Ladies and gentlemen, thank you for standing by, and welcome to the Prysmian Group Q1 2020 financial results. At this time, all participants are in a listen-only mode. After the presentation, there'll be the opportunity to ask questions by pressing star and one on your telephone keypad. I must also advise you the conference is being recorded today. I would now like to hand over to your host, Valerio Battista, Prysmian Group CEO. Please go ahead.
Hello, good afternoon to everyone. Welcome to the first quarter 2020 financial result conference call of Prysmian Group. Let's start with page three, the highlights of the quarter. Organic sales growth, unfortunately negative, not extremely negative, - 5.4%, mostly driven by the expected slowdown of the telecom, 19%, compared obviously to our first quarter 2019 that was very, very good. E&I scaled down 3.4%, not very much, mainly because of T&I, whereas PD was going pretty well, especially in North America, + 3.6%. The results, adjusted EBITDA EUR 197 million, 7.6% of sales versus the EUR 231 million of the previous quarter 2019, with an energy mostly stable, with a positive performance in PD, partly scaled down by T&I. Projects.
Our profitability is stable in underground, high voltage, and submarine, but declining in SURF, because obviously it is linked to the oil and gas market, and the submarine Telecom, simply because we have completed the project that was under execution last year. Telecom has declined as expected, reflecting lower volumes and the price pressure that started in springtime 2019. Partially, we have been able to offset with cost efficiency. On top of it, we got the dramatic drop of YOFC contribution, simply because YOFC is located in Wuhan, at the center of the COVID pandemic issue since January. Net financial debt, EUR 2.606 billion, in line with the expectation. Not so bad, with a sound cash generation confirmed by the last 12 months free cash flow at EUR 538 million.
That's because obviously we are taking care as much as possible of the cash, and we are very, very prudent in growing the volumes, if not with a proper payment. German corridors. We have been awarded by two customers, SuedOstLink and A-Nord, by roughly EUR 500 million project, EUR 500 million value each one. Technically, that represents 50% of both the projects.
The outlook for 2020. Obviously, we released the outlook on the 5th of March. We had to withdraw because the uncertainty extremely high and the lack of visibility during this crazy pandemic do not let us to have a clear view of where are we going to go by the year. Let's flip to page four and have a look of the numbers. Sales Q1 2019, EUR 2 .771 billion . We closed the first quarter 2020 at EUR 2.587 billion , with an organic decline, as I said, - 5.4%.
The related adjusted EBITDA from EUR 251 million scaled down to EUR 197 million, 7.6% of the sales. Of course, not as strong as it has been one year ago. The working capital, one of the chapter we take care of as much as possible, EUR 1.183 billion compared to the level of EUR 1.361 billion of the same month, March 2019. December obviously was lower, EUR 749 million, 6.5%, there is the seasonality that is significantly different. Net financial debt of the company, EUR 2.606 billion at the end of March, comparable with the EUR 2.900 billion of March 2019, EUR 2.140 billion in December 2019. Again, the seasonality. Let's move to page five, the sales and adjusted EBITDA by business. Starting with projects. Sales at EUR 347 million, with an organic decline of -5.5%.
The EBITDA has been EUR 36 million, compared to the EUR 39 million of the previous year, the first quarter, obviously. The marginality is very similar, 10.4% instead of 10.6%. What's good, what's not good? The organic decline has been driven by SURF and submarine telecom. The COVID has started to have a certain effect, mostly on the output of certain plants, especially in South Europe, because a significant part of our high voltage is produced in South Europe, France, and Italy. The tendering activity is going forward very well. We are reasonably confident in the next quarters. Let's move to energy. Energy closed the sales at EUR 1.888 billion, with an organic decline of 2.4%. T&I, EUR 1.239 billion, with -3.4%. The total EBITDA from EUR 69 million scaled to EUR 68 million, consequently almost equal, with a slightly higher EBITDA margin.
The organic decline has been driven by T&I in South Europe and Latam, and partly in the overhead lines. Improved profitability in power distribution, mostly in North America. North America has performed extremely well in the first quarter. Slightly down in T&I. The construction market is one of the most volatile markets, and consequently has started to feel the COVID problem as fast as possible. Industrial and network components, EUR 598 million in the first quarter with an organic smooth decline of 0.3%. The EBITDA moved from EUR 41 -EUR 45 million, and the EBITDA margin went up from 6.9%-7.5%. The profitability has improved, thanks mostly to the mix. OEM has shown a resilience that is even due to the longer order backlog than the T&I. Automotive is a problem, but has not shown itself in the first quarter, if not in the second part of the March month.
Telecom, EUR 352 million, -19% of organic growth, with a significant drop, as expected, from EUR 80 - EUR 48 million. Keeping anyway, a decent EBITDA margin of 15.6%. The significant drop was expected due to the crisis of the market. On top of it, we have to consider that for us, the YOFC first quarter has impacted dramatically from EUR 8- EUR 1 million, simply because the COVID effect in YOFC, based in Wuhan, has been the entire quarter.
Differently from the rest of the world. Overall, EUR 2.587 billion, -5.4%. EBITDA from EUR 231- EUR 197 million, keeping a 7.6% EBITDA margin on the total sales. Moving to page six. German corridors. It was the season, and I told you in the previous meetings that German corridors were going to be awarded by December 2020. Two of the three are already awarded, SuedOstLink and A-Nord. We released the announcement of A-Nord this morning.
Simply because those are already 3,000 kilometer of cables. We have been awarded, rounding the numbers, roughly 50% of the two projects for a total award of EUR 1 billion. SuedLink has to come, is going to be officially awarded in the next month. We are going to negotiate with SuedLink in the next weeks to close the negotiation. Not to forget that SuedLink is more or less double, if not more, than the other two. It is an extremely challenging and important project. From the geography point of view, the sales and EBITDA are showing that EMEA closed with EUR 1.375 billion, -6.1%. The EBITDA went down from EUR 109 - EUR 85 million. Weak performance of EMEA. Why? Because in the second half of March month, the market really collapsed, especially the fast market, that is T&I.
South Europe, U.K., have been almost blocked by the COVID, as well as partly Telecom, have been the weakest business in the region. North America, very resilient. EUR 864 million with 3.6% organic growth. An outstanding, I would say, performance in term of EBITDA and EBITDA margin. You see from EUR 85 -EUR 97 million with an 11.3% EBITDA margin. Particularly strong have been the PD. T&I, not so bad. In the second half of March, T&I started to shrink in the U.S., and we are going to see the effect of it in the second quarter. Latin America. Latin America is another region seriously impacted by the COVID spread. EUR 180 million with -14.6% in term of organic decline. The margins went down from EUR 22 -EUR 14 million, 7.9%. The pretty bad performance comes from T&I and partly Telecom in that region.
Asia Pac, EUR 168 million sales with an organic decline that is very strong, -25%. We have to consider that the COVID spread started in China and in Asia, generally speaking. The first quarter has been the most difficult in China. Reason why our EBITDA in the region disappeared from EUR 15 million last year to EUR 1 million only this year. Let's move to page eight. Excuse me. Page nine. How the company is acting in this particular environment. We decided the priorities, and the priority number one we set has been to protect the group employees, the people. The second one has been to protect profitability and most of all, the cash flow. The third one, to serve the customers, and the fourth one, to support the surrounding, the people around us, the community. What we did to safeguard the group employees, we decided not to fire anyone.
Maybe to reduce the level of activity of everyone, paying a little bit everyone for it. We have, as of yesterday, 42 employees positive to COVID out of 29,000. A very limited numbers. The remote working, we started to implement before the lockdown of the countries, thanks to our IT systems. We have been able to work reasonably well, despite we are not able to in the office. We are protecting our people with all the masks and gloves and whatever we have. Profitability and cash flow. We decided to cut part of the fixed cost of the company, not to hire anyone, and we utilized the temporary layoff in line with the government authorizations. Most of all, we focused the cash flow because once the crisis comes, the first item you have to look at is the cash flow, is the cash position of the company.
Customers are able and ready to pay. Sometimes we have decided not to supply if customer was not giving us a reasonable comfort in the possibility to receive the goods, and most of all, to pay it. It's better not to sell than to sell using date of note. Support of operations. Our supply chain is running reasonably well. I have to say, obviously, in South Europe especially, we are significantly touched by the COVID spread. We have been able to keep the supply chain properly running, giving the service as much as possible to our customers. We plan production orders every day, and we replan all the system, master system, every week. Finally, we participated to the helping the communities. We donated the cables for the hospitals in China, the first two hospitals that have been realized for the COVID, in Italy, in Brazil.
Other than other actions we did in order to help the communities. Flipping to page 10, how the things are going. April, or the first four months. Because we used to give you the first quarter, but in that case, we have decided to give you a light on the trend of the first four months. You see it by region, comparing for E&I only, a trading update . As you can see, you can see in the continuous line the 2019, in the dotted line the 2020. Starting from the left, North America. North America has been going reasonably well, especially in the first two months. March started a little bit to reduce the speed. April, we are seeing a modest decline. South America is much worse. Compared to last year, April is significantly down.
That's because the spread of the virus seems to be stronger in South America than in the rest of the world today. U.K., you know better than me, U.K. at the beginning of the year resisted completely to the COVID spread. March and April, the volumes went down dramatically. Everything has been locked, as a consequence, the volumes are significantly down. More or less the same of South Europe. North Europe and CEE, the rest of Europe is vice versa, going pretty in line with the previous year. That's because the virus in that region is not so hard, the stop of the economical activities have not been introduced strongly. Hopefully, not for the time being. Asia Pac, especially China, has been the first to suffer the COVID impact. Obviously, also for the E&I market, is pretty visible.
We are not very busy in Asia Pac. Consequently, doesn't change a lot our numbers. Looking ahead, page 12. We have entered into the pandemic with strong fundamentals. The business, the geographical mix, the balance sheet is strong. We have a supply chain that is running pretty well. We are able to manage the supply chain and the customers from remote, and the organization is lean. Not enough in my opinion, but is lean. The secular drivers, the big drivers of our business, the energy transition, the telecommunication network, the electrifications are untouched. The COVID is a one-off that has come and hopefully is going to leave as quick as possible. The Q2 will not be an easy task. That's clear, because most of the effect of COVID in our markets are going to be deployed in the second quarter. We have seen with April already.
What we have to do? Chapter one, protect the cash. Chapter two, serve the customers and trying to maximize what can we do for the market, avoiding always to create extra stock. I leave the floor now to Francesco for the details of the economics.
Thank you, Valerio. Good evening to everybody. As usual, let me start from page 14, the profit and loss statement. As Valerio commented, organic growth was negative for around 5%, 5.4%, driven down by the optical cable drop, which was a double-digit drop, what Valerio already explained, and a drop in Energy & Infrastructure, which started in March. Particularly some regions, it was very differentiated region by region. Much heavier in South Europe and U.K., as for Europe. In Latin America, of course, very heavy in Asia-Pacific, specifically in China, which was it for the entire quarter. Whereas North America, specifically in PD, but also in T&I, held up relatively well. The organic growth was much more stable in the project business.
You see a negative sign, but it is mainly related to the oil and gas-driven SURF, and was pretty flat in the industrial business, thanks to the relatively longer order backlog, three, four months, which is protecting the very short term, at least. Adjusted EBITDA down to EUR 197 million, -EUR 34 million. Let me focus on the box on the top right of this page, where we quickly bridge the EBITDA from last year. You see that the main drop is affecting the telecom business, EUR 25 million, fully in line with expectation, I have to say. On top of that, - EUR 7 million coming from the very tough first quarter of YOFC. Much more stable project and even slightly better than last year, the energy business. Of course, in the energy business, we have two completely different speeds.
We have North America, you have seen in the geographic results, in the regional results, growing very significantly in power distribution and the industrial businesses from last year. Some regions in Europe and the entire Asia Pac, much more seriously affected by the COVID crisis. Adjustments, pretty much in line with last year in terms of restructuring charges. We had, as we expected, a negative impact on the metal derivatives fair value, -EUR 36 million, which is driven by the very material drop of the copper price. This was no surprise at all. It is a temporary effect on our profit and loss, which will be reversed in the coming quarters, in the next two quarters, I would say. On top, it is a non-cash effect.
A significant decline on financial charges as well, and a group net income down to EUR 23 million, still positive, down, of course, from the EUR 88 million last year, affected by the operating profitability, read adjusted EBITDA, and also by the negative change of metal derivatives fair value. Let me quickly comment on the following page, the net interest expenses. Very nice drop. The net interest expenses, the first line of the financial charges, which is net interest expenses, is pretty much in line with last year, and also the full- year will be pretty much in line with last year, after having realized the EUR 30 million of synergies coming from the General Cable debt refinancing, which was completed very short after the acquisition.
The total financial charges decreased further and are benefiting of a material reduction of hedging cost for a number of technical reasons, from which we will benefit for the entire year. Balance sheet on page 16. Pretty good performance on the financial debt, down by EUR 300 million versus the equivalent March 2019, so EUR 2.6 billion, with a very strong last 12 months free cash flow generation. I have to say that even the financial dynamics that we see in the month of March, which, as Valerio explained, has been seriously hit in terms of volume, is pretty normal. It's pretty much in line with a normal year, with, for instance, last year's seasonality and the financial dynamics, which gives me and gives us very good confidence on the capability of Prysmian to keep generating cash in this difficult environment.
The positive driver of the debt has been working capital. You see that compared to March 2019, it has been down by EUR 180 million, roughly. This was pushed down by the project division. As a matter of fact, the level of working capital in project was pretty high in March 2019. It was an easy decline. We also benefited, paradoxically, of the reductions of volume. Because our average payment terms or collection terms from customer are shorter than our payment terms to supplier. A reduction of the activity volumes impacted first our receivable, and this happened in the first quarter. Whereas the impact on the payable, which is a reduction on the payable, materialize a little bit later, and this will materialize in Q2.
This to explain why our Q1 working capital benefited significantly of the activity drop, which will be an effect which will be almost totally reversed in Q2. Let me close on page 17 to comment the outstanding performance in terms of cash generation. Last 12-month cash generation, free cash flow exceeding the EUR 538 billion . EUR 100 million increase compared to the free cash flow of the full- year 2019. The big difference was achieved in working capital changes. You see a pretty dramatic reduction that is positive of EUR 228 million, again, driven by the project division, which performed a working capital pretty flat in the first quarter, and also by the receivable net of payable decrease.
The restructuring charges, on the other hand, increased a little bit compared to the full- year 2019, related to the payments, related to the South Europe industrial restructuring, which had an economic effect on the profit and loss last year, and which will have a financial effect in terms of cash out this year. Let me close with a very important page 18, where I want to highlight the position of our group in terms of liquidity and debt profile, also to convey our confidence on this position. First of all, and most importantly, our confidence on our liquidity position, which is extremely strong. As at the end of March, it is made of EUR 600 million cash and cash equivalents on balance sheet, plus a EUR 1 billion committed revolving credit facility, expiring by the way in 2024, so pretty long, and which is fully unutilized, so fully available.
On top, another EUR 400 million, I'm rounding number, of uncommitted credit lines that given our relationship with the bank system, to me, are like committed credit lines. This was the first point. The second is the average debt maturity, which is pretty good. On average, 3.1 years, which is long. You see, bottom right, the profile of our debt maturities in detail. You clearly see that we don't have significant maturities before 2022. The 2022 maturities that most likely we have to deal with end of 2021, so we have more than one and a half year to start and deal with that, are maturities on the capital market, the euro bond and the convertible bond zero coupon, respectively EUR 750 million and EUR 500 million. Even longer are the maturities on the loan market.
With the acquisition term loan of EUR 1 billion, which was contracted for General Cable acquisition, expiring in 2023. Even longer, as I mentioned already, the revolving credit facility, which will expire in 2024. We are extremely comfortable with our position, both in terms of liquidity and in terms of not being obliged to tackle short-term and urgent debt maturities. Good. I think we can move forward with the Q&A session now.
Thank you. As a reminder to participants, please press star and one if you would like to ask a question. If you would like to cancel, please press the hash key. That's star and one to ask a question. Your first question comes from Max Yates from Credit Suisse. Please go ahead.
Thank you. My first question is on the SuedOstLink and A-Nord contracts that you've booked. I just want to understand, given the delivery dates of those are quite far in the future, when do you expect to recognize the revenues for those contracts? Will it be evenly split between now and delivery, or can it be more front-loaded than that? As an extension of that question, when you look at your backlog today and the delivery schedules across your backlogging projects, does it point to you that 2021 should still be a very strong year of growth, both in terms of installations and cable production? That's my first question.
Thank you, Max. I leave the answer to Francesco.
Let me comment on the timing of the execution of these two very important projects. The SuedOstLink and the A-Nord. The timing is pretty different in the sense that the SuedOstLink should be the project with the fastest execution, and actually should positively affect our profit and loss already in 2021. Not this year, next year. Then should have, in our idea, a pretty linear or pretty stable distribution for, if I'm not wrong, three years from 2021. Differently for A-Nord, which has a longer, which was awarded, more or less, with the same timing of SuedOstLink, as you have seen, but has a longer execution timeframe, and actually should start to affect our profit and loss in 2022, even 2023. Marginal in 2022 and main impact in 2023, for the simple reason that the delivery time to the customer is much longer in time.
Because it is required by the customer. From a certain point of view, Max, let me point out that it's even better. Obviously, having everything together may represent a problem. It's better to have more diluted the execution of those projects, because the experience to execute is helpful. It is true that we already did the France, Spain, and the France, Italy that is still under completion. We have a certain experience. That's a slightly different product, and it's better to have a progressive experience in doing it.
Okay. Should I assume when I look at your backlog that across the extruded cables, across the mass-impregnated and installation, 2021 should still be a relatively full-year, or are there any gaps that need to be filled by order wins for the rest of this year?
Let's talk about 2021. For 2021, MI cables is fully booked. Consequently, no problem on it. The execution problem, obviously. For extruded cables, the SuedOstLink is going to help, but not oversaturating our capacity. Let me say that the second half 2021 will be a good part of the year, not extremely buoyant. Did I answer to your question, Max?
Yes. That's helpful. Just the very final one was on the energy products division. Obviously, had a very good performance in Q1. I just wanted to understand, when you look at the April developments across E&I and energy products as a whole, if you showed the margins and the EBITDA, would we see similar resilience to what was shown in Q1? Did that favorable mix and favorable regional mix still continue into April?
Yes. What has helped us in the first quarter has been the geographical mix. North America is doing very well. Crossing fingers, I hope that the COVID impact will not damage too much this trend, I don't believe, because the administration needs to keep the business running. In the second half, especially the fourth quarter, we expect North America to lower the speed simply because the incentives for the power distribution, renewable energy, the wind farms, the land wind farms, are expected to complete, at least with the current scenario, to complete the incentive, consequently, to slow down a little bit.
Okay. Perfect. Thank you very much.
You're welcome, Max.
Thank you. Your next question comes from Lucie Carrier from Morgan Stanley. Please go ahead.
Hi. Good afternoon, gentlemen. Thanks for taking my question. I have three, and I will go one at a time. I was hoping maybe that you could help us to understand a little bit, what you see in terms of current trading in your industrial business. You gave us very helpful data on E&I, but I was hoping we could get a bit more color on how we exited the first quarter in industrial and what you are seeing so far in the second quarter.
Okay, Lucie. It is not easy, because your question is not easy to get an answer, a proper answer. Why? Obviously, the E&I market is the fastest. We know it's the first to go down and it's the first to ramp up. The industrial business has a different order backlog and have to be differentiated segment by segment. For instance, automotive. Automotive is a disaster. Everyone knows, and we know, too. We have been almost surprised of a decent resilience in the first quarter. Now the party is over. Out of our 106 factories, if I'm not wrong, at least three are on hold and are automotive plants, because there are no orders. Obviously, automotive will be also one of the first to revamp when the business will restart.
When it's going to happen, it depends on the region, but I strongly believe that in the second quarter, there will be a restart also for automotive. I have to be clear that the automotive business is not changing our numbers, not significantly, because the turnover, of course, change, but the margins are so limited that are not affecting positively nor negatively our profitability. The other segments of the business, I can give you some color. Mining. Mining is not doing very well. The, let's say, infrastructure, generally speaking, are quite resilient. Crane has recovered, and the rest of the business is almost flattish. We have to see the second quarter, because the second quarter, with the stop of many industrial activities in Europe, may suffer a little bit more. We expect, honestly, in the second quarter, the biggest shrink of the year.
Thank you very much. My second question, if we could go back maybe to the German corridors contract. One of your competitor has publicly stated that they felt the terms of the contract were too risky, and the contract were not necessarily incredibly profitable. I would be interested to have your take on what you think about the risk profile of this contract and how you think about managing this. Overall, in terms of profitability, when we look at the value per kilometer, it seems significantly higher than what we are seeing sometimes on other land high voltage contracts. Your take as well in terms of the overall profitability profile of this contract, versus your traditional land high voltage, would be helpful.
Thank you, Lucie, for the question. I understand the doubt, in brackets. You know the history of Nondum Matura Est? No. Okay.
Sorry.
It's almost Latin old story. To be very clear, the term and condition of the contracts are not worse than a typical submarine project. Are more or less in line. We have been negotiating hard. Thanks to God, at the end, we found an understanding with the two customers. The third one has still to be finalized, and is the biggest. I consider the term and condition of these two projects in line with the risk of the other projects, especially the submarine. It's clear that there is a difference. Which is the difference? That there is no one kilometer of 525 DC extruded working underground since years. Simply that. In order to mitigate this risk, the risk of production, at least, we produced 20 kilometers of this cable at our cost, 10 kilometers for the XLPE and 10 kilometers for P-Laser.
That was the maximum was possible to execute by ourself to protect the risk. Unfortunately, was not possible to install it and to run the cable for a long time, but that mitigated as much as possible the risk we suffered with Western Link, just to be very clear. The risk we suffered with Western Link has been the extension of the production from the prototype to the real production and the manipulation, the handling of the cable during the installation. Okay. I have to say that from the reward, obviously, that's a very important project. It's projects that are the milestones for the future of the energy transition. That's why we accepted the contractual risks, because or you are in or you are out. That's forever. Did I answer to your question, Lucie?
Yes, you have. Thank you very much. I guess my last question, you mentioned earlier, some of the medium-term perspective for your business, including in telecom. I was wondering if you are seeing currently in China an accelerated level of discussion around the 5G deployment, because some of the commentary we could see was suggesting that part of the stimulus would be to accelerate maybe that deployment. I was just curious to hear about your channel checks around the 5G deployment in China.
Almost every day, for sure every Monday, I have a call with our China team to check how the things are moving there. I consider China, at least in this season, at the forefront of what's going to happen in the world, starting from COVID. We got a lot of informations and lessons from them. Now, 5G. 5G is going to come. When? I cannot tell you because I don't know. For sure, if it's going to come, will not be business for us because we are not Chinese, or we are not considered Chinese, and consequently, we have no access to this business. Of course, the 5G start in China will reduce significantly the pressure on the telecom business in the rest of the world.
Even if, today, I have to say, we have been able to demonstrate to ourselves that we can compete with Chinese, at least out of China. In Europe, we are the market leader, and no doubt. Also in South America, in many tenders, we have been able to compete from our sources with the Chinese crazy prices, obviously leaving some margin on the table. We don't see, for the time being, because that was your question, we don't see a revamp of the demand into China, at least for the time being, a significant revamp. Probably we need some more quarters. For sure, the Chinese government wants and need to relaunch the investment, especially in the telecommunications. Consequently, I expect that the 5G will start as expected.
Just maybe on that, Valerio, can you remind us the position of YOFC in China on fiber, please? Their competitive position.
YOFC is the market leader in China.
Is the market leader, is not the double of the number two, but is the market leader. YOFC can compete, of course. They, one year ago, you remember the tender of China Mobile in the springtime 2019. They did not accept the crazy prices put on the table by other players. They've been suffering for one year, six months, the drop of the volumes. They are able to see it. Prices are not always aligned with the costs, and it depends on the appetite. I believe that YOFC is the strongest Chinese player of the market. We do not control, but we are cooperating with them.
Okay. Thank you very much, and stay healthy.
You're welcome, Lucie.
Thank you. Your next question comes from Monica Bosio of Banca IMI. Please go ahead.
Good evening, and thanks for taking my questions. The first one is a general question. How do you see the energy project ordering take and the market once the entire German Corridor will be fully assigned? Just to have an idea what is coming ahead. The second question is on the SuedLink. It is double in size. I can imagine also in value terms. Do you expect to get, I can imagine, a lower share in this last tender? I was wondering if this will require additional CapEx? If you can give us an indication of the CapEx expected for the full-year. Thank you very much.
Okay. Thank you very much, Monica. The German corridors have arrived finally because are at least two years. I was meeting one of the board member of TenneT some years ago, talking about the German corridors to be executed because the utilities in Germany are losing money because they cannot dispatch and sell all the energy produced by the wind farms in the North Sea. Sooner or later, was a necessity to execute it. Now are on the table. We got 50% of the first two. There is the third one, the biggest, that counts as much as, even more, than the other two together. We are in the race. A race that most probably will be finalized, not for the market, but internally, in the next 15 days.
Being the double of the other two, I expect to have possibly our market share, because we got more than our market share in the first two. On the third one, I hope to be able to catch 30%-25%. It depends. I hope to make you happy.
Yes, for sure.
Once you are swimming, because you are in the water, you have to run. No way.
Yeah.
Doing 2,000 km or 4,000 km, who cares?
I can understand. How the energy transition process can evolve after the German corridor, because do you expect a change in pricing other tenders in the next years, maybe not at the same site?
Not very much, because unfortunately, once the market grows, the capacity grows, too.
Yes.
Going to your second question, we will need a little bit of additional CapEx for the German corridors. It depends on the result of SuedLink. If in case, we will be forced to invest a little bit in the French plant to increase the capacity for the very high-tech extruded extra-high voltage. It's not a very big number. Anyway, the cap of the CapEx is there. At EUR 200 million, finito.
Okay.
If someone enter, someone less important have to exit.
Fine.
Okay, EUR 200-EUR 205, doesn't change very much.
Okay.
As you know, we have reduced the CapEx for 2020 by EUR 50 million, including the new ship. Obviously, that's a quite strong effort, but no way. We must do it.
Fine. Thank you very much.
Thank you to you, Monica.
Okay.
Thank you. Your next question comes from Akash Gupta from JPMorgan. Please go ahead.
Yeah. Hi, Valerio and Francesco. Thanks for your time. My first question is on slide number 10. Thanks for giving the granularity about these trends by region. I'm just wondering that if you have to split out, at a group level, how power distribution is doing against T&I, can you help us understand, is it doing better or worse or, especially in the month of April, how the trading has been in power distributions? That's question number one.
I leave the floor to Francesco.
Hi, Akash. Definitely, there is quite a difference between the trend that we see in place for T&I and the power distribution, in the positive sense for power distribution. In a way, of course, we see a drop of power distribution in Q2, but the order of magnitude will be, and this we clearly see already in April, completely different from the one that we see in the construction-driven T&I business, which was the first to react negatively to the COVID crisis. I think 50%, more or less, of our PD volumes are related to North America, to the North America region, and even more in terms of profitability. Let me say that so far, and also in April, we are seeing these volumes holding up pretty well. That's very important, because Valerio showed the E&I trend for all the regions, including North America.
Actually, for North America, we should split this in two, because the trend for T&I in April in North America is already hit by the COVID crisis. Much less is the impact for power distribution, which is, by the way, renewable energy driven, and which is much more stable in the month of April. We hope, let me use the term hope, that this stability will be confirmed also in the following months. On the other end, for some European regions, for instance, South Europe. The negative impact in April and in Q2 in general, will be in place also for power distribution. As a whole, power distribution is performing and will perform much better because it's strongly driven by the North American locomotive.
That is going to be a fact till year-end.
Yeah.
From the year-end onwards, have to be seen, because it depends largely on the incentive.
By the way, Akash, if I may add one point, this strength of the PD business in North America is also very important from the profitability point of view. The level of margins, this applies to T&I as well, but even more to PD, is significantly higher in North America. I have to say that if volumes of PD for North America represents 50%, more or less, our entire power distribution volume, if we look at contribution margin or EBITDA, is more two third or 60%-65%. The resilience of North America in power distribution, but also in the industrial business, is extremely important for the resilience of our overall group result. Let me express some confidence on that. Of course, without having any crystal ball, which is in this period of time, would be unnecessary.
At the end, let me say that we are reasonably happy to have invested so many money in taking over General Cable.
Thank you.
Thanks.
My second question is on Telecom business. I see that most of Chinese production is coming back online after Wuhan has reopened early this quarter. If you can talk about what is happening on competitive and dynamic side, like what are you seeing on pricing? Given the way how we have seen lockdowns impacting your Q2 performance, is it fair to say that the Q2 margins in Telecom could come down to high single-digit levels?
That I don't believe. Frankly speaking, a single digit margin seems to be too tough. Should remain in the level of the first quarter. You have to consider that in the first quarter, our margins have been impacted seriously by the disappearing YOFC, that we expect is going to come back. The prices have been impacted, that's true. Even our costs are going to go down. Consequently, we are able to react and to defend our position.
Obviously, in a market like the European market, we cannot give up. We are the market leader, and we have to keep the position. In a market like U.S., we are the number two behind Corning. The price, Chinese are not welcome in U.S., especially in the telecom business. Consequently, the prices are not so terrible as China and other regions. In South America, we have seen that we are able to compete. Obviously suffering and paying some margin.
in the rest of the world, a nice game every time, tender by tender. Sometimes we win, sometimes we lose. The prices will not revamp, that's quite sure. In a commodity, rarely the price goes up, unless we are going to touch the max capacity available.
Thank you. Sorry, go ahead.
The Chinese have created so much capacity that the problem of the capacity is not anymore on the tables. I don't know if Philippe wants to add anything.
No. Hello, everyone. I think what you said is a good summary. I don't see our margin going down to single digits for the main reasons, Valerio, you just described. We work hard as always. We've always worked hard on our costs, and we are able to compete. That's the essence of what we do. That in China, we are not directly acting. In China, there is YOFC, we are a shareholder, and so we leave it to YOFC, actually. I expect indeed YOFC to have better quarters to come. I have heard, like everyone else, that China has announced an acceleration of the 5G plan. So far, it is only words. I believe it will translate into action. I don't know at which speed, and the next big element to understand the trend in telecom will be the next China Mobile tender, that's expected for
If I understand properly, the end of May or the beginning of June, this will be a moment in which we will understand the other trends in China. Thank you.
Thank you, Philippe.
Thank you. My final one is on restructuring cost. You said earlier that you haven't fired anybody since COVID-19 crisis, maybe if you can talk about what should we expect for the full-year. Should we expect higher restructuring cost? Maybe because you may want to do some restructuring, which was not possible otherwise, or should we expect lower? Any feedback on that would be.
No. First of all, as a result of the COVID crisis, we don't necessarily expect an increase of the restructuring costs, because as Valerio stated very clearly, our idea and our confidence is that we'll be able to preserve our workforce without acting on that because of the crisis. Because we believe it's a temporary crisis, wouldn't make so much sense. The COVID should not impact the restructuring costs significantly. In terms of profit and loss of economic impact, the restructuring costs will be significantly lower than last year. Last year, if I'm not mistaken, we had restructuring cost in the region of EUR 80-EUR 85 million, I go by memory. Let me say that we expect more or less one half of these restructuring costs, even less than one half for 2020, from the profit and loss point of view.
Differently, the picture for the cash point of view, because the cost charges that we took in Q4, due to the Spanish industrial restructuring, will mainly have cash outflows in 2020. Actually, you already see this in Q1. If you take our last 12 months free cash flow chart, you see that the restructuring cost increased compared to the full-year 2019, meaning that Q1, in terms of cash outs, Q1 2020, was higher than Q1 2019. In general, I expect that restructuring cost cash-wise, will be, in 2020, in line with 2019. One picture for the profit and loss, a different picture from the cash point of view. Clear, Akash?
Yeah. Thank you. I'll go back in queue now.
Welcome.
Thank you.
Thank you. The next question comes from Sean McLoughlin from HSBC. Please go ahead.
Thank you. Good afternoon. Can I just come back to the German corridor project? My first question. In March, you said the terms and conditions were not acceptable. What's changed? Did you receive concessions from the customers, or are you simply more comfortable with the risks following your 20 km of test runs? I'm just thinking on my second question, and following a little bit on from Akash's question, how does COVID impact your synergy targets for 2020? Is there a risk that some of these are postponed into 2021 and beyond? Thank you.
Thank you, Sean. No, to be clear, on German corridors, we have been negotiating very much with the customers. Having Hakan in U.S.A., Hakan Ozmen, that is listening, I believe.
Yes.
We spent most of the evening and night during this pandemic lockdown on calls to discuss what could have been accepted and what not, for all the projects. Hakan, can you confirm it?
Yes, Valerio, if you allow me to add. It is always a negotiation, as you said, and we were at the very beginning of the negotiations. Again, it's incorrect, actually, to comment on things that are ongoing during a negotiation. Therefore, the positions are changing. What Valerio was saying is absolutely correct. Versus the technology and the implementation, we see the terms and conditions, at the final agreement, in line with our expectations. Definitely, before you start to have the request evaluated, you may have higher expectations. The final outcome is pretty in line with our expectations, as Valerio said.
Term and conditions are not easy, as well as all the other big projects. I think that are manageable. The real big risk here is that the technology is not going to work on a larger scale. Obviously, that's a risk that all of us have to take care of. We have not very big concerns about it. I have in front of me Srini, the head of R&D of the Group, and
He is very confident with what we are doing. The COVID and impact on synergies.
Yeah.
Of course, the COVID is going to delay a little bit everything, but for a minimal number of months. In the full-year, we don't see significant impact due to the spread. We are moving as fast as possible in the South European restructuring, and we have already closed one plant, and we are going to think when is most convenient for us to close the second one. That's it. It's done. I believe that we can do it as per the plan.
Very clear. Thank you.
Thank you for you.
Your next question comes from David Barker from Bank of America. Please go ahead.
Good evening, everyone. I've got two quick questions. Firstly, on cost savings. I think you've given good detail on travel, and we know how much that is in the P&L. I was just wondering, what are you calling as part of your 5%-10% of other fixed costs in an absolute number? Also, how much can you save on personnel costs? Is there any possibility you could quantify those two numbers for me? Then secondly, on projects. Clearly, margins deteriorated quite significantly versus Q4. Is there any further granularity you can give us on the drag from oil and gas and telecom submarine on margins this quarter? Thank you.
Okay. Cost synergies. Obviously, as soon as the COVID spread has started to hit our perimeter, we have been thinking how to react, because it was essential to reduce the break-even point. You know that one of my most challenging target is on the fixed costs, and analyzing with the team, we decided to claim for a drop of the fixed cost by EUR 50 million. How? First of all, the travel. Secondly, the hiring. Reducing the substitution and the hiring of all the people. Blocking the salaries of everyone, and all the other expenses that are not vital for the company. We have already deployed the goal of EUR 50 million. Now we are in the execution phase. We have been also trying to launch a reduction of the cost of our purchasing raw materials, and not only raw materials, everywhere in the world.
That's much less trackable than the fixed cost, but we hope to be able to realize some other cost savings that are variable in that case, other than the fixed. Asking support and help. Massimo, maybe that can give you some more color because he has already started in the U.S. Second question, projects. Your question was the margins projects.
The oil and gas reserves and the submarine telephone.
The SURF is on hold. That's the problem. We are thinking what to do with the South American SURF activity. Why? The cost of the oil is so low today that there is no way for the oil companies to invest money in the very expensive extraction of oil from deep submarine activity. We made probably a mistake years ago when we decided to invest in the new plant in Vila Velha. No way. We have to find a solution, and I don't believe that we revamp. That's, most of all, the most important way because oil and renewable is substituting progressively the oil, and that's for the benefit of the people. I'm a full supporter of the switch from oil to renewable. We are one of the big players for renewable. Makes no sense to keep investing in oil. We have, and we have to manage.
Of course, we are not investing there, and we are not expecting significant revamp. Maybe that we revamp, but the question is for how long? For the telecom submarine, is more or less the same. Is a one-off. We got a quite good project in Chile. We execute it now. If something else will pass from, we come, we will take it. If not, no way. Is not the business we are looking strongly for the time being. We are too little. We are not a dominant player in the telecom submarine business, and we cannot be the number one everywhere. Consequently, be prudent. In other words, if that's the question, we don't see any significant recovery, if not due to some spot activities coming into our hands.
Understood. Thank you.
You're welcome.
Your next question comes from Daniela Costa from Goldman Sachs. Please go ahead.
Hi. Good afternoon. Can you hear me?
Yeah.
Okay. Well, anyway, I only have one question left, which is actually a follow-up on these last questions, but it's more on looking at the high voltage margin and the fact that it is kind of flattish year-over-year. I know the industry had a tough supply/demand balance over the prior few years, but as yourselves, your order intake is recovering, probably getting closer to what your 2014, 2015 levels of backlog were. Across the industry, everyone now is more utilized. Is there any reason why we shouldn't think that margin could significantly recover closer to the levels that you had back in 2015, 2016, in terms of profitability? What would be the rationale for that not to happen?
Hi, Daniela. Francesco speaking. We already highlighted with the presentation of the full-year results that in 2020, we didn't expect any particular increase of margins and results from the project division, for the simple reason that the German Corridor impact is to come in 2021, and even on a longer timeframe. Certainly, we are improving a lot our operations and our execution, and this is helping improve margins. It's a fact that compared to the intake going back a few years, the recent intake, already since a couple of years, have come at a slightly lower margins. This was already clarified a few quarters ago, let me say. Now we are executing some projects which are a little bit less profitable than the ones that were executed in the years that you are referring to.
It's possible, in my opinion, to stabilize the level of margin. Of course, we have to work very hard on the execution of the projects, on the operations, and avoid any minimal hiccup and try to recover all the, let me say, I'm not calling this price pressure, but the lower margin project mix that we had in the last 12 months, 18 months.
My question was more like as you look out like 2022, 2023.
That is
Yeah.
Is a very long timeframe.
Now everyone is at capacity. All the players.
Let me just give you a comment that by that period of time, we should see a very good impact coming from German corridors. If we assume that we will, as we hope, will have our share also on the SuedLink, we will start and see an impact coming mainly from the SuedLink in 2021. The main kick in terms of impacts and therefore margins, will come in 2022 and 2023 with the, hopefully, SuedLink and certainly A-Nord, because the A-Nord, we have already been awarded. Difficult to envisage or to anticipate which impact the German corridors capacity utilization will have on the pricing. The industry will have a tight capacity utilization. There is no doubt. Because some players are using for the high voltage of the German corridors, the same capacity that they are using for submarine business.
Theoretically, one could even expect a tight capacity utilization on the submarine business as well. In my opinion, we have to wait for the facts to come and see if this theory will translate into reality.
Unfortunately, Daniela, the time to grow the capacity is not very long. It is 12 months, 24 months. The capacity can be adapted quite quickly, reasonably quickly, at least. If a problem of availability will come, will be for a limited number of quarters. If the demand will grow, and I hope that will continue to grow, because after the German corridors, there will be other link to be realized to move the power from one region to the other into Europe. The capacity will follow, no way.
Okay. Thank you very much. Very clear.
You're welcome, Daniela.
Thank you. Your next question comes from Alessandro Tortora from Mediobanca. Please go ahead.
Yes, hi. Good evening to everybody. Okay, some questions have been already answered. Just three, let's say, flash questions, if I may. The first one is on the tax rate. I know that quarterly tax rate is not, let's say, extremely relevant, but if you can give us an idea of, let's say, the increase and what's your expectation for the full-year. The second question was on, clearly, we saw the results of the, let's say, the last tender, A-Nord. I also saw the presence of Sumitomo. Can you give us, let's say, a comment on that? Clearly, if I remind well, this is, let's say, the first important award, okay, from a non-European player for this type of project. The last question, yes, was on the margin on the telecom.
Clearly, in the first quarter, we saw a very good result considering the minus, let's say, almost 20% decline in organic terms. Do you consider a reasonable guidance, the margin dilution we observed in the first quarter, clearly taking out the share related to YOFC? Thanks.
Okay, the first question I leave to Francesco.
The tax rate, the 35%, 35.5% that we have put, I think, is a reasonable estimate for the full-year. Let me comment that, of course, as you know, the tax rate you estimate based on the forecast for the full-year. The EBT, the earning before tax forecast for the full-year. This COVID crisis doesn't contribute to decrease the tax rate because some geographies, and let me highlight, for instance, some countries within South Europe are going to a level of, I'm talking not of EBITDA, but earning before tax, to a level of little loss. When you have some geographies going into a loss, even temporarily, the tax rate normally increase because conservatively or prudentially, we don't accrue deferred tax assets on these losses.
This just to make an example why the tax rate, normally when the profit and loss is it, normally the tax rate tends to increase.
Your second question, the position of Sumitomo in the German corridor. Sumitomo is a very reputable player. We have seen them in the Nemo Link, in the submarine. Let me remind you that Sumitomo has its own compound, similar to our P-Laser. It's different, but at the end, it's the same concept. Consequently for them, it was very important, I understand, to prove the ability to serve the European market. That is today, the market, with their technology. Okay, welcome. What I can say.
Okay.
That's clearly the appetite of Sumitomo for the European market. Sumitomo is a very serious and reputable player, so I have no doubt that they will be able to execute the project in a proper way. Obviously, maybe not so easy for them to act in an environment that is an European environment, but for sure, they'll be able to adapt themselves to it.
Okay.
Telecom margin. The Telecom margins we have seen in the first quarter seems to me reasonable.
Sure.
As you have seen, someone, Akash, if I'm not wrong, asked if we could have been at one digit margin. No, I don't think so. I don't think so, at least for the time being, because for the Asian suppliers to further drop the price of the fibers will not be easy because we are really running at a very low cost, low price. The cost cannot be shrinked, for the time being, much more than it's going to be. I see a modest double-digit margin as a reasonable outcome for the next quarters, at least.
Okay. The last question, Valerio, I promise is the last question, is on the working capital on sales. Clearly, this year, considering, let's say, the current results on the two German corridors, you are going to get the advanced payments. If I remember well, clearly the guidance now has been suspended, but the EUR 300 million free cash flow was already including part of the advanced payments. Is it correct?
Correct. Of course.
Okay.
Correct.
Okay. Clearly, if I remember well, we are not talking about, let's say, the success ratio, because clearly now we already got EUR 1 billion and clearly during the last tender. In theory, can I say that this could be a potential upside for you?
Can I say it again?
Let me comment on this, Alessandro.
[Non-English content]
Yes. On the down payment specifically, you can say that. I think that, depending on the result of the SuedLink, we may end up having an order intake on the German corridors, which is certainly higher and consequently down payments, which are higher than the ones that we projected in our management plan. Of course, the project business picture is more complex because you have also milestones to be achieved in Q3 and Q4. These milestones, if you take a normal year, normally imply collections in Q4 between EUR 400-EUR 500 million collection from customers. You understand that depending also on the COVID crisis and the speed of manufacturing output in the project division, the achievement of these milestones, or some specific milestones, could be slightly delayed.
It may well happen that this upside that we have in down payments is compensated by downsides, I hope not, of course, but by downsides that we have in the achievement of project milestones. This for the project business. Looking at the entire cash flow picture, as Valerio said, we certainly have a positive effect coming from the lower CapEx, because given the environment, we have soundly decided to contain our CapEx level by the EUR 50 million that Valerio mentioned. I expect that working capital all in all, other than project, will not have a huge impact throughout the year, will have a quarterly impact. We have seen working capital decrease a lot in Q1.
I think we will have a partial recovery of working capital in terms of growth in Q2. Then depending on the speed of the recovery in Q4, we will have certainly a buildback or a buildup of working capital. Frankly speaking, I don't expect that working capital will play a major role other than project to affect our yearly cash flow. Then what is left is EBITDA, of course. EBITDA is a direct impact on cash. Let me say that as you have heard, we have withdrawn our guidance. Let me take some time to come back on this and update the free cash flow guidance when we will update the adjusted EBITDA guidance.
Okay. Grazie. Very clear.
Prego.
Yes.
Thank you. You have one more question from Monica Bosio from Banca IMI again.
Yes. Thank you. Just a very quick follow-up. Terna has announced in its strategic business plan, roughly EUR 3.5 billion of investments for the Tyrrhenian connection. I was just wondering if you can give me some indication, because I understood that the tender for the first tranche of the Tyrrhenian Link might occur in 2023, and it could be worth just the very first lot, roughly EUR 900 million. I was wondering if you can give me some indication, if you have, about the weight of the cables in this tender. Thank you.
Okay. Clearly, the Tyrrhenian Link is going to be a very long connection.
Yes
in the Tyrrhenian seas. It was planned to have a meeting with the Terna team in April. Unfortunately, we have been obliged to postpone it. I believe that is a need for Terna, is a need for European community, and will happen. If in 2023 or 2024 or 2022, I don't know. For the time being, the tender is not yet out. If the tender will come, we will be there for sure.
Okay. No more details so far because it's too longer term. Okay.
Not at all. Not at all for the time being, Monica.
Okay. Thank you very much. Thank you.
You're welcome.
Thank you. Your next question comes from Luigi De Bellis from Equita SIM. Please go ahead.
Yes, good evening. Just one question left for me. On the competitive scenario, a more complex macro scenario makes smaller companies more vulnerable and probably weaker. How do you think your industry, generally speaking, will be affected by this emergency? Do you think you will have higher market share after the crisis? Thank you.
Frankly speaking, Luigi, the answer is not, at least in the short, medium term. Why? Because the crisis obviously may create some trouble, but no one of the competitor is going to bail out, at least in the short term. I remember that in 2009, at the end of the subprime crisis, Draka suffered the crisis from the financial point of view, and the shareholders decided to give up, and we took over. May happen again? Who knows? Maybe. If that's the case, unfortunately, our balance sheet today is not sufficiently strong to take it into consideration, if it's going to happen to a big target. Maybe one or two years, why not?
Thank you.
Thank you.
Thank you. We have no further questions at this time. I would now like to hand the call back to yourself.
Thank you very much to everyone for participating to this first quarter 2020 financial result conference call of Prysmian Group, and see you the next quarter. Bye-bye.
Thank you. That does conclude our conference. Thank you all for joining. You may now disconnect.