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.