Ence Energia y Celulosa SA

MAD:ENC

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the ENCE First Half 2022 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 at this first half 2022 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.

Let's start with Slide 3, where we summarize the business highlights of the first half of the year. Free cash flow generation amounted to EUR 129 million. We closed the period with no net debt, which provides us with maximum flexibility to take advantage of multiple future growth opportunities.

Comparable group EBITDA was up by 85% year-on-year to EUR 109 million. Tight supply continues to drive pulp prices higher, supporting continued higher operating margins in our pulp business.

Our differentiated and high value adding products continue to gain market share. I'm proud to announce that ENCE remains the most sustainable player in the global pulp industry. Sustainalytics has just reused our global ESG score of 91 points out of 100.

The Supreme Court has communicated that it will decide in October about the extension of the Pontevedra concession until 2073. We continue to work on our Navia Excelente project to promote the sale of our differentiated products to diversify our pulp production towards fluff pulp and to decarbonize the planet. The Galicia regional government recently announced our new project in As Pontes.

In today's presentation, we will explain our capital allocation priorities and also our new ROCE return-based framework. Our new dividend policy has allowed 100% net income payout ratio in the first half, up to EUR 45 million. As you know, last week, we had to temporarily suspend our activity at Pontevedra due to the very low river flow. We will resume production as soon as the river flow allows it.

We estimate that the total suspension of Pontevedra activity during 30 days would have an estimated impact of EUR 10 million in 2022 EBITDA. This figure will be partially mitigated in 2023 by a lower consumption of imported wood. We believe that EBITDA in the second half of the year will be higher than in the first. Higher pulp prices, strong energy prices, and the better dollar to euro FX will more than compensate for the problems in Pontevedra.

Let's move now to Slide 4, which illustrates our consolidated cash flow for the period. As you can see, the group's EBITDA was up by 85% year-on-year, up to EUR 109 million. In addition to that, we have reversed EUR 40 million from the regulatory collar provision in the second quarter after reviewing the book value of the plants in the light of high current and estimated future energy prices. The provision reversion is offset by an impairment of EUR 36 million in the book value of the plants, with no effect on the cash flow generated in the period.

The remaining regulatory collar provision, which is a difference between the energy market price and its regulated price, which we collected as cash but is not included in EBITDA, resulted in an additional cash inflow of EUR 27 million, rising consolidated operating cash flow to EUR 175 million. As a result, consolidated free cash flow reached EUR 129 million in the first half of the year, despite a 25% reduction in the use of factoring lines and the EUR 25 million we invested in growth and efficiency CapEx.

As you can see in the following Slide #5, tight supply continues to drive pulp prices higher. Gross fixed prices in Europe reached $1,350 per ton in July, and the main power producers have announced further price hikes in Europe, up to $1,380 per ton. Industry specialists are now forecasting an average price of $1,270 per ton for the full year.

Let's move now to Slide 6 where you can see how these strong pulp prices have more than offset the widespread inflation in raw materials and logistic costs boosting the operating margin of our pulp business up to EUR 194 per ton in the first half of 2022. Note that our biomills are energy self-sufficient. They have no gas dependence and that our raw materials are almost all locally sourced. The 33% year-on-year increase in the cash cost is mainly due to nonrecurrent wood imports due to the temporary shortage of harvesting capacity and the rising chemical and logistics costs, which are directly linked to high energy prices.

The change in the remuneration parameters applicable to renewables in 2022 implied by EUR 36 per ton cash cost increase in the period, which is mostly offset at the EBITDA level by a lower regulatory collar provision. This change has no impact on the cash flow guidance given in the Capital Markets Day in March, which already anticipated a similar change.

Let's look now at our pulp sales on Slide 7. Our pulp sales in the first half of the year amounted to almost half a million tons, in line with the same period last year. As we expected, we recovered in the second quarter, part of the volume loss in the first quarter following the 3 weeks transport strike in March. Over the 96% of our sales went to the European market where our customers benefit from ENCE's unique white portfolio of sustainable products and shorter delivery times.

Our differentiated products continue to gain market share. They accounted for 19% of our total pulp sales, compared to 14% in the same period of last year. The higher value added products are more sustainable, and our world adapted to replace plastic and softwood pulp. They also deliver higher margins.

Turning now to our renewables business in Slide #8, you can see how high energy prices and the 25% energy sales increase year-on-year has boosted our operating cash inflow up to EUR 90 million in the first half of the year. Growth in this business through our controlling stake in Magnon Green Energy is based on the development of its 140 megawatt biomass pipeline and its new 300 megawatt PV pipeline, which are at an early stage.

Magnon is also exploring new growth opportunities in industrial heating and biofuels. The government's first biomass auction of 140 megawatt will be held on October 25. Another auction is scheduled for next year and the third one for 2025. The development of the old 373 megawatt PV pipeline pre-sold to Naturgy for EUR 62 million is on track to be cashed between 2022 to 2024.

Moving now to Slide #9, I would like to mention the highlights of our sustainability performance. ENCE is already at the forefront in sustainable forestry, in the circular economy, in social commitment, in gender equality, and in corporate governance. Our best practices have been recognized by independent agencies, such as FTSE4Good and Sustainalytics. In its latest study, Sustainalytics confirmed ENCE once again as the most sustainable player in the global pulp market.

I would like to highlight the following achievements in the first half of the year. Firstly, we have accomplished our 0 accident goal after one year in our pulp business. It is a major achievement in our industry and demonstrates our strong commitment to the safety of our operations. Secondly, we have continued to reduce the order of both pulp biomills, which is already below one minute per day. This is the lowest level in Navia's history. These results demonstrate our strong commitment to the communities in our environment.

And finally, I would like to highlight the continuing reduction of our greenhouse gas emissions during 2021 in line with the targets of our sustainability plan, showing our strong commitment to mitigate climate change.

In the following Slide #10, let me give you an update about our Pontevedra concession. The Supreme Court has said that it will decide in October of this year about the extension of the Pontevedra concession until 2073. It is important to highlight the following. Firstly, the possible closure of the biomill was already provisioned in our accounts last year. Secondly, we await the court's final decision with a very strong balance sheet with no debt and with high liquidity in the pulp business. And thirdly, if the biomill has to be closed, the annual lost free cash flow from Pontevedra will be more than offset by a combination of the Navia Excelente project and by either of the 2 alternatives available to expand Navia production. Nevertheless, the recent favorable ruling from the Supreme Court in a similar case allows us to be more optimistic about the court decision.

Moving now to Slide #11, let me explain our capital allocation priorities. Our very strong balance sheet gives us full flexibility to take advantage of multiple organic project growth opportunities. Our priority for the use of cash. While we are fully mindful of future project funding requirements, our strong balance sheet and our targeted leverage ratios should allow us to continue to pay a competitive dividend aligned with the free cash flow generation of the business. Finally, we will continue to review M&A opportunities that meet our investment, returns target and create value for our shareholders.

In the following Slide #12, we show the new ROCE-based framework, which we have adopted to optimize shareholder value creation and guidance. On the left-hand side on the slide, we set out our clearly defined ROCE calculation of EBIT divided by average capital employed. We define capital employed as shareholders' equity plus net debt. The elements of our calculation can be fully reconciled with our financial statements.

On the right-hand side of the slide, we show how this new returns-based framework is incorporated into our guidance. We target through the cycle, average 5-year rolling ROCE of above 10% and above our cost of capital. We set out our targeted new project ROCE for both the pulp business above 12% and the renewable energy business above 7%, both of which are consistent with the IRR targets articulated in our strategic plan. Finally, we retain our leverage targets of below 2.5x for the pulp business and below 5x for the renewable energy business.

Turning to Slide 13, we'll remind you of our new dividend policy applicable as from this year. Dividend payments are now based on the cash available for distribution, ensuring a conservative leverage ratio of 2.5x in the pulp business and 5x in the energy business, assuming prudent average cycle prices and considering CapEx plans and commitments. This new policy allows us to increase shareholder remuneration in periods like the current one characterized by a strong free cash flow generation and the very low leverage. This implied payout ratio in the first half was 100% of the attributable net income.

The second interim dividend of 13% per share, equivalent to EUR 32 million will be paid on August the 12th. We will pay another interim dividend after the first quarter results are released.

I will now invite Alfredo to review the financial figures in more detail.

[Alfredo Avello, executive]

Thank you, Ignacio. As you can see in the following Slide #14, ENCE has deliver another set of solid operating results. Our pulp business EBITDA improved by 70% year-over-year, up to EUR 70 million, driven by the strong recovery in power prices, which more than offset the widespread inflationary pressure in raw materials and logistics. In addition, renewable energy business comparable EBITDA increased by 2x year-on-year, up to EUR 39 million euros driven by a 25% increase in energy sales by higher prices. On top of that, the renewal business EBITDA includes an extraordinary reversal of part of the regulatory collar provision for an amount of EUR 40 million, partially offset by the recording of our EUR 36 million impairment in the book value of certain biomass plants without any cashflow effect, which I will explain in more detail in the following slide.

We had strong operating results. Our attributable net income reach up to EUR 45 million in the first half of the year, compared with a loss of EUR 195 million in the same period last year, which included impairments and provisions related to our Pontevedra concession for an amount of EUR 200 million.

The following is Slide #15. Let me explain the previously mentioned impairment recorded and the related EUR 40 million regulatory collar reversal. We'll review the book value of all our assets on a regular basis, modeling the expected future cash inflows in order to check if their book value is a correct one or in any other case, adjusted. Well, the fact when reviewing our biomass plants future cash flows, due to the current electricity prices environment, is that most of them are receiving advanced regulatory cash incomes from the market.

When running the regulatory cash flow models, the outcome is different depending on the remaining regulatory life of each plant. In the new Puertollano 50 megawatts were about 46 and those with lower maturity life like were about 50 or maybe 20, there is no impairment adjustments needed. To the current short and medium term prices impact are diluted within their longer term regulatory lives.

In the case of our 41 megawatts plant in Huelva, Jaen 16, Real 16 and Cordoba 14 with regulatory lives ending between 25 and 31, the outcome is a little different. High regulatory cash inflows received in advance combined with the short-term remaining regulatory lives ended in an impairment adjustment of EUR 36 million in the book value of these plants.

At the same time, since we have been adjusting down our revenues in the past through the regulatory collar position due to these specific cash flow advances, we now need to also adjust such provision until it reaches the new book value of these plants. This resulted in the previously mentioned EUR 40 million reversal, which more than offset the EUR 36 million impairment impact.

Just 2 final remarks to end this explanation. Firstly, neither the regulatory reversal nor the impairment have any cashflow impact. Secondly, regulatory cash advances do not impede the plants to continue operating inside or outside of the regulatory framework as long as the market full price exceeds their operating costs.

Turning now to Slide 16. You can see that we have ended the semester with a strong financial position. We reduced net debt by EUR 112 million, then to a net cash position of EUR 10 million at the end of the period with EUR 430 million cash in balance. Our pulp business had a net cash position of EUR 22 million, including EUR 17 million related to lease contracts and a cash balance of EUR 278 million.

During this quarter, we also prepaid EUR 53 million of several of our facilities. On the other hand, renewable energy business net debt was reduced by EUR 108 million, down to just EUR 12 million at the end of the period with long-term maturities and a cash balance of EUR 152 million.

Note that the energy business working capital improvement of 34 in the first half was mainly driven by pending payments to the electricity system, which will result in a cash payment during the second half of the year. The pulp business would also need to return EUR 8 million to electricity system during the second semester. These payments are related with the regulatory changes made by the government within 2022.

Also please note that when comparing the operating cash flow of the first half with the one of the second half of the year, we're forecasting CapEx payments for an amount of around EUR 60 million and tax advances for approximately EUR 35 million. After all, our strong balance sheet provides us with much more flexibility to seize any growth opportunities.

Turning now to the final Slide #17, may I remind you of our strategic road map for the power business with modular and adaptable investments and a targeted ROCE of over 12%. In our Capital Markets Day back in March, we confirmed that our strategy is to defend our Pontevedra concession and to proceed with our Navia Excelente project. Well, we have launched our Navia Excelente project with an estimated investment of EUR 105 million in the next couple of years to promote the sale of our differentiated products to diversify production towards fluff pulp and to decarbonize the plant.

Regarding Pontevedra, we should know that the final decision from the Supreme Court in October, as our Chairman said. But remember that if separate solution is against us, we will proceed with the Navia 100,000 project. As you know, this project consists in using the main equipment from Pontevedra to build a new 100,000 tons BHKP line in Navia with an expected CapEx of around EUR 100 million. The combination of Navia Excelente as Navia 100,000 tons will more than compensate Pontevedra's EBITDA in case we need to dismantle it.

As a conclusion, we will either continue with Pontevedra and Navia Excelente or with Navia 100,000 plus Navia Excelente. But doing nothing is not an option. Furthermore, we recently announced together with the regional government from Galicia, a new project in As Pontes for the production of recycled fiber and biomaterials from recovery paper. We believe this is an opportunity to provide leads recycled fiber to customers eager to increase the circular attributes of their paper products and were struggling to find their acquired amounts of leads recycled fiber due to the decline in printing and writing papers. We have started to analyze the first phase of the project with a time horizon to 2026. Additional phases will be decided in due course.

I will now return the lead of this presentation back to our Chairman for his closing remarks.

[Ignacio de Colmenares, executive]

Thank you, Alfredo. To conclude this presentation, I would like to emphasize the following key messages. Tight supply continues to drive pulp prices higher, keeping high operating margins in the pulp business despite the widespread inflation in raw materials and transport costs. At the same time, high energy prices are boosting the results in our renewable business. 2022 is a year of strong free cash flow generation and high dividend payments. We await the final ruling of the Supreme Court about the continuity of Pontevedra with optimism and with a very strong balance sheet, which provides us with maximum flexibility to seize growth opportunities.

On top of that, we have recently announced together with the regional government of Galicia a new project in As Pontes for the production of recycled fiber and biomaterials from recovered papers. We will resume Pontevedra's activity as soon as the river flow allows, hopefully in a matter of weeks. Strong pulp and energy prices, favorable exchange rates will more than compensate for any problems in Pontevedra. We expect second half EBITDA to be better than first half. Thank you.

We would now please to hear any questions you may have.

[Operator]

Ladies and gentlemen, the Q&A session starts now [Operator Instructions] The first question comes from Inigo Recio from GVC.

[I?igo Pascual, analyst]

Regarding energy business, we have seen an EBITDA of EUR 26 million in the first quarter. And then the EBITDA has been around EUR 30 million in the second quarter, that has been adjusted to EUR 53 million due to the collar reversion. My question is, what can we expect in the EBITDA of that you must plan in the second half of this year and in 2023? Do you have a range of what could be the value of the EBITDA in this period of time?

[Ignacio de Colmenares, executive]

Yes, thank you very much, Inigo. Yes, as you know, we expect to generate over 1.6 gigawatts in 2022, the same amount in the first half than in the second half. We expect an annual electricity price of EUR 175 per megawatt hour of the year, 200 as a rough average figure in the first half and EUR 145 per megawatt hour of the second half. Then regarding free cash flow, the free cash flow on the second half energy will be lower. But regarding the EBITDA, well, it will be consistent.

Then we are going to have something around EUR 40 million EBITDA in the second half. And on top of the EUR 90 million in the first half, well, we will go to this figure.

[I?igo Pascual, analyst]

But regarding the next year, what can we expect in the EBITDA of that you must plan? Is the collar reversion affecting this calculation?

[Ignacio de Colmenares, executive]

Well, we don't care too much about this collar reversion because it's not cash, you know. It just accounts, and it's matched at the EBIT level by the possible impairment. Then well, what we think is in regarding EBITDA, who is not positively affected by this reversal of the collar. And we think next year is going to be an year, but very equivalent to this year.

In terms of EBITDA and in terms of free cash flow, it's going to be a year like this year because we are going to have in next year, a bit better free cash flow than on the second half of this year because prices of the energy seem to be higher for the year -- for next year. You know, the mechanism of this been exception and the prices of the energy are going to be a bit higher next year.

[Operator]

The next question comes from Gonzalo De Cueto from BNP.

[Gonzalo De Cueto Moreno, analyst]

Three questions from my side. First one, on the potential investment in this new project As Pontes. Can you give us more color on the time line of the general study? When do you expect to make the decision and whether the approval of this project will depend on the outcome of Pontevedra's legal case? That would be the first one.

[Ignacio de Colmenares, executive]

Yes, Gonzalo. Thank you. Well, we are starting the studies of this project. And as we have said, it may take us these studies before confirmation and before, formal approval may take between 12 and 18 months.

[Gonzalo De Cueto Moreno, analyst]

The second one would be on the podcast front, mainly on wood supply. Has there been any improvement at all on the tight situation experienced in the last month regarding wood supply? And also, can you provide us with a cash cost figure you expect by year-end?

[Ignacio de Colmenares, executive]

Yes. Well, the only positive effect of what is happening in Pontevedra is that every 4 weeks, we have stopped. Yes, we save 110,000 cubic meter of wood. Then what we think is that we are not going to import anymore in the year. And if we have to be stopped more than 4 weeks, well, we will reduce a lot the imports of next year. All the plans we launched in order to increase the capacity of harvesting are doing well. We are now on Phase 2, and we are increasing on an important base, the volume we are harvesting this year. And we are, again, developing new companies, independent companies to harvest for us.

We are financing the harvester machines, and we hope to continue increasing next year in the portion of wood we are buying ourselves, and we are harvesting ourselves. And regarding cash cost, well, we expect a cash cost for the second half of EUR 515 per ton, 515. This cash cost is before any effect of what is happening in Pontevedra. Every single month of total suspension in Pontevedra, will imply EUR 5 per ton more on the total year.

[Gonzalo De Cueto Moreno, analyst]

Also the last one. Can you give us any update on the development of your renewable pipeline? How is that evolving? Now that you have financial capacity given your net cash position, you have just mentioned the possibilities to do M&A. Is that something that you expect to do any time soon? Can you give us more visibility on that as well?

[Ignacio de Colmenares, executive]

Well, there is no big news because you know, the prices of the energy assets continue to be extremely tight. And we are, as you know, very prudent. Then where we are - we are analyzing maybe in 1 and 2 opportunities per month, but prices are very, very expensive. We have, as you know, a very strict ROCE and IRR commitments. And then at those prices are being prudent on the model because these high energy prices are for 1, 2 or 3 years, but not forever.

Well, we cannot do any M&A deal now. Then we are working on the development of our pipeline. Well, we are doing what is necessary to cash in the EUR 62 million of the sale of the megawatt we sold to Energy at the end of last year. We are developing 300 new megawatts in solar, and we are very happy with that. And we are exploring nice opportunities to grow in combined heating and electricity, replacing gas in industrial partners. And we have the option. The option is going to be in October, at the end of October. We want to be very prudent. We are facing a very -- a lot of uncertainties today.

The prices of all the raw materials, even that steel has started to decline. They are very expensive today than any EPC contractor, who will give us a firm price valid for a couple of years. Well, we have an extra margin of safety would be extremely expensive. At the same time, you know, the problem in Spain with EPC contractors, they are very few and the balance sheet are quite weak.

And if you put all that together with the fact that there is a new auction next year, and it's going to be one option more in 2025, well, we are going to be very present in the auctions of biomass. But nevertheless, we continue to develop our 3 projects while going pretty well and where we continue working for the future.

[Operator]

The next question comes from Jaime Escribano from Banco Santander.

[Jaime Escribano, analyst]

So a couple of questions or 2 questions from my side. One, regarding market outlook, if you can provide us your view on how do you see the market right now, supply-demand? Also in Asia, I know you don't sell there but any insight, I think, would be useful. I remember in the latest call, you mentioned that you were not seeing Brazil selling in Europe. Has this changed? And also, inventories at Europulp were increasing a little bit later data as of May. And could this be a concern, or do you still see the supply-demand model type? This would be my first question.

[Ignacio de Colmenares, executive]

Thank you, Jaime. Well, we are positive regarding the prices in the second half of the year. Firstly, supply remains very tight, and we think it's not going to be solved in the next 2 or 3 months. Secondly, despite what is happening with the economy, despite all the black forecast we all have for the autumn, the demand of pulp is strong. The final demand of paper products is still strong on the states and in U.S.

As you mentioned, I don't have visibility in China. I don't know what is happening in China. But what I know is like what you know. The economy is growing less than normally, but it's not the consumption who is declining, it's the investment who is declining. The paper products sold in China are essential, it's tissue, sanitary products. And it's -- well, then we don't see a big risk in China, even we don't have a strong visibility.

And regarding our competitors, well, Brazil, yes, is switching to dissolving pulp, which is tightening even more the supply. Arauco had a problem at Horcones. Horcones is producing 300,000 tons per year. MAPA project has been delayed furthermore to September. UPM Uruguay, well, they have delayed till the second quarter of next year. They were fired at Valdivia and Arauco. There were a strong fire at Stendal and Mercer, 1 million tons per year in Germany, still shut down. We have this problem in Pontevedra.

Then, well, all that means that tighter -- even tighter supply and logically, strong prices in the pulp for the next months, then we are positive. Thank you, Jaime.

[Jaime Escribano, analyst]

A second question regarding the -- if you could recall us on the earn-out, potential earn-out payment of Ancala, if I recall well, you were speaking about EUR 132 million. And part of that was based on the achievement in getting a new project, a new biomass project. So now we have this option. So assuming that you get one project of around 50 megawatts, could you -- and you build it. Could you recall us how much of this EUR 130 million earn-out would you -- would be paid because I think this could be interesting?

[Alfredo Avello, executive]

Thank you, Jaime. This is Alfredo. Let me try to answer your question. As you know, there were different milestones for the payment of this earn-out. The next milestone that we have right now is with the announcement of the auction. As you know, it's going to be published in the official gazette in these days. So at that time, we will be able to cash in the first EUR 8 million because at the end, the auction is for enough megawatts, the ones that we have in our pipeline.

The next one will be depending on the price obtained in the auction. It doesn't have to be in this auction. I mean, as you know, there's an auction this year. There's another option next year and there's another auction in '25. Yes, depending on the auction, you need to understand that we cannot disclose our strategy. We will be able to get up to EUR 42 million, around EUR 14 million per plant, when and depending on the final price achieved.

The third part of this earn-out will be at the -- whatever we build those plants and will be the combination of the price obtained in the auction with the CapEx finally disbursed and what is the expected IRR that these plants with those 2 combinations will give us. We're talking about EUR 18 million total will be -- the total payment will be around $6 million per plant. And then the last payment will be back in 2028, and we will -- it will depend on the IRR that not only the project, but also the current perimeter will obtain and this can be up to EUR 63 million.

So getting big messages are 2. Number one, first payment should be getting now. I mean, we were just expecting the publishing in the office of the S.A. And the second message is that we do not need to obtain a plant in this auction. We have 2 auctions, and we will see what is the best strategy to get, of course, all of them.

[Jaime Escribano, analyst]

Maybe a last question, if I may, regarding As Pontes project. I don't know if you are in a position to give us like a big figures of how much would be the investment, how much would be the target EBITDA or return on investment that you would expect to get from this project?

[Ignacio de Colmenares, executive]

Yes. Jaime, well, it's very rough figures because we are just now starting to analyze the figures, and we have just sat down. The rough figures are that this recycled fiber plant will cost around EUR 125 million, 125. It will transform recover paper, mix with virgin fiber in mixed fiber and our customers, our tissue customers, our packaging customers are extremely interested in this product. We will do the investments, and we will take decision, well, as I was saying before, in 12 to 18 months if the IRR of this project is in 15%.

As you know, we have a target for the pulp business in ROCE of over 12%, and that requires the IRR of this project to be 15%. Well, and that's -- I can't give you more figures because that's all I have today.

[Operator]

The next question comes from Edward Bottomley from Berenberg.

[Edward Bottomley, analyst]

I was -- you mentioned that you said you expected H2 EBITDA to be higher than in H1. Could I clarify if this includes the regulatory collar provision reversal?

[Ignacio de Colmenares, executive]

No, no, it doesn't.

[Edward Bottomley, analyst]

And on the dividend strategy, you've paid out dividends at a 100% payout ratio in both Q1 and Q2. What should we expect for the remainder of the year since your balance sheet obviously allows you to pay 100% in both Q3 and Q4?

[Ignacio de Colmenares, executive]

I would like to give you a more direct answer, but I can't. Then I have to, again, to repeat our dividend policy and you know it. Then our dividend policy is that we -- it's limited by, firstly, our leverage. It has to be below 2.5x in pulp and 5x in energy and it's also limited by the commitments and CapEx and ongoing CapEx. Well, I think we will continue to pay an interesting dividend in the third quarter, but I cannot give you the figure now.

[Operator]

The next question comes from Pablo Fernández from Orienta Capital.

[Pablo Valdés Fernández, analyst]

Regarding the Pontevedra mill legal process, in the case of a negative sentence from the Supreme Court, will you keep appealing to the European Court and in the formative case? How long will this process and what do you think would be the Spanish government rule regarding the closing of the mill?

[Ignacio de Colmenares, executive]

Yes. Yes. In case, we lose -- well, we will appeal to the tribunal constitutional of the Kingdom of Spain. And if we lose, we will go to the European Court, then it may take a few years more. Nevertheless, if we lose, we will have to negotiate with the government when to shut down Pontevedra mill. And as I have said previously, both the vice-president of the government and Minister of Ecological Transition and the mayor of Pontevedra have said that if we know they are going to close, we are not on a hurry day to close, then they will give us the time we need to launch the projects, who will shifted to the fiber we are producing in Pontevedra with the project we have to increase and to grow.

[Operator]

Ladies and gentlemen, there are no further questions in the conference call. I will now give back the floor to Mr. Ignacio Colmenares and Mr. Alfredo Avello. Thank you.

[Ignacio de Colmenares, executive]

Well, thank you very much, ladies and gentlemen. As soon as we will have more news regarding the Pontevedra water problem, we will let you know. And I hope to meet you earlier then in the end of October in order to give you better news about Pontevedra. Thank you very much. Bye-bye.

[Alfredo Avello, executive]

Thank you.