Ence Energia y Celulosa SA

MAD:ENC

Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the ENCE First Half 2018 Results Presentation. I now hand over to Mr. Ignacio Colmenares, CEO; and Alfredo Avello, CFO. Gentlemen, please go ahead.

[Ignacio de Colmenares y Brunet, Vice]

Good afternoon, ladies and gentlemen. Thank you for attending our first half 2018 results conference call. I'm here today with our CFO, Alfred Avello, and our Head of IR, Alberto Valdes. After the presentation, we will answer any questions you may have. First of all, and probably the most important thing I would like to stress during this presentation is our positive view about pulp prices. As we have said many times in recent months, pulp prices are strong in all markets. Our demand is very solid globally and inventories are very low across the supply chain, which explains the high prices. In the longer term, as new major capacity increases have been announced, we continue to be positive about pulp prices at least until 2023. I would like to continue this presentation with the main highlights of this first half. Our financial results during the period were excellent. EBITDA was up 49%, and net income was 60% higher compared with the first half of 2017. Pulp Business EBITDA grew by 60%. Energy Business EBITDA grew by 5% during the first half of the year, and the second half will be even better. The investments of our strategic plan are on track. We are building 99 megawatts biomass power capacity to generate an additional EUR 30 million of EBITDA annually in this business. We finished Pontevedra's 30,000-tonne capacity expansion during first quarter 2018. We advanced, this year, Navia's annual maintenance stoppage in order to start the 80,000-tonnes pulp capacity increase, which will be completed by second quarter 2019. Finally, our leverage ratio is down to 0.6x our last 12 months' EBITDA. We refinanced the Pulp Business to save EUR 11 million in annual interest payments from 2019. We will pay EUR 25 million to our shareholders in September as the first interim dividend. Let's start with our estimates of supply and demand in the pulp market as shown in Slide 5. We believe new capacity will not compensate for the demand growth. Let's focus on the bottom line of the chart. We have called deficit the difference between the increase in demand and the increase in supply. As you see at the bottom of the slide, we started 2018 with a deficit of 1.5 million tonnes in 2017. That is the reason why we have prices above $1,050 per tonne today. This deficit will grow to 2.9 million, 4.5 million, 5.9 million tonnes in the future years, as you can see on the chart. We have been conservative, and we have included all new authorized and not yet authorized projects. Can you imagine the pulp prices that we will see in 2019, 2020, 2021 and beyond with these increasing deficits? The gap between demand and supply will widen in the future years, at least until the end of 2023. Even the possibility of 1 or 2 large new unplanned production facilities will not compensate for the gap between demand and supply generated between 2017 and 2023. And even if demand remains constant during a couple of years, the deficit will remain and prices will keep strong. This is the reason why we are positive about the future evolution of pulp prices. In Slide 6, we show an overview of pulp prices. RISI's forecast for pulp prices in June are clearly above estimates made 6 months ago. Real pulp prices have consistently exceeded these forecasts even after continuous upward revisions. We believe pulp prices will continue to exceed this forecast as I have just explained. Using RISI's pulp prices forecast, ENCE's pulp EBITDA would grow double digit annually. Our new strategic plan would further improve this EBITDA growth. If we move now to Slide #7, you can see our results. Our revenues increased 17% due to an increase of 26% in net pulp prices despite a 4% reduction in volume sold due to the possibility of further reducing pulp stocks and 18% increase in the Energy Business, with 32% more production sold at the similar pulp prices compared with the last year. Our EBITDA grew 49% over the period, thanks to a 60% growth in the Pulp Business despite an increasing cash cost due to higher wood and caustic soda prices, but 5% growth in the Energy Business. Therefore, we have increased our net income by 60%, even after one-off financial expenses produced by the early redemption of our EUR 250 million bond. Slide 8 shows the evolution of our cash cost. These increased around EUR 29 per tonne compared with the same period last year. The 3 main factors we need to consider are the same as during the previous quarter, increases in wood cost deriving from the linkage to pulp prices, rising caustic soda prices, higher corporate and selling expenses. The important number here is the spread between pulp price and cash cost, which continues to widen, and it's now EUR 533 per tonne. ENCE's priority is to reduce cash cost, and we will continue to do so in the future, although, it is always more difficult in an environment of rising pulp prices. We are modifying our processes to reduce the use of caustic soda and, consequently, to reduce this part of the cash cost in the coming quarters. At current pulp and caustic soda prices, we believe that our average cash cost for whole year should be around EUR 372 per tonne. Slide 9 shows the performance of our Energy Business. EBITDA increased by 5% compared to last year due to the seasonal characteristics of this business and the effective use of the 6,500 hours limit for this technology. Only 44% of the available hours have been used. We maintained our target of EUR 55 million EBITDA in 2018 for the Energy Business. We will continue our cost-reduction strategy, with expected annual savings of EUR 4 million in 2018. And we also are on the lookout for acquisitions, always at conservative prices, in line with our strategy of consolidating the biomass energy sector in Spain. Turning now to Slide #10. Let me explain our cash flow generation. During the first quarter of 2018, normalized free cash flow reached EUR 81 million, a 68% increase. Our net debt is stable compared with the level at the end of 2017. Our leverage ratio now stands at 0.6x our EBITDA over the last 12 months, clearly below our peers' average ratio of 2.6x. Our conservative leverage is allowing us to achieve earlier the targets of our current strategic plan to be ambitious in our new strategic plan while maintaining an attractive shareholder remuneration. Slide 11 and 12 review the next steps of our current strategic plan in the Pulp and Energy Businesses. Firstly, our Energy Business. The construction of our new biomass power plant in Huelva and Puertollano will be completed by the second half of 2019. Additionally, we will build another 7-megawatt biomass power plant in the Olive Pulp Area. These 3 new biomass power plants are expected to contribute an annual EBITDA of EUR 30 million after investing EUR 205 million. Secondly, Slide 12, our Pulp Business. We added 30,000 tonnes at our Pontevedra mill. This will generate EUR 10 million EBITDA, assuming current prices. In Navia, we will add 80,000 tonnes during the second quarter of 2019. This will generate EUR 28 million annual EBITDA using the same assumptions. In total, 110,000 tonnes, contributing EUR 38 million to EBITDA. Finally, Slide 13 shows our attractive dividend policy. Our policy includes 3 dividend payments during the year to achieve a 50% payout ratio. We will pay the first interim dividend of EUR 25 million in September. I will now invite Alfredo to review the figures in more detail.

[Alfredo Avello De La Pena, Chief Financial & Corporate Development Officer]

Thank you, Ignacio. Moving on to Slide 15. Let me start with the operating performance of our Pulp Business. Net pulp price grew by 25% during the period, driving our revenues up to EUR 374 million, even though the volume sold was some 4% lower. Last year, the company sold additional tonnage coming from our operating inventories as an answer to our clients' growing demands. But at this moment, our operating inventories are at record lows with just 28,000 tonnes. This represents approximately 10 days of production and not only includes the pulp in our warehouses but also all the tonnage thrown into our clients. This is a clear evidence of the current tightness of the supply and demand balance. 8% cash cost increase, as our CEO has stated, is explained through the indexation of wood prices to pulp prices; through the rising caustic soda prices, which should be normalized in the coming quarters; and through higher overheads coming from the team building up process of the necessary resources related to our capacity expansions in progress. This should be diluted within 2019 once our Navia 80,000-tonne expansion ramps up. Altogether, rising pulp margins boosted EBITDA by 60%, up to EUR 111 million in the first half of the year. The next slide, following the P&L. Our EBITDA margin grew up to 33% from the previous 24%. Depreciation was 6% above last year period, mainly due to the additional CapEx related with our strategic plan as well as higher forestry depletion charges as a result of larger wood supply sourced from our plantations. Financial expenses of EUR 24 million include, as advanced last quarter, EUR 19 million one-off expenses related to the early redemption of the EUR 250 million high-yield bond of which EUR 5 million are noncash items. Other financial results totaling EUR 8 million includes EUR 6.6 million dividend from the Energy Business to the holding company as well as FX gains. Taxes for the period were also higher for obvious reasons. After all this, net profit from the Pulp Business increased by 60%, up to EUR 55 million. Following with our Pulp Business cash flow generation in the Slide 17, recurrent free cash flow after maintenance CapEx, working capital changes, financial interests and taxes improved by 44%, up to EUR 71 million compared to EUR 49 million in the same period last year. That said, financial payments, again, include EUR 14 million related to the early redemption of the high-yield bond. Basically, half of this figure corresponds to that redemption premium and the remaining amount to the second annual interest coupon due in November. Our working capital increased by EUR 9 million, all linked to pulp price increases. Expansion CapEx amounts to EUR 20 million related to Pontevedra 30,000-tonnes capacity expansion successfully executed during the first quarter. This new capacity will be ramping up until the fourth quarter. Investments connected to the 80,000-tonnes expansion in Navia for the second quarter 2019 have already started. Up to date, a total of EUR 5 million have been invested and some additional 50 are expected to follow during the year. Finally, asset divestments of EUR 4 million include the transfer of the land where the Huelva biomass plants are located from the Pulp Business into the Energy Business for EUR 2.5 million. This is part of the last phase of our business-aggregation strategy initiated back at the end of 2015 now that the administrative licensing process is complete. All together, Pulp Business free cash flow after CapEx amounts to EUR 52 million for the period. In the Slide 18, let me update you on our hedging program. Just to remember, with the only aim of mitigating the FX volatility, ENCE's policy is to hedge at least 50% of our expected USD revenues for at least the next 12 months on a rolling on basis. These [ aim ] structures are [ quickly ] built up, monitored and timely adjusted, taking into account the expected pulp price increases. Currently, we have contracts in place for an average cap of $1.17 for 59% of our expected pulp revenues for the second half of this year, $1.26 for another 59% of those expected in the first half of 2019 and 48% for third quarter of said year. Turning to Slide 19, and regarding our Pulp Business refinancing process, we have used the proceeds coming from the EUR 160 million convert bond with 125 basis points [indiscernible] coupon to prepay the EUR 250 million high-yield bond issued back in 2015 with a [indiscernible] coupon. This prepayment has been completed in June. The company now benefits from a much more efficient capital structure that reduces our yearly financial cost by EUR 11 million and ensures the accomplishment of our strategic plan. Issuance cost of this transaction amounted to EUR 2 million. As you all know, in ENCE, all CapEx are deeply analyzed in order to comply with the specific IRRs and payback periods, and this transaction is not an exemption. In this case, total additional cash invested in this financing process compared to the EUR 11 million cost savings as from 2019 results in an IRR of 123%. As you may see in Page 20, we are not only moving into a more efficient capital structure but we are also fully committed to sustainability as a key driver of our company long-term strategy, and our financial facilities should also reflect so. In May, we have refinanced the fully available EUR 90 million RCF maturing 2021 by a new EUR 70 million sustainable credit facility due 2023. Part of the costs of these refinancings -- of this financing, sorry, is linked to ENCE's performance along environmental, social and corporate governance behavior and will be independently audited. Framed by this same sustainability scheme, we have also refinanced a bilateral loan initially maturing 2021 with the new green loan due 2023 for EUR 20 million. This refinancing has been made at 0 costs and includes a margin reduction down to a fixed 173 basis points. These new facilities, together with the EUR 220 million financing arranged by the Energy Business back in November last year, which obtained Standard & Poor's highest green rating ever, evidences ENCE's strong commitment towards sustainability, transparency and good governance. Turning to Slide 21 and continuing with the balance sheet, Pulp Business net debt ended the quarter at EUR 84 million representing a leverage ratio of just 0.4x LTM EBITDA, well below our self-imposed limit of 2.5x and the lowest of our peers. Let's now change the focus to our Energy Business operating performance in Page 22. Average selling price was very similar to that of last year, and the energy volume was 22% higher due to the new Cordoba 27-megawatt plant acquired in August. As a result, revenues grew by 18% and EBITDA improved by 5% during first half. Note that so far, we have only used 44% of the annual regulated operating cap of 6,500 hours. EBITDA pattern profile is basically the same one as last year. We, therefore, foresee higher volumes and margins for the second half of the year. On top of fixed-cost dilution, we will continue with our cost-reduction strategy not only on the agro diversification supply process but also on the operational side. Following with our Energy Business P&L in the Slide 23. As you are aware, we monthly adjust our revenue to the regulatory collar calculating the average pulp price of the period. In this semester, our EBITDA includes a EUR 1.5 million provision related to this item. Below the EBITDA line, year-on-year high depreciation charges are mostly explained by the asset base increase after our last acquisition in Cordoba. Remaining concepts are again all in line. Taking everything into account, our Energy Business reported a net attributable profit of EUR 3.7 million in the quarter. As previously said, we expect higher results for the second half of the year, driven by higher energy generation. Moving on, on its cash flow generation on Slide 24. Normalized free cash flow after maintenance CapEx, working capital changes, interest and tax amounted to EUR 10.5 million. Other noncash expenses for another EUR 3 million are mainly related to the said regulatory collar and the quarterly provision of certain still-to-be-paid annual expenses. Expansion CapEx amounts to EUR 58 million related to the construction of our 2 new 46-megawatt plants in Huelva and Ciudad Real. The construction of these 2 plants will be followed by a new 7-megawatt biomass power plant in the Olive Pulp Area. As our CEO has stated, the startup of these 3 plants is scheduled for second half of next year, and they will contribute in our EBITDA of approximately EUR 30 million from then on. Moving on now to Slide 25. Net debt position for the Energy Business increased by EUR 35 million at the end of June, following EUR 58 million growth CapEx related to the new plants driving our financial leverage to 1.5x LTM EBITDA. We're about to close in the next days a EUR 70 million amendment and increase within the EUR 220 million facility closed in November last year. These additional proceeds will be used to finance the new Ciudad Real 46-megawatt plant. Conditions will be the same ones as those of the initial facility, and the financial structure will be split in 2 tranches, an amortizing backing tranche for EUR 30 million due 2024, a bullet institutional investor note for the remaining EUR 40 million due in 2025. Our pulp position at the end of the period amounts to EUR 87 million, which, together with EUR 112 million that will be available after the said amendment and increase, will allow us to comfortably confront the construction of our 2 new low-emission biomass plants. Finally, let me remark that we continue analyzing different alternatives to boost EBITDA of our Energy Business beyond our EUR 90 million target for 2020. Let me, please, now return the lead of this presentation back to our CEO for the closing remarks.

[Ignacio de Colmenares y Brunet, Vice]

Thank you, Alfredo. I wish to conclude this presentation by repeating our view that pulp prices will maintain their upward trend with a tight supply and demand balance, at least during the next 4 years. Given current prices, we believe our 2018 EBITDA will be above EUR 300 million. We will maintain an attractive shareholder remuneration and a strong balance sheet that will allow us to complete our pending investments. We are working on a new strategic plan for 2019 to 2023 that will be presented to you in November. Today, I can just say that we are working on almost doubling the EBITDA by 2023 using current prices and keeping today's dividend and leverage policies. Thank you, ladies and gentlemen. Now we are happy to answer any questions you may have.

[Operator]

[Operator Instructions] The first question comes from José Rito from Caixabank.

[José Manuel Rito, Analyst]

So my first question is related with these highlights that you plan to double the EBITDA in the new strategic plan. Just to confirm that you are doubling from the level from the guidance that you provided for this year. So that will be my first question. The second one is related with the price increase that you made 2 months ago. You had a -- your released this price increase to be applied in June and July, I think, but this has been taking a bit longer than expected. Do you think that this price increase will go through in the coming months? And what is the reason behind the delay in passing the increase? And finally, a question related with the Energy division. According to my calculation, the EUR 90 million EBITDA target in 2020 assumes a margin of 42%. Is this correct? And is this margin improvement a function of better sourcing? Historically, the EBITDA margins are more or less 33%.

[Ignacio de Colmenares y Brunet, Vice]

Thank you very much, Mr. Rito. Yes, I confirm that we are working on new strategic plan with an EBITDA of roughly EUR 600 million for 2023. We will give you all the details in November. But as I said before, we will arrive to this EBITDA at current pulp prices, increasing our Energy Business, increasing our Pulp Business and maintaining our leverage policy and our dividend policy. Regarding your second question, we announced $1,070. We are selling very close to $1,070 today. It is true that all the market is at $1,050. We believe -- I may be wrong, but we believe that the reason why there are no more announcements today is because of this strike of transport in Brazil. Our competitors lost an amount of 300,000 tonnes during the strike. The effect on the market is arriving now due to these -- the long lead times, and several of them were obliged to declare force majeure. And what you can do when you are not supplying your customers and you are declaring force majeure is, on top of that, to increase prices. Then what do we expect is that once the problems of these strikes will be solved during July and August on the market, I'm pretty sure that prices will continue going up in September. And regarding ENCE, we stay at $1,070 for July and for August. Going to your third question, we expect an EBITDA for Energy of EUR 55 million for this year. The 3 biomass power plants we are building, and it is important that it is not a dreaming pipeline, it is a 3 biomass power plants. A, they are under construction; b, they are financed; and three, we are not in search of PPAs, we are selling to the energy system with some premiums we obtained on the auctions 2 years ago. Then it's not a dream, it's a fact. And the construction is done on EPC basis by Samet, a first-class construction company. That means that $55 million plus $30 million is $85 million. And we are working on further decrease the price of the biomass by EUR 2.5 million, and we are working on decreasing fixed cost of our actual perimeter by EUR 2.5 million per year. That EUR 55 million, plus EUR 30 million, plus EUR 2.5 million, plus EUR 2.5 million is EUR 90 million. And as Mr. Avello said, we are analyzing some opportunities, and we are pretty sure that we will have more than EUR 90 million by the end of next year.

[Operator]

The next question comes from Jaime Escribano from Banco Santander.

[Jaime Escribano, Equity Analyst]

So a few questions from my side. So from a market perspective, there was a news today that Copec Arauco was releasing or approving a new project of 1.2 million tonnes. First, I would like to understand how do you see this project. And maybe you can give us your view on what other projects do you think that could come or that could be announced, which ones do you think are more feasible, whether from Fibria, Suzano or any other LatAm players. So this would be one question. The second question would be regarding the guidance for 2018, which you mentioned you expect it could be above EUR 300 million. But maybe if you had to give us a range, what would be, like, a bull case for you? And would be -- and what would be other case? I think that would be useful. And finally, regarding the business plan, I don't know if you can anticipate in a very high level, what would be, like, the key themes or key strategic pillars of this business plan to drive the EBITDA to EUR 600 million. And whether this EUR 600 million includes any M&A -- potential M&A, particularly, I guess, in the Energy division?

[Ignacio de Colmenares y Brunet, Vice]

Yes, thank you very much, Mr. Escribano. If you go to Slide #5 of the presentation where you have the information regarding the new capacities, I would like to point out several things. First, you can see that in the first line, estimated BHKP demand increase, we have forecasted for 2019 and so on only 2.4 million tonnes, which is a very conservative figure. Secondly, on the estimated BHKP supply increase, the second line in gray, confirmed, we already have included this morning after the announcements the Arauco's pulp plant according to the calendar. And on top of that, you have the third pack recalled in this slide, potential BHK supply, not confirmed, where we have the UPM pulp mill in Uruguay. And we expect, and it is not yet confirmed, but as I -- we -- I mentioned, this is a conservative presentation, we have understood that by 2023, we can have 1 million tonnes on the market, and maybe 0.5 million tonnes in 2022 from this project. Eldorado, supposing that the takeout from APP goes well, well, I'm pretty sure they will do the Três Lagoas project of Eldorado. And if they start, let's say, everything by the end of this year, well, they will be able to be on the market by 2023. There is, on top of that, the Lwarcel mill in Brazil acquired by APRIL a couple of months ago. Well, we suppose that they will do this 1 million-tonnes capacity increase by 2023 and a bit in 2024. And we a small mill in Vietnam. Then what is important on this chart is that although we have here 6.6 million tonnes included, who are not confirmed today, with a low increase on demand of only 1.4 million tonnes per year, with those conservative assumptions, the gap between the increase in demand and the increase in supply, what we have called here deficit on the black bottom -- black line at the bottom, well, we have started 2018 with a deficit of 1.5 million tonnes, that is why prices are so good today. But this deficit increases by 0.8 million tonnes in 2019 and 0.6 million tonnes in 2018, it goes to 2.9 million tonnes at the end of 2019. It goes to 4.3 million tonnes at the end of '20. It goes to 5.8 million tonnes at the end of '21, and it goes to 5.9 million tonnes at the end of '22, 5.3 million tonnes at the end of '23, which means that if the gap in this deficit increased till 5.3 million tonnes per year -- sorry, 5.3 million tonnes in 2023 with, a, low demand figure, a low increase of demand figure and with any dream of a new pulp mill included, well, anything can happen. We can have today a surprise of a new mill anywhere on the world with 2 million tonnes, or we can have 2 years, by any reason we don't see today, of demand constant and not increasing, the gap will be at least 2x or 3x higher than today. That is why we are absolutely certain that we have in front of us, at least till the end of 2023, strong prices. Well, that is why RISI, who is quite conservative and we only have to look back to what's happened on the last 24 months, RISI, Slide #6, is forecasting prices very close to $1,200. Regarding the business plan, I cannot say more. I prefer that we finished our -- all the works we are doing. We have -- the first draft has been approved by the board. We still have to do some other works. We have -- and we want this new strategic plan to be approved by the end of September on the work by the board, and we will -- it will be presented to the market with all the details you need by November. I cannot tell you much more now. I confirm, as I was saying to Mr. Rito, that at current prices, both of energy and pulp, we see an EBITDA of EUR 600 million, keeping the leverage policy and keeping the dividend policy. Thank you very much, Mr. Escribano.

[Operator]

[Operator Instructions] Ladies and gentlemen, there are no further questions in the conference call. I give back the floor to Mr. Ignacio Colmenares and Mr. Alfredo Avello.

[Ignacio de Colmenares y Brunet, Vice]

Well, thank you very much. Ladies and gentlemen, enjoy the summer, and we will give you even better results on the next quarter. Thank you.

[Alfredo Avello De La Pena, Chief Financial & Corporate Development Officer]

Thank you.