Good morning, ladies and gentlemen. Welcome to the ENCE Q1 2025 results presentation. I will now hand over to Mr. Ignacio Colmenares, Executive Chairman, and Alfredo Avello, CFO. Gentlemen, please go ahead.
Good morning, ladies and gentlemen. Thank you for joining ENCE's first quarter 2025 results conference call. Sorry for the small delay, but as you can see, we have a light problem on the presentation. You are going to see some paragraphs in red. We do not know why. We have been trying to correct that, but we have not been able. Our CFO, Alfredo Avello, and our Head of IR and M&A, Inés Álvarez, are also connected to this call. After the presentation, we will be pleased to answer any questions you may have. The tight pulp supply-demand balance drove prices higher in the first quarter, as you can see on slide 6. Pulp prices bottomed out in December. Since then, the European hardwood pulp price has rebounded by 21% to $1,218 for orders placed in March and delivered in April.
Demand for market pulp continued to grow in the first quarter, driven by China, with a 5% year-on-year increase to February. The record price differential with softwood pulp is boosting demand for hardwood pulp. Hardwood pulp demand was up 7% year-on-year to February. On the supply side, pulp producers' inventories remain relatively low at 40 days. Moreover, the bankruptcy of a large integrated Chinese pulp and paper producer has created a paper supply gap, and the major Brazilian mill continues to switch from hardwood to dissolving pulp. I believe that this tight pulp supply-demand balance should continue to support strong pulp prices despite the short-term turbulence caused by the U.S. tariff announcements.
In the medium term, pulp demand growth is expected to continue at healthy rates, driven by tissue consumption, while no significant market pulp capacity additions are expected in Latin America until 2028, supporting a positive outlook for pulp prices in the coming years. Industry experts continue to forecast an improving price outlook, with average hardwood pulp prices of over $1,400 per ton in 2027. Turning to slide 7, it is worth noting that virtually all of our sales are generated in Europe, where we have significant competitive advantages in logistics and customer service, making us more resilient to rising trade tariffs elsewhere. Our pulp is mainly used to make basic and resilient consumer products such as tissue paper and hygiene products. Almost all our wood consumption is sourced locally. Our chemicals are also locally sourced or imported from Western Europe. Our pulp mills are energy self-sufficient.
They generate, as you know, a surplus of renewable energy, which is sold to the national grid at a regulated price. Similarly, 100% of the biomass used in our renewable business is sourced locally, and the energy produced is sold also on the national market. Continuing with slide 8, our ongoing FX hedging policy will allow us to mitigate the impact of a weaker dollar. As you can see in this slide, we have secured an average cap of $1.09 for almost 50% of our expected pulp sales in 2025. Turning to slide 9, the record price gap with softwood pulp is strengthening demand for our ENCE Advanced Pulp, which accounted for 35% of our total pulp sales in the quarter. These products deliver higher margins than our standard pulp, as they substitute softwood pulp, which is more expensive.
We expect these products to continue to gain market share, reaching 50% of our total pulp sales by 2028, excluding our expected fluff pulp sales. We expect these products to generate an additional margin of almost EUR 30 per ton, improving our average sales price by EUR 15 per ton and our EBITDA by EUR 15 million by 2028. Continuing with slide 10, our first line to produce up to 125,000 tons of fluff pulp at Navia is on track to start up in the fourth quarter. Fluff is a special absorbent pulp used mainly in hygiene products such as sanitary towels, nappies, and feminine care products. Today, it is mainly produced in the U.S. We are the first in Europe to produce it using more economical eucalyptus pulp, replacing the more expensive softwood fluff pulp. Our new line has attracted plenty of interest from several potential customers.
We are now targeting an accelerated ramp-up in 2026. Fluff pulp has traded at an average premium net of commercial discounts of over $300 per ton of hardwood pulp over the last five years. We expect our fluff pulp to deliver a net extra margin of over EUR 60 per ton over our standard pulp. This extra margin should allow us to improve the EBITDA of our pulp business by over EUR 7 million when fully ramped up. Together, our ENCE Advanced Pulp and our fluff pulp will account for more than 60% of our total pulp sales by 2028, with an additional margin of EUR 22 million per year. Turning to slide 11, as previously announced in February, we sold 191 GWh of energy-saving certificates for EUR 30 million net. They were cashed in and reported as other operating income in the quarterly results of our pulp business.
This sale is the result of our continued efforts to create shareholder value through efficiency improvements at all our plants. We are working on further energy efficiency measures to achieve more certificates during 2025 and beyond, though we do not expect them to be as substantial as those already achieved. Turning now to slide 12, I would like to highlight the positive performance of La Galera Biomethane Plant in its first quarter under our management. We acquired the plant last December, and it has already improved its biomethane production by 67% in the first quarter compared to the previous one. We have started to adapt the plant to our unique business model to transform local agricultural biomass and livestock manure into a biofertilizer with multiple benefits and without disturbing the local communities. Firstly, we are eliminating odors and adapting the biomass transportation routes to avoid the trucks passing through nearby villages.
Secondly, we want to upgrade the plant's waste, the digestate, into a high-quality organic fertilizer. We aim to produce and sell 20,000 tons of our biofertilizer in this plant as from 2027. Finally, we are boosting the plant biomethane production up to the targeted 50 GW per year by improving the process and eliminating production bottlenecks. These improvements will allow us to increase the plant's annual EBITDA from over EUR 1 million expected in 2025 to over EUR 4 million expected in 2027. The acquisition of this plant is an important milestone that enables us to fast-track the development of a large biofertilizer and biomethane platform in Spain and to showcase the value added by our respectful business model. This is the plant model that we will be showing this year to the communities where we are developing our other projects.
As you can see on the following slide, number 13, we have a portfolio of 32 biofertilizer and biomethane projects in Spain, which already have land and feasibility studies completed. Sixteen of these projects are already well advanced in the permitting phase. We expect 10 of them to be ready to build during 2025 and 2026. On top of these, we are working on another 16 projects which are at an early stage of development. We plan to build these plants with EPC contracts using non-recourse project financing backed by long-term PPAs, as we did in La Galera. Our initial goal is to generate over 1 TWh per year and to contribute over EUR 60 million to EBITDA by 2030. However, if we consider all the projects that we are developing, we could reach over 3 TWh per year.
Let's continue with the progress of our biomass thermal energy business on slide 14. There is an opportunity to generate more competitive renewable thermal energy with biomass to help decarbonize the Spanish industry at an attractive return. Through our subsidiary, Magnum Servicios Energéticos, we signed our first O&M contract in 2023 with a major industrial company in the food and beverage sector in Spain. At the end of 2024, we signed a second contract with a leading company in the brewing sector in Spain for the installation of two boilers at one of the facilities and for the supply of 85 GWh of biomass thermal energy per year with a 15-year term. We have already started work to launch the service in the first half of 2026 with an expected contribution to EBITDA of over EUR 2 million annually.
This project is our second step in the creation of a renewable industrial heating platform in Spain, as you can see in the following slide, number 15. We are now working on another 13 projects with important industrial companies in the food, beverage, and chemical industries in Spain to provide them with renewable thermal energy. We are in exclusive negotiations for three of these projects, which are expected to materialize this year. As in the biomethane business, we plan to build these biomass thermal plants using EPC contracts and non-recourse project financing backed by long-term PPAs. The aim of Magnum Servicios Energéticos is to produce 2 TWh per year of renewable thermal energy by 2030 and to contribute over EUR 40 million to EBITDA. I now invite Alfredo to elaborate further on our first quarter financial results.
T hank you, Ignacio. Let's continue with the financial performance of our pulp business in slide 17. Our pulp business EBITDA attained EUR 28 million, supported by the 35% sales rate of ENCE Advanced Products with higher margin sold in the quarter. The EUR 11 per ton cash cost reduction compared to the previous quarter, as the temporary factors which affected our cash cost in the fourth quarter of last year began to dissipate, as guided in our previous goal. The sale of energy-saving certificates for a net amount of EUR 30 million coming from our continuous effort in improving energy efficiency in our operations and the gross pulp price increase from the lows of $1,000 per ton to the current $1,218 per ton now in April.
This EUR 28 million EBITDA figure is in line with the same period of 2024, despite the low production and sales as a consequence of the different calendars for the yearly maintenance shutdown at Navia, which was planned for March this year, while in 2024 took place in the month of April. The absence of the cogeneration turbine at Navia had one-off cost impact of EUR 8 million in the quarter, and repairing plans to restart its operation continue for mid-May. We also keep on expecting annual pulp sales above 1 million tons for 2025. Turning now to slide 18, let's talk about our renewables energy platform. As you know, our renewables energy platform is being developed over four main business verticals or linked to our main base core activity and a strong operating know-how: the collection and management of different kinds of biomass and its transformation into non-conventional renewable energies.
These four main verticals are, firstly, our traditional business of biomass into regulated energy, currently operating 266 MW. Secondly, our energy services business, aiming to decarbonize the Spanish food and beverage and chemical industry through providing efficient non-fossil thermal energy, currently managing energy service for one of the biggest Spanish breweries under the construction process of a second one and in the final negotiation phase of another three contracts. Thirdly, the production of biofertilizers and biomethane from agroforestry and livestock biomass, currently operating a 50 MW plant recently acquired in December last year. Fourthly, we are taking first steps for the capture and valorization of the biogenic CO2 produced in our plants towards our potential contribution into the e-fuels industry. All these four verticals also enjoy from very sane and credible pipelines.
Now, focusing on our traditional biomass into regulated energy business, this EBITDA was 6% higher than that in the same period of last year, attaining EUR 7.3 million compared to EUR 6.9 million. When comparing to the previous quarter, the EUR 1.7 million difference is mainly explained through the planned annual maintenance stoppages carried out for 70% of our installed capacity during the first quarter in the expectancy of our biomass costs in the coming quarters. This planned annual maintenance resulted in 12% lower energy volume sold compared to the previous quarter. However, this volume is still 19% higher than in the first quarter of last year. Remember that a new methodology for updating quarterly remuneration of biomass plants was published back in June 2024, with retroactive effects as of 1st January 2024.
The average sales price recognized for our biomass plants in 2025 is approximately EUR 117 per megawatt-hour and has two main components: a regulatory pull price, which is estimated by the regulator using a basket of forward prices, and RO for the difference up to the set EUR 117 per megawatt-hour price. On top of these two components, we still receive the remaining RI, which for the quarter was EUR 6.4 million. It may happen that the real market pull price in each quarter may differ from that estimated by the regulator through the basket of forward prices. Under the old methodology, this difference was compensated through the regulatory collar, but this collar has now been eliminated.
In order to mitigate such risk, we have established a hedging policy that replicates the formula used by the regulator to estimate the regulatory pool price, currently covering up to 40% of our estimated energy sales for the quarter and ending in a net positive impact of EUR 2.7 million in the first quarter, including EUR 1.5 million settlement from these hedges. Net operating costs were flat year-on-year, at EUR 16 per megawatt-hour higher than in the previous quarter due to higher fixed cost driven from the set planned maintenance shutdowns carried out in the quarter. We continue to expect higher energy generation and lower operating costs in 2025 as a result of higher fixed cost dilution and lower biomass costs. When analyzing the full renewable business, including all four verticals, consolidated EBITDA was EUR 6 million for the quarter.
This is some 10% lower than in the first quarter of last year, which included EUR 0.7 million positive contribution from the sale of a 10 MW PV project. The other three renewable businesses verticals had an impact of EUR 1 million of EBITDA in the first quarter due to its earlier stage of development and lower fixed cost dilution. Let's continue in slide 19 with our quarterly consolidated results. Although group revenues were lower by EUR 17 million year-on-year, our consolidated EBITDA was just EUR 1 million lower, at a solid EUR 34 million. This is EUR 22 million higher than in the previous quarter due to the sale of energy-saving certificates coming from our energy efficiency projects in the pulp business.
Finally, the group profit reached EUR 2 million in the quarter, EUR 1 million less than in the first quarter of last year and EUR 12 million more than in the previous quarter in 2024. Turning now to slide 20, consolidated free cash flow before working capital variation and growth CapEx reached EUR 20 million in the quarter. Working capital implied a cash outflow of EUR 8 million, mainly driven by an increase in wood inventories related to Navia's planned maintenance shutdown in March. Growth and sustainability CapEx amounted to EUR 11 million in the quarter, EUR 8 million coming from the pulp business, mostly related to our first fluff pulp line or our first recycled molded fiber packaging line after decarbonization and cost-cutting project in Navia.
Regarding our renewable business platform, we invested EUR 4 million concentrated in our recently acquired conventional biomethane plant in La Galera to improve its performance and round out its process for the future production of biofertilizers. Also, we continue with the development of our biofertilizer and renewable industrial heating verticals in Spain. Continuing with slide 21, our consolidated net debt level was EUR 331 million at the end of the quarter, including EUR 61 million under IFRS 16. This is EUR 10 million higher than at the end of 2024. EUR 5 million is explained by the free cash flow and another EUR 5 million by leases increased under the IFRS 16 in the pulp business and the provision of interest in the renewable business. This figure implies a low leverage ratio of just 1.8 X the group average cycle EBITDA.
We ended the quarter with a strong liquidity position amounting to a consolidated EUR 316 million, with long-term debt maturities in both businesses and no covenants in the pulp business. Note that this liquidity position does not include the revolving credit facilities amounting to EUR 130 million in the pulp business and EUR 20 million in the renewable business, which remain fully available. Also, a non-recourse green project financing facility for the acquisition and planned investments at La Galera plant was closed in January for a total principal amount of EUR 20 million and a final maturity in June 2037. Let's turn now to slide 22. I would like to conclude my section emphasizing once again ENCE's continued and exceptional sustainability performance. We are leaders in sustainable forestry, circular economy, social commitment, gender equality, and corporate governance. Our best practices have been recognized by independent ESG agencies and indices.
They have been ranked by Sustainalytics as the most sustainable player in the global pulp industry for four consecutive years. They have also been awarded the Ecovadis Platinum Medal, the highest rating awarded by this platform, and we remain members of the prestigious FTSE4Good Index since 2021 and the IBEX ESG and IBEX Gender Equality Indexes. Let me hand back now the floor to our Executive Chairman, Ignacio Colmenares.
Thank you, Alfredo. Let me conclude with our outlook for 2025 and some closing remarks. Regarding the outlook for 2025 on slide 24, I would like to highlight the following: Pulp prices bottomed out in December. Since then, the European pulp price has rebounded by 21% to $1,218 per ton in April. Virtually all of our sales and all of our sourcing of raw materials are done in Europe, making us more resilient to rising trade tariffs elsewhere.
Our ongoing FX hedging policy will allow us to mitigate the impact of a weaker dollar. We expect the cash cost reduction to continue during 2025. Our first fluff pulp line is on track for start-up in the fourth quarter. We will start the production and sale of our renewable packaging solutions later this year. Let me finish now with some closing remarks on slide 25 before we move to the Q&A session. Industry experts continue to forecast an improving price outlook, with estimated average hardwood pulp prices of over $1,400 per ton in 2027. Our higher margin and value-added pulp sales are expected to exceed 60% of the total by 2028, including both our ENCE Advanced Pulp and Fluff Pulp sales, delivering over EUR 22 million of additional margin.
We are building a large biofertilizer and biomethane platform in Spain, which aims to produce over 1 TWh by 2030 and contribute over EUR 60 million to EBITDA. Our thermal energy business is developing well. It aims to produce 2 TWh by 2030 and contribute over EUR 40 million to EBITDA. Reaching these goals should allow us to more than double the renewable business EBITDA over the next five years, while the transformation of ENCE into a producer of special pulp will significantly improve the business operating margin. Remember that the execution of these projects will be adapted and aligned to our cash flow generation to maintain a prudent leverage and an attractive remuneration for shareholders. Thank you for your attention. We would be pleased now to hear any questions you may have.
Thank you. Ladies and gentlemen, the Q&A session starts now. If you wish to ask a question, please press Star 1 on your telephone keypad. You will have the opportunity to ask all the questions that you may have. We kindly ask you to ask only one question at a time to our speakers instead of asking multiple questions at the beginning. Once again, please press Star 1 to register for a question. One moment, please, for your first question. Your first question comes from the line of Cole Hathorn with Jefferies. Please go ahead.
Morning. Thanks for taking the question. Can I just start off with your views on pulp near-term? I mean, you've been quite clear medium-term around supportive supply and demand until 2028.
On the short term, we've got a lot of trade uncertainty, and we've seen cuts to import prices in China as well as the resale price levels come down a fair amount. I'm just wondering how you see Europe versus China price gap developing over the next 3-6 months. Do you think that the European index prices or net prices might be able to maintain a premium versus China net prices? Thank you.
Yeah, thank you very much, Claudia. I do think that the European market will keep a premium over the international market. The situation in China is very different from the situation in Europe today.
It is true that the impact, the mathematical impact of the tariffs in the pulp demand in China is minor because the volume imported from China to the States in paper is below 1 million tons, 400,000 tons of tissue paper, and 500,000 tons of packaging. If China loses this market of 1 million tons, it is not a big volume compared to the total size of the industry of the paper and pulp industry in China, where just the market pulp is over 30 million tons. On the other hand, the U.S. exports paper as well to China. The U.S. exports almost 1 million tons also of packaging products to China. We see that China will try to export those products to other countries. China may lose a small part of this volume.
On the other hand, in pulp, as you know, China is not exporting to the U.S., nor to the rest of the countries. The States are exporting pulp to China. They are exporting 1 million tons of fluff per year to China. I think that's an opportunity for the producers of pulp in Scandinavia, in Brazil. If the tariffs keep on to ENCE at the end of the year, we see today there is a lot of uncertainty in China. If you take data and mathematics, the impact in the pulp and paper industry in China is very limited. As I was saying before, more than 70% of what we produce goes to hygiene products, and more than 70% of the pulp China is importing goes to tissue paper and hygiene products.
Basic products are not affected by these kinds of things. We think that we are now trying to fix the prices for May in Europe. It is tougher than it was four weeks ago or eight weeks ago. That's true. We still do not have the results. We will continue pushing for trying to keep prices going up, but we will see the results during next week, not before. It is tougher than one month ago. I think personally that maybe now we are going to be during several weeks on a platform, stable prices at the level we have already reached. Most probably, after all this uncertainty starts to, well, to stop, the pulp will continue going up. That's my vision.
To follow up on that view on the European stability in index prices from here, have you seen any changes in customer order patterns for uncertainty or anything changing from the customer basis or any inventory accumulation? I'm just trying to assess if there's any change in order patterns or inventories that you're seeing on the pulp side.
No, we haven't seen any increase of inventories. We have seen in the last two weeks some spot offers at, let's call that, international prices, but they are very limited. They make a lot of noise, but they are quite limited in terms of volume.
You brought up fluff pulp from the U.S. producers selling into China. Now, if there are tariffs that might displace a lot of those volumes, how do you think that might impact your ramp-up at the Navia Mill?
Do you see some of those U.S. producers potentially exporting more volumes to Europe, or do you think this might give you an opportunity if some of the Scandinavians export from Europe into China while you are trying to ramp up and you can place more volumes in Europe? Just wanting to know if you have any thoughts there, or is it too early?
What I have seen is, and my vision is what I said before, there is now a big opportunity for Brazilians and Scandinavians to substitute the U.S. exports of fluff to China. I think that will be good for the European market in terms of a limited offer. I do not see the U.S. increasing their exports to Europe because they have its long-term contracts, and the European customers are not going to buy more.
They are already buying, and they are satisfied with what they are getting from the mix they are getting from Scandinavia and from Brazil and from the States. What we see is, because of all those doubts, all these doubts regarding the tariffs, we see an increasing interest of all the European customers in ENCE starting as soon as possible to produce pulp. We are going to have, by May 15, we are going to be able to produce fluff pulp, but on bales, not on coils, on bales. With that, we will start the homologations. We think that, well, we think that we are sure that by the fourth quarter, we will have coils available, and then we will start all the process of homologation.
Today, we see that we are going to have a more accelerated ramp-up of this business than what we expected two years ago when we launched this new opportunity.
Thank you. Finally, just I'd love your thoughts on how cash costs in pulp develop through 2025 and are all the temporary issues now resolved and behind you.
Yeah, it's pretty better today. April has been a different month of the first quarter. Some problems we have on the energy generation on the pulp mills is solved. I can confirm that on May 15, the alternator in Navia is going to start to work. We had, as you remember, on the last quarter of 2024 and first quarter of 2025, huge increases of chemicals prices because some problems on a large mill in Spain producing chemicals. That's also solved. The chemicals price is down now.
That is why we see a cash cost for this quarter, for second quarter, of EUR 485. Our guidance for the cash cost of the full year is also EUR 485.
Thank you.
Thank you.
Once again, if you would like to ask a question, simply press Star 1 on your telephone keypad.
Okay, gentlemen, thank you very much for your time. I hope to be in contact with you in three months' time. Thank you.
Thank you.
Thank you. Ladies and gentlemen, this now concludes our presentation. Thank you all for attending. You may now disconnect.