go? Assuming that all the plants are more or less up and running and working fine.

Well, I gave you more or less a question before that we think that we are still at 20% below where we should be in the two new biomass power plants. But we will give you more figures about megawatts for next year or tons for next year in the next meeting once the budget is finished, I mean.

Okay. Okay, very good. And last question, I promise, because I did too many. It's regarding Pontevedra. Could you tell us an update? If you ask your lawyers when do they think that we could have a resolution or what is what they have in mind?

Yeah, something around Christmas, yeah, between December and January. Okay. Okay, very good.

Thank you.

Thank you very much. Ladies and gentlemen, there are no further questions in the conference call. I give back the floor to Mr. Ignacio Colmenares and Mr. Alfredo Abreu. Thank you.

Thank you very much, ladies and gentlemen, for your time. We are in contact. Any questions you may have, you can call us or call Alberto Alfredo, myself, and let's talk in three months' time. Thank you very much.

Bye-bye. Thank you.