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.