Prysmian SpA
MIL:PRY

Watchlist Manager
Prysmian SpA Logo
Prysmian SpA
MIL:PRY
Watchlist
Price: 64.28 EUR 0.66%
Market Cap: 18.7B EUR
Have any thoughts about
Prysmian SpA?
Write Note

Earnings Call Analysis

Q1-2024 Analysis
Prysmian SpA

Strong Q1 Performance with Record EBITDA Margin

Prysmian reported exceptionally strong Q1 results, highlighted by a record EBITDA of €412 million, reflecting an 11.2% margin. The Power Grid segment saw a significant EBITDA surge to €115 million with a 13.5% margin. Free cash flow exceeded €800 million, thanks in part to robust Transmission business dynamics. The company anticipates ending the year at the upper end of its guidance with EBITDA between €1,625 million and €1,675 million, and free cash flow between €725 million and €775 million. CEOs confirmed confidence in achieving their 2025 targets, bolstered by strong backlog visibility and upcoming capacity expansions.

Solid Start to the Year

Prysmian Group kicked off 2024 with strong results, showcasing a robust EBITDA of EUR 412 million and an impressive EBITDA margin of 11.2%. This margin is unprecedented for the company, setting a new benchmark in its history. The company's ability to generate substantial cash, EUR 827 million over the last 12 months, demonstrates the underlying strength of its operations【4:0†source】【4:1†source】.

Sector Performance Highlights

The Transmission and Power Grid segments shined in Q1. Transmission reported only a modest 1% organic growth due to capacity constraints, but the EBITDA margin surged to 13%, reflecting efficient operations and pricing strategy. Power Grid, on the other hand, showed a remarkable EBITDA increase from EUR 73 million to EUR 115 million, with an EBITDA margin of 13.5%, driven by positive pricing and volume dynamics【4:0†source】【4:2†source】.

Challenges in Telecom

The Telecom segment faced significant headwinds, witnessing a considerable contraction compared to Q1 of the previous year. Despite this, the performance was better than expected when viewed against Q4 of 2023. The market is waiting for an anticipated rebound in the second half of the year, buoyed by subsidies and improving market conditions in the U.S.【4:0†source】【4:4†source】.

Encore Wire Acquisition Progress

Prysmian's acquisition of Encore Wire is progressing well, with the expected synergies being accelerated. Upon completion, this acquisition should enhance Prysmian's EBITDA margin by almost two percentage points, contributing an additional EUR 140 million in synergies【4:1†source】【4:5†source】.

Revenue and Cash Flow Outlook

Despite a 5.6% drop in organic growth, primarily due to declines in the digital solutions business, Prysmian maintained robust EBITDA levels close to Q1 2023. The company's free cash flow was strong, exceeding EUR 800 million over the past year, aided by down payments in the Transmission segment. Capital expenditure was also high at EUR 626 million, underscoring the investment in future growth【4:1†source】【4:3†source】【4:4†source】.

Guidance and Future Expectations

Prysmian is optimistic about closing the year at the higher end of its guidance. The company expects EBITDA to range between EUR 1625 million and EUR 1675 million, and free cash flow to be between EUR 725 million and EUR 775 million. Long-term goals set for 2025 include an ambitious target of reaching EUR 1,775 billion in EBITDA【4:0†source】【4:9†source】.

Sustainability Commitments

Prysmian continues to make strides in sustainability. The company achieved a 33% reduction in CO2 emissions (Scope 1 and 2) from the 2019 baseline and aims for a 45% reduction by 2027. Revenue from sustainable products now represents 41% of total revenue, and the use of recycled materials has increased, marking significant progress in its environmental goals【4:2†source】【4:4†source】.

Earnings Call Transcript

Earnings Call Transcript
2024-Q1

from 0
Operator

Good day, and thank you for standing by. Welcome to the Prysmian First Quarter 2024 Integrated Results Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to your speaker, Mr. Massimo Battaini, CEO. Please go ahead.

M
Massimo Battaini
executive

Good morning and good afternoon to everyone. Welcome to the quarter 1 earnings call. Let me take you through the first major KPIs of quarter 1. We had a very good start of the year, very solid performance. The EBITDA confirmed at EUR 412 million with an outstanding 11.2% EBITDA margin, which is an unprecedented level, never hit before in the past and a strong generation of cash in the last 12 months, EUR 827 million. We are particularly satisfied of the EUR 412 million EBITDA because the comparison to last year is pretty tough, it's pretty challenging last year. You see from the bar chart on the right-hand side, we had one of the good months -- one of the best months of Industrial & Construction performance in North America since the [ normalization ] has started. So you see that we noticed a contraction in the Electrification, but less and lower than what we anticipated as a result of this Industry & Construction normalization. On the contrary, you see a stronger performance and continuous performance of Transmission with an increase in EBITDA and [indiscernible] EBITDA margin over quarter 1, '23, but more importantly, an outstanding leap in result in power grid. Telecom is confirmed in line with what we were expecting, significant contraction over quarter 1 last year, but much better than the [ expected ] of quarter 4, 2023.It's important to remind you that we are proceeding with our Encore Wire acquisition. We are in the period between signing and closing where the two major events are expected to happen. While the shareholder meeting of Encore, which will be held around the end of June and the DOJ process for the antitrust for the regulatory matters. We are proceeding well. We don't expect a major issue. We started already outlining a discussion with a counterpart. The major action to be undertaken the day one after the closing to facilitate the integration and more importantly, to capture the expected EUR 140 million synergies with a faster pace than what we anticipated one month ago at the time of the signing. Remind you how accretive is this combination. The Prysmian EBITDA of '23, 10.6% EBITDA margin is expected to gain almost a couple of points once the integration is performed and the synergies are captured. Let me now tell you how we did perform in the Transmission business. The organic growth is in line with expectation. It's only 1% because we will see the major wave of capacity increase in quarter 2, '25 when 2 new lines will come to fruition in terms of production and additional sales. But despite the limited organic growth, we've seen a significant surge in EBITDA margin, 13%. We are following our pattern to achieve the expected 16% in '25 and beyond, even higher than 16%. 13% is a great performance in quarter 1, and we anticipate strengthening of this EBITDA margin in the coming quarters, ending up at the end of '24, with 1%, 1.5% incremental EBITDA margin over this quarter 1 performance. On the right-hand side, you see how we are building up our solid backlog. In the last 3 months, from December ‘23 through March ‘24, we converted a significant chunk of the order demand that were supported by strong commitment from customers, namely down payment. We converted them in backlog. So we received a notice to proceed, and we can now finally classify this EUR 18 billion worth of projects as backlog. This EUR 18 billion is -- are taking us through 2028 with full saturation of the existing capacity and the future capacity. We're also thinking to make a different -- another [ step ] of capacity increase, which will probably kick in in '27, late '27, '28 to further follow the market and ensure that we maintain in the current, still dynamic market, a strong presence, a strong market share, a market share in the region of 25%, 35%. As you see, the mix of the EUR 18 billion is twisted towards a submarine business or submarine interconnectors, submarine offshore, [ as for ] cables with a great participation of Land HVDC. And just for your reassurance, both businesses basically generate a similar EBITDA margin. Let me move to Power Grid. The organic growth is 1.5%, in line with expectation and solid growth, especially in North America but also in other regions. But the most important relevant factor is the surge in EBITDA from EUR 73 million to EUR 115 million, and the EBITDA margin increased to a record level of 13.5%. This EUR 115 million in gross benefit coming from pricing and volume. I told you last time that we would benefit from quarter 1 in 2024 of some first capacity -- ramp-up of capacity in the United States. This has come to fruition. A second round will happen in quarter 2/quarter 3. You see on the ride hand side that not only is this EUR 115 million extremely higher than quarter 1 of 2023, is also much higher than the [ expected ] over 2023 quarter 3 and quarter 4, confirming a solid demand in the market, a continuous benefit coming from our strong relationship with our utilities partner, customer. Of course, a big chunk of this profitability comes from the good performance, the good service level, the good relationship that we have in the United States in the North America environment.Electrification, it is probably the first time that you see the split of the EBITDA margin, EBITDA of the 2 subsegments, Industrial & Construction, Specialties. You noticed that there is a EUR 40 million price effect, price normalization in Industrial & Construction from quarter 1 last year to quarter 1 this year. It is important to note that the Industrial & Construction, quarter 1 [ speed ] is similar into a certain extent, in terms of pricing is better than that of quarter 4, 2023. In quarter 4 '23, we reported EUR 115 million EBITDA, and we starting '24 with a great 114 level, which considering that quarter 1 is normally losses on holidays, it's wintertime and so on, has to be seen as an upside or as a great performance over the [ expected ] last year. Specialties continued constant growth, EUR 78 million for quarter 1 last year, EUR 85 million quarter 1 this year. Even more important is the EBITDA margin improvement. We consider this 11% sustainable through the remaining quarters as we consider the 9.5% Industrial & Construction quarter 1 kind of confirming two factors. One is that the normalization has almost come to an end. If anything, we've seen some price rebound in quarter 1 to April actually, vis-a-vis November, December last year. So pricing are not only holding up in some segment of family products that are also increasing. The real good news is that the order intake in this Industrial & Construction space has been extremely positive and buoyant in quarter 1. We sit today at the end of quarter 1 at the end of March with almost EUR 500 million worth of backlog, vis-a-vis a EUR 350 million same time last year, end of March last year. Strong demand in the market generated by data center, increased reshoring activity, very, very dynamic industrial projects in all the rest. [indiscernible] Electrification as a whole, reported a EUR 203 million, well ahead of what we reported in quarter 4 '23 and not far from what we had in quarter 1, 2023. Telecom digital solutions, again, another difficult quarter, but of course, the comparison to quarter 1 last year is obviously tough. In quarter 1 and quarter 2 last year, we benefited from all backlog that we executed in '23, but was again [ an earned ] in 2022. Now [ we leave ] what we're achieving in terms of order intake on a daily, on a weekly or monthly basis. EUR 32 million is bringing us at the level of 10% -- 10.4% in terms of EBITDA margin so far from the famous historical 14%. But we see our pattern to an increase of EBITDA margin and EBITDA in the coming quarters. We expect, again, second half, United States to see rebounds in the market in light of the end of the destocking, and in light of the new subsidies [ have ] awarded and granted to some of the carriers for the broadband connection to rural area. So the [indiscernible] was very negative last year, of course, compounded by a lot of restructuring costs and one-off costs. So it's a good start, good signs of order intake growing in the coming months, and we are confirming the expectation for the full year. Very, very great performance here in sustainability. As you know, sustainability for us is an important objective in terms of internal action to reduce the Scope 1 and 2 of our footprint factories and distribution center. You'll see that we made another step towards the CO2 reduction of Scope 1 and 2 toward 33%, what we achieved in '23 versus the 2019 baseline. We gained another couple of points adjusted in quarter 1, '24. And you know that our famous target for ‘27 is 45%. Our target for 2030 is 55% to 60% reduction in Scope 1 and 2. We are well placed to achieve and possibly beat this target. Even more outstanding is the business side, the revenue linked to sustainable product has risen to 41% of total revenue and the recycled content of copper metal and plastic polyethylene in our products has gained another couple of points, hitting at 14.7%. This is remarkable because sustainability for us is a way to engage customers, to satisfy customers' expectation of our CO2 emissions. So to link as -- to lock up as closer to customer and of course [indiscernible] into higher share of wallet or price upside. Also on such ambition, we are proceeding in line with our programs. I hand this over now to Francesco for the financial performance [ description ].

F
Francesco Luciano Fanciulli
executive

Thank you, Massimo, and good morning to everybody. Let's wrap up all the numbers with the profit and loss statement. Organic growth was negative for 5.6%, as Massimo anticipated. This is mainly due to the drop of the telecom -- of the digital solutions business, specifically in North America. Very robust performance on the EBITDA, pretty close to the very high level of Q1, 2023 at EUR 412 million, with an unprecedented level of margin at 11.2%. And this notwithstanding -- and you see this on the right part of the chart, the significant drop in the digital solutions business, including also the share of net income coming from YOFC compared to Q1 2023, a drop of EUR 35 million. The other businesses performed really well. Transmission in line with the growth which is expected and which is set in our targets. Power Grid definitely exceeding this level of targets that we have set with a very high level of margin at over 13%. Despite the negative variation versus the record level of Q1, 2023, also Electrification performed very well with a strong margin expansion in the Specialties and a very good trend also in the Industrial and Construction. Massimo anticipated very solid drivers from the North American market, both in terms of volumes and in terms of margins and also European and LatAm, which are further progressing from the margins of last year. Moving down the profit and loss, I like also to mention a relatively stable level of financial charges. This is thanks to our largely hedged interest rates on the total of our gross debt, which has mitigated the impact of the growing interest rates and improving tax rate at 28.3% and as a result, group net profit, which even exceeded the very good level of Q1, 2023 at EUR 185 million. Let's move to the cash flow. As anticipated, the last 12 months' free cash flow has been really great, really strong, exceeding the level of EUR 800 million. The contribution coming from the working capital has been very strong. You see close to EUR 350 million. And this is mainly due to the strong dynamic of Transmission business and also the down payments that we have collected in the last few quarters and all from the first quarter of this year. And I like also to mention that this very high level of LTM free cash flow, EUR 827 million is absorbing a very high level of capital expenditure, EUR 626 million. So it is very high-quality number, let me remark. Excellent. Back to you, Massimo, for the conclusion.

M
Massimo Battaini
executive

Thank you Francesco. So in conclusion, we confirm great confidence resulting from quarter 1 results and also a great confidence on what we see in our backlog, which covers, of course, apart from Transmission, which covers [ EOS ], the rest of the business, we see at least 3, 4, 5 months of visibility. In light of this [ awesome start ] and what we see in our backlog, we like -- we are happy to confirm that we will end up in the upper part of the guidance. So in terms of EBITDA, the range between [ EUR 1625 million and EUR 1675 million ]. In terms of free cash flow within [ EUR 725, EUR 775 million ]. We are extremely positive. We are following our partner that we disclosed at the Capital Market Day, towards our goals. The first appointment for our goals, public goals is, of course, 2025. I'll remind you that we submitted an ambition to reach EUR 1,775 billion before 2025. And with this guidance and the position in the upper part, we, of course, are working towards the EUR 1,775 billion, gaining more confidence as time goes by. It will be very important to continue in this journey. It will be very important for us to conclude the Encore Wire acquisition, as said before. We are also strong confidence that this will happen in a few months and definitely before the end of quarter 4-- the end of '24, quarter 4. So thank you, and I'll leave the floor to your questions.

Operator

[Operator Instructions] We are now going to proceed with our first question. And the questions come from the line of Vivek Midha from Citi.

V
Vivek Midha
analyst

I have a couple of questions on Power Grids. I'll ask them together. The first is just to check, is it right to interpret this margin improvement in Power Grids is structural? It sounds like this is quite well supported. But is there anything you see which will reduce this margin in the mid to long term? And secondly, within the organic growth you had of 1.5%, could you give us some more color on price versus volume? You highlighted that both were there. But is there some sort of mix effect we should be aware of that meant that you weren't more like a mid-single-digit organic growth?

M
Massimo Battaini
executive

Sorry, third question, is the margin improvement is structural? We think so. Of course, here, we have a [indiscernible] visibility and not necessarily backlog because this is a frame agreement business, but of the frame agreement margin. So we have a fixed process with cost price adjustment clauses. It is probably worth saying that the high profitability, which ended up with a 13.5% come from a stronger performance in North America. So we have also a regional mix influencing a lot this level of EBITDA margin. We have visibility of the coming quarters, and we think that will end up in the range of this 13% through the next quarter. So confirming the structural reason behind this high profitability. The 1.5% came, I say, two-third of it from price. We had still seen some price improvement due to the clauses that I mentioned before coming to fruition. But of course, there is -- you remember that we mentioned there are 20,000 tons that we're going to implement in terms of extra capacity in the United States footprint and the American footprint and the big -- first chunk of this, namely 8,000, 10,000 tons has also benefited quarter 1. So the rest of the incremental volume will come in at the end of quarter 2, beginning of quarter 3. So all in all, EBITDA-wise in absolute value, we see this growing. And in terms of profitability, the 13%, 13.5% is confirmed also for the coming months.

Operator

The questions come from the line of Akash Gupta from JPMorgan.

A
Akash Gupta
analyst

I have a couple as well. The first one is on [ D&I ], North America price normalization. So Massimo, if I hear correctly, you said you think that this price normalization is over. The question I had was that are you talking more the sequential price development or year-on-year price development? Because I think if we have end to normalization sequentially, then we might still see some negative effect versus second quarter of last year and also because when we hear from some of your distributor customers like Rexel, I mean, they are still indicating that Q2 year-on-year will still be impacted by price normalizations. So maybe first one on that.

M
Massimo Battaini
executive

Yes, I'm talking sequentially. Of course, the comparison through quarter 1 last year or quarter 2 is still tough, as I mentioned. But if I take quarter 3 and quarter 4 last year, in quarter 1 this year, we outperformed the last 2 quarters. I think there is a new momentum in the market. Now while in '21, '22, you witnessed this price improvement coming from the supply chain disruption, which has created an imbalance between the capacity that was constrained and the demand that was stable, now this supply chain imbalance has come to an end, but we have a new phenomenon. We have the capacity fully available, but a growing demand. So now the imbalance is not coming from constraints, it's coming from market demand. So driven by the use cases that I mentioned before. So what makes me think that the normalization is mostly come to an end is that, first of all, in quarter 1, we have seen some price rebound in some segment of business. Second, this additional demand is going to crystallize the current level of margin, hopefully, and put an end to this price normalization. Of course, when I talk sequentially and not when we compare to quarter 1 last year or quarter 2 last year. So in absolute value, in '24, you will see still a reduction of absolute EBITDA versus last year due to this normalization effect happen in 2023. But margin-wise, on a daily basis were in line with quarter 3, quarter 4 last year.

A
Akash Gupta
analyst

Price normalization, you previously mentioned EUR 100 million each in 2023 and 2024. And if price normalization will be not that significant after second quarter on a year-on-year comparison, could there be some upside to this EUR 100 million normalization number for 2024?

M
Massimo Battaini
executive

[indiscernible] in 2023, lower than EUR 100 million impact. And in light of what I mentioned before, there will be lower than EUR 100 million impact also in 2024, thanks to the softening of the normalization pattern.

A
Akash Gupta
analyst

And the new capacity comment you talked about for Transmission business. So again, it looks like it's in early stage, and you are alluding to potentially this new capacity coming online in late ‘27, early 2028. When it comes to this investment and given the time line, is it fair to think this is more going to be a brownfield expansion in your existing -- alongside your existing production units and not something greenfield? And then if you can also comment about what could be the rough amount of capex that might be required for this expansion if you decide to go ahead?

M
Massimo Battaini
executive

We confirm the original plan of capacity expansion in the brownfields, namely in Pirkkala, Finland – in Naples in France, grown and in [indiscernible] United States. We also confirmed the greenfield build up in North America with breaking point. What I mentioned before is a possible expansion that we are designing, as we speak, for an existing site, again, it is our Finnish plant. We have 2 type of expansion. One is a capability increase using one existing line and turning it into some marine production, full-fledged summer production. And the one is a real increase in capacity. So it's a brownfield expansion of 2 lines. One will add more capability, one, with same capacity, more voltage, let's say, higher voltage. That one will add volume. The investment involved are more or less EUR 50 million, EUR 60 million for the first action, the capability improvement and EUR 70 million to EUR 80 million for the capacity increase on the second line.

Operator

And the questions come from the line of Monica Bosio from Intesa Sanpaolo.

M
Monica Bosio
analyst

Yes. Coming back to the Electrification and to, in particular, in the Industrial and Construction business, could you give us any color on the group's margins in U.S. as for Industrial and Construction and maybe if you can split between volumes and prices in the first quarter? My second question is on the telecom business. We're expecting a sequential improvement across the quarters. The second part of the year will be stronger in the U.S.A. What kind of overall final organic decrease can we imagine for a digital solution by year-end? And the very last is on the tax rate, for Francesco, can we take the 28% as an indication for the full year?

M
Massimo Battaini
executive

First question, the Industrial and Construction profitability. The one at the group level is around 10% in the Industrial and Construction space. Of course, this is a weighted average between Europe, other regions and North America. In North America, still pretty high, is in the range of 18%, 19% EBITDA margin on the Industrial and Construction business. Of course, in the high season, namely '22 or '21 second half, it was about 30% debt to EBITDA margin. But important to note that this current 18% or 19% is well ahead of what we had prior to this spike. It is at least 7, 8 points higher than what was the starting point before all the journey started. Volume, there is volume demand in the United States, there is stability of volume in the other regions. And to follow the volume demand in the United States, we have launched capex last year that are coming already this year to fruition, and we want to follow the aluminum building wire market demand, while in terms of copper building wire, the nice opportunity will be represented by the same opportunity I mentioned before, Encore. The combination of us with Encore will give us access to large capacity, available capacity in the copper building wire space. So not only we will benefit, we will benefit from cross-selling opportunity. We could sell -- we would be able to sell more of copper building wire through the legacy Prysmian channel. I hope I answered your question. And move to digital solution, Monica. The sequential improvement is of a few percentage points in terms of volume, quarter-over-quarter. Of course, we expect the second half to see a stronger presence of United States and North America in general, in our sequential increase. So I further struggle to give you a number for the organic decrease by year end. So I'm seeking the support from my colleagues. I think it will be maybe in the region of 15% negative based on what we have in our full year forecast in comparison to last year.

F
Francesco Luciano Fanciulli
executive

Let me take the one on the tax rate. Yes, by design, this 28% is our best estimate of the full year tax rate.

Operator

And the questions come from the line of Alexander Virgo from Bank of America.

A
Alexander Virgo
analyst

I was just coming back to your comments on Transmission. I think you said margins well above 13% through the balance of the year. And I could have sworn you said 16%, but I want to make sure I double -- I didn't mishear that because I appreciate that that's a big number. So just really to think about the margin progression here and where could we get to if it's not 16%?

M
Massimo Battaini
executive

To clarify this point, 13% was the quarter 1. As mentioned, we expect to see a 15% level in some of the quarters of 2024, bringing the full average EBITDA margin of this year around 14.5%. So from 13% quarter 1, the full year will look like 14.5%. We are heading for a 16% in '25. In '25, not only we will have the benefit of incremental capacity, which will be serving our backlog, which comes with a better margin, but we will have [ flush ] out a lot of the old projects which were taken at a lower margin. That's why the 14.5% will make another leap in '25, adding for the 16%. Then you might remember that our ambition for ‘27 Capital Market Day goal was 16.5%. And so we are well on track to meet with a 16% next year, also the goal for 2027. I hope I'm clear this time.

Operator

The questions come from the line of Max Yates from Morgan Stanley.

M
Max Yates
analyst

Just very quickly, one clarification because you've confused me now. Transmission margins in 2025, earlier in the call, you said 15%, you just said 16% then. Could I just clarify which is it?

M
Massimo Battaini
executive

It's for '25. Yes.

M
Max Yates
analyst

My next question is around the Power Grids business. I mean, clearly, we can see that the business is tracking quite comfortably above your 2027 target. There's obviously a lot of moving parts here around sustainability of margin, the new capacity you're bringing on, which I would imagine is maybe kind of more than you would have originally thought. Just wondering if you could give us, with your kind of best guess internally, when you look at the capacity additions, the pricing environment and what we're seeing from all of this grid spending, is there any way you could frame, kind of, how you're thinking about that '27 number today, perhaps sort of relative to that EUR 390 million?

M
Massimo Battaini
executive

We will definitely answer properly to this question at the next Capital Market Day. Of course, as you noticed, we already ended up very close to the '27 target in 2023, where we reported EUR 390 million. In '24, we are heading for a number that starts with 4, of course and finish with, let's say, EUR 440 million, EUR 450 million. So ‘24 million will be good EUR 50 million, EUR 40 million ahead of 2027. Of course, we will need to review the 2027. How do we see now 2027? We see that demand is there. We have plenty of customers approaching us and wanting to book some additional demand, additional capacity for the coming years. So we launched another wave of capex increase, another way of capacity increase in another plant in North America to respond to this additional demand. So allow us to gain more visibility of the market, more understanding of our time to market with a new capex. And in few months, of course, after the closing of Encore, we will satisfy the desire to understand what ‘27 will look like in the revised role in terms of organic growth, taking advantage of this stronger trend in Power Grid, but also in light of the new acquisition, Encore Wire. I hope you can bear with me for a few months for final view of 2027.

M
Max Yates
analyst

Just a quick follow-up on data centers. I know obviously, you've got some sort of data center exposure via your, kind of, Industrial and Construction business. But what I really want to understand is within the telecom business, how much do -- I don't know whether it's kind of optical fibres, MMS cables going into data centers, how much do they account for today of your sales? And any context on, kind of, how fast that business is growing? How big a business that could be in 3 or 4 years relative to your kind of total telecom revenues? Any color there would be great.

M
Massimo Battaini
executive

[ Color ], what this business use case will look like in terms of revenue in the future -- definitely, we are investing a lot of efforts in refining our go-to-market in making sure that we capture and intercept all the data center opportunities. I would say that as far as today, the global involvement of the company in the data center accounts for some EUR 800 million, specifically in the digital solution I think we are talking something around EUR 150 million. With engagement of both [indiscernible] business, optical cables because we produce a very innovative cables with a high density of fiber, which is what the data center needs. They want to have many hundreds of fiber in the same cables to convey as many data as possible. It will -- it involves also our MMS and multimedia solution capability for [indiscernible] sales plan. So the optical cables are -- high density are the ones connecting the building inside a campus, hyperscale data centers or connecting the hyperscale data center to the standard network. The MMS application are solution that goes inside the specific buildings.

M
Max Yates
analyst

Because it's a bit early to size, but you definitely have the right products that there is no reason why you -- Corning would be ahead of you in the U.S. market? I mean obviously, I appreciate they're larger in the U.S., but fundamentally, you have the right products for this and let's see how it evolves.

M
Massimo Battaini
executive

Let me give you some more color. We have the right product ranges because not only do we have optical cables and MMS, but we also have energy cables. And this is one use case which suits well our footprint of product energy, low voltage, special cables, medium voltage and telecom. We are strong in optical cables in data center. We are not as strong as Corning or Costco in the inside building solution. Of course, we don't have all the exposure to connectivity, involving connectivity, all internal devices and also the software that Costco can perform for data center, the automation, the software solution they can perform for data center. But our strength lies in the breadth of the product range.

Operator

The questions come from the line of Lucas Ferhani from Jefferies.

L
Lucas Ferhani
analyst

I was just wondering if I can push you a bit more on the EBITDA normalization from the U.S. market in Electrification. You gave a EUR 100 million impact at the start of the year. Now at the end of Q2, you're seeing almost the end of that normalization. You had a EUR 30 million headwind in Q1. I guess that's mostly price. If you were to give another number now, where would that number be roughly? Could it be EUR 50 million? Or could it be even just that EUR 30 million in Q1?

M
Massimo Battaini
executive

Here, I'm a bit cautious because we see what we see, and we see a rebound in prices in quarter 1. We have, as I said before, a solid backlog in Industrial & Construction with good margin. But of course, we still don't cover the full year and things might change. But on the positive side, there is the additional demand. There is the copper surge in price, which is helping us pass additional price to the market. So I don't know yet what the number will look like. I have an idea. It will be less than EUR 100 million, it would be probably higher than EUR 50 million. We will fall probably close to the low part of this range between EUR 50 and EUR 100 million.

L
Lucas Ferhani
analyst

And regarding, obviously, the update on the guidance towards the higher end and end of that normalization, the trends you're seeing also in Power Grids, does that give you also more confidence in the 2025 guidance of hitting maybe the upper end of that as well?

M
Massimo Battaini
executive

Bold statement. We have great confidence for ‘25 to achieve the EUR 1,775 million on the back of this performance in '24. So [ they find that ] we see us at -- let's put a number there at EUR 1,650 million this year as opposed to EUR 1,625 million or even less than EUR 1,625 million, makes us confident that the 1,775 for '25 is within reach. Of course, there are a few elements that will bring there, is the growth in Transmission, which is expected to be massive in terms of EBITDA resulting from pricing improvement due to the nice backlog in terms of capacity, more importantly, more in terms of capacity improvement due to the additional kilometers available in terms of production. Also due to the new vessel in quarter 1 next year, we will also receive the new Monna Lisa. So I have confidence for '25. Transmission will have to deliver a massive leaping result. Power Grid is navigating well in '24. And so we will see some additional upside in '25. What we had on the negative side on the other side is the telecom. The telecom was certainly not planned to be in the 2025 target in line with what we see in 2024. So we have a larger gap between ‘24 result and ‘25 target in telecom, which, of course, we will neutralize hopefully, with the upside of Transmission and the upside of Power Grid and the lower reduction, slowdown of Electrification. So at this time, I'd like to confirm 1775.

L
Lucas Ferhani
analyst

Just on Power Grids again, clearly, very strong margin, high utilization. How do you see the risk of increased competition, especially in the U.S.? Obviously, there's high demand and many players are adding capacity. So how do you strike the right balance when you're adding more capacity not to potentially add too much, which could impact pricing with some of the competitor potentially happy to make lower margins in that business?

M
Massimo Battaini
executive

We tend to gauge carefully the commitment of customers when we invest in capacity to serve this demand. And when I say we tend to gauge carefully is that we like support our confidence with the down payment. So we don't spend capacity beyond what comes from the demand secured through down payment. So this gave us a confidence that once we have the capacity up and running, we will have the customer buying the volume that they told us they will need in the future. Second element, second factor to consider that we are very close to some of utilities, namely IOUs in the United States. We know that our strength in the market lies in this strong relationship with this customer and the strong relations with this customer is strong because we provide them an impeccable service. So we have a [ multi-plant ] footprint to serve the same customer. We engage in innovation, technological innovation with the same customer partners. So it's not that easy for other players already present in the United States to add capacity, enter and increase their share of work in this space. So the answer is twofold. We want to increase -- we commit to increasing capacity only when there is a strong commitment from the customer. And our strong relationship with customers is what makes us confident that we can retain our share in the market and stand pressure from additional capacity coming on stream from other players. And by the way, there are players that have tried for many years to enter into the utilities, namely IOUs space and they have failed thus far because what matters is the innovation, the technical leadership and the security of supply with the service level.

Operator

And the questions come from the line of Alessandro Tortora from Mediobanca.

A
Alessandro Tortora
analyst

3 questions, if I may. The first one is on the telecom business. If you can give us an update on the restructuring actions you put in place? [indiscernible] you also comment on the recent decision of the Italian government [indiscernible] a minimum requirement for fiber quality? Then the second question is just a follow-up on Power Grid. So considering basically the message you gave on the importance of the service model in the U.S. or in North America, can you give us a sense of how much today in Power Grid -- how much North America accounts in terms of EBITDA? Is it fair to assume something around 2x North America portfolio EBIT in this segment? And the last question is for Francesco on the financial charges. Considering the pretty low level of financial strategies in Q1, if you can give us an indication of, let's say, the full year levels of commercial charges?

M
Massimo Battaini
executive

Let me answer your 4 questions. The main restructuring actually that we have in place is the shutdown of FOS that we announced back, mid of February. We are now working with the government to try to find a solution to maintain the employment of these 280 people, either with someone who can take over the site and keep continue the fiber production, of course, with different setup, with different solution or alternative solution. We offer to 50% of these people, an alternative occupation within the Prysmian factory adjacent to the FOS area, FOS is in south of Italy in Campania region. And so we are confident that by working together with the government, we'll find a solution to accommodate continuity of employment for these people. The minimum requirements, this is referring to the attempt of the government to try to force the telecom operator in Italy to raise the level of performance features, so quality of the fiber. This will not, per se, make a significant or provide a significant benefit to whoever will take over this plant to continue the fiber production. The problem we suffer from in FOS in Italy as well in larger part of Europe is that there are players offering the standard fiber or the enhanced fiber to European cable maker at a very cheap price. And those are ASEAN players. And the way to solve this, to stem this pressure or price pressure coming from these player is to work with the European commission to establish another robust level of anti-dumping import duties. Moving to move to the second question, if you are happy with the first one. So second question is about our distribution relevance of America out of the total group EBITDA. We must admit that total of this EBITDA is generated in North America, which is also a great result of the positive integration between Prysmian and General Cable, where we combined the 2 footprints, and we added synergies, cross-selling and value. And the EBITDA margin of North America, I don't like to tell you, is extremely high, higher than the 13.5% of course, that we see in the weighted average. I hope you are good with this answer, okay?

F
Francesco Luciano Fanciulli
executive

Alessandro, on the financial charges, I think for the full year, we'll have a level a bit higher than EUR 100 million, I would say, for the full financial charges. The particularly low financial charges in Q1 are also driven by a pretty high remuneration of our available cash. Now of course, we know that interest rates are decreasing because the gross debt is basically hedged on the passive side. On the active side, now we are enjoying a very high level of remuneration. This is projected, of course, to decline, hopefully, I would say, because this would mean that interest rates will normalize a bit. So I'm looking at EUR 100 million plus for the full year.

Operator

The questions come from the line of Sean McLoughlin from HSBC.

S
Sean McLoughlin
analyst

Just a couple of questions around Digital Solutions. I mean this is now your -- it looks like your lowest margin business, and it once was your -- among the highest, I mean, how should we think about how to get back to 15%? Is this market volume driven? Or are there maybe potential adjustments to your cost level and further restructuring around the current footprint? And particularly, how should we think regionally about pickup in Europe versus U.S.? And also how you're thinking strategically around your stake on [indiscernible] Optical.

M
Massimo Battaini
executive

Yes, it would be a challenging goal to go back to the 15% level of margin. The only way to act that 15% is to resolve the European situation [indiscernible] anti-dumping duties, which, of course, will not be happening overnight. But as we achieved the same approach with the cables [indiscernible] cables coming from Chinese player, I'm confident that with the help of the other European fiber producer – few producers -- and while in the past, there was just [ FOS ], now we are also Corning, we will be successful in the anti-dumping duties for fiber imports in Europe from all players, not only Chinese. The other way to go back to the fitting piece, the other elements that [ you will pass ] and go back to the 15% level is to see a stronger rebound and strong alignment of the American market to the drivers that we've seen in 2022. Of course, the structural drivers behind the telecom business are there. So as I said, we are suffering from a transitory hiccup in the market due to the destocking -- due to the excess of buying cables in 2022, the destocking and the lack of subsidies. The restructuring, we also have a play in this journey from 10% to, let me say, 14% more than 15%. We will improve the cost effectiveness of the fiber production focusing our cost saving actions in 2 plants, one in France, Douvrin, the other one in Claremont. And we will also benefit from the consolidation of some optical cables. We have reduced basically by 2 units, the number of plants producing optical cable concentrated their relevant volume in their [ plants ]. So the good combination of those 3 contributors, the fiber footprint, optical cable footprint and the anti-dumping duties in Europe are the key factors to helping us resuming the 14% EBITDA margin. And Sean, I'd add one point, the margin is -- the 10% is not satisfactory. The 14% will be certainly more satisfactory, but what makes the difference here is the cross benefit between energy and telecom. We do sell all the Transmission cables which are equipped with fiber cables. If you were to buy those cables from the market, not only will we suffer from margin contraction, we also won't to have the same type of innovation in these optical cables that are needed to monitor the grid, to monitor the performance of the submarine cables, the performance of the HVDC cables and so on. So we see even growing synergies and commercial sense by keeping our footprint in terms of product range as wide as it is today.

Operator

The questions come from the line of Daniela Costa from Goldman Sachs.

D
Daniela Costa
analyst

I have 3 quick follow-ups. First, I think you hopefully mentioned the backlog in Electrification and obviously, renew in Transmission. Can you also talk through exactly the extent of the backlog at the moment on Power Distribution? And is the type of advances that you get there similar to what you're getting in Transmission? That's the first question. And the second one is related to free cash flow [ pack ] throughout the year. Obviously, we're seeing -- this 1Q seems to be like normal seasonality, 1Q lower. And I guess in most years, you have a Q4 that is much higher. With the changes in the business mix more towards distribution and the other areas also going stronger and even with distribution with higher margin than Transmission, does that change how the free cash flow profile through the year will work? Those are my questions.

M
Massimo Battaini
executive

The backlog in Industrial and Construction was referring namely to the U.S.A. and North America space. Just to give you a sense of the rebound in demand that we've seen in the market, there is a larger backlog in Industrial and Construction when we consider the whole world. And there is also a backlog in specialty cables when we account for the total exposure to all geographies. In Power Distribution business, per se, will on a backlog because we work on these contracts. We received call-offs on a monthly basis from the utilities. So the size of the – the volume is provided by our share of wallet, our participation to this frame agreement with different utilities. But of course, we don't have a great visibility or a long visibility. So there were no longer than the next 2 or 3 months of forecast call-offs from utilities.

D
Daniela Costa
analyst

But with demand increasing there so significantly and capacity constraints, why would be would there not be a backlog?

M
Massimo Battaini
executive

We consider backlog when you receive a firm order, and we received from firm order from utilities on a daily basis. What gives us the visibility and confidence that they will buy what they told us they will buy through the year is the participation to our share of wallet of that business, which is defined at the time of the acquisition of the frame agreement itself. What is on the contrary, giving us confidence that they will buy more is that most of this customer provided us with down payment to support the capacity expansion. So our visibility is provided by 2 things. The forecast, the yearly forecast, which is more refined on a rolling basis month after month and the volume that they committed to buy from us in '26 and '27 once the capacity increase would be implemented. I hope I help you clarify the situation, Daniela.

D
Daniela Costa
analyst

[indiscernible] profiles for the year says we should expect a normal seasonality.

F
Francesco Luciano Fanciulli
executive

Francesco speaking. I think as you correctly said, our current business profile is pretty optimal from a cash flow generation point of view because the growing Transmission business provides a strong profile in terms of down payments and tends to cover some of the sizable capex that we need, which are going to expand capacity. At the same time, the high margins in businesses, which are relatively low intensive in terms of working capital, such as, for instance, the Power Grid, but also the Electrification provides a very strong cash flow generation. So I think that this will not change significantly through the year. The only thing is that compared to last year, we have, I believe, a more equally distributed profile in terms of down payments. Last year were mainly loaded on the second half this year, also as a result of the conversion of the order enhance into backlog are more equally distributed through the year. We had an impact in the second half of the year already starting from the second quarter, which is definitely the much higher level of metal prices that we are seeing now. This will impact potential even EUR 150 million, we think, has a negative impact. But fortunately, I believe we have a very good possibility to recover this impact, further improving our working capital, for instance, in receivables and for instance, also in inventory management and [ DIO ]. So we are very confident on the -- as Massimo said, on the upper end of the guidance. And this first quarter gives us further confidence.

D
Daniela Costa
analyst

One of the comments right at the beginning, on the Transmission business, on the big step-up in capacity in 2025, so is it -- shall we then think that we're not going to see much organic sales growth progression for the rest of '24, maybe a bit from pricing only? And then how large is the capacity expansion for '25?

M
Massimo Battaini
executive

[ Lines ] coming to production. So namely, you want to calculate this in value is [ oil value listener metrics ] and KPI is 800 kilometers of incremental capacity. Bear in mind that our total goal in capacity increases to double the existing capacity. So there will be 800 kilometers out of 2,000 increase -- 2,000 kilometer increase, which is what the total plan is about. And in '24, yes, you're right, there will be no organic growth apart from that coming from better margin, better price of the new projects that are in our portfolio for 2024 as a cushion.

Operator

The questions come from the line of Gabriele Gambarova from Banca Akros.

G
Gabriele Gambarova
analyst

The first one is a general one. If you want -- if I understood well, I see that the European stance towards China in the geopolitical, let's say, landscape is becoming somehow more, let's say, tougher. So I was wondering if, let's say, this trend is confirmed, could benefit you and in which business -- I understood that telecom may benefit. I was wondering if there are other areas that could benefit from this?

M
Massimo Battaini
executive

I mean Europe is trying to, I mean, defend, of course, a net value and [ price ] the local players. And this will be very explicit in digital solution with the anti-dumping duty for fiber introduction, importation in Europe. This will not only impact Chinese but also Indians. I don't see other areas also because, I mean, Chinese are not coming to Europe with energy products. We have to bear in mind that the transportation cost for an optical cable for fiber is very low, very contained while to transport cables from China -- power cable from China to -- or India into Europe is very expensive, not to mention [indiscernible], which is a particular relevant factors to grant us participation to the high share of wallet to our customers. Of course, there is a possible entrance in European business, in the Transmission business, given the strong imbalance between the capacity available for the European players and the strong demand. This has had some mild volumes, a mild example in some of the tenders of '23, actually only one so far, where a portion of the tender was awarded to a Korean player. But as I said, the imbalance is so strong that no one is coming with intention to slash prices to kill the profitability of the business. And so far, it's not certainly disturbing our ambition to expand the volume and to expand the profitability and to grow towards the 2027 goals.

G
Gabriele Gambarova
analyst

And if I may, a second question on the expected organic growth for this year, 2024 for Industrial and Construction and Specialties? I mean what do you see possibly also on volumes and pricing?

M
Massimo Battaini
executive

[ As I speak ] a number for the organic growth for the full year, but we will see a significant rebound in volume in the range of 5% to 10%. I'm talking United States here in the range of 5% to 10% over last year. This is what we've seen already in quarter 1, and the current backlog sits exactly in this direction. Price-wise, I said there is stability over the [ asset speed ] of 2023. We're confident to maintain this stability through the rest of the year. So there are segment of the business, for example, industrial products where the demand is very strong, medium voltage cable to serve reshoring business and so on, where the profitability is even higher than that of quarter 3 quarter 4 last year. And other niches like some [indiscernible] copper building wire where the price pressure is more stronger. But all in all, there will be organic growth in Industrial & Construction, Specialties in '24 over sequentially quarter -- or last quarter of last year.

Operator

The questions come from the line of Xin Wang from Barclays.

X
Xin Wang
analyst

So my first question is on Industrial and Construction. I think a lot of people asked on the U.S. normalization already, but you also commented on margin improvement in EMEA. So that sounds very positive compared with what your peers are talking about. So can you maybe give a bit more color on that? And also, what are you seeing on the volumes front in Europe?

M
Massimo Battaini
executive

Business, we see a stable volume demand over last year. Europe is not exposed or involved in the same [indiscernible] trend as United States in terms of a stronger buildup of data center or reshoring of activity and so on. In EMEA, we also have a larger exposure, and that's [indiscernible] United States to residential business, namely 30% of our EMEA Industrial and Construction business falls into the residential space. So volume-wise, stability, some price improvement here and there. I mean Europe is not as United States -- is not, let's say, one single region as United States. So there are areas of the business in North Europe, where there are greater margin in the level of the one that we see in the United States, there are less enthusiastic margins in some other countries, which I don't want to mention too much. Overall, there is a slight improvement in price mainly due to the regional mix and the country mix than anything else.

X
Xin Wang
analyst

So if I can ask another question on Digital Solutions, please? So I think Q1 margin at 10.4% -- in my view, that's already very rapid recovery from the negative 7.4% level in Q4. I think the commentary was still a recovery from H2. So can you maybe give a bit more color on how destocking in the U.S. is wrapping up? Do you change your expectations when subsidy kicks in? What prevents you from getting more positive from here?

M
Massimo Battaini
executive

We need to get to the end of quarter 2, and this is what preventing us to be more optimistic or aggressive on the second half. The destocking has probably come to an end. So we see signs of order intake increasing already in quarter 1, and we see this happening in the first weeks of quarter 2. Subsidies will play a significant role in making this telecom demand, digital solution demand rebound in the United States, and the first tranche of subsidy will be at the end of quarter 2. So we will wait. We'll have to wait until July and next earnings call to be more explicit about second half. But overall, we see us heading for our goals in '24. And we think also to be a bit positive in terms of beating our goal for 2024 in the Digital Solutions space.

Operator

The questions come from the line of Luigi De Bellis from Equita SIM.

L
Luigi De Bellis
analyst

I have 2 questions on my side. The first one is on the FX. So can you guide on the Forex impact expected at EBITDA level for 2024 at the current FX levels? And the second question on the copper, you signed an interesting agreement recently to secure copper raw materials. We are continuing to see a stronger price increase. So is there a level or a speed of increase that could create in your view, some, let me say, issues for your clients on the projects in your view? So can you elaborate on this?

F
Francesco Luciano Fanciulli
executive

So on the Forex level, we don't expect to have to have a major impact. [indiscernible] 2023, as you saw, is slightly negative for -- in the first quarter, I think, will remain within the -- should remain within the EUR 10 million negativity for the entire year. Of course, it depends how, in particular, the euro-dollar rate will evolve. It's quite volatile, and it's not easy to predict.

M
Massimo Battaini
executive

Thank you Francesco. So copper, yes, we keep engaging our suppliers in long-term contracts to provide our security of supply in this copper space. We are not concerned. If anything, we are happy to see that there is a constant increase in the copper price, because when the copper price increases steadily, the whole industry thrives because we can pass on to the market, a famous price increase. And we are not hitting a particularly high level of copper in the market. So I also confirm no issues at all from any customer, neither Transmission customer nor Industrial and Construction or a business customer in the wake of this strong copper price.

Operator

We have no further questions at this time. I will now hand back to CEO, Mr. Massimo Battaini for closing remarks.

M
Massimo Battaini
executive

Thank you for attending this call. I hope we've been able to satisfy you with the clarification, your question, insights in the business. I look forward to meeting you again at the same occasion for the earnings call of second quarter at the end of July. Thank you all, and have a good day.

Operator

Thank you all for participating. You may now disconnect your lines, and have a good day.

All Transcripts

Back to Top