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

Good afternoon, ladies and gentlemen. Welcome to the ENCE Q3 2025 Results Presentation. I will now hand over to Mr. Ignacio Colmenares, Executive Chairman and CEO; and Alfredo Avello, CFO. Gentlemen, please go ahead.

Good afternoon, everyone, and thank you for joining ENCE's Third Quarter 2025 Results Presentation. Let me please start this presentation pointing out that, firstly, ENCE's Pulp division is firmly evolving towards a higher-margin Special Pulp Centered business, substituting more expensive BSKP alternatives based on local wood sourcing and proximity service. And secondly, our local biomass backboned renewable energy platform continues its development, transforming the biomass nearby collected into a diversified range of energies, including regulated renewable electricity, industrial renewable fitting, biomethane and renewable fuels with solid recurrent EBITDA and tangible pipelines under execution. Today, I'm joined by our CFO, Alfredo Avello; and our IR Director, Ines Alvarez. I will begin with a brief overview of the quarter and our strategic process. Alfredo will then take you through the financials, and I'll return with the closing remarks. On Page 4, you can find the main highlights of the quarter. BHKP prices hit lows in third quarter. Since then, price increase announcements were made by the main producers for a total gross of $130 per tonne in Europe, of which $60 per tonne are already recognized in the PIX. In third quarter, we continued our discipline in cash cost reduction with an improvement of EUR 29 per tonne quarter-on-quarter. Cash cost savings were mainly driven by operational efficiencies and the positive contribution from the energy revenues after the successful ramp-up of Navia's turbine in June. Reinforcing our commitment towards efficiency and competitiveness, ENCE has launched an efficiency and competitiveness plan based on 2 main pillars. Firstly, process reengineering and AI initiatives; and secondly, streamline of the operations through an orderly reduction of FTEs. The full plan will generate potential annual savings of EUR 22 per tonne at cash cost level and will require a cash-out of approximately EUR 23 million, resulting in a net present value of EUR 200 million. The plan will be implemented in the next 24 months. The Navia decarbonization plan and Pontevedra Avanza will continue in parallel. ENCE's higher-margin special pulp products accounted for 29% of the sales volumes year-to-date, 30% higher than in the first 9 months of 2024, delivering an incremental margin of EUR 32 per tonne over the remaining 51% of standard BHKP. Despite low pulp prices, free cash flow before growth CapEx amounted to EUR 12 million compared to a cash consumption of EUR 13 million in the previous quarter, solidly supported by the optimization of the working capital that has fully neutralized the increase of the first half of the year. Our investment approach remains disciplined, prioritizing long-term value creation and cost effectiveness, implementing a clear strategy for both businesses in this new growth phase. By 2028, ENCE aims to increase its across-the-cycle EBITDA by 50% in pulp on the back of higher-margin special products, operational efficiency and cash cost focus, Pontevedra Avanza, As Pontes projects and renewable packaging solutions. And by 2030, our diversified renewable energy biomass backboned platform is on track to more than triple its recurring EBITDA, growing in renewable industrial heating and biomethane businesses prior to entering the renewable fuel business. Moving to Slide 6, you can see that gross BHKP prices bottomed at $1,000 per tonne in August. Since then, 2 price increase announcements were made for a total of gross $130 per tonne in Europe, of which $60 are already reflected in the fixed pulp as well as $30 tonne net in China. The demand backdrop remains supportive with global demand 7% up to August and a widening gap versus softwood pulp. The recent U.S. tariff redemptions for pulp imports and the planned maintenance shutdowns among large Latin American producers in fourth quarter should consolidate the positive price trend into year-end. Continuing with our FX policy in Slide 7, we've hedged nearly half of our 2025 pulp sales with an average cap at $1.09 per euro. In this quarter, FX hedging has resulted in a positive inflow of EUR 4 million and should add another EUR 3 million in the fourth quarter, assuming a euro-dollar exchange rate of 1.16. Turning to Slide 8; I would like to review with you the Efficiency & Competitiveness plan launched in third quarter. It is a 24 -- sorry, 24 months program to streamline our operations based on process reengineering and AI-enabled initiatives across procurement, maintenance, industrial operations, safety and quality. The plan targets approximately EUR 22 per tonne of cash cost savings by the end of 2027, with a cash out of around EUR 23 million to be deployed in the same 2 years, yielding an estimated net present value of EUR 200 million and 1-year payback. Projects have been launched in both businesses and negotiations with Labor representatives are on track. The ultimate goal is to strengthen ENCE's competitive positioning while securing a stable and constructive employment relations framework. Turning to Slide 9; our higher-margin ENCE Advanced portfolio continues to expand. In the first 9 months, special products represented 29% of pulp volumes, an increase of 30% compared to the first 9 months of 2024 and delivering EUR 33 per tonne operating margin premium versus the remaining 61% standard BHKP. The improvement of the mix is central to our strategy of substituting higher cost softwood grades in targeted applications. Continuing with our higher-margin product portfolio in Slide 10, our first 125,000 tonnes fluff line has started its production in the fourth quarter and is already in product homologation phase. As a reminder, fluff is a value-added niche with a gross price gap of around $900 per tonne versus standard BHKP, where ENCE will be the one and only European fluff manufacturer with cheaper hardwood sourcing. Just for your information, as of today, more than 90% of worldwide fluff pulp is softwood. Our fluff pulp should account for more than 12% of sales volume by 2028. and we expect a structural extra margin of roughly EUR 60 per tonne versus standard BHKP at across-the-cycle prices. This is on top of the 50% of the higher margin ENCE Advanced product sales. Special pulp will account to 62% of total sales by 2028. Moving to Slide 11; let's look at the global cost curve and ENCE's positioning. Leveraging on the 62% ENCE higher-margin special pulp mix forecasted for 2028, we are repositioning the company within the cash cost curve. At the second half '25 cash cost guidance of EUR 466 per tonne equivalent to $545 per tonne, ENCE stands as a top quartile producer compared to global BSKP ones that deliver an average cash cost of $678 per tonne. Continuing with the Energy Saving Certificates on Slide 12, we have cashed in the EUR 10 million recorded in the second quarter of the year. To-date, in 2025, we have sold Energy Certificates for a total amount of EUR 40 million, fully cashed in. Also, we are working on generating additional certificates for approximately EUR 4 million that should be recorded by year-end. Let's move now to our local biomass backboned renewable energy platform in Slide 13, talking about La Galera, our Tarragona biomethane plant. As you know, we acquired the plant in December '24. Well, La Galera is now on track to increase its annual production by 20% without CapEx, just by applying ENCE industrial standards. On top of that, others will be completely eliminated by year-end. As guided, we will continue upgrading the plant to increase its annual biomethane output up to 50-gigawatt hour, and we'll launch our first biofertilizer production unit in 2026. These initiatives should be fully completed by 2027. Turning the page to Slide 14. We would like to update you on our solid and tangible biomethane pipeline. We have 38 projects with locations secured and feasibility studies completed. 18 of these projects are already at a late permitting phase and its biomass is secured. The projects will carry a ROCE of over 12%, and we aim to deliver over 1 terawatt hour by 2030. This should yield over EUR 60 million in incremental EBITDA. Nobody in Spain has ENCE experience in biomass procurement, small rural projects development and digestion know-how. Continuing with our Renewable Industrial Heating Solutions in Page 15. We will reach 2-terawatt hour of thermal energy with EUR 40 million incremental EBITDA contribution also by 2030. To achieve this target, we already have 1 plant in operation since 2024, 1 contract in its start-up phase and 3 projects under construction. On top of that, we are currently negotiating 10 projects, and we expect to close at least one of them during the fourth quarter, having another project ready to build before year-end. Continuing with Renewable Industrial Heating business, I would like to explain to you its key achievements of the quarter on Slide 16. On top of the ongoing plant construction at Mahou facilities, we have started the construction of 2 plants for a well-known French Dairy group located in Andalucia and Castilla La Mancha. These 15-year term projects will start its operations during the second quarter of 2026 and will have an estimated combined production of approximately 85-gigawatt hour. In addition, we have gained another O&M contract for 8-megawatt ready-to-operate plant for a Food and Beverage company located in España Rural that is in ramp-up phase and should be fully operational within fourth quarter 2025. Alfredo?

Thank you, Ignacio. Let me start with our Special Pulp Centered business in Slide 18. In the third quarter, pulp sales rose up to 263,000 tonnes, plus 8% quarter-on-quarter, while the average net selling price decreased by around EUR 90 per tonne down to EUR 452. Crucially, cash costs declined by EUR 29 per tonne down to EUR 459, driven primarily by lower wood costs and operational leverage. This sequential step-down supports our second half cash cost guidance of EUR 466 per tonne. Pulp EBITDA accounted for EUR 4 million in Q3. The third quarter includes approximately EUR 8 million of insurance proceeds related to the Navia turbine fully cashed in during the period, but no additional revenues from the Energy Savings Certificates. Turning now to our Renewables Business Backboned platform in Slide 19. Biomass to electricity volumes increased up to 315 gigawatts hour in Q3, plus 4% quarter-on-quarter with lower operating costs per megawatt hour following several maintenance interventions in the first half, operational leverage and lower biomass input costs. Revenues per megawatt hour were 2% higher versus Q2, resulting in an EBITDA of EUR 9 million in our biomass to electricity business vertical, offset by around EUR 1 million from the rest of the business verticals currently in ramp-up process. The final platform EBITDA was EUR 8 million versus EUR 3 million from the previous quarter. Let me now guide you through the consolidated P&L figures on Slide 20. Group revenues declined by EUR 11 million compared to the previous quarter. The growth in renewable energy business has partially offset a EUR 15 million decline in the Pulp business derived from the depressed pricing environment. EBITDA declined to EUR 13 million in 2Q despite the improvement in operating costs in both businesses, ending in a bottom-line showing EUR 15 million losses. In this context, our main focus is to align operational expenditure, investment cadence and cost discipline to capitalize on cycle turn from day 1. Turning to Slide 21; free cash flow before growth CapEx was EUR 12 million in Q3 despite low pulp prices. Working capital contributed with a positive EUR 18 million, fully reversing the first half build. Growth and efficiency CapEx totaled EUR 17 million in the quarter, including the fluff project, Navia decarbonization and cost reduction initiatives, renewable packaging development and the ramp-up of our biomethane and renewable thermal energy projects. All in all, free cash flow for the period was negative by EUR 8 million. Slide 22 highlights our solid financial position. Consolidated net debt stood at EUR 367 million, supported by a strong EUR 265 million cash position. Importantly, both our Pulp and Renewable 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 strengthening of the company along the different cycles. As you've heard me say before, maturities are well distributed across several years, and we benefit from a flexible capital structure that provide us with optionality and growth room. Finally, on Slide 23, let me go through ENCE's sustainability performance indicators, a core pillar of our profitable long-term strategy. We are rated Platinum top 1% by Ecovadis, confirming our position at the forefront of industrial sustainability. Key milestones include our accident rates remain 4x lower than the industry average, and we completed the Pontevedra shutdown with no severe incidents. Navia recorded 0 odor minutes during the 3 quarters '25. 100% of our sites are zero waste certified, 2 new sustainability certifications for our fluff pulp products. Our forestry operations include 4,200 hectares with CO2 sinking rights officially registered in an OECC voluntary as well as improved plant material adapted to climate change. 100% sites SURE System certified, confirming the sustainable origin of our biomass. Promotion of professional development in rural communities with 750 technical advice sessions with forestry owners and forestry machine training programs. Let me please now return the floor to our Executive Chairman for his closing remarks.

Thanks, Alfredo. Let me please conclude the presentation with some closing remarks. Firstly, price increases announcements of gross $130 per tonne in Europe should consolidate on the coming weeks on the back of U.S. tariff redemption for pulp imports, good demand, wide gap with softwood and significant annual maintenance shutdowns announced for the fourth quarter. Secondly, we are firmly committed to cash cost reduction that should target EUR 466 per tonne for the second half of the year. Thirdly, our ENCE Special Pulp Centered business should increase the average across-the-cycle EBITDA by 50% through top line and cash cost initiatives by 2028. On the top line front, I would like to highlight our product mix upgrade towards higher-margin special pulp products that substitute more expensive BSKP, reaching 62% of total sales by 2028 that should contribute with an incremental EBITDA for approximately EUR 22 million. From the cash cost side, the levers are the ongoing competitiveness plant, EUR 22 million; Navia's decarbonization and cost reduction projects, EUR 8 million as well as Pontevedra Avanza, EUR 20 million. On the growth side, the As Pontes project got its Environmental Integral License in third quarter 2025, and we foresee the start of renewable packaging solutions plant in '26. Both projects will further increase our results. Fourthly and finally, we are building the largest biomass backboned renewable energy platform in Iberia, including biomass to regulated electricity, renewable industrial heating, biomethane and renewable fuels. And it is on track to more than triple its EBITDA by 2030. The execution of all these projects will be adapted and aligned to our cash flow generation to maintain a prudent across-the-cycle leverage and an attractive shareholders' remuneration. In Pulp, no one of all these projects require more wood, a [ scarce ] resource worldwide. Thank you for your attention. We will be pleased to hear any questions you may have.

[Operator Instructions] And your first question comes from the line of Alvaro Lenze.

The first one is on the expected cash cost. You're guiding for EUR 466 for the second half. If my math is not wrong, that implies an increase from EUR 459 in Q3 to around EUR 473 in Q4. I just wanted to understand why do you expect cash cost to go up?

Yes. In winter, normally, collection of wood is more expensive. It's more difficult due to weather conditions. And these bad weather conditions at the North Atlantic also normally make a pressure on prices of the freight. And as we are prudent, that's why we expect a slight increase -- a slight temporary increase due to weather conditions.

Okay. My second question is, if you could please try to clarify a little bit of what's going on with the net prices and the discount because you mentioned that the weight of differentiated products, which have a premium keeps going up, but the discount is also going up quite significantly this quarter is about 49%. I understand that the discounts tend to go up in the industry, but I do not think that competitors are having this discount, let alone if we could make the numbers of what the actual discount is in the normal BHKP product that you're selling, it will be probably above 50%. So it's like we should expect the discount to narrow at some point or to stabilize, thanks to the change in mix, just to understand the dynamics there.

Yes. Third quarter has been the worst quarter on the year with the lowest prices. And when the fixed price is at [ 1,000 ] and you are at the lowest moment, it's absolutely impossible to sell the full volume of standard BHKP at this price. Then you have to accept spot orders who have a huge discount in Europe and in the Mediterranean. What I recommend is that you wait for other competitors to publish their results and you will see what is their net price and what is our net price. And that's where you are going to see the big interest of these special products. If we take the average price of this 61% of standard BHKP we have sold on the 9 first months and you compare with the average price of the special products we have sold on these first 9 months, 29%, corrected by the extra costs they have, we have this EUR 33 per tonne of more margin, and that is like that. The problem is that the standard products on the third quarter have been sold at very low prices due to a very tough market.

Okay. And my last question would be on the cost saving plan. I think it's very welcome. And I just wanted to know first, why now what has changed? Why do you see -- why not do this a year ago or something because you have been struggling with high cash costs for quite some time now. And then it also strikes me as very cheap 1-year payback is very good payback for a restructuring plan. So I wanted to know what the mix is from the savings? How much of the savings are coming from layoffs? And why is the plan so cheap?

Yes. I have to start apologizing, but I cannot now disclose a lot of details because we are just on the middle of the negotiation with the unions, and I don't want to disclose my cards. Why now? Well, it has been the fourth quarter, the fourth quarter, one after the other, where prices have been declining and where EBITDA has been declining. According to the Spanish law, you can launch a restructuring plan by economical causes while the more clear, only if you have 3 quarters of turnover and results going down. Then we prepare everything during the second quarter, and we have launched the negotiations during the third quarter. And we are now on the middle of the negotiations. As you know, the 2 mills where we produce pulp in Navia and Pontevedra are very heavily unionized. It's very difficult to reduce employees there. It's almost impossible. We've been -- it has not been possible. But now we have a strong opportunity because law wise, now our position is very solid. And that is why they have accepted negotiations and we are negotiating. We are negotiating at Navia, and we are going to start negotiations next week with Pontevedra and with the unions representing the forest activities and the administrative activities. Sorry. Out of the total layoffs we are planning, 10% can go out immediately, but the balance, we need to invest. We are going to rationalize the control rooms we have in our pulp mills. We have to invest in loops to do that possible. We are putting automation and artificial vision in quality control, and we have several other plans. That's why we have small investments to do all that, but it's small investments. And that's the way we can reduce the number of employees we have. That's going to take 2 years because we need some investments. And we have ways to do that with a good agreement with the unions, and that's what we are working on, okay? On top of that, because the EUR 20 million -- EUR 22 per tonne saving is not because of layoffs. On top of that, we started now one year to do strong reengineering of all the activities subcontracted at ENCE. It's all the movements of biomass and pulp inside the mills. It's all the industrial training. It's all the movement and sales of byproducts. It's all the medical service. And well, we finished by summer all the reengineering has been very tough, and we had -- we did that very carefully in order to have good results. And now we are starting to see the first savings, and these savings will continue over the next 12 months.

[Operator Instructions] And I'm showing no further questions at this time. I would like to turn it back to Mr. Ignacio Colmenares for closing remarks.

Well, I thank you very much for attending our call. I hope to give you more details about these strong plans. We are now working on it and to give you good results about the cash cost and that you will able to see the prices going up at the next call at the beginning of next year. Thank you very much.

Thank you.

Thank you. And ladies and gentlemen, this now concludes our presentation. Thank you all for attending. You may now disconnect.