ENCE Energía y Celulosa, S.A. (ENC) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon, and welcome to the ENCE conference call to explain the incorporation of a minority partner in its Renewable Energy business. I now hand over to Mr. Ignacio Colmenares, Executive Chairman; and Mr. Alfredo Avello, CFO. Mr. Chairman, please go ahead.

Good afternoon, ladies and gentlemen. Thank you for joining ENCE's conference to explain the incorporation of a minority partner in our Renewable Energy business. Our CFO, Alfredo Avello; and our Head of IR, Alberto Valdes, are also connected. After a summary of the transaction, we will be pleased to answer any questions you may have. I believe this transaction is very positive for ENCE. We decided 1 year ago, as you remember, to sell a minority stake in Ence Energía due to the high valuations of renewable assets. The process was launched in February. Due to the pandemic, the process was temporary in standby. We restarted the process in June. Due diligence was conducted during summer, and we finally selected the best offer at the end of September. We are gaining a strong partner to grow in renewables and to contribute to the ecologic transition in Spain. ENCE and Ancala, we are both aligned and committed to this goal. We will maximize the value of our CSP plant in a different deal. The transaction values our Energy Business at over EUR 1 billion and reinforces our balance sheet in the time of uncertainty around the impact the duration of the pandemic. Once COVID is over, we will be in a strong position to boost our growth and to become a indiscernible in the new bioeconomy in Spain, not only in Renewables, also in Pulp. I will now invite Alfredo to give you a brief summary of the transaction.

Thank you, Ignacio. We have agreed to sell a 49% equity stake of our subsidiary Ence Energía to infrastructure investment fund, Ancala Partners, retaining control of the business with the remaining 51% stake. Ancala Partners is an infrastructure investment manager based in the U.K. with around EUR 1 billion of assets under management and with investments in a wide variety of infrastructure sectors including renewable energies. The agreement excludes our 90% equity stake in the 50-megawatt CSP plant in Puertollano, which is being sold separately. As you may know, Ence Energía is the largest generator of renewable energy with agricultural and forestry biomass in Spain with an installed operating capacity of 266 megawatts distributed over 8 biomass clients. The transaction encompasses not only Ence Energía's current operating biomass capacity, but also its pipeline of future renewable energy projects in Spain, which amounts to 405 megawatts. This pipeline already has access to the grid and secured locations. It comprises 3 biomass projects with a combined capacity of 140 megawatts, another 4 PV projects with a joint capacity of 240 megawatts and 1 project to hybridize the Puertollano CSP plant with a 25-megawatt biomass boiler. The development of these projects await a capacity option for the implementation of the National Renewable Energy Plan in Spain. We are completing the administrative process, and we expect the first capacity auctions to be called before the end of the year. The transaction is valued at EUR 186 million. This figure includes EUR 154 million of debt, but does not include the value of the Puertollano CSP plant, which was acquired November 2018 at an enterprise value of EUR 146 million. The price agreed for the 49% equity stake in Ence Energía, excluding the CSP plant, amounts to EUR 359 million. Of this amount, EUR 225 million will be received at the closure of the transaction in December. The reception of the remaining EUR 134 million depends on reaching certain milestones in the development of the biomass pipeline as follows: firstly, the biomass capacity auctions were up to 140 megawatts; secondly, the awarding of this capacity to Ence Energía and the price secured for that capacity; thirdly, the CapEx required for the commissioning of the power plants; and fourthly, the operational performance of these plants until 2028. EUR 130 will be progressively received as and when we reach the ]. Thank you.

We will please -- thank you, Alfredo. We will now be pleased to answer any questions you may have.

[Operator Instructions] The first question from Alberto Espelosín from JB Capital.

I have 3 questions. The first one is from the EUR 225 million. Is there any commitment for the Energy division or can you take the 100% of the amount to the Pulp division?

Could you repeat your question?

So from the fixed EUR 225 million that you received, is there any commitment for the money to stay in the Energy division or can you take the 100% amount [indiscernible]?

No. No, Alberto, there is no commitment, and the money is not going to stay in the Energy division.

Okay. So that was my second question. As it goes to the Pulp division, how is the money received in the Pulp division going to be used? Are you thinking on reducing leverage, distributing an extraordinary dividend or maybe for investments in Navia?

No. It's going to -- as I told you before, it's going to reinforce the balance sheet of the company. And well, we have to wait and see how long the pandemic is going to take. Now we have to be prudent, and we are not going to use this money for anything. And once the -- we will have more vision about the end of the COVID, we will restart to grow faster, both in Pulp and in Energy.

Okay. Perfect. And sir, regarding the thermosolar plant excluded from the deal, do you expect to close the sale of this plant in the short term?

We are working for [Audio Gap]

Next question is from Beltran Palazuelo from SANTALUCÍA AM.

I would like to say or congratulate the team for an attractive price, and I think well, my answer was answered -- well, my question was answered regarding the other proceeds. So to wait for the pandemic to not be here and then grow in Pulp and Energy and maybe going forward, what's the hurdle rates for additional, let's say, investments in Pulp? And well, in Energy, we have seen that you allocate capital extraordinary, so no question in that regard. But what you have to see in the Pulp Business in order to make you allocate more capital in that business?

Well, I'm not pretty sure I have understood well your question. I will try to answer. And if not, you [ repeat that ]. Well, we have a strategic plan. The strategic plan in Pulp now is on the standby. And it will be on standby until we see end of the pandemic, and we see a strong and definitive recovery of the prices of the pulp. And then the next step is to do this expansion at Navia, diversifying the products and producing dissolving pulp for the viscose industry and fluff pulp for the absorbent industry. That's what we are going to do once 2 things -- but 2 things have to happen before: One is that the pandemic is over; and two is that the prices of the pulp have definitely recovered.

Next question is from Alvaro Lenze .

I want to -- do you have a partner on the Energy Business, whether the debt-to-equity mix of investments going forward is going to change and whether the incorporation of a minority also changes your view on whether you should approach the investments via auctions or via PPAs?

Well, regarding the philosophy of leverage where we have agreed with Ancala to be a bit more aggressive, and we are going to be -- to push from 4x EBITDA to 5x EBITDA in Energy. That's going to be an important change. But when we see -- are prudent if we compare with other competitors that are above -- above 9 today. That was the first question. And could you remind me your second question?

Yes. The second question would be whether your new part in Ancala is more prone towards PPAs? Or are you still looking only to finance the investments once you have an auction, public auction?

No. No. Our sense, what -- we don't like to be measured. And Ancala has both a minority stake on a company who doesn't want to have a merchant risk. Then the way to hedge this risk is either with feed-in tariff either with the PAs. Nothing has changed.

Okay. My question would be, would your -- would the earn-out spending be subject on -- of course, they are pending on the auctions. But if you, instead of an auction, you develop the projects under PPA, would that also qualify for the earn-out?

Yes. Yes.

Okay. And lastly, if you could please remind us what is the total expected CapEx needs for developing the current pipeline that you have? And how much of that would be financed via equity and how much with debt, and whether this equity would require a capital increase from the Pulp Business?

Yes. We will have a leverage of between 40% and 35%, yes. And regarding the total amount of money, nothing has changed. We have those 240 megawatts of PV, and that's, well, just below EUR 120 million of total CapEx, yes. And we have 200 megawatts, that's 250 more million of -- yes, 0.5 million per megawatt in biomass. Nothing has changed. It's our strategic plan.

Next question, Jaime Escribano from Banco Santander.

Sorry, because I was kicked out from the call a couple of times, so if I ask a question that has been already answered, don't answer it, and I will ask you afterwards. I have 2 questions. The first one regarding the Puertollano plant, could you tell us what is the net debt in order to calculate the potential equity that you can get from Puertollano and...

Today is EUR 82 million.

In equity, okay.

No, no, debt. Net debt.

Okay.

Is that what you asked?