Prysmian SpA

MIL:PRY

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Prysmian Group Q1 2020 Financial Results. [Operator Instructions] I must also advise you the conference is being recorded today.

I would now like to hand over to your host, Valerio Battista, Prysmian Group CEO. Please go ahead.

[Valerio Battista, executive]

Hello, and good afternoon to everyone. Welcome to the First Quarter 2020 Financial Results Conference Call of Prysmian Group. And let's start with Page 3, the highlights of the quarter.

Organic sales growth, unfortunately negative, not extremely negative, minus 5.4%, mostly driven by the expected slowdown of the Telecom, 19% compared, obviously, to our first quarter 2019, that was very, very good. E&I trended down 3.4%, not very much, mainly because of T&I, whereas PD was going pretty well, especially in North America, plus 3.6%.

The results, adjusted EBITDA, EUR 197 million, 7.6% of sales versus the EUR 231 million of the previous quarter '19, with an Energy mostly stable, with a positive performance in PD, partly carried down by T&I. Projects, our profitability of this is stable in Underground High Voltage and Submarine. But declining in SURF because obviously, it's linked to the oil and gas market and the Submarine Telecom was simply because of we have completed the project that was under execution last year.

Telecom. Telecom has declined, as expected, reflecting lower volumes and the price pressure that started in spring time 2019. Partially, we have been able to offset with cost efficiency. On top of it, we've got the dramatic drop of YOFC contribution, simply because YOFC is located in Wuhan at the center of the COVID pandemic issue since January.

Net financial debt, EUR 2.606 billion in line with the expectation, not so bad, with a sound cash generation confirmed by the last 12 months free cash flow at EUR 538 million. That's because, obviously, we are taking care as much as possible of the cash. And we are very, very prudent in growing the volumes, if not, with appropriate payments.

German Corridors. We have been awarded by 2 customers, SuedOstLink and A-Nord by roughly EUR 500 million project, EUR 500 million value, each one. Technically, that represents 50% of both the projects.

The outlook for 2020. Obviously, we released the outlook on the 5th of March, but we have to withdraw because the uncertainty is extremely high and the lack of visibility during this crazy pandemic do not let us to have a clear view of where are we going to go by the year end.

Let's flip to Page 4 and have a look at the numbers. Sales, Q1 2019, EUR 2.771 billion. We closed the first quarter 2020 at EUR 2.587 billion with an organic decline, as I said, minus 5.4%. The related adjusted EBITDA from EUR 231 million, scaled down to EUR 197 million, 7.6% of the sales. Of course, not as strong as it has been 1 year ago.

The working capital, one of the chapter we take care as much as possible, EUR 1.183 billion compared to the level of EUR 1.361 billion of the same month, March '19. December obviously was lower, EUR 749 million, 6.5%, but there is the seasonality that is significantly different.

Net financial debt of the company, EUR 2.606 billion at the end of March, comparable with the EUR 2.900 billion of March '19 and EUR 2.140 billion in December '19. Again, the seasonality.

Let's move to Page 5. The sales and adjusted EBITDA by business. Starting with projects. Sales at EUR 347 million, with an organic decline of minus 5.5%. The EBITDA has been EUR 36 million compared to the EUR 39 million of the previous year, the first quarter, obviously. The marginality is very similar, 10.4% instead of 10.6%.

What's good, what's not good? The organic decline has been driven by SURF and Submarine Telecom. The COVID has started to have a certain effect, mostly on the output of certain plants, especially in South Europe, because a significant part of our high-voltage is produced in South Europe, France and Italy. But the tendering activity is going forward very well. So we are reasonably confident in the next quarters.

Let's move to Energy. Energy closed the sales at EUR 1.888 billion, with an organic decline of 2.4%. E&I, EUR 1.239 billion, with minus 3.4%. The total EBITDA from EUR 69 million scaled to EUR 68 million, consequently, almost equal, with a slightly higher EBITDA margin. The organic decline has been driven by T&I in South Europe and LATAM, and partly in the overhead lines. Improved profitability in Power Distribution, mostly in North America. North America has performed extremely well in the first quarter. Slightly down in T&I.

The construction market is one of the most volatile markets. And consequently has started to feel the COVID problem as fast as possible. In the Network Components, EUR 598 million in the first quarter with an organic smooth decline of 0.3%. The EBITDA moved from EUR 41 million to EUR 45 million and the EBITDA margin went up from 6.9% to 7.5%. The profitability has improved, thanks mostly to the mix. And OEM has shown a resilience, that is even due to the longer order backlog than the T&I. Automotive is a problem but has not shown itself in the first quarter, if not in the second part of the March month. Telecom, EUR 352 million, minus 19% on organic growth, with a significant drop, as expected, from EUR 80 million to EUR 48 million, keeping anyway a decent EBITDA margin of 13.6%. The significant drop was expected due to the crisis of the market. On top of it, we have to consider that for us, the YOFC first quarter has impacted dramatically from EUR 8 million to EUR 1 million, simply because the COVID effect in YOFC based in Wuhan has been the entire quarter, differently from the rest of the world.

So overall, EUR 2.587 billion, minus 5.4%, EBITDA from EUR 231 million to EUR 197 million, keeping a 7.6% EBITDA margin on the total sales.

Moving to Page 6. German Corridors. It was the season, and I told you in the previous meetings that German Corridors were going to be awarded by the summer 2020. 2 of the 3 are already awarded, SuedOstLink and A-Nord. We made -- we released the announcement of A-Nord this morning, simply because those are already 3,000 kilometer of cables. We have been awarded, rounding the numbers, roughly 50% of the 2 projects for a total award of EUR 1 billion.

SuedLink has to come. And it's going to be officially awarded in the next month. We are going to negotiate with SuedLink in the next weeks to close the negotiations. Not to forget that SuedLink is more or less the double, if not more, than the other 2. It is an extremely challenging and important project.

From the geography point of view, the sales and EBITDA are showing that EMEA closed with EUR 1.375 billion, minus 6.1%, and the EBITDA went down from EUR 109 million to EUR 85 million. So weak performance of EMEA. Why? Because in the second half of March month, the market really collapsed, especially the fast market that is E&I. South Europe, U.K. has been almost blocked by the COVID as well as partly, Telecom have been the weakest business in the region. North America, very resilient, EUR 864 million with 3.6% organic growth, an outstanding, I would say, performance in terms of EBITDA and EBITDA margin. You see from EUR 85 million to EUR 97 million with an 11.3% EBITDA margin. Particularly strong has been the PD. T&I, not so bad. In the second half of March, T&I started to swing the U.S.A. and we are going to see the effect of it in the second quarter.

Latin America. Latin America is another region seriously impacted by the COVID spread. EUR 180 million with minus 14.6% in terms of organic decline. The margins went down from EUR 22 million to EUR 14 million, 7.9%. The performance, the pretty bad performance comes from T&I and partly, Telecom in that region. Asia Pac, EUR 168 million, sales, with an organic decline that is very strong, minus 25%. But we have to consider that the COVID spread started in China and in Asia, generally speaking. The first quarter has been the most difficult in China. Reason why our EBITDA in the region went -- disappeared, from EUR 15 million, last year, to EUR 1 million, only this year.

Okay, let's move to Page 8 -- excuse me, Page 9. How the company is acting in this particular environment? We decided the priorities. And the priority number 1, we set, has been to protect the Group employees, the people. The second one has been to protect profitability and most of all, the cash flow. The third one to serve the customers. And the fourth one to support the surrounding, the people around us, the communities.

What we did to safeguard the group employees, we decided not to fire anyone. Maybe to reduce the level of activity of everyone, paying a little bit everyone for it. We have, as of yesterday, 42 employees positive to COVID out of 29,000. So a very limited numbers. The remote working, we started to implement before the lockdown of the countries. Thanks to our IT systems. And we have been able to work reasonably well, despite we are not able to be in the office. And we are protecting our people with all the masks and gloves and whatever we have.

Profitability and cash flow. We decided to cut part of the fixed costs of the company, not to hire anyone, and we utilized the temporary layoff in line with the government authorizations. Most of all, we focused the cash flow because once the crisis comes, the first item you have to look at is the cash flow -- is the cash position of the company. And if customers are able and ready to pay. Sometimes, we have decided not to supply if the customer was not giving us a reasonable comfort in the possibility to receive the goods and most of all to pay it. It's better not to sell than to sell losing [indiscernible]. Support of operations, our supply chain is running reasonably well. I have to say, obviously, in South Europe, especially, we are significantly touched by the COVID spread, but we have been able to keep the supply chain properly running, giving the service as much as possible to our customers. And we plan production orders every day, and we replan the full system every week.

Finally, we participated to the -- helping the communities. We donated the cables for the hospitals in China, the first 2 hospitals that have been realized for the COVID. In Italy, in Brazil, other than other actions, we have to -- we did in order to help the communities.

Flipping to Page 10, how the things are going? April, are best, the first 4 months. Because we used to give you the first quarter, but in that case, we have decided to give you highlights on the trend of the first 4 months. And you see it by region comparing for E&I only, a trading update. As you can see -- you can see in the continuous line, the 2019, in the dotted line, the 2020. Starting from the left, North America. North America has been going reasonably well, especially in the first 2 months, then March started a little bit to reduce the speed. And April, we are seeing a modest decline.

South America is much worse. And compared to last year, April is significantly down. That's because the spread of the virus seems to be stronger in South America than in the rest of the world today.

U.K., you know better than [ EMEA ], but U.K. at the beginning of the year resisted completely to the COVID spread. Then March and April, the volumes went down dramatically. Everything has been locked. And as a consequence, the volumes are significantly down. More or less the same of South Europe. North Europe and CEE, so the rest of Europe is vice versa and going pretty in line with the previous year. That's because the drivers in that region is not so hard and the stop of the economical activities have not been introduced strongly. Hopefully, not for the time being.

Finally, Asia Pac. Asia Pac, especially, China has been the first to suffer the COVID impact and obviously, also for the E&I market, is pretty visible. But we are not very big in Asia Pac, consequently, it doesn't change a lot of our numbers.

Looking ahead, Page 12, we have entered into the pandemic with strong fundamentals. The business, the geographical mix, the balance sheet is strong. We have a supply chain that is running pretty well. We are able to manage the supply chain and the customers from remote. And the organization is lean. Not enough, in my opinion, but it's lean. The secular drivers, the big drivers of our business, the energy transition, the telecommunication network, electrification are untouched. The COVID is a one-off that has come, and hopefully, is going to leave as quick as possible. The Q2 will not be an easy task. That's clear because most of the effect of COVID in our markets are going to be deployed in the second quarter. And we have seen with April already. What we have to do? Chapter 1, protect the cash. Chapter 2, serve the customers and trying to maximize what can we do for the market. Avoiding always to create extra stock.

I leave the floor now to Francesco for the details of the economics.

[Pier Facchini, executive]

Thank you, Valerio. Good evening to everybody. As usual, let me start from Page 14, the profit and loss statement. As Valerio commented, organic growth was negative for around 5%, 5.4%, driven down by the optical cable drop, which was a double digit drop, what Valerio already explained and a drop in Energy and Infrastructure, which started in March. And it, particularly some regions, was very differentiated region-by-region. Much heavier in South Europe and U.K., as for Europe and Latin America. Of course, very heavy in Asia Pacific, specifically in China, which was it for the entire quarter, whereas North America, specifically in PD, but also in T&I, held up relatively well.

The organic growth was much more stable in the Project business. You see a negative sign, but it is mainly related to the oil and gas driven SURF. And was pretty flat in the Industrial business, thanks to the relatively longer order backlog, 3, 4 months, which is protecting the very short-term at least.

Adjusted EBITDA down to EUR 197 million, minus EUR 34 million. Let me focus on the box on the top right of this page, where we quickly bridge the EBITDA from last year. You see that the main drop is affecting the Telecom business, EUR 25 million, fully in line with expectation, I have to say, and on top of that, minus EUR 7 million coming from the very tough first quarter of YOFC. Much more stable project and even slightly better than last year, the Energy business. Of course, in the Energy business, we have 2 completely different speed. We have North America, you have seen in the geographic results -- in the regional results, growing very significantly in Power Distribution and the Industrial businesses from last year, whereas some regions in Europe and the entire Asia Pac much more seriously affected by the COVID crisis.

Adjustments pretty much in line with last year in terms of restructuring charges. Whereas we had, as we expected, a negative impact on the metal derivatives fair value, minus EUR 36 million, which is driven by the very material drop of the copper price. Again, this was no surprise at all. It is a temporary effect on our profit and loss, which will be reversed in the coming quarters, in the next 2 quarters, I would say. And on top, it is a noncash effect.

A significant decline on financial charges as well. And Group net income, down to EUR 23 million, still positive, down, of course, from the EUR 88 million last year, affected by the operating profitability, read adjusted EBITDA and also by the negative change of metal derivatives fair value.

Let me quickly comment on the following page, the net interest expenses, very nice drop. The net interest expenses, the first line of the financial charges, which is net interest expenses, is pretty much in line with last year. And also the full year will be pretty much in line with last year after having realized EUR 30 million of synergies coming from the General Cable debt refinancing, which was completed very short after the acquisition, whereas the total financial charges decreased further and benefited of a material reduction -- are benefiting of a material reduction of hedging costs for a number of technical reasons, from which we will benefit for the entire year.

Balance sheet on Page 16, pretty good performance on the financial debt, down by EUR 300 million versus the equivalent March 2019. So EUR 2.6 billion, with a very strong last 12 months free cash flow generation. And I have to say that even the financial dynamics that we see in the month of March, which, as Valerio explained, has been seriously hit, in terms of volume, is pretty normal. It's pretty much in line with the normal year, with, for instance, last year, seasonality and the financial dynamics, which gives me and gives us very good confidence on the capability of Prysmian, keep generating cash in this difficult environment.

The driver -- the positive driver of the debt has been working capital. You see that compared to March 2019, it has been down by EUR 180 million, roughly. And these were pushed down by the project division. As a matter of fact, the level of working capital in project was pretty high in March 2019. So it was pretty, an easy decline. But we also benefited of the -- paradoxically of the reductions of volume because our payment terms -- average payment terms or collection terms from customer are shorter than our payment terms to supplier. So a reduction of the activity volumes impacted first, our receivable, and this happened in the first quarter. Whereas the impact on the payable, which is a reduction on the payable, materialized a little bit later. And this will materialize in Q2. So this to explain why our Q1 working capital benefited significantly of the activity drop, which will be an effect which will be almost totally reversed in Q2.

Let me close on Page 17 to comment the outstanding performance in terms of cash generation. Last 12 months cash generation, free cash flow exceeding the [indiscernible] million, EUR 538 million.

EUR 100 million increase compared to the free cash flow of the full year 2019. And the big difference was achieved in working capital changes. You see a pretty dramatic reduction that is positive of EUR 228 million, again, driven by the Project division which performed working capital pretty flat in the first quarter and also by the receivable net of payable decrease. The restructuring charges on the other hand, increased a little bit compared to the full year '19 related to the payments, related to the South Europe industrial restructuring, which had an economic effect on the profit and loss last year and which will have a financial effect in terms of cash out this year.

Let me close with very important Page 18, where I want to highlight the position of our Group in terms of liquidity and debt profile. Also, to convey our confidence on this position. First of all, and most importantly, our confidence on our liquidity position, which is extremely strong. As at the end of March, it is made of EUR 600 million cash and cash equivalents on balance sheet, plus EUR 1 billion committed revolving credit facility, expiring by the way, in 2024. So pretty long and which is fully unutilized. So fully available. And on top, another EUR 400 million, I'm rounding number of uncommitted credit lines that given our relationship with the bank system to me are like committed credit lines. This was the first point. The second is the average debt maturity, which is pretty good. On average, 3.1 years, which is long. And you see bottom right, the profile of our debt maturities in detail. And you clearly see that we don't have significant maturities before 2022. And the 2022 maturities that most likely we have to deal with end of 2021. So we have more than 1.5 year to deal with that, to start and deal with that are maturities on the capital market, the Eurobond and the convertible bond, 0 coupon, respectively, EUR 750 million and EUR 500 million.

Even longer, are the maturities on the loan market. With the acquisition term loan of EUR 1 billion, which was contracted for General Cable acquisition, expiring in 2023. And even longer, as I mentioned already, the revolving credit facility, which will expire in 2024. So we are extremely comfortable with our position, both in terms of liquidity and in terms of not being obliged to tackle short term and urgent debt maturities.

Good. I think, we can move forward with the Q&A session now.

[Operator]

[Operator Instructions]

Your first question comes from Max Yates from Crédit Suisse.

[Max Yates, analyst]

Just my first question is on the SuedOstLink and A-Nord contracts that you've booked. I just wanted to understand, given that delivery dates of those are quite far in the future, when do you expect to recognize the revenues for those contracts? Will it be evenly split between now and delivery? Or can it be kind of more front-loaded than that? And as an extension of that question, when you look at your backlog today and the delivery schedules, across your backlogging project, does it point to you that '21 -- 2021 should still be a very strong year of growth, both in terms of installations and cable activity or cable production? That's my first question.

[Valerio Battista, executive]

Thank you, Max. I leave the answer to Francesco?

[Pier Facchini, executive]

Yes. Let me comment on the timing of the execution of these 2 very important projects, the SuedOstLink and the A-Nord, the timing is pretty different in the sense that the SuedOstLink should be the project with the fastest execution and actually should positively affect our profit and loss already in 2021. So not this year, next year. And then should have in our idea, pretty linear or pretty stable distribution for, if I'm not wrong, 3 years from 2020, 21. Differently from -- for A-Nord, which has a longer, which was awarded more or less with the same timing of SuedOstLink, as you have seen. But has a longer execution timeframe and actually should start to affect our profit and loss in 2022, even 2023. Marginal in 2022 and main impact in 2023, for the simple reason that the delivery time to the customer is much longer in time.

[Valerio Battista, executive]

Because it is required by the customer, but from a certain point of view, Max. So let me point out that is even better because, obviously, having everything together may represent a problem. It's better to have more diluted the execution of those projects because the experience to execute is helpful. It is true that we already did the France, Spain and France, Italy that is still under completion. So we have a certain experience. But that's a different -- slightly different product, and it's better to have a progressive experience in doing it.

[Max Yates, analyst]

Okay. So should I assume when I look at your backlog that across the extruded cables, across the mass impregnated and installation, 2021 should still be a relatively full year? Or are there any gaps that need to be filled by order wins for the rest of this year?

[Valerio Battista, executive]

Let's talk about 2021. For 2021, (MI) Cables is fully booked. Consequently no problem on it, the execution problem, obviously. For extruded cables, this -- the SuedOstLink is going to help, but not oversaturating our capacity. So let me say that in the second half 2021 will be a good part of the year, not extremely buoyant. Did I answer to your question, Max?

[Max Yates, analyst]

Yes. That's helpful. Just the very final one was on the Energy Products division, obviously, kind of very good performance in Q1. I just wanted to understand, when you look at the April developments across E&I and Energy products, as a whole. Would we -- if you showed the margins and the EBITDA, would we see similar resilience to what was shown in Q1, i.e., did that sort of favorable mix and favorable regional mix still continue into April?

[Valerio Battista, executive]

Yes. What has helped us in the first quarter has been the geographical mix. Because North America is going very well. Crossing fingers, I hope that the COVID impact will not damage too much this trend, but I don't believe because the administration needs to keep the business running. In the second half, especially, the fourth quarter, we expect North America to lower the speed simply because the incentives are going to -- these incentives for the Power Distribution, Renewable Energy, the wind farms, the land wind farms are expected to complete at least with the current scenario to complete the incentive. And consequently, to slow down a little bit.

[Operator]

Your next question comes from Lucie Carrier from Morgan Stanley.

[Lucie Carrier, analyst]

I have 3, and I will go one at a time. I was hoping maybe that you could help us to understand a little bit what you see in terms of current trading in your Industrial business? Because you gave us very helpful data on E&I, but I was hoping we could get a bit more color on how we exited the first quarter in Industrial and what you are seeing so far in the second quarter?

[Valerio Battista, executive]

Okay, Lucie. It is not easy because your question is -- it's not easy to get an answer, a proper answer. Why? Because obviously, the E&I market is the fastest. We know it's the first to go down and is the first to ramp up. The Industrial business has a different order backlog and has to be differentiated segment-by-segment. For instance, Automotive. Automotive is a disaster. Everyone knows and we know too. We have been almost surprised of our decent resilience in the first quarter. Now the party is over. And out of our 106 factories, if I'm not wrong, at least 3 are on hold and our automotive plants, because there are no orders. Obviously, Automotive will be also one of the first to revamp when the business will restart. When it's going to happen? It depends on the region. But I strongly believe that in the second quarter, there will be a restart also for Automotive. Have to be clear that the Automotive business is not changing our numbers, not significantly because the turnover, of course, change. But the margins are so limited that are not affecting positively nor negatively our profitability.

The other businesses, I can give you -- the other segments of the business, I can give you some color. Mining. Mining is not going very well. The, let's say, infrastructure, generally speaking, are quite resilient. Crane has recovered. And the rest of the business is almost flattish. Now we have to see the second quarter because the second quarter with the stop of many industrial activities in Europe may suffer a little bit more. We expect, honestly, in the second quarter, the biggest shrink of the year.

[Lucie Carrier, analyst]

My second question, if we could go back maybe to the German Corridors contract. One of your competitor has publicly stated that they felt the terms of the contract were too risky, and the contracts were not necessarily incredibly profitable. I would be interested to have your take on what you think about the risk profile of this contract and how you think about managing debt. And overall, in terms of profitability, when we look at the value per kilometer, it seems significantly higher than what we are seeing sometimes in other land high-voltage contracts. So your take as well in terms of the overall profitability profile of these contracts versus your traditional land high-voltage would be helpful?

[Valerio Battista, executive]

Thank you, Lucie, for the question. I understand the doubt in brackets. You know the history of [ Nando Maturest ]? No, okay, it's almost Latin...

[Pier Facchini, executive]

[indiscernible] novel.

[Valerio Battista, executive]

Latin old story. I believe -- so to be very clear, the term and condition of the contracts are not worse than a typical Submarine project -- are more or less in line. We have been negotiating hardly. Thanks to God, at the end, we found an understanding with the 2 customers. The third one has still to be finalized and it's the biggest. I consider the terms and conditions of these 2 projects in line with the risk of the other projects, especially the Submarine. It's clear that there is a difference. Which is the difference? That there is no 1 kilometer of 525 DC extruded, working underground since years, simply that. In order to mitigate this risk, the risk of production, at least, we produced 20 kilometers of this cable. At our cost, 10 kilometers for the XLPE and 10 kilometers for P-Laser. That was the maximum -- was possible to execute by ourselves to protect the risk. Unfortunately, we -- was not possible to install it and to run the cable for a long time. But that mitigate as much as possible, the risk we suffered with Western Link, just to be very clear because the risk we suffered with Western Link has been the extension of the production from the prototype to the real production and the manipulation, the handling of the cable during the installation.

I have to say that from the reward, obviously, that's a very important project. It's a project that -- are projects that are the milestones for the future of the energy transition. And that's why we accepted the contractual risks because or you are in or you're out. And that's forever. Did I answer to your question, Lucie?

[Lucie Carrier, analyst]

Yes, you have. And I guess my last question, you mentioned earlier, some of the medium-term perspective for the business, including in Telecom. I was wondering, if you are seeing currently in China, an accelerated level of discussion around the 5G deployment because some of the commentary we could see was suggesting that part of the stimulus would be to accelerate maybe that deployment. So I was just curious to hear about the channel checks around the 5G deployment in China.

[Valerio Battista, executive]

Almost every day, for sure, as a Monday, I have a call with our China team to check how the things are moving there. Because I consider China, at least in the season at the forefront of what's going to happen in the world. Starting from COVID. And we got a lot of informations and lessons from them. Now 5G, 5G is going to come. When? I cannot tell you because I don't know. For sure, if it's going to come, it will not be business for us because we are not Chinese. And consequently -- or we are not considered Chinese and consequently, we have no access to this business. Of course, the 5G start in China will reduce significantly, the pressure on the Telecom business in the rest of the world. Even if today, I have to say we have been able to demonstrate to ourselves that we can compete with Chinese, at least out of China. So in Europe, we are the market leader and there's no doubt. But also in South America, in many tenders, we have been able to compete from our sources with the Chinese crazy prices. Obviously, leaving some margin on the table. We don't see for the time being, because that was your question, we don't see a revamp of the demand into China, at least for the time being, a significant revamp. Probably, we need some more quarters. For sure, the Chinese government wants and need to relaunch the investments, especially in the telecommunications. Consequently, I expect that the 5G will start as expected.

[Lucie Carrier, analyst]

Just maybe on that, Valerio, if you -- can you

remind us the position of YOFC in China on fiber, please? Their competitive position?

[Valerio Battista, executive]

YOFC is the market leader in China. It's the market leader, is not the double of the #2, but is the market leader. Now YOFC can compete, of course. They, 1 year ago, you remember the tender of China Mobile in the springtime 2019, they did not accept the crazy prices put on the cable by other players. And they have been suffering for 1 year, 6 months, the drop of the volumes. They are able to [ fight ]. Then prices are not always aligned with the costs. And it depends on the appetite. I believe that YOFC is the strongest Chinese player of the market. Then we do not control, but we are cooperating with them.

[Operator]

And your next question comes from Monica Bosio from Banca IMI.

[Monica Bosio, analyst]

The first one is a general question. So how do you see the Energy project order intake in the market once the entire German Corridor will be fully assigned? Just to have an idea what is coming ahead. And the second question is on the SuedLink. It is double in size, I can imagine also in value terms. Do you expect to get, I can imagine, a lower share in this last tender? And I was wondering, if you -- if this will require additional CapEx. And if you can give us an indication of the CapEx expected for the full year.

[Valerio Battista, executive]

Okay. Thank you very much, Monica. The German Corridors have arrived, finally. Because our -- at least 2 years. I was meeting one of the Board member of TenneT some years ago, talking about the German Corridors to be executed because the utilities in Germany are losing money because they cannot dispatch and sell all the energy produced by the wind farms in the North Sea. And so sooner or later, was a necessity to execute it. Now are on the table. We got 50% of the first two. There is the third one, the biggest that counts as much as even more than gathers 2 together. And we are in the race. Race that most probably will be finalized, not for the market, but internally, in the next 15 days. Being the double of the other 2, I expect to have possibly our market share because we got more than our market share in the first 2. On the third one, higher to -- be able to catch 30% to 25%, it depends. But I hope to make you happy.

[Monica Bosio, analyst]

Yes, for sure.

[Valerio Battista, executive]

Once you are swimming because you are in the water, you have to run, no way. So doing 2,000 kilometer or 4,000 kilometer, who cares.

[Monica Bosio, analyst]

I can understand. And how the Energy transition process can evolve after the German Corridor? Because -- do you expect a change in pricing -- other tenders in the next years, maybe not of the same size?

[Valerio Battista, executive]

Not very much because unfortunately, once the market grows, the capacity grows too. And going to your second question, we will need a little bit of additional CapEx for the German Corridors, but it depends on the result of SuedLink. If in case we will be forced to invest a little bit in the French plant to increase the capacity for the very high-tech excluded extra high voltage. But it's not a very big number. And anyway, the cap of the CapEx is there. At EUR 200 million, finito. If someone enter, someone less important have to exit. Okay, then the EUR 200 million, EUR 205 million doesn't change very much. As you know, we have reduced the CapEx for 2020 by EUR 50 million. Including the ship, the new ship. Obviously, that's quite strong effort, but no way. We must do it.

[Operator]

And your next question comes from Akash Gupta from JPMorgan.

[Akash Gupta, analyst]

My first question is on Slide #10, and thanks for giving the granularity about these trends by region. But I'm just wondering that, if you have to split out at a group level, how Power Distribution is doing against T&I. Can you help us understand, is it doing better or worse? Or especially in month of April, like how the trading has been in Power Distributions, that's question number one.

[Valerio Battista, executive]

I leave the floor to Francesco.

[Pier Facchini, executive]

Akash, definitely, there is quite a difference between the trend that we see in place for T&I and the Power Distribution, in the positive sense for Power Distribution. In a way, of course, we'll see a drop of Power Distribution in Q2 but -- and in -- but the order of magnitude is -- will be -- and this we clearly see for April, completely different from the one that we see in the construction driven T&I business, which was the first to react negatively to the COVID crisis.

I think 15%, more or less, of our PD volumes are related to North America to the North America region and even more in terms of profitability. Let me say that so far and also in April, we are seeing these volumes holding up pretty well. That's very important because Valerio showed the E&I trend for all the regions, including North America. Actually, for North America, we should split this in 2 because the trend for T&I in April in North America is already hit by the COVID crisis, much less is the impact for Power Distribution, which is, by the way, renewable energy driven, which is much more stable in the month of April and we hope, let me use the term, hope, that this stability will be confirmed also in the following months.

On the other hand, for some European regions, for instance, South Europe, the impact is in place, the negative impact in April and in Q2, in general, will be in place also for Power Distribution. But overall you -- Power Distribution is performing and will perform much better because it's strongly driven by the North American locomotive.

[Valerio Battista, executive]

That is going to be a fact till year end. From the year end onwards have to be seen because it depends largely on the incentive.

[Pier Facchini, executive]

But by the way, Akash, if I may add 1 point, these strengths of the PD business in North America is also very important from the profitability point of view. Because the level of margins, this applies to T&I as well, but even more to PD, is significantly higher in North America. And I have to say that if volumes of PD for North America represents 50% more or less our entire Power Distribution volume. If we look at contribution margin or EBITDA, is more 2/3 or 60%, 65%. So the resilience of North America in Power Distribution, but also in the Industrial business is extremely important for the resilience of our overall Group result, and let me express some confidence on that. Of course, without having any crystal ball, which is in this period of time would be highly necessary.

[Valerio Battista, executive]

At the end, let me say that we are reasonably happy to have invested so many money in taking over General Cable.

[Akash Gupta, analyst]

And my second question is on Telecom business. I mean, I see that most of Chinese production is coming back online after Wuhan has reopened, early this quarter. Maybe if you can talk about what is happening on the competitive and dynamic side, like what are you seeing on pricing. And given the way how we have seen lockdowns impacting your Q2 performance, is it fair to see that Q2 margins in Telecom could come down to high single-digit levels?

[Valerio Battista, executive]

That, I don't believe. Frankly speaking, a single-digit margin seems to be too tough remaining -- should remain in the level of the first quarter because you have to consider that in the first quarter, our margins have been impacted seriously by the disappearing YOFC, that we expect is going to come back. The prices have been impacted, that's true. But even our costs are going to go down. Consequently, we are able to react and to defend our position. Obviously, in a market like the European market, we cannot give up. We are the market leader and we have to keep the position. In a market like U.S., we are the #2, behind Corning, but the price -- Chinese are not welcome in U.S., especially in the Telecom business. Consequently, the prices are not so terrible as China and other regions.

In South America, we have been -- we have seen that we are able to compete, obviously, suffering and paying some margin. In the rest of the world is a nice game every time, tender by tender. Sometimes we win, sometimes we lose. But the prices will not revamp, that's quite sure. In a commodity, rarely the price goes up, unless we are going to touch the max capacity available. And the Chinese have created so much capacity that the problem of the capacity is not anymore on the tables. I don't know, if Philippe wants to add anything.

[Philippe Vanhille, executive]

No. I think what you said is a good summary. We -- I don't see our margin going down to single digit. For the main reasons Valerio just described. We work hard as always. We always work hard on our costs. And we are able to compete. That's the essence of what we do. And in China, we are not directly acting in China, there is YOFC, we are a shareholder. And so we leave it to -- with YOFC, actually.

I expect, indeed, YOFC to have better quarters to come. I have heard like everyone else that China has announced an acceleration of the 5G plan. So far, it is only words. I believe it will translate into action in rather good speed. And the next big element to understand the trend in Telecom will be the next China Mobile. That's expected for, if I understand properly, the end of May or the beginning of June. This will be a moment in which we will understand better the trends in China.

[Valerio Battista, executive]

Thank you, Philippe.

[Akash Gupta, analyst]

And my final one is on restructuring costs. And you said earlier that you haven't hired anybody since COVID-19 crisis. But maybe if you can talk about what should we expect for the full year. Like should we expect higher restructuring cost, maybe because you may want to do some restructuring, which was not possible otherwise? Or should we expect lower? So any feedback on that would be...

[Valerio Battista, executive]

No, first of all, as a result of the COVID crisis, we don't necessarily expect an increase of the restructuring costs because, as Valerio stated very clearly, our idea and our confidence is that we'll be able to preserve our workforce without acting on that because of the crisis. Also because we believe it's a temporary crisis. So wouldn't make so much sense. So the COVID should not impact the restructuring costs, significantly.

In terms of profit and loss of economic impact, the restructuring costs will be significantly lower than last year. Last year, if I'm not mistaken, we had restructuring costs in the region of EUR 80 million, EUR 85 million, I go by memory. Let me say that we expect more or less one half of these restructuring costs -- even less than one half for 2020, from the profit and loss point of view.

Differently the picture for the cash point of view because of the cost charges that we took in Q4 due to the Spanish industrial restructuring, will mainly have cash outflows in 2020. Actually, you already see this in Q1. If you take our last 12 months free cash flow chart, you see that the restructuring cost increased compared to the full year '19, meaning that Q1 in terms of cash outs, Q1 2020 was higher than Q1 2019. And in general, I expect that restructuring costs, cash-wise, will be in 2020, in line with 2019. So one picture for the profit and loss, a different picture from the cash point of view. Clear, Akash?

[Operator]

The next question comes from Sean McLoughlin from HSBC.

[Sean McLoughlin, analyst]

Can I just come back to the German Corridor project? My first question. In March, you said the terms and conditions were not acceptable. So what's changed? Did you receive concessions from the customers? Or are you simply more comfortable with the risks following your 20 kilometer of test runs? And I'm just thinking on -- my second question, and following a little bit on from Akash's question. How does COVID impact your synergy targets for 2020? Is there a risk that some of these are postponed into 2021 and beyond?

[Valerio Battista, executive]

Thank you, Sean. No, to be clear, on German Corridors, we have been negotiating very, very much with the customers, having Hakan in U.S.A., Hakan Ozmen, that he's listening, I believe.

[Hakan Ozmen, executive]

Yes.

[Valerio Battista, executive]

We spent most of the evening and night during this pandemic lockdown on calls to discuss what could have been accepted and whatnot for all the projects. Hakan, can you confirm it?

[Hakan Ozmen, executive]

Yes, Valerio, if you allow me to add. It is always a negotiation, as you said. And we were at the very beginning of the negotiations. And again, it is not very -- it's incorrect to actually to comment on things that are ongoing during negotiation. Therefore, the positions are changing. But what Valerio was saying is absolutely correct versus the technology and implementation, we see the terms and conditions at the final agreement in line with our expectations. But definitely, before you start to have the request evaluated, you may have higher expectations. So the final outcome is pretty in line with our expectations, as Valerio said.

[Valerio Battista, executive]

So term and conditions are not easy as well as all the other big projects, I think that are manageable. There is the real big risk here is that the technology is not going to work on a larger scale. But obviously, that's a risk that all of us have to take care of. We have not very big confidence. And I have in front of me, Srini, the Head of R&D of the Group. And he is very confident with what we are doing. So can you -- the COVID and the impact on synergies. Of course, the COVID is going to delay a little bit everything, but for a minimal number of months. Consequently, in the full year, we don't see significant impact on the -- due to the spread. We are moving as fast as possible in the South European restructuring. And we have already closed 1 plant, and we are going to think when it's most convenient for us to close the second one. And that's it, we're done. I believe that we can do it as per the plan.

[Operator]

And your next question comes from David Barker from Bank of America.

[David Barker, analyst]

I've got 2 quick questions. Firstly, on cost savings. I think, you've given good detail on travel, and we know how much that is in the P&L. I was just wondering, what are you calling as part of your 5% to 10% of other fixed costs in an absolute number? And also, how much can you save on personnel costs? Is there any possibility you could quantify those 2 numbers for me?

And then secondly, on Projects, clearly, margins deteriorated quite significantly versus Q4. Is there any further granularity you can give us on the drag from Oil & Gas and Telecom, Submarine on margins this quarter?

[Valerio Battista, executive]

Okay. Cost synergies, obviously, as soon as the COVID threat has started to hit our perimeter, we have been thinking how to react because it was essential to reduce the breakeven point. You know that one of my most challenging target is on the fixed costs and analyzing with the team, we decided to claim for a drop of the fixed cost by EUR 50 million. How? First of all, the travel, secondly, the hiring, reducing the substitution and the hiring of the people, blocking the salaries of everyone and all the other expenses that are not vital for the company. We have already deployed the goal of EUR 50 million. Now we are in the execution phase. We have been also trying to launch a reduction of the cost of our purchasing raw materials, and not only raw materials, everywhere in the work. That's much less tractable than the fixed costs, but we hope to be able to realize some other cost savings that are variable. In that case, other than the fixed, asking support and help. And Massimo, maybe that can give you some more color because he has already started in U.S.A.

Second question, projects. Your question was the margins projects. The SURF is a wound. That's the problem. We are thinking what to do with the South American SURF activity. Why? Because the cost of the oil is so low today that there is no way for our -- for the oil companies to invest money in the very expensive extraction of oil from deep submarine activity. We made probably a mistake, years ago, when we decided to invest in the new plant in Vila Velha, no way. We have to find a solution.

And I don't believe that we revamp. That's most of all, the most important way because oil and renewable is a substitute in progressively the oil. And that's for the benefit of the people. Consequently, I'm a full supporter of the switch from oil to renewable. We are one of the big players for renewable. Makes no sense to keep investing in oil. Then we have and we have to manage. Of course, we are not investing there, and we are not expecting significant revamp. Maybe that we revamp, but the question is for how long?

For the Telecom Submarine, it's more or less the same. It's a one off. We've got a quite good project in Chile, we executed. Now if something else will pass, problem will come, we will take it. If not, no way. It's not the business we are looking strongly for the time being. We are too little. We are not a dominant player in the Telecom Submarine business, and we cannot be the #1, everyone -- everywhere, consequently, be prudent. So in other words, if that's the question, we don't see any significant recovery, if not, due to some spot activities coming into our hands.

[Operator]

And your next question comes from Daniela Costa from Goldman Sachs.

[Daniela Costa, analyst]

Can you hear me?

[Valerio Battista, executive]

Yes, not very well, but...

[Daniela Costa, analyst]

Okay. Well, anyway, I only have 1 question left, which is actually a follow-up on these last questions, but it's more on looking at the High Voltage margin and the fact that it is kind of flattish year-on-year. I know the industry had, had a tough supply-demand balance over the prior period, but as yourself, you have had your order intake is recovering, probably getting closer to what your 2014 [ PCIP ] levels of backlog were. And across the industry, everyone now has a better -- is more utilized. So is there any reason why we shouldn't think that margins could significantly recover, closer to the levels that you had, back in '15, '16, in terms of profitability. What would be the rationale for that not to happen?

[Pier Facchini, executive]

Daniela, Francesco speaking. We already highlighted with the presentation of the full-year results that in 2020, we didn't expect any particular increase of margins and results from the project division for the simple reason that the German Corridor impact is to come in 2021 and even on a longer time frame. At the same time, certainly, we are improving a lot our operations and our execution, and this is helping improve margins, but it's a fact that compared to the intake going back a few years, the recent intake already since a couple of years, have come at slightly lower margins. This was already clarified, a few quarters ago, let me say. And now we are executing some projects, which are a little bit less profitable than the one that we were executed in the years that you are referring to. So it's possible, in my opinion, to stabilize the level of margin. Of course, we have to work very hard on the execution of the projects on the operations. And avoid any minimal hiccup and try to recover all the, let me say, I'm not calling this price pressure, but the lower margin project mix that we had in the last 12 months, 18 months.

[Daniela Costa, analyst]

My question was more or like, as you look out like 2022, 2023 when...

[Pier Facchini, executive]

It's a very long time...

[Daniela Costa, analyst]

Or could we [indiscernible] now everyone is at capacity, now, all the players.

[Pier Facchini, executive]

Let me just give you a comment. That -- by that period of time, we should see a very good impact coming from German Corridors. If we assume that we will -- as we hope, we'll have our share also on the SuedLink, we will start and see an impact coming mainly from the SuedOstLink in 2021. But then the main kick in, in terms of impacts and therefore, margins will come in 2022 and '23 with hopefully, SuedLink and certainly A-Nord because the A-Nord, we have already been awarded.

Difficult to envisage or to anticipate, which impact the German Corridors capacity utilization will have on the pricing. Of course, the industry will have a tight capacity utilization, there is no doubt. Because some players are using for the High Voltage of the German Corridors of the same capacity that they are using for Submarine business. So theoretically, once we didn't expect a tight capacity utilization on the Submarine business as well. But in my opinion, we have to wait for the effects to come and see if this theory will translate into reality.

[Valerio Battista, executive]

Unfortunately, Daniela, the time to go -- to grow the capacity is not very long. It's 12 months, 24 months. Consequently, the capacity can be adapted quite quickly, reasonably quickly. So if a problem of availability will come, will be for a limited number of contracts. If the demand will grow, and I hope that we continue to grow because after the German Corridors, there will be other link to be realized to move the power from one region to the other, into Europe, but the capacity will follow, no way.

[Operator]

And your next question comes from Alessandro Tortora from Mediobanca.

[Alessandro Tortora, analyst]

Okay, some questions have been already answered. Just 3, let's say, last questions, if I may. The first one is on the tax rate. I know that quarterly tax rate is not, let's say, extremely relevant, but if you can give us an idea of, let's say, the increase and what's your expectation for the full year?

The second question was on -- clearly, we sorted out, let's say, the last tender, the A-Nord, and I also saw the presence of Sumitomo. Can you give us, let's say, a comment on that? Because clearly, if I remind, well, this is, let's say, the first important award, okay, from a non-European player for these type of projects?

And the last question, yes, was on the margin on the Telecom. Clearly, in the first quarter, we saw a very good result, considering the minus, let's say, almost 20% decline in organic terms. Do you consider a reasonable guidance, the margin dilution we observed in the first quarter, clearly taking out the share related to YOFC?

[Valerio Battista, executive]

Okay, the first question, I leave to Francesco.

[Pier Facchini, executive]

The tax rate, the 35%, 35.5% that we have put, I think, is a reasonable estimate for the full year. Let me comment that this -- of course, as you know, the tax rate you estimate, based on the forecast for the full year, as the EBIT, the earning before tax forecast for the full year. Of course, this COVID crisis doesn't contribute to decrease the tax rate because some geographies, let me highlight, for instance, some countries, within South Europe are going to a level of -- I'm talking not of EBITDA, but earning before tax, to a level of little loss. And basically, when you have some geographies going into a loss, even temporarily, the tax rate normally increase because conservatively, even or prudentially, we don't accrue deferred tax assets on these losses. This just to make an example why the tax rate -- normally, when the profit and loss is it -- normally, the tax rate tends to increase.

[Valerio Battista, executive]

Your second question, the position of Sumitomo in the German Corridors. Sumitomo is a very reputable player. We have seen them in the Nemo in the Submarine. And let me remind you that Sumitomo has its own compound, similar to our P-Laser. It's different, but at the end, it's the same concept. Consequently, for them, it was very important, I understand, to prove the ability to serve the European market that is today, the market, with today's technology. Okay, welcome, what I can say. And that's clearly the appetite of Sumitomo for the European market. Sumitomo is a very serious and reputable player. So I have no doubt that they will be able to execute the project in a proper way. Obviously, maybe not so easy for them to act in an environment, that is -- an European environment. But for sure, they will be able to adapt themselves to it.

Telecom margins. The Telecom margins we have seen in the first quarter, seems to me reasonable. As you have seen, someone -- Akash, if I'm not wrong, asked if we could have been at 1-digit margin? No, I don't think so. I don't think so, at least for the time being because for the Asian suppliers to further drop the price of the fibers will not be easy. Will not be easy because we are really running at a very low cost -- low price. And the cost cannot be shrinked for the time being, much more than it's going to be. So I see a modest double-digit margin, as a reasonable outcome for the next quarters, at least.

[Alessandro Tortora, analyst]

Okay. Okay. And the last question, clearly, I promise, this is the question is on the working capital on sales. Clearly, this year, considering, let's say, the current results on the 2 German Corridors, you are going to get the advanced payments. If I remind well, clearly, the guidance now has been suspended. But the EUR 300 million free cash flow was already including the part of the advanced payments, is it correct?

[Valerio Battista, executive]

Correct, of course.

[Alessandro Tortora, analyst]

Okay. Okay. Okay. Clearly, of I remind well, we are not talking about, let's say, new success ratio. Because clearly now, you already got EUR 1 billion and clearly during the last tender. In theory, can I say that this could be a potential upside for you?

[Pier Facchini, executive]

Let me comment on this, Alessandro. Yes, on the down payments, specifically, you can say that. I think that depending on the result of the SuedLink, we may end up having an order intake on the German Corridors, which is certainly higher and consequently down payments, which are higher than the ones that we projected in our management plan.

Of course, then the project business picture is more complex because you have also milestones to be achieved in Q3 and Q4. These milestones, if you take a normal year, normal implied collections in Q4 between EUR 400 million, EUR 500 million collection from customers, you understand that depending on those on the COVID crisis and the speed of manufacturing output in the Project division, the achievement of these milestones could be -- or some milestones, some specific milestones could be slightly delayed. So it may well happen that this upside we have in down payments is compensated by downside. I hope not, of course, but downside that we have in the achievement of project milestones. This for the Project business.

Then looking at the entire cash flow picture, as Valerio said, we certainly have a positive effect coming from the lower CapEx because given the environment, we have soundly decided to contain our CapEx level by the EUR 50 million that Valerio mentioned, I expect that working capital, all in all, other than Project, will not have a huge impact throughout the year, will have a quarterly impact. We have seen working capital decrease a lot in Q1. I think, we will have partially -- a partial recovery of working capital in terms of growth in Q2. And then depending on the speed of the recovery in Q4, we will have certainly a build back or buildup of working capital. So frankly speaking, I don't expect that working capital will play a major role other than Project to affect our yearly cash flow. And then what is left is EBITDA, of course. And EBITDA is a direct impact on cash. But let me say that, as you have heard, we have withdrawn our guidance. So let me take some time to come back on this and update the free cash flow guidance when we will update the adjusted EBITDA guidance.

[Operator]

And we have 1 more question from Monica Bosio from Banca IMI, again.

[Monica Bosio, analyst]

Yes. Just a very quick follow-up. Terna has announced its strategic business plan, roughly EUR 3.5 billion of investments for the Tyrrhenian connection. I was just wondering, if you can give me some indication because I understood that the tender for the first tranche of the Tyrrhenian link might occur in 2023, and it could be worth just the very first lot, roughly EUR 900 million. I was wondering, if you can give me some indication, if you have, about the weight of the cables in this tender?

[Valerio Battista, executive]

Okay, clearly, the Tyrrhenian link is going to be a very long connection in the Tyrrhenian Sea. It was planned to have a meeting with the Terna team, in April. Unfortunately, we have been obliged to postpone it. I believe that is a need for Terna, is a need for European community and will happen. If in 2023 or '24 or '22, I don't know. For the time being, the tender is not yet out. And if the tender will come, we will be there for sure.

[Monica Bosio, analyst]

Okay. So no more details so far because it's too longer-term? Okay.

[Valerio Battista, executive]

Not at all. Not at all for the time being, Monica.

[Operator]

And your next question comes from Luigi De Bellis from Equita SIM.

[Luigi De Bellis, analyst]

Just one question left for me. On the competitive scenario, a more complex macro scenario mix, smaller companies more vulnerable and that's probably weaker. How do you think your industry, generally speaking, will be affected by this emergency? Do you think you will have higher market share after the crisis?

[Valerio Battista, executive]

Frankly speaking, Luigi, the answer is not, at least in the short, medium term. Why? Because the crisis obviously, may create some trouble, but no one of the competitor is going to bail out, at least in the short term. I remember that in 2009, at the end of the submarine crisis, Draka suffered the crisis from the financial point of view and the shareholders decided to give up, and we took over. May happen again? Who knows, maybe. If that's the case, unfortunately, our balance sheet today, is not sufficiently strong to take it into consideration, if it's a good -- if it's going to happen to a big target. But maybe 1 or 2 years, why not?

[Operator]

Thank you. And we have no further questions at this time. I'd now like to turn the call back to yourself.

[Valerio Battista, executive]

Thank you very much to everyone for participating to this First Quarter 2020 Financial Results Conference Call of Prysmian Group, and see you the next quarter. Bye-bye.

[Operator]

Thank you. That does conclude our conference. Thank you all for joining. You may now disconnect.

[Valerio Battista, executive]

Thank you. Bye.