Milano Aug 2, 2020 (Thomson StreetEvents) — Edited Transcript of Prysmian SpA earnings conference call or presentation Thursday, July 30, 2020 at 2:00:00pm GMT
Prysmian S.p.A. – EVP of Projects
Prysmian S.p.A. – IR Director
Prysmian S.p.A. – President & CEO of North America and Executive Director
Prysmian S.p.A. – CFO & Executive Director
Prysmian S.p.A. – CEO, GM & Executive Director
Mediobanca – Banca di credito finanziario S.p.A., Research Division – Research Analyst
* Daniela C. R. de Carvalho e Costa
Goldman Sachs Group, Inc., Research Division – MD & Head of the European Capital Goods Equity Research Team
* Sean D. McLoughlin
Ladies and gentlemen, thank you for standing by, and welcome to the Prysmian Group First Half 2020 Financial Results Q&A. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, 30th of July 2020.
I would now like to hand the conference over to your first speaker today, Valerio Battista. Thank you. Please go ahead.
Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [2]
Thank you very much, and good afternoon to everyone. Valerio Battista is — I’m here in the headquarter with some of the colleagues.
Numbers of the first half, the highlights. Organic sales growth minus, 11.8%, obviously negative because of the market trend. Not as negative as it could have been, maybe, but still very tough. Sharp decline, as expected, in Telecom, worsened obviously by the COVID effect. It was expected, but it has been a little bit worst. Weak trend for the T&I. All the construction market has been affected by the pandemic. The year was not so bad, started not so bad. But since mid of February, the market, especially in Europe, declined quite quickly. The E&I in North America, vice versa, went well, thanks mostly to the Power Distribution for the onshore wind. The E&I — the T&I, sorry, the construction market business, scaled down in North America, too, in the second quarter.
Adjusted EBITDA related to the sales closed at EUR 419 million. Also to be noted, 8.4% of sales versus the 8.9% of sales 1 year ago. That is an outstanding achievement, meaning that apparently, we did not have a significant scale down of the markets. With energy, very resilient. I always tell you that energy is our bond, mainly driven, as I said, by the Power Distribution in North America and the Industrial & Network Components.
Projects was not so bad, not very well because of some inefficiencies, some issues in the output. We have been slightly talking the point during the first quarter release, no significant impact, but there’s some delay in the execution, especially in the European — South European factories and the related installations of this.
Telecom. Telecom margins have been penalized because of the volume reduction and the price pressure, partially only offset by the cost efficiency. YOFC, obviously, has been closed until April and consequently did not participate positively to our P&L. Overall, the margins for Telecom have been quite resilient. The volume is better. The turnover obviously is scaling down significantly.
Net financial debt, EUR 2.516 billion with a continuous deleveraging. Net financial debt, confirming the solid LTM free cash flow of EUR 519 million, quite good, really, but we have to consider the seasonality that went in the opposite side because of COVID. Meaning that in the first quarter, we started to have a ramp-up of the stock and the working capital. We have been able to manage our scale up. That is unexpected but most probably is going to be reabsorbed in the second half.
German Corridors are pretty reasonable outcome with over 50% of — roughly 50% of market share out of the 3 projects, confirming to be more or less at 50% in all the 3 projects of German Corridors and generating consequently — adding EUR 1.8 billion to the project of the book. That now has reached the record backlog at over EUR 3.8 billion. Not to be too much expected because in term of results, because the EUR 1.8 billion of German Corridors are going to be diluted in the next 4 to 5 years.
Flipping to Page 4. The sales went down by EUR 900 million from EUR 5.849 billion to EUR 4.985 billion with an organic decline of 11.8%. It is what it is. So in the first half, we lost EUR 1 billion or EUR 900 million compared to the first half ’19. That has been a peak, frankly speaking. The related adjusted EBITDA show a decline of EUR 100 million roughly, EUR 521 million to EUR 419 million, with a quite significant stability in term of EBITDA margin. That means not to have operating deleverage. In reality, we did a hell of actions, even very strong, especially on fixed and variable costs in order to try to control as much as possible the profitability of the lower business that was available.
Operating working capital. The operating working capital that 1 year ago, it was at EUR 1.269 billion, has closed at EUR 1.088 million, 11.3% of the sales. Obviously, the number is lower than 1 year ago, but we have to say that the business is lower than 1 year ago because — as a consequence of the reduction of the volume in the business. Remember that our business, once it’s growing, require working capital. And vice versa, once it scale down, gave working capital free.
Net financial debt. EUR 2.516 billion versus EUR 2.819 billion, a pretty good performance in NFD. That’s thanks partly to the advance payment we got for the German Corridors award, partly due to the very strict control of the stock. The message since February we gave to the subsidiaries is that, don’t worry, I prefer not to have availability of products than to have too much stock that we cannot sell.
Page 5. Sales and adjusted EBITDA by business. The projects moved with an organic decline of 13.9%. That’s not very nice, but it is what it is. And the profit, the EBITDA reality of the projects was carried down from EUR 97 million to EUR 80 million, keeping more or less a similar margin to the same period 1 year ago. Now we have a very big backlog. Unfortunately, the performance in term of profitability is not outstanding. Why is that? Because the previous years of the book or the income has been a little bit low, and our assets are not totally saturated. And here, we’re talking about some factories and some installation assets, mainly ships. That is — are the cycles.
Energy. Energy, quite resilient with a reduction — organic reduction of 9.6% from EUR 4.135 billion down to EUR 3.580 billion, with the first half 2020 that closed at EUR 147 million comparable to the EUR 159 million of the first half ’19. The organic decline has mainly been driven by the T&I in South Europe, U.K., MEAT and LATAM, partially, modestly offset by the Power Distribution in North America and the overhead lines. The profitability in product distribution and overhead has been able to offset the decline in T&I partly. So not so bad, not so bad, but we have to take into account that the problems of COVID we have in our hands.
And the market, our markets have been started suffering this problem, the stop of the activity of our customers since the beginning of April. And now the spread of the virus is moving around the world, moving from Europe to U.S. and South America. And hopefully, it’s not going to come back because as we have seen in the last days that even Europe, in certain countries, has restarted to see an increase of the cases.
Industrial & Network Components. The first half ’19 closed at EUR 1.248 million. The first half ’20 closed at EUR 1.122 billion with an organic decline of 8.4%. What we can say about it? At the end of the story, not so bad, but it’s true that the industrial products are not so fast as the T&I or the construction market to react to the — in this case, the COVID issue. Needs a little bit more time. We are monitoring very strictly the move of our customers. We have also to consider that the automotive has been the most impacted business in term of decline. And except to the automotive, the total industrial scaled down only 1%. But that’s due to the order backlog we created in the previous quarters. Now the problem is to be able to keep the order backlog sufficiently good.
Last but not least, the Telecom. With an organic decline of 20%, closed at EUR 697 million sales versus EUR 886 million, is an unpleasant comparison because the first half ’19 was a very buoyant market with demands from everywhere, fiber shortage, quite high price. And now the picture is completely different with a very sharp decline of the prices that started in China. But even with the COVID effect, and that has hit Europe mostly, other than China. But then in China, we have missed the number there. Consequently, did not significantly touch us.
At the end, if we look at the EBITDA margin, we are not losing a lot. And today, we are around about 15% of margins. Some of you have asked me, which was at the bottom of some quarters ago? And I said that 15% could have been a good proxy. We are already at 15%, and that is probably not going to go down further.
Moving to Page 6, the energy transition projects and most of all, the German Corridors. EUR 1.8 billion awarded to Prysmian in the 3 German Corridors areas. We are simplifying more or less 50% of the 3 projects with the exception of SuedLink. This has been the last to be awarded, where we got only 40%, slightly more than 40% of the project. All the 3 lines are 525 DC extruded. And as you can see from the completion date, especially A-Nord, it’s going to be quite a long time to be completed. We are very proud because we feel to be part of the worldwide system for the energy transition.
Let’s go back to the organic growth just to help you to understand, Page 7. North America, we have the 3 blocks, Q1, Q2 and half 1. As you can see in North America, that was quite good in the first quarter. In the second quarter, it went dramatically down to minus 15%. EMEA was already been strongly touched in the first quarter and collected a minus 18% in the second quarter. Asia Pac, that has been the first one to be touched by COVID, closed the first quarter at minus 20% and the second quarter at minus 10%. Latin America, vice versa, is getting the wave of the COVID, has got the wave of the COVID in the second quarter and is still in the deep down to — of COVID. So it’s like a wave that has started in China and is moving around the globe from east to west smoothly. What we have to understand is if there will be another wave coming again.
By geography. To be noted, overall, that North America overcame Europe in here with EUR 205 million EBITDA compared to the EUR 173 million in the first half.
But we have to start from turnover. EUR 3.147 billion in EMEA versus EUR 2.661 billion this year, continuing an organic decline in first half of 13%, of which, in the second quarter, minus 18%. That is a significant contraction.
North America, vice versa, has been touched in the first half only by 6% organic decline, in the Q2 by roughly minus 15%. Nevertheless, despite the scale down of the volumes, North America has been able to increase the margins from 10.9% to 12.7%, giving to North America the EUR 205 million EBITDA. That is a remarkable margin. What is good and what is bad? E&I in North America is driven by the onshore wind, a lot of power distribution for the offshore wind only. Margins improvement, thanks to the business mix and the integration and a number of actions that the local team have implemented in the market.
Okay. Europe, vice versa, has had a not very good performance in main markets, especially South Europe, U.K. and the Middle East. As well as the Telecom, projects and, this year, T&I have been the weakest business.
Latin America. The Latin America business scaled down from EUR 466 million in the first half 19 to EUR 334 million the first half ’20 with an organic decline in the first half of 21%, more or less. On the Q2, even worse, minus 27%. Why? Because the wave of COVID came into Latin America later. And consequently, the second quarter has been even worse, for sure worse, than the average.
Asia Pac, vice versa, had a very, very difficult half 1, mostly in China, with minus 15%. But that the Q2 has been a bit lighter in term of reduction, minus 9.7%. Overall, if you look at the total EBITDA, from EUR 29 million scaled down to EUR 15 million, of which a significant chunk, EUR 8 million, EUR 12 million versus EUR 3 million, is due to the share of net income of YOFC. You have to consider that YOFC has been closed down until mid-April, so practically not utilized.
What we have done? Our desire was not to — monthly volume evolution, the trading update, North America region.
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Unidentified Company Representative, [3]
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Nine.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [4]
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Nine. Now you can see the dotted line is 2020, and the continuous line is 2019, the previous year. As you can see, North America grew last year. This year, it’s not growing and — in the first half, I mean. And in the last month, after the COVID, the trend in the North American market, the business is scaling down a little bit.
Latin America has been terrifically impacted by the COVID and is still is there.
U.K., the same. Since April, U.K. went down very very much. Here are we talking about only the physical volumes of E&I, T&I and PD. You can see that not only Europe as well as the CEE, the Central and North Europe, have been more or less stable compared to the previous year. That was because the COVID impact has not been very strong in these regions. South Europe as well as U.K. and Latin America has been able, vice versa, to lose up to 50% of the volumes of the previous year, most of all in the April month.
Now we have a problem in MEAT, Middle East and Africa, where driven mostly by OCI, where the volumes have scaled down significantly in the last quarter. Overall, you can say that the bottom has been touched in April. And we are still well below the previous year but slightly recovering month after month.
Which have been our actions? Priority 1, our people. Our people, the people, because no people, no business, as simple as that, both from the customer side and from the employee side. So no layoffs. We preserved all the permanent employees, trying to minimize the impact of, for our employees, of the pandemic, taking care also where it was possible and needed of local communities.
On the other side, we strictly controlled all the expenses. Fixed cost reduction, we launched minus EUR 50 million fixed cost reduction at the end of February — no, mid-March, mid-March. And obviously, we asked to our suppliers to participate, to help us, clarifying that other EUR 50 million of variables were asked to be participated by the suppliers.
Cash flow, I already commented. The cash flow, cash is cash. No cash, no party. Very strict control of inventory, the receivables and reduced the CapEx. Maybe you remember that we were talking about the EUR 250 million CapEx, including the new ship. Then we moved the EUR 250 million CapEx including — excluding, from excluding to including in the ship. Now we are talking about EUR 200 million CapEx, including the ship. That’s it. So a quite tough and strict management of the cash flow.
Last but not least, the outlook. I was not feeling comfortable not to give outlook because we have a quite reasonable clear view of how the business is moving. Obviously, we are not in one of the most impacted business by the pandemic. And that’s the reason why we give your — we give to you the guidance.
Guidance on EBITDA, about — between of EUR 800 million and EUR 850 million and the related free cash flow in between EUR 200 million and EUR 300 million. Obviously, that’s a goal that can be reached, assuming that the COVID disruption will not come back or will not worsen too — very much in the second half. This is a challenge nobody knows. If Europe, U.S. or whatever is going to be in the total lockdown in the second half, this guidance will not be matched, just to be clear. Assuming that the pandemic will stay under control as it is today, hopefully better, we believe that it is a reachable goal.
You have to consider that in the second half, we are going to see some effects of the pandemic that are coming, in which sense — in the sense that the spread of the virus has been in the beginning in China, later in Europe, now in the U.S., and it’s not over. And the 2 entities, U.S. and South America, are under the threat of the pandemic very much today. Consequently, whereas the first quarter has been reasonably good, the second quarter has been in the surviving mode. The third and the fourth quarter, nobody knows, but we assume that it will be in the mid of the trend of the first 2 quarters, meaning not so good as the first, not as bad as the second. And that’s the reason for our guidance between EUR 800 million and EUR 850 million.
That’s it. Thank you very much. I leave the floor to Francesco Facchini.
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Pier Francesco Facchini, Prysmian S.p.A. – CFO & Executive Director [5]
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Thank you, Valerio. Good evening to everybody. As usual, let me start with the profit and loss recap. As Valerio explained, organic growth was minus 11.8%, minus 17% in the second quarter specifically. This half year organic decline was mainly driven by the telecom drop, minus 20%, as Valerio explained, which is pretty close to the volumes that we anticipated at the beginning of the year, but of course, also in this case, impacted by the slowdown of telecom equipment installations, telecom cables installations, particularly in some regions such as South Europe.
In the Project business, we had some COVID-related effect on production, mainly high voltage, land high voltage, on installations, also in this case, mainly land high voltage. And this was the — were the main reasons for driving the sales down, as Valerio anticipated.
On the other hand, we had a very resilient Energy business with a mild minus 10% compared to last year. Pretty strong in industry and network components, first of all. I think that excluding the automotive business, industry and network component was substantially flat compared to the previous year, of course, also protected by the 3, 4 months order backlog, which is typical of this business. E&I was also very resilient, obviously supported by the very strong performance of North America, mainly related to onshore renewable power distribution but also by strong overhead lines business. And let me comment, in general, supported the E&I business by the very wide geographic diversification, because also in Europe, which was heavily hit by the pandemic, we had regions such as Central Eastern Europe, for instance, or Northern Europe, which are performing pretty much in line with last year, in some cases, even slightly ahead of last year. So this very solid diversification, which was, by the way, enhanced by the General Cable acquisition, of course, is contributing to make our bond, as Valerio is calling it, even a more solid bond, let me say. And that’s a very important point to add.
Adjusted EBITDA, EUR 419 million, minus approximately EUR 100 million from prior year. Very resilient margins. Let me just comment that the specific Q2 EBITDA margin reached 9.3%, substantially flat from the 9.4% of Q2 last year. And given the drop of sales, let me call this a remarkable, a really remarkable achievement, which, by the way, a very significant sequential improvement of EBITDA margin from the 7.6% of Q1 this year.
2/3, approximately, almost 2/3 of the EBITDA drop in half 1 stemmed from the telecom business, ex share of net income, meaning YOFC mainly, included. The rest of the business was pretty resilient, supported and driven by the timely and strong actions that we took on costs, both variable and fixed cost, pretty material in the region of EUR 100 million, as Valerio commented. And this was really allowing to maintain the margins and to limit the negative impact of plant under-saturation, which was, in my opinion, the most important part of our good half 1 results.
And then, of course, last but not least, we have to mention the better business mix that paradoxically COVID temporarily put in place. Meaning that the COVID impact was mainly on the T&I, meaning the lowest margin business, on the lowest margin region such as, for instance, South Europe. Whereas North America went through a very positive season for the onshore power distribution business, and this is a much higher margin business. And also, for instance, the business was much more resilient in Northern Europe, as I explained, which is also in the E&I business, a higher margin business. So in general, the business mix improved, and this was driving the — some of the stability of our margins.
Adjustments were very positively lower than last year, only EUR 12 million, compared to the EUR 29 million of last year. Whereas special items, meaning nonmonetary items, has been impacted, in particular, by approximately EUR 40 million impairment that we took in the South Europe region because the COVID effect triggered the requests also coming from the regulator, by the way, of pervasive impairment tests that we performed throughout our cash-generating units, 100%. And let me say, maybe not surprisingly, South Europe, the most impacted region, was impacted by this. And we prefer to prudently take a certain level of impairment on these assets.
Very positive continuation of the drop of finance costs. You see an extremely material drop from EUR 72 million to EUR 55 million. Tax rate, of course, slightly higher than last year, as always happens when earning before tax drops, especially in the lowest margin region because — and also when we have items such as impairment, which are substantially nontax deductible, so technically resulting in an increase of tax rate. And the group net income amounted to EUR 78 million with a reasonably strong Q2 at EUR 55 million despite the impairment that we took in South Europe.
Let me briefly comment the line of financial charges, net interest expenses. Net interest expenses dropped from EUR 44 million to EUR 38 million, minus EUR 6 million, continuing the very nice drop that we have seen over the last 2 years since General Cable acquisition, starting from the very material synergies that we had out of the General Cable refinancing. On a full year basis, I would expect the line of net interest expenses in the region of EUR 80 million. And on top of this, we are also seeing a very good decrease of hedging costs for technical reasons that I don’t want to waste your time with. But we are seeing a drop of EUR 5 million, which may more or less double on a full year basis on hedging costs, which are not immaterial on our profit and loss.
Balance sheet, on the following page. Let me briefly comment the very significant and positive drop that we had in operating working capital over the last 12 months, a drop of almost EUR 200 million, EUR 182 million to be precise. This is mainly driven by the Project business, which was particularly good in terms of cash flow in the last 12 months.
But I’d like to mention 2 additional items which explains the drop of operating working capital. The very good job that our operations team and our operations function and, of course, not only are in Milan but across the regions, have done in managing inventory, which is something that Valerio has clearly mentioned. But the fact that really, we managed the supply chain, really looking after the requirements of our customers without exceeding and pushing deliveries or — and this, of course, allowed us to drive down inventory by a significant — very significant amount.
And let me also mention an item that I am particularly proud of, which is the reduction that we have achieved in receivable overdue. It’s not a huge amount. It’s an amount of around EUR 30 million, just for the sake of reasoning. But it’s particularly remarkable to have achieved this in such — in a period of such a dramatic crisis. That, of course, contributed to our cash working capital decrease and our cash generation.
In terms of net financial position, of course, we had the consequence of the good job done on working capital with a remarkable drop of debt down to around EUR 2.5 billion. This makes us very confident also to achieve very positive result in terms of net financial position for the year-end, also based on the free cash flow guidance that we have given from EUR 200 million to EUR 300 million that Valerio has mentioned.
And let me also mention the fact that we went across this crisis without any covenant change, without any covenant relaxation and, by the way, closing the half 1 with a leverage well below last year and well below the 3x covenant max, covenant cap that is included in our financial contracts.
Financial flexibility, last but not least, is certainly there. I’d like to remind that Prysmian Group, right now, have available credit lines and mostly committed, by the way, in cash in excess of EUR 2 billion. And this, of course, this puts us in a pretty comfortable position to tackle this tough period. And also in terms of refinancing maturities on the capital market, we are in a pretty much comfort zone, with the first maturities coming beginning of 2022. So no urgent needs to tap on the capital market as we speak.
My last page is on cash flow. This, I believe, is, together with margins, the main achievement of the first half. In last 12 months, free cash flow, above EUR 0.5 billion, EUR 519 million, which is approximately in line with the last 12 months free cash flow that we recorded at Q1. Despite, of course, the drop of EBITDA that we experienced in the second quarter, we maintained the last 12 months free cash flow level, over EUR 500 million. And this was driven by the extremely good performance of projects in the first half and, in general, management of working capital. However, we have to recognize that this huge free cash flow over the last 12 months has some, let me call, temporary elements or temporary drivers included, which will not allow to maintain this level of free cash flow generation for the entire full year 2020. And therefore, we indicated the guidance, let me say, taking the midpoint at EUR 250 million.
Just to mention one particularly significant or particularly clear temporary items. As a consequence of the COVID in a number of countries, there were some tax reliefs or let me call them tax postponements more than tax reliefs, which shifted material tax payments for an amount of approximately EUR 70 million, so not a material amount from half 1 to half 2. This is only one of the reasons why the — it will not be possible to maintain this level of free cash flow for the entire year.
Let me also conclude saying that the top of our free cash flow guidance, meaning EUR 300 million, is not very far from the previous free cash flow guidance. You remember EUR 330 million plus/minus 10%. Actually, it’s exactly like the bottom of the previous free cash flow guidance. And we have to achieve this, and we will achieve this, with an EBITDA which is, if you take the midpoint of our guidance, is EUR 180 million below last year. So I think that this is — this puts in the right light, let me say, also our free cash flow guidance.
I’m over, and I think we can go ahead with the Q&A.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [6]
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Hello? Hello? Hello, operator? No.
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Questions and Answers
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Operator [1]
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Ms. Daniela Costa, your line is open.
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Daniela C. R. de Carvalho e Costa, Goldman Sachs Group, Inc., Research Division – MD & Head of the European Capital Goods Equity Research Team [2]
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I have a few questions, but I’ll ask 3 now. And then I’ll put myself back on the queue. The first thing I wanted to ask was back to the explanations you have given on the free cash flow. Understand, obviously, the earnings are — the earnings guidance is lower this year. But you also have a higher amount, I guess, from advances than you had back when you had guided that bottom end of EUR 300 million originally, given the German Corridors. So can you tell us sort of like the makeup of the free cash flow guidance? How much of that is advances? And how high is the working capital, I guess, consumption in the second half to explain why it looks a little low, the guidance?
My second question was regarding the high-voltage margins in Q2. They seem — they also seem a bit lower than you have had in prior periods. You’ve mentioned COVID impact there. Can you help us with what would have been a more normalized margin? Is it comparable to Q1 and that’s sort of how — what we think going forward now that there hopefully aren’t as many COVID impacts there?
And then the third thing, I was wondering if you could comment on what you’ve observed in YOFC, particularly now that we know the China Mobile tenders are out and YOFC had a very high allocation. But the prices are also down. What’s the implication for the global telecom landscape from that? I have one more, but I’ll leave it for later.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [3]
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Okay. Thank you very much. I leave the floor for the figures over to Francesco.
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Pier Francesco Facchini, Prysmian S.p.A. – CFO & Executive Director [4]
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Thank you, Daniela. Let me try to explain a bit better the free cash flow guidance. Of course, the free cash flow guidance embeds a second half free cash flow which is significantly lower than last year. It’s true what you say that we will receive significant advances from 2 German Corridors because, one, we have already received by way in June, but 2 is left. So this is true. But it’s also — keep in mind that last year, we had an extremely strong performance, actually higher performance, in terms of cash in, coming, for instance, from the Viking project, from the intake of the Viking project, which brought in some advance and the achievement of the first milestone, by the way. And if I compare the Viking cash in that we had last year with the 2 missing, still missing German Corridors advances that will come in half 2, the balance is negative. Meaning that the 2 advances is significantly lower by an amount of EUR 40 million, EUR 50 million compared to the Viking collections that we have last year. That’s the first point.
The second point always regards the project business and has to do with the particularly rich cash collections in terms of milestones achievements last year. I don’t want to mention the project names, but we had specifically 2 very large projects which were substantially finished last year, which brought in very important milestones collections. Whereas the second half this year will be slightly less rich than that. These are the 2 items, the 2 main items related to the project business.
Coming to the rest of the business. Of course, we have to keep in mind the EBITDA. The reality that embedded in our EUR 800 million and EUR 850 million guidance, so for simplification, say, taking the midpoint, the EBITDA of the second half will be a bit lower, significantly lower, than last year. And this is, of course, cash in the end. And we are talking of an amount of EUR 70 million, EUR 80 million.
Then the last item is the working capital. The working capital on the rest of the business, not on the project business, performed really well in the first half. But this really good performance was also driven by the volume drop. We have to be realistic about that. And with — if we assume a mild restart of the business, like we are doing, and by the way, we are already seeing, taking the months of June and July, we have to assume that some of this huge drop of working capital that we had over the last 12 months will be at least partially rebuilt starting from inventory in the second half. And of course, we will try our best to keep it contained.
Then there is one item, which is the last, which plays on the other end, on the positive side, which is the CapEx. On the CapEx side, for sure, we will have a second half lower, significantly lower, by around EUR 50 million compared to the previous year. If you put all this in a pot and you mix it well, you come out with the second half which is, apart from jokes, around EUR 250 million lower in terms of cash flow, free cash flow, compared to last year. And this explains the bridge from the EUR 0.5 billion last 12 months half year to the, say, EUR 250 million, taking the midpoint of the free cash flow guidance.
Sorry, I took a bit some time, but I thought it was very important to explain this well.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [5]
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Daniela, your second question. The margins in HV in Q2 seems to be lower than the expectation. That’s not totally wrong, mostly because in H2, especially, South Europe has been suffering quite a lot of the desaturation. Absent this low output of the plants, especially in France and partly but more in Q1 in Arco Felice. That has created some inefficiencies that are reported in the numbers of projects. For instance, our plants in France have been quite significantly impacted by the COVID and the consequence have not been able to deliver what was planned to be.
In addition to it, I have to say we have some costs unabsorbed because of the HV submarine and HV land in Finland is not saturated. That’s because we didn’t get sufficient orders in the previous quarters. And that’s the answer.
Finally, the comments on YOFC and the China Mobile tender. Beginning in Q2, the Chinese style is spreading around. That’s the problem. And as well as YOFC has been hitted significantly by the terms of last year. YOFC gave back the service to the competitors in China, but pricing very, very low. Consequently, the price for the fiber in China went to an incredibly low level. It is what it is. What I can do. For the time being, we are not seeing any significant effect on the pricing in Europe nor obviously, North America. We are working on our costs in order to be more resilient as possible, and to be able to survive with such a very low prices. At the same time, as I anticipated in June, we are trying to defend our rights, IP rights in the market. Maybe you have seen our press release, we decided to utilize our patents in a more staff way.
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Operator [6]
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(Operator Instructions)
And your next question comes from the line of Lucie Carrier from Morgan Stanley.
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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [7]
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I also have 3 questions. I will go one at a time. The first one is a follow-up on the project business, and I appreciate the disruption from COVID. But when we look into the second half of the year, should we expect an acceleration in terms of the pace of execution because you are catching up? Or is it pushed out into 2021? And as we look into 2021, obviously, the awards, so far, year-to-date, is quite remarkable, even if we remove the German Corridors. When do you think you’re going to be, I would say, saturated in terms of your manufacturing capabilities and installation at a level that you see as being kind of optimal, I mean, maybe not 100%, but optimal for your profitability.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [8]
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Yes. Lucie, thank you very much for your question. Very honestly, I don’t see a second half that is going to recover what we have lost in term of profitability in the first half. It is not a drama. But we have to consider that there are 1 or 2 mid little sized projects that were foreseen in the budget in the forecast for the full year, but are not going to materialize. What does it mean? That, in reality, the market is in a wait-and-see mode for the medium little sized projects. Whereas, the big projects are going to progress. The medium-sized are frequently on hold because of COVID. That’s what we see. There are at least 2 projects that were expected to be awarded this year that have not been awarded, and I’m not sure are going to be awarded on time to have the expected effect in 2020. That’s the reason why I’m saying you, I don’t expect a significant recovery in the second half. I know that is not nice. It is what it is.
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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [9]
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And just are you speaking specifically about Land High Voltage here or the total kind of high voltage scope in…
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [10]
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So I’m talking about total High Voltage system, land and the submarine. The project I was referring to were submarines. That is it..
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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [11]
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And just on the second part of my question, please, on when you — considering your current backlog, when do you expect to kind of reach that saturation level of — or sufficient capacity utilization?
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [12]
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I think the second half, next year.
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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [13]
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My second question is more a financial one. But obviously, we’ve seen — you only have a 10 basis point margin contraction in the quarter on 18% organic decline, which is quite remarkable. Just maybe to play a bit devil’s advocate here. But can you help us understand how much, what I would call, Government scheme in terms of furlough or (inaudible), temporary unemployment schemes, have helped that performance or other type of initiatives you had within the company that might not be necessarily continued through the rest of the year?
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [14]
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So we have to consider that the Government subsidies to the business has not been improving, after all, our results because we sustained the costs. And part of those costs have been compensated by the Government subsidies. So we are not talking about improvement. We are talking about a lower loss. Do you understand what I mean, Lucie?
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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [15]
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Yes, yes. I think that’s clear. But I’m just trying to understand, if we look at the rest of the year going into next year, whether you think that basically what you produced in the second quarter — or let’s put it another way. If you think that the margin resilience that you’ve shown in the second quarter is something that, from your standpoint, is fairly sustainable.
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Pier Francesco Facchini, Prysmian S.p.A. – CFO & Executive Director [16]
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Lucie, Francesco speaking. I think that this shouldn’t be any concern for you. Meaning that the — as Valerio explained, the — let me say, (inaudible), you mentioned, the (inaudible), the various measures that you have in different countries, which are, by the way, different country by country, only helped us very partially, by the way, to offset the industrial inefficiencies which resulted from the dramatic drop of volumes, in some cases, even plant lockdowns, like in Italy in April or in France, that we experienced at the very — in the very middle of the COVID crisis.
The net is seriously negative, significantly negative. Just to give you an indication, without any willingness to be too precise. We estimate that the industrial inefficiency is already net of this Government support or subsidies, as you call it, it was a net amount of around EUR 30 million, which was a negative impact on our first half. So when, hopefully, volumes will recover from the very low level of the second quarter as well the impact on our margins, it should be positive. Also, also considering the fact that we will not count any longer on the Government subsidies.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [17]
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Lucie, let me try to help your way of thinking. If you think about the savings we posted of roughly EUR 50 million of fixed costs, we are going to extend across the year, the full year, and hopefully, to control very much next year. If we think about — you think about the other EUR 50 million that have the savings on variable costs, mainly agreements with suppliers to reduce the cost of raw materials and supplies, that’s much more difficult. And I do not consider replicable in the second half of the year, at least on a larger extent.
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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [18]
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Okay. That’s clear. And my last question is on telecom, if I may. I mean quite surprised on the positive side that the performance on the margin despite the decline. I think it is probably ahead of a lot of people’s expectations, especially because of everything we are hearing on China and supposedly Chinese manufacturer dumping a lot of their capacity in Europe. Can you maybe give us, one, a little bit of an update on this competitive situation that you are seeing? And maybe explain to us what you have done on the cost base to allow for such a rebound in the margin despite the top line decline? And how do you see kind of the overall prospect for this division, I would say, over the next couple of quarters as hopefully the market stabilized.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [19]
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Your question is a difficult question, Lucie.
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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [20]
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Always, totally.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [21]
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Keeping on aside the way you see and the Chinese market, obviously, in Europe, we made a lot of effort to reduce the cost of the fiber and to define and homologate new products like the 180 micrometer, like the FlexRibbon in order to have — to give our customers another advantage of closing up the price. Because in terms of price, the G652 commodity, obviously, for us, is quite difficult to be better than the Chinese. But technology, i.e. we can. That has helped us to keep in position and market share, even if with a little bit higher prices with our customers. That’s the most big port we did in the last year, let me say. And that’s the way we intend to continue to protect our business. Adding to it the pressure, the defense of our patents in Europe. Because whereas in China, it’s almost impossible to fund part European patents. In Europe, is much more feasible.
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Operator [22]
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And your next question comes from the line of Akash Gupta from JPMorgan.
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Akash Gupta, JPMorgan Chase & Co, Research Division – Research Analyst [23]
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I have 3 questions as well. My first one is on your guidance. So basically, the guidance implies second half EBITDA of EUR 378 million to EUR 428 million. And the question I have is that how much of this is covered by visibility that you have in form of firm backlog in projects or some kind of framework agreements that you have in telecom and some industry verticals? And how much of this is exposed to markets where you have no visibility? So if you can comment on that that would be great.
The second question I have is on this EUR 100 million cost efficiencies this year. I think you said EUR 50 million is fixed and EUR 50 million is variable. I’m just wondering how much of this you can carry forward into 2021? If you can provide any color on that that would be helpful.
And then the final one is on free cash flow guidance. So if I look at the Slide 17 on last 12 months free cash flow, you exclude IFRS 16 from your free cash flow calculation, which was EUR 94 million on a rolling 12 months basis. So is it fair to say that this EUR 200 million to EUR 300 million free cash flow guidance excluding IFRS 16 this year? And maybe if you can provide what should we expect for IFRS 16 this year.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [24]
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Okay. Thank you very much, Akash. Let me give you an answer about the forward-looking for the savings we posted in the ’20, in the first half of the year. I said the EUR 50 million fixed costs, because we cutted EUR 50 million the fixed costs, and the EUR 50 million of variable costs mostly provided us by our suppliers in some way under a reasonable agreement. The first EUR 50 million, the fixed cost, can be extended to the full year. The next year, I don’t know, because theoretically, fixed costs are fixed, that’s my theory, contributory can only go down. Now I have 29,000 people against this criteria but they try to defend. I believe that part of it can be saved, meaning that the fixed cost has not to rise again next year by EUR 50 million. The EUR 50 million variable cost, unfortunately, are really variable, meaning that our one-off we negotiated with our suppliers in order to get protection and [earn out] to survive. Consequently, are not repeatable in my opinion or only partly repeatable. We will try not, but it depends on the market conditions.
Let me leave the floor to Francesco for what concern the free cash flow question?
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Pier Francesco Facchini, Prysmian S.p.A. – CFO & Executive Director [25]
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Yes, I believe there were — there was, first of all, a question on the guidance EBITDA that I can address also. The — basically, Akash, your reasoning is you closed Half 1 at EUR 419 million. The full year guidance, taking the midpoint for simplification’s sake, invest an adjusted EBITDA half 2 of EUR 405 million, something like this, EUR 405 million to be — EUR 406 million to be exact.
Let me explain this. Of course, the project visibility is there because the project backlog is such, even if it is pretty much diluted in time due to the German Corridors, but the short-term portion of the order backlog is such so significant that gives, in principle, no uncertainty on this guidance.
What our guidance embeds is a simple fact. The simple fact is that the pandemic has crossed the globe, the world from east to west. And now is the epicenter, let me say, of the pandemic is North America and South America. That’s a fact, if you look at numbers. And North America, as we commented, had a particularly significant performance, mainly driven by the power distribution business, but not only also by the industrial business, by the way, in the first half. We believe that it will still be pretty good in the second half. But of course, we have to take into account the fact that now it is becoming the epicenter in terms of pandemic spread. And therefore, our Half 2, specifically, for North American region is a bit more conservative, not conservative, it’s realistically lower than the first half. That’s the reason why taking the midpoint of the guidance, the second half, embeds a slightly lower Half 2 than Half 1. By the way, taking the upper part of the guidance, this consideration is not true because it takes more or less exactly the double of the Half 1 results.
Then I come to your last question, which was on the IFRS 16 effect on our guidance. Actually, IFRS has, let me say, nothing to do with the guidance because the guidance is explained — is expressed in terms of free cash flow. And IFRS impact is on the debt. So of course, you took Page 17, if I’m not mistaken, is a bridge between the debt June 2019 and the debt to June 2020. And in this bridge, of course, we need to include also the IFRS, the IFRS impact. The IFRS is impacting also the free cash flow in the sense that it is increasing EBITDA because, in principle, it replaces monetary cost, the leasing costs with depreciation and amortization costs. So it’s increasing as the free cash flow. But at the same time, it is increasing also the debt also due to the renewal of the leases coming to maturity. Okay?
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Akash Gupta, JPMorgan Chase & Co, Research Division – Research Analyst [26]
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So basically, renewal to maturity is in IFRS 16 lines? So this EUR 94 million is basically the lease amount that you are paying in last 12 months. Is that fair?
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Pier Francesco Facchini, Prysmian S.p.A. – CFO & Executive Director [27]
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Exactly. Exactly.
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Operator [28]
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And your next question comes from the line of Monica Bosio from Intesa Sanpaolo.
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Monica Bosio, Intesa Sanpaolo Equity Research – Research Analyst [29]
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I have 2 questions. The first one is on energy infrastructure in North America. Can you comment on the expire of the incentives for power distribution? And what do you expect — I know that in North America, are you expecting some a bit of trouble due to the pandemic. But just for energy and infrastructure, what is your view? And what is your view on the incentives?
And the second that — I will be back in queue, I’m going to wait for the answer, and then I will ask the second question.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [30]
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Okay. Thank you, Monica. Let me give a simple answer. The E&I in North America has enjoyed a very good season in the last 18 months, thanks to the incentives for the power distribution — for the onshore wind. We developed new products, we got a significant chunk of the market, and we have been able to enjoy very good markets.
But what about the future? Obviously, the incentives are going to expire. Let us create as needed a rush to get the pieces of the projects, cable included, as soon as possible in order to be able to make the investment. Now the problem is that maybe that will be extended. Some of is talking about 6-month extension. But that will be positive. I don’t know, frankly speaking.
Around the table here is Massimo Battaini, the CEO of North America. I would like him directly to tells you what we feel about the trend in the North America.
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Massimo Battaini, Prysmian S.p.A. – President & CEO of North America and Executive Director [31]
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Thank you, Valerio. Monica. The — to add a little bit — elaborate a bit more about the incentive of onshore business. The pandemic has accelerated, as Valerio said, the acceleration of plenty of projects because we were already planning a weak second half in power distribution due to expiration in incentive, which is set for December. Now, set for December means that the project needs to be installed by June, July and September, in order to be commissioned by December. So the whole volume of cable would have been delivered within September in a normal year. Thanks to pandemic, there’s been an acceleration. The overall yearly volume has been delivered within quarter 2 this year. So there will be much — there will be no much left for the second half of this year.
But as Valerio anticipated, the rumors are that end customer kind of comfortable with the scenario, the incentive will be extended by 1 year. So there will be a 1-year worth of extension to cover the whole of 2021, which is positive because we would not see a big drop of performance and volume in 2021 in the power distribution business normally.
This is still not confirmed but it’s likely to happen. And as far as 2020 is concerned, we already, let’s say, delivered everything we need to deliver. Within the month of July, we will finish the full delivery of the wind business for North America.
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Monica Bosio, Intesa Sanpaolo Equity Research – Research Analyst [32]
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Okay. And as for my second question is on the industrial cables. The second quarter was pretty good due to the execution in the backlog. Should we expect a reversal in the third quarter because of the effect of the pandemic that will be felt later for industrial cables than for the rest of the business? Is this correct?
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [33]
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In the industrial cable, we have to remind you that the first half has been reasonably positive despite the pandemic, thanks to the order book we accumulated before. You have to consider that this business runs with 3 to 5 months order backlog — order…
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Pier Francesco Facchini, Prysmian S.p.A. – CFO & Executive Director [34]
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Lead time.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [35]
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Lead time. Today, we are not seeing a very buoyant order income. It depends on the region. We are seeing quite good order income in China, not good in Europe nor in U.S.A. Where the pandemic has affected region after 3 months. The first 3 months, the region suffer of construction market. The second quarter or the second 3 months starts to suffer a little bit more the industry. That makes sense.
Automotive, that is part of the industrial business that accounts to almost nothing in terms of profitability, has a different trend because has started to collapse much in advance, simply because the market disappeared.
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Operator [36]
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We will now be taking our next question from the line of Alessandro Tortora from Mediobanca.
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Alessandro Tortora, Mediobanca – Banca di credito finanziario S.p.A., Research Division – Research Analyst [37]
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I have 2 questions, if I may. The first one is, if you can, let’s say, talk a little bit on the time line and the execution of the EUR 1.8 billion intake you got from the German Corridor, just to share with us an idea at full speed let’s say, probably 2023, assuming that the combination of the 3 projects have an idea of the impact in terms of sales, do you expect to see at full speed from these projects?
The second question is on the E&I. If you can give us any idea on, let’s say, the trend in July, considering, let’s say, that basically we have an idea at the end of the month. So just have an idea of if you see any sequential improvement on this side?
And sorry, the third question was on the CapEx because I didn’t catch the comment you made on the structural level or CapEx you are projecting, let’s say, going forward, considering the savings you made this year.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [38]
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Okay. Alessandro, thank you for your questions. Let me try to give you the answers, at least, part of the answer.
German Corridors. The German Corridors are long-term projects that are going to be executed within 5 years starting from the second half next year. 5 years to go. Consequently, it’s a very well-spread number. You are looking — I know you are looking at the bottom end number. The bottom end number is positive, it’s significant, but it’s so much diluted that you cannot see a peak. It will start second half next year, quarter-by-quarter, they’re reaching a peak of EUR 60 million additional EBITDA.
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Hakan Ozmen, Prysmian S.p.A. – EVP of Projects [39]
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Valerio, if you want, I can give a brief.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [40]
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Okay.
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Hakan Ozmen, Prysmian S.p.A. – EVP of Projects [41]
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Yes. The German Corridors, Hakan Ozmen speaking, I’m the Head of Project. As Valerio said, between ’21 and ’26 is the execution of the 3 projects. And the first project is going to be performed with SuedOstLink and then SuedLink and then Amprion, the A-Nord project. We can assume that in ’21, as Valerio said, it is going to be relatively small, the effect, we will start with the production. But after ’22, we can assume that it is equally distributed among the 4 years. So if we are going to talk about EUR 1.8 billion of orders entry, we can let about EUR 1.6 billion, EUR 400 million sales per year.
But about the margins, I would not explicitly say any numbers, but I’m sure you can extrapolate the margins based on the sales.
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Alessandro Tortora, Mediobanca – Banca di credito finanziario S.p.A., Research Division – Research Analyst [42]
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Okay. I have the EUR 60 million. I took EUR 60 million as a [not.] And just can I follow-up on this point. If you believe that at full speed, the contribution after, let’s say, 2021 soft ramp up could be EUR 400 million, considering the size of the Underground High Voltage segment sales, are we talking about a division that, let’s say, could be really close to EUR 1 billion in, for instance, 2023?
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Hakan Ozmen, Prysmian S.p.A. – EVP of Projects [43]
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Yes. Okay. Valerio, if you — I can answer this one.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [44]
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Yes, yes. For me, the answer is yes. But I’ll let you answer.
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Hakan Ozmen, Prysmian S.p.A. – EVP of Projects [45]
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Okay. We can say that approximately, the EUR 400 million is going to be a plus, but we have to also think about that some portion of our capacity, we will not use for the lower-margin projects that we have. So that is going to be, of course, a small portion, which is going to be overlapping because the full capacity we oversaw that we will not utilize with the existing capacity only for the German Corridors, but also for other projects that may come. Therefore, there is going to be an overlap, but it’s not a significant amount. We can assume that we will come close to the EUR 400 million, but not exactly, you will not see exactly that number.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [46]
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Alessandro, last question about CapEx. CapEx…
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Pier Francesco Facchini, Prysmian S.p.A. – CFO & Executive Director [47]
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E&I July.
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Maria Cristina Bifulco, Prysmian S.p.A. – IR Director [48]
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July 3.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [49]
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Sorry. What’s the update on the July trend. July trend for E&I T&I, let me say, is not very different from June. We see the demand, obviously, has been suffered. We have seen a little bit of recovery in the month of June, not so sharp as other competitors have told in the market but not so bad, not so bad. After the crisis of the COVID in the second quarter, obviously, everything is not so bad.
Now we see a little bit of recovery. My concern is if will stabilize or not? We need [off time].
The last question, Alessandro, was about the CapEx. What about the CapEx going forward? To reduce to EUR 200 million, including the ship, means that we have canceled or postponed many CapEx. I have a hell of people asking to get the CapEx. For sure, we have to restore a decent level of CapEx because I don’t want to destroy the company.
How big? CapEx, if you look at the needs of the teams, our — there is no bottom. In my opinion, EUR 250 million has to be a reasonable number to be kept for the company as it is today.
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Operator [50]
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And your next question comes from the line of Sean McLoughlin from HSBC.
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Sean D. McLoughlin, HSBC, Research Division – Associate Director of Clean Technology [51]
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Just one follow-up. Can you confirm you will not need to expand production capacity in order to deliver the High Voltage backlog? I recall Q1 that this depended on effectively the size of the SuedLink win. And you’ve also mentioned on this call about reaching saturation of High Voltage. Could you just help us understand what that means exactly? And how reaching saturation actually impacts your ability to bid for further projects?
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [52]
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Okay. So, Sean, I have to be clear. We did not and are not going to approve additional CapEx in terms of capacity for the HV. Finito. That’s it. What we are doing and what I have partly already approved are CapEx for the capability, meaning to let certain lines to produce better performance and higher tension cables, modifying some lines. I do not intend to create additional capacity.
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Hakan Ozmen, Prysmian S.p.A. – EVP of Projects [53]
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Yes. If you allow me, Valerio, I will add also that we have capacity that are — that we want to activate as Valerio said, due to capability adjustments. And this capacity is going to be enough also to continue to serve the existing market. So we will not reach our full capacity with the German Corridors. We will definitely serve our existing customers. But as I said also before, there is going to be some overlap, and we will be a little bit more selective in the projects with the profitability.
On the other hand, submarine side. I want to — just to give highlights that this will not affect the submarine. We have still capacity to serve our customers for the — from the submarine, especially on the extruded cable’s perspective.
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Sean D. McLoughlin, HSBC, Research Division – Associate Director of Clean Technology [54]
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Understood. So when you talk about saturation, what are you specifically referring to?
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [55]
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The saturation, I was referring to — okay, Hakan, if you want to, you can answer.
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Hakan Ozmen, Prysmian S.p.A. – EVP of Projects [56]
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Yes. I mean, from the saturation perspective, we are currently — I mean, looking to the next 5 years, the German Corridors is not going to fully saturate our capacity because we are expecting to continue to the existing level of High Voltage business. If not, at least 80%, 90% of the existing business, we would like to continue. With that, of course, we will be fully saturated. I mean we are exploiting every possibility to use any lines available inside our perimeter. As you know, we have a very large footprint inside the group, not only in Europe but also in the U.S. and also in other countries for the High Voltage, like also in Russia, in China. And therefore, the capacity saturation, of course, projected will be relatively high. We can say, we will reach the top level of saturation. But of course, we have to keep in mind that there is a portion, which is the continuous business that we have — that has to be captured. They are not in the backlog. So I just want to give also to our customers the belief that we will continue to serve with the available capacity for them.
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [57]
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Anyway, Sean. If you need of some hundred kilometers of HV, tell me, give me a call, and I will serve you. That’s all.
Last question.
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Operator [58]
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Mr. Gabriele Gambarova, your line is now open.
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Gabriele Gambarova, Banca Akros S.p.A., Research Division – Analyst [59]
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Yes. A couple of quick questions from my side. The first one is a comment on your latest acquisition, EHC Global, the small company in Canada, you bought 10 days ago. So any comment on this, on the rationale? And in general, what is your appetite for further acquisition in this moment?
And the second one was a picker, let’s say, update on the most interesting opportunities you see on the project award front?
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [60]
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Okay, Gabriele. I understood. First parts were EHC. EHC is a company operating in the elevator products. It’s a good, not very big company that fits perfectly with the mix we supply to our customers in the elevator business. Moreover, EHC has developed the belt, the new belt for moving the cabin of the lifts. And they are specialized in the handrails. Overall, are very interesting products, will never be a business that can compete with PD or High Voltage, it’s a limited business. But we are serving the main customers of the elevator business, the majors. And other than serving them with the components we delivered today, we can deliver, in a profitable way, also those components, increasing the products that we are able to deliver to the customers. So it’s a reasonably good acquisition in a business that is sufficiently profitable. In reality, it was a swap at the beginning, selling airspace and buying EHC. In reality, the sale of aerospace has not been possible to complete because of the antitrust measures. So, let’s wait. The — so I see a good expansion of the business we have with our main elevator customers.
The second question was on the pipeline of the project awards. I see very good pipeline projects coming, then I’d like to have the orders. The pipeline is extremely good. We have been awarded of the German Corridors. Now we need to be awarded of some High Voltage submarine extruded because it’s the empty part of our capacity. That doesn’t mean that I wanted to give up on margins, everything in order to fill my stomach. But I believe that it’s time for us to get something to saturate, to better saturate the capacity.
If I look at the theory, the theory of the queue of the project is extremely long and good. But in the meantime, I wait for the theory becoming reality, I need to eat every day. That’s the problem. You understand the main message?
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Gabriele Gambarova, Banca Akros S.p.A., Research Division – Analyst [61]
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Yes, I’m pretty sure.
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Operator [62]
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(Operator Instructions)
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Valerio Battista, Prysmian S.p.A. – CEO, GM & Executive Director [63]
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Okay. If there are no other questions, thank you very much to all of you. I wish all of you very good and safe holidays. Thank you.
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Operator [64]
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Thank you. And that does conclude our conference for today. Thank you all for participating. You may all disconnect.