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

Good morning, ladies and gentlemen. Welcome to the ENCE First Quarter 2025 Results Presentation. I will now hand over to Mr. Ignacio de Colmenares, Executive Chairman; and Alfredo Avello, 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 wood and also local biomass. Our production of Advanced pulp products continue to grow, substituting for the more expensive BSKP products. We continue to generate diversified nonconventional 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 cost to EUR 488 per tonne, a EUR 22 per tonne improvement from first quarter, underpinned by our operational efficiency and energy optimization initiatives. Our strategic diversification program is also advancing firmly. ENCE Advanced pulp sales now account for 32% of total sales, underscoring our continuing shift toward higher added value Advanced pulp grades with resilient demand. The first Fluff pulp line remains on track for commissioning in fourth quarter. Our targets are the growing but resilient end-use sectors such as hygiene and health care. Both ranges of products substitute more expensive BHKP. 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 pulp prices in Slide 6, we think that the pulp market is at a transitional moment. In July, prices in Europe dropped to USD 1,060 gross per tonne, effectively close to marginal cost of part of the industry, impacted by U.S. 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 tonne. This 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 on Slide 7, one of ENCE's greatest strength is our roots in Europe. 100% of our biomass and nearly all pulp inputs are locally sourced. We are not energy self-sufficient -- sorry, we are not only energy self-sufficient, but we also produce a surplus that is sold to the grid. And 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 8. 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 USD 1.09 per Euro. Our top line is partially protected from these movements. Potential positive liquidations from these hedges should result in an inflow of approximately EUR 9 million during the second semester at a euro-dollar exchange rate of 1.18. In Slide 9, our ENCE Advanced portfolio, which now accounts for 32% of our pulp sales is the clearest indication of our value uplift. These products yield a higher operating profit, higher by around EUR 30 per tonne. The Advanced product range substitutes BSKP. By 2028, we expect over 62% of our pulp sales to come from these grades, including annual pulp 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 tonnes 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 cautious segments. It will deliver an estimated EUR 60 per tonne 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 fluff manufacturer with BHKP sourcing. As you know, more than 90% of fluff pulp is BHKP. 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 EUR 488 per tonne, ENCE 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 CAEs. By means of officially verified and registered efficiency projects, which imply annual energy savings equivalent to 251 gigawatt hour, we generated another EUR 10 million in energy saving certificates in the second quarter. Together with the EUR 30 million already cashed in the first quarter, this will account for EUR 40 million in the first half of the year. And we expect an additional EUR 4 million 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 2.2x 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 30. 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 ROCE of over 12%, and we aim to deliver over 1 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 Mahou-San Miguel project with the construction of 2 boilers. The production target is 85 gigawatt hour annually over a 15-year contract and with a ROCE in excess of 11%. Lastly, we have recently reached a final agreement for another 2 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 2 terawatt hour by 2030, contributing over EUR 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 pressure. 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 tonnes, a recovery driven by the return to full capacity after the Navia annual plant shutdown in Q1. Crucially, we achieved a EUR 22 per tonne reduction in cash cost down to EUR 488 per tonne, marking a foreseeable progress in cost optimization and realignment with our full year guidance of EUR 485 per tonne. Notably, temporary cost headwinds from Q1, such as the turbine setup at Navia have now fully dissipated. Regarding this, full impact of the Navia turbine in the first half has been EUR 10 million, of which EUR 3 million were incurred in the second quarter. However, EBITDA fell to EUR 20 million, down from EUR 29 million in Q1, mainly related to the energy efficiency certificates. We have sold a total of EUR 40 million in CAEs during the first half of the year, representing energy savings for 251 gigawatts hour. Of this, EUR 30 million were registered in the first quarter and just EUR 10 million in the second one. As also said in the previous quarterly presentation, this 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 of Accounting -- and 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 renewable electricity cash costs were reduced by EUR 14 per megawatt hour, thanks to lower biomass prices and improved operating leverage. However, energy revenues declined by EUR 25 per megawatt hour, reflecting softer energy prices, leading to an EBITDA for the quarter of EUR 4 million versus EUR 5 million in Q1. This includes a EUR 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 EUR 192 million compared to the first quarter, with growth in pulp offsetting lower energy revenues. EBITDA declined to EUR 24 million, down from EUR 34 million in Q1, mainly as a consequence of the effect of the different level of CAEs registered in each quarter and the pulp price pressure, ending in a bottom line showing a net loss of EUR 9 million compared to EUR 2 million of profit in Q1. We're managing through this with caution, aligning operational expenditure, investment guidance 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 EUR 3 million, impacted by a EUR 12 million working capital outflow in the pulp business due to the higher wood inventories and receivables, notably the ones linked to the recent EUR 10 million sale of CAEs that will be cashed in, in the third quarter. EUR 19 million in growth and sustainability CapEx were deployed across strategic projects, including the fluff pipeline, Navia's decarbonization initiative, engineering for Pontevedra Avanza, development of biomethane and renewable thermal projects. All of this stays 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 EUR 362 million, supported by a strong EUR 283 million cash position. Importantly, both our pulp and renewables business have fully available revolving credit facilities for a total amount of EUR 150 million, and our pulp 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 provide us with financial optionality and growth headroom. Let me now highlight Slide 23, which showcases ENCE's leadership in sustainability, a core pillar of our profitable long-term strategy. We are rated as Platinum top 1% by EcoVadis, confirming our position at the forefront of industrial sustainability. Key milestones include our accident rates remained 4x lower than the industry average, and we completed the Navia shutdown incident-free. Navia recorded zero odour minutes [ greenhouse ] 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 plan material adapted to climate change. We're also strengthening our supply chain oversight with over 1,000 suppliers reviewed and full alignment with the EU 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 help 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 tonnes fluff pulp line in Navia will be commissioned in the fourth quarter 2025. The operating margin is expected to be approximately EUR 60 per tonne 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 EUR 22 per tonne in the quarter, in line with our target of below EUR 485 per tonne for the full year. We are building a large biomethane platform in Spain with aims to produce over 1 terawatt hour by 2030 and to contribute over EUR 60 million to EBITDA. Our renewable industrial heating business aims to produce 2 terawatt hour by 2030 and to contribute over EUR 40 million to EBITDA. Reaching these goals should allow us to more than triple the renewable business EBITDA over the next 5 years, whilst the transformation of ENCE into a producer of special pulp 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 will be pleased to hear any questions you may have.

[Operator Instructions] Your first question comes from the line of Manuel Lorente Ortega from Santander.

So my first question probably is on the energy certificate savings. We have been talking a lot in the recent past regarding pulp dynamics or even your diversification strategy in renewables. But we -- I believe that we lack of information regarding how the energy certificates are created. This is a sustainable business model for you. This, let's say, EUR 45 million positive contribution of this year, it's a run rate for the future? I don't know. Any more color regarding this issue is more than welcome because it looks like it's having and it might have a relevant impact going forward.

Thank you very much for your question, Manuel. Unfortunately, not. I think it's several one-offs this year. The law has been modified. And then from next year, we will get also cash, 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 0 and EUR 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.

Okay. Understood. So let's return to the basics then. And you were mentioning it last year, you have more or less, I don't know, some positive thoughts regarding pulp prices by the second half of the year. It will be very much appreciated if 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. It looks like we might be lower for longer on the current, let's say, low pulp cycle.

Yes. Well, I have to insist in what I said previously, yes. Current BHKP prices are below the marginal cost of part of the industry at the price of today, $1,060 per tonne gross, which is equivalent, for instance, to $500 per tonne 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.

And your next question comes from the line of Cole Hathorn from Jefferies.

The first one is on wood costs. I'd just like to understand what you can do to improve the wood cost position over time. I know you've guided to EUR 485 per tonne for this year, and you also 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?

Yes. Thank you for your question. Yes, we have, let's say, a totally different view. We think that wood cost worldwide will continue to increase. The main 2 drivers are the past demand increasing by between 1 million and 2 million tonnes per year, which equals to 4 million to 7 million tonnes of wood per year. In the other hand, all the new biofuels while going to be made in Brazil are going to consume a lot of wood. In first hand, the Green Steel also in Brazil will consume a lot of wood. That's why we think that globally, the price of the wood based, the eucalyptus wood is going to be higher year-on-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 soft wood on the next years. By all those 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 EUR 1, that is EUR 3 per tonne 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, 1/3 of the wood is sourced purchasing it directly to the forest producers. And the size -- the average size in the Northwestern Spain of each plantation is 0.5 hectare. And we are very, very close -- extremely close to the market. We have -- and it is in our cash cost. We have over 100 persons being in contact with this market purchasing. And the other 1/3 is purchased through 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 capillarity is extremely important to protect our market share. And we only buy 1/3 of our needs to something around 20 big trading companies of us. Then as a resume, we see on the next 5 to 10 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.

And then maybe just some comments on demand. You've been very clear that you're positioning your portfolio to target more into 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.

Yes. 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 a destocking 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 tonne 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 ENCE. I think the market and the purchasing decisions of our customers are very affected by all these tariff wars. Nobody knows if in August 1, Brazil will have 50% of tariffs on these -- on the regular export to U.S. They export something close to 2.4 million tonnes 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 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? And how long does it take to reroute shipments from maybe the U.S. to Europe? I think logistically, it's probably a lot more challenging than people imagine to move that pulp around.

Yes, 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 this 50% tariffs on August 1, well, they cannot switch to Europe from one day to the other because what they have contracted these vessels for transporting the pulps to the states, not to Europe, and these vessels have to come back with other 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, I have to ask that to them. What we know at ENCE is that despite all these uncertainties and this very disruption market we have today, well, we see opportunities for us. We see that the U.S. is exporting to Europe today 1 million tonnes 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 tonnes of pulp in Europe. We see the U.S. also exporting 1 million tonnes 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 tonnes. But well, 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 they know is from a logistical point of view, it's different -- it's very difficult to switch, but you have to ask to them what are they going to do.

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 if pulp recovers strongly, you'll have more cash flow to put into your projects. But how do you think about CapEx where we are now into 2026? And which would be the projects that you would say this is our focus area and the other ones if demand improves and cash generation improves, we accelerate? Will it be kind of more focused on Pontevedra, more focus on kind of the renewables business? How do you think about that CapEx into 2026?

Thank you. As we said from the -- I mean, we've always said regarding our CapEx policy is fully linked to our cash flow generation. At this moment, as our Chairman has said, we are in a kind of uncertainty situation regarding these tariffs and so on and so forth. But be sure that we'll be conservative and we'll be facing our CapEx expenditure 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 would tell you that we'll be fully matching the cash flow generation that we'll have for next year. There's 2 things here. One is regarding the pulp. The other is regarding the renewables. You've seen 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 pulp and around 50% in the renewable business, including those growth projects or those inorganic...

[Operator Instructions] your next question comes from the line of Luis de Toledo from ODDO BHF.

My first question refers to the global cash cost curve in the Slide 11. I was surprised to see Indonesia taking over Brazil as cash cost leader. I don't know if you can elaborate on the reasons and potentially the impact that this can have on world trade flows, listing prices. I assume that Brazilian producers maintain the price 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.

Yes. Thank you very much for your question. I think you can have a look to our presentation on Slide #11, you have the market pulp production cost by regions. You have in light green BHKP and in dark green BSKP. Then what we would like to highlight is that we are at the middle of the curve, as you see, Iberia, $553 per tonne. That's where we are, and that's where we are really. Then if you compare us with the people who are on dark green at our right, yes, well, you have 23,000 tonnes in dark and you have further 5,000 tonnes more in light green have a higher cost than us. Then if you analyze and you compare ENCE as a pure BHKP player, well it is true that our position is not excellent. Indonesia and Brazil and Chile are better positioned 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 BSKP. And our target is by 2028. The mix has to be over 62% with the ENCE Advanced pulp products and the fluff 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 win this game and to have a good yield from our strategy.

But I mean you're not concerned about the Indonesia 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 BHKP. 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, 1/3 already against Canadians, Scandinavians and other people buying...

Understood. The second question with respect to commercial discounts, 48% in the current context and I mean, assuming that prices rebound once uncertainties on tariffs disappear. I mean, do you expect also the commercial discount to decrease? Or you would tend to believe that this reference is adequate one for the next semesters?

Well, yes, the problem is that we don't know when the prices are going to bottom out. I think that the -- today, by fundamentals, the prices should have already start to bottom out, but they haven't. And they haven't not because a problem related to demand of pulp, but related to the tariff uncertainty. Then I don't know what is going to happen on 3 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 while it will be below the normal discount because the fixed price today is $1,060 per tonne. $1,060 per tonne gross price is equivalent to a net price of $570 per tonne. And today, if you want to sell on those countries, you have to sell close to $500 per tonne, then the discount will be higher. It depends on how many tonnes you are forced to sell at these low prices and how long does it take before the prices recover.

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, gentlemen.

Thank you.