Ence Energia y Celulosa SA

MAD:ENC

Earnings Call Analysis

Focus on PV Development, Eucalyptus Pulp Edge

The company experienced a EUR 51 million negative free cash flow and a EUR 73 million increase in net debt, leaving a EUR 22 million discrepancy. It aims to be exclusively a photovoltaic (PV) developer, avoiding operation of assets as the return on equity for these projects currently falls below the company's weighted average cost of capital (WACC). Grants of EUR 10 million were provisionally secured for As Pontes, 8% of the planned EUR 125 million investment, with EUR 1.5 million requested for another project, marking 5% of its costs. Eucalyptus, with higher pulp content (33%) compared to spruce (20%), offers a competitive advantage in pulp production, supporting the company's market position, especially in Europe where there's a push toward local CO2 reduction and manufacturing.

Cost Efficiency and Balance Sheet Strength

The company has effectively reduced its cash costs, by EUR 152 per tonne in consecutive quarters, bringing it down to EUR 484 per tonne, which has been instrumental in mitigating the 37% fall in net pulp prices. This trend in cost reduction is set to continue, offering optimism for future margins. Additionally, differentiated products making up 25% of pulp sales also contributed to the strength of the business, providing higher margins due to lower environmental footprints and their viability as substitutes for less sustainable materials. The company boasts a healthy cash balance of $298 million and sustained a low leverage position, demonstrating financial stability and prudent management.

Market Outlook and Pricing Recovery

Pulp prices are on an upward trajectory, and the company anticipates strong prices ahead. With demand outpacing supply growth projections over the next five years, the outlook for pulp prices remains positive. This anticipated market balance is expected to contribute to further margin recovery for the company. Cash costs are projected to fall below EUR 470 per tonne in the near term, augmenting the positive financial outlook.

Demand Dynamics in China and Implications

China's pulp and paper demand has surged in the latter half of the year, with predictions for continued acceleration. Contributing factors include urban growth and improved living standards in emerging markets, an ongoing shift from plastic and synthetic fibers to pulp, and the diminishing availability of recycled fiber. These trends are likely to bolster the demand for virgin fiber, playing into the company's hands given their product offerings.

Strategic Focus on High Value-Added Products

The company has a targeted strategy to increase sales of its higher value-added products, aiming to reach over 0.5 million tonnes per year by 2028, exclusive of Fluff pulp. These products not only promise to deliver higher margins due to their lower environmental impact and versatility in replacing plastics and softwood pulp, but also align with the company's sustainable business model and commitment to innovation.

Financial Performance and Shareholder Remuneration

Despite a 20% dip in revenue year-over-year due to lower pulp prices and noncash impacts from regulated energy price updates, the company has shown resilience with positive free cash flow of EUR 17 million before growth CapEx and a robust dividend distribution of EUR 140 million. The focus on reducing cash costs and enhancing product value is clear, with net debt standing at EUR 190 million, which reflects a sound financial policy and commitment to shareholder value.

Operational Efficiency Initiatives

Efficiency initiatives, such as the water recovery solution at Pontevedra and energy turbine repairs, led to additional cash costs, but the continuing downward trend is expected to drive cash costs below EUR 470 per tonne in the subsequent quarter. These measures reflect the company's ongoing efforts to optimize operations and reduce expenses, further reinforcing future profitability.

Sustainable Growth and Diversification Opportunities

The company's growth strategy extends beyond pulp, with expansion plans in renewable energy and biogas. It aims to operationalize new biomass projects and capitalize on its expertise in biomass supply services across the Iberian Peninsula. The development of biomethane plants under the ENCE Biogas subsidiary is on track to start before 2026, with an ambitious target of developing 20 plants over five years. The diversification into sustainable and renewable energy sources illustrates the company's foresight in adapting to a low-carbon economy and tapping into emerging market opportunities.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, welcome to the ENCE Third Quarter 2023 Results Presentation. I now hand you over to Ignacio Colmenares, Executive Chairman; and Alfredo Avello, CFO. Please go ahead.

[Ignacio de Colmenares, executive]

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining ENCE's Third Quarter 2023 Results Conference Call. Our CFO, Alfredo Avello, and our Head of IR, Alberto Valdes, are also connected to this call. After the presentation, we will be pleased to answer any questions you may have.I would like to start with Slide 6 and the key highlights. Firstly, pulp prices in Europe have started to recover after falling during the second and third quarter. Main pulp producers have announced several price increases up to $980 per tonne from November.Secondly, we reduced our cash cost by EUR 152 per tonne in the second and third quarters, down to EUR 484 per tonne. This partially mitigated the 37% fall in net pulp prices during the same period. We believe the downward trend in cash costs will continue over the coming quarters.Thirdly, our differentiated products accounted for 25% of our pulp sales in the third quarter. These products offer a lower environmental footprint. They have enhanced technical properties that favor the substitution of plastic and softwood pulp, and therefore, offer a higher margin.Fourthly, we have recently reinforced our position as the largest private forestry manager in Spain with the acquisition of Sniace forestry assets.Fifthly, the Board has approved our first investment to diversify into Fluff pulp.And finally, we closed the third quarter with a low leverage position relative to our average cycle EBITDA and with a consolidated cash balance of $298 million.Turning now to Slide 7. You can see how pulp prices have now started to recover. We expect strong prices in the foreseeable future. This downward trend in cash cost will continue over the coming quarters and will contribute further to the recovery of our pulp operating margin. We expect cash costs below EUR 470 per tonne in the fourth quarter.As you can see in the next slide, #8, we expect growth in demand for pulp to exceed growth in supply over the next 5 years, which should support an improving outlook for pulp prices. As regards to market demand, the recent destocking in the Western paper industry is almost over, and demand for pulp and paper in China recovered strongly during the second half of the year. We believe demand will accelerate in the coming years as a result of 3 positive structural trends.Firstly, urban population growth and higher leading standards in emerging markets. These have boosted demand for tissue and hygienic products, which now account for over 50% of market pulp demand.Secondly, continuing plastic and synthetic fiber substitution. This will strengthen pulp demand over the next few years.Finally, the reduced availability of recycled fiber due to a reduced consumption of printing and writing paper. These trends will increase demand for virgin fiber.As regards to market supply, no significant additions to capacity have been confirmed as from 2024 beyond Suzano Cerrado project. Additions to competitive pulp production capacity are constrained by wood availability and land scarcity. Furthermore, permanent capacity closures announced so far in 2023 exceed 1 million tonnes per year.Let's turn now to Slide 9, where we give an overview of our differentiated pulp products, which accounted for 25% of our pulp sales during the third quarter. These higher value-added products have a lower environmental footprint and are well adapted to replace plastic and softwood pulp in multiple paper applications. They also deliver higher margins for ENCE. We aim to increase our sales of these products over the next few years towards a target of over 0.5 million tonnes per year by 2028, excluding Fluff. We will give you more details in our next Capital Market Day that we are planning for the beginning of next year. On top of that, our Board has approved the first investment to diversify our pulp production in Navia into fluff mill. The fast-growing segment, which offers even higher margins compared to the standard hardwood pulp.I now invite Alfredo to further elaborate our first half (sic) [ third quarter ] results.

[Alfredo Avello, executive]

Thank you, Ignacio. Continuing with our consolidated results on Slide 10. Group revenues reached EUR 630 million in the first 9 months of the year, [ 20% ] lower than those of the same period last year. This decline was mainly driven by the cash -- by the year-on-year decrease in pulp prices as well as the accounting noncash impact caused by the regulated energy price update last June. These are the 2 main factors that explain our Group's EBITDA reduction to EUR 64 million in the first 9 months.As our Chairman has already explained, it's important to highlight the EUR 152 per tonne cash cost reduction achieved by the company during the second and third quarters. This trend will continue during the coming quarters. Also, the sale of our PV projects in Jaen and Huelva during the first and third quarters contributed EUR 27 million to [Technical Difficulty]As you can see on the next slide, #11, free cash flow in the first 9 months was positive by EUR 17 million before growth CapEx and the working capital normalization recorded during the period. Working capital changes include the return of EUR 85 million of excess remuneration collected in 2022 following last year's regulatory adjustment as well as the normalization of operations at Pontevedra after the temporary suspension caused by the extraordinary severe drought we suffered in Spain during the second half of last year.Turning now to Slide 12. You can see our strong shareholders' remuneration related to 2022 results, which included EUR 140 million dividend distribution during the first half of 2023. Our dividend policy allows us the flexibility to increase shareholder remuneration in periods of strong free cash flow generation and low leverage.As you can see on the following slide, #13, we ended the third quarter with a low leverage position relative to our average through-the-cycle EBITDA, despite the working capital normalization and the strong dividends distributed over this period. During this year, we have amortized EUR 63 million remaining from the convertible bond issued back in March 2018 for an amount of EUR 160 million, which was refinanced to EUR 268 million of new facilities. We closed September 2023 with EUR 288 million in cash on our balance sheet.Our pulp business ended the period with a net debt of EUR 190 million, which includes IFRS liabilities from our lease contracts, which amounted up to EUR 40 million. Cash balance in our pulp business was EUR 251 million at the end of the quarter. Note that our pulp business financing facilities are covenant free. Also, during the month of October, and continuing with our aim of diversifying our financing sources, we have filed our first commercial paper program for an amount of EUR 200 million.First placement was largely oversubscribed at an average spread over Euribor of 100 basis points and up to a 3 month tenor. Additional placements will be launched in the next months. Regarding our annual business, we ended the period with a net debt of EUR 93 million and a cash in balance of EUR 47 million.Turning to Slide 15, let's review the financial performance of our pulp business. Pulp sales in the first 9 months amounted to over 700,000 tonnes, 4% higher than in the same period last year, which was affected by a temporary downtime of Pontevedra's biomill in the second half of the year. As already highlighted, our differentiated products accounted for 25% of our pulp sales in the third quarter and 18% of our pulp sales during the first 9 months. Note that, this was achieved despite a temporary narrowing of the price spread versus softwood pulp during the first quarter. These higher value-added differentiated products are more sustainable and well adapted to replace plastic and softwood pulp in multiple paper applications and also deliver higher margins for ENCE.We're aiming to increase the sale of these products during the next few years towards a target of 0.5 million by 2028. Over 92% of our pulp sales went to the European market where our customers benefit from ENCE's unique wide portfolio of sustainable products and shorter delivery times versus our competitors. Over half of our sales were in the fastest-growing tissue and hygiene product segments.As you can see on the following slide, #16, our pulp business was mainly impacted by an 18% [ mill ] pulp price year-on-year decrease, driving our EBITDA to EUR 28 million. The average cash cost in the first 9 months was 7% higher than that one in the same period last year.Having said that, I'm turning into Slide 17. Our cash costs showed a significant improvement over the second and third quarters, which allowed us to partially mitigate the decline in pulp prices. Cash costs improved by EUR 152 million -- EUR 152 per tonne in the second and third quarters, falling to EUR 484 due to lower wood, chemicals, energy and logistic costs.Pontevedra's water recovery solution and repairs of its energy turbine implied an extra cash cost of EUR 46 per tonne in the first quarter and EUR 28 in the second. This downward trend in cash cost is expected to continue in the coming quarters, and we are currently targeting and cash cost [ shown ] below EUR 470 per tonne for the fourth quarter.Continuing into Slide 19, let's review the financial performance of our renewable business, mostly driven in this 9-month period by the regulated energy price update published in June, when it was reduced on a retroactive basis for the year from EUR 208 down to EUR 109 per megawatt hour. This update has an accounting noncash impact in 2023, which will be compensated by a EUR 9 million higher remuneration for investment cash annually starting this year.On the other hand, the energy sold in the first 9 months was 807 gigawatts hour, mainly due to the lower energy market prices, together with a longer than usual maintenance work carried out at Huelva 50 megawatt power plant. Note that, we expect a low renewable energy output in the fourth quarter due to extraordinary repair works being carried out at Huelva 46 and Ciudad Real 50 MW power plant, which will remain offline until the end of the quarter.The sale of our first PV projects in Jaen and Huelva during the first and third quarters contributed EUR 27 million to our EBITDA, as you can see in the following slide, #20. We expect a further EUR 23 million contribution to EBITDA from the remaining PV project sales during the year of 2024.Turning now to Slide 21. Let me conclude my section emphasizing once again ENCE has continued an exceptional sustainability performance. We are leaders in sustainable forestry in the circular economy, social commitment, gender equality and corporate governance. Our best practices have been recognized by independent ESG agencies and indexes. In its latest study, Sustainalytics confirmed ENCE for the third consecutive year as the most sustainable player in the global pulp market. This year, ENCE was awarded the Ecovadis Platinum Medal, the highest rating awarded by this platform.Furthermore, we have been a member of the prestigious FTSE4Good Index since 2021, and I am very proud to remark that we have also been included in the new IBEX ESG and IBEX Gender Equality Indexes. Regarding our recent sustainability achievements, we can highlight the water footprint reductions in Navia, Pontevedra and our biomass power plants that we continue to reduce the odour from both pulp biomills, which is already below 1 minute per day, demonstrating our strong commitment to the communities in our environment. Our health and safety record remains very strong with no sick leave accidents over the past 9 months in the renewable business. ENCE's pulp business ended last year with the best safety metrics in its history at levers that are 14x lower than the benchmark values for industry in Spain.Let me now hand back to our Chairman and CEO to review our outlook and update you on the multiple growth and diversification opportunities.

[Ignacio de Colmenares, executive]

Thank you, Alfredo. Let's continue with Slide 23, which summarizes the outlook for the fourth quarter 2023. We expect pulp demand recovery to continue in the fourth quarter. Pulp prices in Europe will continue the recovery in the fourth quarter. Cash cost reductions will continue in the coming quarters. We expect a cash cost below EUR 470 per tonne in the fourth quarter. Our sales of differentiated products will continue to grow. We expect a lower renewable energy output in the fourth quarter due to extraordinary repair works at Huelva and at Puertollano power plants.Let me update you now on our growth and diversification initiatives. First of all, let me describe one of our unique competitive advantages, our local wood sourcing in Slide 25. Firstly, our biomills are surrounded by over 0.5 million hectares of eucalyptus plantations. Their excellent location allows us to source our wood at an average distance of less than 110 kilometer.Secondly, ENCE is the largest forest manager in Spain. We now manage close to 70,000 hectares with an annual production of around 400,000 tonnes.Thirdly, we benefit from our own wood supply team, which is able to source almost 1/3 of our wood needs directly from small landowners.And fourthly, we have developed a long-term relationship with our capillarized network of small local forest service companies, from whom we source over 40% of our wood needs. These trends allow us to source locally over 95% of our wood needs. We import less than 5% of the wood we consume, whereas our largest peers in the Iberian Peninsula already import close to 30% of their wood needs. There is not enough local wood to supply new projects in the Iberian Peninsula, and we believe imported wood will become even more expensive in the future. None of our growth and diversification projects require increased wood consumption, this gives us a unique competitive advantage.We have recently reinforced our position as the largest private forestry manager in Spain with the acquisition of Sniace forestry assets, as you can see in the following Slide 26. We have invested around EUR 10 million for 3,400 hectares of eucalyptus plantations in Cantabria, including 2 global species resistant to local plagues. This step will allow us to strengthen further our local wood sourcing and to complement our R&D program for the development of new eucalyptus species better adapted to climate change and local plagues.We have been pioneers in the Iberian Peninsula in the clonal reproduction of eucalyptus globulus and we already have 3 nurseries producing 12 million improved clones and seedlings annually. Our plantations do not just produce close to 400,000 tonnes of pulp wood annually, they also remove over 600,000 tonnes of CO2 annually from the atmosphere and provide other environmental benefits such as biodiversity, water cycle regulation, and soil protection.Moving now to Slide 27. Let me remind you of our ongoing growth and diversification initiatives in the pulp business. Firstly, we continue to diversify our production towards higher value-added differentiated products with the aim of exceeding 0.5 million tonnes by 2028. Our higher value-added products are more sustainable and are better adapted to replace plastic and softwood pulp in multiple paper applications. Importantly, they also deliver higher margins.Secondly, the first project to diversify our production into fluff pulp has been approved and will be executed over 2024 and 2025, with an estimated investment of over EUR 30 million and a targeted return on capital employed of over 12%. Fluff pulp is a raw material needed to produce a wide range of absorbent hygiene products. It's one of the fastest growing segments, with rising demand driven by an aging population. It has a significant price premium compared to the standard hardwood pulp.Thirdly, we continue progressing with the engineering and permitting of the As Pontes project for the production of bleached recycled pulp. It was recently declared a project of strategic importance by the regional government, which should accelerate the permitting process. We aim to finish the engineering and the permitting process by summer next year. Hopefully, we should be able to take the final investment decision by the end of 2024.We believe wood will be an increasingly limited resource in the future. Note that none of the investments I have described will require more wood. The timing of all these investments will be adapted and aligned to our cash flow generation throughout the pulp cycle and to our leverage policy. Our aim is to maintain a prudent leverage and offer attractive remuneration for shareholders while investing for profitable growth in the future.Let's now move to our growth and diversification opportunities in renewables, starting with ENCE Biogas in Slide 28. ENCE Biogas is our subsidiary created to develop and operate biomethane plants. Our circular business model is based on the recycling of local organic waste into biomethane and its corresponding sustainability certificates, as well as a high-quality organic fertilizer. Our target is to develop 20 plants during the next 5 years and to supply over 1 terawatt hour per year.The estimated CapEx is around EUR 20 million on average per plant, with a targeted return on the capital employed of over 12%. The accomplishment of this goal would allow us to more than double the recurrent EBITDA of our renewable business. ENCE Biogas already has a portfolio of 6 projects at the engineering and permitting phase, which are expected to start before 2026. We will build these biomethane plants with EPC contracts using nonrecourse project financing, just as we did in biomass. ENCE has 2 unique advantages to build this business successfully, our long experience and familiarity with the agricultural sector and our knowledge of how to eliminate the spread of odour.Let's turn now to Slide 29, which illustrates all the growth opportunities within ENCE's renewable business. Firstly, we are creating a new subsidiary that brings together all our expertise in biomass supply services in order to expand them to the whole Iberian Peninsula and to serve other businesses. We are the largest agroforestry biomass manager in Spain, by far, and we believe there is an opportunity to serve a growing demand for heating, biofuels, and other biomass uses.Secondly, we have developed 3 biomass power plant projects with a combined capacity of 140 megawatt, which are ready to participate in future public auctions.Thirdly, we are working with several companies in the food and beverage industry in Spain to help them decarbonize by replacing fossil fuel heating with biomass renewable heating. We signed our first service contract in June.Fourthly, and continuing in Slide 30, we are developing another 300 megawatt in PV on top of the projects that will be sold in 2024.Fifthly, our forestry management expertise brings additional opportunities to produce carbon credits and monetize them in the voluntary CO2 market. We have already registered more than 500 hectares with the Spanish Climate Office change -- sorry, with the Spanish Climate Change Office and we will register another 500 hectares, up to 1000 before the year end. We aim at registering 2000 hectares per year. These hectares could produce carbon credits for around 350,000 tonnes of CO2, at an average price of EUR 30 per tonne of CO2, this target would imply revenues of over EUR 10 million during the life of the plantations, 20% of these revenues will be collected upfront. This means that we can expand our eucalyptus plantations without any initial cash out.And finally, we have hired the engineering for capturing the biogenic CO2 at our pulp and energy mills. Agricultural and forestry biomass combustion is the only source of biogenic CO2, which is a raw material used to produce e-methanol and other green fuels. ENCE Group annually produces around 6 million tonnes of biogenic CO2, which could be used to produce e-methanol.Moving now to Slide 31, let me give you some closing remarks before we move to the Q&A session. Pulp prices in Europe started to recover after August. We expect stronger prices in coming months. The recent destocking in the Western paper industry is almost over, and demand for pulp and paper in China is recovering strongly during the second half of the year.The acquisition of Sniace forestry assets is a strategic step to increase our managed forests up to almost 7000 hectares -- 70,000 hectares and to further strengthen our local wood sourcing advantage. Cash cost reductions will continue in the coming quarters. We expect cash cost to be below EUR 470 per tonne in the fourth quarter and should continue to follow in the following quarters. We will continue diversifying our pulp production towards our higher margin differentiated products and fluff pulp.The future of Pontevedra concession is clear now, and our balance sheet is strong. We will give you details in next Capital Markets Day about our plans in Pontevedra. We are well positioned to pursue different growth and diversification opportunities in both businesses, while maintaining a prudent leverage and an attractive shareholder remuneration. We will share with you our strategic plan for the next 5 years at the beginning of next year.Thank you for your attention. We would be pleased now to hear any questions you may have.

[Operator]

Thank you. [Operator Instructions] The first question comes from the line of Enrique Parrondo from JB Capital.

[Enrique Parrondo, analyst]

So I have 3, if I may. The first one would be on the cash flow. I believe that the cash burn in the quarter was slightly higher than we expected. So it would be helpful to understand your view on the possible reversal of working capital trends, as well as change in loans with associates that took place during this third quarter? That would be my first question.

[Ignacio de Colmenares, executive]

Yes. Thank you very much, Enrique. Yes, I think it's important to understand why, let's say, let me use this word apparently, we have invested in working capital on the third quarter. In the company, we have increased the working capital in the third quarter by EUR 20 million, EUR 34 million in pulp and we have reduced working capital in renewables by EUR 14 million. And it is important to understand this increase of EUR 34 million in pulp.Firstly, out of these EUR 34 million, EUR 18 million come, because we are using -- we have used on this third quarter EUR 18 million less of factoring lines. If our factoring lines would have been at the end of fourth -- third quarter at the same level than at the end of second quarter, this increase in working capital would have been EUR 18 million less. And we have increased EUR 20 million, the working capital in pulp on top of this EUR 18 million due to the factoring, because we have spent during the third quarter EUR 10 million of the annual shutdowns [ down ] on the second quarter, then it's temporary and it will not come back again.And as we are reducing cash cost, the amount of money financed by our suppliers is reduced by EUR 10 million. And on top of that, we have decreased our stocks by EUR 4 million, which is positive in terms of working capital. Then I think that we have to understand these figures in order to understand that we are not reversing 100%, but there is not going to be further investments in working capital on the fourth quarter.

[Enrique Parrondo, analyst]

And on the associates part? On the loan with associates in the renewable energy business?

[Ignacio de Colmenares, executive]

Sorry, can you repeat again your question?

[Enrique Parrondo, analyst]

Yes, sure. There was a move in cash flow that contributed to the net debt increase, or at least I wasn't expecting the repayment of the loan.

[Ignacio de Colmenares, executive]

Okay, okay. Yes. Yes, the EUR 15 million distributed to our partners in the -- in Magnon is according to our shareholders, which states that any cash excess will be distributed. Nevertheless, shareholders would finance growth cash requirements, if needed. That was the reason.

[Enrique Parrondo, analyst]

Okay. So, on my second question related to the renewable energy business. It's related to, if you could share expectations for sales volumes point, going forward, as load factors in this year are significantly below historical levels, maybe you could share your view on biomass availability and volumes going forward, that would be helpful.

[Ignacio de Colmenares, executive]

Yes, sure. Yes. Enrique, note that we operate our plants in order to optimize our financial results, considering both regulated and market energy prices. Lower energy volumes this year are mainly due to lower market energy prices, together with a longer than usual maintenance works carried out at Huelva 50 megawatt power plant.We also expect lower volumes in the fourth quarter due to low prices of the energy and 2 extraordinary maintenance works being carried out at Huelva 46 megawatt and Puertollano 50 megawatt power plant. They are both expected to start by early January. We expect to generate around 1 terawatt hour of renewable energy in 2023. Our aim, with very unstable prices of the energy, very volatile prices of the energy, and still high prices of biomass, is to optimize the margin, then we are not orientated to volume, but to margin generation.

[Enrique Parrondo, analyst]

Understood. And then my final question would be related to investments. So, I believe that the decarbonization initiative considered in the Navia Excelente plan is no longer considered, at least according to the presentation. Should we expect these investments to be targeted to other initiatives in Pontevedra or Galicia? And to what extent could we expect part of this to be financed with European funds?

[Ignacio de Colmenares, executive]

Yes. Yes. I think, there are different answers. Yes, Navia Excelente project was based on 2 pillars, 1 pillar was the fluff. The fluff has been already this morning approved by the Board, the investments have been approved. And the second investment was this decarbonization at Navia Mill.During all the engineering we have found several things and we have different conclusions. We think that we have to go slowly than expected because some unmature technologies and risky technologies, and we have found that at [ fail-free ] engineering. And on the way, we are seeing that now, for instance, we are already using 10% of the primary energy in the Navia Mill, today is used with -- in methanol that we used to burn before [ in ] producing energy. Now we are using that, which is saving us between EUR 2.5 and EUR 3.5 million per year, and we want to continue with those trials. And we are also performing trials on next quarters using biomass in the kiln oven instead of natural gas or fuel.Then we prefer to go step by step with minor investments, and today we think we are going to arrive to the same conclusion, to the same end decarbonizing, but at least 50% in Navia, but with less CapEx and maybe during a longer period, 2 or 3 years instead of 1 or 2 years. And then I heard something regarding the purchase or something like that. Could you repeat your question?

[Enrique Parrondo, analyst]

Yes, sure. Maybe related to this lower CapEx that you expect related to Navia Excelente due to this initiative, we did expect these excess CapEx maybe to be targeted to Pontevedra or other projects? And if we could also expect some EU funds coming into this?

[Ignacio de Colmenares, executive]

No, we will give you more details on the Capital Markets Day at the beginning of next year, yes. We don't today, w are still working on that.

[Operator]

The next question comes from the line of Jaime Escribano from Banco Santander.

[Jaime Escribano, analyst]

So, a couple of questions from my side. The first one regarding price expectation -- pulp price expectation for following months, you were mentioning the price increases of competitors to $980 per tonne, but I wonder if you could give us also your view in the sense of what are the spot prices in Turkiye right now? And also what is the price increases that you are being able to pass through to customers? And what is your sense, how much do you think of these $980 per tonne are they willing to accept? So basically, trying to have a little bit more visibility on how much of this $880 (sic) [ $980 ] per tonne can be achieved, in your view? My second question would be regarding net debt as of December '23?

[Ignacio de Colmenares, executive]

Sorry. I will answer your question, and then we'll go to the second one.

[Jaime Escribano, analyst]

Okay, okay. [Indiscernible]

[Ignacio de Colmenares, executive]

Well, today, the stocks are lower than they used to be on the second and third quarter. Today, the demand is strong in China. The demand is better in Europe. And today the prices in China and the prices in Middle East are higher than in Europe. Then it's very simple. If our European customer do not accept the $980, we will send this material to Middle East or to China. Then I can say that 100% of this price increase will be passed on.

[Jaime Escribano, analyst]

Okay. Very good. My second question would be regarding the net debt, if you can give us some visibility on the net debt for December '23. So do you think it's going to be in current levels? Should we think about some decline of this net debt or increasing a little bit?

[Ignacio de Colmenares, executive]

Yes. We believe the net debt of the Group is going to be slightly below the level of today. Not significantly, but slightly below the level of today.

[Jaime Escribano, analyst]

Okay. And another...

[Ignacio de Colmenares, executive]

Well, you have to understand that -- sorry, it is important to understand that during third quarter it was the worst momentum because despite the cash cost reduction, the prices decreased more, and now the situation has been reversed. Then, today we have again positive today -- in October and in November, we have positive EBITDA and then for -- we are making better fix, then we see reduction of the net debt in the fourth quarter.

[Jaime Escribano, analyst]

Okay. Perfect. And then, another quick one regarding cash cost. So you point to a cash cost below EUR 470 per tonne in Q4. I wonder if you can also provide some qualitative outlook in 2024. So how should we think about the cash cost, EUR 450 or below, does this make sense? Or what is your ambition?

[Ignacio de Colmenares, executive]

Well, our ambition is the soonest -- the possible to be at normal cash cost of the past. I still don't know if it's going to take us 3, 4 or 5 quarters. Then for sure the cash cost on the fourth quarter is going to be below the cash cost of the third quarter. And for sure, the cash cost in the first quarter next year and in the second quarter next year will continue going down. Now we are working on the budget, and I prefer to wait till our results presentation of the fourth quarter to give you more details. But cash cost will go down, down and down, for sure.

[Jaime Escribano, analyst]

Okay. Very good. And a final question if I may. Regarding biogas, which looks quite encouraging, doubling the EBITDA of Magnon in the following years. I was reading an article the other day, I don't know if you saw it in [ Tech Spanish ] talking about the biogas, that there has been like a kind of a boom with more than 200 licenses being asked, so which is good because it looks -- there is growth potential on that biogas. My question for you would be, if this implies competition for you, competition for the organic raw material that you need for your biogas plants? Or how do you see the competitive landscape in biogas?

[Ignacio de Colmenares, executive]

Today, We don't see a competition. I think, there is enough room for everybody. I think, what is very interesting of biomethane is that using residues that today are producing methane who goes to the atmosphere, we are going to transform this free methane into a clean biomethane and we will inject it on the grid. And there is plenty of residues in Spain.According to the European Union, Spain is the second country after Germany in terms of potential growth in biomethane. And even if today everybody's talking about biomethane and everybody's a bit shocked about the number of projects, well, we are like in 2004, 2005 on the PV industry. Nobody was thinking that the number of PV farms we have today and the number of PV megawatts installed and it will be the same in biomethane, the market can be enormous and we don't see any problems or troubles or competition for the residues.And you have to understand that among all the developers in biomethane, we are the only ones linked to the agriculture, because we have a long experience on the pulp industry and on the biomass power electricity [ in dealing ] with the country, and we have a lot of experience in that. Then we are very well positioned. And you don't only need residues coming from farming, you need at least 50% of residues coming from agriculture, and that is our core business at Magnon. Then we know this market better than anyone. You cannot produce biomethane only with cow's residues or pork residues.

[Jaime Escribano, analyst]

Okay. And one follow-up question, and why this biomethane was not used before as a renewable source? Or that has been always there? Or has there been a breakthrough in terms of technology that allows these type of plants to be now profitable, and this is why this is being developed now? Or it's been always there, but it was not developed? So, what has made the change to invest in biogas?

[Ignacio de Colmenares, executive]

Yes. The regulation in Europe, that is a mature market in Germany. It is a mature market in Denmark. The technology is there. There is a some market in France, some market in Italy and the market was not existing in Spain. Then today, due to the high prices of CO2 and due to these markets of green certificates of biomethane, today, it is absolutely profitable without any feeding tariff and without any subvention. Then it's not going to be a regulated market, it's a free market and with [ PPAs ] in biomethane.

[Operator]

The next question comes from the line of Jose Antonio Suarez Roig.

[Jose Antonio Suarez Roig, analyst]

Good afternoon, everybody. So most of my questions have been answered, but I have 1 regarding full discounts. We've seen a significant decrease for the quarter...

[Ignacio de Colmenares, executive]

Regarding what, sorry?

[Jose Antonio Suarez Roig, analyst]

Pulp discounts, pulp discounts. We've seen a reduction from that.

[Ignacio de Colmenares, executive]

Yes, yes, discounts.

[Jose Antonio Suarez Roig, analyst]

From the 43% to the 38% in this quarter. Could you explain the rationale behind it? And if you think it's okay to use it as a good reference going forward the 38% discount in the market for the upcoming quarters?

[Ignacio de Colmenares, executive]

Yes. Our [ inside ] commercial discount has improved from [ 48% in the second ] quarter to 38%, as you know, in the third quarter, mainly due to 2 reasons. If you can mute, I think we will hear better.Firstly, the temporary price gap between the fixed price in Europe and spot prices in outside Europe has now been reverted. And secondly, we have increased the sale of our higher margin differentiated products to 25% in the third quarter. That's the 2 reasons why now we are in 38% instead of 43%. We expect the impact commercial discount to remain around this level during the fourth quarter.Any further questions?

[Operator]

The next question comes from the line of Alvaro Lenze from Alantra Equities.

[Alvaro Lenze Julia, analyst]

Just wanted to understand the impact of the sale of the Huelva 40 megawatts PV project. I see that, you indicate that it has contributed the whole -- the 2 sales EUR 27 million EBITDA in the 9 months. If I am not mistaken, it was roughly EUR 23 million the impact of the sale of Jaen. So does this mean that there has been a EUR 3 million positive impact in EBITDA from this? Maybe you said this in the presentation, but I didn't get it.

[Ignacio de Colmenares, executive]

Yes, EUR 4 million, EUR 4 million.

[Alvaro Lenze Julia, analyst]

EUR 4 million, okay. And then if I go to the cash flow statement I wanted to know what the impact has been and whether this EUR 4 million is adjusted and then added the full proceeds from the sale.

[Ignacio de Colmenares, executive]

I don't understand very well because we have a very bad line. Could you ask again your question, please?

[Alvaro Lenze Julia, analyst]

Yes, I wanted to know what the impact on the cash flow statement of the sale has been in Q3, specifically.

[Ignacio de Colmenares, executive]

No, it has been the same. It has been the same.

[Alvaro Lenze Julia, analyst]

Okay. So the same EUR 4 million. Okay. Then just to...

[Ignacio de Colmenares, executive]

We have mentioned these are new projects during the third quarter.

[Alvaro Lenze Julia, analyst]

Okay. And then, just to understand, maybe this is related to a question that Enrique asked on the transfer to the Magnon partner. So you have reported EUR 51 million negative free cash flow, but net debt has increased by EUR 73 million, so there is a EUR 22 million gap there. What is this related to? And if it is due to this transfer to Magnon, shouldn't that be reported within the free cash flow as a dividend to minorities?

[Ignacio de Colmenares, executive]

Yes. 15, yes. EUR 15 million, yes.

[Alvaro Lenze Julia, analyst]

Okay. And the last question would be on the strategy regarding the PV business. Are you planning to become a developer and seller of -- or an EPC player in PV? Or are you still planning to operate the assets at some point in the future, as it was the original strategy to generate cash flows and have some stability to compensate the pulp business?

[Ignacio de Colmenares, executive]

No, no. We -- in the PV, we want to be a pure developer. We have the skills to develop, we have proved that, and that's what we want to use. Today, we still find that the return on equity of these projects, it's below our WACC, then it's better that we just developed those PV plants, and we sell them to people with a lower WACC than ourselves.

[Operator]

The next question comes from the line of Enrique Parrondo from JB Capital. Please go ahead.

[Enrique Parrondo, analyst]

Sorry for coming back to this, but I was wondering, you commented in the past that As Pontes project was eligible for some sort of EU grants from PERTE or European funds. Is this also the case for any of the initiatives in Navia Excelente or should we expect no contribution from this?

[Ignacio de Colmenares, executive]

Yes. Thank you, Enrique, for your question. Well, we have been provisionally awarded at As Pontes with grants for EUR 10 million. It is 8% of the estimated investment. The estimated investment is EUR 125 million. It's still provisionally, it's quite low in terms of percentage, as you can see.And in Navia Excelente, the Fluff project, we have asked for EUR 1.5 million, which is 5% of the estimated investments. It is difficult to understand by the fact in all the purchase is that they are very limited and the amount of support are very small. We have that in our experience in both Navia and As Pontes and we are seeing that in other industries. The rules of competence in the EU prevent any significant amount of grants to a single group, as they should be considered as [ state aid ].Then in the circular economy PERTE, the limit was EUR 10 million per project. And we believe on the Decarbonization fund, which is going to come soon, the maximum -- the limit is going to be EUR 30 million per project. Then, while it's limited support, but are good for an excellent project, but you never decide to do a project just because [ the purpose. ]

[Operator]

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

[Cole Hathorn, analyst]

I'd like to follow up on your forestry and wood costs. Could you give a little bit of color on what you think your regional wood costs will develop versus the Nordic region as well as Central Eastern Europe from a wood cost perspective? And then following on from this, just to understand how you're thinking about kind of that forestry, you've done a deal to kind of add to your forest base now. Should we be thinking that you want to actively grow your forest ownership over time?

[Ignacio de Colmenares, executive]

Yes. Yes. Thank you very much for your question. I think it's important to start by the beginning. And the beginning is that we are using eucalyptus. The eucalyptus -- we harvest eucalyptus between every 12 and 15 years. They harvest in Canada, in Central Europe or in Scandinavia, their spruces every 70 to 90 years. The content of pulp in an eucalyptus is 33%. The content of pulp in a spruce growth -- growing in Scandinavia, Canada or Central Europe is only 20%. Then we have a bit more than 60% of pulp in the same tonne of wood, then that is why producing pulp from eucalyptus it's more competitive than producing pulp with spruce.We are growing every year around 1000 hectares our forest properties in the northwest of Spain, in order to secure long term wood. But you have to understand that once have made the agreement for 1000 hectares, which are divided in many plots while you are planting and we will not harvest before 12 years, and we are working for the future. And for the medium and short period, what we are strengthening is our capacity of buying directly to landowners. Then, today we are buying almost 1/3 of our needs directly to very small landowners. We don't have traders on the middle. We control this market. It is almost impossible to capture this market share from us, because we do all for these people.We support them in planting, we support them in technology of silviculture, we do the permitting when they have to harvest and we do the harvesting for them. And we are buying 60% of the remnant through small service companies we have developed ourselves. They have been developed with our financial support and they are very loyal to us. Then this market share is very, very secure and very strong and it is very competitive. And then we are buying the remaining like everybody to big traders of wood. But it's wood produced in the North-Western part of Spain.We are -- as I mentioned before, we are only importing 5% of the wood and not all the years from Latin America. Then that is why we think we have a unique competitive advantage in our industry. Because we are one of the first -- or one of the sole large eucalyptus pulp mills not needing to import from abroad. And we are benefiting from this more competitive pulp than the pulp produced with spruce in Scandinavia, Central Europe or Canada.

[Cole Hathorn, analyst]

And then maybe just following on from that, you -- what we've seen in the Scandinavian region, an impact for a shortage of wood because they used to import a lot of pulp wood from Russia. Have you seen any impact on your region at all, with them importing maybe some more wood from Spain or the Portugal region?

[Ignacio de Colmenares, executive]

Yes. Yes. We saw that last year, not this year. Last year, we saw a boom of exporting wood from the northern part of Spain. This wood was going to energy to Scandinavia and was going for pulp production to Scandinavia, substituting birch coming normally from Russia. With the reduction in prices of the pulp, it is not any more possible, and then today these exports are not happening.

[Cole Hathorn, analyst]

And then maybe for your differentiated products, I mean, there was a big step-up in the portion of higher margin products. What is the reason for that bigger step-up in differentiated products?And then following on from that, I know you've still got to do your Fluff project at Navia, but what do you think about players like international paper and graphic Georgia Pacific effectively closing fluff pulp capacity in the U.S. as well as Suzano kind of entering the market fluff with eucalyptus as well, you know, how do you see that kind of market developing for yourself and in Europe?

[Ignacio de Colmenares, executive]

Yes. Yes. We see an enormous interest from our customers of hygiene products in Europe. You have to understand that almost all the pulp used for producing absorbent products is made on the States by the 2 companies you mentioned. They have 60% market share in this industry and due to the commitments of reduction of CO2 of our customers in hygiene products, they prefer to buy locally.And again, this product may either by Suzano or by us, is benefiting from the fact that the eucalyptus is more competitive than pine. The content of pulp in eucalyptus, as I mentioned before, is 1/3 and the content of pulp on a pine is 50%; then we have a strong competitive advantage, in terms of cost and in terms of interest because our customers want to decarbonize and they want to have products manufactured locally. Today, out of 2 million tonnes of fluff manufactured in Europe, only 0.5 million tonnes is coming from Europe, 1.5 million tonnes is imported from the States and our customers want to have pulp produced locally.

[Operator]

There are currently no further questions registered. I hand the conference back to you speakers.

[Ignacio de Colmenares, executive]

Yes. Thank you very much to everybody for your interest and we will meet soon after the New Year. Thank you.

[Alfredo Avello, executive]

Thank you.