Prysmian SpA
MIL:PRY

Watchlist Manager
Prysmian SpA Logo
Prysmian SpA
MIL:PRY
Watchlist
Price: 61.92 EUR 1.14% Market Closed
Market Cap: 18B EUR
Have any thoughts about
Prysmian SpA?
Write Note

Earnings Call Transcript

Earnings Call Transcript
2018-Q1

from 0
V
Valerio Battista
executive

Thank you very much and good afternoon to everyone. Welcome to the First Quarter Results Conference Call of 2018 in the Prysmian Group. As usual, let's start with the highlights after Page 3.

Financial highlights. Organic sales grew plus 3.1%, not so bad. Supported mostly by the Underground High Voltage and the Industrial Cable growth, a high single-digit growth in Optical & Connectivity and a positive organic trend in T&I, if we do not consider the field effect of OCI, that is obviously negative. The adjusted EBITDA has closed out at EUR 153 million, 8.1% of the sales, in line with Q1 2017.

What about the segments that have contributed to it? Telecom. Further margin expansion with volume growth, significant volume growth, improved manufacturing efficiency, namely the effects of the investments that we are progressing in the fiber and the YOFC results that has been very good in 2017, in 2018. Obviously, reporting in the first quarter, the upside we did not -- were aware in -- of the last year. At the same time, we had the reversal of part of the bad debt provisions we did in 2016 for the OE bankruptcy. The problem of OE [indiscernible].

Energy Projects. Energy Projects are going reasonably well. But we have decided to take a provision of EUR 20 million that has negatively impacted the operating results of the quarter because of the Western Link project having had a problem in the connection in, at the beginning of April due to probably a problem in the shallow water cable. But we will touch more deeply the point later.

ForEx. We had EUR 13 million of ForEx negative effect. And obviously, OCI, I was commenting before, a negative effect of EUR 3 million. Net financial debt closed at EUR 648 million, coming from the EUR 998 million same quarter of last year. But with EUR 291 million effect positive from the equity-linked bond that has been converted recently.

Let's flip to the financials, Page 4. EUR 7 billion turnover EUR 1.879 billion versus EUR 1.849 billion of first quarter of last year, that means organic growth of 3.1%. The adjusted EBITDA, as I said, the EUR 153 million practically in line with the previous year despite the EUR 20 million provision release for the problem on the effect of Western Link. Operative net working capital at EUR 604 million comparable with the EUR 732 million of the same quarter last year. So 8% of working capital on sales. Net financial position. As a consequence, EUR 648 million compared to the EUR 998 million of March 2017.

Let's move to Page 5 and see that the profitability is continuing to grow, thanks mostly to Telecom, obviously. But also properly read the Energy Projects. Because Energy Projects are I suppose have pretty low EBITDA margin after the accrual for the problem in the test phase of Western Link. 6.9% with an organic growth that vice versa has been very positive with 14.8%. As you can see, the result at the end of the game has been EUR 21 million after the accrual of EUR 20 million we posted. The organic growth of 14.8% has to be properly read because we have to consider the summary despite the EUR 20 million Western Link provision, has had a growth of 3%. Otherwise it would have been 13% roughly without the provisional release, without the provision and High Voltage that posted a very significant growth, unfortunately 1 quarter is not the full year, but very significant growth of 40% compared to the same quarter last year.

E&I. E&I had EBITDA margin slightly scaling down from 4.3% to 3.8%. And an EBITDA as a consequence of EUR 31 million comparable to the EUR 35 million of the same quarter of last year. To be noted, inside it, that -- there is effect of OCI that is still declining compared with previous year. This effect should be over within the first half, the end of first half. The organic growth globally is minus 2.5%, has to be evaluated, taking into account that without OCI, the organic growth would have been 1.9%. Consequently, it's not so bad. And most of all, that is positive 5% for T&I and negative 5% for PD. Then obviously, the difference in terms of size of T&I and PD where T&I is higher is generating the plus 1.9% compounded organic growth.

Industrial & Network Components, flat in terms of results, EUR 27 million, EUR 27 million, with a slight decline in terms of EBITDA margin. And an organic growth that is pretty significant, 10.7%, mostly in the industrial cable segment because Network Components is still suffering of the same problem of Power Distribution at the end. And posted an organic growth negative for 5%.

Oil & Gas, minus 2.3% adjusted EBITDA margin. Minus EUR 1 million, with an organic decline of 9.1%. Now the SURF is suffering as well as been suffering the core Oil & Gas in the past quarters.

Telecom. The very good news is Telecom where the organic growth -- the EBITDA margin has jumped from 16.3% of the first quarter last year to 23.5% this year. From the results point of view, from EUR 53 million to EUR 75 million, very big jump, with an organic growth of 1.7%. The 1.7% has to be correctly analyzed with the optical cable going up by 8%, copper cables vice versa going down by 25%. And fiber serve -- that are only the fibers we serve to third parties with a minus 10% but simply because of we need of our fibers for ourselves. We are not selling fiber to third parties if not absolutely needed.

So overall, 8.3% versus 8.1% this year is the EBITDA margin. The 3.1% is the total organic growth and the result is in line with the previous year.

Let's flip to Page 6 and see the EBITDA bridge. EUR 154 million was the result in 2017. Energy Projects before the Western Link provision posted an increase of EUR 2 million. The Western Link provision we took is for EUR 20 million. E&I, excluding OCI, has been positive for EUR 2 million, thanks to T&I that went up by EUR 5 million and the PD that vice versa scaled down by EUR 3 million. OCI has a negative impact of EUR 3 million and the Industrial & Network Components globally had a positive impact of EUR 3 million too. Oil & Gas, minus EUR 1 million, as we have seen. And the Telecom, that has to be correctly analyzed, EUR 28 million upside of which EUR 12 million are coming from the bad debt provision for EUR 5 million and the carryover of the result of YOFC for EUR 6 million.

ForEx counted for EUR 13 million negative results, negative effect on the results.

Overall, my comment is that the results have been pretty good despite obviously the Western Link provisions, of which we have to better clarify to you the reason why. Who is driving the growth of the company? It's Telecom, definitely, at the moment.

Let's flip to Page 7. General Cable acquisition. General Cable acquisition is progressing very fast, that's my opinion. We got almost all the clearances except the Brazil that is disputed clearance because there are 15 days to oppose to the clearance. And the decision is still to come. So the closing of the transaction should have been pretty quickly.

Moving to page 9. Energy Projects. As I said, the organic growth has been 14.8%. Very significant, mostly driven by Underground High Voltage, partly by High Voltage Submarines. The business is going well. Unfortunately, during the test phase of the pole one of Western Link, to be totally transparent to you, an interruption of the link has occurred -- has occurred in the line we were testing with the customers, and it has occurred probably because of the fault of the cable. We don't know yet because we don't have the cable already enhanced. We don't know yet the reason for it. Obviously, the location of the fault is in the intertidal area, meaning where the sea goes up and down roughly by 8 meters coming from 8 meters water depth -- from, sorry, 4 meters water depth to minus 4 meters, consequently to totally no water here, dry water, dry water area. It's a very difficult location. It was a very difficult location for the installation and it is more over for the repair. The repair, what we consider the EUR 20 million to be very clear are EUR 3 million that are the deductible of the insurance because the fault -- the repair is covered by the insurance and the expected roughly 60, 67 days, of time to go to complete the repair. At this stage, we would be able to reconnect the line and to complete the testing of the 2 poles.

As of now, we cannot test the other pole simply because we do not have the return cable.

Underground High Voltage is going very well, with very positive start in Asia Pac and EMEA. Indonesia particularly is driving the raise, it's fine. Unfortunately, the margins are not so high as could have been in other markets but it is acceptable.

The Energy Projects closed at EUR 311 million and EUR 21 million EBITDA. The EBITDA obviously has to be read with and without the provision. Otherwise, that would have been EUR 41 million.

Order book. The order book for High Voltage is back to EUR 450 million. Whereas for Submarine, has declined to EUR 1.900 billion. It's very huge, but it's not as huge as some months ago -- some quarters ago, sorry. We expect in the second half of the year to see the execution of other tenders so that today have been delayed for technical reasons.

Energy infrastructure. Energy infrastructure closed at EUR 790 million, with compared to the EUR 806 million of previous year with a slight organic decline of 2.5%. The EBITDA has been EUR 31 million versus the EUR 35 million of the same quarter 1 year ago. As I said in that chapter, we have to consider the effect of OCI. Without OCI, the organic growth would have been positive for 1.9%.

Overall, the business is improving, especially in Europe. South Europe, Germany, East Europe and Netherlands, are going well. The margins are growing, I'm talking about P&I only. And the EBITDA is better than the previous quarters finally. Thanks to the CPR introduction that we have already commented in the last quarters, the volume growth is generating even more margin.

The picture is different for Power Distribution where the volume slowdown in South America and Nordics are not totally compensated by the slight recovery that we are seeing now in Germany and the Netherlands. We expect that that's an effect of the first quarter only. Obviously, the winter has been particularly difficult this year. But we considered that the real season is starting now with April, considering the second quarter should be at -- a good indication for the trend of the year.

Industrial & Network Components closed with EUR 369 million, coming from the EUR 340 million of the previous year, of the first quarter previous year, with an organic growth significant of 10.7%. That's a sign that the growth of the CapEx into the Industrial segment is having an effect in the cable business, too. We have seen in the previous quarters a growth of the CapEx for Industrial. And now we are seeing the effects here. The result has been positive. It's been positive for EUR 27 million, in line with the previous year, not better simply because of the mix. Mix, because we have seen a positive performance in Railways and Infrastructures. But we have seen a decline compared to the same quarter last year in nuclear, mining and, let me add, Crane. The trend is stable in the renewable, and -- but we have a certain slowdown in Wind in the North America because it's going to start in the next quarters. Elevator, good organic growth in Europe, and -- but compensated partly by the weak performance in Asia Pac as well as by the effect in North America of the exchange rate because all the business in U.S. that is big, we have denominated in dollars, obviously, going to euros, suffering the exchange rate effect.

Automotive, going pretty well, sound organic trend. Strong performance in North and South America as well as Europe. The adjusted EBITDA has benefited from a mixed improvement and the business is improving. Finally, network components. Not very strong in the medium voltage and low voltage. In line, by the way, with the trend of medium voltage cable as we have seen in the Power Distribution. Whereas the recovery in High Voltage accessories reflect the improvement of the business in HV.

Oil & Gas closed the first quarter with EUR 57 million compared to with the EUR 66 million of the previous year first quarter, where the Umbilical was going pretty well still. Today, obviously, the Umbilical dropped significantly during the quarter with a very strong price pressure in Brazil. It's expected, with the order we see, to recover, in terms of volumes, not in terms of margins, starting from the second quarter. The DHT is going vice versa pretty well, the Downhole Technology, thanks to the number of rigs that are under activation into -- especially into U.S. The core Oil & Gas cable is recovering, still recovering in the onshore side. In the offshore and Marine, frankly speaking, not yet. But with the oil price at $75, we think that the business will recover.

Finally, Telecom. Telecom, EUR 317 million sales with an organic growth of 1.7% on the previous year. But an outstanding result of EUR 75 million compared to the EUR 53 million of the previous year. And the EUR 75 million, we have to take into account the EUR 11 million one-off represented by the effect of YOFC upside last year -- of the last quarter last year, and EUR 5 million of the provisional release for OE accruals.

The business is going outstandingly with a very sharp demand of fiber cable. The real problem is the availability of fiber that is in shortage everywhere. And consequently, the demand is very strong. And we are -- we have been growing and we are continuing to grow in terms of capacity of the fibers, and that is helping us also to reduce the costs.

The chapter of the Telecom that vice versa is declining is the Copper Telecom because the Copper Telecom in Australia that has been very buoyant in the last years and today unfortunately, it was foreseen a business that has no longer life than it.

Let's go to the outlook, Page 15. The outlook we are giving to the market is EUR 730 million, EUR 770 million for the full year 2018, taking into account the EUR 20 million of provisions we took on the Western Link project, on the problem in the Western Link. Obviously, this guidance is linked to unexpected volume and margin Telecom trend in line with the Q1. Volume trend in E&I and Industrial that should be, and makes sense to have a trend similar to Q1. The effect of the ForEx that has impacted the EUR 30 million in the first quarter not to go higher than EUR 20 million, EUR 25 million. But if we look at the exchange rate of today, it makes sense. Energy Projects, obviously, we considered the EUR 20 million provisional release, and we think that should be enough to cover the problem that we had in the testing.

Okay, that's it. I leave the floor to Francesco for the details of the P&L.

P
Pier Facchini
executive

Thank you, Valerio, and good evening to everybody. I start as usual with the profit and loss statement, just to recap some notes that Valerio has already anticipated.

Total organic growth was 3.1%. Actually, this has been the best quarter since 2016 in terms of organic growth. And followed an already reasonably good fourth quarter 2017, which was close to a 3% organic growth. As Valerio explained, this was driven by quite solid growth in the Industrial businesses even if on the lower part of the mix, which expressed a bit on our margins. It was obviously driven by the sharp growth of optical cables, very close to 10%, 8% as Valerio explained. And also reasonably positive performance of the E&I business, net of the -- excluding the OCI performance, which was a positive in mid-single digit, specifically in the T&I business. I repeat, excluding the OCI performance. Adjusted EBITDA was substantially flat compared to with the previous year, EUR 153 million. Just to recap, 3 main impacts on this number, 2 pretty negative impacts: The Western Link provision for EUR 20 million; and EUR 13 million of currency translation effect, partially compensated for EUR 12 million by the Telecom one-offs. Still, netting these effects, we have a EUR 20 million negative effect net, which is burdening the EUR 153 million. So this let us comment that results have been, in the first quarter, pretty, pretty solid. And of course, this is the way also to read the guidance that Valerio anticipated between EUR 730 million and EUR 770 million. We have to consider that this guidance absorbs the EUR 20 million Western Link provision. Of course, takes into account that, say, EUR 11 million, EUR 12 million of one-offs in the Telecom but also absorbs a pretty negative ForEx scenario and the assumption is that for the full year, the ForEx will impact between EUR 20 million and EUR 25 million, just to help you read correctly the guidance.

Going to the lower part of the profit and loss. We have a pretty nice reduction of the financial charges that I will comment separately. We had a reduction of the tax rate as well, down to 27%. Unfortunately, the group net income was negatively impacted, as you see is lower than the prior year, it was negatively impacted by the reversal of the metal derivatives fair value which is, as I always say, a noncash effect, which is the result of the stabilization of the metal price after the sharp rise of the metal price in 2017.

We can flip to the following page just to shortly comment that the total EBITDA adjustments decreased since last year, from EUR 24 million to EUR 17 million. Pretty low restructuring charges, waiting of course for the combination with General Cable. And most of these EBITDA adjustments are related, as you see, with the General Cable acquisition, acquisition costs and net integration costs. In the special items, you see the negative impact of EUR 26 million that I was referring to in the comment in the profit and loss statement. The reversal of this positive metal derivatives fair value of 2017.

I go to the following page to comment on the financial charges. Net interest expenses, which is the most meaningful line here, is down to EUR 15 million from EUR 17 million last year. This growth is mainly due to the conversion of the old 2013 convertible bond because the conversion resulted in the fact that the last cash coupon was not due as the conversion took place. And these, of course, reduced the net interest expenses compared to the prior year.

We can flip to the following page to comment the balance sheet. Operative net working capital decreased compared to March '17 by approximately EUR 130 million, down to EUR 604 million. There is a major noncash effect here which is due to the depreciation of the currencies, which is a decrease of working capital for EUR 80 million and the other pretty positive effect is the reduction of the working capital in the project business as well. On the opposite side, there was an increase of working capital, driven by the higher metal price compared to last year. Net financial debt, EUR 648 million. If we add back, as Valerio explained, the EUR 291 million debt related to the old convertible bond conversions, this means EUR 939 million like-for-like with EUR 998 million of March 2017, a reduction of approximately EUR 60 million but taking into account that this EUR 60 million reduction of net debt was achieved with EUR 100 million dividend distribution. And also EUR 50 million shares buyback which was executed in the second quarter 2017.

Last but not least, the cash flow. Given the seasonality of our working capital, I would mainly focus on the right column, which is recapping the cash flow of the last 12 months, from the 1st of April '17 to end of March '18. The free cash flow is pretty good, EUR 257 million on the last 12-month basis, I repeat. And it is not very far from the record free cash flow which was achieved for full year 2017, which was EUR 276 million. So pretty solid cash generation in the last 12 months.

I think I just concluded and we can go ahead with the Q&A session.

Operator

[Operator Instructions] We will now take your first question from Daniela Costa from Goldman Sachs.

D
Daniela Costa
analyst

Are you hearing me? I hear the line really badly. Hello?

P
Pier Facchini
executive

Yes, we hear you.

D
Daniela Costa
analyst

I wanted to ask 2 things. First, we've seen the tenders for wind offshore starting in both -- at least, for the turbine side for -- in U.S. and in Taiwan. Can you comment a little bit about your expectations around these markets, when could cable orders come and how would you be positioned in terms of the capacity to supply those and gain contracts there? And then the second point, can you talk a little bit about CPR? It doesn't look like Energy Projects could have accelerated in Q1. Can you talk about what we have seen in terms of people getting out of the market that are compliant pricing? Give a bit of color on, should we still expect to see an acceleration in the business driven by CPR?

V
Valerio Battista
executive

Okay. Thank you, Daniela, for your question. First of all, let's go to the tender of offshore wind farms in the U.S. and Taiwan. We have heard something, honestly. We have not received any request for quotation yet. We hope that at least the U.S. will start with such a kind of technology that seems for Europe to generate a pretty good and cheap energy. Clean and cheap energy. For the time being, it is too far away the idea to see business coming from it. So I cannot give you a very brilliant answer today. But as soon as we have, be assured that we will tell you. For the time being, we have no tender activity on it. And frankly speaking, I'm a little bit careful on it because theoretically, we have been awarded by the -- by a customer in U.S., of the Cape Wind Project that never has been realized consequently.

CPR. CPR is going well. Unfortunately, on a limited number of markets in Europe. But for sure, we have seen a number of competitors not -- especially the very little one, not being able anymore to supply products, compliant products to the market. And that is helping us and the serious competitors, to grow and to serve the market as properly without the dogs that are killing the prices for the volumes. So we are pretty reasonably happy with the outcome of CPR. The real problem is that has not been extended seriously in the application, country by country by certain countries. That's a matter of opposition of the cable access -- Local Cable Association.

D
Daniela Costa
analyst

Can I follow-up on your first point, given that you don't see, sort of, U.S. and Taiwan very near term. What are the biggest contracts or the biggest tenders out there for the next 12 months in terms of submarine? I know we've seen news flow about Viking maybe being delayed, there's also another project called Euro Asia ]out there. But can you give some concrete example of what's potentially out there in the pipeline for tendering over the next 12 months?

V
Valerio Battista
executive

Okay, let me give you my knowledge. The knowledge is that Viking has been postponed in terms of award of tendering, sorry, because of problems in the permits in U.K. that are suffered by National Grid. The other projects and vice versa are coming. BICC should be another 50 Hertz, as big as the first probably. Other medium-sized project. But let me leave the floor to Massimo Battaini that is here in order to give you more color on the tendering activities.

M
Massimo Battaini
executive

Thank you, Valerio. Thank you, Daniela. So there is still kind of active tendering movement in the market. As Valerio said, Viking has been only delayed by -- due to specific technicalities which is the permitting of the land portion in the U.K. But as far as the rationale and the business case, associated with a project, we don't see any risk associated to it. There are other projects like FABlink, the connection, U.K. and France, which are quite active. There are active projects in the offshore space like 50 Hertz as mentioned by Valerio, which is a duplicate of the 50 Hertz that we are just about to complete. The first projects awarded to us 3 years ago. There is an offshore project in Holland, [ HKZ ], quite relevant. So there is, both in interconnection in the offshore, quite an intensive return in activity. We do expect the market in 2018 to chop a little bit with what has been awarded, as what has been adjudicated in 2017 when the market ended up with the EUR 1.9 billion, EUR 1.8 billion worth of intake. So we do expect that improvement over 2018. Although Viking which is a big size, a big portion of 2018 market will slip into early 2019. But overall, the outlook is extremely positive and the tender activity dynamic as well.

Operator

We will now take the next question from Lucie Carrier from Morgan Stanley.

L
Lucie Carrier
analyst

Can you hear me?

P
Pier Facchini
executive

Yes.

L
Lucie Carrier
analyst

Okay, perfect. I have 3 questions. The first one is around the Telecom. I mean I understand that you had some provision release in the quarter, which was small, and also some carryover from YOFC. But even if we exclude that, the margin expansion actually looks quite spectacular, especially considering the organic growth was a little bit lower this quarter. So maybe can you explain the building block of this margin expansion? And specifically, how much visibility you have for the margin for the rest of the year? And of course, I'm here curious to know about the sustainability of what we've seen in the first quarter, that's question #1.

V
Valerio Battista
executive

Thank you, Lucie. Now the provision release has been EUR 5 million, is related to the provision we took on the entire credit with OE, it's secured. The EUR 5 million of course, we have to release it. The margins are nevertheless very high. Why are very high? First of all, there is an operating leverage effect because the volumes are going up, the fixed cost for -- by definition, are -- might go fixed because we cannot grow, and growing the volumes, that helps also to grow the efficiency, thanks to the investments that we keep doing. If you remember in 2014, we started -- or better, we restarted to invest in Telecom in fibers. And we started with the aim to reduce the cost of the fibers because we were pretty high in terms of the fiber costs. Now the fiber cost is much better, helped by the actions, the investments we did, the improvement in the process and the volume also with the scale effect. The race is not over. We have still to go to complete the capacity and the upside in a business that is driving the raise, it's growing. Just in case, today during the board, where we ask and we obtain the -- a significant investment of EUR 110 million to be executed in the next 2 years, to further grow capacity and reduce the cost of the fiber. The combined effect of the 2, the growth capacity, the growth in capacity and the reduction of the costs, is giving very solid margins to the Telecom business. We expect that's the kind of level can be sustainable for the next quarter. What about the view of the market trend? Frankly speaking, everyone is oversaturated, we do. We are trying -- we are moreover going to close the deal with General. And consequently, to increase further our capacity and our presence in the market. I don't see any problem for the time being. The real problem may come in the future, may be some very sharp slowdown of the Chinese market. But for the time being, it's not in the -- in any forecast, even YOFC is not. Lucie, did I answer to your question?

L
Lucie Carrier
analyst

Yes, you have. That was very clear. The second question I had was around Energy Projects. And if I exclude the provision, the contribution was actually only cable, I would say, year-on-year. But I see that in your guidance slide, where you showed the arrows by division, you are indicating that you expect contribution, organic contribution, in Energy Projects to be up actually year-on-year versus last year. So how much visibility do you have in terms of the building blocks for this margin to actual -- for the organic contribution to accelerate in the remainder of the year considering it's stable in the first quarter?

V
Valerio Battista
executive

Are we talking about projects overall? And we expect a better contribution in 2018 compared to last year of high voltage. A very moderate improvement Western Link provision apart. A very slight improvement maybe of Submarine. But most of all, the progression of the trend of high voltage to the rest of high voltage. That's the -- Massimo, I don't know if you have anything to add.

M
Massimo Battaini
executive

There will be a slight -- I mean, we have full visibility of the projects because they are all in hand. As far as Submarine is concerned, we can easily project a slight improvement in Submarine. As far as High Voltage is concerned, we should do better than last year because we're going to have a better result in China, thanks to the qualification that are going on. So we are going to recover that portion of the market we a little bit lost as a result of the disposal. And so I will say a safe visibility of a -- some improvement in Submarine, a more significant improvement in High Voltage at the end of the year.

L
Lucie Carrier
analyst

Okay. My third question was just on the industry division order book and I understand that the mix at the moment is not necessarily the best mix from a margin standpoint. In the order book that you have for industry for the rest of the year, are you potentially seeing an acceleration or an improvement of this margin mix as the cyclical benefits are continuing to improve?

V
Valerio Battista
executive

Lucie, let me leave the floor to Francesco Facchini, responsible of product. So that you can hear -- directly from him. You can answer.

P
Pier Facchini
executive

Goodnight -- good evening. Do you hear me?

L
Lucie Carrier
analyst

Yes.

P
Pier Facchini
executive

Okay, hello. So thanks for your question. The picture as of now in the order books reflect the speed we have seen in the first quarter. The quality of the order book is still characterized by midsized projects while we are still awaiting the big orders that should come related to the largest project that has not been released yet. So order book quality, in terms of mix, is still driven by transportation segment, mainly railways or restock, good solar park coming, stable wind, and relatively stable [indiscernible] Mining. The expectation for the year-end is to keep stable at the speed as it is today, providing the release of the expected industrial project in the pipeline.

L
Lucie Carrier
analyst

Okay, thank you. And maybe if I can have one last question if I may. Thank you for all of the color around the provision and what's going on exactly at the Western Link. Valerio, Francesco, from your standpoint, is this level of provision of EUR 20 million conservative enough? Are you feeling comfortable with this level?

V
Valerio Battista
executive

Okay. To be clear, that's the provision that is totally in line with the risk we have today because EUR 3 million out of EUR 20 million are for the...

P
Pier Facchini
executive

Deductible.

V
Valerio Battista
executive

Deductible. And we expect EUR 50 million, the total cost of the delay, because we are going to be late 2 months more. And 2 months more times the LDs we pay per day is a mathematical calculation. Then obviously, if the delay will be longer, but we don't think so, we are already on site. In the next 2 days, should we be able to have the cable, to get the cable, and to start the installation of the repair cable. We believe that, that's the proper provision for the damage we had.

Operator

We will now take our next question from Monica Bosio from Banca IMI.

M
Monica Bosio
analyst

My first question is on the organic growth in the first quarter, which as Francesco told us, was pretty, pretty good. I was wondering if you believe that this organic growth could be maintained or improved over the rest of the year? My second question is on the General Cable acquisition cost and the integration costs in the first quarter. Obviously, they were quite small, just peanuts. But I was wondering if they are on top of the EUR 220 million that you announced at the time of the acquisition? And the third question is on General Cable on the first quarter. The first quarter for General Cable was characterized by a negative mix in the U.S.A. and a pretty good 12 months in Europe. I was wondering if you could comment on this and on what do you think about the rest of the year for General Cable? And the very last question is an indication from Francesco, if it's possible on the financial charges by year-end.

V
Valerio Battista
executive

Thank you very much, Monica. So first question. Organic growth first quarter, let's say, not so bad, 3.1%. We expect that level to be sustainable in the full year. Obviously, it's a compound of different organic growths. We see Energy Projects, thanks to High Voltage mostly, able to grow a little single digit. Submarine, flat. So I'm going to give you an answer that gives information for the guidance to all of you. Industrial -- sorry, that's Energy Projects. E&I, slightly positive despite OCI. Because OCI has been seriously negative in the first quarter. And the second quarter should be with a lower level of negativity. But in the second half, should be at least in line with the previous year. We have 2 effects. First of all, the previous year, the second half was the drama for OCI. Secondly, the oil price is now at $75. If that level of price keeps, the investments in the Middle East may restart. How time -- how much time it will take? I don't have a very clear idea but we are seeing a better perspective for OCI. Industrial & Network Components, a mid-single digit growth, that's what we're foreseeing today. So lower, to be clear, than the 10% we posted in the first quarter? Why? Because the first quarter last year was a very low level. Today, more better. This year has been much better. But last year, if you remember, progressively, the Industrial Cable segment went up along the year. Finally, Oil & Gas, I'd say, more or less flat with a potential recovery in the SURF in terms of organic growth. But the organic growth -- without the margins, it's useless. So the problem of SURF is going to be the margins of the new tenders. Because our competitors in South America have pushed down the price like hell, we reacted. And now we have the volumes going to come but with very low margins. Finally, Telecom, a single high digit organic growth that is more -- that is better than the 1.7% we posted. Obviously last year, the copper telecom that has had an effect -- a negative effect in the first quarter along the year will have a lower effect. Unfortunately, it was foreseen and planned that the slowdown of the copper telecom in the last mile for NBN. So overall, I confirm that the current first quarter organic growth is something that we are thinking to be able to reach year-end. And that's the first question. Second question, integration costs. Francesco, do you wanted to...

P
Pier Facchini
executive

I think in substance, hi Monica, Francesco speaking. I think in substance, we can say that these integration costs are included in the EUR 220 million total implementation costs. In any case, they represent, as you said, a pretty small part.

V
Valerio Battista
executive

More the integration costs for the time being, are we talking about the cost of lawyers, the cost of consultants? What about the first quarter of General Cable, our comment. Okay, has not been outstanding. Has not been even so bad. Obviously, it is impacted by the fact that General Cable doesn't hedge the metal. So last year, last -- a part of the products, for what is our knowledge at the time, they do not hedge the metals. What does it mean? That last year, in the first quarter, they enjoyed a very high level of copper. Consequently, they had a positive result from it. This quarter, the first quarter, unfortunately, they have not been able to enjoy the same upside in the copper. And consequently, they did not -- they lost. They lost. They did not realize the same advantage over last year. The business is going reasonably well. Not dramatically -- while not dramatically down. There is an effect of the mix, obviously we have been talking with them just to understand the trend of the business. We don't see, and they don't see, an effect -- a dramatic effect on the Power Distribution as someone else has shown. The Power Distribution is growing not very well but not very, very bad, is pretty stable. Maybe a little bit of negative mix. But nothing else. What else? There is an effect of mix in North America. That's true. Because the mix for special cables and for Power Distribution tends to go through -- tends to go -- is higher in the trade. And in the trade, the margins have lowered, by definition. This has been, in their opinion, a little slowdown. On the contrary, it is improving definitely Europe, that's the projects and the High Voltage. That's partly, by the way, are doing for us for the France, Italy. And that's it. I'm not worried.

M
Monica Bosio
analyst

Okay. And...

P
Pier Facchini
executive

Financial charges.

V
Valerio Battista
executive

Maybe, I take this question, Monica, on the financial charges. Let me refrain, first of all, from giving you an indication on the expected net interest expenses of the year-end, including potentially the combined perimeter because it's very complex, it depends on the timing, it depends on a lot of accounting impacts and would be a waste of your time. What I can say is, [ if we are reason ] on our existing perimeter. Last year, we had, at the level of net interest expenses, approximately EUR 70 million. We will enjoy the positive effect of the conversion of the old convertible bond, the 2013. And these, of course, should impact around EUR 9 million, EUR 10 million positive. Then what I can say is that in 2019, when the financial expense -- when the synergies on financial expenses will be already at run rate after the refinancing of General Cable debt and the payment of the acquisition consideration, we will realize around EUR 30 million synergies. And in my best estimate, this should leave the net interest expenses -- combined net interest expenses, around EUR 100 million for the combined company. Then you have to add, of course, the hedging costs, which is another EUR 15 million to EUR 20 million. The financial expenses -- or some financial expenses, amortization. But at the line of net interest expenses. I think that EUR 100 million for the combined entity 2019 would be a good target to reach.

Operator

We will now take our next question from Andreas Willi from JPMorgan, London.

A
Andreas Willi
analyst

I have 2 questions left, please. First one on the provision in the Western Link issues. When you had the original problem with the project in a different part of the cable, it was also because it was a new type of cable and something specific, and therefore unlikely to occur elsewhere in other projects. Is that -- the current fault also related to this being kind of a bit of a one-of-a-kind? Or what do you think it could be? And could there be an issue elsewhere where you have to use the similar cable? And the second question on -- for Francesco, on the net financial position. At the end of the year, prior to the deal happening, so what do you see in terms of kind of working capital CapEx move, and where should we land at roughly for the end of the year as a starting point before we add the debt and -- further financing of the deal?

P
Pier Facchini
executive

Thank you, Andreas, for the question. I try to answer to your first question. At the end, the -- some problem in the testing phase of a link of 900 kilometers may happen. Now obviously with the history of Western Link, everyone is scared. We too. The point is that where, first of all, we had the fault, if any, we have to see because maybe even an external damage. The fault, if any, has happened in -- the first is 2,000 -- 1,500 meters from the shore in an intertidal area. Maybe that obviously has been a fault due to the cable. Maybe that has been a fault due to an external damage. Maybe made by third parties. Or maybe it has been a fault that progressively came out because of damage or a particularly hard solicitation of the cable we did during the installation in that difficult area. We don't know today. We have to have the cable in hands and to examine and to analyze.

V
Valerio Battista
executive

Massimo, I don't know if you want to...

M
Massimo Battaini
executive

No, as far as the cable is concerned, you said everything. Until we get the cable in hand, we cannot figure out whether this is an intrinsic cable problem or an external damage. We will know this in the next -- over the next 10 days. Your question was also about whether we have other application of this technology, which we don't have. So this was the only cable project where we apply the polypropylene laminate technology. So if you are hinting at a possible risk in other projects, they're not at all associated to the technology. This would be the unique project which we done with this specific insulation technology.

V
Valerio Battista
executive

Did that answer the question, Andreas?

A
Andreas Willi
analyst

Yes, that was very clear.

V
Valerio Battista
executive

Francesco, would you like to answer on...

P
Pier Facchini
executive

On the debt, is running on the current parameter. The -- basically, let me start from the EUR 436 million debt at the end of last year. We -- I anticipate a free cash flow, let me say, between EUR 200 million, EUR 230 million. So a little bit weaker than last year because last year benefited from a major reduction of working capital. This year, I think we will have an increase of the working capital. Then, of course, we have to consider the dividend, let's say, EUR 100 million, considering everything. So a net cash flow between EUR 100 million and EUR 120 million. This would bring the debt down to EUR 300 million and then you have to take into account the conversion. Keep in mind that EUR 17 million of this conversion took place already in '17 and the EUR 280 million has already occurred in Q1. So this boils down to NFP which is after the conversion of the 2013 bond, a very small debt in terms of NFP. Then of course you have to consider all the effects of the acquisition, including the capital increases that we want to finalize as soon as possible. I can also give you an estimate of the debt -- of the combined debt that I see for year-end, all including acquisition including -- and including the capital increase that, in my opinion, should be slightly higher than EUR 2 billion -- between EUR 2 billion and EUR 2.1 billion, I would say. Year-end 2018, including General Cable acquisition, refinancing of the debt of General Cable and the EUR 500 million capital increase.

V
Valerio Battista
executive

Long-term forecast. '18 is not that long term. It's actually short.

Operator

We will now take our next question from [ Tom Smith from Credit Five ].

U
Unknown Analyst

I guess just to follow-on from Andreas' question. Just seeing at the bottom of the first page on the press release saying the possible capital market transaction in the coming months. I know you've spoken about the equity raise, but what on the debt side, are you thinking about coming to the debt market anytime soon?

P
Pier Facchini
executive

We have not -- hi, it's Francesco Facchini speaking. We have not decided yet. The acquisition will be funded with the acquisition financing for EUR 1.7 billion, EUR 1 billion is a subloan, EUR 700 million is a bridge financing. And then of course the bridge financing is a bridge financing, so it's subject to a take-up. This -- a takeout, sorry. This takeout will take place most likely in the second half of the year, in the fourth quarter actually, of the year. And then of course, to be decided whether the takeout will be for the entire amount of EUR 700 million or only a part of that. Too early to answer the question.

U
Unknown Analyst

All right. I mean just thinking aloud here. You've got the 22s at 2.5 and I know they're trading -- they're trading all right. So just thinking it might be quite opportunistic for you guys to tap the markets again, that's all. So just thinking aloud.

U
Unknown Executive

[Foreign Language]

P
Pier Facchini
executive

Yes, sure. No, no, sure. I agree. The interest rates on the market are very interesting. The market confirms to be pretty appealing, pretty attractive right now. Going to the market in the second part of the year will allow us to fix a pretty low interest rate. So we will -- if there is, as I think it will be the case, a good window, we will certainly take it. To be decided the amount because it's not a given that we will go to the capital market for the entire amount of the bridge.

Operator

We will now take the next question from Dennis Dinkelmeyer from Goldman Sachs.

D
Dennis Dinkelmeyer
analyst

My first question is regarding the Viking Link. Obviously, the Viking Link is going to be a very large interconnector. And a lot of stakeholders are involved in the organization and the decisions made regarding technologies and potentially the suppliers. Do you think that your experience with National Grid and potentially the problems you had with Western Link are in any way impairing your ability to gain the Viking Link? And secondly, do you think that, given that Western Link was done with incremental technology that's perhaps a little bit older, do you think there's any way that the Viking Link now will favor extruded lines?

V
Valerio Battista
executive

Okay. Let me give the floor to Massimo Battaini to give you an answer.

M
Massimo Battaini
executive

Dennis. Sorry, regarding the Viking and yes, National Grid is involved, it's one of its customer. And the other one in Energinet. But as we many times said, the Western Link experience with National Grid should strengthen our position within National Grid rather than weakening it. So we don't feel any kind of disadvantage in participating to the Viking project or any negative influence from the Western Link position. Viking would be a different technology than Western Link. It is unlikely that is going to be extruded. Because as Valerio said before, it is the longest connection ever. And I don't see customers ready to take on the risk of running a new technology, extruded technology, that 525 kilovolt, which is the voltage of the line in an extruded solution. So I'm 99% confident that technology chosen for this connection will be the MI. So the paper insulated technology which is a very well consolidated technology in which we benefit from a long experience of many projects installed, one of which has been installed 50 years ago and is still running. So actually, we think are the best positioned in terms of experience and know-how on the MI technology in the market. This is what we know at this stage. As you know, the award that was supposed to happen in July will be probably moved back to quarter 1 next year. But I think the customer decision regarding technology has been already made according to the connection and the information that we get from the customer.

D
Dennis Dinkelmeyer
analyst

And a second question regarding the Telecom division. First, you have mentioned that there's a very strong demand in the market for fiber and there's also a shortage. Do you think there's potentially a pricing upside to optical fiber cables, at least also the ones that you're selling, given the shortage? And perhaps could you also comment on where you see strong demand, in which regions, is it Europe, is it China, or is it North America?

V
Valerio Battista
executive

Okay. First part of the question, yes and no. Obviously, there is a shortage of fiber today in those markets and consequently the prices are slightly going up. But very slightly in Europe and U.S. Why? Because simply there is the terror of the Chinese entering into these markets. The Chinese is true that they don't have capacity. But they may try anyway to offer at -- in the markets of U.S. and Europe in order to prepare the future of themselves. That's why we keep the prices in line with the -- I cannot say the desire of the customers, but we rise the prices very smoothly for the time being, very smoothly. Can you repeat the second part of the question, sorry?

P
Pier Facchini
executive

[indiscernible]

D
Dennis Dinkelmeyer
analyst

The second part of the question, where are you seeing strong demand for optical fiber cables, is it mostly Europe, is it North America, is it China?

V
Valerio Battista
executive

It's everywhere in the world. It's Europe today, thanks mostly to France because France launched a big investment to digitalize the community. It's U.S, but it has been launched 2 years -- 1.5 years ago, is the reply of the telecom carrier to the projected investment of Google that has been canceled. And finally, it's China that is governmental driven and is growing terrifically in terms of demand. Today China Mobile is tendering roughly 200 million fiber kilometer per year. That is a dramatic number and seems not to slow down at least for the time being. So we expect this demand still going to grow. Obviously, the operators are preparing big network for the 5G. But the 5G is not yet in place. Nowhere. Consequently, it is a further upside that should come in the next 5, 10 years.

Operator

We will now take the next question from Gabriele Gambarova from Banca Akros.

G
Gabriele Gambarova
analyst

Just a couple of questions from my side. The first one is on the tax rate. In Q1, you had a very low 26% tax rate. So I was wondering if we can assume this level across the whole year? And second question is on Trade & Installers, you said or you stressed that the CPR put somehow some of your worst competitors out of the market. So I was wondering if you can quantify this aspect. I mean, the overcapacity was around 40%. Is it possible to say what -- how much of this overcapacity is just out from the game?

V
Valerio Battista
executive

Okay. Let me leave the floor to Francesco for the first question.

P
Pier Facchini
executive

Gabriele. I think for the existing perimeter, it's certainly a good assumption. Actually 27%, the tax rate, not 26%.

G
Gabriele Gambarova
analyst

Okay.

V
Valerio Battista
executive

Second question, T&I. Quantify is not easy. But if you consider that -- because it has to be done market by market. Let's take an example of the Italian market. The Italian market has 3 big players. We are the fourth one, or we are supposed to be the fourth one, and there are at least 20 little producers. Out of the 20, only 5 or 6 are today able to provide CPR cables. Will they be able to join the specs? Probably yes. When? Don't ask me because I don't have any idea about it. But in my opinion, out of the total capacity, roughly 10% of the capacity can be considered today in the CPR -- real CPR markets, out of [ scope ]. Obviously, are we coming from an overcapacity of 30%, 40%? Today, we -- maybe that we are around about 30%. But at the same time, the CPR has obliged the producers to reduce the speed of the installation lines. Consequently, further reducing the capacity output. And there is another additional step forward to have the saturation of the lines. But for the time being, if that's your goal, there is no clue of a potential shortage. Very long way to go.

Operator

We will now take our next question from [ Artem ] [indiscernible] from Crédit Suisse.

U
Unknown Analyst

I have two, if I may. So on Energy Projects margin, excluding the EUR 20 million one-off charge, I think the margin is still 130 basis points down year-over-year. And you flagged [ mig ] and High Voltage Underground cables as the main driver. Could you just give us a bit of color how we should think about margin progression going forward this year?

V
Valerio Battista
executive

Okay, I give you a very simple answer. Higher is the impact or the percentage of High Voltage land in the combined turnover of projects. Higher is the impact of the margin. Simply because the margins of HV -- the rest of HV, is lower than the Submarine link. As a full year expectation, I told you that we expect a very limited single-digit organic growth considering that comes entirely from HV terrestrial and not from Submarine that will be flat. Obviously, that will explain a lower margin for the combined business segment. Maybe not as low as it appears today because the upside in terms of HV terrestrial has been particularly strong this quarter. In the quarters to come, we expect not to be plus 40% just in case.

U
Unknown Analyst

Okay, thank you very much. That's very clear. And my last question would be, given some of your competitors run spare capacity this year and going forward, do you see any deterioration in pricing in Energy Projects business, in the orders and just generally on the market?

V
Valerio Battista
executive

Unfortunately, yes. If I'm not wrong, some of our competitors has even told that we'd be very aggressive. Okay, here we are.

U
Unknown Analyst

And is it possible to -- could you to give any color on what's the magnitude or...

V
Valerio Battista
executive

No, frankly speaking, not because I do not -- I have an idea of what means aggressivity from their side. It depends -- everything depends by the capability to compete. So obviously, project by project, the picture is different because there are projects that some competitors can do, projects that some competitors cannot do, cannot execute. There will be -- I'll not be surprised to see a reduction in the margins of the projects. That's sure. But there is a limit for everything. There is a point to which we have to say, okay, be free to go, help yourself.

M
Massimo Battaini
executive

Let me just one thing, add. It's not that this is new, we have been seeing this price reduction over the last 3 years. It has just happened that over the last 3 years we have been able to add the internal action to offset and mitigate the price pressure. So this action will continue from our side, on internal side, as well the price reduction [ or markup ] will be still there. So we're not -- it is not an unusual trend compared to the past. And as well as I said, if that is project by project in certain situations where we are kind of a single supplier, we can compete much better, in some other cases, of course not. And additionally, bear in mind that price is only one element to the adjudication. There is the technical capabilities and internal conditions. Most of the time, we win or we lose, based on the other 2, not on the price.

Operator

As there are no further questions in the queue, I would like to turn the call back to Mr. Battista for any additional or closing remarks. We have another question from Luigi De Bellis from Equity SIM. Do you want to take the question?

V
Valerio Battista
executive

Yes, yes.

L
Luigi De Bellis
analyst

Yes, three -- two quick questions from me, sorry. Considering the delay in the award of Viking, how much is the expected order intake for transmission in 2018 and the market size compared to 2017? And do you expect any impact in the first part of 2019 due to potentially lower workload in 2018 or your backlog is sufficient to cover all 2019? And second question, how much is the expected contribution in the guidance of YOFC?

V
Valerio Battista
executive

Okay, Luigi, thank you for the question. Late and is good. So I'll give the floor to Massimo.

M
Massimo Battaini
executive

The size of Viking is a EUR [ 100 ] million project. In a normal situation, we would have faced EUR 3.5 billion, EUR 3.3 billion-worth of market in 2018. So once you take out Viking, we expect now the market to be in the region of EUR 2.5 billion, EUR 2.6 billion, EUR 2.4 billion. So many other variables. The workload for next year, I mean, we have a backlog which is big, not entirely sufficient to cover completely 2019. But we still have the whole of the impact of the order intake of 2018 to help out to fill up 2019. So at this stage, we are not worried, we are not so certain about 2019 workload. And we will manage it as time goes by in the next -- for the next tenders. Did I answer, Luigi?

L
Luigi De Bellis
analyst

Yes, yes. Thanks.

V
Valerio Battista
executive

About YOFC. We expect YOFC to perform slightly better than this year, even if they always surprise us.

P
Pier Facchini
executive

Luigi, let me add. Francesco speaking, a very short comment on this. Of course, first of all, we expect that it's more than an expectation. We consider this the guidance, the carryover coming from 2017, that's an obvious. The famous EUR 6 million that we have referred to.

V
Valerio Battista
executive

Then we substantially -- what I can say is that for the remainder of the year, we are assuming that the very strong results that YOFC posted in the first quarter, will more or less be in line -- will continue for the following quarters. So a trend in line with the first quarter.

Operator

It appears there are no further questions at this time. Mr. Battista, I would like to turn the conference back to you.

V
Valerio Battista
executive

Yes, thank you very much. I thank you, everyone, who has been participating to our conference call. Thank you very much and see you next time.

All Transcripts

Back to Top