Ence Energia y Celulosa SA

MAD:ENC

Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the ENCE Third Quarter 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 ENCE Third Quarter 2018 Results Conference Call. I'm here today with our CFO, Alfredo Avello; and our Head of IR, Alberto Valdes. After the presentation, we will answer any questions you may have. I would like to start with the main highlights of this quarter. First of all, I wish to repeat our positive view about pulp prices. While demand is very strong, factories are operating at 90% of their capacity and no major capacity increases are anticipated before the end of 2021. Therefore, our view is that pulp prices will remain high, at least until 2022. Our financial results during the period continued with an upward trend. EBITDA was up 45% and net income was 54% higher compared with the same period of 2017.Pulp Business EBITDA grew by 58%. Renewable Energy business EBITDA was stable due to operating incidents in our power plants.We recently announced the acquisition of the Thermosolar power plant in Puertollano for EUR 140 million. It will add EUR 18 million annually to our EBITDA once the business formally closed. Our construction of 99-megawatt power capacity is on track to start in December 2019. This will add another EUR 30 million to our annual EBITDA. The pulp investments of our strategic plan are also on track. We finished Pontevedra 30,000 tonnes capacity expansion, and this will be followed by another 20,000-tonne capacity expansion during first quarter 2019.Navia's capacity increase of 80,000 tonnes will be finished by second quarter of 2019. Our leverage ratio is 0.6x over last 12 months EBITDA. Finally, we will pay the second interim dividend, which shall be decided by the board in November.Let's start on Page 5, with our review of demand and supply in the industry, which as you can see, imply a market tightness that will keep on increasing, until at least 2022.Global hardwood pulp demand has already increased by 1.2 million tonnes in the first 9 months of the year, led by China, even exceeding the growth rate in 2017. If we add the fact that lead time for new project is close to 3 years, we maintain a very positive view for pulp prices.In Slide 6, we show the estimates of pulp prices. We believe pulp prices will continue to exceed these forecasts due to the strong global demand for pulp, increasing environmental protection in China, the price gap between hardwood and soft wood, which now exceeds $180 per tonne and will increase softwood pulp substitution by hardwood pulp and the absence of any announcement of large capacity increases with the industry already operating at 90% of its capacity. For all these reasons, we are positive about the future evolution of pulp prices.If we move now to Slide #7, you can see our financial results. Our Pulp Business revenues increased 18% due to an increase of 24% in net pulp selling prices, a 3% reduction in volume sold due to the pulp stock replenishment. We are increasing our stock volumes to be ready for Navia's longer shutdown in the second quarter of '19 to increase capacity. EBITDA in the Pulp Business grew 58%, despite higher cash cost. Our Renewable Energy business revenues increased 14% due to a 14% increase in Energy volume sold, while EBITDA was stable due to operating incidents in our power plants. Finally, our net income grew 54%.Slide 8 shows the evolution of our cash cost. The increase of around EUR 27 per tonne compared with the same period last year, can be explained by the following factors: EUR 8 due to increases in wood costs deriving from the linkage to pulp prices; EUR 8 due to higher conversion costs, mostly linked to rising chemicals and fuel costs, especially caustic soda cost; EUR 8 per tonne due to higher corporate expenses as a result of the headcount growth; EUR 3 per tonne due to higher transport cost as a result of the fuel price increase.Now let me highlight the spread between gross pulp price and cash cost, which continues to widen and is now EUR 493 per tonne. We believe that our average cash cost for the whole year will be around EUR 380 per tonne at current pulp prices. We anticipate a cash cost improvement to EUR 375 per tonne in 2019 due to fixed cost dilution over the higher pulp sales coming from the announced capacity expansions of Navia and Pontevedra during the first half. Slide 9 shows the performance of our Renewable Energy business. Let me explain why EBITDA is flat compared to the last year. The main reason was several operating incidents that affected some of our power plants. In the case of Huelva, as you know, we are increasing the use of agricultural biomass in order to multiply its availability and reduce its cost. On the other hand, the optimized use of agricultural byproducts require us to adapt our logistics and boiler operating procedures. Short term, higher biomass treatment expenses and lower boiler operating stability are offsetting reduced biomass cost. These problems are being solved, but with result in an annual cost overrun this year. As a result, we now expect a lower contribution for the Renewable Energy business to annual EBITDA of EUR 45 million in 2018. More regular production level next year, together with the contribution of the new Thermosolar power plant, will boost Renewable Business annual EBITDA up to over EUR 68 million in 2019. At this point, let me remind you that we are conservatively including in our EBITDA, a provision in our Renewable Energy business accounts, for the difference between the maximum regulated pool price of EUR 48 megawatt hour and the high pool prices of 2018.Turning now to Slide #10. Let me explain our cash flow generation. During the third quarter of 2018, normalized free cash flow reached EUR 141 million, with a very high EBITDA conversion into free cash flow of 68% (sic) [ 69% ] including a EUR 13.7 million one-off corresponding to the refinancing costs. Our net debt remains stable. After the Strategic Plan investments of EUR 127 million and the last dividend payment of EUR 39 million.Let me mention now on Slide 11, our latest acquisition the Thermosolar power plant in Puertollano. We are very happy with this acquisition, and it meets our required return for new investments in the Renewable Energy business. We will pay EUR 140 million for this plant, which will contribute EUR 18 million to our annual EBITDA. This plant is very close to the biomass power plant we are building in Puertollano. This Thermosolar plant may hybridize with biomass, resulting in a fully manageable renewable power plant. This will require an estimated CapEx of EUR 30 million and can multiply by 4 the plant's power output. In Slide 12, you can see an update of our investment in our Renewable Energy business. The construction of our new biomass power plant in Huelva in Puertollano will be completed by the second half of 2019 and will contribute EUR 30 million to EBITDA. The regulated return on investment will be reviewed for renewable energies as from 2020. The regulator is now proposing a 7.09% regulated return on investment for renewables during the next 6-year period. The impact on our Renewable Energy business EBITDA, the Thermosolar included, will be only EUR 1.1 million from 2020 onwards.In Slide 13, we'll review the investment in our Pulp Business. We added 30,000 tonnes at our Pontevedra biofactory in 2018. We will add another 20,000 tonne in Pontevedra during 2019. This expansion will add EUR 7 million (sic) [ EUR 18 million ] to our annual EBITDA at current market prices. We will also add 80,000 tonnes in Navia during the second quarter of 2019. This expansion will add EUR 28 million to our EBITDA at current market prices. Slide 14 shows our attractive dividend policy for shareholders. We paid the first interim dividend, EUR 25 million in September. The second dividend will be announced during November.Finally, on Slide 15, there is an explanation of our guidance of 2018 and 2019. We expect 2018 EBITDA to be between EUR 290 million and EUR 300 million. This is mainly the effect of operating incidents in our Renewable Energy business, as explained before. On top of that, we have a higher cash cost in our Pulp Business affected by only 950,000 tonnes of pulp sales expected for 2018 due to the stock-replenishment ahead for next year capacity expansions. It is also affected by raw material price increases; wood, chemicals and fuel. In 2019, we expect EBITDA to be over EUR 340 million at constant pulp prices. We are increasing the capacity of our biofactories by 100,000 tonnes during the first half 2019, which will allow us to increase yearly pulp sales to over 1 million tonnes. It will also dilute cash cost down to EUR 375 per tonne, pushing our Pulp Business EBITDA to EUR 275 million at constant pulp prices.In the Energy Business, with more constant production next year together with the contribution of the new Thermosolar power plant acquisition, will push Renewable Energy business annual EBITDA up to over EUR 68 million in 2019. And by the end of 2019, we will add our new power plants already in construction, we will raise our 2020 Energy EBITDA to more than EUR 100 million. I will now pass to 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 17. Let me start with the operating performance of our Pulp Business. Net pulp price grew by 24% during the period, driving our revenues up to EUR 443 million. As expected, our pulp production increased by 2% after last capacity expansions, although the volume sold was some 3% lower. In order to ensure the correct servicing to our clients, during the next year, we need to replenish our inventories during the third and fourth quarter, ahead of the capacity additions planned for the first half of 2019.Remember that we plan to expand capacity by 80,000 tonnes in Navia in April, May next year and by 20,000 tonnes in Pontevedra also in March next year, and our inventories were at record lows in second Q '18, with it as 28,000 tonnes or 10 days of production. Despite lower dilution of fixed cost due to these said lower sales, 8% cash cost increase is mainly to explain; on one hand, higher raw material prices, including the effect of wood indexation to pulp prices as well as rising caustic soda and fuel prices. On the other hand, due to higher overheads, coming from the team building-out process of the necessary resources related to our capacity additions in progress. These should be diluted within 2019 with startup of the said expansions. Altogether, rising pulp margins pushed EBITDA by 58% up to EUR 181 million in the first 9 months of the year. In the next slide, following the P&L. Our EBITDA margin grew up to 35% from 26% in the same period last year or 33% in the previous quarter. Pulp Business results include a provision of EUR 6 million below the EBITDA line. I want to stress out that this provision exclusively corresponds to our commitment signed back in 2016 with the city of Pontevedra. As you may check, under notes 31 and 32 of our 2016 and 2017 annual accounts, this agreement comprises aids for the modernization of Pontevedra city water-treatment plant next to our biofactory for up to EUR 15 million; for the refurbishment of our building to house our forestry R&D center for up to EUR 5 million; and for a new soccer field replacing the one that was formerly within our premises for up to another EUR 1 million. These payments are subject to Galicia's administration, on schedule and could happen in 1 year or spread out in several months, it is completely beyond our control. We were prudently accounting for this provision during this year, but it is possible that we might have to revert it at year-end and account for it again next year, since it's certainty depends on Galicia's administration licensing process. For all these, I'm preferring greater transparency and comparability of our results, in line with pulp industry standards, we have decided to account it separately. The rest of our more recurring social and environmental expenses are included above the EBITDA line. Following the P&L, financial expenses of EUR 26 million include, as you already know, EUR 19 million one-off expenses in the second quarter related to early redemption of the $250 million high-yield bond of which EUR 5 million are noncash items. Other financial results totaling EUR 8 million include a EUR 6.6 million dividend from the Energy Business to the holding company as well as FX gains. Taxes for the period were also some higher for obvious reasons. After all this, net profit from the Pulp Business increased by 62%, up to EUR 92 million.Following with our Pulp Business cash flow generation in the Slide 19. Recurrent free cash flow after maintenance CapEx, working capital changes, financial interest and taxes improved by 70%, up to EUR 136 million compared to EUR 79 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 in Q2. Our working capital increased by EUR 14 million, mainly due to the pulp price increases, and we already explained inventory-replenishment process. Expansion CapEx amounts to EUR 35 million related to the Pontevedra 30,000 tonnes capacity expansion, executed during the first quarter and other investments connected to the 80,000 tonnes capacity expansion in Navia for the second quarter 2019. An additional EUR 15 million are expected to follow during the last quarter. Finally, asset divestment of EUR 4 million included transfer of the Huelva lands where the 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 segregation strategy, initiated back at the end of 2015, now the administrative licensing process is completed. Altogether, Pulp Business free cash flow after CapEx amounts to EUR 104 million for the period.On Slide 20, let me update you on our known hedging program. The only aim of mitigating currency volatility will hedge at least 50% of our expected U.S. dollar revenues for at least the next 12 months on a rolling-on basis. These hedging structures are weekly 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 EUR 1.17 for 63% of our expected pulp revenues for the fourth quarter this year, EUR 1.25 for 55% of expected revenues for the first half of 2019, and EUR 1.28 of 48% of the expected revenues for the second half of 2019. Turning to slide 21. Let me briefly remind you our Pulp Business refinancing. Following the issuance of the EUR 160 million convertible bonds with 1.25% annual coupon in March this year, we used the proceeds with additional cash available on our balance sheet to finance the prepayment in June of the EUR 250 million high-yield bond issued in 2015 with 5 3/8 given. This transaction would translate into a more efficient capital structure, yearly reducing our financial cost by EUR 11 million as from 2019 and assuring our long-term capital needs. As you may see in Page 22, we are not only moving into a more efficient financing, but we are also fully committed to sustainability, as a key driver of our company long-term strategy and our capital structure should also reflect so. In May, we refinanced the fully available EUR 90 million RCF due 2021 for a new sustainable credit facility due 2023, linking per office cost to Ence's performance along environmental, social and corporate governance behaviors. Also framed by this same sustainability scheme, we have refinanced our bilateral loan initially maturing in 2021 with a new Green Loan due 2023, with a limit of EUR 20 million. These new transactions, together with a EUR 220 million financing arranged by the Energy Business in November 2017, which obtained S&P's highest green rating ever evidences Ence's strong commitment towards sustainability, transparency and good governance. Turning to Slide 23, and continuing with the balance sheet. Pulp Business net debt ended the quarter at EUR 60 million, representing a leverage ratio of just 0.3x 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 24. Average selling price was very similar to that of last year due to the CapEx published by the regulator and which has entailed a provision up to EUR 6.2 million in the period. The Energy volume sold was 14% higher due to the new Cordoba 27-megawatt plant, acquired in August last year, which has been partially offset by the operating one-offs suffered at several of our plants and previously detailed by our CEO. These failures are being solved but have resulted in a cost overrun of approximately EUR 5 million in the third quarter. As a result, revenues grew by 14% although the EBITDA remained flat.Following with our Energy Business P&L in the Slide 25. Below the EBITDA line, year-on-year high depreciation charges are mostly explained by the asset base increase after our last acquisition in Cordoba. Finance cost increased by EUR 2 million, up to EUR 6.7 million in the period due to the higher gross debt balance to finance the construction of the 246-megawatt biomass plants that will be operating by the end of next year. Taking everything into account, our Energy Business reported a net attributable profit of EUR 7.7 million in the period.Focusing now on its cash flow generation in the Slide 26. Normalized free cash flow after maintenance CapEx, working capital changes, interest and taxes amounted to EUR 18.2 million compared to EUR 12.7 million in the same period last year due to better working capital performance. Other noncash expenses for another EUR 3.5 million, are mainly related to the said regulatory collar. Expansion CapEx amounts to EUR 89 million related to the construction of our 2 new 46-megawatt plants in Huelva and Puertollano, another EUR 30 million should follow in the fourth quarter. As our CEO stated earlier, the startup of this plant is scheduled for the end of next year, and will contribute an annual EBITDA of approximately EUR 30 million from then on. Moving on now to Slide 27. Net debt position for the Energy business increased up to EUR 97 million following EUR 89 million growth CapEx related to the new plants, driving our financial leverage for the Energy Business to 2.1 LTM EBITDA. Additionally, we expect to close in November the acquisition of the 58-megawatt thermal-solar plant in Puertollano. Net cash impact in our balance sheet will be EUR 140 million with our debt-to-equity ratio of at least 65:35. Additionally, this solar-thermal power plant, will contribute from December 28 with a stable annual EBITDA of EUR 18 million before synergies. Our cash position at the end of the period amounts up to EUR 60 million, which, together with the EUR 40 million still undrawn from our last financing, and the new one that we are just about to close for the Puertollano 46-megawatt plant under construction, will allow us to comfortably confront the construction of our 2 new low-emission biomass plants. 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 conclude this presentation by repeating our view that pulp prices will maintain the upward trend. The tight supply and demand balance will exceed analysts' expectations at least until 2022. At current market conditions, we believe our 2018 EBITDA will be between EUR 290 million and EUR 300 million. Our 2018 Pulp EBITDA will be around $250 million, and our Renewable Energy business EBITDA will be around EUR 45 million.In 2019, we expect EBITDA to be over EUR 340 million at constant bond prices. We will maintain an attractive shareholder remuneration and strong balance sheet that will allow us to complete our pending investments and be fully prepared for the execution of our new Strategic Plan. Let me also remind you of our invitation to the presentation of our new Strategic Plan 2019-2023 on November 20 in Madrid, where I hope to meet all of you. With this new Strategic Plan, we aim to almost double the group's EBITDA in the next 5 years, and increase its resilience, growing prudently step-by-step, always keeping a low leverage and maintaining our shareholder remuneration policy. Thank you very much, 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 BPI.

[José Manuel Rito, Analyst]

Just one question on the pulp prices. You mentioned that you expect the pulp prices to continue to increase over the coming years based upon the fact that there is no new capacity increase in the pipeline. But we have been seeing some news saying that additional discount is being applied in China recently. Could you comment what you expect over the coming months evolution in terms of pulp prices if you foresee any kind of volatilities or slightly decrease in the short term, and then eventually in 2019, an increase again of pulp prices? That will be my first question. The second question related with the pulp prices discounts. I would expect to see some year-on-year improvement on these discounts, but this has not been the case for Ence, at least in the 9 months. So I think that the impact from last year's pulp week on November was quite solid on these pulp discounts evolution. But we have not seen these throughout the year. Are we expect this resolve, and if you have a positive view regarding discounts or so for 2019? And finally, on this guidance -- EBITDA guidance, for 2019, could you detail a bit more what is the implied volumes expected for the pulp division, you said over 1 million tonnes? If you can be a little bit more precise, it will be helpful.

[Ignacio de Colmenares y Brunet, Vice]

Thank you very much, Mr. Rito. I will start by pulp prices, where I am very confident. I would like to talk about short term, long term and talk a bit about the potential new projects. Regarding short term, the outlook for pulp prices remains very positive. In August, pulp market was affected by the Turkish lira depreciation. Turkey is an important market for us. But pulp prices, however, remain strong. You were talking about China, yes, we have heard about few customers asking $5 to $10 rebates in the Chinese secondary support market for some volumes, but we see the prices stabled. We believe, the Chinese market's underlying fundamentals remain solid and the prices will remain strong. Global demand growth in 2018 remains very strong led by China, which is adapting to stricter environmental policies as you know. Global hardwood pulp demand has already increased by 1.2 million tonnes, as I said recently and it is exceeding 2017 growth rate. In addition, price gap with softwood remains at $180, fostering pulp substitution. From the supply side, the industry is already operating almost at full capacity. And as you know, pulp supply from Indonesian mills remains limited for several reasons, and capacity conversions to dissolving pulp will further damp supply next year. Long term. In the long term, tight supply and demand balance created in 2017 and 2018 will keep on increasing until at least 2023 with continued global demand growth and the lack of confirm capacity increases. The first capacity increase will come from Arauco's new 1.5 million tonnes in Chile during second half 2021, and it will only be a mid and short relief to the increasing supply gap. The UPM pulp mill in Uruguay is not yet confirm, and if the board of UPM confirm the project, the project will not start before 2022. Meanwhile, demand is growing by 1.5 million tonnes every year. Well, you know there is no additional capacity expansion projects confirmed, and remember that it takes close to 3 years to start up a new project, providing it already has all necessary environmental permits, financing and available supply planted at least 6 years in advance in Brazil or 10 years in advance in Uruguay or Indonesia. Assuming average demand growth of 1.4 million tonnes for the period, accumulated supply gap by 2022 could be over 5 million tonnes, that means 5 million tonnes worse than today. Therefore it would take several projects and several years to return to 2017 market balance and prices. Regarding discounts, let me tell you that in London, we are asking for a decrease of discounts. And regarding 2018 discounts, at the beginning of the year, we closed sale agreements with our customers up to 100% of our pulp sales target of 990,000 tonnes in 2018, with lower discounts than the previous year, close to 26% versus 27% in 2017. However, implied discounts during the first 9 months of the year seemed to be higher due to growing pulp prices. Rising pulp prices and exchange rate improvement temporary reduced the implied discounts as the price of most of our contract is referenced to the previous months. And going to your first question, well we are budgeting 1,020,000 tonnes of production and sales for 2019, 560,000 tonnes at Navia mill and 460,000 tonnes at Pontevedra.

[José Manuel Rito, Analyst]

Just a follow-up on the first one regarding pulp prices. So do you expect, considering all your comments, that eventually we could have a new pulp price increase in the short term, let's say by January '19?

[Ignacio de Colmenares y Brunet, Vice]

Well, I see stable prices for the next 2 or 3 months and normally prices will move up after that.

[Operator]

Your next question comes from Jaime Escribano from Banco Santander.

[Jaime Escribano, Equity Analyst]

Two questions from my side. The first one regarding the guidance for 2018 and '19, I would like to confirm that this is an -- EBITDA adjusted. So before excluding the one-offs, and if that's the case, how much could be the one-offs for 2018? And how much could be the one-offs in 2019? And my second question is regarding the inventory levels. You said that you were now producing more because you are stopping the plant next year. However, when I look to your cash flow statement, I don't see an increase in working capital due to inventories or in the balance sheet. So I would like to better understand how is the accounting because I would have suspect that you increased your working capital needs because of higher production in Q3 and Q4 and not selling these volumes?

[Ignacio de Colmenares y Brunet, Vice]

Thank you, Mr. Escribano. Yes, regarding 2019 guidance -- well, regarding what you say adjusted EBITDA for the 9 months of 2018, the only adjustment to the EBITDA is this EUR 6 million provisions for Pontevedra city that Mr. Avello explained you before. This EUR 6 million will be EUR 8 million at the end of the year. And we expect to do the same amount next year. And the reason why we have modified our policy and those annual EUR 8 million not in our EBITDA is because by the agreements we have with the government of Pontevedra, we don't know exactly when we are going to pay those millions. Today, I have to say that I see 95% of probability, we will not pay a single euro in 2018, and therefore we will have to reduce this provision at the end of the year. What shall we do next year to provision again EUR 8 million or EUR 16 million, we have no idea. We will see that according how everything is evaluating regarding the construction of this water treatment plant in Pontevedra. And that is why we have preferred to put that below the EBITDA in order to don't make strange movements on the EBITDA with an investment who is not our business. Then coming back to your question, and as a resume in our guidance of 2018, we have EUR 8 million provisions below EBITDA for the water treatment system in Pontevedra city. And when we are saying over EUR 340 million for 2019, we have the same again. Coming back to the inventory levels. Well, we said that we have to increase our stocks for this shutdown in Navia, in April, May who may take 10 to 15 days more than normally. We have started, we have not finished. That is why we are not seeing everything on the working capital figures yet. You will see that by the end of the year. But in terms of money, it is not an important amount of money. And normally in winter time, we reduce also our stocks of biomass, we reduce also our stocks of wood, and then normally, it will not have a huge impact in our accounts.

[Jaime Escribano, Equity Analyst]

May I ask one follow-up question regarding discounts next year. Basically, if you could give us a little bit of color on how the negotiations are going and what could we expect?

[Ignacio de Colmenares y Brunet, Vice]

We have just started. We are asking 2% reduction of discounts, but we have just started. Well, that is what we are aiming, but I cannot give you any figure today. We have -- I think we already have contracted 100,000 tonnes more for next year. Then maybe if you attend to our Investor Day on November 20 in Madrid for the Strategic Plan, we can give you an update. But for today, it's too early.

[Operator]

The next question comes from Nuno Estácio from Haitong Bank.

[Nuno Estácio, Equity Research Analyst]

The first question is again just related to the scheme of the environmental pact in Pontevedra. So if I understand well -- if I understood well from your last reply to the question of Jaime, you are not spending a single euro until now, and you don't have the visibility when that -- this will happen. So it means that when it happens, when it's not the provision, you actually will take that to EBITDA? Just to clarify that. The second question would be related to cash costs. And if you could help us explain, in your presentation at the end of July, you were aiming for an average cash cost in the second half of $270 -- EUR 270 per tonne, and your average for the second half is actually EUR 290. And what we have seen is that you were mentioning in the first half presentation, cash cost, higher conversion costs, higher corporate costs essentially the same as now. So could you help us explain what changed in this second half, so that you make this revision in terms of cash cost?

[Ignacio de Colmenares y Brunet, Vice]

Yes, thank you very much, Mr. Estacio. Let me try to explain that again in Pontevedra, and if I do not succeed, I will ask Mr. Avello to explain that better. Well, we signed an agreement with the government of the Galician region in Pontevedra for giving them money to improve the water treatment of Pontevedra city of EUR 15 million, 1-5, to rebuild a palace for R&D of forest activities near the factory who will not be managed by us, EUR 5 million and EUR 1 million for a football camp close to the city. According to the agreement, we will not pay before the works are done. We will pay once the works are done. That is the government who has to publish in official papers the auction for those works, have to have all the legal permits to do those works, have to contract those works, and have to pay those works and then we will pay. That's one information. Then -- although, it's very stupid, but although it is a CapEx as it is not a CapEx for us, it is not a CapEx in their accounts, it is an expense. Then we are provisioning this amount of money, but we cannot have generic provisions. So we will have -- to have those provisions when we will pay. Till now, we haven't paid anything, because they haven't started to do any work. And being now in November, I can tell you it's almost impossible they do any expense before the end of the year. Then most probably, this provision who was above EBITDA and now is below EBITDA, will be destroyed at the end of the year. Then we will have to decide what to do next year. And we have 2 choices, either to restart the provision EUR 8 million or EUR 16 million, I don't know. We will do -- we will define that from now till the end of the year. And it will be in the accounts, below EBITDA, once we will pay those amounts. But today, we don't have visibility of when we are going to pay that. Then we are prudent, we are doing the provision, but we cannot have the provision if we are not paying. Then we do the provision when we will pay. And in order to don't change the EBITDA of the Pulp Business every year according to what is happening in the area of Pontevedra, that is why we have decided to put that below the EBITDA. Regarding cash cost. Well, we have 3 impacts who are affecting second half cash costs if we compare that to what we said a few months ago. The volume, today, we know that this big investment in Navia for 80,000 tonnes will be longer than what we knew 3 months ago, between 10 and 15 days. And we think it is good to have larger stock in order to don't fail with our customers. And that has an impact of lower dilution, prices of fuels are going up furthermore than what we expected. And all that together is why we are facing a higher cash cost in the second half of the year than would expect.

[Operator]

[Operator Instructions] The next question comes from Alberto Sanchez with Fidentiis.

[Alberto Sánchez Salazar, Equity Analyst]

I have 3 questions. The first of all is on cash costs, again. And the question is, if you could provide more color on the drivers behind the sequential increase that you expect in Q4 from EUR 376 per tonne in Q3 to EUR 384. And how much relates to higher structural costs, if any? The second question is on the biomass EBITDA. I think you've guided towards EUR 68 million next year and that includes EUR 18 million from new solar-thermal plant that you've acquired. So basically the underlying figure will be EUR 50 million. I think in the previous presentation, I think you guided for EUR 60 million of EBITDA in 2019. So just asking what's behind this difference? And the third question is on the CapEx is just a confirmation. Pulp CapEx or the CapEx in the Pulp Business is expected to be EUR 99 million in 2018. And I think that you've already invested EUR 39 million. So just to confirm that we should expect EUR 60 million in Q4?

[Ignacio de Colmenares y Brunet, Vice]

Yes, I will answer the question regarding the biomass and then Alfredo Avello would explain what is happening -- what will happen on -- what is happening in the fourth quarter on the cash costs, because I have failed, I've already tried to explain. I will try that Mr. Avello explain that better. And then we continue -- we will continue with the CapEx of 2018. But in biomass, we were expecting, as you know, for 2018, an EBITDA between EUR 50 million and EUR 55 million. And with the same perimeter, we were expecting an EBITDA of EUR 60 million. What is happening? Well, we have reduced the cost of our biomass 100% what we expected in Huelva and Merida, because on the fuel of biomass power plants, we are using olive oil byproduct and nothing has changed and nothing will change. It's a very competitive fuel. What has happened is that, we are having higher treatments of the biomass in our biomass power plants before fueling the boiler, in internal logistics, in treatment of the biomass. We see a lot of improvement, but today, it's more expensive than what we expected. And we have not yet learned how to perfectly manage each boiler in Huelva with the new biomass mix. And we are having some problems on the boilers who are obliging to stop some days and to pay a lot of maintenance to repair these problems. In this Strategic Plan, we will present to you, by November 20, we see, in 2-years' time, our perimeter of biomass to be in EUR 60 million. Let's say that we are a bit more conservative, and we say, well, we are in EUR 45 million this year, we will be in EUR 50 million in 2019 and we will be in EUR 60 million in 2020, because we think it'd the gas a bit more than what we expected. That is explanation. Alfredo, could you answer the question regarding the cash flow of second quarter?

[Alberto Valdes]

Yes, Alberto, I mean the items are the 3 ones that our CEO was stating earlier. You have an item related to the fixed cost dilution. Basically with this -- restocking of this replenishment process since we have sold less amounts of tonnage. You are dividing the fixed cost within less tonne. Two, it is true that the -- there's a rising of raw material prices, especially in wood. Maybe this is a little -- so more than we initially thought regarding wood, regarding chemical or regarding fuel. And the corporate expenses, this is a question again of speed, since we are getting more near the expansions and the ramp-up of those expansions, we are trying to delay until that part that need -- I mean, the people and the rest of the structure that we need to assure that we are managing those operations properly. We could do everything during this year, and then you may have all the cost over there but we thought that it was better to keep on doing it step-by-step, and depending on the need and affirmation that the people in the location need of business expansion. If we want to split this EUR 8 per tonne. Basically you can say that between EUR 1.5 and EUR 2 are these corporate expenses. Around EUR 1 per tonne would be the less fixed cost dilution, and the rest is the mixture of the rest of the wood, chemicals and fuels. I guess, that mainly in 2 terms: number 1, the speeding of this cost increase altogether is a little more -- yes, because we're getting more near those expansions and it is true than it would, we have a little more than what we thought. I don't know if I have been enough clear.

[Ignacio de Colmenares y Brunet, Vice]

And now going to your last question. If I have understood well. We see certain topics in our past activities of EUR 81 million in 2018. And to complete this EUR 81 million, we will pay EUR 28 million in fourth quarter. And I'm talking not about accounts but about cash. Means that we have already invested EUR 12 million in first quarter, EUR 17 million in second quarter, EUR 24 million in third quarter, and we will further invest or pay EUR 28 million in fourth quarter, would means EUR 81 million in pulp for the full year 2018. Was that your question regarding the pulp investment?

[Alberto Sánchez Salazar, Equity Analyst]

Yes, yes, that was my question. Now the only thing is whether that -- how that compares within EUR 99 million that you explained on Page 12 of your presentation -- sorry, it's on Page 13, the EUR 45 million plus EUR 44 million?

[Ignacio de Colmenares y Brunet, Vice]

Sorry, I'm just having -- Slide number 13 or 14?

[Alberto Sánchez Salazar, Equity Analyst]

Yes, 13.

[Ignacio de Colmenares y Brunet, Vice]

In Slide 13?

[Alberto Sánchez Salazar, Equity Analyst]

You have EUR 45 million In Pontevedra plus EUR 45 million in Navia. So that is not going to be EUR 99 million, but it is going to be EUR 81 million.

[Ignacio de Colmenares y Brunet, Vice]

Yes, because I was talking about cash flow before and what was -- what we are paying, okay.

[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. Thank you.

[Ignacio de Colmenares y Brunet, Vice]

Well, we thank you all for this -- for your time during this conference call. And I hope you will attend our Investor Day on November 20 in Madrid, where we will explain on detail this good Strategic Plan the board have approved for 2019, 2023. Thank you very much. See you soon.

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

Thank you.