Ence Energia y Celulosa SA

MAD:ENC

Earnings Call Analysis

Strategic Investments and Diversification

The company is diversifying its production with the aim to reduce dependency on hardwood pulp and move towards high-margin products like Advanced pulp, fluff, and As Pontes recovered paper. One of the key projects includes the diversification of up to 125,000 tonnes of production into fluff pulp, with an anticipated investment of over €30 million, targeting a return on capital employed of over 12%. Another highlight is the As Pontes project for producing bleached recycled pulp, where engineering and permitting processes are expected to conclude by summer next year, and the final investment decision by the end of 2025.

Cost Reduction and Efficiency Improvements

The company is focusing on reducing costs and improving efficiency. For example, the Pontevedra Avanza project aims to cut cash costs by €50 per tonne and increase the use of various eucalyptus species. This project is estimated to cost €120 million over five to six years and is designed to adapt to the company's cash flow and leverage policies. The company has plans to maintain a prudent leverage ratio while offering attractive shareholder returns, as they pursue profitable growth.

Renewables Expansion

Through its subsidiary Ence biogas, the company is developing a portfolio of over 20 biomethane plants, with the first six in the engineering and permitting phase. Similarly, another subsidiary, Magnon Servicios Energéticos, is targeting the renewable thermal energy market and is a final bidder in several contracts to provide renewable thermal energy. These projects will significantly contribute to the future EBITDA growth of the renewable business segment.

Pulp Business Momentum and Market Outlook

The executive team expressed confidence in the pulp market's strength in Europe and the sustained demand. There are no major concerns about new projects like the Cerrado affecting the market balance in the near term. They anticipate a recovery in pulp prices throughout 2024, driven by low inventories and growing demand, which should bolster cash flow generation for the business. They highlighted a strategic priority of shifting production towards higher-margin pulp products and achieving greater cost competitiveness.

Leveraging Tax Credits and Regulatory Changes

The company expects to cash in approximately €20 million in tax credits in the coming quarters and has another €50 million in tax credits on the balance sheet expected to be cashed in over the coming years. In addition, new regulations in the Renewable division could lead to a better conversion of EBITDA to free cash flow, with costs of around €110 to €120 per megawatt hour being recognized, which is €10 higher than the previous year.

Future Plans and Capital Allocation

While the company is committed to investing in growth, it adheres to a conservative debt policy, targeting a net debt-to-EBITDA ratio below 2.5 for the pulp business. They prioritize balancing shareholder remuneration with growth investments, proceeding cautiously with strategic investments like the Pontevedra project and new endeavors in biomethane and thermal energy. Investments will be staged gradually over several years, adapting to the company's financial position and market conditions.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and welcome to the Ence Fourth Quarter '23 Results Conference Call. Throughout the call, all participants will be in a listen-only mode, and afterwards, there will be a question-and-answer session. Please note, this call is being recorded. Today, I'm pleased to present Ignacio Colmenares. Please begin your meeting.

[Ignacio de Colmenares, executive]

Good morning, ladies and gentlemen. Thank you for joining Ence's Fourth 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 the main highlights of the quarter on slide 6. You can see how average net pulp prices started to recover at the end of the third quarter, following a sharp decline from the peak in the fourth quarter of 2022. This recovery is continuing into the first quarter of 2024, supported by low pulp inventories and growing demand.European pulp prices are already at $1220, and the main pulp producers have announced a further price increase of up to $1300. At the same time, we were able to reduce our cash cost by €180 per ton during the year, down to €455 per ton in the fourth quarter. These two factors resulted in an initial operating margin recovery of up to €67 per ton in the fourth quarter. I expect this margin to increase during the coming months.Cash cost reduction in the last quarter was favored by a higher fixed cost dilution, leverage on strong production, as you can see in the following slide #7. Pulp production increased by 15% during the fourth quarter, boosted by market recovery and by the strong performance of both of our biomills. In 2023, production at Navia reached its highest level ever, producing 614,000 tonnes. Note that in 2023, we invested over $16 million in an innovative water recovery solution at Pontevedra.We have recently received the environmental permit for the recovery of Ence's internal effluent. We also expect to receive in the coming quarters, the concession and the environmental permit to use the effluent from the adjacent waste water treatment plant, which is managed by the regional government. Ence advanced pulp sales accounted for 28% of total pub sales in the fourth quarter, as you can see in the following slide #8.These higher value-added products have a lower environmental footprint and are better 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 tons by 2028.During the fourth quarter, we completed the acquisition of Sniace forestry assets in the north of Spain, reinforcing our position as the largest private forest manager in Spain as illustrated on the following slide #9. We invested close to 11 million in 3,400 hectares of eucalyptus plantations in Kantavia, including two global resistant to local diseases. This step stands our local wood sourcing and complements our R&D program for the development of new eucalyptus species, better adapted to climate change and local diseases. We have been pioneers in the Iberian Peninsula in the clonal reproduction of eucalyptus globolus, and we already have three nurseries producing 12 million improved clones and seedlings annually.2023 has been a year of strong performance in sustainability, as we summarized in slide 10. We are leaders in sustainable forestry, the circular economy, social commitment, gender equality and corporate governance. Throughout 2023, we followed our sustainability priorities, as you can see in this slide. Our best practices have been recognized by independent ESG agencies and the indices. For example, in its latest study, sustainalytics confirm Ence for the third consecutive year as the most sustainable player in the global pulp market [indiscernible] platinum metal busier, it is the highest rating awarded by this platform. We've been a member of the prestigious FTSE4Good Index since 2021, and we've been included in the new IDEX ESG Index and also in the IBEX Gender Equality Index.I now invite Alfredo to further elaborate on our financial results.

[Alfredo Avello, executive]

Thank you, Ignacio. Let's continue with slide 12, where you can see the turnaround in our fourth quarter results. This was mainly attributable to operating margin recovery in the pulp business. Group revenues grew by €30 million up to €201 million, and the cash cost was reduced down to €455 per ton, €30 per tonne lower than the previous quarter and €180 lower complying with the first quarter of the year, showing our strong commitment towards efficiency and cost control.As a result, group EBITDA improved by €27 million when comparing to the third quarter up to €25 million and the attributable net income improved by €27 million, up to €3 million in the quarter. Note that the fourth quarter results also include two positive factors below the EBITDA line. Firstly, we reversed an impairment provision of €8 million in the renewables business as a result of the announced regulatory remuneration increase from 2024 onwards, offsetting the biomass cost inflation. Secondly, the reversal of the provision in the value of our pulp inventories registered in previous quarters amounting to €9 million due to the pulp price recovery during the quarter.Turning now to slide 13. Our full year results and the comparison with the previous year were still affected by the price cycle change registering both the pulp and the Energy business. Pulp prices bottomed out in the third quarter '23 from the peak they reached in the fourth quarter '22, something similar happened with the market energy prices. As a result, group revenues were €830 million in 2023, a decrease of 17% compared to the previous year.Group EBITDA was €89 million, same decrease compared to the previous one. 58% of this reduction in EBITDA comes from the pulp business, where the decline in pulp prices were partially mitigated by the €180 per ton cash cost reduction during the year. The remaining 42% derived on the renewables business, mainly as a result of lower energy volume generated related to the extraordinary maintenance shutdowns in two of our plants, as well as to lower market prices.Please let me explain the operating performance of our two businesses later in more detail. Finally, attributable net results in 2023 were negative by €25 million compared to the positive result of €247 million in '22, which included €169 million of positive impact resulting from the Supreme Court ruling supporting the legality of our content concession extension until 2073.Free cash flow in the fourth quarter amounted to €8 million, as you can see in the following slide #14. The working capital inflow of €48 million in the quarter was mainly related to a reduction in our inventories, explained by higher sales and the normalization of our nonrecourse factoring lines in the pulp business, following their temporary reduction in the previous quarter. This working capital inflow allowed us to fully offset the regulatory color adjustment by $22 million, as well as the growth and sustainability CapEx by another €26 million.Please note that this figure also includes the acquisition of over 3,300 hectares of Sniace forestry asset as well as the Pontevedra's water recovery solution. Remember that under the current regulation, the difference between the regulated and market price energy prices generates future cash collection rights that will be settled to the rest of regulatory life of the plant. This is what we mean when we refer to the term regulatory color.Continuing with the following slide #15. Full year cash flow generation before working capital changes and growth CapEx was positive by €26 million despite lower pulp prices compared to the previous year. The working capital outflow of €78 million shown in the graph in 2023, includes a return of €85 million of excess remuneration elected in year 2022, following the adjustment to the regulatory regulation applicable to renewables in such year, as well as the normalization of our Pontevedra operations after the drought season suffered back in 2022.Growth and sustainability CapEx amounted to €66 million during the year, including €16 million of our innovative water recovery solution in Pontevedra, €11 million coming from the acquisition of Sniace forestry assets and €5 million related to the engineering of our growth and diversification projects. The remaining €34 million correspond to a number of smaller investments aimed at improving efficiency and sustainability standards of our biomills.The change in net debt in 2023, shown in the following slide #16, includes the €140 million dividend distribution coming from 2022 results and paid during the first half of 2023. Our dividend policy allows us the flexibility to increase shareholder remuneration in periods of a strong free cash flow generation and low leverage. We ended the year with a net debt of €280 million and a low leverage position relative to our average through the cycle EBITDA, despite the working capital normalization and the strong dividend distributed over the year. Note that due to the cyclical nature of our pulp business, financing facilities are covenant free and enjoy long-term maturities.We also ended the year with a strong liquidity amounted up to €345 million, as you can see in the following slide #17. Note that this figure does not include the undrawn revolving credit facility for an amount of €130 million in the pulp business and €20 million in the renewals business, which remains fully available. During the year, we have amortized the €63 million remaining from the convertible bond issued back in March 2018 for an amount of $160 million, which was refinanced through €270 million of new facilities.Additionally, and following our policy to diversify financing sources, during the fourth quarter, we listed and launched a sustainable commercial paper program on Spain's alternative fixed income mark. At year-end 2023, €53 million were outstanding under this program.Turning now to slide #19. I will now review the financial performance of our pulp business, which turned around in the fourth quarter boosted by lower cash costs, better prices and higher volumes sold. The average net pulp price realized in the quarter improved by €45 per ton, in line with the 10% recovery in average market prices. As our Chairman highlighted earlier, this pulp price recovery continues into the first quarter '24, with net pulp prices already standing at $700 per ton and new prices increases announced up to $750 per tonne.At the same time, as previously said, the cash cost reduction process continued in the fourth quarter, adding €28 per ton more to our yearly improvement down to €445 with higher production rates. The volume of pulp sales increased by 12% during the fourth quarter, boosted by the strong performance of both of our mills as our Chairman has also highlighted earlier. As a result of these three factors, the Pulp business EBITDA improved by €25 million up to €19 million in the fourth quarter, pushing the pulp business annual EBITDA up to 46%.Continuing with slide 20, you can see how full year results in the Pulp business and in comparison with the previous year, we're still affected by the price cycles change. Oil prices bottomed out in the third quarter '23 on the peak in the fourth quarter '22, resulting in €179 net sales price decrease year-on-year, which was partially mitigated by the cash cost reduction and higher sales volume.Cash costs improved by $180 per ton compared to the first quarter, falling to €455 mainly driven by lower raw material and logistic costs. Pulp sales volume increased by 18% in 2023 compared to the previous year, affected by temporary downtime at the Pontevedra biomill during the second half of the year due to the low river water levels. Additionally, it is worth highlighting the strong operating performance of our Navia mill, where production reached a record in 2023.Turning now to slide 22. I will now review the financial performance of our renewables business, mostly driven by lower power generation linked to the extraordinary maintenance shutdowns at our plants, as well as lower market prices. Energy generation in the fourth quarter decreased by 44% compared with the previous quarter, down to 141 gigawatts hour due to the extraordinary maintenance shutdowns at the Huelva 46 and Ciudad Real 50-megawatt power plants, as well as to lower market prices.However, lower energy generation and its lower dilution impact on operating costs were more than offset by higher earnings per megawatt in the quarter, supported by the regulatory core, which will be cash in the following years. As a result, the renewable business EBITDA improved by 52% compared with the previous quarter up to €7 million. Note that this figure includes €2 million of extra costs linked to the development of the new biomethane and thermal LNG businesses.Continuing with slide 23. Full year EBITDA reached €43 million, despite the lower energy generation and its impact on operating costs, aided by a higher contribution from our ancillary services and by the sale of PV projects. The sale of our first PV projects in Huelva during the first and third quarters contributed €27 million to our EBITDA, as you can see in the following slide #24. We expect further €16 million contribution to EBITDA from the remaining PV project sales within '24.Let me please hand back now the rest of our presentation to our Chairman and CEO to review the outlook and update you on our multiple growth and diversification projects.

[Ignacio de Colmenares, executive]

Thank you, Alfredo. Let's continue with slide 26, which summarizes our outlook for 2024. Pulp prices in Europe are continuing the recovery during the first quarter. I already stand at US$1220 per ton, and the main pulp producers have announced a further price increase of up to US$1300, as a result of low part inventories and growing demand in Europe.Our Pulp business operating margin should continue to improve during this quarter, even though, we expect a slight cash cost increase, mainly due to the reduced contribution from the sale of our energy supply, due to lower energy prices, together with temporary higher logistic costs in January.On the other hand, our renewable business will benefit from the €10 megawatt hour remuneration increase expected in 2024. Also, the ministry is now working on a new draft regulation for biomass power plants, which aim to align the cash generation with our accounting EBITDA. According to this draft, we would sell and cash our energy production at a regulated price of between €110 and €120 per megawatt hour. As a result, the regulatory collar adjustment in our cash flow statement will disappear.Turning now to slide 27. Let me update you now on our growth and diversification initiatives. First of all, let's look at slide 28, which describes our local wood sourcing and our unique competitive advantages. Firstly, our biomills are surrounded by over 0.5 million hectares of eucalyptus plantations. The excellent location allows us to source our wood at an average distance of less than 110 kilometers. This factor is going to be more and more important in the future due to our customer CO2 reduction commitments.Secondly, Ence is the largest forest manager in Spain. We now manage close to 70,000 hectares with an annual production of more than 300,000 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 land owners. We are talking above 130 professionals buying and supervising the harvesting of this wood.And fourthly, we have developed a long-term relationship with our capitalized network of over 150 small local forest service companies, from whom we source over 40% of our wood needs. We financed the acquisition of machinery. We train the staff. We arranged the permitting, and we now import staff from Latin America for them.These strengths allow us to source locally over 95% of our wood needs. We import less than 5% of the woods we consumed, whereas our peers in the Iberia and Venezuela already import close to 30% of the wood needs. There is not enough local wood to supply new projects in the Iberia and Venezuela, and we believe imported wood will become even more scarce and expensive in the future. None of our growth and diversification projects require increased wood consumption. This gives us a unique competitive advantage.Moving now to slide 29. Let me update you on our ongoing growth and diversification initiatives in the pulp business. Firstly, we continue to diversify our production towards Ence-advanced pulp with the aim of exceeding 0.5 million tons by 2028. These higher value-added pulp products are more sustainable and are better adapted to replace plastic and softwood pulp in multiple paper applications, important, they also deliver higher margins. We compete with these products against softwood pulp producers in Scandinavia, and we are very competitive.Secondly, the first project to diversify up to 125,000 tonnes of our production into frac pulp was approved last year and will be executed over 2024 and 2025 with an estimated investment of over €30 million and the 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 is 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. In this segment, we compete with softwood pulp producers in North America. Our Fluff flat pulp will be very competitive.And thirdly, we continue to make progress with the engineering and permitting of the As Pontes project for the production of bleached recycled pulp. This has been 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. We should be able to take the final investment decision by the end of 2025. Remember, that none of the investments I have described will require both. We believe, wood will be an increasingly limited resource in the future.Turning now to slide #30. Let me present you our Pontevedra Avanza project that will boost Pontevedra efficiency and flexibility. We already announced our plans to invest in Pontevedra to reduce costs and to continue operating with the best quality and sustainability standards. On top of recurring maintenance and sustainability investments, we are now finishing the engineering for Pontevedra Avanza project. This project will allow us to reduce Pontevedra's cash cost by €50 per tonne, improve its flexibility to use different species of eucalyptus and to continue moving from standard part to Ence dvanced pulp.We envisage a very competitive biomill specialized in high-margin products. The estimated CapEx in these projects amount to €120 million during the next five to six years with a required return on capital employed of over 12%. Its execution 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 an attractive remuneration for shareholders, while investing for profitable growth in the future. All these projects will boost our pulp EBITDA.Let's move now to our multiple growth and diversification opportunities in renewables in slide 31. Firstly, through our subsidiary, Ence biogas, we are developing a portfolio of over 20 biomethane plants, six of them are now at their engineering and permitting phase. The initially estimated CapEx is around €20 million per plant with an estimated production of 50 gigawatt hour per plant and with a targeted return on the capital employed of over 12%.Secondly, biomass thermal energy is not only carbon neutral, but may also be more price stable and more competitive than fossil thermal energy. Through our subsidiary, Magnon Servicios Energético, we signed our first service contract last year with a major beverage company. We are final bidders in five other contracts to provide renewable thermal energy and are developing further opportunities.Our customers appreciate our strong position and our experience in providing interval solutions from biomass sourcing to plant design and operation. The estimated CapEx per plant ranges between €6 million and €20 million, with an estimated production between 60 and 200 thermal gigawatts per plant and the targeted return on capital employed, ROCE above 11%. We will build these plans in both of these two businesses, Biogas and Thermal Energy with EPC contracts, using nonrecourse project financing, but by long-term PPAs.Moreover, in five years' time, biogenic CO2 capture will start to allow us to significantly grow our EBITDA in all our businesses. Forestry and agricultural biomass combustion is the main source of biogenic CO2, which is a raw material used to produce greenfields like e-methanol or sustainable aircraft fuel. Ence Group annually produces around 6 million tons of biogenic CO2, which will be used to produce these new biofuels. We are already advancing with the engineering and permitting to capture the biogenic CO2 produced by our pulp and energy mills.Let's turn now to slide 32, which illustrates all the growth opportunities within Ence's Renewables business. Firstly, we have incorporated a new subsidiary that brings together all our expertise in biomass supply services in order to expand them throughout the whole Iberian Peninsula and to serve other businesses. We are the largest agro-forestry biomass manager in Spain by far. And we believe, it will be an opportunity to serve the current growing demand for heating and beyond 2030 for biofuels.Secondly, all our biomass power plants are able to provide ancillary services, to the electricity system operator at a higher price, generating additional EBITDA without any CapEx. Thirdly, we are developing another 300 megawatts in period, on top of the projects, that will be sold in 2024.And fourthly, our forensic management expertise brings additional opportunities to produce carbon credits and monetize them in the voluntary CO2 market. The development of these businesses should allow us to more than double the recurring EBITDA of Antero.Moving now to slide 33, I wish to make some closing remarks, before we move to the Q&A session. Pulp price recovery in Europe continues into 2024, supported by growing pulp and paper demand and low inventories. Pulp prices in Europe currently stands at $220 per ton, and the main producers have announced further price increases up to $1300.Resale prices in China are also rising after the Luna New Year. Note, that there are no significant market pulp capacity additions confirmed beyond the Cerrado project this year, supporting an improving outlook for pulp prices in 2025, 2026 and 2027 as interest specialists are currently forecasting. The expected pulp price recovery and the improvement of operating margins will boost the cash flow generation in both businesses.I believe, we are well positioned to pursue our strategic priorities in both businesses, whilst maintaining a prudent leverage and an attractive shareholder remuneration. Our priorities in the pulp business are to reduce cash costs and to diversify our production towards higher-margin products such as Advanced pulp, flat and As Pontes recovered paper.We will make Pontevedra, one of the most competitive plants in Europe. Higher priorities in the renewable business are to expand our leadership in biomass -- oh, sorry, our biomass trading in Spain and to develop the renewable thermal energy and the biomethane businesses. We are working towards being beyond 2030, a major supplier of biogenic CO2 for biofuels production in Spain. The achievement of these goals should allow us to significantly improve our recurrent EBITDA in the Pulp business and to double it in the renewable business.Thank you for your attention. We will be pleased to hear any questions you may have.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Enrique Parrondo from JBCM. Please go ahead, Enrique. Your line is now open.

[Enrique Parrondo, analyst]

So my question was regarding [indiscernible] transfer full year 2024, especially on pricing for the European continent. I'd like to have your view on how do you see pricing levels signaled by the forward curve, the sustainability of this pricing levels in light of inventory expected to remain low, but if its going to be Suzano allocating higher production to the EU and the US and their capacity ramping up in the second half of the year. So basically, your take on the moving parts for prices in this year?

[Ignacio de Colmenares, executive]

Well, what we see is that we are now implementing the last movement, the $1300 price. We see the market strong in Europe. Demand is strong. You have to take into account that the demand was very, very poor last year. And we believe that the stocks were extremely low at the end of the year. Then now we are seeing a normalization of the demand growing from last year, plus still the industry to rebuilding stocks in Europe, what I think happened in Asia on the second half of last year.At the same time, we don't have yet a lot of news from China. The only thing we know, and it is public is that the resale price is increasing in China. And regarding second half of the year, we are not really concerned about Cerrado project. Cerrado projects will probably start by summer, according to the information Suzano is reporting to the market.But due awarded from the market and the big investment in logistics, they have to do. We don't see any pulp coming from Cerrado to Europe or even to Asia before the end of the year. Then we are today quite confident about second half of the year as well. Thank you, Enrique.

[Enrique Parrondo, analyst]

Thank you very much. So my second question would be on cash costs. So you've done a really good job lowering this to levels of €455 per tonne. You recently commented that you see a small increase in -- for the first quarter from temporary one-offs and logistics and also energy. But could you give us a sense on what the actual expectations are as you did in the past for the first quarter? And maybe how do you see the cash cost evolving for the rest of the year? Just some guidance on the moving parts would be helpful.

[Ignacio de Colmenares, executive]

Yes. Yes. Well, as you said and as I said previously, yeah, we did a good job in the fourth quarter, after also third quarter going down. Now we have wood in the first quarter still going a bit down. We have high cost -- we had high costs in logistics in January, but that's temporary because we prefer to sell far away from Europe in January, at the beginning of January, prices were higher abroad than in Europe, and then we had higher logistics costs. It's not the case in February. And it won't be the case in March.And we are, let's say, suffering for the reduction of the price of the energy, but that may be offset by this new regulation, we think we are going to see between end of March and beginning of April. And then today, it's a bit difficult to say we are going to be €15 or €20 above the fourth quarter. But in any case, we think it's temporary because the logistics effect and the energy effect will disappear. And then, we see still room for a slight cost reduction during the year. We are going to meet again in 45 days after our annual shareholders' conference. And we will give you then a more precise cash flow guidance for the year.

[Enrique Parrondo, analyst]

Sorry, and if I could just one follow-up. Did you mention -- I think the line broke a little bit on my side, €15 to €20 per tonne increase for this first quarter.

[Ignacio de Colmenares, executive]

Yeah, temporary, temporary quarter increase for first quarter, yeah.

[Enrique Parrondo, analyst]

Okay. Okay. Thank you. And my final question would be on a more longer-term or midterm to longer-term view on wood costs, okay? So you commented that you will see a small reduction this year, but what is your view for your main raw materials in the mid and long-term within the Iberian Peninsula, specifically in light of, well, current forestry availability and maybe potential capacity scheduled to come online in the next few years.

[Ignacio de Colmenares, executive]

Yeah. Yeah. Looking ahead, we see scarcity of wood. That is why we decided to invest in the assets of Sniace. That is why we are -- we've been last year, the year before, and we will continue this year, reinforcing this amazing network of buyers on the rural areas of the northwestern part of Spain. We will continue strengthening this good relationship with these small forestry services companies. We have almost helped to create because this network is going to protect us from these big scarcities on wood. That's one thing.The other strategic decision we already took two years ago was none of our growing and diversification projects will require more wood. We believe it will be impossible to source more wood in the Iberian Peninsula. We believe -- we strongly believe that importing wood from Latin America is not sustainable on the long-term, price-wise and sustainability-wise. All our customers are more and more committed to a reduction of the CO2 impact in Scope 3 and are asking us to reduce our Scope 1.Then we are -- as all our Latin American colleagues are saying in their annual conference calls, wood is it going to discuss and wood is going to be expensive in the future. Let's say, from today till 2030 and beyond 2030, well, wood will be green carbon for biofuels in Europe and in Latin America. And then, the competition will not only be new projects from new pulp projects, but also the oil and gas companies. And I insist that [45:54] -- that is why all our strategy is to diversify in higher-margin products and not to grow consuming more good.A good example is what we did. We canceled two years ago, our dissolving pulp project in Navia. This project was a 200,000 tonnes project requiring one million tons of woods, and we realized that that was not drastic at all, because all the changes in the industry. We canceled this project. And we made all our efforts in this fantastic project As Pontes, where we are not going to use a single kilo of wood. We are going to use as a raw material, recover paper, recover board.This project has something very important for the Europeans today. We will reutilize our industrial land. You know that a big coal thermal plant was there. We are not in buying a natural space protected. Then we have the support of the society. The society is supporting this project. Water consumption on the pulp industry is heavy. When you are working on recovered paper and recover board, the difference is absolutely different. It's very, very low.And then we think that is the kind of projects we will promote on the future. Then we are going to diversify the products we produce in Navia and we produce in Pontevedra being more flexible, being more competitive, but not growing on wood demand. And we are going to grow in such products like the As Pontes bridge recovered paper or new projects like the molecules we are starting to study today. Thank you.

[Enrique Parrondo, analyst]

Thank you. I'll jump back to the queue.

[Operator]

Thank you. [Operator Instructions] And one moment, please, for our next question. And our next question comes from the line of Cole Hathorn from Jefferies. Please go ahead. Your line is open.

[Cole Hathorn, analyst]

Good afternoon. Thanks for taking my question. I just like a bit of a follow-up on how you're managing the logistics customers. I mean, we listened to Suzano, yesterday I was talking about shifting around inventories and needing the benefit of having local pulp inventories in Europe. And you've has made that one of your benefits versus the Lat Am producers. I'm just wondering how you're leveraging that the moment when it's been called out by the biggest player in the market.Then -- the second question is on Pontevedra. I mean I always like cost-focused CapEx to reduce the production costs. I'm just wondering, is this a project that you're going to be doing every year when you take your annual maintenance to implement some of this project or could you bring forward some of this CapEx to implement that project sooner? Thank you.

[Ignacio de Colmenares, executive]

Yeah. Thank you very much for your question. Well, we are a very different animal to the large Latin American mills. The big difference is that our lead time it's between five and seven days to any demand from any customer. That means that we are able to supply week-on-week what they require. Our target is not to be the largest supplier on 150,000 tonnes per year consumer of pulp, but to be the flexible supplier. And then, we are able to supply them on a weekly basis, what is extremely important. And coming back to our working capital investments and to our logistics, while you know that we have pulp stocks between 30,000 and 40,000 tonnes normally, that is extremely low because we produce 90,000 tonnes per month, that is less than 15 days. And these 15 days do include the stock at the end of the pulp mill, the stock on the port, the stop traveling on the seas and the stocks traveling by train or by lorry Lori to our customers around Europe, an extremely very low working capital and a similarly very quick delivery.That is why I think well, cash cost, we are not exactly comparable in terms of cash cost with a large Latin American supplier. They benefit from lower good, for sure, but we benefit from a lower balance sheet. We have less working capital investment, and we do have less forestry investment, like they have, okay.Regarding Pontevedra, well, our idea. Now at the board of November, we approved a strategic path for the company regarding Pontevedra. We made a strong analysis of what -- how Pontevedra has been performing financially on the last 10 years. And it is important that despite good years and bad years in terms of price. And despite the problems we had on the drought, with the drought a couple of years ago, Pontevedra has been always delivering free cash flow, an important free cash flow after CapEx.The Rocky of Pontevedra is almost the same than the Rocky of Navia, it has -- you have a lower amount of money per year, but you have a lower investment in Pontevedra. Then we forecasted, well, what is going to happen in Pontevedra in the next 10 years, if, let's say, we just invest what is legally, we are legally obliged to invest, and that is an amount of almost €57 million, what we call the sustainability investments. And the mill was performing well, and the mill was making again free cash flow.And then we said, well, if we have a mill who has been giving free cash flow, who is able to continue giving free cash flow with just recurrent CapEx. What happens if we invest in improving its competitiveness? What happens if we invest in enhancing its product range in order to sell more expensive products with higher margins? And then we confirm that we have a good return on the investment. Then the Board gave the green light to one, do all the engineering, cell 1 and cell 2 during this year, start to negotiate all the contracts. And we will take the final investment decision by the end of this year, by November or December 2024.And as I mentioned before, we see a very important room of cost reduction of €50 per ton. And we see a very important way of improving the range of products, giving more EBITDA and more margin. For the time being, we estimate these projects in €120 million to be invested in the next five to six years. When I say five to six years is because you know that we have a prudent leverage policy. We don't want to have a ratio net debt to EBITDA of more than 1 -- sorry, 2.4x. What means that we have to adjust the speed of our investments to the price of the market? And we don't know if we are going to do these investments in five years or in six years time.

[Cole Hathorn, analyst]

Understood. And then maybe just as a follow-up, a lot of people have commented on kind of an uptick in demand in the first quarter and some restocking benefits across various sectors. And I'm just wondering, what are you seeing from your pulp customers? Can you give any commentary from tissue customers, printing and writing as well as some of the specialty paper customers? Any color you can provide? Thank you.

[Alfredo Avello, executive]

Yes. Thank you. I will do that. Yes. Last year, demand for tissue was stable. We see demand for tissue to remain stable with a normal growth between 2% and 3%, this market grows annually. Printing and writing is improving in terms of demand. Well, last year was terrible. The decrease was by third quarter, something around 30%, and it's not very difficult and improvement. And we see today a good improvement. We don't know exactly today if it is restocking or it is the final demand growth if we compare with last year, not to with 2022. But customers are placing a lot of orders. That is why price improved to US$1220 and US$1300.And with the vision we have today for the orders we have for March, April and May, this good demand in printing and writing will continue. And we also think that there is a temporary positive factor is that these problems in Middle East and on the Red Sea are benefiting our printing and writing customers in Europe, because there is less paper coming from Asia, and the paper which came in from Asia is more expensive because the increase in freight costs coming from Asia. And regarding specialty, there is a good recovery of the market. The market is not booming, but the market is correct. The market is good.

[Cole Hathorn, analyst]

Thank you.

[Alfredo Avello, executive]

Thank you.

[Operator]

And one moment, please, whilst we take our next question. And our next question comes from the line of Jaime Escribano from Banco Santander. Please go ahead. Your line is open.

[Jaime Escribano, analyst]

Hi. Good morning. So three questions from my side. The first question would be regarding pricing. So the [indiscernible] the one that is putting new capacity into the market in the second half, at the same time, they are increasing prices. So probably, they are playing this strategy on purpose. So what do you think they have in mind, first question and whether you -- how do you see this $1300 per ton being implemented? Do you think this is sustainable? Or do you think it's going to be a couple of quarters of price improving and then there's been some decline? Or well, just to understand, how do you think about the pricing evolution based on Suzano strategy. So this is one first block of question. The second one...

[Ignacio de Colmenares, executive]

I will answer your first question. Yes. Well, I am no one to judge the strategy of Suzano. I will give you my comments on how we see the market and how we see the current -- what is happening on the market. Because it's not only Suzano, we had increased prices 15 days ago before the announcement of Suzano, we were already ourselves talking with our customers, already announcing a price increase, not yet defined for March. We see, as I said before, the market is strong in Europe. The demand is strong in Europe. We are not selling. We are not active in Asia, as you know. But according to the news, we follow by specialists. Resale price is moving up in Europe, even they are just coming back from Lunar Year, which is positive. And according to rubber projects, all the projects normally are delayed. Let's suppose there are no delays. They start in summer like they have announced. Well, they have to fill up the logistics. And no pulp, we came to the market in the end of the year, nor in America, in Asia or in Europe, then, we see a good market. And I am not the only one to do that. More companies have announced price increases for March. And all the industry specialists are reviewing their price forecast for the year, increasing it up.

[Jaime Escribano, analyst]

Okay. No, that's fair enough. Yes, I just wanted to understand that because maybe Suzano thinks the same, and that's why they are pushing prices up because they know that they will place the new capacity probably more into the 25%. My second question is the cash cost. So [indiscernible] and then very high pulp prices. So do you say the cash cost you will try to put it down. But how is -- how do you reconcile this with pulp prices going up, because otherwise, your net margin is going to expand massively. So are you not seeing that the cash cost will have to correlate to some extent to the pulp prices?

[Ignacio de Colmenares, executive]

Well, you know that in our cost wood, local wood is partially linked to the pulp. But we are not concerned about wood price increases. The wood demand this year is quite normalized in Spain. Last year, almost on the first half and the year before in 2022 there were a huge demand for energy in Iberian Peninsula. We were competing against pellets, and we are competing against Scandinavians, importing wood from -- for energy persons in Spain. Now with the gas at 2024 that's finished, then the -- let's say, we have less competition in Iberian Peninsula to buy wood. And well, even if we just recognize the increase on the pulp prices, today, we are not concerned about wood prices in Iberian Peninsula for this year.Regarding Energy, with a negative cost for us, as you know, well, we strongly believe this new regulation is coming at the end of March early, April would benefit us something around €10 per tonne of pulp, because the retribution of operation is going to be increased by this amount of money. And this problem we have between accounting EBITDA and the free cash flow EBITDA of the energy is going to be solved, and that is good for the cash cost on the pulp business as well because, as you know, despite the Good Energy generation we have in our Renewables business, we are a strong producer of energy and exporter of energy as the pulp business.Thirdly, Chemicals, they are still far away from what they used to be. And with such low energy prices, both gas and electricity, we see room for chemicals to go down. The same with Freight costs. Freight costs, other than the prices they were last year, but they are not at the prices they were in 2020 or 2021, and we see a room for that. The brand is at 80%, and then we see room for cost to continue going down. We are working very hard on fixed cost. We are working very hard on the overhead. We have three big projects. And that is why we think all around, we are going to be able to continue on second, third and fourth quarter to slightly reduce costs, despite the good momentum on the pulp business.

[Jaime Escribano, analyst]

Okay. Very good. And another a couple of more questions. One on tax credits -- because there is this new ruling, which should allow you to compensate losses and there are other small caps that are quantifying. Could you -- I don't know if you have done the exercise to quantify the tax credits impact from this new ruling?

[Ignacio de Colmenares, executive]

Yeah. Yeah, I know that, but I will make Alfredo to have the pleasure to inform you about that.

[Alfredo Avello, executive]

Jaime, yes, we have been reviewing the new regulation with our lawyers. It seems that we have a solid position regarding recouping the credits. We also had an inspection last year that is basically giving us more solidness to our expectancy. Right now, if everything goes well, we should cash in approximately €20 million all in all. But again, I mean, this is what we expect and nothing changes regarding the regulation. That is what we should have.

[Ignacio de Colmenares, executive]

Yeah. it is important to say that we will cash this €20 million on the coming quarters. And on top of this figure, we have tax credits for another €50 million on our balance sheet that will be cashed in the coming years.

[Jaime Escribano, analyst]

Okay. Very good. And final question from my side, building on the new regulation for the Renewable division. So could you give us a sense of, what would be the recurrent EBITDA and cash EBITDA once the new regulation is implemented? Thank you.

[Ignacio de Colmenares, executive]

Well, you know that we normally don't give guidance on EBITDA. What is important is that if everything goes like we think it's going to be by late March or early April, they will approve the new regulation. This color adjusting the EBITDA to free cash flow will disappear. And almost 100% of the EBITDA will be cash conversion -- well, cash conversion before CapEx. And I think that's good news for this business, yeah. And according to what they have announced, they are going to recognize as a cost of around €110 and €120 per megawatt hour with slightly €10 higher than today, than the previous year, sorry.

[Jaime Escribano, analyst]

Perfect. Thank you very much.

[Ignacio de Colmenares, executive]

Thank you.

[Operator]

Thank you. And one moment, please, whilst we take our next question. [Operator Instructions] And our next question is a follow-up question from the line of Enrique Parrondo from JBCM. Please go ahead. Your line is open.

[Enrique Parrondo, analyst]

Hi. Hello. Just one follow-up on your plans for the future, so I believe your last strategic plan ended last year. You have some interesting projects ahead that you've commented, but are you planning maybe on sharing in more detail for you on these this year or anytime soon? Thank you.

[Ignacio de Colmenares, executive]

Yeah. Thank you very much, Enrique. We have approved a strategic framework in November at the Board that establishes our strategic priorities in both businesses. Why it is not a strategic plan, we can communicate in full detail to the market? Because we have this prudent debt policy that allows us to invest, but we need to be always below 2.5 times net debt-to-EBITDA on the pulp business, then we don't know if we are going to accomplish all these investments in four years' time, in five years' time or in six years' time.In any case, the new businesses we are launching today, it is a As Pontes. And as I mentioned before, we are going to take the final investment decision mid next year. We have the Avanza project in Pontevedra, and we are going to take the final decision by the end of 2024 and in December this year once all the engineering is performed and we confirm the exact amount of money and paybacks. And on the same time, as you know, we are developing this fantastic business in biomethane. Today, we have six plants under permitting and engineering. We hope this figure to be 13 at the end of the first semester, and we hope to have some -- the first ones starting to be constructed at the end of the year.And regarding the thermal energy new business, well, today, we have one contract running. We have been granted -- almost granted in -- with new five contracts. I hope we are going to finally sign one of them on the second half of the year. And the idea is when we will have a bit more visibility we will organize a Capital Market Day.

[Enrique Parrondo, analyst]

Super. Thank you.

[Ignacio de Colmenares, executive]

Thank you.

[Operator]

Thank you. And one moment, please, whilst we take our next question. And our next question comes from the line of Cole Hathorn from Jefferies. Please go ahead. Your line is open.

[Cole Hathorn, analyst]

Thanks for taking my follow-up. Maybe just a follow-up on the capital allocation, I mean if coal prices stay even where they are at the moment and your cash cost stay, let's say, the average of the second half of last year, it implies a good uplift to your EBITDA and cash delivery.If 2024 and 2025 stays at those levels, the balance sheet will look quite attractive and allow you flexibility for capital deployment. How do you think about that in a scenario where profits are healthy and cash generation is good, what is the priority for those projects? I know you've clearly got the ongoing ones, but would you prioritize Pontevedra and bring forward a lot of that CapEx? Or would you do dividends or even buybacks as an option?I'm just trying to understand the focus of capital deployment, if you're in a good position at the end of this year from a cash and net debt perspective?

[Alfredo Avello, executive]

No, we will balance both things, as I said before, keeping always in mind this prudent leverage, we will give a good remuneration to our shareholders, and we will continue growing. What is very interesting of all these projects is not only that they don't use wood is that, it's feasible project step by step. Then once we will approve Pontevedra, let's say, by €120 million is not one project, €120 million. It's several projects of 10 to 15 projects of €10 million to €15 million is one. Then we will do that sequentially on five to six years' time. I think that, well, in this business, despite we may be very optimistic today about what is going to happen in '25 to '27 because there are no new projects coming on. We have to be prudent. Then I think we have to go step by step.

[Cole Hathorn, analyst]

Fair enough. So, just to understand, the Pontevedra is a good example. If things are in a good position, maybe you do 1 million, 2 million, 3 million of those 10 million to 15 million smaller projects at one time and kind of bring them all forward. And if not, you take longer and deploy it over the five-year period?

[Alfredo Avello, executive]

Yes, yes, we will advance. If things go well, we can advance two or three projects of €10 million to €15 million, but not -- we never advance the project of €100 million to one year, never.

[Cole Hathorn, analyst]

Thank you. Very clear. Thanks very much.

[Operator]

Thank you. And as we have no more questions registered, I hand back to our speakers for any closing comments.

[Ignacio de Colmenares, executive]

Thank you very much, ladies and gentlemen. We'll meet again early April after our Annual Shareholders Conference. Thank you very much and enjoy this Friday.

[Operator]

This now concludes our presentation. Thank you all for attending. You may now disconnect.