ENCE Energía y Celulosa, S.A.

Good afternoon, ladies and gentlemen. Welcome to the ANSES second quarter 2021 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 ANSES First Half 2021 Results Conference Call. Our CFO, Alfredo Avello, and our head of IR, Alberto Valdez, are also connected. After the presentation, we will be pleased to answer any questions you may have. Let's start in slide number three with a summary of the latest developments concerning our concession in Pontevedra. As you know, on July the 15th, the National Court issued a ruling that annuls the extension of the concession of public land in Pontevedra on which ANSES Biomil is located. Yesterday, we appealed to the Supreme Court against this ruling and we will exhaust all legal avenues to defend the legality of the 2016 extension. In view of the Court's ruling and in accordance with the accounting regulations, we have recognized asset impairment losses and expenditure provisions in the second quarter financial statement. These include impermanent losses and provisions in a net amount of 148 million, which won't imply any cash outflow, together with a provision of 42 million to cover the estimated cost of dismantling the bio-rail, and the provision of 6 million to cover the estimated cost of terminating outstanding products. The cost of restructuring the excess labor, including the associated corporate overhead, which will be caused by the potential closure of the bio-mill, has not been provisioned yet, as the requirements for its accounting have not been fulfilled. If the annulment of the extension is confirmed, and once all legal avenues and appeals have been exhausted, ENCE will claim the patrimonial responsibility of the national government and seek compensation for all damages caused by your concession, previously granted and subsequently annulled, as well for all investments that were committed and completed. In this event, our alternative is to replace Pontevedra by building a new pipeline in Navia with an installed capacity of 340,000 tons and an investment of 450 million. As you know, we already have all the permits and the land for this new palm mill. It will be smaller than Ponte Vedra in terms of tons, but much more efficient with a cash cost around 25% lower. This new line will generate more EBITDA and more free cash flow than the Ponte Vedra plant and is going to be much more resilient. However, Before moving forward with this investment, we will need to know more about the ruling of the Supreme Court and, in the worst case, about the date set by the authorities for the potential closure of the plant. In the meantime, we will focus on increasing the sales of our differentiated pulp products, on developing our renewable energy business, and on reducing cash costs. Let's move on to slide four, where we summarize the business highlights in the first half of the year. Pulp prices have recovered rapidly after trading at record lows for all of 2020. In Europe, hardwood pulp is trading at a gross price of $1,140 per ton, representing a rally of 68%, which will be fully visible during the second half of the year. At the same time, energy prices in Spain have doubled in the first half of the year to an average of €62 per MWh, and futures point to average energy prices above $180 MWh in the fourth quarter. From an operating point of view, pulp production increased by 4% year-on-year in the second quarter and by 20% compared to the first quarter. when both bio-meals were idle for maintenance work. Pulse production in the second quarter marked a new quarterly record of 270,000 tons, thanks to the capacity we added at the end of 2019. The reduction in conversion costs, which derives from production growth, coupled with saving on overhead expenses, offset the impact of raw material inflation in the first half of 2021. As a result, our cash cost fell by 2% year-on-year to €368 per tonne in the second quarter. In the other hand, renewable energy sales increased by 12% in the first half of the year on a like-for-like basis. Group Ibiza, before the impact of hedges, amounted to €56 million in the second quarter and 71 million in the first half of the year, a 56% year-on-year increase driven by higher pulp and energy prices. On the other hand, the pulp and energy price hedges arranged in 2020, due to the uncertainties caused by the pandemic, had a negative impact during the first half of the year, 10 million in the pulp business and 5 million in the renewable energy business. This negative impact was partially offset by the positive impact of 3 million as a result of our ongoing FX hedging policy. If we discount the impact of the ruling on the Pontevedra concession, our underlying business would have shown a net profit of 12 million in the second quarter. Our balance sheet remains strong. Net debt stood at 176 million at the end of the quarter, with 381 million cash in balance after a 19 million reduction in the use of factoring facilities, the settlement of carryover payments for 40 million, and the prepayment of 95 million of bilateral loans held by the PAL business. Finally, I am proud to communicate that we have been ranked as the leading sustainability player in the global PAL market, according to the most recent study by Sustain Analytics. Let's move now to slide 5, which shows the rapid spark price recovery video. Gross peak pressures in Europe have been trading since July at $1,140 per ton, equivalent to $750 per ton net. On the other hand, net peak pressures in China peaked at $780 per ton in May. Since June, they have progressively returned to $620. While prices in Europe tend to follow prices in China with a lag of two or three months, we are witnessing a decouple between Europe and China due to a strong paper market in Europe and logistics constraints that could last for several more months. At present, it is difficult to shift large pulp and paper shipments from one region to another. This process takes several months. In the following slide, number 6, we summarize our views on pulp demand and supply balance in the coming years. We expect pulp demand to outgrow supply during the next four years, supporting a relatively tight market. The tissue and hygiene product segments already account for 55% of global part demand, and we expect it to continue growing at around 4% annually, driven by urban population growth and improving living standards in emerging countries. Packaging and specialty segments account for 25% of global part demand, and we expect their growth to accelerate to around 3% as a result of economic recovery, single-use plastic substitution, and lower recycled fiber availability. On the other hand, the printing and writing segment now only accounts for the remaining 20% of global part demand. Consumption fell 16% in 2020 and should remain at this low level over the next two or three years. On the supply side, apart from Arauco and Brazil projects in 2022, there is only the UPM project in 2023. The Suzano, METSE and CNPC projects have been announced. The construction has not yet started and they will not be commissioned before 2024. Note, that Brazil has started its ramp-up very progressively during the next couple of years, and that most of its bulk will be used internally to feed Royal Golden Eagle group paper and viscous capacity expansions in Asia. Very little amount will go to the market. In fact, many industry experts have recently increased their pulp price estimates for the fourth quarter of 2021 and for 2022. Moving now to slide number seven, you can see the positive operating performance of the pulp business during the second quarter. Pulp production increased by 4% year-on-year in the second quarter and by 20% compared to the first quarter, when both bio-meats were idled for maintenance work. Pulse production in the second quarter marked a new quarterly record close to 270,000 tons, thanks to the capacity we added at the end of 2019. The reduction in conversion costs deriving from higher production, capital with savings in overhead expenses, offset the impact of raw material inflation. As a result, our cash cost was reduced by 2% year-on-year to $370 68 euro per ton in the second quarter. Looking ahead to the second half of the year, we should expect a higher cash cost compared to the second quarter, driven by higher raw material, energy, and logistic costs. As you know, our wood cost is partially linked to the peak price performance, which reached its annual maximum during the third quarter, implying an increase of around €7 per tonne in our expected cash cost for the second half compared to the second quarter. Besides, we are bringing wood from our plantation in southern Spain and we will import 60,000 tonnes of wood to mitigate the temporary reduction in eucalyptus harvesting capacity due to the strong demand for pine wood. This will imply an increase of €8 per tonne in our expected cash cost for the second half compared to the second quarter. Gas, chemicals, and logistics costs are also rising, implying an increase of another four euro per ton in our respective cash costs for the second half compared to the second quarter. As a result, we now expect an average cash cost of around 387 euro per ton in the second half, an average cash cost for 2021 of 382. These figures exclude the accounting effect of the regulatory COLA on the energy sales price, with an estimated non-cash negative impact of 18 million in our P&L for the second half of the year, assuming an average energy price of 120 euro megawatt hour on the second half. Let's look now at our pulp sales on slide 8. Pulp sales in the second quarter grew by 2%, increasing to almost half a million tons in the first half of the year. This lower figure is caused by the fact that annual stoppages in 2020 occurred in the third quarter, while this year we stopped in the first quarter. Over 90% of these sales went to the European markets, where our customers benefit from ENCE's unique wide portfolio of sustainable products and shorter delivery times. Our differentiated products accounted for 14% of our pulp sales in the first half of the year. These products are more sustainable and are adapted to replace plastic and softwood pulp. They also provide higher margins. Turning to slide number nine, you can see the operating performance of our renewable energy business during the first half of the year. The volume of our energy sales during the first half increased by 12% on a like-for-like basis, excluding the CSP plan. This was driven by higher contributions from the two new plans commissioned during the first quarter of 2020 and a higher contribution from the World Bar 41 megawatt plant, which was idle, as you remember, during second quarter 2020. On the other hand, the World Bar 50 megawatt plant was offline during the second quarter due to an incident detected at the generator in the course of its annual review. We expect to bring it back online in October. The average sales price increased by 2% year on year, thanks to increasing energy prices, which are limited by the color, same by the regulator, and by the hedges. In 2020, we decided to lock in an average price of 44 euro per megawatt hour for the sale of over 700,000 megawatt hour of energy in 2021, at a time when prices were at record lows and when the uncertainty induced by the COVID-19 pandemic was high. The next slide, number 10, updates our renewable energy pipeline. We have developed in-house a pipeline of 140 megawatts in biomass and 373 megawatts in PV. All of them have grid access and location secured. We have already obtained the environmental authorization for a new 50 megawatt biomass project in Porto Llano. and we expect to obtain the permits for the rest of the projects during the coming quarters. The approval of the environmental authorization is taking longer than usual, as the authorities are having to deal with an exceptionally high number of projects. I will now invite Alfredo to review the financial figures in more detail.

Thank you, Ignacio. As you can see in the following slide, number 11, and they showed a very strong EBITDA recovery in the first half of the year compared to the same period last year, pushed by the PAL business. Our PAL business EBITDA before hedging impacts improved by 162% year-on-year, up to $48 million, driven by the strong recovery in PAL prices. PAL hedges arranged last year in the very uncertain environment caused by the pandemic had a negative impact of $10 million, which were partially offset by the positive impact of $3 million coming from our ongoing FX hedging program. On the other hand, other income and expenses not included in cash costs had a positive impact of $4 million coming from our forestry activities and the reversal of certain provisions, including those related to Ponte Vedra, following the National Court's ruling on its concessions. After hedges, our coal business EBITDA increased up to 41 million, four times higher than that in the first half of 2020. Focusing now in our renewable energy business, its EBITDA before hedges also increased by 24% year-on-year on a like-for-like basis, excluding the Puerto Llano CSP plant sold last December. This improvement was driven by higher energy volumes and sale prices. We should note that our energy sale prices are affected by two factors. On one hand, the regulatory color, which shows a non-cash negative impact of 1.2 million for the period. And on the other hand, the fixed price contracts signed in 2020, again, under the pandemic environment, which had an impact of 4.6 million in the period. Including all impacts, our Renewable Energy Business ABDA attained €18 million, same level as that of 2020. The slight increase in average sales prices was offset by some higher biomass costs. With our consolidated EBITDA of 59, we should have shown a net profit of €2 million in the first half of the year. This turned into a net loss of 195 million after recording the accounting consequences of the court's ruling on the Ponce de Letras concession. As you can see in the following slide number 12, free cash flow before growth capex was positive by 18 million, including a 24 million working capital reduction after a 19 million lower use of our factoring facilities. Growth and sustainability capex in the period amounted to $40 million, basically related to carryover payments coming from the strategic plan investments made back in 2019. The remaining carryover payments amounting to $28 million in the fall business and $8 million in the renewal business will be fully paid down in the second half of the year. Only the standard maintenance capex for both of our businesses are expected for next year. Net debt at the end of the period remained at $176 million, including $17 million related to lease contracts under IFRS 16, following a $29 million write-off corresponding to Ponce Vedra's annual concession lease. Let's have a closer look at our net debt position in each business in the following slide, number 13. Net debt in the Paul business was just $43 million at the end of the period, including 16 relating to lease contracts and with a cash imbalance of €307 million. On top of the said €19 million reduction in factoring facilities, we have prepaid until June 95 of bilateral loans in our PAL business, adjusting down our balance sheet position after the last year's sale of a minority interest in our renewable energy business. In addition, during the month of July, we prepaid another $20 million, and the business's revolving credit facility of $70 million was refinanced, increasing its availability up to 130 and extending its maturity until June 2026. Of course, maintaining our non-covenant policy. On the other hand, net debt in renewable energy business amounted to $133 million at the end of the period, also with long-term maturities and a cash imbalance of 74 million euros. Turning to slide 14, let me remind you about our current hedging programs in both of our businesses. Regarding FX, our policy is to hedge up to 50% of our pulp sales for up to 12 months. We have secured an average cap of 1.23 and an average floor of 1.18 for almost 50% of our dollar exposure for the remaining of 2021, as well as for the first semester 2022. This program had a positive impact of 3 million euros in the first half, and we don't expect any further impact during the second half of the year. Additionally, and for the first time during the third quarter of last year, we decided to secure better pulp and electricity prices for 2021, due to the uncertainties caused by the pandemic, with pulp and energy prices at record lows and having 75 million carryover payments committed for this year. We secured an average price of $773 per ton for 24% of our expected pulp sales in 2021, compared with an average price of $680 in 2020. These hedges had a negative impact of $10 million in the first half And we still made another 41 for the second half, assuming an average price of 1,140. We also secured an average price of 44 euros per megawatt hour for 50% of our expected renewable energy sales in 2021, compared with an average electricity price in Spain of 34 euros per megawatt hour in 2020. These hedges had a negative impact of 4.6 million in the first half and we estimate another 31 for the second half, assuming an average full price of 120 euros per hour. Please note that from a cash flow perspective, we're still forecasting an operating cash flow of 60 million for 2021 before working capital, interest payment, and capex, since the regulatory call is an accounting but is a non-cash provision. I will now return the lead of this presentation back to our chairman for the final slides.