Hello and welcome to the Ence Fourth Quarter 2023 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 de Colmenares. Please begin your meeting.
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 Valdés, 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 their 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 EUR 1,220, and the main pulp producers have announced a further price increase of up to EUR 1,300.
At the same time, we were able to reduce our cash cost by 180 EUR per ton during the year, down to 455 EUR per ton in the fourth quarter. These two factors resulted in an initial operating margin recovery of up to 67 EUR 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, leveraged 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 tons.
Note that in 2023 we invested over EUR 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 wastewater treatment plant, which is managed by the regional government. Ence Advanced pulp sales accounted for 28% of total pulp 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 500,000 tonnes by 2028.
During the fourth quarter, we completed the acquisition of Ence 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 EUR 11 million in 3,400 hectares of eucalyptus plantations in Cantabria, including two global species resistant to local diseases. This step strengthens 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 globulus, 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 summarize 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 their indices. For example, in its latest study, Sustainalytics confirmed Ence for the third consecutive year as the most sustainable player in the global pulp market. Ence was awarded the EcoVadis Platinum Medal this year. This 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 IBEX ESG Index and also in the IBEX Gender Equality Index. I now invite Alfredo to further elaborate on our financial results.
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 EUR 30 million up to EUR 201 million, and the cash cost was reduced down to 455 EUR per tonne. 30 EUR per tonne lower than the previous quarter and 180 lower, comparing with the first quarter of the year, showing our strong commitment towards efficiency and cost control. As a result, Group EBITDA improved by EUR 27 million when comparing to the third quarter, up to 25, and the attributable net income improved by 27, up to EUR 3 million in the quarter. Note that the fourth quarter results also include 2 positive factors below the EBITDA line.
Firstly, we reversed an impairment provision of EUR 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 EUR 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 registered in both the pulp and the energy business. Pulp prices bottomed out in the third quarter 2023 from the peak they reached in the fourth quarter 2022. Something similar happened with the market energy prices. As a result, group revenues were EUR 830 million in 2023, a decrease of 17% compared to the previous year.
Group EBITDA was EUR 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 was partially mitigated by the said EUR 180 per tonne cash cost reduction during the year. The remaining 42% derived from the renewables business, mainly as a result of lower energy volumes 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 EUR 25 million compared to the positive result of EUR 247 million in 2022, which included EUR 169 million of positive impact resulting from the Supreme Court ruling supporting the legality of our Pontevedra concession extension until 2073. Free cash flow in the fourth quarter amounted to EUR 8 million, as you can see in the following slide 14. The working capital inflow of EUR 48 million in the quarter was mainly related to a reduction in our inventories, explained by higher sales and the normalization of our non-recourse 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 collar adjustment by EUR 22 million, as well as the growth and sustainability CAPEX by another EUR 26 million.
Please note that this figure also includes the acquisition of over 3,300 hectares of Ence's forestry assets, 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 during the rest of the regulatory life of the plants. This is what we mean when we refer to the term regulatory collar. Continuing with the following Slide Number 15, full-year cash flow generation before working capital changes and growth CAPEX was positive by EUR 26 million, despite lower pulp prices compared to the previous year.
The working capital outflow of EUR 78 million shown in the graph in 2023 includes a return of EUR 85 million of excess remuneration collected 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 EUR 66 million during the year, including EUR 16 million of our innovative water recovery solution in Pontevedra, EUR 11 million coming from the acquisition of Ence's forestry assets, and EUR 5 million related to the engineering of our growth and diversification projects. The remaining EUR 34 million correspond to a number of smaller investments aimed at improving the efficiency and sustainability standards of our biomills.
The change in net debt in 2023, shown in the following Slide 16, includes the EUR 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 EUR 280 million and a low leverage position relative to our average through-the-cycle EBITDA, despite the working capital normalization and the strong dividends 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 equity amounted up to EUR 345 million, as you can see in the following Slide 17.
Note that this figure does not include the Andritz Revolving Credit Facility for an amount of EUR 130 million in the pulp business and EUR 20 million in the renewables business, which remain fully available. During the year, we have amortized the EUR 63 million remaining from the convertible bond issued back in March 2018 for an amount of EUR 160 million, which was recognized through EUR 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 market, the MARF. At year-end 2023, EUR 53 million were outstanding under this program.
Turning now to Slide Number 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 EUR per tonne, in line with a 10% recovery in average market prices. As our chairman highlighted earlier, this pulp price recovery continues into the first quarter 2024, with net pulp prices already standing at $700 per tonne, and new prices increases announced up to $750 net per tonne. At the same time, as previously said, the cash cost reduction process continued in the fourth quarter, adding 28 EUR per tonne more to our yearly improvement, down to 445 EUR, 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 EUR 25 million, up to EUR 19 million in the fourth quarter, pushing the pulp business annual EBITDA up to EUR 46 million. Continuing with Slide 20, you can see how full year results in the pulp business and its comparison with the previous year were still affected by the price cycle's change. Pulp prices bottomed out in the third quarter 2023 on their peak in the fourth quarter 2022, resulting in EUR 179 net sales price decrease year-over-year, which was partially mitigated by the cash cost reduction and higher sales volume.
Cash costs improved by EUR 180 per tonne compared to the first quarter, falling to EUR 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 regeneration 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 GWh, due to the extraordinary maintenance shutdowns at the Huelva 46 MW and to the Jaén 50 MW 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 collar, which will be cashed in the following years. As a result, the renewables business EBITDA improved by 52% compared with the previous quarter, up to EUR 7 million. Note that this figure includes EUR 2 million of extra costs linked to the development of the new biomethane and thermal energy businesses.
Continuing with Slide 23, full year EBITDA reached EUR 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 EUR 27 million to our EBITDA, as you can see in the following Slide 24. We expect further EUR 16 million contribution to EBITDA from the remaining PV project sales within 2024. Let me please hand back now the lead of the presentation to our Chairman and CEO to review the outlook and update you on our multiple growth and diversification projects. Thank you, Alfredo. Let's continue with Slide 26, which summarizes our outlook for 2024. Pulp prices in Europe are continuing their recovery during the first quarter.
They already stand at $1,200 per tonne, and the main pulp producers have announced a further price increase of up to $1,300, as a result of low pulp 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 supplies due to lower energy prices, together with temporary higher logistics costs in January. On the other hand, our renewable business will benefit from the 10 EUR/MWh remuneration increase expected in 2024. Also, the Ministry is now working on a new draft regulation for biomass power plants, which aims to align their cash generation with their accounting EBITDA.
According to this draft, we would sell and cash our energy production at a regulated price of between 110 and 120 EUR per MWh. 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 500,000 hectares of eucalyptus plantations. Their excellent location allows us to source our wood at an average distance of less than 110 km. 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 landowners. We are talking about 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 finance their acquisition of machinery. We train their staff. We arrange their 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 wood we consume, whereas our 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 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 500,000 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 tons of our production into fluff pulp was approved last year 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 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 pulp will be very competitive.
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 will 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 more wood. 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 required 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 EUR 50 per tonne, improve its flexibility to use different species of eucalyptus, and to continue moving from standard pulp to Ence Advanced Pulp. We envisage a very competitive biomill specialized in high-margin products. The estimated CAPEX in this project amounts to EUR 120 million during the next 5-6 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 EUR 20 million per plant, with an estimated production of 50 GWh 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 Energéticos, we signed our first service contract last year with a major beverage company. We are final bidders in 5 other contracts to provide renewable thermal energy and are developing further opportunities.
Our customers appreciate our strong position and our experience in providing integral solutions, from biomass sourcing to plant design and operation. The estimated CAPEX per plant ranges between EUR 6 million and EUR 20 million, with an estimated production between 60 and 200 thermal gigawatts per plant, and a targeted ROCE of about 11%. We will build these plants in both of these two businesses, biogas and thermal energy, with EPC contracts, using non-recourse project financing backed by long-term PPAs. Moreover, in 5 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 green fuels, 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 other 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 agroforestry 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 MW in PV on top of the projects that will be sold in 2024. And fourthly, our forestry 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 recurrent EBITDA of Ence Renovables. 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 stand at $1,220 per tonne, and the main producers have announced further price increases up to $1,300. Retail prices in China are also rising after the Lunar 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 industry 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 while 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, Fluff, and As Pontes recovered paper. We will make Pontevedra one of the most competitive plants in Europe. Our priorities in the renewable business are to expand our leadership in 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.
Thank you. If you do wish to ask an audio question, please press Star One One on your telephone keypad. If you wish to withdraw your question, you may do so by pressing Star One One again to cancel. Once again, that is Star One One on your telephone keypad to register for a question. If you have multiple questions, please ask only one question at a time. There will now be a brief pause while any questions are being registered.
Our first question comes from the line of Enrique Parrondo from JB Capital Markets. Please go ahead, Enrique. Your line is now open.
Yes. So my first question was, regarding sector transport for 2024, especially on pricing for the European continent. So I'd like to have your view on, on how do you see pricing, levels signaled by the forward curve, of the sustainability of these pricing levels in light of inventories expected to remain low, but Suzano allocating higher production to, the EU and the U.S. and, and also their capacity ramping up in, in the second half of the year. So basically, your take on, on the moving parts for, prices in, in this year.
Well, what we see is that, we are now implementing the, last movement, the, $1,300 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 the second half of the year, we are not really concerned about the Cerrado project. The Cerrado project will probably start by summer, according to the information Suzano is reporting to the market.
But due to how far they are 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 quite—we are today quite confident about the second half of the year as well. Thank you, Enrique.
Thank you very much. So my, my second question would be on, on cash costs. So you've done a really good job, lowering this to levels of EUR 455 per tonne. You recently commented that you see a small increase in—for the first quarter—from temporary one-offs in logistics and also energy.
But could you give us a sense on, on what the actual expectations are, as you did in the past, for the first quarter, and maybe how do you see then cash costs evolving for the rest of the year? Just some guidance on, on the moving parts, would be helpful.
Yeah. Yeah. Well, as I, as you said and as I said previously, yeah, we, we did a good job in the, fourth quarter after also the third quarter going down. Now we have, wood in the first quarter still going a bit down. We have a, a high cost, we had high costs in logistics in January, but that's temporary because, as, because we prefer to sell, far away from Europe in, 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. We are, let's say, suffering for the reduction of the price of the energy, but that may be offset by these new regulations we think we are going to see between the end of March and the beginning of April. And then today, it's a bit difficult to say if we are going to be EUR 15 or EUR 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 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 Cost guidance for the year.
Sorry, Matthew, just one, one follow-up. Did, did you mention—I think the line broke a little bit on my side—EUR 15-20 per tonne increase for this first quarter?
Yeah, temporary. For the quarter. Temporary quarter increase for the first quarter, yeah.
Okay. Okay. Thank you. And, and my, my final question would be on a more longer-term or mid-term 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?
Yeah. Yeah. Looking ahead, we see scarcity of wood. That is why we decided to invest in the assets of Ence.
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 this, big scarcity of 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 their 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 going to be scarce 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 is why all our strategy is to diversify in higher-margin products and not to grow consuming more wood. A good example is what we did. We canceled 2 years ago our dissolving pulp project in Navia.
This project was a 200,000-tonne project requiring 1 million tonnes of wood, and we realized that was not realistic at all, because of 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 recovered paper, recovered board. This project has something very important for the Europeans today. We will reutilize an industrial land. You know that a big coal thermal plant was there. We are not invading a natural space protected. Then we have the support of the society. The society is supporting this project. Water consumption in the pulp industry is heavy. When you are working on recovered paper and recovered board, the difference is absolutely different.
It's very, very low. And then we think that it's the kind of projects we will promote in 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 bleached recovered paper or new projects like the molded cellulose we are starting to study today. Thank you.
Thank you. I'll jump back to you.
Thank you. And as a reminder, it is star one one on your telephone keypad to register. 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.
Good afternoon. Thanks for taking my question.
I'd just like a bit of a follow-up on, you know, how you're managing the logistics to customers. I mean, we listened to Suzano yesterday who was talking about shifting around inventories and needing the benefit of having local pulp inventories in Europe. And you've always made that, you know, one of your, your benefits versus the LatAm producers. So I'm just wondering how you're leveraging that at the moment when it's been called out by, 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, you know, 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. Yeah.
Thank you very much for your question. Well, we are a very different animal to, to the large Latin American mills. The big difference is that our lead time, it's between 5 and 7 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 a 150,000 tonnes per year consumer of pulp, but to be the flexible supplier. And then, we are able to supply them on a week on a weekly basis, which is extremely important. And coming back to our working capital investment and to our logistics, well, 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.
These 15 days do include the stock at the end of the pulp mill, the stock on the port, the stock traveling on the seas, and the stocks traveling by train or by lorry to our customers around Europe. Then an extremely very low working capital and an extremely very quick delivery. That is why I think, well, cash costs we are not exactly comparable in terms of cash costs with a large Latin American supplier. They benefit from lower wood, 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.
It is important that despite good years and bad years in terms of price and despite the problems we had with the drought a couple of years ago, Pontevedra has been always delivering a free cash flow, an important free cash flow after CapEx. The ROCE of Pontevedra is almost the same as the ROCE of Navia. Then 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 we are legally obliged to invest. And that is an amount of almost EUR 57 million, what we call the sustainability investments. And the mill was performing well, and the mill was making, again, free cash flow.
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, phase one and phase two 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 EUR per tonne, 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 EUR 120 million to be invested on the next 5-6 years. When I say 5-6 years, it's 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, 2.4 times, which means that we have to adjust the speed of our investments to the price of the market. Then we don't know if we are going to do these investments in 5 years or in 6 years' time.
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, you know, printing and writing, as well as some of the specialty paper customers? Any color you can provide? Thank you.
Yeah. Thank you. I will do that. Yeah. Last year, demand for tissue was stable. We see demand for tissue to remain stable with a normal growth between 2%-3%, this market growth annually. Printing and writing is improving in terms of demand. Well, last year was terrible. The decrease was by third quarter something around 30%. Then it's not very difficult, an improvement. Then 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 with 2022. But customers are placing a lot of orders. That is why price improved to $220 and $213. 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 the 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 is coming from Asia is more expensive because of 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.
Thank you.
Thank you.
Thank you. One moment, please, whilst we take our next question. Our next question comes from the line of Jaime Escribano from Banco Santander. Please go ahead. Your line is open.
Hi. Good morning. So three questions from my side. The first question would be, regarding pricing. So Suzano is 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 well on purpose. So what do you think they have in mind, first question, and whether, how do you see this $1,300 per tonne being implemented?
Do you think this is sustainable, or do you think it's going to be a couple of quarters of price increasing, and then there's been some decline, or, or well, just to understand, how do you think about the pricing evolution based on Suzano's strategy? So this is one first block of questions. The second one is to. Sorry,
I will answer your first question. Well, I am no one to judge. 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 who has 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, retail price is moving up in Europe, even though they are just coming back from Lunar Year, which is positive. And according to the Rado project, 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 will come to the market till the end of the year, nor in America, in Asia, or in Europe. Then we see a good market.
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.
Okay. No, that's fair enough. Yeah. 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 2025. My second question is the cash costs. So bearing in mind, again, the very high pulp prices, so you say the cash costs, you will try to put it down. But 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 costs will have to correlate to some extent to the pulp prices? Thank you.
Well, you know that in our costs, 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 huge demands for energy in Iberian Peninsula. We were competing against pellets, and we were competing against Scandinavians importing wood for energy purposes in Spain. Now, with the gas at EUR 24, that's finished. Then, let's say we have less competition in Iberian Peninsula to buy wood.
Well, even if we just recognize the increase on the pulp prices, today we are not concerned about wood prices in the Iberian Peninsula for this year. Regarding energy, which is a negative cost for us, as you know, well, we strongly believe this new regulation which is coming at the end of March, early April, will benefit us, something around EUR 10 per tonne of pulp, because the retribution of operation is going to be increased by this amount of money. This problem we have between accounting EBITDA and the free cash flow EBITDA on 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 at 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 a room for chemicals to go down. The same with freight costs. Freight costs are not at 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 PIX is at 80. And then we see a room for costs to continue going down. We are working very hard on fixed costs. We are working very hard on the overheads. We have three big projects. And then that is why we think, all around, we are going to be able to continue in second, third, and fourth quarter to slightly reduce costs, despite the good momentum on the pulp business.
Okay. Very good.
And another 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 quantify? I don't know if you have done the exercise to quantify the tax credits impact from this new ruling.
Yeah. Yeah. I know that, but I will make Alfredo to have the pleasure to inform you about that.
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 EUR 20 million all in all. But again, I mean, this is what we expect.
If nothing changes regarding the regulation, that is what we should have.
Yeah. It is important to say that we will cash these EUR 20 million on the coming quarters. On top of this figure, we have tax credits for another EUR 50 million on our balance sheet that will be cashed on the coming years.
Okay. Very, very good. Final question from my side. Building on the new regulation for the renewable division, so could you give us a sense what should be the recurrent EBITDA and cash EBITDA once the new regulation is implemented? Thank you.
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 collar, adjusting the EBITDA to free cash flow, will disappear, and almost 100% of the EBITDA will be cash conversion. Well, cash conversion before CAPEX. Then 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 110-120 EUR per MWh, which is slightly 10 EUR higher than today than the previous year. Sorry.
Perfect. Thank you very much.
Thank you. And one moment, please, whilst we take our next question. And just as a reminder, if you would like to register for a question, it is STAR11. And if you do have multiple questions, please ask one question at a time. And our next question is a follow-up question from the line of Enrique Parrondo from JB Capital Markets.
Please go ahead. Your line is open. 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 a more detailed view on these this year or anytime soon? Thank you.
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 is it 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 2.4-2.5 times net debt to EBITDA on the pulp business.
Then, we don't know if we are going to accomplish all these investments in 4 years' time, in 5 years' time, or in 6 years' time. In any case, the new businesses we are launching today, it is 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 at the same time, as you know, we are developing this fantastic business in biomethane. Today, we have 6 plants and they're 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 in 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.
Super. Thank you.
Thank you.
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.
Thanks for taking the follow-up. Maybe just to follow up on the the capital allocation.
I mean, if pulp prices stay even where they are at the moment and your cash costs stay, let's say, the average of the second half of last year, you know, it implies a good uplift to your EBITDA and cash delivery. If 2024 and 2025 stay at those levels, you know, 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? You know, what is the priority for those projects? I know you've clearly got the ongoing ones, but, you know, would you prioritize Pontevedra and bring forward a lot of their CAPEX, or, you know, would you do dividends or even buybacks as an option?
I'm just trying to understand, you know, 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.
No. We will balance both things, as I said before. Keeping always in mind this prudent leverage, we will give 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 projects step by step. Then, when once we will approve Pontevedra, let's say, by EUR 120 million, it's not one project, EUR 120 million. It's several projects of 10-15 projects of 10-15 million, each one. Then we will do that sequentially on 5-6 years' time.
You know, I think that, well, in this business, despite we may be very optimistic today about what is going to happen in 2025-2027 because there are no new projects coming on, we have to be prudent. Then I think we have to go step by step.
Fair enough. So just to understand, so the Pontevedra is a good example. If things are in a good position, maybe you do 1, 2, 3 of those EUR 10-15 million smaller projects at one time and kind of bring them all forward. And if not, you, you take longer and de-deploy it over the 5-year period.
Yeah. Yeah. We will advance. If, if things go well, we can advance 2 or 3 projects of EUR 10-15 million. But not, we never advance a project of EUR 100 million to 1 year. Never.
Great. Thank you.
Very clear. Thank you very much.
Thank you. And as we have no more questions registered, I hand back to our speakers for any closing comments.
Thank you very much, ladies and gentlemen. We meet again, early April, after our annual shareholders' conference. Thank you very much. And enjoy this Friday.
This now concludes our presentation. Thank you all for attending. You may now disconnect.