Prysmian SpA

MIL:PRY

Earnings Call Transcript 2019-Q1

[Valerio Battista, executive]

Good afternoon to everyone. Valerio Battista speaking. We are here with the management team of Prysmian Group, and welcome to our Q1 2019 conference call.

First page, the financial highlights. Organic growth sales went reasonably well, 1.9%, mostly thanks to a very strong performance of telecom with almost 10% of organic growth, and a solid trend in E&I. In particular, Power Distribution went up almost 15.7%. North America plus 5 regionally -- North America, plus 5.4% and LatAm, plus 6%. So a quite good quarter.

Adjusted EBITDA closed at EUR 231 million, 8.3% on sales comparable with the EUR 198 million in the first quarter '18, 7.2% of sales.

Projects. Not very well, unfortunately, as foreseen, because of the low order intake in the 2018 -- during the 2018.

Energy. Energy went well in E&I, PD and T&I regionally in North America. Industrial & Network Components almost stable.

Telecom. Very strong volume growth in optical cable business. With a capacity increase, we realized in fiber and manufacturing efficiency improving, increasing the output of the cable plants.

On the contrary, the YOFC contribution in 2019 first quarter declined compared to the first quarter last year. The net negative one-off of last year have been EUR 9 million Q1 '18 because the sum of EUR 20 million negative Western Link and EUR 11 million positive one-off in Telecom, namely the translation of the last quarter 2017 of YOFC. And obviously, the OE, the famous OE provisions release.

Q1 2019, we modified the IFRS with a positive impact of EUR 9 million on the EBITDA. On the contrary, as you can see in the bottom line, increasing the debt by EUR 139 million.

Synergies are going well with an updated -- in line with the updated plan we gave you last quarter. And the net financial debt over -- overall is EUR 2.9 billion, in line with expectations because of seasonality but with the additional EUR 139 million due to the IFRS impact.

Let's flip to the next page, Page 4, Sales. Sales closed at EUR 2.771 billion versus the EUR 2.734 billion of the first quarter last year with an organic growth of 1.9%. Obviously, here are we reporting the combined entities of Prysmian and General Cable.

The adjusted EBITDA, on the same way, went up from EUR 198 million from the first quarter '18 to EUR 231 million of Q1 '19, taking into consideration the famous EUR 9 million of IFRS 16.

From the working capital point of view, the working capital is -- has closed at EUR 1.327 billion, 12% compared to historical 7%, 8% one digit. That's because we took, since the acquisition of General, all the working capital of General Cable, and that raised significantly our working capital. We are still working on it.

The net financial debt, as a consequence of all of it, has closed at EUR 2.9 billion, of which EUR 139 million coming from the IFRS 16. Without this impact anyway, it would have been at EUR 2.761 billion.

Okay. Let's go to Page 5. The performance of the various segments. Let's start with Projects. Project went up in term of profitability, but not in term of profit. As you can see, the profit went up from EUR 32 million to EUR 38 million with an organic decline of 5.3% that was expected because the poor order book of -- the poor order income of last year. The profitability scaled up, but simply because the Project in Q1 2018 has been affected by EUR 20 million provision for the [indiscernible] of Western Link.

E&I. E&I has increased from EUR 50 million to EUR 65 million [ net ] EBITDA. The organic growth has been 3.4% and the profitability moved up from 3.9% to 5%, not so bad.

Industrial & Network Components finally moved up from EUR 36 million to EUR 39 million with an organic slight decline of 1.6%, and a profitability that moved up from 6% to 6.5%.

Last but not least, the Telecom. The Telecom moved down theoretically in term of EBITDA from EUR 80 million to EUR 78 million. But you have to consider the EUR 11 million, EUR 12 million of one-off enjoyed last year in the first quarter, that is not replicable, obviously, this year or is replicable only for EUR 1 million. Consequently, the profitability went down from 20.1% to 18%.

Overall, the company moved well from EUR 198 million to EUR 222 million with an organic growth of 1.9% already commented. And EBITDA margin that increased from 7.2% to 8%, not so bad.

Let's move to the next page, Page 6. We tried to condensate a little bit more our presentation, following some suggestions.

Projects. Projects have reached an organic sales negative growth of 5.3%. That was written in the story because with the very low order income of last year, obviously, the saturation of the capacity is not very strong. And moreover, we have still to produce the part of the cables that had been not delivered last year. You can see that EUR 32 million in Q1 2018 moved up to EUR 38 million in Q1 2019. But in '18 -- in the first quarter '18, we accrued EUR 20 million. Consequently, we have to read as written in the right side of the column, Projects, excluding Western Link, our profitability went down from EUR 52 million to EUR 38 million.

Today, there is a very strong tendering activity. And we are confident that in the next weeks, months, we are going to recover what we have lost in term of market position in 2018.

The market is sound. The market is still around about EUR 3 billion, even a little bit higher than the previous year. Previous last year was a little bit difficult, especially in the first half. And we consider to be in the good position to reach our historical market share.

Energy. Energy went reasonably well with an organic growth of 1.7%. E&I, in particular, with plus 3.4% moving up in term of EBITDA from EUR 50 million to EUR 65 million and in term of EBITDA margin, from 3.9% to 5%. Industrial & Network Components, more stable with 1.6% organic decline, but a better profitability in term of both EBITDA, EUR 36 million, that moved up to EUR 39 million and a percentage of the sales that moved up from 6% to 6.5%.

E&I, especially, Power Distribution already commented that is going very well. North America and Latin North are doing very well. Because the numbers you have seen are already affected by the already commented negative market position of the overhead lines in Latin America, we suffered in the last -- in the second part of 2018, and we are still a little bit suffering. But we expect, in the second half of the year to recover the [ gas ] on overhead lines business.

The Industrial & Network Components overall is going pretty well, especially the elevators. Unfortunately, the Automotive, is very well known to all of you, is vice versa shrinking.

Last but not least, Telecom. You can see very clearly here that excluding the one-off of 2018 -- positive one-off of 2018, the result went up EUR 11 million from EUR 68 million to EUR 77 million of Q1 '19 versus Q1 2018. Obviously, if we do not take into consideration the one-offs, the results have been almost stable and the percentage of result has been even lowered from 20% to 18%. That's simply because of the one-off contribution of YOFC of the last quarter '17 and the OE effect that impacted EUR 6 million if I'm not wrong.

From the business point of view, the business is going very well for sure in Europe and in North America. Obviously, you all know very well the situation of China where it's not so much a matter of volumes in the market, but is much more a matter of pricing.

Let's flip to Page 7. Q1 sales organic growth by geography because now geography have a role. And the total sales have been EUR 2.771 billion, as you can see on the right side of the chart with an organic growth of 1.9%. Geographically.

Let me say that North America that represented EUR 837 million sales went up in term of organic growth of 5.4% with a strong performance of both, of Power Distribution and Telecom.

Latin America, EUR 224 million with plus 6%, another very good trend driven positively by Industrial and Power Distribution.

EMEA that is still the largest region, by far, slightly more than 50% of the total sales, EUR $1.484 billion with an organic growth that is 0, but if I remove the 5.3% organic decline of Projects that are completely or almost charged to Europe, the organic growth of Europe could have been 2.8%. That's just the preview of the feeling of how the real business is going.

In Europe it's going very well the Telecom. And excluding Projects, the organic growth, as I said, could have been 2.8% or at least 2.8%.

Lastly, Asia-Pac. EUR 226 million, we have not very, very weak in Asia-Pac with an organic decline of 1%, mostly due to the lower telecom volume in Australia. That has been a very good business in the last 3 years -- 3, 4 years and now is a little bit declining.

Let's flip to Page 8. About the synergies. Synergies are going very well and that's one of our best performance. In 2018, you know that we reached EUR 35 million synergies. 2019, the expected number is going to be EUR 120 million, a very important upside in the synergies. As well as in 2020, we expect to go far ahead at EUR 155 million and in 2021, the famous, EUR 175 million. We are faster. That doesn't mean that we can double the synergies, but make much more reasonable the goal to reach the EUR 175 million.

Finally, the guidance. Flipping to Page 10. 2019, target for EBITDA is confirmed in between EUR 950 million and EUR 1.20 billion with a midpoint at EUR 985 million. We see Telecom going well. Western Link, obviously recovering at least all the negative [ doings ] suffered last year. But Projects, not going very well because obviously, the short order book is penalizing us.

Energy is improving. The Forex is foreseen to be flat, and the synergies are going to give us a significant upside. Did we consider the exchange rate flat all over the year. We confirm also the free cash flow outlook to be around about EUR 300 million, including -- after EUR 90 million of cash out because of the restructuring and integration costs.

Okay, that's it. I leave the floor to Francesco for the details on financials

[Pier Facchini, executive]

Thank you, Valerio. Good evening to everybody. As usual, I comment briefly the profit and loss statement. As Valerio said, organic growth in Q1 was a slight solid, plus 1.9%, [ carving ] out of the negative organic growth in the Projects business. Organic growth ex Projects was in excess of 3% overall, driven by business-wise, a very solid E&I performance, specifically in Power Distribution and even more, a very strong Telecom performance, both in optical cable and Multimedia and specialties (sic) [ Specials ], geographically driven by North America and LatAm, as Valerio already explained.

And let me also highlight that the weight in the new combined group of North America representing now 35% approximately of the total adjusted EBITDA anticipated for 2019, makes the positive trends in North America very important because, of course, is a machine, is an engine which can really -- which can really boost the group's results.

In terms of adjusted EBITDA, grew to EUR 231 million. In the slide, we highlight the IFRS 16 impacts line by line. As Valerio already explained, the EUR 9 million positive effect at the adjusted EBITDA and also the reported EBITDA level. Let me say, in earnings growth, which was even better -- even better than we anticipated at the beginning of the year.

In the box that you see right in the page, we included a very summarized bridge, recapturing all the effects from Q1 2018 to Q1 2019, EUR 222 million, excluding the EUR 9 million IFRS 16 effect. And just to recap what Valerio already explained, the main effects are the EUR 20 million negative Western Link provision in the previous year in Q1 2018, the EUR 11 million positive Telecom one-offs in the previous year Q1 2018 for a net negative impact on Q1 2018 of EUR 9 million, then organically a decrease of Projects EBITDA for EUR 14 million, and a very positive, as I was saying, even better-than-expected growth in Energy EBITDA of EUR 20 million, of Telecom EBITDA, excluding YOFC of EUR 13 million and a negative contribution or a decline of the EBITDA related to YOFC for EUR 4 million. This bridge, the EUR 180 million -- 198 million last year to the EUR 222 million this year ex the IFRS 16 effect.

Adjustment and special items were in total positive, negative for EUR 11 million adjustments and positive EUR 16 million special items were a net positive effect on our earning before tax of EUR 5 million, mainly driven by a positive change of metal derivatives fair value.

Financial charges are absolutely in line with our expectations and reflects the synergies coming from the very fast refinancing of General Cable debt, which was done right after the closing of the acquisition in June -- in July 2018. And we are fully on track in terms of synergies on interest expense.

The group net income was particularly significant in the first quarter. As you see, EUR 88 million, a very sharp growth from the previous year.

I flip to the following page to comment very briefly adjustments and special items, in particular let me comment the restructuring. Restructuring costs are still pretty low in the first quarter, EUR 4 million total, of which only EUR 2 million related to the integration of General Cable, a little bit more cash wise of the restructuring cash out were in the region of EUR 8 million, EUR 10 million in the first quarter, and these is absolutely in line with a total restructuring cost. So over the 4 years -- 3, 4 years of integration that we anticipated at total cash amount of EUR 220 million, as you perfectly know, despite -- and we kept it stable despite the synergies upgraded to EUR 175 million.

I flip to Page 14 to comment financial charges, in particular, net interest expenses. EUR 22 million, again, very much in line with our anticipation. I anticipated total net interest expenses for the full year around EUR 90 million, which is a very nice drop from 2018, which was at a combined level at EUR 103 million so minus of EUR 13 million. And this comes after a reduction in 2018 from the pro forma 2017 of EUR 35 million. So it's huge. If we cumulate 2 years, the 2 years of synergies, it's a huge reduction of the net interest expenses. Just to quantify the synergies, total synergies or gross synergies on interest expenses amount to approximately EUR 38 million.

I move to Page 15, balance sheet. As Valerio already explained, the balance sheet is impacted by the new IFRS 16, effective since January 1. You see that this impacts the net fixed assets and the net financial debt for the identical amount of EUR 139 million. So basically, the net debt of EUR 2.9 billion before IFRS 16 effect, that it's EUR 2.761 billion, which is absolutely in line with our expectation and on track to achieve the EUR 300 million plus/minus EUR 10 million of guidance in terms of free cash flow.

And working capital moved significantly up from year-end 2018, and this is mainly the effect of seasonality, which is a seasonality on the enlarged perimeter, including also General Cable, includes the increase of the working capital as usual in the first quarter or in the Projects business. And these are the 2 main effects. Whereas compared to March 2018, the equivalent period, and of course, equalizing the perimeter working capital was pretty stable.

But let me explain this better on the following page where we tried to bridge the cash flow better to bridge the net financial position in the upper part of the slide, the last 12 months from March '18 to March '19 and in the bottom part of the slide, from year-end 2018 to March 2019, so 1 quarter only.

Apart from all [ of the ] comment in the upper part of the slide, the last 12 months cash flow, apart from the, let me say, extraordinary or financial effects and I clearly refer to the General Cable acquisition, the EUR 2.5 billion impact, the dividend and the capital increase and the IFRS 16. What really matters on the slide is that free cash flow generation of the last 12 months, as you see, over EUR 51 million. Apparently, very low, but very important to highlight that this plus EUR 51 million of free cash flow before dividend is impacted by EUR 240 million negative impact coming from the restructuring, transaction and acquisition cost of General Cable. These are cash effects. And also from approximately EUR 90 million cash effects -- negative cash effects related to the Western Link issues. So of course, these are EUR 51 million plus EUR 240 million, reach almost EUR 300 million, which is, in my opinion, before the growth of EBITDA that we will certainly enjoy with the progression of the quarter, a very significant and a very positive free cash flow performance.

Whereas for the lower part of the slide, as I commented, the Q1 evolution, the net financial position increase is affected by the working capital changes, which mainly stem from the seasonality, also in General Cable perimeter and the increase of working capital in Projects.

Let me conclude with a very quick summary of the debt profile. As you know, beginning of April, we refinanced our revolving credit facility of EUR 1 billion, which was due in June 2019. We refinanced this with a few months of anticipation of a [ balance. ] And moving with maturity to 2024, as you can read from the slide, we significantly improved the average maturity of our debt, which increased to, on average, to 3.7 years. So commenting the repayments date of our debt, this simply means, that we don't face any significant loan [ market ] maturity before 2023. And we don't face any significant capital market, meaning bonds maturity, before 2022. So our debt profile is very comfortable, very, very long.

Let me also highlight that with the refinancing of the revolving credit facility, we enjoy an even stronger liquidity and financial flexibility than before. Let me highlight, as you see in the left part of the slide that the interest rate is almost fully converted to fixed rate, meaning that we are not exposed to any risk of hike or increase in interest rate. And let me also highlight finally that our covenants are not impacted by any project one-offs, which affect our profit and loss because these are [ carved ] out from the -- may be [ carved ] out from the calculation of our covenants.

I believe I finished my presentation so we can go ahead with the Q&A session.

[Operator]

[Operator Instructions] And the first question comes from the line of [ Benjamin Zacharias ] from Goldman Sachs.

[Unknown Analyst]

I've got 2 questions. One of them would be around the projects and the tendering that you expect. You said that you see very strong tendering going into 2Q, and you still see the market around EUR 3 billion. And I was wondering if you could kind of give some color around whether you still see a strong tendering environment in the U.S. and Asia? And then, obviously, if you could provide us with any update around Viking Link, that would be very appreciated.

And I believe, with 4Q '18 results, you also mentioned a big project in the Mediterranean, possibly in 2019. If you have heard any updates about that, it would be much appreciated.

And then just a second one around Telecom. You obviously had very strong organic growth with Europe and North America going well, but China weaker on pricing. I was wondering if you could give any quantitative sort of color around the contributions of the different regions to the Telecom growth? And if you have any visibility there? That would be great.

[Valerio Battista, executive]

Okay. Benjamin, thank you very much for your questions. First of all, the tendering status on projects, provided that the answer to Viking will be no comment for whatever question is going to come. Reality, the tenders are in the market. They are even pretty huge tenders and not only in Europe, as it has been in the last year, but also U.S. and Asia.

Okay. Take into consideration that the Asian tenders are not off limits for us, but are not very comfortable, we consider vice versa the U.S. market extremely important for us, and we are waiting for our first sizable orders in the next quarters.

The other question for projects was related to the Mediterranean project. In reality, there is a big project that is going to come -- is expected to come into the Mediterranean Sea. It's a little bit early in order to comment on it. There is more than 1 project, frankly speaking, because the connection of the islands is becoming crucial for matching the 2020 commitment on the pollution. So 1 project is under discussion. The [ other ] is drafted, but not yet in tendering.

For the Telecom, I would like to leave the floor to Philippe Vanhille, that is here around the table with me to explain you about the organic growth by region.

[Philippe Vanhille, executive]

Good evening, Benjamin. So I would say that being in the optical business, we enjoy double-digit growth everywhere. Everywhere except one place, which is Australia. So as you know, we are mainly acting in Europe, North American and South America, and in all these 3 regions, we grow double-digits.

And in Australia, it's the other way around. We are shrinking because of the end of the NBN project that was anyway planned. And on top, you have to add the copper traditional business that is shrinking everywhere, except in South America, where it is growing for us [ and it ] also double-digit, but on the -- of course, on the smaller scale. That's the color we were reporting. I think in China, as you know, we are not acting as Prysmian. So we are [ not active in ] China, at this stage at least.

[Valerio Battista, executive]

To be clear, Benjamin, in Telecom, we enjoyed a very good season for some years with the NBN project in Australia. When these big projects go to an end for a while or for a number of years, the market obviously has a contraction that is double-digit. Just to be clear, the organic decline in Australia for Telecom Optical has been double-digit and it's not starting with one. Because of that's the name of the game.

[Philippe Vanhille, executive]

But today, the decline of Australia is clearly offset by the growth that we see in North America and EMEA. That's clear.

[Valerio Battista, executive]

The market overall is growing, but locally [ it's at sometimes weak. ]

[Unknown Analyst]

That's very clear. Maybe just on the visibility aspect, how much visibility would you say you have just across regions in Telecom?

[Valerio Battista, executive]

The visibility on the margin of the EBITDA. Yes, we see -- can you repeat the question? Sorry, because no one of us has understood very well.

[Unknown Analyst]

I was just wondering how much visibility you have in terms of the double-digit growth continuing in the regions where you have been experiencing that growth?

[Valerio Battista, executive]

We see a solid growth in Europe and North America. Double digit? I don't know. We are following the market, that is growing, thanks to our investments. To say now that it's going to be double-digit in the long run for a long time, I don't know, of course. But...

[Pier Facchini, executive]

If I can. Last quarter -- last year, in the first quarter, the market for telecom was not very brilliant nor we have been very brilliant. The reason why, the organic growth was moderate. Obviously, on the basis of our first quarter '18, pretty moderate. It has been much easier to reach a double-digit in the first quarter. That is not expected -- I personally do not expect to replicate quarter-by-quarter for the full year. Reason why? When we talk about the organic growth for Telecom, we talk about -- we told about single largest [indiscernible ], which is still our view, high single-digit, low double-digit. It's not very far. It's not accurate enough to know now. It's too early to say.

[Operator]

Your next question's from the line of Lucie Carrier from Morgan Stanley.

[Lucie Carrier, analyst]

I have a couple of them, and I will take them one at a time. And my first question was around IFRS 16, and I was hoping you could give us some indication around the full impact you expect for 2019. I mean it's already EUR 9 million in the first quarter. And related to that, I just would like to understand regarding your guidance because when you gave the guidance end of last year, there was no mention or impact of IFRS 16. Now you are keeping this guidance similar, but we are seeing a benefit. So how should we understand that? And maybe where should that help you position within the guidance range? That's the first question.

[Valerio Battista, executive]

Okay. Lucie, I take this over. I think we indicated -- we gave an indication on the 2019 impact already in the appendix of the full year '18 presentations, which is not a very different from 9 times 4, which is EUR 37 million. If I were to remember, EUR 36 million as you want. The impact on the debt and the net fixed assets, you know, these are EUR 139 million is the value at March end. And it will decline slightly over the course of the quarters. And to be very clear, these EUR 36 million or EUR 37 million IFRS impact on adjusted EBITDA are not included in our guidance. So our guidance was given excluding IFRS 16 effect. So you take the guidance as EUR 950 million to EUR 1,020 million and you add up the EUR 36 million or EUR 37 million.

[Lucie Carrier, analyst]

Okay. Okay. So the current range doesn't include IFRS 16? And that was already the case at the fourth quarter?

[Valerio Battista, executive]

Yes.

[Lucie Carrier, analyst]

Okay. Very clear. My second question was around Western Link. Two questions around that. The first one is, I noted your comment in the release saying that you expect the 2019 results to be influenced positively by the recovery effect of the negative effect of Western Link. Apologies to maybe be pushing here a little bit, but what gives you the confidence that we are not going to be seeing further negative impact on Western Link?

And related to that, I know you are currently performing a repair on the Western Link cable. If you have any update on that repair, that will be helpful. But more generally, after you have done this repair, how far are we from, I would say, the commissioning phase? Or in other words, how advanced were you in the ramp up of the system when the issue has occurred? Because I think what we're all trying to know is or trying to evaluate is how much more risk is it around the Western Link? Is it -- are the risks over or is there still a little bit of risk because we are close to the finishing all of the milestone and the ramp up? Or is there still quite a lot to do for you to commission the project?

[Valerio Battista, executive]

Okay. Lucie, thank you very much for the question. The situation is the following: We are repairing the last fault because is in the deepwater consequently, is a little bit longer. We expect by the round about end of the month to complete the operation and to give back the line to the customers.

The question is, is going to fail again in the future? We are not sure. For sure, all the damages till now have been installation damages. And in a route of 780 kilometers of cables may happen in the installation to create some damages. Now, is going to be other -- is going to be other faults, other damages? We don't know today. For sure, in the accrual we posted in the year-end, the EUR 30 million, we took it into account that something else may happen in the year. That is not written anywhere.

[Pier Facchini, executive]

I would like to add one more clarification. The large damage that is under repair is under investigation. So there is no conclusion about the reason of the damage. Just to make sure, the prior thought that we had were more on the installation. So...

[Lucie Carrier, analyst]

But just kind of for me to understand maybe a little bit better. So first of all, I mean I remember you had mentioned in the past that the maximum liquidated damages you would have to pay to National Grid was EUR 120 million. Out of the EUR 165 million, you've passed a provision last year for Western Link. How much are we in the EUR 120 million? And also I appreciate that it's a whole new project, whole new technology. You don't have the return of experience on that technology, but in terms of -- after you are finished with the current repair, technically, if everything was going to be kind of happening as planned, would we be close to the end of the project and potential commissioning? Or is there still a lot for you to do in terms of ramping up, testing and so on the system?

[Valerio Battista, executive]

No. Okay. Just to be clear, obviously, there is a difference between the provisions we have to post and the EUR 120 million max liquidated damages. Because there are certain costs that are not in exactly the liquidated damages. Having said that, the situation is the following: The line is going to be back into service -- get back into service at least back to customer by round about end of the month. We were with the customer making the acceptance test, the final acceptance test when the cable failed in April. That's it, now we have to restart the process or to complete the process of the final acceptance test. Just to be more clear, we believe that by the year-end, should be completed the talk. [ customer ] will be taking over certificate.

[Lucie Carrier, analyst]

Okay. And just to go back on the liquidated damages, have you exhausted now the EUR 120 million to be paid to National Grid? Or is there still potential -- if there were any issue, is there still a bit more maybe that could come?

[Pier Facchini, executive]

Lucie, Francesco speaking. Let me say that with the last provision of EUR 70 million that we posted in Q4, we are quite close to the amount that you are mentioning in terms of [ simulated ] liquidated damages.

[Operator]

Your next question is from the line of Max Yates from Crédit Suisse.

[Max Yates, analyst]

Just my first question would be around YOFC. And could you just firstly give us a sense of what you're assuming in your guidance about business? And secondly, when you show on page 12 the EBITDA bridge, where you show YOFC as a minus EUR 4 million, should we take that to assume that, that is a sort of sensible run rate when we look at how the full year may evolve? Or was there any sort of seasonality in that business? I.e., is it reasonable to believe that YOFC is down EUR 16 million for full-year '19?

[Valerio Battista, executive]

Okay, Max, thank you for your question. YOFC, it's clear that YOFC is a listed company, and we cannot comment for them as much. What I can say is that we planned in our guidance YOFC to scale down because it was already smelling in the air that, that market in China could have been suffering. The real problem and what overcame our expectations is the speed. As you learn in China, everything is very fast, and the drop of the prices have been faster than expected.

[Max Yates, analyst]

Okay. And maybe silly, would you be able to just give us your view on the China market more broadly? I mean the pricing decrease that we've seen, is there anything temporary in that? Or as the 5G rollout continues, should we assume that pricing from here on will just be structurally lower? Or is there any reason to assume that could improve as demand picks up, perhaps the market consolidates? Any color there would be helpful on what you see and what you think.

[Pier Facchini, executive]

I think it's too early to say, Max. Look the point here is that the decrease in price was clearly seen and very fast in the first big tender of the year. We expect the next tenders to be of the same kind. Now we have to look at this market because it's a significant change for this market after a few years of significant growth and very, very high prices because the market was protected. Now we see a big swing -- a major swing. We need to see how the different players will cope with this. We need to understand who is going to have a process that is going to enable them to be sustainable at that level of price, and we will see how it will evolve.

I really want to be careful here because we had one big event. It's a big event. Now we have to analyze the market carefully, see who are the players, what are the capacities in hold, who is depending on what and see where the market grows. I certainly do not think that this year will be good in China as the level of price. Of course, the trend is there. How long will it last? It's a question mark for me. Honestly, it's a question mark.

[Valerio Battista, executive]

Obviously, if the demand in China will recover, thanks to 5G, it will help.

[Hakan Ozmen, executive]

[ Will ] recover has not dropped. Has stabilized. It's an excessive capacity, [ but ] that has been more than sufficient for the Chinese players to run the prices much lower than before. Simply because the capacity is continuing to grow like hell every quarter, that's a problem.

[Pier Facchini, executive]

It's [ not as if ] growth of capacities is going to slow down by definition. So you have to look at [ holds ].

[Max Yates, analyst]

And could you also give us -- I think you mentioned Western Link in the quarter had a EUR 90 million cash out related to it. Could you give us a sense of how much more cash out or where you are in terms of the cash versus the provision that you took? I.e, is that the only use of the provisions that we've seen taken on Western Link? And how much more of the provision do you expect to be cashed out for the remainder of the year?

[Pier Facchini, executive]

What I was -- Francesco Facchini speaking. What I was commenting in my presentation was actually the total cash out for Western Link for the last 12 month going from April 1, 2018, to March end 2019. And these cash outs are in the region of EUR 90 million for 12 months. For the first quarter, I think that the cash outs related to Western Link are not very significant. Of course, there is the -- let me say that our guidance related to free cash flow was the same of EUR 300 million plus/minus 10% -- was already including all the problems and the technical issues related to Western Link with only one exception, which is the last accrual, the last provision of EUR 70 million.

Of course, I don't anticipate that this EUR 70 million will 100% convert into a cash out because, as we commented, we are taking in this EUR 70 million a certain statistics and possible, possible, possible issues to come. But of course, just the cost related to the repair that Hakan was commenting that we are currently performing will add a negative effect. If you want a number, we can say EUR 20 million, something like this, which could be not fully included in our EUR 300 million plus/minus 10% guidance, but will just make the guidance a little bit more challenging. But, As I said, I am confirming the guidance. So I am fully confident that despite this little additional cash out that we will incur due to the last April Western Link issue, we will achieve our guidance, and we will be able to reabsorb this little hiccup in terms of cash out in the EUR 300 million free cash flow.

[Max Yates, analyst]

Okay. And maybe just a final one. Valerio, if you could just comment. I think, obviously, you said that tendering activity is very good. Could you talk a little bit about how going forward you may sort of think about structuring contracts differently or the way that you're sort of pricing contracts as we go forward to try and perhaps sort of build in more defensiveness versus some of the issues that we've had on Western Link? Is there any sort of change in thinking about how you go about the bidding process that maybe gives more flexibility and more defensiveness against? And how you perhaps have changed the way you will approach these contracts going forward? Because obviously, they will be very -- they will be sort of deep offshore, very lengthy. And so how we can maybe get some comfort that these problems can be avoided going forward?

[Valerio Battista, executive]

As you can well imagine, the market is moving in the direction to create more difficulties. Price is under pressure, conditions time by time more challenging. Our approach has been to keep a reasonable level of margin for the projects. Obviously, we are tendering. We are participating to the tender. For the time being with not very good order book, order income, but we expect to be able in the next quarters to reach some important results. For sure, in reality, if you analyze our mistakes because of some of the mistakes of the past, you have to -- we have to learn. We made a big mistake with underestimating the PPL technology introduction in the Western Link. And that's a problem that we have paid and we are still paying.

So one lesson learned is no technology on big connections. Short connection, first of all, and then once approved we can progress with the longer projects. That's the reason why, for instance, the project in Greece deepwater with the new -- reinforcement of the cable, the [indiscernible] we took a little project as the first step. Otherwise, we are not going to produce and install the big projects. That's the lesson learned. Obviously, the competition is becoming vice versa time by time more aggressive and makes sense because, one, a player can be aggressive until have not a big problem. And that's the condition we are in. The market is competitive, that's sure, but we are organizing ourselves in order to be able to compete with the other players.

[Operator]

And the next question is from the line of Akash Gupta from JPMorgan.

[Akash Gupta, analyst]

I have a couple of questions as well. My first one is on growth trends that you have seen so far in second quarter. Has there been any change in trends that we have seen in Q4 -- Q1 that we should be aware of?

[Valerio Battista, executive]

Sorry, Akash. I didn't catch perfectly your question. The trend for the second quarter seems to be in line with the trend of the first quarter giving us the confidence on our guidance. That's the reason why we confirmed our guidance. The second quarter for the time being we are at the end of April. We already completed April. May and June, unless something is going to happen, seems to be in line with the trend of the first quarter. With a very good market with North America, reasonably good South America, almost stable in Europe and Asia-Pac we are [ minus consequently. ]

[Akash Gupta, analyst]

My second question is on synergies. You have realized EUR 25 million synergies in Q1. Maybe if you can talk about phasing of remaining synergies of EUR 60 million in the coming quarters.

[Valerio Battista, executive]

The phasing, the phasing is a little bit too much, frankly speaking. Of course, we are thinking to execute, and we have -- we are on track on the execution of the synergies. It's clear that our first tranche of synergies of 2019 has been realized with the costs of 2018. If you look at the extraordinary cost for the restructuring, in 2018, last quarter were pretty significant. In the first quarter this year, not a lot. Why? Because we made a significant chunk year-end. Now the first quarter, we are completing the cleaning of the organization. Next chapter is going to happen in the second quarter and in the third quarter, where maybe that we are going to move also on the investor footprint. But it's something sensitive that I cannot disclose more than that.

[Akash Gupta, analyst]

And my final one is on medium-term margin potential for Project business. Do you think we can go back to mid-teens margins? Or will that be an ambition given the current competitive dynamics?

[Valerio Battista, executive]

I'm going to tell you what I told to my team. Guys, this is true that the prices are under pressure, no doubt. How much? It depends. Project by project is different. System is a different project. Consequently, the margins are anyway under pressure. The real goal to keep the profitability at the level of, let's say, 15% that is our -- I'm talking about EBITDA margin -- is to have flawless executions, not to have the problems we had last year, mostly last year, obviously on Western Link but even in some other projects. That's the goal. If we're going to have realized -- flawless or almost flawless executions, we are going to keep the profitability of the Project business.

[Operator]

Your next question comes from the line of Monica Bosio from Banca IMI.

[Monica Bosio, analyst]

The first one is on the Project business for the submarine. You have indicated a size for the market of EUR 3 billion. Can you comment on your expected market share by year end which is accounted in your current guidance? Could it be in the range of 30% or something more? And can you just give us a rough indication of the expectation of the capacity production for the Submarine business? And the second one is on the telecom. Pricing is going down. Maybe it will continue. The situation might be a little bit more -- can become tougher. And I was just wondering. In a 3 years' time, if pricing in Asia will continue to go down, what is your sustainable profitability for the Telecom division? What kind of profitability on a sustainable level do you see in a 3-years' time within this new environment?

[Valerio Battista, executive]

Thanks to you, Monica. Submarine project, EUR 3 billion market. Our historical market share has been 55%, EUR 1 billion easy. But in reality, our market share year-by-year can fluctuate even very much. We expect this year on the year to reach something more than 30% because our order book is not so buoyant, and that's the first as well. Then I like the actuals, and I don't like very much the forecasts. Let's see which the actual will be or is going to be.

The second point, telecom. Pricing on telecom and margins on telecom as of now and in the next 2, 3 years. That largely depends. If there was not the price war in the Chinese market, I could have said to you stable, maybe even better. With the Chinese war opened, we'll do everything as possible, and we are acting strongly on the products and costs in order to keep the profitability of the Telecom business. We will succeed on it? I think so, but I'm not sure.

[Monica Bosio, analyst]

So you have room to improve the [ deeps ] or to improve technology or...

[Valerio Battista, executive]

We are making two choices -- two things. The first one is to drop the costs further on the standard products -- on the standard fibers to be able to compete with even the Chinese. Because once the Chinese will not be able to sell their fibers into the Chinese market or in the markets that are accessible to them, they will start to drop the prices in other markets, probably except U.S., because in U.S. they are not very welcomed. Let's see what happen. What we have to be sure is that we are going to be competitive -- sufficiently competitive against the imported eventually fibers from China. And we know that we are able to compete, but that doesn't mean that our prices and consequently our margins could not be affected. You understand what I mean?

Then in order to protect as much as possible ourselves from the price war, we are developing new products, obviously, covered by patents that can provide a better product and a better system to our customers, avoiding or limiting much more the competition, is example of the Flextube. I don't know if you are already aware of it, is a product that is having an extremely interesting result in the North American market and in the European market for the time being partly.

If this product is going to explode on the network, for the time being is used mostly for the interconnections of data systems of -- that may be a real upside. But it's too early. I was thinking it to present to you and the financial community the products and the characteristics of the market once the penetration of this product into the market will be consistently in. For the time being, is a little bit too early, but it's well we have got it.

[Operator]

Your next question comes from the line from Sean McLoughlin from HSBC.

[Sean McLoughlin, analyst]

Firstly on synergies. Given that you are accelerating the impact of synergies, is EUR 175 million now a conservative forecast? Secondly, just on the competitive environment in Projects, just wanted to understand -- I know -- I get that Asian projects are low-priced and highly competitive. How is the competitive environment in the U.S. compared to your [ other left ] competitors? Do these projects have different -- are they potentially more attractive margins profiles? And thirdly, just on telecom, we had a comment from your competitor. The pressure on supply is now greater on fiber optical cables than on optical fibers. I'm just wondering are you seeing this change in dynamic. And how is this shaping strategy?

[Valerio Battista, executive]

Thank you, Sean. Synergies, we moved up from EUR 150 million to EUR 175 million, and you are already after 3 months starting to challenge us on further upside. Not yet, no. Let me say no. The risk is that being too fast in realizing the synergies, we may disappoint the financial market because we'll quickly stabilize. But anyway, obviously, EUR 175 million, we see, and we consider every opportunity that may come to even rise further. But for the time being don't ask me. It's EUR 175 million, and that's it.

[ Chapter two ] projects, U.S. market. U.S. market is for the time being very limited, is almost negligible, but is taking off. And that's the most important news. Because there are at least 2 projects that are on track, are taking off, and we want to be part of at least 1 of it. Let's see. I prefers to talk once we have the order in of the contract in hand. The competition -- as well as for the Power Distribution of the high-voltage, the competition is not as strong as it is in Europe in the sense that the number of players are lower than Europe. And so it's not a terrific market as Europe, at least for the E&I projects.

In the submarine, obviously, it's a new market. It's a completely new market. What I hope is that once the market has started and Americans -- the market -- we'll see the profitability of developing certain projects, the market can accelerate. Third question, the telecom price, Philippe, would you like to comment on it?

[Philippe Vanhille, executive]

Yes. If I understand your question correctly, Sean, it's about the change in the availability of fiber in the world. Yes, you are right. There was a change. In the last 3 years, let's say, at least 2 years, the world was in shortage of bare fiber. So those making cables were struggling to get the fiber. Now after the Chinese stabilization and the investments that every -- any big player have done in that field, the world is not anymore in shortage. So there is availability of fiber, which means a different scenario depending on who you are because you can be amongst the big players.

You have those making more cable than fibers, you have those making more fibers than cables and you have those being more or less balanced. Prysmian is quite balanced. We buy some fiber from third parties, and we also sell some fibers to third parties. Globally, we are probably one of the most balanced players in the world on that perspective. And so we make our fiber for ourselves primarily. And when we buy some fiber, then we will buy in a market that is less favorable to the buyer for the part that we buy. So the change in the market is significant. For those having to buy fiber, it tends to be favorable for those having to sell fiber because they sell more fiber as bare fiber than as cable. It's a bit less favorable. We are quite balanced in this situation.

[Operator]

Your next question comes from the line of Alessandro Tortora from Mediobanca.

[Alessandro Tortora, analyst]

I have two questions if I may. The first one is on the Energy Project. I understood that you mentioned before, let's say, a sound pipeline for the group, hopefully. What I would like to understand is if you can, let's say, better picture now the starting point. So I'm referring to the 2019, which looks to be, let's say, a transitional year for you. I'm referring to the top line trend which is already negative in this first quarter if considering the current workload that we may see, let's say, a further worsening. And also on the margin side, if independently from the provision you made last year on Western Link, if you can give out, let's say, an idea of a clean margin for this year as a sort of starting point, okay, for 2019. And the second question is on, again, on the wind offshore in the U.S. I understood that there are some, let's call it, pilot project or maybe midsize project. What I would like to understand is let's assume this market is going to take off in the next year. So what's the strategy on Prysmian in terms of production capacity? Is there any possibility, for instance, if you can try to switch some of your plans you have in the U.S. in order to supply directly or domestically in the U.S. to these projects?

[Valerio Battista, executive]

Okay, Alessandro, thank you very much. Energy Projects. The Energy Projects, as I said, orders are going to come. How much and which are going to be the margins? Let's see. But we are confident to be able to recover in the next quarters the order book. For sure, 2019 will be better than 2018, at least from the order book point of view. Margins, frankly speaking, the margins from the price point of view are a little bit under pressure. That's evident. It's evident. You know. And what we have to -- what's our focus, as I said, is to recover the executions. Because in 2018, we lost a number of millions into execution mistakes. Obviously, the projects never go totally flawless, but the problems we encountered last year have been really a little bit too much. And I'm not considering the Western Link issues. So the other projects have not been lucky, let's say. We believe that in 2019, we have to be able to reestablish the flawless or almost perfect execution of 2015 and '16 and partly '17. Then it's clear that, in 2018, we have been a little bit disturbed by the Western Link mess, but it's something we have to manage, in a way. Which was the last question? Maybe I lost it.

[Pier Facchini, executive]

Offshore.

[Valerio Battista, executive]

The offshore capacity.

[Pier Facchini, executive]

In North America.

[Valerio Battista, executive]

Okay. For the time being, the answer is no, in the sense that we do not have plans for submarine in U.S. We have plans, many, but not on the sea. Consequently, it is an option to be evaluated if and when the market will boom. For the time being, we don't [ indiscernible ] yet. We see tenders, yes, but before to this side, to invest in North America for a plant, for submarine, I have to see a steady -- a reasonably steady sizable market. Now is not the time for a CapEx, for investment. It's time for making the projects and making the projects well and cashing in period.

[Alessandro Tortora, analyst]

Okay. So my [indiscernible] point, you, let's say, may not have any tariff risk assuming that you are going, let's say, to produce the cable in Europe and then shipping to the U.S., for instance?

[Philippe Vanhille, executive]

Definitely, there is going to be tariff, but we have to think also that there is no, let's say, submarine cable production in the U.S. yet and make sure submarine cable production in the U.S. On top of it, the installation will be, I think, in the short term -- in the midterm the deciding factor to be successful in the U.S. market. Wherever we see some development of the market, the first step to create capabilities on the installation side. I think it may be an effect in the long term if the tariffs are going to stay like this, but we see also that the tariffs are -- can be also temporary and not, let's say, for the long-term in that level. So far, for the activity what we see in the U.S. we don't see any effect of the tariffs for the offshore business in the U.S.

[Operator]

Next question comes from the line from Lucie Carrier from Morgan Stanley.

[Lucie Carrier, analyst]

That was actually on telecom and the differences between the various market. I understand that the price pressure is quite strong at the moment in China, but it seems to me that, historically, Chinese prices were significantly higher also than rest of the world. So my first question is, is there a risk of, I would say, contamination, if I may say, of price pressure, what we're seeing in China into the other market considering that historically they were not really working in sync? And then related to that, if we were seeing a bit of a rebound in terms of demand in China, maybe 5G, what would be necessarily the interest of Chinese manufacturer to go outside of China, especially if their price point is just a little bit higher than what it is in the other region?

[Valerio Battista, executive]

Okay, Lucie. I understood the question. It's clear that the price in China have been extremely good and now are reasonably bad. Let me use these words. Extremely good because when the market was going up and there was a short of capacity -- a shortage capacity in China, the prices have been able to reach $14, extremely high, almost I cannot say the double, but much more than the European or American prices. As well as went up very much, prices went dramatically down right now with the last tender. This has been one tender, but is a good direction. Now the prices today in China are low, but are slightly lower than European prices. So because they are not so far from the cost base as well as Europeans, we -- the Europeans are we, and Americans too. The margins are much better than the past, but are still very limited compared to the CapEx sides to create less capacity. Lucie, do you understand the message?

[Lucie Carrier, analyst]

The first part, yes. I think I do, that's helpful. So if I understand, China prices are slightly lower than European prices now. How do they compare versus U.S.? And also related to that. Of course, I know there's a -- I mean that's not the case, of course, for YOFC, but a lot of operators in China have kind of operated in a closed market for a long time. And the status around the patents that they are using for fiber is not always very clear. So when you think about the potential threat from Chinese manufacturers, which you've mentioned already a lot in the past, I mean, what do we think here in terms of time frame in terms of pricing dynamic, demand dynamic, but also everything that is regulatory as well?

[Valerio Battista, executive]

Yes. What you have not to forget is given the mentality of certain Chinese players, they don't care to have a margin sometime. They care of the turnover, period. And that's really out of our way of thinking. Philippe, do you want to comment?

[Philippe Vanhille, executive]

To your -- Lucie, to your question about the possible contamination, yes, of course, because they are -- if you have some capacity and you are a significant Chinese player, of course, you are trying now to go outside China and create your positions in other markets that are now slightly more attractive than China in terms of price. So clearly, there is an attractiveness. The point is, in certain segments of products and customers, it's feasible. In some others, it's much more difficult because you need the qualification of your customers. You need to make sure that you are not going to infringe any Western company patents. So I'm sure they are working on this, and they are going to have to end up with some pressure on us.

But as Valerio was saying, we also innovate very much. We also work a lot on our cost and all this has to be put in the equation as well as the fact that we have -- as I said earlier, we have to observe very well what is happening in China because maybe not all these players -- I don't know, but I say just maybe. Some of these players will not be able to have the right cost to make it sustainable for themselves in the long run. So it's all happening. We are just after a big change in the market, which is a change only on the Chinese market. We have to be careful in drawing conclusions too early. That's my experience on this market that is telling me to be a bit careful and observe for a few months, and then we will understand better.

[Operator]

Your next question comes from the line from Roberto Campani from Amundi.

[Roberto Campani, analyst]

Actually my question was already made from somebody else. It was about the [ resource ] spillover of prices of the telecom cables, fiber and optic in the rest of the world. So that's okay. Thank you. You answered already.

[Operator]

Your next question comes from the line from Luigi De Bellis from Equita SIM.

[Luigi De Bellis, analyst]

Just a quick question on the High Voltage land business. Could you provide an indication of the tenders [ placed in ] for 2019 regarding the Südlink project, if you can provide an update on the timing?

[Valerio Battista, executive]

Okay. Thank you very much, Luca (sic) [ Luigi ]. HV land, HV land in '19 is going reasonably steady compared to previous year. Obviously, Südlink and Südostlink are out of this picture because are foreseen to be powered in the first quarter next year, at least in the first [ lots, ] as simple as that. For the rest, the HV land is seen almost stable. Obviously, there are projects that are exiting from the pipeline like the France, Italy. Other projects that are coming in, nothing special.

[Operator]

Your next question comes from the line from Gabriele Gambarova from Banca Akros.

[Gabriele Gambarova, analyst]

Just a couple of questions. One is on CapEx because I saw that you invested around EUR 36 million in Q1, and you said that this is not time to invest much. So I was wondering if your guidance of EUR 250 million is confirmed.

[Valerio Battista, executive]

Okay. The answer is very quick. The guidance is confirmed, period. And we have used the CapEx level as a ceiling of the CapEx. Then we have to choose which are the best CapEx to be promoted and which one have not to be promoted. As already I told you, in the guidance of EUR 250 million, year-over-year is now included the shift. That is not negligible in term of amount. But until I don't see the projects coming back with order book and margins is better to push a little bit the [ bridge ] in CapEx, unless there is a specific big order that needs of additional CapEx. But if something enter in, something else has to exit. Because the ceiling is [ too big ] that we have certain tolerance because we are not so precise.

[Gabriele Gambarova, analyst]

Okay. Thank you. And very last question is on -- again on Western Link, I'm afraid. Is there any -- I understood that there is an investigation on the reasons behind this April problem -- issue. I was just wondering if preliminary speaking, is anything that makes this accident different from the others? Only because I saw that it's in deep offshore basically. So I was wondering if in nature is there anything that makes this issue different from the others that were in land and so on.

[Valerio Battista, executive]

Listen, I am very transparent. On Friday, the piece of the cable that failed arrived here. We are going to open tomorrow with the customer. I'm going to give you -- and as well in one direction or another in 1 month because we needed to open completely. Apparently, from the external point of view, there is nothing new compared to the other faults, but is a very superficial valuation.

[Operator]

There are no further question at this time. Please continue.

[Valerio Battista, executive]

Okay. Thank you very much to all of you. And next quarter. Thank you, and good evening to everyone.