Ladies and gentlemen, thank you for standing by, and welcome to the Prismian Group first half twenty twenty financial results Q and I must advise you that this conference is being recorded today, Thursday, 30th July 2020 I would now like to hand the conference over to your first speaker today, Valera Batista. Thank you. Please go ahead.
Thank you very much, and good afternoon to everyone. Mario Batista is, I'm here in the quarter with some of the colleagues Numbers of the first half, the highlights. Organic sales grew minus 11.8%. Obviously negative because of the market trend, not as negative as could that be, maybe, but, scale very fast. Sharp decline is expected in Theragun.
Was, and obviously, by the COVID effect, it was expected, but it has been a little bit With trend, for the TNI, all the construction market has been affected by the pandemic. The year was not so bad. We started not so bad, but since mid of February, the market especially in, in Europe, declined quite quickly. The E and I in North America by SSA went well. Thanks mostly to the power distribution for the onshore wind.
The E and I, the T and I, sorry, the construction market business scattered down in North America too. In the second quarter. Adjusted EBITDA related to the sales, closed at $419,000,000, or to be noted, 8.4% of sales, as well as the 8.9% of sales 1 year ago. That is, 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 power distribution in North America and with the industrial network component.
Projects Projects went not so bad, not very well because of some inefficiencies, some issue in the output. We have been slightly taking the point during the first quarter release, no significant impact, but the sum delay in the execution, especially in the European South European Factories and the related install So please. Telecom, Telecom margins have been penalized. Because of the volume reduction and should see. YFC obviously has been closed until April and consequently deep participate positively to our P and L.
Telephone have been quite resilient. The problem is that the terminal, where are those risks going down significantly. Next financial debt, EUR 2,516,000,00516,000,000, which are continued deleveraging. Net financial debt, confirming the solid LTM free cash flow, of EUR 519,000,000. 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 scale. That is unexpected, but most probably is going to be rear served in the second half. General corridors are a pretty reasonable outcome with over 50% of roughly 50% of market share out of the 3 project. Confident to be more or less at 50% in all the three projects of German corridors and generating consequently, adding 1,000,000,000 to the project of the book. That now has reached the record backlog that over 1,000,000,000, not to be too much expected because, in term of results, because the EUR 1,800,000,000 of German overdose are going to be diluted in the next 4 to 5 years.
Flipping to Page 4, the sales went down by 900,000,000 from $5,849,000,000 to $4,085,000,000,000 with an organic of 11.8%. It is what it is. So in the first half, we lost $1,000,000,000 or $900,000,000 compared to the first half twenty nineteen. That has been a peak, frankly, speaking. The related adjusted EBITDA show a decline of 100 roughly 521 to 4 19.
With a quite significant stability in term of EBITDA margin. That means not to have operating the leverage. In reality, we did the hell of actions, even based on, 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 9 has closed at 1,000,008,11.3 percent of the sales. Obviously, the number, it's 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 Once it's growing, require working capital and vice versa, once it's paid down, gave working capital free.
Net financial debt, EUR 2,516,516, versus EUR 2,819,000,000 are pretty good performance in NFP. That's, thanks partly to the advanced payment we got for the German corridor 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'd prefer not to have availability of products, then to have too much stock that we can accept. Page 5, sales and adjusted EBITDA by business.
The project moved with an organic decline of 13.9 percent. That's not the increase, but it is what it is. And the profit, the EBITDA of the projects, scale it down from 97,000,000 to 80,000,000. Keeping the more or less a similar margin to the same period when you're Now we have a very big backlog. Unfortunately, the performance in term of profitability is not outstanding.
Why is that? Because the previous years or the book or the income has been a little bit low, you know, and our assets are not totally saturated. And here, we're talking about some factories, and some installation assets, namely ships. That is, calls. Energy, energy, quite resilient with a reduction organic reduction of 9.6% from $4,155,000,000, down to $3,550,000,000, with The first half twenty twenty that closed at $147,000,000 comparable to the 159 of the 1st 2019.
The organic decline has mainly been driven by the TNI South Europe, MET and LATAM, partially, mostly offset by the power distribution North America and the OLED clients. The profitability for our distribution and overhead has been able to offset the decline in TNI partly. So not so bad not so bad, but we have to take into account that the programs of COVID we have in our hands. And the market, the narrower market has been started suffering those problems, the stop of the activity of our customers since 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 we are seeing 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 twenty nineteen closed at the first half twenty twenty, closer to 1,122, 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 TNI have the destruction market to react to the in the case decoded issue. Means a little bit more time, we are monitoring very strictly the move of our assumes, we have also to consider that the automotive has been the most impacted business in term of decline. And except 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.
Last but not the least, the telecom With an organic decline of 20%, closer to 697,000,000 sales versus 886. Is an unpleasant comparison because the first half twenty nineteen was a very buoyant market with demand from everywhere, fiber shortage, quite high price and now the feature is completely feet with a very sharp decline of the prices that suck with Ukraine, but even with the COVID effect that has heated Europe, mostly, other than China, but then China, we have missed an overdue and consequently did not significantly touch bars. 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 has asked me, which was at the bottom of some costs that's ago.
And I said that the 15% could have been a good proxy. We are already at 50 And I hope we are not going to slow down further. Moving to Page 6 the energy transition projects and most of all, the German corridors. 1,800,000,000 our to Brisbane in the 3 German couriers, we are simplifying more or less 50% of the 3 projects with the exception of the link that has been the last to be awarded where we've got only 40% slightly more than 40% of the project. All the three lines are 525DC.
And as you can see from the completion date, especially anode, A node is going to be quite 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 just to help you to understand. Page 7. North America We have the 3 blocks Q1, Q2 and ALF1.
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 our minus 18% in the second quarter. Asia Pac that has been the first one to be touched by COVID, closer to 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 downturn of it.
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 it is if there will be another way coming again. By geography, to be noted overall that North America overcome euro in error. With 1,000,000 EBITDA compared to the 173 of Europe in the first half. But we have to start from Tumogou.
3,000,000,001,47,000,000 in EMEA versus 2,661,000,000 this year. Contributed unorganic decline in first half of the 15%, of which in the second quarter, minus 18%. That is just significant. North America by cigarettes has been touched in the first half only by 6% organic decline in the Q2 by roughly minus 15%. Nevertheless, despite the scale download the volumes, North America has been able to increase the margins from 10.9% to 12.7%, giving to North America the $205,000,000 EBITDA.
That is a remarkable number for agriculture. What is good and what is bad? E and I in North America, driven by the onshore wind, a lot of power distribution for the offshore wind only on land. Margins improvement, thanks to the business mix and the integration and a number of actions that the local team has implemented in the market. That's it.
Europe by Severaxa has had not very good performance in main markets, especially in South Europe, UK and Middle East, as well as the telecom projects and the T and I have been the weak business. Latin America. The Latin America business scattered down from $466,000,000, the first half twenty nineteen to 3.54 the first half to 18 with an organic decline in the first half of twenty one percent more or less. On the Q2, even worse, minus 27%. Why?
Because the wave of COVID came into Latin America later. And consequently, the 2nd quarter has been even worse for sure worse than the average. Asia Pac, nice English, had a very, very difficult half 1, mostly in China, with a minus 15% But the Q2 has been added with lighter in term of reduction. -9.7 percent. Overall, if you look at the total EBITDA, from 29 scaled down to 50, of which, a significant chunk, 8,000,000 to Atlas 3, is due to the share of net income of YOC.
You have to consider that YOC has been closed closed down till mid-'80. So practically, not utilized. What we have done Our desire was monthly volume evolution with trading update. North America
Page 9
9. No, 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 is not growing.
And in the first half, I mean, And in the last month, after the COVID that came in the North American market, the business is scaling down a little bit. Latin America has been terrifically impacted by the COVID and the steel is there. UK, let's see. Since April, UK went down very, very Here are we talking about only the physical volumes of E and I, T and I and PD. You can see that Northern Europe, as well as CEE, the Central And North Europe, have been more or less stable compared to the previous year.
That was a big boost. The COVID impact has not been very strong in these regions. South Europe as well as UK And Latin America. Has been able to deliver electricity up to 50% of the volumes of the previous year, most of all in the April month. Now we have a problem in MET, Middle East and Africa.
Were driven mostly by OCI, where the volumes have scaled down significantly in the last 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 in the business are simple as that. Both from the customer side and from the employer side.
So no layoff We present the dual department and employee trying to minimize the impact of for our employees of the pandemic. Taking care also of where possible and needed of local semesters. On the other side, we strictly controlled all We launched a minus 50,000,000 fixed cost reduction at the end of February. No, mid March. And obviously, we asked it to our supplier to participate to help us.
Clarifying that 1,000,000 of variable savings were asked to be participated by this guidance. Cash flow, I already commented the cash flow, cash is cash. No cash, no party. Very strict control of inventory, the receivables and reducing the CapEx. May you remember that we were talking about 250,000,000 CapEx, including the new ship, Then we move up to 250,000,000 CapEx, including from excluding to increase in the ship.
Now we are talking about 200,000,000 CapEx including the ship. That's it. So a quite tough, a strict management of the cash flow. I was not feeling comfortable not to give an answer, because we have acquired a reasonable, clear view of how the business is moving. Obviously, we have not in one of the most impacted business by the Pandelli.
And that's the reason why we give your we give to you the guidance. Guidance on EBITDA about in between of 800 and 800 $50,000,000 and the rated free cash flow in between of $200,000,000 $300,000,000. Obviously, that's a goal that can be reached assuming that the COVID disruption will not come back or will not worsen too much, in the second half that these are a challenge nobody knows. If Europe U. S.
Or whatever is going to be in the total lockdown in the second half of this guidance will not be matched. That has to be clear. Assume that the pandemic will stay under control, as it is today, hopefully better, we believe that a reachable goal. You have to consider that in the 2nd 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 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 moment The 3rd and the 4th quarter, nobody knows, but we assume that we'll be in the mid of the trend of the first two quarters, meaning, not so good as the first Not as bad as the second. And that's the reason for our guidance between 800 50. That's it. Thank you very much. I leave the floor to Francesco Vaki.
Thank you, Valerio. Good evening. Everybody, As usual, let me start with the profit and loss, the cap. As Valero explained, organic growth was minus 11.8%, minus 17% in the 2nd quarter, specifically. This Altria 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, impact by the slowdown of telecom equipment installations, telecom cables installations, particularly in some regions such as South Europe.
In the project business, we had the 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 driving the sales down as Vale anticipated. On the other hand, we had a very resilient energy business, with a mild minus 10% compared to last year. A pretty strong in industry and network component. First of all, seeing 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 and 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 and I business by the very wide geographic diversification because also 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 these very solid diversification, which was, by the way, named by the General Cable Acquisition, of course, is contributing to make our bond as well. He's calling it even a more solid bond. Let me let me say. And that's a very important point to me.
Adjusted EBITDA for under 19,000,000, minus approximately 100,000,000 from prior year, very resilient margins. Let me just comment that the specific Q2 EBITDA margin reached the 9.3%, substantially flat from the 9.4% of Q2 last year. And given the drop off sales, let me call these a remarkable, really remarkable achievement, which by the way, a very significant sequential improvement of EBITDA margin from the 7.6% of Q1 this year. 2 third, approximately almost 2 third of the EBITDA drop in ALF 1, stand from the telecom business. So share of net income, meaning while seemingly 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 $100,000,000 as Valerio commented. And these was reallowing to maintain the margins and to limit the negative impact of plant and saturation, which was, in my opinion, the most important part of our good alpha-one 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 TNI, meaning the lowest margin business on the lowest margin regions, such for instance, South Europe, whereas the 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 and I business, 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 12,000,000, compared to the 29,000,000 of last year, whereas special items, meaning non monetary items, have been impact in particular by approximately 40,000,000 impairment that we took in the south euro of region because the COVID effect triggered the request also coming from the regulator, by the way, of pervasive implementation that we performed throughout our cash generating units 100 percent. And let me say maybe not surprisingly, South Europe, the most impacted region was it by this. And we prefer to prudently take a certain level of internment on these a very positive continuation of the drop of finance costs.
You see an extremely material drop of $72,000,000 to $55,000,000. Tax rate, of course, is slightly higher than last year as always happens when earning before tax drops, especially in the lowest margin origin because and also when we have items such as impairments, which are substantially non tax deductible. So, technically, resulting in an increase of tax rate and the group net income amounted to 78,000,000 with a reasonably strong 22 at $55,000,000 despite the impairment that we took in South Europe. Let me briefly comment the line expenses. Net interest expenses dropped from $44,000,000 to $38,000,000 minus 6,000,000 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 finances.
On a full year base, I would expect the line of net interest expenses in the region of EUR 80,000,000 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 $5,000,000, which may more or less double on a full year basis on 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 1000000, 1000000 to be precise. This is mainly driven by the project business, particularly good in terms of cash flow in the last 12 months. But I like to mention 2 additional items, which claims dropped of operating working capital.
It was a very good job that our operations team and our operations And of course, not only here in Milan, but across the regions have done in managing inventory, which is something that Valerio has clearly mentioned that the fact that really we managed the supply chain really looking after the requirements of our customers without exceeding in pushing deliveries or, and this, of course, allowed us to drive down inventory by a a very significant amount. And let me also mention an item that I am particularly proud of is the reduction that we have achieved in receivable overdue. It's not a huge amount. It's an amount of around $30,000,000 just for the sake of resuming, but it's particularly remarkable to have achieved this in such a in a period of such a dramatic crisis, that, of course, contributed to our cash debt or working capital decrease in 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 $2,500,000,000. This makes us very confident also to achieve a very positive result in terms of net financial position for the year end, so based on the free cash flow guidance that we have given from $21,000,000 to $300,000,000 at Valerio as mentioned. And let me also mention the fact that we went across these crisis without any covenant change, without any covenant relaxation. And by the way, closing they help 1 with leverage well below last year and well below the three times covenant max, covenant but that is included in our financial context. Financial flexibility, last but not least, is certainly there I'd like to remind that Brazilian Group right now have available credit lines mostly committed by the way, and cash in excess of 1,000,000,000.
And this, of course, gives, 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 urgency that 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 1,000,000,000, EUR 519,000,000, 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 1,000,000,000. And this was driven by the extremely good performance of projects in the first alpha and in general management of working capital. However, we have to recognize that these huge free cash flow over the last 12 months as a sum, let me call temporary elements or temporary drivers included, which will not allow to maintain this level of pitch free cash flow generation for the entire full year 2020. And therefore, we indicated the guidance, let me say, taking the midpoint at 2 50.
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 payments for an amount of approximately EUR 70,000,000, so not any material amount from AlphaONE to ALSPO. This is only one of of the reasons why the it will not be possible to maintain at 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 $300,000,000 is not very far from the previous free cash flow guidance. You remember 330,000,000 plus -10 percent. 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 $180,000,000 below last year. So, I think that this is, this
puts in
the right light. Let me say also our free cash flow items. I'm over and I think we can go ahead with the Q And A.
Hello?
Okay. Hello?
Operator?
Mr. Daniela Costa, your line is open. You may ask your question now.
I hope you're all well. 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 300 originally given the German corridor. So can you tell us sort of like the makeup of the free cash flow guidance?
How much of that is advances in and how high is the working capital, I guess, consumption in the second half to explain why it looks a little a little low the guidance. My second question was regarding the high voltage margins in Q2. This seems they also seem a bit lower than you have had in prior periods. You mentioned COVID impacts 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's hopefully has many COVID impacts there. And then the third thing I was wondering if you could comment on what you've observed in in Y OFC, particularly now that we know the China mobile tenders are out and YFC had a very high allocation, but the prices are also down the implication for the global telecom landscape from that? I have one more, but I'll leave it for later.
Okay. Good.
Thank you very much. I did the floor for the free cash flow to Francesco.
Thank you. Hi, Daniela. Let me try to explain a bit better the free cash flow guidance. Of course, the free cash flow guidance, invests 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 the way in June, right?
But 2 is left, so is this is true. But it's also 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 vacation that we had last year, with the 2 missing, still missing, German colleagues or advances that will come in Alstoo, the balance is negative. Meaning that the 2 advance is significantly lower by an amount of 40,000,000 dollars, $50,000,000 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 of this year will be slightly less rich than that. These are the two 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 that the EBITDA, the reality is that embedded in our 800,000,000 and 150,000,000 guidance. So for simplification, say, taking the midpoint, 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 70,000,000 dollars, $80,000,000. 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 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 it, taking the month of June July, we have to assume that some of the a 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'll try our best to keep it contained. Then there is one item is the last, which plays on the other hand, 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 $50,000,000 compared to the previous year. If you put all these in a port and you mix well, you come out with a second dance, which is a platform jocks around 250,000,000 lower in terms of cash flow, free cash flow compared to last year. And this explains the bridge from the 1,000,000,000 last 12 months, Altier to the, say, $250,000,000, 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 it well.
Your second questions. 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 desaturation, desaturation. Absent is low output of blends, especially in France, and partly, but more in Q1. In AGCOFELDichapuru.
That has created some unefficiencies that are reported in the numbers of projects. So Eastern tower plants in France have been quite significantly impacted by the COVID, and the consequence have not been able to to deliver what was planned to be. In addition to it, I have to say we have some Costs unabsorbed because of the HV Saman and HV Land in Finland is not saturated. That's because we didn't get sufficient targets in the previous quarters. And that's the answer.
Finally, the comments on YFC And the China mobile spend, the gaming is not the Chinese style is spreading around. That's the problem. And as well as YOC has been heated significant by the terms of last year, YOC 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 or they 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 cost 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 you, 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 softly.
Thank you.
And your next question comes from the line of Lucy Carrier from Morgan Stanley.
I also have three 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 award 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.
Okay, Lucy, thank you very much for your question. Very honestly, I don't see a second of that is going to recover what we have lost in term of profitability in the first half. Is not a drama, but we have to consider that there are 1 or 2 mid retail sites projects. That were foreseen in the budget in the forecast of the full year, but that gonna materialize, whatever it means, that in reality, the market is in a wait and see mode. For the medium lithium sized projects, whereas the big projects are going to have, are going to progress The medium side are frequently on hold.
Because of COVID. That's what we see. There are accurate 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 it's not nice, but it is obvious.
Thank you. And just are you speaking specifically about Land High voltage here or the total kind of high voltage.
I'm talking about the total total high voltage system, land and the summary. Project that was referring to a summary for this period.
Okay. And just on the second part of my question, is on when you considering your current backlog, when do you expect to kind of reach that saturation level of or sufficient capacity utilization?
I think the 2nd half next year.
Thank you. 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 advocate here, but can you help us understand how much what I would call government scheme, you know, in terms of furlough or quota rights, temporary and employment 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?
We have to consider that, the government subsidies to the business have not been improving at all our result because We sustained the costs and part of these costs have been compensated by the governance subsidies. So we are not talking about improvement. We are talking about a lower loss You understand what I mean, Lucy?
Yes, yes. I think that key 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?
Lucy Francesco speaking.
I think that these shouldn't be any concern. For you, meaning that the, as Valera explained, the, let me say, Whirderbate, you mentioned the Kathleen DeGrazonics, various measures that you have in different countries, which are, by the way, different. Counter by country only helped us very partially, by the way, to offset the industrial efficiencies which resulted from the dramatic drop off volumes. In some cases, even planned 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, is seriously negative, significantly negative.
Just to give you an indication without any willingness to be too precise, we estimate that the industrial inefficiencies already net of these government supports or subsidies, as you call it, was a net amount of around 1,000,000 which was a negative impact on our first health. So when, hopefully, volumes will recover from the very low level of the second quarter, as well as 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.
Lucy, let me try to help your, what you're thinking. If you think about the savings, we posted of roughly $50,000,000 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 $50,000,000 that are the savings on variable costs mainly agreements with suppliers to reduce the cost of raw materials and supplies, that's much more recall, and I do not consider replicable in the second half of the year, at least in a larger on a larger extent.
Okay. That's it. Thank you very much. And my last question is on telecom, if I may. I mean, quite surprised on the positive side by the performance on the margin despite the decline.
I think it is probably ahead of of a lot of people's expectation, 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 stabilizes.
Your question is a difficult Keeping on a side of what 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 189 per month like the Flexuid. And in order to have, to lead our customers and other advantage of the close not the price. Because in term of price for the G6 52 commodities, obviously, for us, is quite difficult to be better than the Chinese, but technologically, we can That has helped us to keep position and market share, even if we're a little bit higher prices with our customers. That's the most big report we did in the last Yes, let me say.
And that's the way we intend to continue to protect our business, adding the tool the pressure, the defense of our patents knew because whereas in China, it's almost impossible to defend the European patents in in Europe is much more feasible. Okay. Thank you. And
your next Your next question comes from the line of Akash Gupta from JP Morgan.
Thank you, operator. Good afternoon, Vallejo, Francisco. Thanks for your time. I have three questions as well. My first one is on your guidance.
So basically, the guidance implied 2nd half EBITDA of 3.78000000 to 4.28000000 And the question I have is that, how much of this is covered by visibility that you have in form of per backlog in projects or some kind of framework agreements that you have in telecom and in 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 with 100,000,000 cost efficiencies this year. I think you said 50,000,000 is fixed and 50,000,000 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 94,000,000 on a rolling 12 month basis. So is it fair to say that this 200,000,000 to 300,000,000 free cash flow guidance excluding IFRS 16 this year. And maybe if you can provide, what should we expect for IFRS 16 this year?
Okay. Thank you very much, Akash. Let me give you an answer about the forward looking for the savings. So we posted in the in 20 in the first half of the year. I said the 50,000,000 fixed costs, because we cut it, the 50,000,000 fixed costs, And the 50,000,000 of variable costs mostly provided us by our suppliers in some way.
Under a reasonable agreement. The first 50,000,000, the fixed cost can be expanded to the full year. The next year I don't know, because theoretically fixed costs are fixed. The semi theory, consequently 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 5th cost have not to rise again next year by 50 the EUR 50,000,000,000 variable cost unfortunately has a really variable, meaning that our one off we negotiated with our suppliers in order to get our protection and our help to and buy. That's it. Consequently, are not repeatable in my opinion, or only part we repeat. We will try, but It depends on the market's conditions.
Let me leave the floor to Francesco. For what concern of the free cash flow question? Yes.
I believe there were, there was a first of all, a question on the guidance, the EBITDA that I can address also. They basically, Akash, your reasoning is you closed out one at 419, the full year guidance, taking the midpoint for simplification of 6, if that's an EBIT and adjusted EBITDA of $405,000,000 or something like this, $405,000,000 to be $406,000,000 to be exact. Let me explain this. Of course, as the project's visibility is there, because the project backlog is such, even if it is pretty much diluted in time due to the German corridors, but for the short term portion of the order backlog is such a significant gives, in principle, no uncertainty on the on this guidance. What our guidance embed 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. Let's say, that's effect if we look at numbers. And North America, as commented a particularly significant performance, mainly driven by the power distribution business, but not also by the industrial business, by the way, in the first half. We believe that with fixed goods, 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 ILF II specifically for North American region is a bit more conservative, not conservative, is realistically lower than the first half. So that's the reason why taking the midpoint of the guidance the second half embeds is slightly lower as 2 than Gulf 1. By the way, taking the upper part of the guidance, this consideration is not is not true because it takes more or less exactly the double of the alpha-one 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, of free cash flow. And the IFRS impact is on the debt. So of course, you took Page 17. I'm not mistaken, is a bridge between the debt, June 2019 and the debt, June 2020. 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 replaces, monetary cost, the leasing costs with the 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. So basically, this renewal to
maturities in IFRS 16 line, so this 94,000,000 is is basically the lease amount that you are paying in last 12 months. Is that fair?
Exactly, exactly. Welcome.
Thank you. Your line is open.
I have two 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 into, I'm going to wait for the for the answer. And then I will ask the second question. Thank you.
Okay. Thank you, Monica. Let me give simple answer. The E and I in North America has enjoyed a very good season in the last 18 months, thanks to the incentives for the power distribute for the of onshore wind. We developed the new products.
We got a significant chunk of the market, and we have been able to enjoy very good markets. But what about in the future? Obviously, the incentives are gonna expire. That has created a rush to get the pieces of the projects, cable included, as soon as possible in order to be able to made the investment. Now the problem is that maybe that would be extended.
Mhmm. Safran is talking about 6 months extension, but that will be positive. I don't know, if I'm speaking. Around the table here is Marcio Bataynik, the CEO of North America. I would like him directly to tells you what you feel about the trend on PD North America.
Thank you. Thank you, Valerio. Hi, Monica.
So to add a little bit, elaborate a little bit more about the incentive of onshore business. The pandemic as a separator, as I said, the acceleration of plenty of projects because we were already planning a weak second half in power distribution due to an expiration and incentive which is set for December. My set for the summer is that the project is being installed by June, July, and September 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 acceleration.
The overall yearly volume has been delivered within a quarter 2 this year. So there will be much there will be no much left for the second half of this year. But as very anticipated, the rumors are that and customer kind of comfortable with this scenario, the incentive will be extended by 1 year. So there will be a 1 year water 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, not limited. This is still not confirmed
but it's likely to happen.
But as far as 2020 is concerned, we already, let's say, deliver everything we needed to deliver with the month of July, we will finish the full delivery of the wind business phone or delivery.
Okay. Thank you very much. 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 and then for the rest of the business. Is this correct?
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 ordered or the lead time, 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, in Europe, nor in USA. Where the pandemic has affected the region after 3 months. 1st 3 months, the region suffer construction market. The 2nd quarter or the 2nd 3 months fast to suffer a bit more the industry, okay? That's makes sense.
Okay. Automotive that is part of the industrial business that accounts almost nothing in term of profitability, has a different trend because it has started to collapse much in advance simply because the market disappeared.
Yes, correct. Yes, got it. Got it. Very clear. Thank you very much.
You're welcome.
Thank you. We will now be taking our next question from the line of Alessandra Sothra from Mediobanca. Your line is open. You may ask your question.
Yes. Hi. Good afternoon to everybody. I have question, if I may. The first one is, if you can, let's say, talk a little bit on the a timeline and the execution of the $1,800,000,000 intake you got from the German corridor.
Just to shared with us NEDIA at full speed, let's say, probably 2023, assuming the combination of the three projects to have an idea of the impact in terms of sales you expect to see at speed from these projects. The second question is on the, E and I if you can give us any idea on, let's say, the trend in July, considering, let's say, that's basically, we are at the end of the month just have an NADA 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 that you made on the structural level of Cap Exxa, you are projecting, let's say, going forward, considering the saving you made Thanks.
Thank you for your questions. Let me try to give you at least part of the results. German corridors. The German corridors are long term projects, that are going to be executed within 5 years starting from the 2nd half next year. 5 years to go.
Consequently is a very well spread. Number. You are looking, I know you, you are looking at the bottom end number. The bottom end number is positive. It's significant, but there's so much dilutive that you cannot see a peak.
It will start 2nd half year, working by quarter, still reaching a peak of 60,000,000 additional EBITDA, right, in quarter,
Valero, if you want, I can give a brief yes. The German corridor, Hakan Osman speaking and the head of project. As Valerio said, between 20226 is the execution of the 3 projects. And the first project is going to be performed with SuDOT Link and then SuT Link and then Umclion, the A Naught project. We can we can assume that in 2021, as Valerio said, it is going to be relatively small.
The effect will start the production. But after 22nd, we can assume that, it is equally distributed among the 4 years. So if we are going to talk about 1,800,000,000 of orders, entry, we can live about $1,600,000,400,000 sales per year. About the margins, I would not explicitly say any numbers, but I'm sure you can extrapolate the margins based on the sales.
Okay, I have the 60, I took 60 as an out. And just to kind of follow-up on this point, if you believe that at full speed, the contribution after, let's say, 2021 soft ramp up could be 1000000 considering the size of the underground of all the underground high voltage segment phase, are we talking about a division that, let's say, could be really close to 1,000,000,000 in, for instance, 2023?
Yes. Okay. Valerio, if you,
if you want, I
can answer to this.
But I'll let you answer.
Okay. We can say that approximately the $400,000,000 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 corridor, but so far, 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 $400,000,000, but not exactly you will not see exactly that number.
Okay. Thanks very clear.
I'll start the last question about CapEx. Profits, yeah, July.
Do I trade the date on July 3? Sorry.
Also the update on the July trend. July trend, the for E and I, P and 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 call, we've been in the second quarter of this week, everything takes not so bad. Now we see a little bit of recovery. My concern is if will stabilize or not. Unit of time. The last question I said a word about the CapEx.
What about the CapEx going forward? To reduce to $200,000,000, including the ship means that we have canceled or postpone many CapEx. I have a lot of people asking us to get the CapEx. For sure, we have to restore this level of CapEx because I don't want to destroy the company. How big CapEx, if you look at the needs of the teams are there is no button.
In my opinion, 250 have to be a reasonable number to be kept. For the company as it is today.
And your next question comes from the line of Sean McLoughlin from HSBC. Your line is open.
Thank you, and good afternoon. Just one follow-up. Can you confirm you will not need to expand production capacity in order to deliver the high voltage backlog, I would call it Q1 that this dependent on effectively the size of the SODLINK 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. Thank you.
Okay.
So Sean, I have to be clear, we did not and are not going to approve additional CapEx in term of capacity for the HD. Finito, that's it. What we are doing and what I have partly already approved it are CapEx for the capability, meaning to let certain lines to produce better performance and higher potential tables, modifying some lines. I do not intend to create additional aircraft.
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, probably full capacity with the German corridor 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 project with the profitability. On the other hand, the 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 cables perspective.
Understood. So when you talk about saturation, what are you specifically referring to?
The saturation I was referring to, okay, Ahan, if you want to, you can answer.
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 thing to continue to the existing level of high voltage business. If not, at least 80, 90 percent 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 read the, the top level of saturation.
But, of course, we have to keep in mind that there is 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 to our customers the release that we will continue to serve them with the, with the available capacity for them.
If you need of some 100 Kilometers of HP, please ask me, give me a call and I will serve you.
Thank you.
Last question I can bring
Ms. Gabrielle Dombrova, your line is now open. You may ask your question.
Yes. 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 big, let's say, update on the most interesting opportunities you see the project award, front.
First ones were EHSC. C is, company operating in the Elevator products is a good, not very big company. That fit perfectly with the mix we supply to our customers in the derivative business. Moreover, EHC has developed the belt, the the new belt for moving the Caribbean of the lifts. And they are specialized in the handrails Overall, our very interesting products will never be business that can compete with PD or high voltage is 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 deliver today, we can deliver in a profitable way, also those components, increasing the products that we are able to deliver to the customers. So is a reasonably good acquisition in a business that is sufficiently profitable. In reality, it was as woke at the beginning. Selling airspace and buying EHC.
In reality, the sale of Aerospace has not been possible to complete because of the the antitrust measures. So let's wait. The so I see a good of the business we have with our main elevator customers. The second question was the pipeline of the projects. I see very good.
Pipeline projects coming, then I like to have the updates. The pipeline is 3,000,000 meters. We have been awarded off the German corridors balance we need of to be awarded of some high voltage submarine extruded because it is the empty part of our capacity. That doesn't mean that I wanted to give up on margins, everything in order to fill my storage. 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 projects 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? Yes.
I'm pretty sure. Thank Okay. If there are no other questions, Thank you very much to all of you. I wish all of you very good and safe Thank you.
Thank you. And that does conclude our conference for today. Thank you all for participating. You may all disconnect.