Ence Energia y Celulosa SA

MAD:ENC

Earnings Call Transcript 2024-Q1

[Operator]

Hello, and welcome, ladies and gentlemen, and welcome to the Ence First Quarter 2024 Results Presentation. I now hand you 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 2024 results conference call. Our CFO, Alfredo Avello; and our Head of IR, Alberto Valdes, are also connected to this call. After the presentation, we will be pleased to answer any questions you may have.I would like to start with the main highlights of the quarter on Slide 6. The pulp price recovery is continuing, boosted by pulp demand growth, low pulp inventories and pulp supply constraints. Our average net pulp price improved by 15% compared to the previous quarter up to EUR 600 per ton, more than offsetting a 7% quarter-on-quarter increase in cash costs and boosting our pulp operating margin by 70% up to EUR 114 per ton. The cash cost increase registered in the quarter is mostly related to temporary factors, which should be offset in the coming quarters.Continuing with Slide 7. The renewable business was also favored by the startup of Huelva 46 megawatts and Puertollano 50 megawatt power plants in February following the unplanned shutdowns during the previous quarter. This boosted renewable energy generation by 65% quarter-on-quarter.Let's move on to Slide 9, which summarizes our outlook for the pulp business in the coming quarters. The positive pulp price momentum continues, boosted by pulp demand growth, low pulp inventories and pulp supply constraints. We are already selling our pulp at USD 1,380 gross per ton, equivalent to around EUR 760 net per ton. And the main pulp producers have announced further price increases of up to USD 1,440 gross per ton equivalent to around EUR 800 net per ton. At the same time, our cash cost should recover its downward trend in the coming quarters, favored by a higher energy contribution, lower logistics costs and higher fixed cost dilution. Both factors will continue to boost our pulp operating margin and our cash flow generation in the coming quarters.Regarding the outlook for our renewable business and turning to Slide 10. The Ministry of Ecological Transition has submitted to the State Council, Consejo de Estado, revised regulation proposal for biomass power plants aiming to align the short-term cash generation with their accounting EBITDA. According to this proposal, we will sell and cash our energy output at a regulated price of EUR 120 per megawatt hour. As a result, the regulatory collar adjustment in our cash flow statement would disappear. This new regulation will be applicable as from January 1, 2024, and it would have an estimated positive impact of between EUR 50 million and EUR 60 million in the cash flow generation this year compared with the estimated cash flow generation with the current regulation. We expect the new regulation proposal to be approved by the end of the second quarter or the beginning of the third quarter.I now invite Alfredo to elaborate further on our financial results.

[Alfredo Avello, executive]

Thank you, Ignacio. Let's continue with the financial performance of our pulp business in the Slide #12. The pulp business EBITDA grew by 66% compared with the previous quarter, up to EUR 31 million. The EUR 79 per ton improvement in average sales prices easily offset the 7% quarterly spike in the cash cost and the lower sales volume related to the usual restocking process prior to Navia's annual maintenance shutdown in April, As announced in our previous call, we were already expecting a temporary increase in the cash cost during the first quarter, mainly due to higher logistics costs related to deliveries to more distant clients with higher margins, lower energy revenues and lower fixed cost dilution.. These factors should reverse as from the second quarter and should result in a lower cash cost through year-end. These, together with the continued pulp price improvement, should result in a stronger operating margin and cash flow generation in the coming quarters.Turning now to Slide 13. Renewable business EBITDA reached EUR 14 million, more than twice the figure of the previous quarter, driven by the restart of our Huelva 46 megawatts and Ciudad Real 50 biomass power plants in February following the extraordinary shutdowns initiated during the previous quarter. In addition, we closed the sale of a 10 megawatts PV project in Huelva during the first quarter, generating revenues of EUR 2 million and an EBITDA contribution of EUR 700,000. We expect to close the sale of the remaining 2 PV projects in Seville and Granada with a combined capacity of 223 megawatts during the coming quarters with an expected EBITDA contribution of approximately EUR 15 million.As continue on Slide 14, with a strong improvement of our consolidated results, driven by the recovery in pulp prices and the high renewable energy output. EBITDA grew by 78% up to EUR 45 million and net income doubled up to EUR 8 million, continuing with a positive trend initiated during the fourth quarter last year that should continue in the coming quarters.Turning now to Slide 15. Let's review the cash flow generation in the quarter. The cash flow was marked by a working capital increase mainly linked to a higher account receivables balance due to the strong pulp price improvement as well as to the proper stocking process ahead of Navia's annual maintenance shutdown. Free cash flow before working capital and the regulatory collar adjustment was positive by EUR 19 million, after including EUR 5 million of maintenance CapEx, EUR 9 million of net interest payments, including advance prepayments of certain facilities and EUR 12 million of growth and sustainability CapEx. Out of the said, EUR 44 million working capital outflow in the quarter, EUR 22 million are related to the effect of higher pulp prices on trade receivables, EUR 8 million to the pulp inventories increase in anticipation of Navia's annual maintenance shutdown, and the rest are lower trade payables in pulp and higher renewable energy output.Finally, remember that under the current renewable energy regulation, the difference between the regulated and the market energy prices generates cash collection rights that will be settled during the rest of regulatory life of the plants. This is what we mean when we refer to the regulatory collar, which amounted to EUR 26 million in the quarter, together with other minor cash adjustments. Note that we expect a change in the regulation for biomass power plants between the second and third quarter this year, which will align accounting and cash EBITDA and in these regulatory collar adjustments. These would have the consequence of advancing the said cash inflow into this [ year ] rather than waiting for the rest of the regulatory life of the power plants to cash it in. The strong pulp price momentum, together with expected change in the renewable regulation for biomass power plants anticipate a strong cash flow generation in 2024.Net debt increased up to EUR 323 million at the end of the first quarter, as you can see in the following Slide #16. Our liquidity position reached up to EUR 252 million at the end of the quarter after the early repayment of certain bilateral loans in the pulp business amounting to EUR 73 million. On the other hand, the balance outstanding under our sustainable commercial paper program increased by EUR 22 million in the quarter, up to EUR 74 million. Note that this liquidity position does not include 2 RCFs amounting to EUR 130 million in the pulp business and EUR 20 million in the renewable business, which remains fully available.Finally, as mentioned before, the strong cash flow generation expected in 2024 should allow us to end the year with some lower net debt figure even after the planned growth CapEx and expected dividend payments.Let me hand you back now to our Chairman and CEO to continue with the presentation.

[Ignacio de Colmenares, executive]

Thanks, Alfredo.Continuing with Slide 17, I'm glad to announce that we have updated our sustainability master plan for the next 5 years. This plan has been based on a double maturity assessment from both a sustainability and financial perspective, and it is structured on 5 strategic pillars. The first one, safe and [ equifficient ] operations pursues operational excellence in our industrial and forestry activities from environmental, safety and efficiency perspectives. Our sustainability master plan includes a decarbonization plan that will allow us to reduce the group's CO2 emissions by 70% under Scope 1 and 2 before 2025. It will also improve our profitability because biomass fuel is cheaper than gas or fuel. It also includes the water resilience plan that will allow us to reduce our water consumption and make us self-sufficient during [indiscernible] situations.The second pillar, sustainable products, aim to boost the development and diversification of Ence's sustainable products and services, all of which are based on natural and renewable resources and contribute to a decarbonized economy. Most of these products compete with so good pulp and yield better budgets. The third pillar, a responsible supply chain aims to improve the ESG performance of our supply chain with a special focus on human rights and on environmental protection. One of our competitive advantages is our short wood supply chain. Therefore, we don't expect any cost increase. The fourth pillar, positive social impact includes different initiatives designed to benefit our employees and the local communities where we operate. The fifth strategic pillar aims to further strengthen the corporate governance at the organization enhancing the ethics and compliance function. Our best practices have been recognized by independent ESG agencies and indices. In the latest study, Sustainalytics confirmed Ence for the third consecutive year as the most sustainable player in the global pulp markets.Moving now to Slide 19. Let me update you on our growth and diversification initiatives in the pulp business. Firstly, we continue to diversify our production towards higher value-added pulp products. Ence advanced pulp sales accounted for 19% of total pulp sales in the first quarter. We aim to reach 25% this year and 50% by 2028. Our Ence advanced pulp products are more sustainable and are better adapted to replace plastic and subdued pulp in multiple paper applications. They also deliver higher margins. With these products, we compete against pulp producers in the Scandinavia based on soft wood and we are more competitive. Secondly, our project to diversify up to 125,000 tons of our production into flat pulp for absorbent hygiene products is on track. This is an innovative project that has generated a lot of interest among our clients in Europe who are currently importing flat pulp from North America based on soft wood. Our flat pulp will be based on eucalyptus. It will be very competitive and we deliver higher margins. The project has all the permits required. We have already ordered the equipment and started the civil works. The commissioning is scheduled for the end of 2025. We estimate a CapEx of EUR 30 million between 2024 and 2025, with a targeted return on capital employed of over 12%.And thirdly, the As Pontes project is an excellent opportunity to continue growing and diversifying our pulp business without increasing the consumption of wood. The project is based on the recovery of paper board and textile fibers on the recovery of water and on the recovery of industrial land to produce bridge recycled pulp for paper, textiles and bio products. It will be a fully circular plant, 100% decarbonized with no waste generation and minimal water consumption. It also avoids a new mill invading a natural space since the project will be located on industrial land occupied previously by a thermal coal plant. For all these reasons, the project has already completed the public information process without any social opposition. We aim to finish the engineering and the permitting process by the summer of next year. We should be able to take the final investment decision by the end of 2025. Note that none of the investments I have described will require more wood, which we believe is an increasingly limited resource today. Remember that the Iberian peninsula, pulp industry already imports over 2 million tons of wood from Latin America.Turning now to Slide #20. Let me remind you about our Pontevedra Avanza project. At last, we have an integral project that will replace Pontevedra's efficiency and flexibility at the forefront of the industry in Europe. This project will allow us to reduce Pontevedra's cash cost by EUR 50 per ton, improve its flexibility by using different species of eucalyptus and to continue to upgrade our production from standard pulp to Ence advanced pulp products. We envisage a very competitive biomill specializing in high-margin products. The estimated CapEx in this project amounts to EUR 120 million during the next 5 years with a required return on capital employed of over 12%. Its execution will be adapted and aligned to our cash flow generation throughout the pulp cycle and to our leverage and dividend policies. Remember that our aim is to maintain a prudent leverage and offer an attractive remuneration for shareholders while investing for profitable growth in the future.Turning now to our growth and diversification opportunities in renewables in Slide 21. Firstly, through our subsidiary, Ence Biogas, we aim to produce 1 terawatt hour of biomethane by 2030. Our business model is based on the recycling of local organic waste into biomethane, with corresponding sustainability certificates as well as producing a high-quality organic fertilizer and biogenic CO2. Ence Biogas has already developed a portfolio of 20 biomethane projects, which already has a land secured and the feasibility studies completed. We expect 8 of them to be ready for construction in 2025 and to become operational in 2026. In addition to these 20 projects, Ence Biogas is developing another 15 biomethane projects at an early stage of development. We plan to build these plants with EPC contracts using nonrecourse project financing, backed by long-term PPAs. The initially estimated CapEx is around EUR 20 million for a standard plant with the capacity to produce 50 gigawatt hour per [ plant ]. The targeted return on the capital employed is over 12%.Second, biomass thermal energy is not only carbon neutral, but may also be more price stable and more competitive than fossil thermal energy. Through our subsidiary, Magnon [ Servicios Energeticos ], we signed our first service contract last year with a major industrial company in the food and beverage sector in Spain. We are final bidders in 5 contracts with important industrial companies in Spain, and we are working with another 15 companies in the food, paper and chemical industries to provide them with renewable thermal energy. Our customers appreciate our strong position in the biomass market and our experience in providing integral solutions from biomass sourcing to plant design and operation. As in the biomethane business, we plan to build these biomass thermal plants with EPC contracts and using nonrecourse project financing, but by long-term PPAs. The estimated CapEx per plant ranges between EUR 6 million and EUR 20 million with an estimated production of between 60 gigawatts and 200 gigawatts per plant. The targeted return on capital employed is over 11%. The development of these 2 businesses should allow us to more than double the recurrent EBITDA of our renewable business in the next 5 years. Furthermore, looking beyond 2030, biogenic CO2 capture will become a new source of revenues and EBITDA for all our businesses.As the leading player in Iberia in eucalyptus pulp and biomass energy, Ence Group annually producers around 6 million tons of biogenic CO2 in our different businesses. This biogenic CO2 is a raw material used to produce green fuels such as e-methanol or sustainable aviation fuel. These green fuels will play a crucial role in decarbonization of our economy with extensive use in marine and air transport and in the chemical industry. We've been actively studying the market, and we are now making progress with the engineering and permitting needed to capture and monetize our biogenic CO2. We will start to see the results by the end of this decade.Let's finish now with some closing remarks in Slide 22 before we move to the Q&A section. The positive price momentum continues boosted by pulp demand growth, low inventories of pulp and pulp supply constraints. There are no significant market pulp capacity additions confirmed beyond the Cerrado project at the end of this year, supporting an improving outlook for pulp prices in 2025, 2026, and 2027, just as industry specialists are currently forecasting. At the same time, our cash cost should recover its downward trend in the coming quarters, also contributing to the firm operating margin improvement and cash flow generation.Regarding our renewable business, the expected change in the regulation of biomass power plant will also boost this business cash flow generation in 2024. Our priorities in the pulp business are to reduce cash costs and to diversify our production towards more profitable products such as Ence Advanced pulp, fluff and As Pontes recovered fiber. We will make Pontevedra one of the most competitive mills in Europe. Our priorities in the renewable business are to expand our leadership in biomass trading in Spain and to develop our renewable thermal energy and biomethane businesses. The achievement of these goals should allow us to significantly improve our recurrent EBITDA in the pulp business and more than double the recurrent EBITDA in the renewable business in the next 5 years.Looking beyond 2030, we are getting prepared to be a major supplier of biogenic CO2 for the production of e-fuels. I believe we are well positioned to pursue our strategic priorities in both businesses while maintaining a prudent leverage and an attractive shareholder remuneration. Thank you for your attention. We would be pleased now to hear questions you may have.

[Operator]

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

[Enrique Parrondo, analyst]

I have 3, if I may. The first one is related to the latest price hikes announced by Suzano. I wanted to get your view and better understand what do you believe is the main driver behind this last hike? Is it more demand or supply driven, do you believe? And how confident are you with regards to its implementation?

[Ignacio de Colmenares, executive]

I'm 100% confident in we are going to achieve this price hike. And I would say, 50% came from supply and 50% came from demand. Supply, as I have already mentioned, we have on the industry, some problems in Scandinavia with the ports. One of our colleagues have had a terrible exposure, and it's stopped now. There are problems in Northern part of the states and Canada to produce soft wood. And we also have the fact that the Canada [indiscernible] is not able to transport all the paper, which should come from Asia to Europe, and therefore, our customers in Europe are working pretty well. And continuing with demand, well, the demand is not boosting, but it's much better than last year. Remember that last year, it was an year of destocking all the supply chain, and we have decreases in printing and writing paper of 25%, 26% on the demand in specialties of 15% of the demand. Well, and now the final demand is normal in Europe, it's slightly increasing. The final demand is growing like it is always growing in China. Don't forget that the product we are selling, the pulp we sold in China is not transformed in harbors or houses or factories. It's a basic healthy product, and therefore, the demand is still growing in China. And on top of that, we have the restocking of all the supply chain. We think the restocking of the pulp inventories have already finished. And now we are seeing the restocking of the paper industries, and we will see on summer the restocking of the retail stocks.Then as a conclusion, we are 100% sure that the new price hike will go to the market.

[Enrique Parrondo, analyst]

Second one is related to cash costs. Maybe could you give us a range on where do you expect cash cost to be in the second quarter and whether the reduction of achieving close to 4 quarter '23 level is still your goal for the end of this year? Maybe also comment on different components moving parts would be helpful.

[Ignacio de Colmenares, executive]

Yes, coming back to your first question, I forgot to comment that the Cerrado project is 2.5 million tons pulp mill in Brazil, belonging to Suzano is starting in the middle of the year. But due to the logistics, we don't foresee any part coming to the market nor in Europe or in Asia or in the states before the end of the year. And that is very important because the market is growing this year, like every year. And that means that the growth of the market will permit the market to be balanced at the end of the year despite the new pulp of Cerrado project coming on stream by the end of the year and beginning of next year. And you have to remember that there are no further new projects of pulp worldwide for the next 3 years. And we are quite confident in having good 2025, 2026, and 2027 on top of good 2024.And now going back to your second question, well, we had a temporary increase on the cash costs in the first quarter. If we compare that to the first quarter, we had a bit higher chemicals due to price increases on the chemicals. We had a temporary increase in logistics. Now it's solved, and we are coming back to the figures we had at the end of the year. and we have the effect of the energy. Now looking to the second quarter, we see a decrease in the cash costs, and we hope to see to be between the first quarter and the fourth quarter of last year. And we continue to see to be at the end of the year at a very similar level at the level we reached at the end of last year.

[Enrique Parrondo, analyst]

Super. And the final question would be with regards to capital allocation, specifically, maybe how should we think of shareholder remuneration and investment plans, specifically in the plan Avanza for Pontevedra, so assuming that most likely towards the end of the third quarter, you will be below your target leverage level. So maybe what's kind of your priority here considering that this project will probably boost shareholder returns in the future?

[Ignacio de Colmenares, executive]

Well, as we have always said, we want to combine a prudent leverage. And you know that for us, a prudent leverage is to be below 2.5x net debt to EBITDA, talking about the recurrent EBITDA of this company in this business in pulp and below 4.5x in energy. We don't like big projects in pulp because the market suddenly changed. And while you have to pay what you have already committed. That is why we like very much phased projects. The Pontevedra Avanza project is a project of EUR 120 million. We will have all the engineering finished by third quarter this year. We will take the final investment decision in the fourth quarter this year. And I would say, first even if we wanted to spend more money next thing, it will be impossible because it takes time to buy and to produce the equipment and to install the equipment, and we only stop our fund base once per year. Then we think that the most prudent and the more [ restive ] things is to do these investments in the 5 years we have already forecasted. We will not accelerate these projects because we want to be on the low level of debt, because we want to keep an interesting dividend for our shareholders and because we think these projects do require time to do that proportion.

[Operator]

And our next question comes from the line of Jaime Escribano from Santander.

[Jaime Escribano, analyst]

A couple of questions from my side. The first one regarding the regulatory collar. So you mentioned that you expect a change in the regulation that should normalize or should reconcile the P&L EBITDA with the cash flow. My question would be if, for example, the EUR 33 million regulatory collar that you are accumulating in Q1 plus whatever is accumulated in Q2, with the new regulation, it is contemplated that you cash in this money this year? Or maybe you can just explain us better how should we think about the cash flow this year once the regulation has changed? That would be my first question.

[Ignacio de Colmenares, executive]

This is what we have said. According to the text, the Consejo de Estado has shared with us formally that we present our ideas. We are going to cash this collar we think, on the third quarter or maximum in the fourth quarter. That is why I was saying before that our cash flow statement is going to improve by EUR 50 million to EUR 60 million compared to the previous situation. Alfredo, you have to add something.

[Alfredo Avello, executive]

Just one question. Just to make it clear, all the net collar that we have in our accounts until December 31, '23, that will follow the same rules as in the past. It will be included in the RI that will be cashed '26 and onwards. But as you said, all the collar generated between January 1 till now or within this year will be cashed netted within this year.

[Jaime Escribano, analyst]

Okay. Alfredo, can you add Fred, can you remind us before December '23, what has been accumulated to know that portion that comes in 2026?

[Alfredo Avello, executive]

Give me 2 minutes, and I'll come back to you on this.

[Jaime Escribano, analyst]

Okay. And then my second question is if you can elaborate a little bit on the biogenic CO2 opportunity. I know it's still very preliminary. But just to give us some figures because you have talked in the past, and it looks like very interesting, but maybe you can elaborate a little bit more.

[Ignacio de Colmenares, executive]

Yes. In 5 years' time, biogenic CO2 capture will become a new source of revenues and EBITDA for all our business, as I mentioned before. We are advancing with the engineering process to capture the biogenic CO2 released by our pulp and biomass power activities. As a leading player in Iberia in eucalyptus pulp and biomass energy, Ence Group annually produces around 6 million tons of biogenic CO2 in our different businesses, roughly 50% in pulp and 50% in [indiscernible] energy. The biogenic CO2 is the raw material used to produce green fuels in combination with green hydrogen, such as e-methanol or sustainable aviation fuel, SAF. These green fuels will play a crucial role in decarbonizing our economy with extensive use in marine and air transport and in the chemical industry. We see a market in Iberian peninsula at the South and Northwest of Spain between 2 million tons and 10 million tons, it's maybe too early now to define exactly [indiscernible] market in 2030 and increasing very, very rapidly to 2035. We've been actively studying, as I said, the market, and now we are making practices with the engineering and permitting needed to capture and monetize our boigenic CO2. We have land available in all our plants, but in Pontevedra to have electrolyzers to have the synthesis and to have the capture of CO2 in Huelva, in Puertollano, in Merida, in Navia. We have already asked with the support of the local administrations, the power for these electrolyzers on the [indiscernible] 2025-2029. We have the water needed for these electrolyzers. And we are doing all the engineering [indiscernible] in all these plants to capture the CO2. We will not invest in producing green fuels ourselves. We are talking about major investments, maybe EUR 2 billion per plant. But we will have everything ready to invite investors to come to our sites to capture or co-capture our CO2 and produce these e-fuels based on all the framework we are organizing. And we think that will give an important value for our company, and it will improve the EBITDA of all our businesses in the future. Today, we have offers of [ EUR 14 ] per ton of CO2 just on the [indiscernible] without investing from our site. Then we think that with all the engineering and permitting we are doing, we will benefit even a bit better.

[Alfredo Avello, executive]

Jaime, we are talking about EUR 27 million, of which EUR 21 million are in the renewable business and EUR 6 million in the pulp business.

[Operator]

[Operator Instructions] And the next question comes from the line of Cole Hathorn from Jefferies.

[Cole Hathorn, analyst]

Can I just start off with how you see wood availability in the Iberian peninsula? And if we can support further capacity expansions in pulp or other end markets in the Iberian business because I mean we look up to the Nordics and it's a challenging market, ability to add new capacity is limited. You look at either Central Eastern Europe, including Poland, we've seen pushback on capacity expansions. So I'm just wondering how do you think about the Iberian peninsula and the wood availability in your region?

[Ignacio de Colmenares, executive]

Yes, we think it's the same around the globe. Wood is going to be a limited resource. That is why all our growth and all our diversification is not using more wood as we have said and insisted many times. Remember that we used to have back in 2018, a very interesting project to produce dissolving pulp at Navia. At this time, we had all the permits. We have the land. We had the engineering, and we decided to stop a project of 200,000 tons of dissolving pulp, it will require a bit more than 1 million tons of wood per year. And today, in Iberia, pulp producers are importing between 2 million and 3 million tons per year. We are already importing between 2 million tons and 3 million tons per year from Latin America, then we think it has absolutely no sense on a market where there is no wood or a market where the wood is expensive because in Iberia, the market is extremely expensive. You will compare with Indonesia, South Africa or Brazil or Chile or Uruguay, it has absolutely no sense to invest on the new pulp mills requiring more wood. On top of that, but in 2018 then 2 years after we took the decision, the regional government of Galicia launched a law called moratoria for bidding planting new eucalyptus, the same thing, Portugal did back in 2016. Today, the population, the society, the ecologists don't want more plantation of eucalyptus. We think that today there is not enough wood for the requirements of today and the same has to increase the pulp capacity certainly you have to take into account that [ BHKP ] requires 3 tons of wood for 1 ton of pulp where we are talking about dissolving pulp is 70% more. You require at least 5 tons of wood per 1 ton of pulp that it is a more intensive product in wood per ton of pulp. And that is why in our site, we have developed the flat project. This is not an increase in terms of production. It is a diversification. We want to have 50% of our pulp sold as special products with higher margins, not increasing the volume. And that is why we have launched this fantastic project in As Pontes, where we are recovering paper and both from the northwest of Spain and transforming it in recovery.

[Cole Hathorn, analyst]

And then maybe just a follow-up. I mean, we've seen, I think it's like the eighth month in a row now where hardwood pulp prices have been rising. And your comment earlier around logistics, supply disruptions, while very helpful, we've seen a lot of those supply disruptions actually in softwood pulp. So I'm just wondering, softwood pulp is probably the one where I would have expected a tighter market and more push for the price, but we're seeing a lot of those price increases in hardwood. And I'm just wondering what are the demand drivers of pulling through the hardwood and the hardwood price rather than softwood? And maybe could you give a little bit more color on your inventories. You said the inventory pulp supply chain has restocked, but you still expect kind of some of the end market retail restocking in end products. Was that on tissue, graphic paper? I'm just wondering what end markets you're referring to?

[Ignacio de Colmenares, executive]

Yes. It is true that the constraints are happening more in softwood and surprisingly, softwood is increasing less than hardwood in terms of price and more slowly. Well. I really don't know why, and we are a bit surprised and the fact is that on the first quarter, our special products, we only were able to sell 19% of the total sales when our target for the year is 25%. We are going to do that in the second quarter. And the main reason was because the gap between short fiber and hardwood was lower than normally. And we really don't know what is the reason of that. And we even don't know why with these strikes imports in Finland, the long fiber is not increasing more rapidly. We don't know like you I don't know the exact reason. What I know is that the market part in hardwood is hot. Customers are demanding more. You have to remember that more or less 70% of the pulp used in any paper grade, you can do that either with short fiber or long fiber, with hardwood or with softwood when you are more efficient in some products with 1 or the 2 fibers, but 70% can be substituted. And what I suspect is that due to these logistic constraints, we are seeing a bit more substitution and a bit more demand in hardwood.Regarding your question of the stocks, as I said before, and I don't have more further information. But we see now that the pulp stocks are when they should be because in China and in Europe, customers have been buying, seriously buying on the last quarter last year and the first quarter this year. And now what we see and our customers attending as is the paper mills who are buying paper, then we see that this resulting of the paper industry, the industry things we continued in the summer. And on top of that, it is very important, the final demand is better than last year, then when everything is good, we think that this year is going to be a normal increase in the final pulp demand between 1 million tons and 2 million tons like always, with bigger volumes due to this restocking.

[Cole Hathorn, analyst]

And then just a final question on the CapEx profile. You've been very clear that you're going to be disciplined, and it depends on your leverage and your free cash flow generation. But I'm just wondering how you think about it into '25 and '26 because if pulp prices stay where they are now or increase as you suggest, the Suzano hike, your earnings are going to be very good. Your free cash flow is going to be higher. You will have that flexibility to potentially pull forward a little bit more CapEx. So I'm just wondering, yes, you may have the the financial flexibility to do more CapEx, but how much can you manage? How much can the Ence project teams kind of do a year? Because even if you have the financial flexibility to spend EUR 150 million, EUR 200 million of CapEx, do you have the operational team ability to pull that forward? I'm just wondering how should we think about that CapEx so that we can think about how much may be returned to shareholders versus debt paydown?

[Ignacio de Colmenares, executive]

No. That is what I tried to say before, we have 2 constraints. We have our suppliers constraints and our technical team constraints. And now we have over team dedicated to the flat project in Navia, we have an engineering team working in engineering in the Pontevedra Avanza project in the end of the year. And then we have to invest in Pontevedra phase by phase because we cannot stop the [indiscernible]. We have to take profit of stops of 2 weeks per year and then you can do what you can do in 2 weeks. And as you have mentioned, we have the team we have, then we will not change dramatically our calendar of investments, even if the market is extremely good, and we have to monitor that. And we don't have to be proud in this industry. Even if you see everything in fantastic color suddenly and many things change. And then it is important to go step by step and to follow the calendar [indiscernible] and well, it's easier to give a bit more dividend than to try to invest more in 1 year and it has been the nature.

[Operator]

And our next question comes from the line of Jose Antonio Suarez from [indiscernible] Bank.

[Unknown Analyst]

I'll take 2 of them and I'll go back to the queue. First one is relating to the potential EBITDA generation for 2024. So basically, you're mentioning that you see Suzano's price hike going forward its capacity not coming into the market until year-end '24. So in this scenario where prices will stand high, you don't see major corrections going forward. Doing some numbers. I come to a figure, do you think it should be feasible to achieve for the EBITDA division, EUR 200 million of EBITDA in 2024, would you be comfortable with this deal, do you think it's seasonal? That will be the first question.

[Ignacio de Colmenares, executive]

We never give guidance of EBITDA.

[Unknown Analyst]

Yes. But basically, do you see...

[Ignacio de Colmenares, executive]

And cash flows...

[Unknown Analyst]

I mean, you're assuming prices of...so you're basically saying that...

[Ignacio de Colmenares, executive]

And you also have to decide in which level of dollars you are going to put... But we do not give that...

[Unknown Analyst]

Okay. No problem. So going with another question. In terms of pulp discount, what level should we think in the next quarters going forward? How do you see the levels going forward in the second and third or in the fourth quarter if you may.

[Ignacio de Colmenares, executive]

41%.

[Unknown Analyst]

And just a last one. With this strong evolution of your pulp, especially in the pulp division, the cash flow you will be generating from the tenders in [ MHA ] regulatory. Could you give a little bit more visibility on how should we think about dividend for 2024. A little bit more color on that.

[Ignacio de Colmenares, executive]

Yes, you know what is our policy. Yes, we will give back to the shareholders at everything, who allows us to be in part below 2.5x the debt-to-EBITDA and to pay the committed CapEx and to do the CapEx of next year, and we see an interesting dividend this year, but I cannot give you now the exact what we'll pay [indiscernible] and good dividend in the third quarter, but then we'll have to wait a bit, the Board decides the level.

[Operator]

[Operator Instructions] Unless we have no more questions registered, and I'll hand back to our speakers for any closing comments.

[Ignacio de Colmenares, executive]

Thank you very much, ladies and gentlemen. We meet again in 3 months' time. Thank you.

[Alfredo Avello, executive]

Thank you.

[Operator]

This now concludes our presentation. Thank you all for attending. You may now disconnect your lines.