ENCE Energía y Celulosa, S.A.

Good morning, ladies and gentlemen. Welcome to the NC first quarter 2025 results presentation. I want to hand over to Mr. Ignacio Cominares, Executive Chairman, and Alfredo Avelio, CFO. Gentlemen, please go ahead.

Good morning, ladies and gentlemen. Thank you for joining us today. I wish to take you through our second quarter results for 2025. Our company is based on local roots and also local biomass. Our production of advanced pulp products continues to grow, substituting other more expensive BSKT products. We continue to generate diversified non-conventional renewable energy. We are doing this prudently And our focus is on profit, strength, and sustainability. Our CFO, Alfredo Avello, and our head of IR, Ines Alvarez, are also connected to this call. I'll begin with the main strategic highlights of the quarter and the operational backbone of our businesses. Alfredo will then present our detailed financial performance. I would like to start with the main highlights of the second quarter in slide 4. We continued our disciplined delivery in cash cost reduction during the quarter and made steady progress within a complex global situation. We successfully reduced our pulp costs to 488, a 22 euros improvement from first quarter. by our operational efficiency and energy optimization initiatives. Our strategic diversification program is also advancing firmly. ENFE advanced PAL sales now account for 32% of total sales, underscoring our continuing shift toward higher added value advanced PAL grades with resilient demand. The first FLAF pipeline remains on track for commissioning in fourth quarter. Our targets are the growing but resilient end-use sectors, as are hygiene and healthcare. Both ranges of products substitute more expensive BSKP. We have initiated the decarbonization project at our Navia facility and continue progressing with our diversified renewable energy platform, including incremental biomethane output at La Galera and the construction of a new renewable industrial heating project. Together, these steps form part of a coherent strategy focused on margin quality, business diversification and operational resilience. As always, our investment approach remains disciplined, prioritizing long-value term creation, cost effectiveness, and alignment with European sustainability goals. Following parts prices in slide 6, we think that the part market is at a transitional moment. Prices in Europe dropped to 1,060 gross per ton, effectively close to marginal cost of part of the industry, impacted by US tariff uncertainties.

Historically, this low price level should signal a potential future recovery.

Softwood pulp continues to command a gross premium of over $200 net per ton. These reinforced demand for hardwood grades during the first semester. However, tariff-related disruptions, particularly between the U.S., Brazil, and China, have interrupted the recovery of prices that began during the first quarter. Continuing with the current global situation in slide 7, one of ENCE's greatest strengths is our roots in Europe. 100% of our biomass and nearly all pulp inputs are locally sourced. We are not only energy self-sufficient, but we also produce a surplus that is sold to the grid. Our sales are virtually all with the European Atlantic and Mediterranean markets. This situation should give us cost reliability in the current geopolitical climate. However, we have to be cautious and follow its development closely. Although we think that there will be no significant impact on trade flows in the very short term, there could be some impact in the medium term. Moving to slide eight, let's talk about currency volatility, which is a significant risk for any non-U.S. producer. In view of this risk, we've hedged nearly half of our 2025 pulp sales with an average cap at 1.09 U.S. dollars per euro. Our top line is partially protected from these movements. Potential positive liquidations from these hedges should result in an inflow of approximately 9 million euros during the second semester, at a euro-dollar exchange rate of 1.18. In slide 9, our ENFE advanced portfolio, which now accounts for 32% of our PAL sales, is the clearest indication of our value uplift. These products yield a higher operating profit, higher by around 30 euro per ton. The advanced product range substitutes BSKP. By 2028, we expect over 62% of our PARP sales to come from these grades, including our FARP production. It's a story of higher margins and long-term

differentiation from the traditional BHKP market.

Continuing with our product portfolio in slide 10, our 125,000 tons fluff pulp line, set to launch in the fourth quarter, opens new avenues for growth. This pulp is used for personal hygiene, medical, and absorbent products. Stable, high barrier, and ESG conscious segments. It will deliver an estimated 60 euro per ton uplift in margins and grow to 12% on sales by 2028. Most importantly, this is a value-added niche where ENCE will be the one and only European flat manufacturer with BHKP sourcing. As you know, more than 90% of fluff pulp is BSKP. Now turning to slide 11, let's talk about the global cost curve at ENCE. In view of the 62% ENCE advanced products and fluff mix anticipated for 2028, we are seeing a strategic repositioning of the company within the cost curve. at the current 488 euro per ton, and sits firmly in the top quartile of global producers for this 62% of its product mix, where we are better positioned than any of our North American, Asian, or Nordic peers. Let me update you in slide 12 about the energy efficiency credits, the so-called CAIS. By means of officially verified and registered efficiency projects, which implied annual energy savings equivalent to 251 gigawatt hour, we generated another 10 million in energy saving certificates in the second quarter. Together with the 30 million euro already cashed in the first quarter, this will account for 40 million euros in the first half of the year. And we expect an additional 4 million euros by the end of the year. Let's talk now about our renewable platform in slide 13. La Galera, which is our conventional biomethane plant, has increased its quarterly output by 2.2 times since its acquisition by ENCE on December 18 last year. This increase has been achieved without any additional capex. We achieved it simply by our team revisiting the operational process and by applying our best industrial practices to these assets. We will continue to increase its output up to the 50 gigawatt hour design in future quarters. Whilst, at the same time, we began to produce compost and biofertilizers. Others? will be fully eliminated by September 30th. We can review our biomethane growth project in slide 14. La Galera is only the first step. We now have 37 projects with location and feasibility studies completed. 17 of these plants are at the late permitting phase and biomass is already secured. The project will carry a ROC key of over 12%, and we aim to deliver over one terawatt hour by 2030. This should yield over 60 million in incremental EBITDA. Looking at renewable industrial heating in slide 15, our biomass heat solutions offer a contracted stable revenue base. In addition to the operation of our first boiler in a brewery in northwest Spain, which we started in 2024, we have begun our Mao San Miguel project with the construction of two boilers. The production target is 85 gigawatt hour annually over a 15-year contract and with Oroki in excess of 11%. Lastly, We have recently reached a final agreement for another two contracts for over 80 gigawatt hour per year with a major international dairy company. In slide 16, and as with our biomethane business, we aim to expand our renewable industrial heating business up to two terawatt hour by 2030, contributing over 40 million EBITDA. This should produce a stable income in the long term with controlled capex and strong corporate alignment. I now invite Alfredo to present our detailed financial performance. Thank you, Ignacio. The second quarter marked a challenging yet resilient performance, despite external headwinds, particularly trade uncertainties and price pressures. Let me unpack this in detail in slide 18 for our pulp operations. Although net sales price decreased by 3%, pulp sales volumes grew by 12% quarter over quarter, reaching 243,000 tons, a recovery driven by the return to full capacity after the NAVIA annual plant shutdown in Q1. Crucially, we achieved a 22 years per ton reduction in cash cost down to 488, marking a foreseeable progress in cost optimization and realignment with our full year guidance of 485. Notably, temporary cost headwinds from Q1, such as a turbine setup at NAVIA, have now fully dissipated. Regarding this, full impact of the Navier Turbine in the first half has been 10 million euros, of which 3.3 million were incurred in the second quarter. However, EVDA fell to 20 million, down from 29 in Q1, mainly related to the energy efficiency certificates. We have sold a total of 40 million euros in CAES during the first half of the year, representing energy savings for 251 gigawatts hour.

Of these, 30 were registered in the first quarter, and just 10 in the second one.

As also said in the previous quarterly presentation, these transactions are registered in the other operating revenue line of our P&L, following the interpretation of the current accounting regulation in the absence of a specific rule. and pending a consultation from the Institute for Accounting and Auditing, not yet answered. Turning to slide 19, let's review our biomass renewable electricity business. Energy volumes rose by 9% to 303 gigawatts hour, recovering from Q1's extensive maintenance stoppage. Biomass to renewable electricity gas costs were reduced by 14 euros per milliwatt hour, thanks to lower biomass prices and improved operating leverage. However, energy revenues declined by 25 euros per milliwatt hour, reflecting softer energy prices, leading to an EBITDA for the quarter of 4 million euros versus 5 in Q1. This includes a 1 million negative EBITDA from the rest of the platform businesses in their ramp-up phase. While margin compresses in the biomass electricity business, we are laying the foundations for a stable long-term value in a diversified renewables platform, including renewable industrial heating, biomethane, renewable fuels, having the biomass sourcing and trading vertical as solid common backbone. Slide 20 summarizes our group-wide financials. Group revenues increased up to 192 million euros compared to the first quarter, with growth in PULP offsetting lower energy revenues. ABDA declined to 24 million down from 34 in Q1, mainly as a consequence of the effect of the different level of crisis registered in each quarter and the PULP price pressure, ending in a bottom line showing a net loss of 9 million compared to two million of profit in Q1. We're managing through this with caution, aligning operational expenditure, investment cadence, and cost discipline ahead of the potential market cycle turn. Slide 21 represents our cash flow dynamics. Free cash flow before growth capex was minus 3 million, impacted by a 12 million euro working capital outflow in the fall business due to the higher wood inventories and receivables, notably the ones linked to the recent 10 million euro sale of cais that will be cashed in in the third quarter. 19 million in growth and sustainability CAPEX were deployed across the three projects, including the Fluff Outline, Navias Decarbonization Initiative, Engineering for Pontevedra-Avanza, Development of Biomethane and Renewable Thermal Projects. All of this pays with available resources, ensuring that we continue investing in value while safeguarding our balance sheet. Now, slide 22 highlights our solid financial position. Consolidated net debt stood at 362 million euros, supported by a strong 283 million cash position. Importantly, both our pulp and revolve business have fully available revolving crate facilities, for a total amount of 150 million euros, and our pub segment is covenant-free. This high liquidity position ensures the strength of the company along the different cycles. Maturities are well distributed across several years, and we benefit from a flexible capital structure that provides us with financial optionality and growth headroom. Let me now highlight slide 23, which showcases emphasis leadership in sustainability, a core pillar of our profitable long-term strategy. We are rated as top 1% by ECOBADIS, confirming our position at the forefront of industrial sustainability. Key milestones include our accident rates remain four times lower than the industry average, and we completed the Navia shutdown easy and free. NAVIA recorded zero odor minutes in the first half of the year. 100% of our sites are zero-waste certified. 32% of our pulp sales now come from special products with higher margins and a clear path to 62% by 2028. NaturCell Zero, our carbon-neutral pulp product, and our forestry operations include 2,100 hectares with CO2 sinking rights officially registered in the OECC voluntary as well as improved plant material adapted to climate change. We're also strengthening our supply chain oversight with over 1,000 suppliers reviewed and full alignment with the AU deforestation regulation. On the social side, we've launched a new Pontevedra social plan and continue promoting internal talent. 38% of hires were internal. and over 30% of women in managerial positions. Profitability, sustainability is clearly embedded in our operations and helps differentiate ENCE commercially and reputationally. Let me please now hand back the presentation to our Chief Executive Chairman for his closing remarks. Thank you, Alfredo. May I conclude with these closing remarks? Prices are now below marginal cost levels of part of the industry. This should lead to a potential start of price recovery in a few months, provided that the tariff war has ended. Our first 125,000 tons fluff pulp line in Navia will be commissioned in fourth quarter 2025. The operating margin is expected to be approximately 60 euro per ton higher than our standard pulp as we compete against BSKP. Special pulp sales are expected to exceed 62% of total sales by 2028. This is significantly repositioning ENCE in the top quartile of the global cash cost curve. We expect to start the production of our renewable packaging solution in late 2025. Cash cost has been reduced by €22 per ton in the quarter, in line with our target of below €485 for the full year. We are building a large biomethane platform in Spain. We aim to produce over one terawatt hour by 2030 and to contribute over 60 million to the BDA. Our renewable industrial heating business aims to produce two terawatt hour by 2030 and to contribute over 40 million to the BDA. Reaching these goals should allow us to more than triple the Renier Barber Business EBITDA over the next five years, while the transformation of ENCE into a producer of special parts will significantly improve the business operating margin by over 20 million per year. The execution of these projects will be adapted and aligned to our cash flow generation to maintain a prudent leverage and an attractive remuneration for shareholders. Thank you for your attention. We would be pleased to hear any questions you may have.

Thank you. Ladies and gentlemen, the Q&A session starts now. If you wish to ask a question, please press star one on your telephone keypad. You will have the opportunity to ask all the questions that you may have. We kindly ask you to ask only one question at a time to our speakers. instead of asking multiple questions at the beginning thank you once again that is star and one to ask a question their first question comes from the line of Manuel Lorente Ortega from Santander please go ahead yes hello good morning so my first question probably is on the energy certificate savings we have been talking a lot

on the recent past regarding power dynamics or even your diversification strategy in renewables, but I believe that we lack of information regarding how these energy certificates are created. This is a sustainable business model for you. uh this let's say uh 45 million euros positive contribution of this year it's a round rate for the future i don't know any more color regarding um this issue is more than welcome because it looks like it's happening and it might have a relevant impact going forward thank you very much for your question unfortunately not i think it's uh

several one-offs this year. The law has been modified, and then from next year, we will get also CAES, but on a lower amount, and we will need to invest for having them, to invest more than what we did. Then any figure between zero and 10 million per year is going to be possible on the next years, but not on the amount of this year. and always related to CapEx.

OK, understood. So let's return to the basics then. And you were mentioning, Ignacio, you have more or less some positive thoughts regarding poll prices by the second half of the year. very much appreciated you can elaborate a little bit on those thoughts regarding the, I don't know, the news flow that we are receiving on weakening demand in Europe, cheap availability of wood in China, overall FX headwinds. Looks like we might be lower for longer on the current, let's say, low pulse cycle.

I have to insist on what I said previously. Current BHKP prices are below the marginal cost of part of the industry at the price of today, $1,060 per ton gross, which is equivalent, for instance, to $500 net in China. At current price levels, Integrated cost producers in China, despite there is more wood, are already replacing the production for market pulp.

And then market pulp demand is increasing and will continue increasing. Demand in Europe is not so strong than last year, but is good.

And fundamentals are strong. On the other hand, the BHKP price gap versus BSKP is above $200, favoring short fiber market share again. A lot of customers are switching from standard BSKP to standard BHKP, and that is improving the demand of BHKP, and it will continue with this gap. And as I said before, historically, when reaching these levels, a restocking process occurs, driving prices up. Common sense lead us to consider that once the tariff uncertainty disappears, prices should bounce back.

Okay. Thank you, guys. Thank you very much.

Thank you. And your next question comes from the line of Cole Hathorn from Jefferies. Please go ahead.

Good afternoon, thanks for taking my question. The first one's on wood costs. I'd just like to understand what you can do to improve the wood costs position over time. I know you've guided to 485 for this year and you will get the benefit of some of your projects. Could you just remind us of the project benefits that you should get to lower your production costs in 26-27 at a high level? And then also, are there any structural reasons why wood costs in Iberia could go down? I mean, if we look back versus history, wood costs are up in Iberia and they're up globally. So I'm just wondering, could there be a shift or a trend change to lower Iberian wood costs going forward? Thank you.

Yeah, thank you for your question. Yeah, we have, let's say, a totally different view. We think that wood cost worldwide will continue to increase. The main two drivers are the part demand increasing by between 1 and 2 million tons per year, which equals to 4 to 7 million tons of wood per year. In the other hand, all the new biofuels who are going to be made in Brazil, are going to consume a lot of wood.

In third hand, the green steel, also in Brazil, will consume a lot of wood.

That's why we think that globally, the price of the eucalyptus wood is going to be higher year by year. If now we go to the northern hemisphere, well, the plantations in Canada, the forest in northern part of Europe is suffering of disease, drought, and it seems it is starting to be structural. Then we strongly believe there is going to be less availability of softwood on the next years. By all these reasons, we see globally prices of the wood going up. Going now to your question on Spain, we see the wood stable. We don't see it will be possible to reduce the price of the wood in Spain, or maybe by one euro, but that is three euros per ton of pulp.

From a structural point of view, we see a strong demand, but have to go and have to refer to our strong network buying wood. As you know, one third of the wood is sourced, purchasing it directly to the forest producers.

And the average size in the northwestern Spain of each plantation is half a hectare. Then we are very, very close, extremely close to the market.

We have, and it is in our cash course, we have over 100 persons being in contact with this market, purchasing. And the other third is purchased to small,

Forest companies we have developed. We are financing. It is on our assets. And we are supporting them. They buy very few quantities every month. But this capital is extremely important to protect our market share. And we only buy one third of our needs to something around 20 big trading companies of goods. Then, as a resume, we see on the next five to ten years strong prices of the wood going up. We see scarcity of wood, and we strongly believe ENCE has a very strong competitive advantage with our capillarity and our network buying almost directly to the market in northwestern Spain.

Thank you. Thank you.

And then maybe just some comments on demand. You've been very clear that you're positioning your portfolio to target more inter-advanced and you'll start ramping up fluff pulp. You get a margin premium trying to kind of compete with softwood. But I'd like to hear your thoughts around the current demand trends on the standard hardwood as well as what you're seeing on those niche products. We've seen shipments into China higher, but it's also against very easy comps. So the comp base is easier, whereas Europe and North America has been a bit softer. And I'm just wondering, is it the situation where people are destocking a little bit on expectations that pulp prices are declining? So is some of the lower demand statistics in Europe and North America just because your customers are destocking, any kind of customer feedback or thoughts from the tissue or graphic paper producers into the second half of the year would be very helpful.

Yeah, thank you. Well, I don't think I can give you more information than the one you have. What we see is that the apparent demand is very much affected by the so-called tariff war. Then what we see is this stocking of important customers. That's what we see in June. In June, the first 15 days of June, it was terrible. It was impossible to sell a single ton of pulp anywhere in Europe, in Northern Africa, in Middle East, in Far East. Then prices went down a lot at Prices close to $500, then the market restarted to buy. We see the market buying in Far East and Middle East at those prices. And we see that the European customers are waiting and see. I think the market and the purchasing decisions of our customers are very affected by all these tariff wars. Nobody knows if in August the 1st, Brazil will have 50% of tariffs on their regular exports to the US. They export something close to 2.4 million tons per year. China has 30% tariff on their exports. They are not exporting a lot of paper. They are. And then we see the market is very, very affected by this tariff war. And it's very difficult to see really what is happening. Our vision is that the final demand, the demand from houses, the demand from the industry, from the end users, is stable, both in Europe and in China. We are pretty sure about that. And what we see is customers not taking decision of purchase, because of the uncertainties due to the tariff war.

And then maybe just following on from the Brazil point you mentioned, I know it's very difficult to comment, but if there is a tariff on Brazil, how do you think the market plays out here? Do you think that will be the trigger for some of the larger Brazilian players to take commercial downtime and kind of manage supply to demand? how long does it take to reroute shipments from maybe the US to Europe? I think logistically it's probably a lot more challenging than people imagine to move that help around.

You are right. This market is not flexible at all. We saw that on COVID. What happened in COVID is a good example and is a good comparison of what is happening today. Then Our colleagues in Brazil, if they have these 50% tariffs on August 1st, well, they cannot switch to Europe from one day to the other because what they have contracted is vessels for transporting the parts to the States, not to Europe. And these vessels have to come back with all the goods who are already contracted. Then it is not flexible at all. It can take several months, many months. to change and to switch those traffics. What we see, and I don't know what Brazil is going to do, you have to ask that to them. What we know at ENCE is that despite all these uncertainties and this very distortion market we have today, well, we see opportunities for us. We see that the US is exporting to Europe today 1 million tons of fluff pulp. Well, if we really go to a tariff war, well, it will be much easier for us to sell our new 125,000 tons of pulp in Europe. We see the US also exporting 1 million tons of fluff pulp to China. And the same, we see a lot of interest of Chinese customers to buy fluff pulp from us. Our target is Europe because we are a small player with only 125,000 tons. But maybe at the beginning of the ramp-up of the project, it can ease things if we can sell a bit to China. But regarding what Brazil is going to do, what I know is from a logistical point of view, it's very difficult to switch, but you have to ask to them what they're going to do. Thank you.

And then just finally, a question for Alfredo on CapEx. Is there a guidance that you can give for 2025? Because I imagine most of your projects are planned and you know the number for 2025. And then into 2026, you've always said that you would adapt your projects depending on cash flow. And, you know, if pulp recovers strongly, you'll have more cash flow to put into your project. But, you know, how do you think about CapEx where we are now into 2026? And, you know, which would be the projects that you would say, you know, this is our focus area and the other ones if demand improves and cash generation improves, you know, we accelerate. You know, will it be kind of more focused on Ponte Vedra, more focused on kind of the renewables business? How do you think about that capex into 2026? Thank you.

Thank you. As we said from the – I mean, it was always said regarding our CapEx policy is fully linked to our cash flow generation. At this moment, as our chairman has said, we're in a kind of uncertainty situation regarding the studies and so on and so forth. But be sure that we'll be conservative and we'll be facing our CapEx manager for next year depending on what we see. Right now it might be, as you may understand, too early. to talk about 26, but at this moment I will tell you that we'll be fully matching the cash flow generation that we'll have for next year. There's two things here. One is regarding the PULF. The other is regarding the renewables, using the cadence of our renewable business and how we are growing in biomethane and in industrial heating. At the same, it will be adapted to whatever we see. Regarding 25, we maintain the same view that we were saying previously of about 75 in the bulk and around 50 in the renewable business, including those growth projects or those inorganic projects.

Thank you.

Thank you. Once again, should you have a question, please press star and one on your telephone keypad. Your next question comes from the line of Luis de Toledo from OdoBHF. Please go ahead.

Good afternoon. My first question refers to the global cash growth score in the slide 11. I was surprised to see Indonesia taking over in Brazil as cash growth leader. I don't know if you can elaborate on the reasons and potentially the impact that this can have on world trade flows, I assume that Brazilian producers maintain the price setter condition, but I would like to know if considering lower logistic costs in China, if this can be a threat to prices, and I would also like to see your relative position on the sector, if something material is advantage of Indonesia over Brazilian producers.

Yeah, thank you very much for your question. I think you can have a look to our presentation on slide number 11. you have the market part production cost by regions. You have in light green BHKP and in dark green BHKP. Then what we would like to highlight is that we are at the middle of the curve. As you see, Iberia, $553 per ton. That's where we are, and that's where we are really. If you compare us with the people who are on dark green at our right, you have 23,000 tons in dark and you have 5,000 tons more in light green who have a higher cost than us. If you analyze and you compare ENCE as a pure BHKP player, it is true that Our position is not excellent. Indonesia and Brazil and Chile are better position than us. But now we sell 32% of special products, not competing with Indonesia, Brazil, or Chile on BHKP, but competing against the Scandinavians, the Canadians in BHKP. And our target is by 2028, The mix has to be over 62% with the ENCE Advanced Pulp Products and the FLAS Pulp. Then more than 50% of our revenues will come from products where we are competing with BSKP. Therefore, if you analyze again with this view where we are in terms of competition, well, we are very well positioned to compete win this game and to have a good yield from our strategy.

Thank you. But you're not concerned about the Indonesian cost advantage becoming wider?

Well, because we don't compete against Indonesia. Indonesia is selling in Far East Asia. Well, they are a significant player. They, like Brazil, they mark the price on BHCP, but in 2028, that will be below 40% of our sales. Over 62% of our sales, we will compete, as we are doing today, on 32% of our sales, one-third already, against Canadians, Scandinavians, and other people buying stock.

Absolutely. The second question would refer to commercial discounts, 48% in the current context and assuming that prices rebound once uncertainties on tariffs disappear. Do you expect also the commercial discount to decrease or you would tend to believe that this reference is the adequate one for the next semesters.

Well, yeah. The problem is that we don't know when the prices are going to bottom out. I think that today, by fundamentals, the prices should have already started to bottom out, but they haven't. And they haven't not because a problem related to demand of parts, but related to this tariff uncertainty. Then, I don't know what is going to happen on three months' time. Now, in the second half of July, well, if you have to do a spot price, let's say in Turkey or in Egypt, to sell, well, it will be below the normal discount because the peak price today is 1,060. 1,060 gross price is equivalent to a net price of 570s. And today, if you want to sell in those countries, you have to sell close to 500, you know. Then the discount will be higher. It depends on how many times you are forced to sell at these low prices and how long does it take, you know, before the prices recover.

Thank you very much. Thank you.

Thank you. That ends our question and answer session. Ladies and gentlemen, this concludes today's call. Thank you for participating. You may all disconnect.

Thank you very much, Benjamin. Thank you.