Ence Energia y Celulosa SA

MAD:ENC

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the ENCE First Quarter 2023 Results Presentation.I will now hand over to Mr. Ignacio Colmenares, Executive Chairman; and Alfredo Avello, CFO. Gentlemen, please go ahead.

[Ignacio de Colmenares, executive]

Good afternoon, ladies and gentlemen. Thank you for joining ENCE's First Quarter 2023 Results Conference Call. Our CFO, Alfredo Avello; and our Head of IR, Alberto Valdes, are also connected. After the presentation, we will be pleased to answer any questions you may have.May I begin by saying that ENCE is, in my view, ideally positioned to offer shareholders increased value in the future. We delivered excellent results during the first quarter. We are working on a number of important growth and diversification initiatives, which will increase income and cash for our shareholders in the future. We continue to lead the pulp industry in sustainability.I would like to start by looking at Slide 5 with the highlights of the first quarter. Alfredo will discuss these highlights in more detail, but I wish to draw your attention to 2 things. Our outstanding EBITDA of EUR 89 million, which includes the sale of our first PV project. Our decision to announce a final dividend against 2022 results of $0.29 per share already approved at our recent AGM. I will update you on the significant growth and diversification initiatives I have just mentioned in the final section of today's presentation.I now invite Alfredo to summarize the financial highlights of the first quarter.

[Alfredo Avello, executive]

Thank you, Ignacio. Starting on Slide 8, I would like to mention the main 6 key financial highlights for the first quarter. Firstly, Group revenues grew by 26% and EBITDA almost doubled up to EUR 89 million, boosted by a still strong pulp price, the normalization of our production at Pontevedra, the highly regulated energy price and the sale of our first PV project under construction. Secondly, Group LTM ROCE rose up to 18% in the quarter.Thirdly, the difference between regulated and market energy prices generated cash collection rights amounting to EUR 40 million in the quarter, of which EUR 33 million will be fully cashed along 2024. Fourthly, new facilities totaling EUR 145 million were raised in our pulp business, contributing to asset group cash balance of EUR 350 million at the end of March 2023.The key highlight is that we continue to report a low leverage ratio of just 0.4x, leaving ENCE ideally placed to seize multiple growth opportunities.And finally, as Ignacio has already mentioned, we recently announced a final dividend against 2022 results of $0.29 per share. This was recently approved at our AGM and will be paid on the 18th of May.Let me now elaborate on the first quarter Group financials on Slide 9. First of all, please note that the government has proposed a new methodology for the compensation of [ DBA ] between the regulated energy price and the market price. This new proposal applies to all our biomass plants and our gas cogeneration plants, whether in the renewable or in the pulp business, but not to our lignin cogeneration plants in the pulp business. Although the government draft is still in its allegation phase, we have prudently considered this new methodology in our first quarter results.With the previous methodology, our first quarter EBITDA would have been EUR 14 million higher. In the proposed new methodology, the regulatory collar generated in 2023 for our biomass and gas cogeneration plants will be fully cashed in 2024 instead of during the regulatory life of the plants, thus improving our free cash flow generation in the short-term.Following the said adjustments, Group revenues of EUR 296 million in the quarter were driven by still strong [ coal ] prices, normalization of our production at Pontevedra, the highly regulated energy price and the sale of our first PV project under construction. EBITDA almost doubled up to EUR 89 million, driven by the strong sales growth and a EUR 33 million contribution from the first PV project sale.As we expected, EBITDA also benefited from highly regulated energy prices. These generated cash collection rights registered a regulatory collar amounting to EUR 40 million, of which EUR 33 million will be fully cashed within 2024. Also the income more than doubled up to EUR 30 million in the quarter.Turning now to the next Slide #10. You can see that first quarter group free cash flow was, as expected, negative by EUR 99 million. It was impacted by 3 main factors. Firstly, the difference between regulated and unregulated market prices in the quarter. As said, the difference between regulated cash collection rights amounting to EUR 40 million. Secondly, the return of the excess -- return of the operational remuneration collected following last year's regulatory adjustment, the remaining EUR 20 million were returned in April. And third, the normalization of our operations in Pontevedra.As you can see on Slide 11, we entered the quarter with a very strong financial position, and net debt EBITDA ratio of just 0.4x at the group level. This gave us flexibility to seize a number of different future growth opportunities. Please note that the group net debt of $127 million was mostly driven by the working capital normalization in the quarter, as explained in the previous slide.During the quarter, we have also amortized EUR 63 million remaining from the convertible bond issued back in 2018 for an amount of EUR 160 million, refinanced to EUR 145 million of new facilities. Additional facilities for EUR 57 million have also been raised up to this stage, totaling EUR 202 million. All these facilities enjoy from non-governance structures.Regarding cash balance, we ended March with EUR 350 million. Our pulp business showed a net debt of EUR 72 million, which includes liabilities from lease contracts amounting to EUR 37 million. Cash balance in our pulp business amounted to EUR 252 million at the end of the quarter. And our renewal business net debt was EUR 55 million with a cash balance of EUR 98 million.Let's move now to the next Slide #12. As our Chairman mentioned earlier, our recent AGM held on the 5th of May approved the distribution of our final dividend of EUR 70 million to be paid on the 18th of May. This is in addition to EUR 137 million already distributed over the past 12 months in respect to financial year '22. Our dividend policy allows us to increase shareholder remuneration in periods of a strong free cash flow generation and low leverage, thus improving the efficiency of our balance.Turning to Slide 14. I will [indiscernible] the financial performance of our pulp business. Pulp sales in the first quarter amounted to 217,000 tonnes. This is 17,000 tonnes more than the corresponding quarter in '22 with Pontevedra production now normalized. Also the annual maintenance shutdown during the first quarter of last year.Our differentiated products accounted for 15% of our total pulp sales compared to 18% in the same period of last year due to a temporary narrowing of the price spread versus softwood. Now the spread has widened again. These higher valued-added products are more sustainable and are well adapted to replace plastic and softwood pulp in multiple paper applications and also deliver higher margins.We aim to increase progressively the sale of these products during the next years towards a target of 400,000 tonnes. Over 90%, 93% of pulp sales went to the European market, where our customers benefit from ENCE's unique wide portfolio of sustainable products and shorter delivery times, where half of our sales were in the fastest-growing tissue and hygiene product segment.As you can see on the following Slide 15, gross pulp prices in Europe reached USD 1,340 per tonne in the first quarter. These prices more than offset the global inflation in raw materials, excluding the temporary extra cost at our Pontevedra mill. We have delivered a set of strong pulp operating results in the quarter with pulp production normalizing at Pontevedra, attaining revenues of EUR 191 million, up 20% year-on-year. The EBITDA grew at 77%, up to EUR 37 million compared to the first quarter last year, driven by the sales growth and also boosted by EUR 12 million coming from higher regulated energy prices, of which EUR 5 million are related to the biomass plants and will be fully cashed next year and are proposed under the proposed new regulation. Please note that the industry specialists currently expect an average pulp price of $1,060 per tonne over 2023.Starting with Slide 17, we will review the financial performance of our renewable business. In December 2021, Magnon agreed to sell its several PV projects as they reached their ready-to-build status. In the first quarter, we closed the sale of our first PV project in Jaen, which contributed EUR 23 million to our EBITDA. We expect another EUR 27 million contribution to EBITDA for the remaining PV projects in sale in '23 and '24.Turning to Slide 18. The average selling price in the quarter increased to EUR 240 per megawatt hour, benefiting from the highly regulated price, currently at EUR 207 per megawatt hour for the first semester, together with the complementary remuneration on the operation and our gas cogen plant in Cordoba, pending to be adjusted to the new regulation and increased contribution from our backup services to electricity system.Our renewable sales increased by 40%, while EBITDA reached EUR 52 million, also boosted by the EUR 23 million already mentioned from the PV project sales in the quarter. The market energy price has delivered a higher EBITDA in the quarter through regulatory collar. As previously mentioned, the government has proposed a new methodology for the compensation of deviations between regulated energy price and the market price, the so-called regulatory collar.The government's draft, which is currently in its allegation phase, sets 4 main changes. Firstly, it only applies to our biomass and gas cogeneration plants in the renewable and in the pulp business, but not to our lignin cogeneration plants, which will follow the current regulation. Secondly, regulated price will be set annually rather than every 3 years, as currently. Thirdly, on the applicable plants, deviations between the regulated and market energy prices will be compensated during the following year instead of during the rest of the regulatory life of the plants. This means that the regulatory collar balance at the end of '23 will be fully collected along '24.Fourthly, the annual settlements will be independent from the remuneration from investments set for each plant and will be proportional to the real power generation, instead of the theoretical production of 7,500 hours per year. Note that the average production of our biomass plants during the last 5 years has been approximately 5,500 hours per year. This number of hours was aimed at optimizing our production in order to maximize our financial results based on the current regulation. In the second semester, we will adjust our operations to the new optimal production hours in order to also maximize our financial results under the new regulation proposal.Let me conclude my section at Slide 19, emphasizing once again ENCE's continued exceptional sustainability performance. We are leaders in sustainable forest, in the circular economy and social commitment, in gender equality and in corporate governance. Our best practices have been recognized by independent agencies such as FTSE4Good and Sustainalytics. Actually Sustainalytics confirmed ENCE in its latest study, once again, as the most sustainable player in the global pulp market.Let me highlight some of our recent sustainability achievements. Firstly, Navia and Pontevedra continue to reduce their water footprint by 5% and 10%, respectively, compared to a year ago as we recently developed an innovative solution to minimize river water consumption during times of drought at Pontevedra. Secondly, we continue to reduce the odor of both pulp biomills, which is already below 1 minute per day. These results demonstrate our strong commitment to the communities in our environment.And thirdly, our health and safety record remains very strong with no accidents in the past 6 months in the renewable business. And thus pulp business ended last year with the best metrics of its history at levels that are 14x lower than the [indiscernible] benchmark values for the industry in Spain.I will hand back to our Chairman and CEO, to review our 2023 outlook and our growth and diversification initiatives.

[Ignacio de Colmenares, executive]

Thank you, Alfredo.Now let's move to Slide 21 with our outlook for 2023. 2023 will be characterized by the normalization of our pulp production close to 1 million tonnes. Average pulp prices which industry specialists are now forecasting at $1,060 per tonne in 2023. The improvement of our cash costs compared to the first quarter, down by EUR 135 per tonne during the second half to below EUR 500 per tonne. The higher regulated energy price of EUR 207 per megawatt hour for the first semester, which boosted our renewable business EBITDA in the first quarter and a regulated price of EUR 144 per megawatt hour for the second half of the year.Remember that the difference between the regulated and market energy prices generates cash collection rights that will be cashed in 2024. We expect PV project sales in 2023, 2024 to boost our renewables EBITDA by over EUR 50 million in those years, including EUR 23 million already obtained in the first quarter.Let's move to Slide 22 and our mid-term view of the market dynamics of pulp, supply and demand. We expect current destocking process in the paper industry to end soon. China's reopening and the displacement of its integrated pulp capacity at current net price levels should unleash a strong rebound in market pulp demand during the second half of the year. I remain confident about the fundamental strength of the pulp industry. We expect pulp demand to outgrow supply over the coming years, providing a strong support for pulp prices.On the one hand, there are no new pulp projects confirmed thus far from 2024. Wood availability is limiting pulp capacity additions, both market and integrated. On the other hand, demand growth should accelerate as a result of the fastest-growing pulp segments, which now account for over 80% of market pulp demand, boosted by structural growth trend such as urban population increase and higher living standards in emerging markets. Also, as a result of plastic and synthetic fiber substitution, which will play an increasing role in the coming years. And also as a result of the lower availability of recycled fiber due to declining printing and writing paper consumption. This will increase demand for virgin fiber.Industry specialists currently expect pulp prices to rise significantly as from 2025 onwards. As regards wood, I remind you of ENCE's unique strong position, which is the result of our solid local wood sourcing.Now let's move to Slide #23 and our cash cost forecast. We expect cash cost to fall by EUR 135 per tonne during the second semester compared to the first quarter, down to below EUR 500 per tonne, mainly due to lower energy, wood, chemicals and logics fixed costs. Note that Pontevedra rented water recovery equipment and rented diesel generators had an estimated impact of EUR 46 per tonne neon group cash cost during the first quarter, but both situations should be resolved by this summer.Let's move to Slide 24, which summarizes the current mechanism for biomass regulation, which ensures a minimum return on investment in our biomass assets of 7.4%. Our biomass plants sell their renewable energy at regulated price. The difference between the regulated price and the market price in 2022 generates cash collection rights, which will be cashed in 2024.In the following slide, #25, we summarized the main changes included in the new methodology proposed by the regulator collar calculation. The government's draft, which is currently in its allegation phase sets 2 main changes. Firstly, the regulated price will be set annually rather than every 3 years as at present. Secondly, deviations between the regulated and market energy prices will be paid during the following year instead of during the rest of the regulatory life of these plants.As I said in my introduction, ENCE is pursuing significant growth and diversification initiatives. I would like to briefly remind you of this. Let's start with Slide 27, the Navia Excelente project. We announced at our Navia Excelente project on our Capital Market Day back in March 2022. It aims to increase the sale of our differentiated products with great potential to substitute plastic in multiple applications to diversify production towards flat pulp and to decarbonize the bio mill. The project will be undertaken between 2024 and 2027.Now let's move to next Slide #28, the As Pontes project. In June last year, we announced a new project at As Pontes for the production of bleached mixed fiber from recovered paper and from virgin pulp produced by us. We believe this is an excellent opportunity to offer bleached mixed fiber to our customers. This project is still in its engineering phase. We aim to start the permit process during the second quarter of the year. This process is likely to take over 1 year.Hopefully, we should be able to take the investment decision around the end of 2024. The first phase of the project consists of a line for the production of bleached mixed fiber with a capacity of 100,000 tonnes per year, which could be operating by 2027. We estimate an investment of EUR 125 million with a targeted return of over 12%.Finally, 2023 CapEx in Pontevedra will allow the biomill to operate in drought periods. Note that none of these investments will require more wood. We believe that wood is going to be a limited resource in the future. And the timing of all these investments in Pontevedra, in Navia and in As Pontes will be adapted to our cash flow generation throughout the cycle. Our aim will be to maintain a prudent leverage and an attractive remuneration for shareholders.Let's now talk about our renewable business, starting by Slide 29. ENCE Biogas is our new subsidiary, created to develop and operate biomethane plants. Our circular business model is based on the recycling of local organic waste into biomethane, a high-quality organic fertilizer and sustainability certificates. Our target is to develop 20 plants with a total capacity to supply over 1 terawatt hour per year during the next 5 years.ENCE Biogas already has a portfolio of 15 projects under development in Spain. 6 of these projects are at their engineering phase and they're expected to start up by the end of 2025 and 2026. The estimated CapEx is around EUR 20 million on average per plant with a targeted return on the capital employed of over 12%. We will build this biomethane plants with EPC contracts and using nonrecourse project financing as we did in Biomass.Let's turn now to Slide 30, which illustrates other growth opportunities within Asset Renewables business. I wish to highlight 3 things. Firstly, we have developed 3 biomass projects with a combined capacity of 140 megawatts, which are ready to participate in future public auctions. Secondly, biomass has a great potential to decarbonize the industry. We are already working on several opportunities in Spain to replace gas with biomass in renewable industrial heating. Thirdly, we have started to develop another 300 megawatts in PV on top of the project that will be sold to Naturgy in the coming quarters.Let's now turn to Slide 31, our management of forest in Spain. ENCE is the largest private forest manager in Spain. We manage 60,000 hectares, and we are a model of responsible and sustainable forestry. Our managed forests constitute an important carbon sink and offer additional growth opportunities in the voluntary CO2 markets. The forest do not only produce pulp wood, they also remove over 600,000 tonnes of CO2 annually from the atmosphere and yield another environmental benefit, such as biodiversity, water cycle regulation and soil protection.Part of our managed forest produce carbon credits, which may be sold in the voluntary CO2 market to help other companies offset their carbon footprint. We have already registered 387 hectares within the Spanish Climate Change office, equivalent to the removal of over 600,000 tonnes of CO2 during the life of these plantations. Furthermore, we have identified 4,000 hectares within our current plantations, which are eligible to produce carbon credits, and we aim to register even more hectares over the next 5 years.To give you an idea of the potential of this business, each hectare can produce carbon credits amounting to about 200 tonnes of CO2 during the life of the plantation and its price may be around EUR 30 to EUR 45 per tonne of CO2. CO2 credits will allow us to double the revenues of these hectares as they produce roughly the same amount of CO2 as of wood and the price of CO2 credits is also similar to that of standing timber.Let's look finally at Slide 32, which summarizes our conclusions. I believe pressures are bottoming in China. Pulp and paper destocking in Europe is close to its end. We remain confident on the strong fundamentals of the pulp industry. We delivered strong first quarter results. Our balance sheet is strong, and we anticipate strong organic free cash flow generation in the future.ENCE is now well positioned to take full advantage of multiple opportunities for growth over the coming years, and we expect these opportunities to create significant value for our shareholders. Our main target for 2023 is to reduce cash costs. We look ahead to 2023 and beyond with confidence.Thank you for your attention. We would be pleased now to hear any questions you may have.

[Operator]

[Operator Instructions] The first question comes from the line of Enrique Parrondo from JB Capital.

[Enrique Parrondo, analyst]

So I have 3, if I may. The first one on the pulp market. Could you maybe share your views on the current environment? Maybe did you see any improvement in the months of April and May? If you could comment by segments, that would be helpful. And also on your view for pricing in the coming months. And is it -- does it differ materially from consensus estimate that you've recently shared?

[Ignacio de Colmenares, executive]

Yes. Thank you, Enrique. Yes, as I said, I believe pulp prices are already bottoming in China. You have to take into account that the -- today's price in China of $450 net is far below the variable costs of local integrated producers. China reopening and the displacement of its integrated pulp capacity at current net price levels into important market pulp should unleash a strong rebound in the market part demand during the second half of the year.You have to remember there are 5 million tonnes of integrated pulp capacity in China, and they are swinging to important market pulp because it's cheaper than the variable cost of production. In Europe, current destocking should end by summer. Industry specialists now expect pulp prices to normalize around $900 gross per tonne during the second half of the year in Europe. As I said before, I remain confident in the strong fundamentals of the pulp industry. There is no single new project after 2024.Fiber, the wood is a scarce resource. We expect our demand to adverse supply over the coming years, providing a strong support for pulp prices. I think that's the most important. Thanks for your first question.

[Enrique Parrondo, analyst]

Second one on cash costs. So you revised downwards your cash flow outlook for the second half, like close to 6%. Could you run us through the different levers of this? So for instance, what sort of decline are you expecting in wood costs? And also considering that the first quarter cash costs were slightly below your estimate share during full year '22 results presentation. Is there room also for some improvement in the second quarter cash cost estimate that you shared during the full year '22 release?

[Ignacio de Colmenares, executive]

Yes. Thank you very much. Yes. Yes. As I said, we expect cash cost to be below EUR 500 per tonne in the third quarter and in the fourth quarter. We expect cash costs in the second quarter to be below EUR 580 million. We have, as I mentioned before, different areas of reduction. The most important one is that these extraordinary costs we are suffering in Pontevedra in the first half of the year are quite significant. They are on average on the group cash cost close to EUR 40 per tonne in the first half of the year, and it will be zero from the second half of the year.These equipment for using the water of the Pontevedra treatment plant is rented -- is partially rented because we were obliged to put it when we had no visibility about the construction. And now we are investing in our own equipment and then we are going to save a bit more than EUR 1 million per month of rental of the equipment.And secondly, as you know, we had a severe problem on a turbine on the first half of the year in Pontevedra. And the turbine is coming back from Germany now in June. And meanwhile, we have been obliged to rent these generators to generate the energy we need with a terrible impact on the cash cost. But as the turbine is coming back in June, this effect will not continue in the second half of the year.Those 2 effects have an impact of EUR 40 per tonne of improvement in the second half of the year, starting in the third quarter. Then we see the wood slightly going down, we see chemicals going down, we see freight rates going down. And all these effects put us to be below EUR 500 million in third and fourth quarter and below EUR 580 million in the third quarter -- sorry, on the second quarter of this year.

[Enrique Parrondo, analyst]

And the final one. So on growth plans that you recently commented for biogas and industrial heating. I know it might be a bit early in terms of timing. But could you help us understand what sort of revenue contribution could we expect from both businesses? And also in terms of investment required, are you planning on requesting any aids from the European funds or sharing the investment with a partner, I guess, the latter applies for biogas.

[Ignacio de Colmenares, executive]

Yes. Okay. Let's start by biogas and let's continue with the renewable and industrial heating. In biogas, we are following the same strategy that we did successfully in biomass 10 years ago. We are going to have, in some plants, a local shareholder, a local partner, able to supply part of the raw material we need but on the holding of the biomass company, we are going to be alone for the time being. We are very excited with this project. Biomethane is the second substitute for natural gas with the highest growth potential in Europe.As I mentioned before, our business model is based on the recycling of local organic waste, and we know how to buy organic waste. We are buying 1.7 million tonnes of agri forest biomass today in Spain. We are going to convert that into biomethane. We are going to sell the gas to the grid. In our business model, the gas is at EUR 30 per megawatt today, if anyone would like to buy at over EUR 60. The associated sustainability certificates are increasing and increasing in price and in demand.And we are going to produce with a byproduct, a high-quality organic fertilizer. And it's a business where we are going to have 3 incomes in each plant, and each one has a weight of 1/3, the biomethane, the certificate and the organic fertilizer. Our target is to develop 20 plants, each plant cost roughly EUR 20 million on average. Then we are talking about a total investment of EUR 400 million. And the idea is to have a capacity of 1 terawatt hour per year and to have that complete after 5 years.Today, we have a portfolio of 15 projects out of this plant of 20 and the development in Spain. And 6 of them, as I mentioned before, are at their engineering phase with a potential to start by the end of 2025 or early 2026. And we are also looking some brown opportunities -- brownfield opportunities.Our required return on the capital employed, ROCE is over 12%. And as I mentioned, we try to avoid risk, then we are going to build those plants with EPC contracts in order to avoid technological risk and the construction risk as we did in biomass successfully, and we are going to finance in project finance without the cost of the rest of the businesses. And the banks are a good filter to analyze each project one by one. That's biogas.Regarding renewable industrial heating, biomass and electricity have a great potential to decarbonize the industry in Spain, responsible for more than 30% of the country's energy consumption. Today, we are working on several opportunities with some Spanish industries to replace gas, even coal or fuel in industrial heating, and we are replacing that. We will replace that either with biomass or with renewable electricity. The relevant sectors are food and beverage and chemicals. We expect renewable industrial heating to become a material business line for ENCE during the next 5 years.We will share with you more details of it's -- of this business plan in due course. It is not a regulated business, and we like that. It is not a regulated business. And the typical size of the renewable industrial heating plants range from 4 to 15 megawatts, thermal with a required CapEx below EUR 1 million per megawatt.

[Operator]

The next question comes from Jaime Escribano from Banco Santander.

[Jaime Escribano, analyst]

So my first question regarding market outlook. Are you start seeing your customers [indiscernible] again? I'm asking this because the Europe pulp is at -- almost at 1.8 million tonnes…

[Ignacio de Colmenares, executive]

Jaime, I'm very sorry. Jaime, you have the voice disruption, and I don't understand very well what you are saying.

[Jaime Escribano, analyst]

Yes, my first question regarding the second quarter outlook. My question is the inventories at Europe pulp are at close to 1.8 million tonnes. And you are talking about the restocking process going to an end? And my question is if you are seeing customers already restocking or the stocking process you think is going to continue a few more months?

[Ignacio de Colmenares, executive]

Okay. Understood. Yes. Yes. Well, today, we have no signals of this destocking process to have finished. The only thing we have is the forecast of our customers, and we have a better demand for June than for May and better demand for July than for May, not being yet a strong demand. And all our customers, because we have 2 problems, you have this large volume of pulp in European ports. And the root cause of what is happening is a big stock of paper on the supply chain.And our customers are telling us that this high level of paper on the supply chain is arriving to a normal level, but they were saying the same a couple of months ago. Then we don't have a clear visibility of that. We think and all the industry think, in Europe that this problem of supply chain being overstock of the paper is going to be solved by summer. But we don't have KPIs for exact figures to follow that.

[Jaime Escribano, analyst]

And in terms of new capacity coming into the market, are you seeing the new capacity from Arauco already arriving to Europe? Or when do you expect this new supply coming to the market?

[Ignacio de Colmenares, executive]

No, we are saying -- we are seeing Arauco and MAPA in Uruguay. They have started. They are offering mainly to China now, and they are in conversations with Europe, but I think they will start on the first quarter on the first 4 months to supply before to China and in Europe.

[Jaime Escribano, analyst]

And a question on the cash cost. So you are pointing to a cash cost below EUR 500 per tonne in the second half of the year. But just thinking out loud, what happen if the European prices go down as much as the Spanish prices? And also, what happen if there is…

[Ignacio de Colmenares, executive]

Your first question was, sorry Jaime, your first question was, I didn't understand that. What happen if -- what happen with the pricing?

[Jaime Escribano, analyst]

Yes. My question is, if you think that the European price would go down to the levels of China because if it goes to the levels of China, the price -- the selling price would be below your cash cost. Or you don't think this is not going to happen in Europe?

[Ignacio de Colmenares, executive]

Well, I think it's very, very improbable that it happens in Europe because I think this is my personal opinion, that prices are very soon bottoming out in China. And with this integrated pulp mills stop in China and buying annually 5 million tonnes of market pulp, the prices should recover a bit in China. Then -- and we have been always able to defend a gap between Chinese price -- Chinese lowest price and European lowest price. I don't see that.But in any case -- on the worst case, if prices are in Europe at $450, well in asset, this price will be above our cash cost in Navia and above our variable cash cost in Pontevedra, then we will continue working and having a contribution margin with very low EBITDA, but contribution margin in Pontevedra and EBITDA in Navia.

[Jaime Escribano, analyst]

And a final question on cash cost, sorry. If this summer, we have rain problems again, the cash cost of Pontevedra you have to use residual water of the city of Pontevedra, the cash cost is the same. Or is it the cash cost a little bit higher?

[Ignacio de Colmenares, executive]

No, no. And I have to go back to last year. Last year when we suffered the drought in end of July, while we were working, remember in August and September, our engineering solution to use the water of the Pontevedra treatment plant. We put that working with a 50% owned capacity and 50% rented capacity. Then what we are doing, since we knew that we have EUR 1 million on the super-import, then what we did is that we are canceling these rental contracts, and we are building our own capacity.And then we are saving this 1 -- more than EUR 1 million per month of rental of those equipments. And if we have problems of water in Pontevedra this summer, we have -- we are going to have our own equipment to work without paying those [indiscernible].

[Operator]

Your next question comes from Cole Hathorn from Jefferies.

[Cole Hathorn, analyst]

I'm just trying to understand your CapEx profile over the next few years and how you think about your absolute debt level. So maybe we'll start with the CapEx. When you talk about the biogas plants and you talked about the EUR 400 million of CapEx, could you give us an idea of when that CapEx will be spent? Will it be '24, '25, '26? Just a rough estimate of how you see that CapEx being deployed on the biogas.

[Ignacio de Colmenares, executive]

Yes. Yes. Let me explain you 2 things before, both are important. Yes. We have a commitment to never surpass 2.5x normal EBITDA of the company in terms of debt. And normal is the EBITDA the company has with an average price of the pulp of $900 per tonne, which is the historical average price on the last 15 years.Secondly, we don't have a single EUR 400 million project. We have 6 different small projects and each project has different phases. We have the biomethane and the total investment is EUR 400 million, [indiscernible] in 6 years, 7 years, and it's plant by plant. We have the Navia Excelente project who has 3 different projects inside this name, and it's roughly EUR 100 million, and it's going to be done between 2024, 2025 and 2026.And we have the As Pontes project, which is EUR 125 million. And in principle, we are going to build that between 2025 and 2027. But as I said on my conference before, we will adapt our CapEx to the market and where we are in terms of debt and free cash flow. Then the first rule is to never surpass 2.5x of normalized EBITDA to debt and to, let's say, play with the times we invest in order to do our program.And if we do the program in 4 years, we do the program in 4 years, because we can do that. And if we have to do that in 8 years, we will do that in 8 years. We don't have a single huge program. We have different small program that will give us a lot of flexibility to adapt our CapEx to the cycle.

[Cole Hathorn, analyst]

And then I mean, maybe if we split that out, you're always going to be looking at the group level rather than kind of the pulp business level and the energy business level because you may be in a position where if we're at the trough of pulp prices in, let's say, 2024, you don't have any covenants on your debt, you don't have any covenant problems. Your balance sheet and your energy division might be fine and you can still invest in those biogas and put that forward as many of those energy projects as possible. So I'm just trying to think -- understand how you're thinking about it at the group and the company level because on the cost EBITDA, your -- go ahead.

[Ignacio de Colmenares, executive]

When I was talking about 2.5x, it is in pulp business, and that is pure pulp and As Pontes project as well. And in the energy business, the growth is 4x for [indiscernible] to EBITDA. And that applies for Magnon, the electrical biomass energy for the renewable industrial energy and for the biogas.

[Cole Hathorn, analyst]

So you've got -- you've still got significant flexibility there. If we do go to understand, you've always been quite conservative in your CapEx projects and when you pull your -- pull the trigger on bigger projects, what are the levers you have to pull in 2024? And we should be thinking about on the profitability and cash flow. Should I imagine we should start getting working capital inflows into 2024? You should also get the cash benefit of the energy provisions coming back into ENCE. I'm just wanting to understand potentially the cash inflows that we could see in 2024 that -- maybe not thinking about immediately.

[Ignacio de Colmenares, executive]

Yes. Yes. Well, the first thing is to know what is going to be the price in the -- in 2024. The second question is how below from EUR 500 million going to be in terms of cash cost in 2024. And with that, we are going to build our CapEx plan for 2024. And in 2024, let's say, the standard program talks about EUR 70 million CapEx in Pulp business, EUR 70 million. Well, that's one thing that can be changed -- can be reduced or can be accelerated with market changed rapidly. And that -- and we will add as an income, the regulatory collar we are going to cash in next year.And on the Energy business, all those things I told you, well, the amount in -- between the biogas, the energy services and Magnon to EUR 85 million at the same, we will adapt that according to our expectations of the price of the energy -- the price of the biomass in 2024. And that's one thing we have been doing that in the past.

[Operator]

The next question comes from Jose Antonio Suarez from CaixaBank.

[Jose Suarez, analyst]

So my question is regarding the appeal for nullity filled by the State state attorney regarding the ruling of Pontevedra that has been really the information this last week. Could you provide us some visibility where it…

[Ignacio de Colmenares, executive]

Sorry, Antonio, I have the same problem with Jaime before. I don't understand -- we don't understand what you are saying. We hear a voice deformity.

[Jose Suarez, analyst]

So my question was regarding the appeal for nullity filled by the Spanish state attorney regarding the ruling of Pontevedra, but this news has been provided this last week. So I was wondering if you have any visibility whether it could be admitted or not. And in case it wasn't needed and how long will it take for this new process to have a resolution. So a little bit about the visibility regarding this news of the ruling of Pontevedra and the appeal of the state attorney.

[Ignacio de Colmenares, executive]

Yes. Well, I have to start saying, and I will conclude saying that we don't see any risk at all. The Supreme Court has confirmed the legality of the Pontevedra construction until [ 2023 ]. The Supreme Court is the last resort in an administrative process, and therefore is [indiscernible]. As expected, the town considers Pontevedra and the state attorney have requested the nullity of the Supreme Court ruling. It is likely that the Supreme Court should dismiss the claims. That's what our lawyers saying.However, it is also expected that we could try to appeal before the constitutional court of Spain after. Again, our lawyers understand that there are no solid grounds for these claims to prosper. We are confident that the issue of Pontevedra is over and have a firm concession until 2073.

[Jose Suarez, analyst]

So you have almost full visibility on that on your -- from your lawyers part, but is the situation if -- just imagine the situation could go worse, in the sense that the -- even the constitutional -- outside the constitutional court take the appeal into consideration, more or less in the worst case scenario, how long do you think it would last this in -- just in this worst-case scenario, how long should it take in this worst case scenario to result in case constitutional admitted the appeal? Do you have any visibility? Are you contemplating getting your -- in your numbers…

[Ignacio de Colmenares, executive]

It can take between 1 to 2 to 3 years for these politicians claiming of the growth. Remember that Greenpeace is not claiming. It's the politicians who are claiming and we are now in -- close to May in Spain. But I insist, we are confident, and we don't see any risk.

[Jose Suarez, analyst]

So, worst case scenario -- you see no risk at worst case scenario 1, 3 -- to 3 years.

[Operator]

The next question comes from Pablo Renteria from Kepler Cheuvreux.

[Pablo De Renteria Villacampa, analyst]

Do you think that the Altri's project to build up this pulp mill in Galicia could somehow interfere with your [indiscernible] in As Pontes given the current tightness of the Iberian wood market?

[Ignacio de Colmenares, executive]

Yes. Yes. Thank you. Well, I would -- I don't know what they are doing, and I don't know what -- why Altri is doing -- what they are doing. And all my opinions are personal opinions and what we think here anything. And I don't like to talk about competitors. But I understand I'll keep promoting the pulp mill in Galicia during the process we were on the court, hoping that we are going to lose. Once we have won and we have a concession granted till 2073. it's clear there is no wood in the -- not only in Spain, there is no wood in Iberian Peninsula for a new project who according to the figure we are reading is going to consume over 1 million tonnes of it.Secondly, our company promoted a dissolving project, you remember in Navia 5 years ago. We have all the permits. We have the land, and we have canceled this project. And every single new project we are launching is a project with no wood. As Ponte is producing bleached recycled fiber, not using woods. The flat we are going to sell from Navia is not mobile is instead a regular BHKP because we think there is no more wood in Iberian peninsula to source new projects.And at ENCE, if we would promote a dissolving pulp mill of 100,000 to 200,000 tonnes, we will not do that in Spain where the wood is extremely expensive comparable to Latin America or South Africa or Indonesia for producing product with intensive in wood. Remember that we need 3 tonnes of wood of eucalyptus for 1 tonne of BHKP and this is already 5 tonnes.Any case, wood supply is one of our unique competitive advantages. Our biomills are surrounded by enough eucalyptus plantations to fulfill our demand. As you know, we are reporting less than 5% of the wood we consume, while our peers in the Iberian Peninsula already import 1/3 of the wood -- as important wood. It's going to be a problem. Important woods from LatAm will be more scarce and expensive one Arauco UPM and Suzano new projects have started. Then we don't see it. Again, we don't see a problem there. Thank you very much.

[Operator]

Ladies and gentlemen, there are no further questions. Dear speakers, back to you.

[Ignacio de Colmenares, executive]

Sorry, because we have a problem we don't know if we are out or we are in. Then if we are in and if there are no further questions, thank you very much for your time, and I hope to meet with you again before August holidays.Thank you very much. Bye-bye.

[Operator]

Thank you very much, ladies and gentlemen. This is the end of our conference call. You may now disconnect your lines.