ENCE Energía y Celulosa, S.A. (ENC) Earnings Call Transcript

Good morning and good afternoon, ladies and gentlemen. Welcome to the Ence Third Quarter 2026 Results Presentation. I will now hand the call over to Mr. Ignacio Colmenares, Chairman and CEO; and Alfredo Avello, CFO. Gentlemen, please go ahead.

Good morning, good afternoon, and welcome to Ence's Third Quarter 2026 Results Presentation. Thank you for joining us. I'm Ignacio Colmenares, Chairman and CEO. And today, I'm joined by our CFO, Alfredo Avello, and our Head of IR, Ines Álvarez. I'm pleased to report that we continued delivering on our main strategic KPIs during this quarter, consolidating the turning point that started in the second quarter. In this context, let me briefly remind you of 5 of these KPIs. First, growth in high-margin special pulp, substituting more expensive BSKP; two, local wood and biomass sourcing; three, delivering on our Efficiency and Competitiveness Plans; four, deleveraging the company; five, solid progress in our renewable platform; and on top of that, our energy efficiency projects added revenues totaling EUR 17 million in the quarter, turning this initiative into an ongoing priority for our R&D team. All this said, consolidated EBITDA reached EUR 46 million, net profit stood at EUR 10 million, net debt fell by EUR 25 million in the quarter, and the fourth quarter should bring further cash inflows from reinforced performance, energy saving certificates and grants. Slide 4 summarizes the quarter -- sorry, the third quarter of 2026. Execution remains the core theme. Pulp prices held at sound levels despite the summer slowdown. Our renewable business recovered normal production levels after the historic rains and maintenance shutdowns of the first semester. Our special pulp volumes kept growing and the Efficiency and Competitiveness Plan continued to deliver even though cash costs face temporary headwinds due to the conflict in the Gulf. Starting with pulp, and as we anticipated in July, normal summer seasonality led European gross BHKP prices to decrease by $100 per tonne during the quarter. Our average pulp price was nevertheless EUR 97 per tonne higher than in the third quarter of 2025. Since the end of September, major producers have announced price increases in anticipation of client restocking, and we expect the positive trend to continue until the end of the year. The product mix also continues to move in the right direction. Special pulp substituting more expensive softwood products represented 32% of sales volume in the first 9 months of 2026 compared with 29% in the same period of 2025. This growth comes even with the price gap between BSKP and BHKP at historic lows. In fluff, 5 homologation processes have been completed and 30 clients are now in the industrial testing phase. Cash cost stood at EUR 463 per tonne in the third quarter and EUR 476 per tonne year-to-date, which is EUR 8 per tonne below the first 9 months of 2025. The EUR 8 per tonne increase versus the second quarter reflects 2 factors: inflationary pressure caused by the Iranian conflict beyond our initial estimates and the success of the water effluent recovery system at Pontevedra. Our Pontevedra biomill operated without taking any water from its usual source, the Lérez River, from the start of August until today. Instead, it drew reclaimed water from the city wastewater treatment plant. This is an industrial milestone. Pontevedra is the only mill in Europe able to run uninterrupted while using reclaimed water. The system is already a strategic part of our production process. Operating it at full scale this quarter did carry a cost around EUR 9 per tonne and some 10,000 tonnes of lower output, but we are refining how we run it and steadily moving up the learning curve. As a result, we need to update our full year cash cost forecast from our initial EUR 468 per tonne to EUR 475 per tonne. Around EUR 3 per tonne comes from the longer-than-expected inflationary pressure caused by the Iranian conflict and around EUR 3 per tonne from the extra cost of the Pontevedra water recovery system during this summer. The Efficiency and Competitiveness Plan is progressing as expected. Consolidated annualized savings already stand at EUR 14.7 million against the full year target of EUR 15 million. In our biomass-backed renewable energy platform, the third quarter showed a steady recovery. Biomass-to-electricity production reached 311 gigawatt-hours, up 22% quarter-on-quarter following the maintenance shutdowns of the second quarter. Average energy prices were 47% higher year-on-year and 33% higher quarter-on-quarter as a consequence of the inflationary pressure caused by the Iranian conflict. In renewable industrial heating, 2 projects started industrial operations with aggregated estimated production of around 118 gigawatt-hours thermal per year. In biomethane, we obtained our first favorable Environmental Impact Declaration, a crucial step before the Integral Environmental Authorization. Financially, consolidated EBITDA was EUR 46 million in the quarter compared with EUR 13 million in the third quarter of 2025 and EUR 27 million in the second quarter of 2026. Pulp contributed EUR 33 million, including EUR 17 million from energy saving certificates compared with EUR 4 million a year ago and EUR 23 million in the second quarter. These certificates were registered in the third quarter and collected in October. Renewables contributed EUR 13 million, up 51% year-on-year and EUR 8 million above the second quarter, driven by the normalization of biomass-to-electricity operations, higher sale prices and higher revenue from secondary markets. As a result, net profit amounted to EUR 10 million. CapEx amounted to EUR 30 million in the quarter, of which EUR 23 million corresponded to growth investments, notably the final payment of the Navia efficiency and decarbonization project. We maintain our full year CapEx forecast of around EUR 120 million, mostly related to projects already committed in 2025. Net debt stood at EUR 467 million at the end of September, EUR 25 million below June, with EUR 196 million of cash. The fourth quarter should bring further positive cash impacts: the EUR 17 million from the energy savings certificates registered at the end of September and cashed in October and the EUR 12 million grant related to Navia efficiency and decarbonization investments whose cash-out is already behind us. In short, our turning point was further consolidated during the third quarter: sound prices, a growing special pulp mix, an Efficiency and Competitiveness Plan that continues to deliver, a normalization in the biomass-to-renewable electricity production and pipeline progress in renewable industrial heating and biomethane. Let's now look at cost competitiveness on Slide 6. Cash cost stood at EUR 463 per tonne in the third quarter compared with EUR 455 per tonne in the second quarter. The Efficiency and Competitiveness Plan is delivering despite a more demanding environment. Consolidated annualized savings totaled EUR 14.7 million by the end of September compared with EUR 8 million at the end of June, and they include the impact of inflation throughout the year. Therefore, our message on costs is unchanged. The initiatives are progressing and the structural reductions remain on track, while the adjusted forecast for 2026 reflects external pressures not foreseen at the outset. Slide 7 looks at the pulp market. As anticipated, gross BHKP prices in Europe decreased by $100 per tonne in the quarter, reflecting the usual summer slowdown. Nevertheless, major producers have announced price increases for October, and several factors will support prices in the coming months. First, wood cost pressure in China. BHK net prices in China bottomed at around $558 per tonne in mid-August, consistent with rising fiber costs. This sets a higher floor under the BHKP cost curve, supporting the September rebound and the $20 per tonne increase announced for October in China. As in Europe, we announced a price increase of $50 in October. Second, supply and inventories. There are no major new capacity additions, with continuing delays in the start-up of OKI II, and BHKP inventories remain lean, both in China and in Europe. Third, the BSKP to BHKP price gap. The gap stands at historical lows at approximately $70 per tonne year-to-date versus a historical average of $140 per tonne. We expect the gap to gradually normalize as BSKP prices recover following a major capacity restructuring. Taking all this together, we expect the sound pricing momentum to continue for the rest of the year, together with a progressive recovery of the BHKP to BSKP price gap. Moving to Slide 8. Our product strategy continues to progress. Special pulp accounted for 32% of sales volume in the first 9 months of 2026. [ 10% ] growth is particularly remarkable considering that the BSKP to BHKP gap is at a historic low. ENCE Advanced is our broad range of BHKP substitute pulps with different attributes: high strength, unbleached hardwood pulp, low porosity and softness, suitable for hygiene, decor, packaging and other applications. Our 2028 target is 0.5 million tonnes with an incremental margin of over EUR 30 per tonne versus standard BHKP. ENCE Fluff is our other flagship strategic product. ENCE is the sole European producer of fluff pulp based on eucalyptus wood competing with softwood. The 2028 target is 125,000 tonnes with an incremental margin above EUR 60 per tonne. 5 homologation processes have been finalized and 30 clients are at the industrial testing stage. Overall, we target more than 62% of our sales in special pulp by 2028 with an incremental EBITDA margin of around EUR 36 per tonne versus selling only standard BHKP. Slide 9 shows why the product strategy and the cost strategy must be viewed together. In 2028, more than 62% of our sales will come from products that compete with BSKP. In this segment, the global cash cost curve shows Iberia well positioned among the lowest-cost producers and clearly below Nordic, North American and Canadian softwood producers. This makes ENCE a top competitive player in the BSKP segment. In other words, we are not only lowering the cost of producing standard hardwood pulp; we are also changing what we sell and who we compete against. This repositioning improves our resilience in down cycles and increases our operating leverage in up cycles. Moving now to the renewable platform. Slide 10 focuses on renewable industrial heating. Our 2030 target is to supply 2 terawatt-hours of thermal energy and to contribute around EUR 30 million to EBITDA with a target ROCE above 11%. The platform is progressing steadily. During the quarter, 2 projects started industrial operations and 2 more are expected to reach commercial operation before the end of the year. This means that we will end 2026 with 5 projects in operation compared with only 1 at the end of 2025 and with estimated annual production of 240 gigawatt-hours thermal. We have 11 projects under negotiation, of which 4 are in advanced negotiation. Our pipeline foresees 7 plants in operation in 2027, 11 in 2028 and 13 in 2029. Continuing with Slide 11, our biomethane platform advances steadily. Our target is to produce 1 terawatt-hour of biomethane by 2030 from a pipeline of 4 terawatt-hours and to contribute more than EUR 60 million to EBITDA with a target ROCE above 11%. We have 41 plants where gas grid connection, feedstock locations and feasibility studies have been completed. Of these, 28 are already in the permitting phase, and we expect 8 environmental licenses between 2026 and 2027. The most relevant milestone in the quarter is that we obtained the first favorable Environmental Impact Declaration. It is a key administrative requirement before the Integral Environmental Authorization. We expect at least one Integral Environmental Authorization before the end of the year, which will allow us to move from development to construction of our first project. Slide 12 illustrates the maturity of the pipeline, which has a potential capacity of around 4 terawatt-hours, 4x our 2030 target. We currently have one operational plant, which is expanding its capacity from 30 to 45 gigawatts-hours, and 28 projects at an advanced stage. Of these 28 projects, 16 submitted the documentation to the authorities almost 2 years ago on average. Authorizations should be confirmed between the fourth quarter of 2026 and the third quarter of 2028. The other 12 were submitted around 10 months ago on average. Authorizations should be confirmed between the fourth quarter of 2028 and the third quarter of 2029. Across the pipeline, gas grid connection and other analyses have been completed. Feedstock availability is more than 3x plant needs, and land options have been signed for 100% of the first group and 83% of the second. Biomethane is a permitting-intensive business, so the quality of the pipeline is measured by the maturity of land, grid, feedstock and environmental work. Our pipeline is well positioned in all of these areas. I will now ask Alfredo to summarize our financial position and our cash flow evolution.

Thank you, Ignacio, and good afternoon, everyone. I will take you through the third quarter financials, the P&L, cash flow and our financial position. I will then highlight our sustainability progress before handing back to our Executive Chairman for the closing remarks and Q&A. Let me start on Slide 14. The headline is that we -- that the turning point we flagged in the second quarter has been consolidated: EBITDA of EUR 46 million and attributable net profit of EUR 10 million against a loss of EUR 15 million a year ago and a breakeven in the second quarter '26. Three factors explain the improvement: stronger prices in both businesses, a normal operating quarter in biomass to electricity following the maintenance stoppages of the second quarter and EUR 17 million from the sale of energy saving certificates, or CAEs. Starting with the top line, group revenues were EUR 216 million, up 19% year-on-year and 7% quarter-on-quarter. In pulp, revenues rose 12% to EUR 147 million. Our average selling price, excluding hedges, was EUR 97 per tonne higher than in the third quarter of '25, partially offset by lower volumes. In renewables, revenues reached EUR 69 million, up from EUR 50 million, a production of 311 gigawatt-hours, in line with last year, and an average sale price of EUR 191 per megawatt-hour, up 47%. At the EBITDA level, the pulp business delivered EUR 33 million versus EUR 4 million in the third quarter of '25 and EUR 23 million in the second quarter. The year-on-year improvement reflects higher prices and the CAEs, which were registered in the quarter and collected in October, so the cash impact falls in the fourth quarter. Compared with the second quarter, the CAEs more than offset a higher cash cost of EUR 463 per tonne versus EUR 455. The main driver was Pontevedra. With low flows in the adjacent Lérez River, the mill ran from 1st of August to the end of the quarter without taking river water, using treated water from the municipal plant instead. Our water recovery system allowed the mill to keep operating normally, which is a really important industrial milestone. Excluding that effect, cash costs would have been broadly flat on the second quarter despite the annual maintenance shutdown and persistent inflation linked to the Iranian conflict. The Efficiency and Competitiveness Plan was also continuing to deliver. As our Chairman mentioned, annualized savings consolidated or under execution reached EUR 14.7 million, practically our full year target of EUR 15 million. Of this, EUR 10.9 million come from the plan itself and EUR 3.8 million from the Navia efficiency and decarbonization investment. In renewables, EBITDA was EUR 13 million, up 51% year-on-year and EUR 8 million above the second quarter. This is driven by the normalization of operation, higher sale prices and higher revenue from secondary markets. On earnings quality, we hedged 83% of production in the quarter. The gap between the regulated price and the market price contributed EUR 13 million, which was offset by EUR 11 million of hedge settlements. Below EBITDA, depreciation and depletion was EUR 22 million. Net financial expenses were EUR 10 million and income tax was EUR 3 million. Attributable net income was, therefore, EUR 10 million with pulp contributing EUR 11 million and renewables recording a loss of EUR 1 million. In summary, both businesses contributed to the growth in EBITDA and net profit, and our cost program continues to advance despite inflationary pressures that were not in our initial estimates. Turning to Slide 15. The third quarter delivered positive free cash flow of EUR 10 million as the investment peak of the first half is now behind us. Starting from EUR 46 million of EBITDA, we spent EUR 7 million on maintenance CapEx, EUR 4 million on net interest. Tax payments were negligible. That leaves EUR 35 million of free cash flow before working capital and growth CapEx. Working capital released EUR 16 million in the quarter. Normalized free cash flow, which includes that release, was, therefore, around EUR 50 million. Growth and efficiency investments absorbed EUR 23 million, mostly the final payments of the Navia efficiency and decarbonization project. This is below the first half run rate, and our full year CapEx estimate of EUR 120 million implies a much lighter fourth quarter. Finally, financial investments, disposals and other adjustments absorbed EUR 7 million. This is essentially the CAEs recognized in EBITDA at the end of September but collected within October, so with no cash effect in the quarter. Free cash flow for the quarter was, therefore, EUR 10 million. Looking ahead, we expect 2 positive cash impacts in the fourth quarter: EUR 17 million from the CAEs already collected in October and EUR 12 million linked to the Navia investment. Together with lower CapEx and a supportive pulp price outlook, this is consistent with our message for 2026: a first half investment peak followed by a second half deleveraging phase. Moving to our financial position on Slide 16. Group net debt stood at EUR 467 million at the end of September, EUR 25 million below June with EUR 196 million of cash. This marks the start of the deleveraging phase we anticipated. Compared with December '25, net debt is EUR 89 million higher, mainly reflecting the year-to-date growth CapEx I just described, particularly in Navia, and the working capital outflow of the first half. In the pulp business, net debt was EUR 340 million, EUR 29 million lower than in June with EUR 149 million of cash. Financing is covenant-free, which gives us flexibility to manage the cycle and deliver on deleveraging without covenant pressure. On maturities, we have EUR 29 million remaining in 2026, mostly linked to our rolling over paper program, and EUR 119 million in 2027, of which EUR 49 million is commercial paper that we foresee to roll over during the year. EUR 149 million of cash plus a fully undrawn EUR 130 million revolving credit facility cover those maturities almost twice over. In renewables, net debt was EUR 127 million, EUR 5 million above December, reflecting the investment in industrial heating and biomethane. The structure is long-dated: of EUR 169 million of gross debt, EUR 119 million matures beyond 2030. It comprises EUR 152 million of Magnon corporate financing, EUR 14 million of project finance at La Galera and EUR 7 million of industrial heating loans, and the EUR 20 million revolving credit facility is also fully available. From here, our priorities are clear: protect liquidity, maintain capital allocation discipline and keep reducing net debt, supported by the fourth quarter cash inflows, lower CapEx and solid operating performance in both businesses while delivering on our strategic KPIs. Before handing back to our Executive Chairman, a word on Slide 17. Sustainability is fully integrated into how we operate, and it translates into business advantages: lower costs, stronger customer preference, secure access to fiber and biomass and our license to operate. On safe and eco-efficient operations, our cumulative lost time injury frequency rate stood at 3.96 at the end of September, the best result in our entire historical series. Navia recorded just 3 odor minutes, and Pontevedra cut odor minutes by 69% versus the 9 months of 2025. Both mills achieved record-low water consumption, and 100% of our pulp and energy plants are certified 0 waste. On decarbonization, biomass is increasingly replacing fossil fuels in Navia lime kilns, with average substitution above 35% and peaks of 100%. On by-products, we obtained 16 new approvals for specialty pulps under ENCE Advanced, and special pulp reached 32% of sales. In As Pontes, we were awarded a EUR 25 million decarbonization grant for a pioneering recycled fiber facility. On our supply chain, more than 85% of the land we manage and more than 80% of the wood we source are certified, and all our sites hold SURE System certification for sustainable biomass. We're also deploying tools to comply with EU Deforestation Regulation ahead of its entry into force at year-end. On people, women represent 25% of our workforce and 31% of our managerial positions. 72% of job openings were filled through internal promotion, and ENCE obtained Top Employer 2026 certification. On governance, the external audits of our criminal compliance system and our anti-bribery system were completed, confirming that both operate perfectly. In short, these achievements reinforce our ESG profile and, more importantly, support safer operations, lower resource intensity, a stronger special pulp proposition and a more resilient local supply chain. With this, let me hand the floor back to our Executive Chairman for the closing remarks and the Q&A session. Thank you.

Thank you, Alfredo. I would like now to turn to Slide 19, which sets out our 2026 outlook, and offer you some closing remarks before we proceed to the Q&A session. We remain focused on execution. The Efficiency and Competitiveness Plan progresses well. The deleveraging phase has started, and our midterm strategic goals remain on track. I wish to highlight the following: first, price momentum should remain positive. BHKP prices are supported by lean inventories and wood cost pressure in Asia. We expect a progressive recovery of the BHKP to BSKP price gap on the back of capacity restructuring in the BSKP segment. Second, the Efficiency and Competitiveness Plan is delivering results with annualized savings of EUR 14.7 million captured. We have updated our cash cost forecast to EUR 475 per tonne, reflecting the inflationary impact of the Iranian conflict, which was beyond our initial estimate at around EUR 3 per tonne, and the extra cost linked to the Pontevedra reclaimed water system, which allowed us to continue operating in a period of total water scarcity, at around another EUR 3 per tonne. Third, renewable industrial heating is growing. We expect by the end of the year 5 projects in operation compared with just 1 at the end of 2025. Fourth, our organic biomethane development progresses. One favorable Environmental Impact Declaration has been granted so far this year. Fifth, we consolidate the turning point in our results. After EUR 0.5 million of net profit in the second quarter, we delivered EUR 10 million in the third. Sixth, our midterm strategy is clear. In pulp, we aim to be a specialized player in higher-margin products, substituting BSKP and to reduce cash costs. In renewables, we aim to grow and diversify while protecting the balance sheet and maintaining capital allocation discipline. We remain clearly focused on our deleveraging target. Thank you. We now invite your questions.

[Operator Instructions] Your first question comes from Maks Mishyn with JB Capital.

So the first question is on cash cost in pulp business. Given your more conservative view on 2026 due to inflation, what makes you confident you can still achieve the 2027 target?

Sorry, I have heard the beginning of your question, but not the end of your question. I presume you want to know something about 2027. Is that right?

Yes, exactly. So given the inflation is higher in 2026, why do you still reiterate 2027 target?

Well, as you know, we end last year with a high cash cost of EUR 483, and we see now EUR 475 on the average of the year. And the goal was EUR 453 for 2027, EUR 30 less than EUR 483 as we have 2x EUR 15 of cash cost reduction, EUR 15 in 2026 and EUR 15 in 2027. Today, it's difficult to have a vision of what is going to happen in the Gulf the next months and how is that going to affect the gas and the freight rates and the diesel, which is very important for us in our harvesting operations. We have a capacity of maneuver in order to reduce a bit more than what we expected in order to counterbalance if there is gas and diesel a bit more expensive than initially expected next year. But we have to wait until, let's say, December to know what is happening on the Gulf and to have a more precise guidance in the cash cost of next year.

And then another question is on the biomass business. Given the favorable price environment, I was wondering if you could share your expectations on the full year EBITDA in the biomass, please?

Yes. I have to remind that as we are investing in this business with a view of like if it is an infra business, we are hedging 80% of the sales, then we are not assuming the risk of the market. Therefore, while we are benefiting a bit of the fantastic prices of the energy now, but only in 20%. We made EUR 13 million EBITDA on the third quarter. We think we are going to be between EUR 10 million and EUR 12 million on the fourth quarter. We don't see any reason to be lower than the third quarter, but the more expensive biomass due to the humidity on the rainy period.

And the last question is, could you please remind us on the remaining green certificates in your pulp business?

Yes. We sold this EUR 17 million energy saving certificates at the end of September. We cashed them a few days ago. We have another one quite important. We don't know if it is -- it will be between EUR 6 million and EUR 9 million. And we have 2 small ones, EUR 1.5 million each one. I don't know if we are going to be able to do all the process of verification, certification, audit and organize the inscription in the Industry Ministry and to do the auction before the end of the year or the first quarter of next year. After that, I think we will have certificates for an amount of EUR 4 million per year, but not the important figures we had this year and the year ago.

Your next question comes from Alvaro Bernal with Alantra.

The first one is simply a confirmation regarding the CAEs. You said EUR 4 million per annum after this year, just confirming on that.

No, no. It depends when we will cash the other EUR 10 million. We are working on that in 3 different certificates. If we cash them in 2026, well, a couple of million euros next year, after that EUR 4 million per year. And if we cash big amount next year -- well, this big amount next year and EUR 4 million in 2028 and so on.