Ladies and gentlemen, welcome to the Ence third quarter 2023 results presentation. I now hand you over to Ignacio de Colmenares, Executive Chairman, and Alfredo Avello, CFO. Please, go ahead.
Thank you. Good afternoon, ladies and gentlemen. Thank you for joining Ence's third quarter 2023 results conference call. Our CFO, Alfredo Avello, and our Head of IR, Alberto 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 Slide 6 and the key highlights. Firstly, pulp prices in Europe have started to recover after falling during the second and third quarter. Main pulp producers have announced several price increases, up to $980 per ton from November. Secondly, we reduced our cash cost by EUR 152 per ton in the second and third quarters, down to EUR 484 per ton. This partially mitigated the 37% fall in net pulp prices during the same period.
We believe the downward trend in cash cost will continue over the coming quarters. Thirdly, our differentiated products accounted for 25% of our pulp sales in the third quarter. These products offer a lower environmental footprint. They have enhanced technical properties that favor the substitution of plastic and softwood pulp, and therefore offer a higher margin. Fourthly, we have recently reinforced our position as the largest private forestry manager in Spain with the acquisition of Sniace forestry assets. Fifthly, the board has approved our first investment to diversify into fluff pulp. And finally, we closed the third quarter with a low leverage position relative to our average cycle, EBITDA, and with a consolidated cash balance of EUR 298 million. Turning now to Slide 7. You can see how pulp prices have now started to recover. We expect strong prices in the foreseeable future.
The downward trend in cash cost will continue over the coming quarters and will contribute further to the recovery of our pulp operating margin. We expect cash costs below EUR 470 per ton in the fourth quarter. As you can see in the next Slide, number 8, we expect growth in demand for pulp to exceed growth in supply over the next 5 years, which should support an improving outlook for pulp prices. As regards to market demand, the recent destocking in the western paper industry is almost over, and demand for pulp and paper in China recovered strongly during the second half of the year. We believe demand will accelerate in the coming years as a result of 3 positive structural trends. Firstly, urban population growth at higher living standards in emerging markets.
These have boosted demand for tissue and hygienic products, which now account for over 50% of market pulp demand. Secondly, continuing plastic and synthetic fiber substitution. This will strengthen pulp demand over the next few years. Finally, the reduced availability of recycled fiber due to reduced consumption of printing and writing paper. These trends will increase demand for virgin fiber. As regards to market supply, no significant additions to capacity have been confirmed as from 2024 beyond Suzano's Cerrado Project. Additions to competitive pulp production capacity are constrained by wood availability and land scarcity. Furthermore, permanent capacity closures announced so far in 2023 exceed 1 million tons per year. Let's turn now to Slide 9, where we give an overview of our differentiated pulp products, which accounted for 25% of our pulp sales during the third quarter.
These higher value-added products have a lower environmental footprint and are well adapted to replace plastic and softwood pulp in multiple paper applications. They also deliver higher margins for Ence. We aim to increase our sales of these products over the next few years towards a target of over 500,000 tons per year by 2028, excluding fluff. We will give you more details in our next capital market day that we are planning for the beginning of next year. On top of that, our board has approved the first investment to diversify our pulp production in Navia into fluff mill, the fast-growing segment, which offers even higher margins compared to the standard hardwood pulp. I now invite Alfredo to further elaborate our first half results.
Thank you, Ignacio. Continuing with our consolidated results on Slide 10, group revenues reached EUR 630 million in the first nine months of the year....percent lower than those of the same period last year. This decline was mainly driven by the cash, by the year-on-year decrease in pulp prices, as well as the accounting non-cash impact caused by the regulated energy price update last June. These are the two main factors that explain our group's EBITDA reduction to EUR 64 million in the first nine months. As our chairman has already explained, it's important to highlight the EUR 152 per ton cash cost reduction achieved by the company during the second and third quarters. This trend will continue during the coming quarters. Also, the sale of our PV projects in Jaén and Huelva during the first and third quarters contributed EUR 27 million to.
As you can see on the next Slide, 11, free cash flow in the first nine months was positive by EUR 17 million, before growth CapEx and the working capital normalization recorded during the period. Working capital changes include the return of EUR 85 million of excess remuneration collected in 2022, following last year's regulatory adjustment, as well as the normalization of our operations at Pontevedra after the temporary suspension caused by the extraordinary severe drought we suffered in Spain during the second half of last year. Turning now to Slide 12, you can see our strong shareholder remuneration related to 2022 results, which included EUR 140 million dividend distribution during the first half of 2023. Our dividend policy allows us the flexibility to increase shareholder remuneration in periods of a strong free cash flow generation and low leverage.
As you can see on the following Slide, number 13, we ended the third quarter with a low leverage position relative to our average through the cycle EBITDA, despite the working capital normalization and a strong dividends distributed over this period. During this year, we have amortized EUR 63 million remaining from the convertible bond issued back in March 2018 for an amount of EUR 160 million, which was refinanced to EUR 268 million of new facilities. We closed September 2023 with EUR 288 million in cash on our balance sheet. Our pulp business ended the period with a net debt of EUR 119 million, which includes IFRS liabilities from our lease contracts, which amounted up to EUR 40 million.
Cash balance in our pulp business was EUR 251 million at the end of the quarter. Note that our pulp business financing facilities are covenant-free. Also, during the month of October, and continuing with our aim of diversifying our financing sources, we have filed our first commercial paper program for an amount of EUR 200 million. First placement was largely oversubscribed at an average spread over Euribor of 100 basis points and up to a three-month tenor. Additional placements will be launched in the next months. Regarding our annual business, we ended the period with a net debt of EUR 93 million and a cash balance of EUR 47. Turning to Slide 15, let's review the financial performance of our pulp business.
Pulp sales in the first nine months amounted to over 700,000 tons, 4% higher than in the same period last year, which was affected by a temporary downtime of Pontevedra's bio mill during the second half of the year. As already highlighted, our differentiated products accounted for 25% of our pulp sales in the third quarter and 18% of our pulp sales during the first nine months. Note that this was achieved despite a temporary narrowing of the price spread versus softwood pulp during the first quarter. These higher value-added differentiated products are more sustainable and well adapted to replace plastic and softwood pulp in multiple paper applications, and also deliver higher margins for Ence. We're aiming to increase the sale of these products in the next few years towards a target of 500,000 by 2028.
Over 92% of our pulp sales went to the European market, where our customers benefit from Ence's unique wide portfolio of sustainable products and shorter delivery times versus our competitors. Over half of our sales were in the fastest-growing tissue and aging product segments. As you can see on the following Slide, number 16, our pulp business was mainly impacted by an 18% mill pulp price year-on-year decrease, driving our EBITDA to EUR 28 million. The average cash cost in the first nine months was 7% higher than that one in the same period last year. Having said that, I'm turning into Slide 17. Our cash cost showed a significant improvement over the second and third quarters, which allowed us to partially mitigate the decline in pulp prices.
Cash cost improved by EUR 152 million, 52 euros per ton in the second and third quarters, falling to EUR 484 due to lower wood, chemical, energy, and logistic costs. The water recovery solution and repairs of its energy turbine implied an extra cash cost of EUR 46 per ton in the first quarter and 28 in the second. This downward trend in cash cost is expected to continue in the coming quarters, and we are currently targeting a cash cost some below EUR 470 per ton for the fourth quarter.
Continuing into Slide 19, let's review the financial performance of our renewable business, mostly driven in this 9-month period by the regulated energy price update published in June, when it was reduced on a retroactive basis for the year from 208 down to 109 EUR per MWh. This update has an accounting non-cash impact in 2023, which will be compensated by a EUR 9 million higher remuneration for investment cash annually starting this year. On the other hand, the energy sold in the first 9 months was 808 GWh, mainly due to the lower energy market prices, together with a longer than usual maintenance works carried out at a 150 MW power plant.
Note that we expect a low renewable energy output in the fourth quarter due to extraordinary repair works being carried out at Huelva 46, and Ciudad Real , 50 MW power plants, which will remain offline until the end of the quarter. The sale of our first PV projects in Jaén and Huelva during the first and third quarters contributed EUR 27 million to our EBITDA, as you can see in the following Slide, number 20. We expect a further EUR 23 million contribution to EBITDA from the remaining PV projects sales during the year of 2024. Turning now to Slide 21, let me conclude my section, emphasizing once again, ENCE's continued and exceptional sustainability performance. We are leaders in sustainable forestry, in a circular economy, social commitment, gender equality, and corporate governance. Our best practices have been recognized by independent ESG agencies and indexes.
In its latest study, Sustainalytics confirmed Ence for the third consecutive year as the most sustainable player in the global pulp market. This year, Ence was awarded the EcoVadis Platinum Medal, the highest rating awarded by this platform. Furthermore, we have been a member of the prestigious FTSE4Good Index since 2021, and I am very proud to remark that we have also been included in the new IBEX ESG and IBEX Gender Equality Indexes. Regarding our recent sustainability achievements, we can highlight the water footprint reductions in Navia, Pontevedra, and our biomass power plants, that we continue to reduce the odor on both our bio mills, which is already below one minute per day, demonstrating our strong commitment to the communities in our environment. Our health and safety record remains very strong, with no sick leave accidents over the past nine months in the renewable business.
Ence's pulp business ended last year with the best safety metrics in its history, at levels that are 14 times lower than the benchmark values for industry in Spain. Let me now hand back to our Chairman and CEO to review our outlook and update you on multiple growth and diversification opportunities.
Thank you, Alfredo. Let's continue with Slide 23, which summarizes the outlook for the fourth quarter 2023. We expect pulp demand recovery to continue in the fourth quarter. Pulp prices in Europe will continue the recovery in the fourth quarter. Cash cost reductions will continue in the coming quarters. We expect a cash cost below EUR 470 per ton in the fourth quarter. Our sales of differentiated products will continue to grow. We expect a lower renewable energy output in the fourth quarter due to extraordinary repair works at Huelva and at Puertollano power plants. Let me update you now on our growth and diversification initiatives. First of all, let me describe one of our unique competitive advantages, our local wood sourcing in Slide 25. Firstly, our bio mills 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. Secondly, ENCE is the largest forest manager in Spain. We now manage close to 70,000 hectares with an annual production of around 400,000 tons. Thirdly, we benefit from our own wood supply team, which is able to source almost one-third of our wood needs directly from small landowners. And fourthly, we have developed a long-term relationship with our capitalized network of small local forest service companies, from whom we source over 40% of our wood needs. 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 largest peers in the Iberian Peninsula already import close to 30% of their wood needs.
There is not enough local wood to supply new projects in the Iberian Peninsula, and we believe imported wood will become even more expensive in the future. None of our growth and diversification projects require increased wood consumption. This gives us a unique competitive advantage. We have recently reinforced our position as the largest private forestry manager in Spain with the acquisition of Sniace Forestry Assets, as you can see in the following Slide 26. We have invested around EUR 10 million for 3,400 hectares of eucalyptus plantations in Cantabria, including two global species resistant to local plagues. This step will allow us to strengthen further our local wood sourcing and to complement our R&D program for the development of new eucalyptus species, better adapted to climate change and local plagues.
We have been pioneers in the Iberian Peninsula in the clonal reproduction of Eucalyptus globulus, and we already have 3 nurseries producing 12 million improved clones and seedlings annually. Our plantations do not just produce close to 400,000 tons of pulpwood annually. They also remove over 600,000 tons of CO2 annually from the atmosphere and provide other environmental benefits, such as biodiversity, water cycle regulation, and soil protection. Moving now to Slide 27, let me remind you of our ongoing growth and diversification initiatives in the pulp business. Firstly, we continue to diversify our production towards higher value-added, differentiated products with the aim of exceeding 500,000 tons by 2028. Our higher value-added products are more sustainable and are better adapted to replace plastic and softwood pulp in multiple paper applications. Importantly, they also deliver higher margins.
Secondly, the first project to diversify our production into fluff pulp has been approved and will be executed over 2024 and 2025, with an estimated investment of over EUR 30 million and a targeted return on capital employed of over 12%. Fluff pulp is a raw material needed to produce a wide range of absorbent hygiene products. It's one of the fastest growing segments, with rising demand driven by an aging population. It has a significant price premium compared to the standard hardwood pulp. Thirdly, we continue progressing with the engineering and permitting of the As Pontes project for the production of bleached recycled pulp. It was recently declared a project of strategic importance by the regional government, which should accelerate the permitting process. We aim to finish the engineering and the permitting process by summer next year.
Hopefully, we should be able to take the final investment decision by the end of 2024. We believe wood will be an increasingly limited resource in the future. Note that none of the investments I have described will require more wood. The timing of all these investments will be adapted and aligned to our cash flow generation throughout the pulp cycle and to our leverage policy. Our aim is to maintain a prudent leverage and offer attractive remuneration for shareholders while investing for profitable growth in the future. Let's now move to our growth and diversification opportunities in renewables, starting with ENCE Biogas in Slide 28. ENCE Biogas is our subsidiary created to develop and operate biomethane plants. Our circular business model is based on the recycling of local organic waste into biomethane and its corresponding sustainability certificates, as well as a high-quality organic fertilizer.
Our target is to develop 20 plants during the next five years and to supply over 1 TWh per year. The estimated CapEx is around EUR 20 million on average per plant, with a targeted return on the capital employed of over 12%. The accomplishment of this goal would allow us to more than double the recurrent EBITDA of our renewable business. ENCE Biogas already has a portfolio of 6 projects at the engineering and permitting phase, which are expected to start before 2026. We will build these biomethane plants with EPC contracts using non-recourse project financing, just as we did in biomass. ENCE has two unique advantages to build this business successfully: our long experience and familiarity with the agricultural sector, and our knowledge of how to eliminate the spread of odor. Let's turn now to Slide 29, which illustrates other growth opportunities within ENCE's renewable business.
Firstly, we are creating a new subsidiary that brings together all our expertise in biomass supply services in order to expand them to the whole Iberian Peninsula and to serve other businesses. We are the largest agroforestry biomass manager in Spain by far, and we believe there is an opportunity to serve a growing demand for heating, biofuels, and other biomass uses. Secondly, we have developed three biomass power plants projects with a combined capacity of 140 MW, which are ready to participate in future public auctions. Thirdly, we are working with several companies in the food and beverage industry in Spain to help them decarbonize by replacing fossil fuel heating with biomass renewable heating. We signed a first service contract in June.
Fourthly, and continuing in Slide 30, we are developing another 300 MW in PV on top of the projects that will be sold in 2024. Fifthly, our forestry management expertise brings additional opportunities to produce carbon credits and monetize them in the voluntary CO2 market. We have already registered more than 500 hectares with the Spanish Climate Change Office, and we will register another 500 hectares, up to 1,000, before the year end. We aim at registering 2,000 hectares per year. These hectares could produce carbon credits for around 350,000 tons of CO2. At an average price of EUR 30 per ton of CO2, this target would imply revenues of over EUR 10 million during the life of the plantations. 20% of these revenues will be collected upfront.
This means that we can expand our eucalyptus plantations without any initial cash out. Finally, we have hired the engineering for capturing the biogenic CO2 at our pulp and energy mills. Agricultural and forestry biomass combustion is the only source of biogenic CO2, which is a raw material used to produce e-methanol and other green fuels. Ence Group annually produces around 6 million tons of biogenic CO2, which could be used to produce e-methanol. Moving now to Slide 31, let me give you some closing remarks before we move to the Q&A section. Pulp prices in Europe started to recover after August. We expect stronger prices in coming months. The recent destocking in the Western paper industry is almost over, and demand for pulp and paper in China is recovering strongly during the second half of the year.
The acquisition of Sniace Forestry Assets is a strategic step to increase our managed forest up to almost 7,000 hectares, 70,000 hectares, and to further strengthen our local wood sourcing advantage. Cash cost reductions will continue in the coming quarters. We expect cash costs to be below EUR 470 per ton in the fourth quarter and should continue to follow in the following quarters. We will continue diversifying our pulp production towards our higher margin, differentiated products, and fluff pulp. The future of Pontevedra concession is clear now, and our balance sheet is strong. We will give you details in next capital market day about our plans in Pontevedra. We are well positioned to pursue different growth and diversification opportunities in both businesses, while maintaining a prudent leverage and an attractive shareholder remuneration.
We will share with you our strategic plan for the next five years at the beginning of next year. Thank you for your attention. We would be pleased now 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, please press star one, one to register for a question. We kindly request to ask only one question at a time. There will be a brief pause while questions are being registered. The first question comes from the line of Enrique Parrondo from JB Capital. Please go ahead.
Hi, good afternoon. Thank you for the presentation, and for taking my questions. So I have three, if I may. The first one would be on the cash flow. I believe that the cash burn in the quarter was slightly higher than we expected. So it would be helpful to understand your view on the possible reversal of working capital trends, as well as the change in loans with associates that took place during this third quarter. That would be my first question. Thank you.
Yeah, thank you very much, Enrique. Yeah, I think it's important to understand why, let's say, let me use this word, apparently, our, we have invested in working capital on the third quarter. In the company, we have increased the working capital in the third quarter by EUR 20 million, EUR 34 million in pulp, and we have reduced working capital in renewables by EUR 14 million. And it is important to understand this increase of EUR 34 million in pulp. Firstly, out of these EUR 34 million, EUR 18 million come because we are using, we have used on this third quarter, EUR 18 million less of factoring lines. If our factoring lines would have been at the end of third quarter, at the same level than at the end of second quarter, this increase in working capital would have been EUR 18 million less.
We have increased EUR 20 million, the working capital in bulk, on top of these EUR 18 million due to the factoring, because we have paid during the third quarter, EUR 10 million of the annual shutdowns down on the second quarter. That is temporary, and it will not come back again. As we are reducing cash costs, the amount of money financed by our suppliers is reduced by EUR 10 million. On top of that, we have decreased our stocks by EUR 4 million, which is positive in terms of working capital. I think that we have to understand these figures in order to understand that we are not reversing 100%, but there is not going to be further investment in working capital on the fourth quarter.
Thank you. And on the, on the associates part, on the loan with associates in the renewable energy business?
Yeah. Sorry, can you repeat again your question?
Yes, sir. There was a move in cash flow that contributed to the net debt increase, or at least that I wasn't expecting-
Oh, okay.
the repayment of the loan.
Yeah, yeah. Yeah, yeah, the EUR 15 million distributed to our partners in the in Magnon is according to our shareholders, which states that any cash excess will be distributed. Nevertheless, shareholders will finance growth cash requirements if needed. That was the reason.
Okay, thank you. So on my second question is related to the renewable energy business. It's related to if you could share expectations for sales volumes going forward. Absolute factors in this year are significantly below historical levels. Maybe you could share your view on biomass availability and volumes going forward. That would be helpful.
Yeah, sure. Yeah. Enrique, note that we operate our plants in order to optimize our financial results, considering both regulated and market energy prices. Lower energy volumes this year are mainly due to lower market energy prices, together with a longer than usual maintenance works carried out at Huelva 50 MW power plant. We also expect lower volumes in the fourth quarter due to low prices of the energy and to extraordinary maintenance works being carried out at Huelva 46 MW and Puertollano 50 MW power plant. They are both expected to start by early January. We expect to generate around 1 TWh of renewable energy in 2023. Our aim, with very unstable prices of the energy, very volatile prices of the energy, and still high prices of biomass, is to optimize the margin. Then we are not orientated to volume, but to margin generation.
Understood. Thank you. And then my final question would be related to investments. So I believe that the decarbonization initiative considered in the Navia Excelente plan is no longer considered, at least, according to the presentation. Should we expect these investments to be targeted to other initiatives in Pontevedra or Galicia? And to what extent could we expect part of this to be financed with European funds? Thank you.
Yeah, yeah. I think there are different answers. Yeah, Navia Excelente project was based on two pillars. One pillar was the fluff. The fluff has been already, this morning, approved by the board, the investment has been approved. And the second investment was this decarbonization at Navia mill. During all the engineering, we have found several things, and we have different conclusions. We think that we have to go slowly than expected because some immature technologies and risky technologies, and we have found that at the FEL-3 engineering. And on the way, we are seeing that now, for instance, we are already using 10% of the primary energy in the Navia mill. Today is used with fuel oil that we used to burn before without producing energy.
Now, we are using that, which is saving us between EUR 2.5 million and EUR 3.5 million per year, and we want to continue with those trials. We are also performing trials on next quarters using biomass in the kiln oven instead of natural gas or fuel. Then we prefer to go step by step with minor investments, and today, we think we are going to arrive to the same conclusion, to the same end: decarbonizing, but at least 50%, in Navia, but with less CapEx, and maybe during a longer period, two or three years instead of one or two years. Then I heard something regarding the purpose or something like that. Could you repeat your question?
Yeah, maybe. Yeah, sure. Maybe related to this lower CapEx that you expect related to Navia Excelente, due to this initiative, should we could expect these excess CapEx maybe to be targeted to Pontevedra or other projects? And if we could also expect some EU funds coming into this. Thank you.
No, we will give you more details on the capital market day at the beginning of next year. Yeah, we don't, we don't today, we are still working on that.
Okay, thank you.
Thank you.
Thank you. The next question comes from the line of Jaime Escribano from Banco Santander. Please, go ahead.
Hi, good evening. So, a couple of questions from my side. The first one regarding price expectation, pulp price expectation for following months. You were mentioning the price increases of competitors to $980 per ton. But I wonder if you could give us also your view in the sense of what are the spot prices in Turkey right now, and also what is the price increases that you are being able to pass through to customers, and what is your sense, how much do you think of these $980 per ton are they willing to accept?
Basically, trying to have a little bit more visibility on, on how much of this $880 per ton can be, can be achieved, in your view. My second question would be regarding net debt, as of December 2023.
Sorry, I will answer your question, and then we go to the-
Okay. Okay. Okay.
Okay. Well, today, the stocks are lower than they used to be on the second and third quarter. Today, the demand is strong in China, the demand is better in Europe, and today the prices in China and the prices in Middle East are higher than in Europe. Then it's very simple. If our European customer do not accept the $980, we will send this material to Middle East or to China. Then, I can say that 100% of this price increase will be passed on.
Okay, very good. My second question would be regarding the net debt. If you can give us some visibility on the net debt for December 2023. So do you think it's gonna be in current levels? Should we think about some decline of this net debt or increasing, increasing a little bit? Thank you.
Yeah. We believe the net debt of the group is going to be slightly below the level of today. Not significantly, but slightly below the level of today.
Okay. And, another-
Sorry. It is important to understand that during the third quarter, it was the worst momentum because, despite the cash cost reduction, the prices decreased more, and now the situation has been reversed. Then today, we have, again, positive. Today, in October and in November, we have positive, positive, EBITDA, and then for... We are making better figures flow. Then we see a, a reduction of the net debt in the fourth quarter.
Okay, perfect. Then another quick one regarding cash cost. So you point to a cash cost below EUR 470 per ton in Q4. I wonder if you can also provide us some qualitative outlook in 2024. So how should we think about the cash cost, EUR 450 or below? Does this make sense, or what is your ambition?
Well, our ambition is the soonest possible to be at normal cash cost of the past. I still don't know if it's going to take us three, four, or five quarters. Then, for sure, the cash cost on the fourth quarter is going to be below the cash cost of the third quarter, and for sure, the cash cost in the first quarter next year and in the second quarter next year will continue going down. Now, we are working on the budget, and I prefer to wait till our results presentation of the fourth quarter to give you more details. But cash cost will go down, down, and down, for sure.
Okay, very good. And a final question, if I may. Regarding biogas, which looks quite encouraging, doubling the EBITDA of Magnon in the following years. I was reading an article the other day, I don't know if you saw it in Expansión and talking about the biogas, that there's been like a kind of a boom with more than 200 licenses being asked. So, which is good because it looks, it's there is growth potential on that biogas. My question for you would be, if this implies competition for you, competition for the organic raw material that you need for your biogas plants, or how do you see the competitive landscape in biogas? Thank you.
No, today we don't see a competition. I think there is enough room for everybody. I think what is very interesting of biomethane is that using residues that today are producing methane, who goes to the atmosphere, we are going to transform this free methane into into a clean biomethane, and we will inject it on the grid. And there is plenty of residues in Spain. According to the European Union, Spain is the second country after Germany in terms of potential growth in biomethane. And even if today everybody's talking about biomethane, and everybody's a bit shocked about the number of projects, well, we are like in 2004, 2005 on the PV industry, right?
No, no, nobody was thinking that the number of PV farms we have today and the number of PV megawatts installed, and it just, it will be the same in biomethane. The market can be enormous, and we don't see any problems or serious competition for the residues. You have to understand that among all the developers in biomethane, we are the only ones linked to the agriculture because we have a long experience on the pulp industry and on the biomass power electricity in dealing with the countryside, and we have a lot of experience in that, then we are very well positioned. You don't only need residues coming from farming. You need at least 50% of residues coming from agriculture, and that is our core business at Magnon.
Then we know this market better than anyone. You cannot produce a biomethane only with cows residues or pork residues.
Okay, and one follow-up question. And what—why, why this biomethane was not used before as a renewable source? Or there's been always there, or, is there's been a breakthrough in terms of technology that allows these type of plants to be now profitable, and this is why this is being developed now? Or, or it's been always there, but it was not developed. So, so what has made the change to invest in biogas?
Yeah, the regulation in Europe, that is a mature market in Germany. It is a mature market in Denmark. The technology is there. There is some market in France, some market in Italy, and the market was not existing in Spain. Then today, due to the high prices, prices of CO2, and due to this market of green certificates of biomethane, today, it is absolutely profitable without any feed-in tariff and without any subvention. Then it's not going to be a regulated market, it's a free market and with PPAs in biomethane.
Okay, fair enough. Thank you very much, Ignacio.
Thank you very much.
Thank you. One moment, please, for the next question. The next question comes from the line of José Antonio Suárez CaixaBank. Please, go ahead.
Hi, good afternoon, everybody. Thank you. Thank you for the presentation and taking my questions. So, most of my questions have been answered, but I have one regarding fluff discounts. We've seen a significant decrease quarter-on-quarter-
Regarding what, sorry?
Pulp discounts. Pulp discounts.
Discount.
We have a reduction from the...
Yeah.
Yeah, yeah, discounts from the 43% to the 38% in this quarter. Could you explain the rationale behind it? And if you think it's okay to use it as a good reference going forward, the 38% discount in the market for the upcoming quarters?
Yeah. Yeah, our implied commercial discount has improved from 48% in the second quarter to 38% and below in the third quarter, mainly due to two reasons. If, if you can mute, I think we will hear better. Firstly, the temporary price gap between the peak price in Europe and spot prices in outside Europe has now been reverted. And secondly, we have increased the sale of our higher margin differentiated products to 25% in the third quarter. That's the two reasons why now we are in 38% instead of 43%. We expect the implied commercial discount to remain around this level, this level during the fourth quarter. Any further questions?
One moment, please, for the next question.
Sorry.
The next question comes from the line of Alvaro Lenze from Alantra Equities. Please go ahead.
Hi, thanks for taking my questions. Just wanted to understand the impact of the sale of the Huelva 40 MW PV project. I see that you indicate that it has contributed the two sales EUR 27 million EBITDA in the nine months. If I am not mistaken, it was roughly EUR 23 million, the impact of the sale of Huelva. Does this mean that there has been a EUR 3 million positive impact in EBITDA from this? Maybe you said this in the presentation, but I didn't get it.
Yeah, EUR 4 million, EUR 4 million.
EUR 4 million. Okay, and then if I go to the cash flow statement, I wanted to know what the impact has been, and whether these EUR 4 million are adjusted and then added the full proceeds from the sale?
I don't understand very well because we have a very bad line. Could you ask again your question, please?
Yes. I wanted to know what the impact on the cash flow statement of the sale has been in Q3, specifically.
No, it has been the same. It has been the same.
Okay, so the four-
Yeah.
Same EUR 4 million. Okay, then, then just to-
Yes, mentioned these projects during the third quarter.
Okay. And then just to understand, maybe this is related to a question that Enrique asked on the transfer to the Magnon partners. So you have reported negative EUR 51 million free cash flow, but net debt has increased by EUR 73 million. So there's a EUR 22 million gap there. What is this related to? And if it is due to this transfer to Magnon, shouldn't that be reported within the free cash flow as a dividend to minorities?
Yeah. 15, yes. 15, yes. Yeah.
Okay. The last question would be on the strategy regarding the PV business. Are you planning to become a developer and seller of, or an EPC player in PV? Or are you still planning to operate the assets at some point in the future as it was the-
No, no
... original strategy to generate cash flows and have some-
No.
- Stability to compensate the pulp business?
No, no, we in the PV, we want to be a pure developer. We have the skills to develop, we have proved that, and that's what we want to use. Today, we still find that the return on equity of these projects, it's are below our WACC. Then it's better that we just develop those PV plants, and we sell them to people with a lower WACC than ourselves.
Okay, thank you.
The next question comes from the line of Enrique Parrondo from JB Capital. Please go ahead.
Hi, sorry for coming back to this, but, I was wondering, you commented in the past that, As Pontes project was selected, eligible for, some sort of EU grants from, PERTE or European funds. Is this also the case for any of the initiatives in Navia Excelente or should we expect no contribution from this? Thank you.
Yeah, thank you, Enrique, for your question. Well, we have been provisionally awarded at As Pontes with grants for EUR 10 million. It is 8% of the estimated investment. The estimated investment is EUR 125 million. It's still provisionally. It's quite low in terms of percentage, as you can see. And, in Navia Excelente on the fluff project, we have asked for EUR 1.5 million, which is, 5% of the estimated investments. It is difficult to understand by the fact in all the, the purpose is that they are very limited, and the amount of supports are very small. We have that in our experience in both, Navia and As Pontes, and we are seeing that in other industries.
The rules of competence in the EU prevent any significant amount of grants to a single group, as they should be considered as state aids. Then, in the circular economy, PERTE, the limit was EUR 10 million per project, and we believe on the decarbonization fund, which is going to come soon, the maximum, the limit is going to be EUR 30 million per project. Then, well, it's limited supports, which are good for an excellent project, but you never decide to do a project just because the purpose.
Understood. Thank you.
Thank you.
Ladies and gentlemen, if you would like to ask a further question, please press star one one on your telephone keypad. The next question comes from the line of Cole Hanson from Jefferies. Please go ahead.
Good evening. Thanks for taking my question. I'd like to follow up on your forestry and wood costs. Could you give a little bit of color on what you think your regional wood costs will develop versus the Nordic region, as well as Central Eastern Europe from a wood cost perspective? And then following on from this, just to understand how you're thinking about kind of that forestry. You know, you've done a deal to kind of add to your forest base now. Should we be thinking that you want to actively grow your forest ownership over time? Thank you.
Yeah. Yeah, thank you very much for your question. I think it's important to start by the beginning, and the beginning is that we are using eucalyptus. The eucalyptus, we harvest eucalyptus between every 12 and 15 years. They harvest in Canada, in Central Europe or in Scandinavia, the spruces every 70-90 years. The content of pulp in an eucalyptus is 33%. The content of pulp in a spruce growth, growing in Scandinavia, Canada, or Central Europe, is only 20%. Then we have a bit more than 60% of pulp in the same ton of wood. Then that is why producing pulp from eucalyptus it's more competitive than producing pulp with spruce.
We are growing every year around 1,000 hectares our forest properties in the northwest of Spain, in order to secure long-term wood. But you have to understand that once you have made the agreement for 1,000 hectares, which are divided in many plots, well, you are planting, and we will not harvest before 12 years, then we are working for the future. And, for the medium and short period, what we are strengthening is our capacity of buying directly to landowners. Then today, we are buying almost one third of our needs directly to very small landowners. We don't have traders on the middle. We control this market. It is almost impossible to capture this market share from us, because we do all for these people.
We support them in planting, we support them in technology of silviculture, we do the permitting when they have to harvest, and we do the harvesting from them, for them. And we are buying 60% of the remainder to small service companies we have developed ourselves. They have been developed with our financial support, and they are very loyal to us. Then this market share is very, very secure and very strong, and it is very competitive. And then we are buying the remaining, like everybody, to big traders of wood, but it's wood produced in northwestern part of Spain. We are, as I mentioned before, we are only importing 5% of the, of the wood, and not all the years from Latin America.
Then that is why we think we have a unique competitive advantage in our industry, because we are one of the first or one of the sole large eucalyptus pulp mills, not needing to import from abroad. And we are benefiting from this more competitive pulp than the pulp produced with the spruce in Scandinavia, Central Europe, or Canada.
Thank you. And then, maybe just following on from that, well, we've seen in the Scandinavian region an impact for a shortage of wood because they used to import a lot of pulpwood from Russia. Have you seen any impact on your region at all with them importing maybe some more wood from Spain or the Portugal region?
Yeah, yeah. We saw that last year, not this year. Last year, we saw a boom of exporting wood from the northern part of Spain. This wood was going to energy to Scandinavia and was going for pulp production to Scandinavia, substituting birch coming normally from Russia. With the reduction in prices of the pulp, it is not any more possible. And then today, these exports are not happening.
And then maybe for your differentiated products, I mean, there was a big step up in the portion of, you know, higher margin products. What is the reason for that bigger step up in differentiated products? And then following on from that, I know you've still got to do your fluff project at Navia, but, you know, what do you think about the players like International Paper and Georgia-Pacific effectively closing fluff pulp capacity in the U.S. as well as Suzano kind of entering the market, fluff with eucalyptus as well? You know, how do you see that kind of market developing for yourself in Europe? Thank you.
Yeah, yeah. We, we see an enormous interest from our customers of hygiene products in, in Europe. You have to understand that almost all the pulp used for producing absorbent products is made in the States by the two companies you mentioned. They have 60% market share in this industry. And due to the commitments of reduction of CO2 of our customers in hygiene products, they prefer to buy locally. And again, this product made either by Suzano or by us is benefiting from the fact that the eucalyptus is more competitive than pine. The content of pulp in eucalyptus, as I mentioned before, is one third, and the content of pulp on a pine is 50%.
Then we have a strong competitive advantage in terms of cost and in terms of interest, because our customers want to decarbonize, and they want to have products manufactured locally. Today, out of 2 million tons of fluff manufactured in Europe, only 0.5 million tons is coming from Europe. 1.5 million tons is importing from the States, and our customers want to have pulp produced locally.
Thank you.
Thank you.