ENCE Energía y Celulosa, S.A.

Good afternoon, ladies and gentlemen. Welcome to the NCES Fourth Quarter 2020 results presentation. I now hand over to Mr. Ignacio Gourmenares, Executive Chairman, and Alfredo Abello, CFO. Gentlemen, please go ahead.

Good afternoon, ladies and gentlemen. Thank you for joining NCES Fourth Quarter 2020 results conference call. Our CFO, Alfredo Abello, 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 three with the main highlights of our presentation. Pulse prices are rapidly recovering after one year at minimum levels, driven by strong demand growth in China and elsewhere. European hardwood pulp prices have been rising in recent months and will continue to rise. Our 2020 results show an operating improvement in both businesses following the strategic plan investments made in 2019 and despite the difficulties caused by the pandemic. Firstly, we have further reduced our cash costs during the fourth quarter. down to 367 euro per tonne. Moreover, our part sales improved by 12% year on year with a better commercial mix. Secondly, our renewable energy sales increased by 36% year on year, following the commissioning of the two new biomass plants in first quarter 20. Despite this operational improvement, Financial results were affected by low prices of pulp and electricity with an EBITDA of 14 million in the pulp business and 60 million in the renewable energy business. This regulated business is adding stability to the group. In December, we completed the sale of a minority stake in ENCE Energía and the sale of our CSP plant. The implicit valuation of ENCE's renewable energy business exceeded 1 billion. These deals reinforced our balance sheet with 318 million in December, reducing the group's net debt down to 178 million. I am proud to tell you that our ECG practices were recognized by the independent agencies MSCI and Sustainalytics. they upgraded our ECT rating, ranking ENCE now among the leaders in sustainability in our industry. All ENCE's activities, from our forestry and biomass operations to pulp production and the generation of renewable energy, were declared essential at the start of the pandemic. Our prompt reaction to the threat presented by COVID-19 together with the regular updating and rigorous application of our protocols to prevent the spread of the virus, is keeping our staff safe. We have continued to operate even during the most recent outbreaks of the virus in the country. As of today, I can confirm that there have been no outbreaks in any of our facilities. 2021 will be another year of operational improvements. Our priorities remain the health and safety of our staff, the continuity of our operations, and the reduction of costs. We are finalizing all the permits required to develop our renewable energy pipeline, and once we have overcome the uncertainties of the pandemic, we will resume the investments proposed in our strategic plan for the PAL business. Moving now to slide four, we show the rapid pulp price recovery now underway. Pulp demand in the second half of the year was stronger than initially expected. Year on year, demand growth in 2020 reached 3%, equivalent to 1.9 million tons, fostered by robust growth from tissue and the recovery of pulp inventories in the paper industry, which has offset the drop in demand for printing and writing papers as a result of the COVID lockdowns. China represents close to 40% of the global pulp market and is growing again at almost double digits now that the pandemic there has been almost overcome. Net hardwood pulp prices in China have already recovered more than 30% since the end of 2020 and are already at a range of $620 to $730 per tonne net. These price increases are already being passed through the European market, where gross hardwood pulp prices have only recovered 15% since December, up to $780 per tonne gross in February. They will continue to increase. Note that this gross price in Europe is equivalent to a net price of just $514 per ton in China, using an average discount of around 34%. The equivalent gross price in Europe to the current net price of $620 to $730 per ton in China is $940 to $1,106, dollars per tonne gross. Therefore, I see room for further price increases in Europe in the coming months, favoured by strong demand and the high price gap with Southwood and China. New price increases have been announced for March in China and today to some customers in Europe. In the following slide, number five, we summarize our views on pulp supply on demand. We expect the demand for tissue and hygiene products, packaging and specialities to remain strong in 2021, while demand for printing and writing is fading as economic activity recovers. Market conditions should tighten in the coming months without any new capacity additions until the end of the year. In the longer terms, Part-demand should add growth supply. Urban population growth and improving living standards in emerging countries, together with increasing plastic substitution, will continue to support part-demand growth. On the supply side, there are only two major paper-grade parts projects now underway. Arauco in Chile and the UPM project in Uruguay. Brazil's stream mill in Brazil is expected to be more biased towards dissolving bulb. There are no other greenfield projects under construction, and as lead times for new projects are close to four years, no further new capacity should come on stream before 2025. Even in 2022 and 2023, when Arauco and UPM will increase capacity, the expected growth in demand should exceed the growth in capacity. You can see from the chart that the supply-demand balance will tighten each year. As you can see in slide number six, we have recovered a strong operating improvement in 2020, following Navia's capacity expansion in the fourth quarter of 2019. Our part portion increased by 10% year-on-year up to a new maximum of over 1 million tonnes, and we further reduced our cash cost during the fourth quarter down to €367 per tonne, beating our target of an annual average of €375 per tonne in 2020. Our PARP sales improved 12% year-on-year, with a better commercial mix, as you can see in the following slide number 7. Almost all of these sales went to the European market, where ENSA 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 plastic and softwood pulp, continue to advance and accounted for 9% of our pulp sales in 2020. Slide number eight looks at our renewable energy business. Renewable energy sales increased by 36% year on year in 2020, and EBITDA grew by 15%, up to 60 million, following the commissioning of two new biomass power plants during the first quarter. These offset difficulties caused by the pandemic and lower electricity prices. This regulated business is adding stability to the grid. The next slide, number nine, illustrates our renewable energy pipeline, which should be ready for building by the end of 2021. We recently obtained grid connection permits for another PV project in the south of Spain with a capacity of 100 megawatts. Turning to slide 10, I would like to summarize the deals we closed in December reinforcing our balance sheet and crystallizing the value of our renewable energy business. Firstly, we sold our Puerto Llano CSP plant for 82 million euros, plus 75 million of net debt assumed by the buyer. Secondly, we sold 49% in our renewable business to the Ankara partner infrastructure fund for almost 357 million euros, and keeping control of the business with the remaining 51% stake. Of this total, 223 million were collected at the closure of the transaction. The collection of the remaining 134 million depends on the successful development of our 140 megawatt biomass pipeline and the price obtained in the biomass auctions with the following milestones. Firstly, the call for biomass auctions for a capacity of up to 140 megawatts. Secondly, the capacity allocated to us and the price obtained in the auctions. Thirdly, the price obtained in the auctions combined with the final capex for these plants. And fourthly, cash distributed by the business during the next eight years and its valuation at the end of that period. I will now invite Alfredo to review the financial figures in more detail.

Thank you, Ignacio. As you can see in slide number 11, these transactions, just explained by our chairman, have reinforced our balance sheet by €380 million in December, reducing the group's net debt down to €178 and ending the cash imbalance of over 540 million euros. Free cash flow before growth capex and the effect of the regulatory color attained 84 million euros. Carryover payments from growth capex coming from 2019 amounted to 81, matching the set free cash flow figure, and the effect of the regular trade collar was positive by 36 million euros in 2020. We still have payments pending from these investments totaling 75 million euros that will be paid in 2021. Of these, 60 are linked to our pulp business and 15 to the energy business. While in the case of our energy business, these capex payments will be evenly spread out along the year. Almost 50% of the growth capex payments related to our public business will be paid out in the first quarter. Slide 12 analyzes more closely our net debt position in each business. Net debt in the public business decreased down to 43 million, and it is worth saying that it is all related to IFRS 16. Cash imbalance reached 457 million at the end of the period. On top of this figure, we have our 70 million revolving facility fully and drawn and therefore available as of December 2020. Regarding our renewable energy business, net debt decreased down to 135 million at the end of the year with a cash imbalance figure of 84. Both businesses enjoy from ample liquidity, long-term maturities, and in the case of pulp, from covenant-free facilities. Turning to slide 13, our pulp business BDA reached $14 million in 2020, dragged down by pulp prices at the minimum of the 10-year average, partially upset by a 12% increase in pulp sales and a 6% reduction in cash costs. On the other hand, our regulated renewable energy business increased its EBITDA by 15% up to 60 million following the commission of our two new biomass plants in the first quarter last year, offsetting the decline in electricity prices and the difficulties caused by the pandemic. The group ended with a net income of minus 27. Please note that this figure includes the 33 million capital gain from the sale of the CSP, but does not include the capital gain obtained from the sale of a minority interest in our renewable energy business. Since we continue consolidating 100% of the business in our accounts, this last capital gain is registered as equity in the consolidated balance sheet. Also note that both capital gains are tax accepted. Turning to slide 14, let me update you on our current hedging programs aimed to mitigate the volatility in both the pulp and the energy businesses. Regarding FX, our policy is to hedge 50% of our US dollar exposure during the following 12 months. This program and a negative impact of 9 million euros in 2020 compared to a positive one of 30 in the previous year. The current FX hedging program ensures an average cap of 120 and an average floor of 113 for over 40% of our dollar exposure for 2021. Additionally, ENCE decided last year to secure better pump and electricity prices for year 21 than those we had in 2020. So far, we have secured an average price of $773 per ton for 24% of our expected pub sales in 2021. This compares with an average price of 680 in 2020. We have also fixed an average price of 43 euros mega hour for one third of our expected renewable energy sales for 2021. This compares with an average electricity price in Spain of 34 euros mega hour in 2020. Let me please now return the lead of the presentation back to our chairman for the final slide.

Thank you, Alfredo. Regarding Pontevedra's bio meal concession in slide 15, we are still expecting a first ruling by the national court in the next few months. Remember, that it will be the first step in a legal case that could last for another four years, including appeals to higher courts. The next slide, number 16, reviews our pending diversification projects in topal business. Firstly, the adaptation of the Navia BioMil for the manufacture of absorbent hydrogen products. Secondly, also in Navia, the phased construction of a new swing line. The processing of the environmental permits and the engineering works for both projects are progressing well. We want to be a model in the development of the bioeconomy in Spain and we have presented projects to participate in the European Union Recovery Fund. The Board will decide on the timing of these two projects in due course once we have overcome the uncertainties of the pandemic. In the following slide, number 17, 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. Due to the uncertainties, We also took measures in the second quarter of last year to increase our liquidity, which has been further reinforced by the transactions made in our renewable energy business at the end of the year. Moving now to slide number 18, I would like to mention the highlights of our sustainability performance in 2020. Companies that care for the environment, for the staff, and for the communities, And companies with a strong corporate governance are more efficient, more flexible, and more competitive. ENFE is already at the forefront in sustainable forestry, the circular economy, social commitment, and gender equality. Our best practices have been recognized by the independent agencies MSCI and Sustainalytics, who upgraded our ATG ratings. they now rank ENFE amongst the leaders in sustainability in our industry. We have also been included in the FTSE for Good Index. In addition to all the measures 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 in the pulp business by 25% in 2020 and we are preparing for different climate change scenarios following the TCFD recommendations. Secondly, the successful development of differentiated and more sustainable and profitable products, which already account for almost 10% of our pulp sales. Thirdly, we have been pioneers with the publication of an environmental product declaration for our pulp, which places us at the forefront of the sustainability in our industry. And fourthly, the continuous reduction of other impact and water consumption at our bio-meals year after year. To conclude this presentation, I would like to emphasize the following key messages. Pulse prices are now rapidly recovering. Strong demand and the lack of new capacity should support further price increases in the coming months. We have reinforced our balance sheet with the sale of a minority stake in the renewables business and the CSP plant, having zero net financial debt in the PALP business. The operating improvements achieved in 2020 should continue in 2021 with a 3% growth in PALP sales, a 2% reduction in cash costs, a 9% growth in renewable energy sales despite the deconsolidation of the CSP plant. Our priorities remain the health and safety of our staff, the continuity of our operations, and the reduction of costs. We are working to secure all the permits required to develop our renewable energy pipeline, and we will resume the investments foreseen in our strategic plan for the PALP business once we have overcome the uncertainties of this pandemic. We want to be a model in the development of the bioeconomy in Spain, enhancing and diversifying our growth in both renewable energy and biomaterials. We have the balance sheet, the talent and the experience to grow in this new economy. Thank you. We will be pleased to hear any questions you may have.

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 stating multiple questions to our speakers. Thank you. Question comes from Joel Pinto from J.B. Capital. Please go ahead.

Thanks for taking my questions. Starting with poll prices, the momentum is very supportive with Europe still having to catch up with China. Two questions regarding this topic. The first one, in China, do you see significant room for further price increases in the short term?

Well, we just knew one hour ago that Suzano has announced a further increase till $720 net in China, which is more or less the same price that Arauco announced yesterday. Then, well, March is $100 more. What can happen later on, I have no idea. I think the demand is quite strong there. because the final demand of papers is strong. The pandemic has overcome in China, and the activity, as you know, the GDP is growing at double digits. And you have to take into account that it's difficult what I'm going to say now, but what is the normal price, what is the average price of the pulp in the cycle? Well, the problem to answer this question is that from an intuitive point of view is that, you know, 15 years ago we had 6% discounts. Today we have Europe 34 discounts. Then, well, with the discount of today in Europe 34, the net price we had in Europe on the last 15 years marks a gross price above 900. What means that, well, in strong moments of recovery, the prices will be above this level of price, then yes, I see that maybe in China prices still increase a bit. But I'm more concerned about the gap between China and Europe. And what I see is that this gap is going to be lower than today. Therefore, prices in Europe will continue to grow. Prices in China till now have already grown by 30% and only by 15% in Europe. Then I see a lot of potential in the European market. Sino has just announced a few minutes ago a new price in Europe of $910, which is an increase of $90 for March. And this price of $720 net in Europe, if you divide by 0.66, Well, you get 1,090, which means that there is plenty of room to continue increasing prices in Europe. Thank you, John.

Very clear. Secondly, also on poll prices, regarding the new capacity coming online next year, do you see any risks that the momentum in poll prices could weaken in the second part of 2021? I mean, this new capacity could already pressure prices or discounts already this year, or this is highly unlikely?

Well, it's very difficult to have a vision of that. But by fundamentals, by fundamentals, the market will grow close to 2 million tons this year. In final demand, in through demand, on top of that, we have now the recovery of stocks of all the supply chain. And next year, we see, again, 1.9 million tons of increase. You know, as we explained on the paper, more than 50% of the market is tissue. A bit more than 25% is specialities and packaging, and those two markets are growing strongly. And, well, even if printing and writing paper stays stable and doesn't recover the huge drop suffered last year, well, it's 1.9 million tons of increase next year. Then from fundamentals, I see it's room for these new capacities, both Arauco at the beginning of next year and UPM at the beginning of 2023. But the prices are not only a question of fundamentals, also expectations. Then I can't give you a firm answer.

Okay, thank you. Very clear. My first question, regarding the expansion capacity plan in Navier, is there any proposed targets that you would feel comfortable with to initiate the project?

No, I think that we are more concerned about the global growth of the GDP worldwide. And we are more concerned about the end of the pandemic. Our vision today is that we have to still be prudent Even if demand is growing, and even if GDP in certain areas of the world is growing, well, it is true that we may be vaccinated in Europe, the States, Canada, Korea, Japan, China, Australia, by the end of this year, but it will take at least a big part of 2022 to vaccinate other countries, and the poorest countries of the world won't be vaccinated in 2023. would mean that we have the risk of new kind of virus coming here, then we want to have a strong visibility that the pandemic is over before taking any new decision of investment. We are working on the permits of the FLAF. The FLAF is a small investment, is below 50 millions. We already have all the permits. And regarding the dissolving pulp string mill, well, we are continue working on the permits. We are at the final stage. I think that in three to six months, we'll have all the permits. But we would like to face this project. One thing we loved in our strategic plan approved in 2018 for 2019-2023 is that we were growing and we were diversifying in pulp step by step. meaning that we were not committing a huge investment and then having the risk of something like last year for the company. We were going step by step. Well, with the problem of Pontevedra, we decided that to concentrate the investments in Navia. And when you concentrate the investments, we have a larger swing mill in Navia, but it is a larger investment, and we don't like that too much. Then We are working in trying to face these investments in order to don't commit, let's say, 400 millions at once. Then we have to wait until we have more visibility about the through end of the pandemic. And we need an engineering solution to face the investments and to don't commit at once 400 millions. Thank you.

Very clear. My final question on Pontevedra. Do you have any feedback from the court? Why is it taking so long to have a first ruling?

No, unfortunately not. We just know that we are on the queue. But I don't have further information, unfortunately.

Thank you very much.

Thank you very much, Raul.

Thank you. The next question comes from . Please go ahead.

Hi. Thanks for taking my question. I wanted to know your views on the renewable actions and how the competitive landscape looks for the biomass technology and also whether you believe that you could still achieve your targeted equity returns on photovoltaic technology. at the prices that I've seen in the last auction?

Yeah. Well, I would like to start looking back to the history of what we have done at ENCE, and I think it's important because we have been able to set up a business of one billion value in eight years without any failures. It would mean that we've been growing slowly, step by step, We haven't had any accident. We didn't open a biomass, biomeat where there were no enough biomass. We didn't vote any electricity company with problems. Then we've been growing step by step very prudently and it is a solid business. And with a low leverage. You know that we have a lot of renewable energy companies with 80% of leverage on the project with eight to nine times EBITDA on the balance sheet, net debt, and we have below four times, and we've been growing slowly. And we want to continue to do such. We strongly believe that we can obtain these IRR we are looking for around 8% in PV. Well, some 30% of the megawatts on the last options were just below this 8%. It's a question of how you do the numbers. We were bidding at 29.99, which means that we were very, very close to have some megawatts, but we haven't. And we were bidding at this price because it's the price with our model to obtain 8%. Today we have PPH at 32, 34, then we don't see any difficulties in obtaining these 8%. And we are pretty sure that on the medium term, the technology will continue reducing its costs and will continue increasing its efficiency. That is why we are very happy with these 240 megawatts where we have connection to the grid authorized, fully authorized, and we have the land secured and we are doing all the permits. And we are very happy with this new 100 megawatts on top of that we get last month from Retelectrica. And regarding biomass, well, we think that it will be some options by the end of, on the second half of this year, probably. And we are not in a hurry. We have, as you know, three very good projects, very solid projects, where we are doing all the engineering and we are working on all the permits. They are almost finished. We have secured in the three projects both the grid connection and the land. And, well, we don't have the financial capacity to do the three projects at once. And, well, we have many years to do those projects, and we will do these projects. and we will obtain in biomass for sure the IRR we are looking for in our strategic plan, yeah.

Okay, and regarding the pulp investments, I know that in the past you've mentioned that investment plans are subject to your leverage, and now leverage calculations in the pulp business are difficult to make due to you not having... No, they are very easy. We have no debt. It's very easy. So I wanted to know whether This implies that these investments will be made in 2021 or maybe 2022?

No, no, as I was replying before to your colleague, we have to be extremely prudent. Well, I think what we have learned in 2008 and we have learned last year is that anything that you think that can never arrive, arrives. Then, well, we need to be absolutely sure that the COVID is out of the world. and it will take at least a couple of years. And we need to have a vision of the demand and supply balance for the next few years. And today we only have a vision that the market is booming now, and the market will be probably very good and very strong in 2021, 2022, and 2023. But, well, we need a longer vision. And also we need to know what happens with Montevideo. then I think that for the time being, we are not going to invest in pulp in growing or in diversifying. As I said before, we are working on the permits. We are working on the engineering. We are working in trying to phase in two or three times this streamline in Navia. And for 2021 and probably 2022, we will continue doing that.

Okay, perfect. Thank you. Last question, if I may. Regarding your dividend policy, I understand that 2020 was loss-making, but whether you would maintain your usual dividend policy going into 2021 if all prices allow for positive net profit?

Yes, we will continue with this policy of 50%. Yes, absolutely. Okay, thank you very much. Thank you very much, Álvaro.

Thank you. The next question comes from Laurent Fabier from Sadiq Asset Management. Please go ahead.

Yes, good afternoon. Can you hear me?

Very well. Thank you, Laurent.

Yes. Thank you for the quality of your slides. There is one question I want to ask you. On the presentation of the condition for the EARNOT of 134 million, I want to understand The conditions you fix are the minimum in order to get the 144, and if you get more, because obviously you're displaying the capacity which you're looking at, which is well above the 140 megawatts you're talking about, what happened with this hair knot? Can it go up? So basically what I'm asking you is it's maximum you get 134, or you could get more, or you could get less, and what's the calculation of this range?

No, the maximum is 134 and Alfredo Avello will give you all the details of how it can go below.

Yeah, 134 is the maximum earn out for the 49% that we sold. And this is divided into four installments. The first one is just the call of the biomass auctions by the government. Just that, nothing else. And this is up to 8 million, as we were saying. The second one is the megawatts that we have allocated. We have 140 megawatts. If in the first auction we can get half of that, this is the part of this milestone that will be cashed then. If this is this year, it will be this year. If this is spread out along two auctions, it will spread out along two auctions. The third one, well, of course, on the price obtained. The third one is the combination of the price obtained and the budget. If we meet the prices and the budgets that are in our plan, we will get all that cash. If the price is lower but the budget is lower, that can compensate. And all these three milestones are fully linked to the pipeline, to the three biomass plant projects. The fourth one is back in 2028, and this is just linked to the cash distributed along the eight years, and includes not only the pipeline, but also the full perimeter, the current perimeter. So as Ignacio was saying, yes, it's 134, the maximum that we can get. We can get less. But we are ready to get it, and it depends a lot on the auctions and the result of them and the budget at the end.

Just to make sure, it will be linear on these four steps, or it will be if you succeed in the first step, then you get the money?

Well, if I succeed in the – well, the first step is just the call of the auctions.

And it's one-fourth?

And it's what? No, no, it's up to 8 million euros. That's it. It's 8 million euros, up to 8 million euros.

Okay.

The second one is up to 42 million euros, basically 14 per plant. And the third one is up to 18, and the rest is on the fourth one.

Okay. So most is in 28, basically.

Yes. You can say that, yeah, it's almost 50-50, but yes, it could be more driven by the 28, which implies the full cash distribution.

All those details in the annual report, all those details are very precisely explained in the annual report.

I didn't see them. Thank you.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. The next question comes from Jaime Escribano from Bank of Santander. Please go ahead.

Hello. Good afternoon. So a few questions from my side. The first one regarding the market outlook, I wanted to ask you, How do you see the implementation of prices when you speak with your clients? And how do you see the demand? Because the inventories as of January are the lowest of the last couple of years, which I guess is very good. So what is your feeling? How do you interpret this figure?

Well, Jaime, You know that, let's say that the prices for March are going to be 910 gross in Europe. How does it develop? 910 is what the industry is asking for the pulp. Then the spot business will be concluded at this price for sure. I will explain to you later on why. And the PIX price, who is published every week, the most probably by the end of March will be around 910. All the contracts we have ourselves, and is a normal practice in the industry, are linked to the PIX of the previous month, which means that we have at least four weeks till the fixed recognize the price announced, and we have one month more. That means that we will have these $910 announced for March. We will have them not in March, not in April, but in May. We have not at all, we have any difficulties in implementing such price increases by three reasons. The first reason is that the demand in Europe is strong. It's not booming like in China, but it's strong. TCU has been strong all 2020. Specialities were weak at the beginning of the year, but on the second half of the year, the growth were there again. Packaging has been strong the full year. And printing and writing, was with minus 30% at the end of the second quarter after the big lockdowns in spring, but has recovered to minus 11% at the end of the year. And it is stable. What means that the demand is there and the customers need the pulp because they are selling paper. On the other hand, we have the possibility today to sell at spot prices, at the prices of China, In any country, in the Mediterranean or in the Middle East, would mean that if by any reason a customer doesn't accept the new prices, it's very simple. We ship to Turkey or we ship to Egypt or we ship to Morocco. And thirdly, we have today the possibility to sell at this incredible spot price for February of 730 in China any quantities we want. What means that the demand is solid, we have plenty of possibilities, and we have no difficulty at all in increasing prices. And there is no single customer today saying any problem to the new prices. Because they are also increasing papers prices. Thank you.

Okay. And building on this, do you think that we could see even... another price increase above 910? Or do you think 910 is already, well, you almost answered before, but just to understand your feeling. So do you think we can go to 950 or 1000? Or is not on the table right now?

As I was saying, we are not present in the Chinese market. I only know the fundamentals of the Chinese demand. but what I am reading like you, then I cannot give you more information. I'm more concerned about what is happening in Europe because it's my main market and we see that, well, it's plenty of room for further increases in Europe on the next two or three months. Then I don't care too much about what is happening in China, you know, and I don't have enough information to know if the prices in China will continue to go up or not. I have no idea. Okay.

And a question regarding cash costs. We've seen a better than expected year of cash costs at 367 euros per ton in Q4. If we look at it, it's mainly due to transformation going down strongly, SG&A overheads. My question would be, how much room you have to further improve the cash cost by reducing the wood cost, which it seems is a little bit, you have reduced it a little bit, but yeah, that would be my question.

Yeah, well, we have a target, as you know, of having an average cash cost of VCO 2021 of 365, 365. with a part price of 680. What means that inside this 365, we have the price of the wood as if the part was at 680. If the price of the part is at 900, we will have just because of the link between part and wood in our contract, we will have six euros more in cash costs. Two euros more per cubic meter of wood would mean six euros more. But we see that we have further capacity of reducing the transformation costs. The transformation cost was 109 in 2020, and we see an average for the full year of 105. Logistical is going to be quite stable, and the structural overhead was 31.3 and we see an average of 25.5 in 2021. What means that, well, we have, let's say if the prices are in 900 and today, well, most of the analysts are seeing an average price in 2021 of 900, well, we are going to have a cash cost of 365 plus six euros on top of that because of the linkage between wood but we will continue reducing transformation costs and we will continue reducing structural costs.

Okay, very good. And my last question, if I may, regarding, just to clarify, the FLAP project is not adding new capacity, right? It's just adapting the existing capacity in order to produce FLAP.

Absolutely, it's a diversification project.

Okay, and then my question would be, When you say that you have put on hold the investments until you see the COVID has passed and so on, are we talking about also the FLAP project or the FLAP project given that it's a smaller investment and it doesn't imply new capacity? Is it something that you would think about doing it or not?

Not for the time being. We are making a revision of those investments at the board once per quarter. But for the time being, now we are concentrated in reducing cash costs.

Okay. Very good. Thank you very much.

Thank you.

Thank you. The next question comes from Laurent Saclier from Zadig Asset Management. Please go ahead.

Yeah, I just wanted to come back quickly to the paper. You know, you said historically the discount in Europe was 6%, now it's at 34%. What does it take for the discount to narrow back to 6%? Just that I get it.

Sorry, Laurent, I don't understand your question. What I said is that 15 years ago the discount was 6%, not on the average. It was 6% in 2005. And it has been growing step by step till 34 on the last 15 years. And then we have to think not in gross price because most of the industry we think in gross price. We have to think in net price, in net price. And the net price on the cycle, on the average of the cycle has been, let me take the calculator, has been 600 euros per year. Sorry, $600 net, $600 net. That's the average price in Europe on the last 15 years, the net average price, 600.

I understand, but why the discount went from six to 34, and what will take it for this plan to reverse?

I don't understand. No, it's just a question of negotiation. Every year when you negotiate the contract, In the years where in November and December, when you negotiate the contract, the demand is very supportive. We keep the same discount of the previous year or we reduce the discount. And when you have to negotiate and the demand is weak, the customer asks you for more discounts and you give him more discounts. But you increase the price at the beginning of the year as soon as you can. You arbitrate with the gross price.

So if we continue seeing what we're seeing, i.e. increase in demand, the discount will now. That's what you're telling me for 2022.

No, I don't care too much about the discount because the gross price is arbitrated later. I think what is important is the net price, what happens with the net price. Then you have two forces, the force of the discount and the force of the gross price. And what is important is the combination of both.

Can I ask you more directly on 21? You know, with the cost price going down, with the 100 euro more or less you're talking about in terms of price increase, you should make in excess of 100 million EBITDA in paper, or did I get it wrong?

We don't give guidance on EBITDA. I can give you a guidance on volume. I can give you a guidance on cash costs, I have said, and you have to put the price yourself.

Okay. Okay. It's what I did, and I go to well in excess of 100 million. Well, having said so, it's the end of the first quarter.

Thank you.

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

Just a quick follow-up on Jaime's question. Regarding your wood cash costs I understand that wood prices are linked to pulp prices, but in any case, 2020 wood cash costs have been higher than they were, for example, in 2018 or in 2017 when prices were much higher. So other than the component of the pure price of wood per meter, or for a ton of wood, what are the other driving forces that have driven wood costs up even in a context of falling pull prices and what should we expect going forward on this front?

The price of wood, Álvaro, in 2020 was lower than in 2019. We should have been able to reduce further but the price was a bit lower than in 2019.

Yes, for example, it stood at 204.5 euros per ton in 2020 when it was 201.4 in 2018.

You have to take into account that the price of the wood has three components with one third each one. The price of the standing wood you are paying to the forest owner and that's the of the price goes up or down according to the price of the pulp. And then you have one-third of these transports and one-third of these harvesting costs. And those costs stay stable. That's why when you, the price of the pulp goes up very, very much or you don't have 20 euros more on the cubic meter of wood. But when the pulp goes down, you don't have 10 euros less.

Yes, I understand. My question then would be if average prices, average bull prices in 2018 were at $1,037 per tonne and during 2020 they have been at $680, how come your wood costs this year have been $204 while they were $201 in 2018? Shouldn't they be much lower this year than... than in 2018 with coal prices now at the bottom when in 2018 they were at their highest?

Well, I have in front of mind the price of the wood in euro per cubic meter, which is the price we buy and what we pay. It was 67.2 in 2018, it went up to 69.3 in 2019, and it was 67.1 in 2020. And as I said before, it should have gone further down, but it has been a bit down, a bit lower than in 2019. What we have seen is that, well, the price of the wood is very difficult to make strong reductions because the owners don't sell. And on top of that, the price of the wood is in euros per cubic meter, and the PIX is in dollars. And we translate that to euros when we figure the price. Then the wood, the forest owners are paid for the wood according to the PIX price net in euros.

Okay, understood. Thanks. 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 Gormenares and Mr. Alfredo Avello. Thank you.

Thank you very much for your time, and we are in contact. You know that any questions you may have, you just call us, and we organize a quick meeting, and we give any answers. Thank you. Bye-bye. Thank you.