ENCE Energía y Celulosa, S.A.

Good afternoon, ladies and gentlemen. Welcome to the NCES third quarter 2021 results presentation. I now hand over to Mr. Ignacio Colmenares, Executive Chairman and Alfredo Abello, CFO. Gentlemen, please go ahead.

Good afternoon, ladies and gentlemen. Thank you for joining NCES third quarter 2021 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 with slide three, where we summarize the business highlights in the first nine months of the year. Pulse prices have recovered strongly. They are trading at $1,140 per ton since July, boosting the pulse business operating margin. At the same time, the reduction in conversion costs coupled with savings in overhead expenses, have offset the impact of raw materials inflation during the first nine months. Pulse production increased by 2% in this period, while cash cost was maintained at 377 euros per tonne. On the other hand, renewable energy sales increased by 6% on a like-for-like basis, fuelled by the two new biomass plants commissioned last year, which have offset the shutdown of the worldwide 50 megawatt plants during the second and third quarters. As a result, group EBITDA before the impact of hedges rose to 63 million in the third quarter and to 134 million in the first nine months of the year, more than doubling its comparable EBITDA in the same period of last year. Our underlying business would have shown a positive net income of 40 million in the first nine months, excluding one of hedges signaled in 2020 during the pandemic and the impacts of the ruling of the Pontevedra concession. Strong cash generation in the period allowed us to reduce our net debt position by 16 million, despite reducing the usage of factoring facilities by 19 million and settling carryover payments for another 49 million. Our liquidity position is very strong. We have a cash balance of 375 million at the end of the period after the prepayment of 115 million of bilateral loans and the successful refinancing of another 210 million in the PAL business. Finally, it is important to highlight that we have been ranked as the leading sustainability player in the global palm market according to the most recent study by Sustainalytics. Let's move now to slide 4, which shows the strong palm price recovery this year. Gross peak prices in Europe have been trending at $1,140 per tonne since July. Our net selling price improved by 60% year-on-year in the third quarter and by 27% in the first nine months, boosting the part-business operating margin. We are witnessing a decoupling between European and Chinese markets due to the logistic constraints that could last for several more months. In the following slide, number five, 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 segment already account for 55% of global pulp demand, and we expect it to continue growing at around 4% annually driven by urban population growth and improving living standards in emerging countries, together with enhanced post-pandemic consumption habits. Packaging and speciality segments account for 25% of global power 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 pipe 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 and no more until the SUSANO, METSE and CNPC projects. We have not yet started construction, planned to start by 2024. Note that Brazil has stated that its ramp-up will be very progressive during the next couple of years and that most of its pulp will be used internally to feed Royal Golden Eagle Group paper and viscous capacity expansions in Asia. Moreover, Arauco has delayed the start of its MAPA project until the second quarter of next year. Moving now to slide number six, you can see the positive operating performance of the pulp business during the first nine months of the year. Pulp production increased by 19% compared to the third quarter of last year, when both bio-meats were idled for maintenance work. In the first nine months, pulp production increased by 2%, thanks to the capacity we added at the end of 2019. At the same time, the reduction in conversion costs, coupled with savings in overhead expenses, allowed us to offset the impact of raw material inflation during the first nine months, maintaining our cash costs for the period at $377 Cash costs in the third quarter increased to $380 per ton, mainly due to higher wood costs, as anticipated in our latest result presentation. As you know, our wood cost is partially linked to the PIX price performance, which is trading at its annual maximum. We are bringing wood from our plantations in southern Spain and we will import 90,000 tons of wood to mitigate the temporary reduction in eucalyptus harvesting capacity due to the extraordinary demand for pine wood. Looking forward to the fourth quarter, you should expect a cash cost of around 416 euro per ton, mainly due to the higher inflation in raw material prices, mainly in wood, gas and chemicals. Let's now look at our pulp sales on slide 7. Pulp sales in the first nine months reached 757,000 tons, in line with those of the same period last year. Over 90% of these sales went to the European market, where our customers benefited from ENCE's unique wide portfolio of sustainable products and shorter delivery times. Our differentiated products accounted for 15% of our pulp sales in the first nine months, compared to 9% in the same period of last year. These products are more sustainable and are well adapted to replace plastic and softwood pulp. They also provide higher margins. Turning to slide number eight, you can see the operating performance of our renewable energy business. The volume of our energy sales during the first nine months increased by 6% on a like-for-like basis. Higher contributions from the two new plants commissioned during the first quarter of 2020 and from the Welba 41 MW plant were partially offset by the Welba 50 MW shutdown during the second and third quarters. This plant has been back online now since mid-October. In the other hand, the average sales price decreased by 10% year-on-year despite increasing energy prices. This was caused by the combined effect of the regulatory collar on energy prices together with the impact of fixed price contracts. However, note that from a cash flow perspective, the regulatory collar is a non-cash provision, ensuring higher amount of operating cash flow in 2021. Finally, remodernization on investment decreased by 5% in the first nine months on a like-for-like basis due to the shutdown of Welba 50 megawatt plant. In the next slide, number nine, you can see our renewable energy pipeline of 513 megawatts. All of them have the grid connection permits and locations secured. and the administrative processing is expected to be completed in the coming quarters. We are now considering rotating our portfolio of 373 megawatts of PV projects if its current market valuation offers a better opportunity to create value for our shareholders. The selling process is still at an early phase and no negotiations have yet begun with potential interest investors. On the other hand, We will participate in the next biomass options with our portfolio, and we will continue developing new projects, including PV, to further expand our renewable energy business in the coming years. 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 10, ENCE showed a very strong everyday recovery in the first nine months of the year fueled by the pulp business. Our pulp business EBTA before hedging impacts improved from 17 up to 100 million euros driven by the strong recovery in pulp prices. Note that this figure already includes the non-cash accounting provision of the regulatory quarter of the energy sales coming from our link nine co-generations at each biomass. This regulatory quarter adjusted down the EBTA by 11 million euros during the third quarter. Pulp hedges arranged last year in the very uncertain environment caused by the pandemic had an negative impact of 31 million euros, which were partially upset by the positive impact of 3 million coming from the ongoing FX hedging program. After hedges and including the regulatory color adjustment, our pulp business EBITDA increased up to 71 million euros, 10 times higher than in the same period of 2020. Focusing now in our renewable energy business, its EBITDA before hedges also increased by 21% year-on-year on a like-for-like basis, excluding the Puerto Vallano CSP plant sold last December. This improvement was driven by the higher energy volumes and sales prices. We should note that our energy sales prices are affected by two factors. On one hand, the regulatory color, which shows a non-cash downside adjustment of 18 million euros in the period, And on the other hand, the fixed price selling contracts signed back in 2020 under the pandemic environment, we had a negative impact of 20 million euros in the nine-month period. After taking into account all these factors, our Renewal Energy Business EBITDA reached 14 million euros. With such a strong EBITDA recovery, we would have shown a positive net income of 40 million euros in the first nine months of the year, excluding one of hedges and accounting consequences of the court ruling on the Ponte Vedra concession, which amounted to 196 million euros and that were registered in the previous quarter. As you can see in the following slide, number 11, cash flow generation was strong the first nine months of the year. The cash flow before growth capex doubled to 38 million euros compared to the 19 of the same period in 2020. after a working capital increase of 26 million euros and a reduction of another 19 in the usage of factoring facilities. Just remember that although the energy revenue figure registered in our accounts is adjusted up or down by the regulatory collar in both of our businesses, this is not the case with the cash inflow coming from those sales, which is received at its full market value with no regulatory adjustment. Growth and sustainability capex for the period amounted to 49 million euros, basically related to carryover payments coming from the strategic plan investments made back in 2019. The remaining carryover payments, which amount to 22 million euros in the pulp business and to 4 million euros in the renewable energy business, will be completed in the coming months. Only standard maintenance capex for both of our businesses should be expected for next year. Net debt was reduced down to 162 million euros, including 16 million euros related to lease contracts under IFRS 16. Let's have a closer look at our net debt position in each business in the following slide number 12. Net debt in the Paul business was just 18 million euros at the end of the period. This includes 15 million euros related to lease contracts and a cash balance of 310 million euros. We have prepaid 115 million euros of bilateral loans in our PAL business after the sale last year of a minority interest in our annual energy business. In addition, during the third quarter, we successfully refinanced the business revolving credit facility, increasing its availability up to 130 million euros, as well as another 80 million euros in bilateral loans, extending all their maturities until 2020 exists. On the other hand, net debt in the renewable energy business amounted to 144 million euros at the end of the period, also with long-term maturities and a cash imbalance of 65 million euros. Turning to slide 13, 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 pub 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 remainder of 21, as well as for the first semester of 22. This program had a positive impact of 3 million euros in the first nine months. On the other hand, it could have a negative impact of 2 million during the fourth quarter if we assume an average exchange rate of 1.16 dollars per euro. Also, as said during the third quarter of last year, under a very uncertain business horizon caused by the pandemic, we decided for the first time to secure better pulp and electricity prices for 2021. When the pulp price was at $680 per ton, we secured an average price of $773 for 24% of our expected pulp sales in 2021. These hedges had a negative impact of 31 million euros in the first nine months, and we still made another 21 for the fourth quarter, assuming an average price of 1,140. We also secured an average price of 44 euros per hour for 50% of our expected renewable energy sales in 2021 compared with an average electricity price of 34 in 2020. These hedges had a negative impact of 20 million in the first nine months, and we estimate another 31 for the fourth quarter, assuming an extraordinarily high average full price of 200 euros mega hour. I will now return the lead of this presentation back to our chairman for the final slides.