Ence Energia y Celulosa SA

MAD:ENC

Earnings Call Transcript 2020-Q3

[Operator]

Good afternoon, ladies and gentlemen. Welcome to the ENCE Third Quarter 2020 Results Presentation. I'll now hand over to Mr. Ignacio de Colmenares, Executive Chairman; and Alfredo Avello, CFO. Gentlemen, please go ahead.

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Good afternoon, ladies and gentlemen. Thank you for joining ENCE's Third Quarter 2020 Results Conference Call. Our CFO, Alfred Avello; and our Head of IR, Alberto Valdes, are also connected. We are wearing masks. If you have problems understanding us, please let us know it. After the presentation, we will be pleased to answer any questions you may have. Let's start in Slide #4 with the main highlights of the first 9 months of the year, which have been marked by the international spread of the coronavirus. I'm proud to tell you that our early reaction to the threat from this virus, together with the regular updating and rigorous application of our protocols in order to prevent its spread, is keeping our staff safe. We have continued to operate even during the most recent virus outbreak. All ENCE activities from our forestry and biomass operations to pulp production and the generation of renewable energy have been declared essential. Our first 9 months results show a good operating performance in both businesses, following the strategic plan investments made last year and despite the difficulties caused by the pandemic. Firstly, we have further reduced our cash costs during the third quarter, down to EUR 376 per tonne despite the annual maintenance shutdowns carried out at both of our biomills. Moreover, our pulp sales improved by 7% year-on-year with a better commercial mix. Secondly, our renewable energy sales increased by more than 27% year-on-year, following the commissioning of the 2 new biomass plants in first quarter '20. This regulated business is adding stability to the group. Despite this operational improvement, our first 9 months financial results continue to be affected by the extremely low prices of pulp and electricity with an EBITDA of EUR 7 million in the pulp business and EUR 42 million in the Renewable Energy business. Pulp prices are at their 10-year minimum. For 2021, we have already hedged the price for 193,000 tonnes of pulp at $770 per tonne, which is $90 per tonne above the current reference price in Europe. We also hedged the price of 500,000 megawatt hour at EUR 43 per megawatt hour. In order to ensure the resilience of our business in any future scenario, we have increased our liquidity by 59%, up to EUR 360 million. Remember that our pulp business debt has no covenant at all, and we enjoy long-term financing with no relevant maturities in the next 2 years. Our top priorities now are the health and safety of our staff, the continuity of our operations and the reduction of costs and leverage in the pulp business. Moving now to Slide 5. We can see some of the measures we took against the coronavirus, which have been effective and have prevented the spread of the virus in our workplace, allowing us to continue our operations. Our protocols have different degrees of safety measures according to the rates of infection in the different regions. All staff maintained 2-meter of distance, everyone wears masks, our offices and work areas are ventilated, following an important investment in improved air conditioning. The regular disinfection of hands and tools is mandatory. Other measures are implemented according to the level of infection in the locality. These measures are the frequency and the kind of tests, the percentage of teleworking and the organization of shifts. We have successfully applied our prevention protocol since February 24 throughout our organization, including subcontractors and logistics services. This protocol has been periodically updated with best practices as more is known about this pandemic with the advice from the best scientists in Spain. We have also taken measures to increase our liquidity. Firstly, we have drawn the revolving credit facility for -- of EUR 70 million in the pulp business maturing in March 2023. Secondly, we have closed long-term backup credit facilities with no covenants for an additional EUR 102 million. Thirdly, we have pushed back to next year CapEx payments for an amount of EUR 51 million. And finally, we continue to optimize the use of our factoring and confirming lines. Moving now to Slide 16 -- sorry, to Slide 6. I would like to mention the highlights of our sustainability programs. Companies that care for the environment, companies that respect the staff and their communities and companies with a strong corporate governance are more efficient, more flexible and more competitive in the long run. ENCE is already at the forefront in sustainable forestry, circular economy, social commitment and gender equality. Our best practices have been recognized by independent ESG analysts, such as Sustainalytics. In their latest assessment, ENCE attained a total score of 82 points, placing us as leaders in our index. In addition to all the measures that we implemented to protect the health of our staff during 2020, I would like to highlight: firstly, we have set a new target to reduce CO2 emissions by 25% in 2025, and we are preparing ENCE for different climate change scenarios following the TCFD recommendations; secondly, the successful development of our differentiated and more sustainable products, which already account for 10% of our pulp sales; thirdly, the 40% year-on-year reduction in the odor impact of our biomills, which is down to 1.4 minutes per day; and fourthly, the continuous reduction of water consumption levels of our biomills year after year. Moving now to Slide 7 and our Renewable Energy business. We commissioned 2 new biomass power plants during the current year: in Huelva on January 31 and in Puertollano on March 31. Thanks to the commissioning, our renewable energy sales increased by 27% year-on-year in the first 9 months despite the difficulties caused by the pandemic. The scheduled ramp-up of our 2 new biomass power plants and the fine-tuning of equipment were delayed by the mobility restrictions and the absence of external technicians caused by the pandemic. The turbine of Huelva 41-megawatt power plant is back on track since the end of August. Its repair in Germany took 3 months longer than expected due to the pandemic. This regulated business gives stability to the group, as you can see in the following Slide #8. Our renewable energy sales price is supported by its regulated minimum. It has only declined by 6% from its regulatory cap to its regulatory floor compared to the 36% drop in the market energy price. Additionally, the regulated annualized return on investment of our power plants was confirmed at 7.4% for the next 12 years. This implies an annual amount of EUR 63 million with no costs, only subject to a minimum operation of just 3,000 hours per power plant. The next Slide #9 illustrates our renewable energy pipeline. We have 8 projects with a combined installed capacity of 405 megawatts. All of them have already grid connection permits and locations secured. Administrative authorizations are being processed. We expect the public auctions required to implement the National Renewable Energy Plan in the coming months. This business is able to finance its own growth, and we expect to begin the construction of the new projects between the fourth quarter 2021 and the first quarter 2022. On top of that, we have other projects at an early stage of development. Turning now to the pulp business in Slide #10. We have recorded a good operating performance in the first 9 months of 2020, following the 100,000 tonne capacity expansions carried out in 2019. We have further reduced our cash costs during the third quarter, down to EUR 373 per tonne despite the annual maintenance shutdowns carried out at both of our biomills. These annual shutdowns were delayed to the third quarter due to the pandemic. The one at Pontevedra took 15 days longer than initially planned, resulting in a production loss of 20,000 tonnes mainly due to the strict safety measures. We have implemented several energy efficiency improvements at this biomill and fine-tuned the second pulp dryer at Navia, which should be reflected in higher production rates in the future. Our pulp production increased by 2% year-on-year, and we stick to our target of reaching 1,025,000 tonnes in 2020 with a cash cost of EUR 375 per tonne, EUR 22 per tonne below 2019 cash costs. Our pulp sales improved 7% year-on-year with a better commercial mix, as you can see in the following Slide #11. Almost all of them went to the European market where ENCE has significant logistical and service advantages. Moreover, almost 60% went to the growing tissue market. Our differentiated products, which are more sustainable and are better adapted to replace softwood pulp, in specialty segments, already account for 10% of pulp sales. In the following Slide #12, we can see the evolution of global pulp shipments and pulp producers inventories over the last 5 years. PPPC updated its statistics in August, including data from Brazilian producers which revealed stronger demand in 2020 than initially expected. It has recovered by 5% versus the first 8 months of 2019, which were affected by the destocking of pulp in the paper industry. Restocking, together with 5% higher demand for tissue paper, has offset the 18% drop in demand for printing and writing papers, particularly during the lockdown. Producers' inventories remained fairly stable during the first 8 months of the year, despite the postponement of most maintenance shutdowns to the second half of the year due to the coronavirus and the impact of lockdown measures on demand for printing and writing papers in the second quarter. As you can see, the following Slide #13, pulp prices have remained at the minimum level over the last 10 years. These prices have remained below the cash cost of many pulp producers for 1 year. This situation is unsustainable for the industry, and we have started to see some market-related downtime of high-cost mills. As you know, the price increase for October of $20 per tonne was announced in China for BHKP. Looking to 2021, we have already hedged the price of 193,000 tonnes at $770 per tonne, which is $90 per tonne above the current reference price in Europe. In Slide 14, we summarize our views on pulp supply and demand. Underlying pulp demand will decrease this year due to the impact of the lockdown measures, particularly on printing and writing paper. We expect demand for tissue and hygiene products to remain strong, while demand weakness for printing and writing is phasing as economic activity recovers mainly in China. Market conditions should tighten in the coming months as demand improves and supply is constrained by delayed maintenance shutdowns and production cuts from less efficient producers. In the longer term, pulp demand should outgrow supply. Urban population growth and improving living standards in emerging countries together with increasing plastic substitution will continue to support pulp demand growth. On the supply side, there are only 2 major paper grade pulp projects now underway, Arauco MAPA and the UPM project in Uruguay. Remember that lead times for new projects are close to 4 years, meaning that no further supply will come on stream over the next few years. Let's continue in Slide #15 with a summary of our first half financial results. Pulp business EBITDA reached EUR 7 million. Renewable business EBITDA reached EUR 42 million. Lower pulp and electricity prices complicate the comparison with the same period last year despite a better operating performance. Turning to Slide #16. You will find the main cash flow components and our net debt position at the end of the period. Free cash flow before growth CapEx and the effect of regulatory collar amounted to EUR 50 million. Carryover payments from investments implemented in 2019 amounted to EUR 62 million, and the effect of the regulatory collar was EUR 32 million. The group's net debt increased by EUR 43 million up to EUR 556 million, including EUR 54 million related to lease contracts. It is important to highlight once more that our pulp business is covenant-free, that our 2 businesses enjoy long-term financing with no relevant maturities in the next 2 years, and that our cash balance at the end of the quarter amounted to EUR 360 million. Finally, let's look at Slide 17 concerning Pontevedra's biomill concession. We expect the first ruling by the National Court in the next few months. It will be the first step in a legal case that could last for another 4 years, including appeals to higher costs. I will now invite Alfredo to review the financial figures in more detail.

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

Thank you, Ignacio. Let me start with our pulp business results, which you will find on Slide 19. In the first 9 months of the year, pulp sales increased by 7% year-on-year up to 756,000 tonnes, thanks to the higher production levels achieved after the capacity expansions carried out back in 2019. In quarterly figures, sales were 11% lower with respect to 2019 due to the maintenance shutdowns executed at both of our biomills during the month of July. As our Chairman has previously explained, the higher fixed cost dilution deriving from the capacity increases, together with lower corporate expenses and wood costs, allowed us to reduce our cash cost by 3%, down to EUR 376 per tonne. This was possible even with a longer than usual shutdown at our Pontevedra biomill. On the other hand, and in line with the sharp drop in the reference price, our average sales price decreased by 26%, resulting in an EBITDA of EUR 7 million. This figure reduced negative FX settlements of EUR 10 million in the first 9 months compared to the EUR 24 million recorded in the same period last year. Additionally, we have provisioned EUR 1.5 million in the third quarter due to the effect of lower pulp prices in the value of our pulp inventories. Moving forward on to the pulp business P&L in the next slide. After EBITDA, depreciation amounted to EUR 49 million. This figure represents a 5% increase, mainly driven by a larger wood depletion figure related to a greater use of wood from our own Southern plantations. Next to the right, we show the recording of provisions for EUR 3.8 million related to ENCE's environmental pact in Pontevedra with no cash outflow effect. All this result in a negative EBIT figure of EUR 45 million for the period. Finally, the negative financial result of EUR 9 million, together with a positive tax effect of EUR 13 million, added up to a net result of minus EUR 41 million for the first 9 months of 2020. If we continue to Slide 21, we can analyze our pulp business cash flow generation. Normalized free cash flow after working capital changes, maintenance CapEx, financial payments and taxes attained EUR 9 million, which after the carryover CapEx payments all coming from 2019 investments resulted in a free cash flow figure of minus EUR 31 million for the period. As our Chairman highlighted earlier, we continue to actively manage the cash outflows related to these carryovers, both postponing some of them into next year and canceling some others. Up to now, we have postponed carryover payments in the pulp business amounted to EUR 40 million, and we have reduced other investments by another EUR 5 million. As a result, in our pulp business, we expect CapEx payments of EUR 70 million for the year, including EUR 10 million from maintenance. Let me update you on our ongoing FX hedging program in Slide 22. As we mentioned in the first quarter results presentation, we have returned to our standard policy, consistent in hedging 50% of our pulp sales using average cycle prices and limiting the period to 12 months. This program had a negative impact of EUR 10 million in the first 9 months of the year compared to EUR 24 million in the same period last year. Currently, ENCE has secured an average cap of $1.19 and an average floor of $1.12 for 50% of its dollar exposures until September '21. If we will continue to Slide #23, you will find our pulp business balance sheet. Net debt increased by EUR 45 million during the 9 months up to EUR 350 million, including EUR 45 million related to the lease contracts. At the same time, cash in balance increased by EUR 132 million reaching EUR 237 million at the end of the period. Within our plans to maximize liquidity and help shielding our operations against any adverse scenario in the framework of this pandemic, we have firstly drew down our revolving a facility of EUR 70 million and expanded our long-term backup credit facilities by another EUR 102 million. Secondly, we have negotiated the postponement to 2022 of carryover payments amounting to EUR 40 million and reduced other investments for another EUR 5 million. And thirdly, we're increasing the use of our factoring and confirming lines available. As you already know, this business is covenant-free and enjoys long-term maturities, releasing our balance sheet from short-term pressures. Net debt-to-EBITDA ratio in this business is affected by minimum cycle prices and the negative EBITDA recorded in fourth quarter '19 due to Navia's extraordinary shutdown related to the 80,000 tonnes expansion. When considering average net cycle prices of $600 per tonne, the leverage came down -- sorry, $800 per ton, the leverage came down to approximately 2x. Let's now focus on the Renewable Energy business in Slide 24. The energy volume sales increased by 27% in the first 9 months of the year, thanks to the contribution of our 2 new biomass plants commissioned in the first quarter and despite the pandemic. We were able to resume operations at our Huelva 41-megawatt biomass plant after it suffered a failure in its turbine in March, and its repair in Germany took more than expected due to the pandemic and mobility restrictions. Regarding prices, the average selling in price in the first quarter was 6% lower than in the same period last year as a consequence of the falling electricity market price. Current market prices are below the floor set by the regulator, and therefore, we have recognized an income of EUR 22 million for the period related to this regulatory collar. Higher energy sales increased our EBITDA by 2% up to EUR 42 million, offsetting the decline in the average sales price. On Slide 25, you can find the breakdown of our Renewable Energy business P&L. Below EBITDA, the depreciation and others column increased by 61% up to EUR 32 million as a result of the commissioning of the 2 new biomass plants, together with the transfer of the remaining assets from the pulp business to renewable business in Huelva during the first quarter. Net financial costs of EUR 12 million imply a 6% reduction compared to the first 9 months of 2019, which included certain one-off expenses related to the 50-megawatt CSP project financing with maturity in March 2031. All in all, following a EUR 1 million tax income contribution, the attributable net result of the energy business after minorities shows a negative figure of EUR 3.5 million in the first 9 months of the year compared to a positive balance of EUR 4 million in the same period last year. Let's follow in the next Slide #26 with our Renewable Energy business cash flow generation. After taking into consideration changes in working capital, maintenance CapEx, interest and taxes, normalized free cash flow amounted to EUR 41 million. The EUR 60 million reflected in the other collection and payments and noncash adjustments column includes the effect of the regulatory collar recorded as an income for an amount of EUR 22.4 million that will be collected over the coming years. The strategic plan CapEx figure of EUR 23 million represent pending payments of the 2 new biomass power plants commissioned in the first quarter of the year. We have also negotiated the postponement into '21 of certain carryover payments in the energy business amounted to EUR 11 million. As a result, our initial CapEx payment guidance of EUR 50 million for 2020 is now EUR 39 million, including maintenance. All these drive our renewable energy free cash flow figure for the period to EUR 2 million. Let me conclude this review in Slide 27 with our Renewable Energy business debt situation. Net debt decreased by EUR 12 million down to EUR 206 million at the end of the period, with cash in balance of EUR 122 million. As you can see, this business also enjoys very long-term maturities and ample liquidity. Our financial leverage multiple of 3.9x constitutes a very low figure for regulated business and will continue decreasing moving forward with the full contribution of the 2 new biomass plants commissioned in the first quarter. Let me now please return the view of this presentation back to our Chairman for the closing remarks.

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Thank you, Alfredo. With the backdrop of the pandemic, it is important to highlight that all our activities have been declared essential, and we continue operating safety. The capacity expansions we made in 2019 have resulted in a better operating performance through the year despite the difficulties caused by the coronavirus. We maintain our annual operating targets for both businesses, which are a 13% improvement in pulp production, a 6% reduction in cash cost and a 34% growth in renewable energy sales. This regulated business adds stability to the group. Our 405-megawatt pipeline awaits the upcoming public auctions of the National Renewable Energy Plan before we can begin its construction. For 2021, we have already hedged the price of 193,000 tonnes of pulp at $770 per tonne, and we have also hedged the price of 500,000 megawatt hour at EUR 43 per megawatt hour. Prices of both pulp and energy have already started to rise. The price hike of $20 per ton was recently announced in China. We have increased our liquidity to face any continuing adverse scenario. Our 2 businesses enjoy long-term financing without any covenant in the pulp business. Our top priority now is the health and safety of our staff, the continuity of our operations and the reduction of costs and leverage in the pulp business. Thank you. We will be pleased to hear any questions you may have.

[Operator]

[Operator Instructions] The first question comes from João Pinto from JB Capital.

[João Filipe Pinto, Associate of Equities Research Portugal]

I have 3, if I may. The first one, regarding this new hedging agreements for pulp prices, given this is the first time, can you explain to us how these instruments work in pulp?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Yes. Thank you very much, João. We have hedged the price of 193,000 tonnes of pulp, as we said, at $770 per tonne with 2 top American banks. Well, that means it's like the hedging of the energy or the hedging of the chemicals, it's the same, or the hedging of the fuel, it's the same. That means that we have already sold this volume at this price for next year. Is that enough? Or do you need more...

[João Filipe Pinto, Associate of Equities Research Portugal]

Is it split throughout the year? Or...

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Yes. It is 12,000 tonnes per month throughout the year. Sorry, sorry, sorry, it's more. This amount divided by 12 during the year, yes, in equal quantities.

[João Filipe Pinto, Associate of Equities Research Portugal]

Okay.

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

16,000 tonnes per month.

[João Filipe Pinto, Associate of Equities Research Portugal]

My second question. Regarding pulp prices, do you have any feedback about how paper players are reacting to the price hikes announcement in China?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Well, I think that regarding pulp prices, we have to differentiate very much what is happening in Western world and what is happening in China. In China, the economy has started to grow again sooner than in Europe. Consumption is also growing. It's not only investment or industrial activity, consumption is also growing in China. And the paper industry is booming in China today. Paper mills are buying pulp, paper distributors are buying paper and consumers are buying paper. It means that the market is happy with this announcement of $20 in China, who is following -- which is following announcements in softwood, as you know. Regarding Europe, it's a different situation. The economy has grown a bit during second quarter. We still have to know what is happening during the third quarter and the fourth quarter. And here, the economy is not so strong, as you know. Here, pulp prices are stable, but they are stable at historical minimum levels. You know that pulp market is 60 million tonnes per year. Out of these 60 million tonnes, it's important to know that 40% goes to China, which means that 40% of the market is normalized in terms of consumption, in terms of growth, which is good for the industry. And that's since July, August. It's very recent. And with 60 million tonnes, if you differentiate not by geography but by market segment, 55% is tissue. Tissue has no problem at all. It's growing at 5% worldwide, in some countries, like in the States, even at higher rates. We have 25% of this 60 million tonnes goes to printing and writing. And in this segment, we have a problem. This segment during the hard lockdown of second quarter, the reduction was almost 40%. It was 38%. And in the cumulative first 9 months of the year, we are at minus 19%. That means that we have 2 different situations in China. I would say today, fortunately, a normalized situation of the market growing, in Europe, a soft market. And by segments, we have tissue market, 55% of the market, is growing at 5%. We have no problem to sell any single tonne. And we have the segment of printing and writing, which is suffering a lot. As you know, ENCE is not a big player in printing and writing. We are selling less than 10% in this segment. We are selling over 60% in tissue. And therefore, during third quarter, we were forced to substitute tonnes where we agreed to go to paper mills in Europe, we send them to tissue mills in North Africa and Middle East. That means that we don't have any problem to sell any single tonne we produce, but we are for the time being sending some tonnes to the third countries because the printing and writing industry is suffering in Europe. There is a third market, which also very important, 15,000 tonnes per month, same size than the printing and writing, is specialties. And in specialties, you have many industrial products like filters, but you have a lot of tonnes of decor paper, decor paper for furniture, and this market is booming. In old Europe, the families are investing in renewing their houses and their kitchens, and this market is booming. Then we have a good market, tissue; a good market, specialties; and a market who is not good at all, that is printing and writing. And we have, and I'll finish, by areas, a good market, China, 40% of the demand since the last 2 months, going up; and we have a soft market in Europe and the States. Thank you.

[João Filipe Pinto, Associate of Equities Research Portugal]

Just to confirm, this $20 price hike, you are referring to hardwood pulp in China, right?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Could you repeat your question?

[João Filipe Pinto, Associate of Equities Research Portugal]

The $20 price hike that you mentioned that previously were announced in China is regarding hardwood.

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Yes, it is regarding hardwood. ENCE and other Latin Americans have announced $20 for October for China -- sorry, from China.

[João Filipe Pinto, Associate of Equities Research Portugal]

My final question, if I may, in energy, are there any developments on the sale process as a minority stake or the plan remains suspended?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

No. For the time being, I cannot give you further information.

[Operator]

Your next question comes from Jaime Escribano from Banco Santander.

[Jaime Escribano, Equity Analyst]

So a few questions from my side. So following up on this new hedging on pulp prices, my question would be what happens if pulp price goes above $770 per tonne? So how should we think about that from an accounting perspective?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

We will be extremely happy because we will sell over 900,000 tonnes at a fantastic price.

[Jaime Escribano, Equity Analyst]

Okay. And what you have hedged, you have to look at like a negative difference? Or how many...

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Yes, yes, yes. But that will be a dream.

[Jaime Escribano, Equity Analyst]

Yes. It would be less of a problem, okay. And in terms of the discount, are you hedging the discount? Or the discount is not hedged?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

No, no, no. It's not a discount. The discount is a relationship between add and our customers is the gross price of the pulp.

[Jaime Escribano, Equity Analyst]

Okay, perfect. And my second question is -- I'm following up on this, would you be willing to hedge more? Or can you hedge more than -- are the banks willing to hedge you more tonnes?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

So it's a small market, yes. Yes, we did that a few weeks ago, and we may do that on the future, if there is market for that. I'm not pretty sure if we're going to find more market. It's not a liquid market.

[Jaime Escribano, Equity Analyst]

Okay, very good. And yes, my second question is regarding a little bit of outlook, regarding November, December. Could you tell us how are you feeling the order intake, the orders from your customers for November and December? Just to have an idea in terms of volumes, how should we think about this Q4 in terms of volumes?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

In terms of volume, it's going to be a good quarter because it is important to remember what I told you before, we have no problem to sell. Then we will sell over 280,000 tonnes in the quarter, I would say 284,000 tonnes and more probably. We will reduce 6,000 tonnes further our stock. The burden comes from the price. Then we are selling, let's say, 80%, 85% in Europe to our normal customers. And on the last 4 months, we always have the same problem during the month. We start the month with a good order book for printing and writing, around 7,000 to 8,000 tonnes, which is not a lot. And during the month, the big paper mills cancel the other because the market is not supporting. And then we are forced on the last 2 weeks of the month to sell this volume to tissue makers in the South part of the Mediterranean Sea. Then we don't have any problem in selling, but the discount should be in the area of 32. They are in the area of 34 because the price in this market is a bit lower than in Europe. Well, October is almost done. Yes, it has been from operations and from sales in volume a good month. And we don't see any problem regarding November or December.

[Jaime Escribano, Equity Analyst]

Okay, very good.

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Thank you, Jaime. The problem is price -- is the price. That's the only problem, and it's a major problem.

[Jaime Escribano, Equity Analyst]

Okay. Well, I'm following up on this, do you see -- -- with the positive dynamics seen in China, the spreads widening a little bit, inventory is going down in September in Europe EBIT. Do you see Brazilians increase in prices in Europe or not yet?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Well, they haven't done any announcement yet. I think that as I said before to João Pinto, we have to differentiate the situations, a good market with good demand with good consumption with optimism in China, where there is no anymore coronavirus, yes; and we have the steady problem in Europe, as you know, which is affecting consumption of printing and writing. It's not affecting consumption of tissue paper. It is not affecting consumption of decor paper or filters. But all these lockdowns are seriously affecting the consumption of printing and writing. It will not be as strong as the second quarter, for sure, but the situation has normalized. And it is 25% of the market, yes. And when you have 25% of the market reducing by 19%, well, it's hard and that is the situation. But if we see 2021, while the pandemic will be there but it will be less aggressive in terms of lockdowns, in terms of actions in the second quarter than on the first quarter, in the third quarter than on the second quarter, then we situation normalizing quarter-by-quarter.

[Jaime Escribano, Equity Analyst]

Okay, very good. And in terms of cash cost, what is the sign of this decline? Because in my opinion, it was better than expected with the maintenance, the strong maintenance you did in Q3. And still, I see that transformation cost was down and commercial and logistics were down significantly, but maybe you can give us more color. And what -- again, what could we expect in Q4? Because if we are at EUR 373 with 2 maintenance stoppage in Q3, in Q4, more volumes sold. Where do you see the cash cost sitting?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

We are on the third quarter at EUR 373, despite not only the long maintenance shutdowns and very inefficient because on a normal shutdown at our biomill, it takes 15 days and being 15 days, you have over 1,000 persons working on the mill. And to do that with safety measures has been a nightmare, and it takes us longer. But we've been able to do that what is very important. Secondly, we had EUR 373 despite EUR 5 per tonne we have from the beginning of the year in extraordinary costs due to the coronavirus. All the number of tests we are performing, all the disinfection of the mills, the different way to work with the shifts, all the masks, all the filter for the air, all the expenses in ventilation with new systems, all that is EUR 5 per tonne in 9 months. That means that without that, despite the long maintenance shutdowns, we would have been below EUR 370. And that's where we want to be on the fourth quarter and where we are pretty sure we are going to be. And the big -- the main difference between second and third quarter has been wood. We had a reduction in wood. During the hard lockdown in second quarter, people buying pinewood in Northwestern of Spain for plywood were shut down. And then there were more people able to harvest wood. They were more offers of wood, and we were able to reduce a bit the price of the wood. That's the main component of the reduction between second and third quarter. What we see for the fourth quarter is the wood to continue stable at the price we had in the third quarter, and we see by volume a slightly better dilution. We forecast that we are going to stay on this EUR 5 per tonne of the expenses as of the COVID, and that is why we see a cash cost around EUR 370 on the fourth quarter, who will give us to an average cash cost for the year of EUR 375.

[Jaime Escribano, Equity Analyst]

Okay. And one question -- sorry because I'm making many. I remember in Q2, you said that because of COVID lockdown, there were some efficiencies that you were doing that you couldn't do it because the German specialists have to return back to Germany. And my question basically is if you have been able to finalize all these efficiencies? Or is this something that we are going to see in following quarters?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

No. 95% is already done. The turbine of Pontevedra, which was installed in December 2019 and was starting at the beginning of the lockdown, now is working at 95%. And it will take several months, this 5% more but we are happy. The digester of Navia and the new dry line of Navia, who also was installed in December '19, was starting with the pandemic -- the pandemia arrived. Now it's doing pretty, pretty well. We are very satisfied with this investment, and we have been able to manage that and that is solved. And regarding the 2 new biomass power plants, 1 in Huelva, who started in January this year, and the 1 in Puertollano, who started at the end of March of this year, and just in the middle of the pandemia. Well, we still are, let's say, at 80%. We are not at 100%, and there is still 6, 7 months of improvement in front of us. And we have been suffering a long stop of the turbine of 41 megawatts in Huelva, the old one. We had a problem at the beginning of the year. And it took, as I said before, 3 months more than normal to repair a turbine in Germany because of the pandemia. And well now, it's working at 100%. That means that all in all, we still have some improvement on the new 2 new biomass power plants. In Huelva, in Navia and in Pontevedra, everything now in all fine.

[Operator]

Our next question comes from Alvaro Lenze from Alantra Equities.

[Alvaro Lenze Julia, Research Analyst]

I have a follow-up on the question from Jaime regarding cash costs. You said that you expect EUR 270 per tonne cash costs for Q4, which is roughly in line with the guidance you are providing for 2021. Could you explain the maintenance of cash costs even though you are expected to have more volume in 2021 than you are likely going to have, I assume, in Q4?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

I will answer this question, Alvaro. Thank you. Well, we expect, as I said, EUR 375 for the year with ERU 370 on the last quarter. We are working now, where we have engaged 1 year or more visibility. We have reduced -- as you know, last year, we were in the first 9 months in EUR 389. We are now -- we have been on the 9 months of 2020 EUR 376. That means that we have reduced by EUR 22 per tonne our cash cost. We did that because of the investments we made at the end of last year and also with the support of Boston Consulting Group. We have engaged them for next year. We are now doing the budget. And today, the only thing I can do is that we will have for sure a cash cost below EUR 370. But please give me some time to finish the budget, and I will give you a more precise figure for next year -- or the next meeting.

[Alvaro Lenze Julia, Research Analyst]

Okay. And another question, if I may. Regarding the CapEx spending from the 2019 capacity increases in Pontevedra -- sorry, in pulp and energy, if you could provide some split of how much of that you expect in Q4 and how much in 2021.

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Yes. Well, my -- am I wrong, Alfredo, if I say that we are going to pay carryover CapEx from next year of EUR 23 million, EUR 24 million during fourth quarter?

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

You're right.

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Something below EUR 25 million, that's what we have to pay during fourth quarter. And we have a figure of EUR 51 million for next year. It was supposed to be during the year, and we have agreed with the suppliers to pay next year.

[Alvaro Lenze Julia, Research Analyst]

Okay. Perfect. And last question from my side, regarding the CapEx for the strategic plan that you will have not yet made. I understand that investments in pulp are on hold as long as pulp prices remain so low. But how should we think about the investments for the energy business? If you were to win the auctions on renewable capacity, would you make the investments despite the overall group leverage being too high? Or would you continue with the investments?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

I think that -- we have to do a comparison with what is happening in pulp with China and Europe. China is shining, and Europe is very quiet. And energy is the same. If energy is shining, then we will invest as much as we can. Then we have this pipeline, who is ready to start to build with all the permits and everything in 3 quarters. What is most important is that we have secured the connection point and the land and we have the support of all the authorities in the areas. And we are -- as we don't want to be a merchant, we are awaiting these auctions, and these auctions will be around the end of the year or in December or in January. In -- our idea is to start construction of 2 biomass power plants at the end of last year, if we win the auction and to start the 240 megawatts of PV also at the end of next year. If we win the auction or we have a PPA. We are also working on PPA for PV.And as you are saying, pulp is a hold. In pulp, we continue with the engineering, which is EUR 1 million per year, not more. We continue with all the permits. We continue studying even better the flat market, doing trials. We continue studying better the dissolving pulp market. And we -- let's say, that once we will start, it will go quicker than expected because we know much more now and we have much more engineering already done.

[Operator]

The next question comes from Beltran Palazuelo from SANTALUCIA.

[Beltran Palazuelo Barroso, Equity Analyst & Equity Portfolio Manager]

I only have one question. I think it was a direct question regarding, let's say, the minority stake sale or possibility of minority stake of the energy business. I think seeing uncertainty there currently is, it's not appropriate to say that we don't discuss about it. So regarding, well, the article that was on this weekend that you valued more or less your 2 divisions. I think it's appropriate to -- if you don't want to divest, now there's a reasoning when you will do it. So I think we should know a little bit more.

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Yes. Beltran, I cannot give you more information because I cannot give you more information. Once we'll be able to disclose the information, we will disclose the information. And regarding this interview on this financial magazine, the journalist was asking if we're thinking in splitting both companies in several years, and we said yes, normally, yes. But the fact of thinking that maybe in 6, 7, 10 years, we will have 2 different companies is not saying that we are not going to do a deal in energy before.

[Beltran Palazuelo Barroso, Equity Analyst & Equity Portfolio Manager]

Okay. So the line to that question is you're working on it. It's not like, let's say, in April or May, you said it was impossible to due diligence. So currently, you are, let's say, looking at all the options and equity for all shareholders. It's not that you're not doing anything.

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

No, no. Sorry, I already answered that, Beltran.

[Operator]

The next question comes from Jaime Escribano from Banco Santander.

[Jaime Escribano, Equity Analyst]

Just a couple of more questions. Regarding the Energy division, the EBITDA margin in Q3 was around 28% versus Q2 31% despite higher volumes this quarter and higher average selling prices. What is -- could you tell us what is behind this performance?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Let me see if I understand your question, Jaime. I mean what you're saying is that this -- you are questioning the performance between...

[Jaime Escribano, Equity Analyst]

In the energy division, the EBITDA margin was a 28.4% in Q3 2020. And in Q2 2020, it was 30.6%, yes. And the volumes -- you have increased the volumes quarter-on-quarter, and the average selling price is also slightly higher. So I just want to understand...

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

It's very easy, Jaime, you only have 2 reasons. And we will send to all of you a paper with regard to the information. But there are 2 main reasons. One is that this problem we have on the turbine of Huelva 41. On the third quarter, I think that there is between EUR 1.5 billion and EUR 2 billion of costs to those -- cost about EBITDA for the repair of this turbine, and it decreased the margin. And the other is that it's a slightly higher cost of the biomass. And we will send you -- to all of you a paper with information. Thank you, Jaime.

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

In any case, yes, to add some more -- there's some financial cost that we'll let you know about in the succeeding quarter.

[Jaime Escribano, Equity Analyst]

Okay. Yes. No, it's just that I was a little bit surprised. But yes, this explains it. And in terms of next year, with Huelva at working speed, with the contribution of the 2 new plants, how should we think about 2021 in terms of volumes sold in the energy division? Where do you think you can go with all the -- assuming that all the plants are more or less up and running and working fine?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Well, I'll give you more or less a question before that. We think that we are still at 20% below where we should be in the new -- the 2 new biomass power plants, but we will give you more figures about megawatts for next year or tonnes for next year in the next meeting once the budget is finished, Jaime.

[Jaime Escribano, Equity Analyst]

Okay, very good. And last question, I promise, because I did too many. It is regarding Pontevedra. Could you tell us an update, if you ask your lawyers when do they think that we could have a resolution? Or what is what they have in mind?

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Yes. Something around Christmas, yes, between December and January.

[Operator]

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

[Ignacio de Colmenares y Brunet, Chairman, CEO & MD]

Thank you very much, ladies and gentlemen, for your time. We are in contact, any questions you may have, you can call us or call Alberto, Alfredo or myself. And let's talk in 3 months time. Thank you very much. Bye-bye.

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

Thank you.