Hello. Good afternoon to everyone. Valeri Batista speaking. We are here with the management team of Prisma Group and welcome to our Q1 2019
conference call.
1st page, the financial highlights. Organic growth sales went reasonably well, 1.9%, mostly thanks to very strong performance of telecom with almost 10% of organic growth and a solid trend in E and I In particular, power distribution went up almost 15.7%. North America+5 regionally. North America+5.4percent and LatAm plus 6%. So a quite good quarter.
Adjusted EBITDA closed at 1,000,000 8.3% on sales, comparable with the $198,000,000 in the first quarter of 2018, 72% of sales. Projects, not very well, unfortunately, as foreseen, because of the low order intake in the 2018 during the 2018. Energy. Energy went well in E and I, PD and DNI, regionally in North America, industrial and network components are most stable. Telecom.
Very strong volume growth in optical cable business with capacity increase, we realized that in fiber, and the manufacturing efficiency improving, increasing the output of the cable plants. On the contrary, the YOC country will in 2019 first quarter decline compared to the first quarter last year. The net negative one off of last year have been EUR 9,000,000 in Q1 twenty eighteen because the sum of EUR 20,000,000 negative link and the 11,000,000 positive one off in telecom, namely this translation of the last quarter 2017 of YOC. And obviously, the OE the famous OE provisions of this. Q1 2019, we modified the IFRS, with a positive impact of $9,000,000 on the EBITDA on the contrary, as you can see in the bottom in the bottom line, increasing the debt by EUR 159,000,000.
Synergies are going well with an upgraded in line with the upgraded plan we gave you last quarter. And the net financial debt or overall is $2,900,000,000, in line with expectation because of seasonality, but with the additional 139,000,000 due to the IFRS impact. Let's flip to the next page. Page 4. Sales, sales closed at was the $2,734,000,000 of the first quarter last year, with an organic growth of 1.9%.
Obviously, Here are we reporting the combined entities of Prisma And General Cable. The adjusted EBITDA On the same way, went up from 198 of Q1 twenty nineteen. Taking into consideration the famous 9,000,000 of IFRS 16. From the working capital point of view, the working capital is has closed at 12% compared to, ah, nice historical, 7, 8% 1 digit. That's because we took since the acquisition of General, all the working capital of General Cable and that's raised significantly our working capital.
We are still working on it. The net financial debt as a consequence of all of it has closed at $2,900,000,000, of which $159,000,000 coming from the IFRS 16. Without this impact, anyway, it was has been at EUR 2,761. Okay. Let's go to Page 5, the performance of the various segments.
Let's start with projects. Project went up in term of profitability, but not in terms of term of profit. As you can see, the profit went up from $52,000,000 to $38,000,000, with an organic decline of 5.3 percent that was expected because the poor order book of the poor order income of last year The profitability scaled up, but simply because the project in Q1 2018 has been affected by $20,000,000 provision for the first port of Wasserlink. E and I, E and I has increased from $50,000,000 to $65,000,000 the EBITDA, the organic growth has been 3.4% and the profitability moved up from 3.9% to 5%, not so bad. Industrial network component finally moved up from 36 to 39 with an organic slight decline of 1.6% and our profitability that moved up from 6% to 6.5%.
Last but not least, the telecom. The telecom moved down theoretically in term of EBITDA from 80 to 78. But you have to consider quarter. That is not replicable, obviously, this year, or it's replicable only for EUR 1,000,000. Consequently, the profitability went down from 20.1% to 18%.
Overall, the company moved well from 198 to 222 with an organic growth of 1.9% already commented and our EBITDA margin that increased from 7.2% to 8%. Not so bad. Let's move to the next page. Page 6, we tried to condensate a little bit more our presentation following some suggestions. Reached an organic sales negative growth of 5.3%.
This was was a return in the store because with the very low order income of last year, obviously, The saturation of the capacity is not very strong. And moreover, we have still previous the part of the payables that had been not delivered last year. You can see that the EUR 32,000,000 in Q1 2018 moved up to EUR 38,000,000 in Q1 2019, but in 2018, in the first quarter of 2018, we accrue at the EUR 20,000,000. Of course, we have to read as written in the right side of the column projects. Excluding Western Link, our profitability went down from 50 to 38.
Today, there is a very strong tendering activity, and we are confident that in the next weeks months, we are going to recover what we have lost in term of market in 2018. The market is sound. The market is still around about 1,000,000,000, even a little bit higher than the previous year previous last year was a little bit difficult, especially in the first half And we consider to be in a good position to reach our historical market share. Energy. Energy went reasonably well with an organic growth of 1.7%.
E and I, in particular, with plus 3.4 percent, moving up in term of EBITDA from $50,000,000 to 65 and in term of EBITDA margin from 3.9% to 5%. Industrial network component more stable, with 1.6% organic decline, but a better profitability in term of both EBITDA 36 that moved up to 29 and a percentage of the sales that moved up from 6 to 6.5 E and I, especially power distribution, we already commented that it's going very well. North America and Latin America are doing very well. Because the numbers you have seen are already affected by the already commenced, the negative market position of the overhead lines in Latin America. We suffered in the 2nd part of 20 18.
And we are still a little bit suffering, but do we expect in the second half of the year to recover the gas? On overhead lines business. The industrial component overall is going pretty well, especially parameters. Unfortunately, the automotive is very well known to all of you is vice versa shrinking. Last but not least, Telecom, you can see very clearly here that excluding the 1 off of 2018, positive one off of 2018, The result went up $11,000,000 from $68,000,000 to $77,000,000 Q1 2019 versus Q1 20 18.
Obviously, if we do not take into consideration the 1 offs, the results have been almost stable and the percentage of result has been even lowered from 20% to 18%. That's simply because of the one off contribution of YFC of the last quarter 17 and the OE effect that impacted the $6,000,000 if I'm not wrong. From the business point of view, the business is going very well for sure in Europe and in America. Obviously, you all know very well the situation of China, where it's not so much of volumes in the market, but there's much more a matter of pricing. Let's flip to Page 7.
Q1 sales are going to grow by geography because now geography have a rule. And the total sales have been SEK2.771 as you can see on the right side of the with an organic growth of 1.9 percent geographically. Let me say that North America, that represented $837,000,000 sales, went up in term of organic growth of 5.4 percent, with a strong performance of both of power distribution and telecom. Latin America, EUR224,000,000 with a plus 6% another very good trend. Driven positively by industrial and power distribution.
EMEA, that is still the largest region, by far. Slightly more than 50% of the total sales, 1,484,484, with an organic growth that is 0. But if I remove the 5.3 percent organic decline of projects that are completely or almost charged to Europe, the organic growth of Europe would have been 0.8%. That's just to give you the feeling of how the real business is going. In Europe, it's going very well.
The telecom and 2 unique projects, the organic growth, as I said, could have been 2.8 percent or is 2.8%. Lastly, as a pack, 226,000,000, we are not very very meat in Asia Pac with an organic decline of 1%. Mostly due to the lower telecom volume in Australia. That has been a very good business in the last 3 years. 3, 4 years and now is a little bit declining.
Let's flip to Page 8. About the synergies. Synergies are going very well, and that's one of our best performance in 2018, you know, that we reached the $35,000,000 synergies. In 2019, the expected number is gonna be EUR 120,000,000, a very important upside in the synergies. As well as in 2020, we expect to go far ahead at the 155,000,000.
And in 2021, the famous 100 75. We are faster. That doesn't mean that we can double the synergies, but they make much more reasonable than the goal to reach the 175,000,000. Finally, the guidance. Flipping to Page 10, 2019.
Target for EBITDA is confirmed in between of $9.50 $1,201,000,000,000 with a midpoint after $9.85. We see Theracom going well. Western Link obviously recovering at least all the negative swings suffered last year, but the projects not going very well because obviously, the short order book is penalizing us. Energy is improving. The ForEx is foreseen to be flat.
And the synergies are going to give us a significant upside. Did we consider the exchange rate flat all over the year. We confirm also the free cash flow outlook. To be round about $300,000,000, including after $90,000,000 of cash out because of the restructuring and costs. Okay.
That's it. For the details on financials.
Thank you, Valerio. Good evening to everybody. As usual, I comment leave a profit and loss statement. As Valerio said, organic growth in Q1 was quite solid, plus 1.9% carving out of a negative organic growth in the project business, organic growth ex project was in excess of 3% overall, driven by business wise, a very solid E and I performance, specifically in power distribution and even more, a very strong compartment, both in optical cable and multimedia and specialties, geographically, driven by North America and LatAm as well as your explained. And let me also highlight that the weight in the new combined group of North America representing now 35% approximately of the total adjusted EBITDA anticipated for 2019, makes the positive trends in North America very, makes the positive trends North America, very important because, of course, is a machine, is a engine, which can really boost the group's results.
In terms of adjusted EBITDA, it grew to 131 In this slide, we highlight the IFRS 16 impacts line by line, as well as already explained, the 9,000,000 positive effect at the adjusted EBITDA and also the reported EBITDA level. Let me say an earnings growth, which was even better, even better than we anticipated at the beginning of the year. In the box that you see right in the page, we included a very, very summarized bridge recapturing all the effects from the Q1 2018 to Q1 2019. $222,000,000 excluding the $9,000,000 IFRS 16 effect. And just to recap what Vale already explained, the main effects are the 20,000,000 a negative Western Link provision in the previous year in Q1 2018.
The 11,000,000 positive tell come one offs in the previous year Q1 2018 for a net a negative impact on Q1 2018 of $9,000,000. Then organically a decrease of projects EBITDA for $14,000,000 and a very positive, as I was saying, even better than expected growth in energy EBITDA of 1,000,000 of telecom EBITDA excluding YFC of 1,000,000 and a negative contribution or a decline of the EBITDA related to YRC for $4,000,000. Millbridge, the $180,000,000 $98,000,000 last year to the $222,000,000. This year ex IFRS 16 effect. Adjustments and special items were in total positive, negative for 11,000,000 adjustments and positive 16,000,000 special items, so a net positive effect on our earning before tax of $5,000,000, mainly driven by a positive change metal derivatives, fair value.
Financial charges are absolutely in line with our expectation and reflect the synergies coming from the very fast refinancing of General Cable Debt, which was done right up the closing of the acquisition in June July, 2018, and we are fully on track in terms synergies on interest expense. The group net income was particularly significant in the first quarter. As you see, 88,000,000, a very sharp growth from the previous year. I flip to the following page comment very briefly adjustments and special items, in particular, let me comment restructuring and restructuring costs are still pretty low in the first quarter, 4,000,000 total, of which only 2,000,000 related to the integration of General Cable, a little bit more cash wise of the restructuring cash outs were in the region of 8 $10,000,000 in the first quarter. And this is absolutely in line with the total restructuring costs over the 4 years, 3, 4 years of integration that we anticipated at a total cash amount of $220,000,000, as you perfectly know, despite and we kept a stable despite synergies upgrade to $175,000,000.
I flip to Page 14 to comment financial charges, in particular net interest expenses, $22,000,000, again, very much in line with our anticipation. I anticipated total net interest expense is for the full year around $90,000,000, which is a very nice drop from 2018, which was at a combined level at 100 and 3, so minus 1,000,000. And this comes after a reduction in 2018 from a pro form a 2017 old $35,000,000. So it's a huge if we accumulate 2 years, the 2 years of synergies is a huge reduction of the net interest expenses just to quantified synergies, total synergies are gross synergies on interest expenses amount to approximately 1,000,000. I move to Page 15 balance sheet, as Valerio already explained, the balance sheet is impacted by the new IFRS 16 effective since January 1st.
And you see that these impacts of the net fixed asset and the net financial debt for the identical amount of $139,000,000. So basically, the net debt of $2,900,000,000 before IFRS 16 effect, it's 2761,000,000, which is absolutely in line with our station and on track to achieve the 300,000,000 plus minus 10 of guidance in terms of free cash flow. Working capital moved significantly up from year end2018 And this is mainly the effect of seasonality, which is a seasonality on the and largely the effect of seasonality which is a seasonality on the enlarged perimeter, the perimeter, including also Generate cable, includes the increase of the working capital as usual in the first quarter or in the project business and these are the 2 main effects, whereas compared to March 2018, the equivalent period and of course, equalizing perimeter. Working capital was pretty stable. Let me explain this better on the following page where we tried to bridge cash flow and better to bridge the net financial position in the upper part of the slide, the last 12 months, from March 18 to March 2019.
And in the bottom part of the slide, from year end 2018 to March 2019. So one quarter only. Apart from all in the front, commenting the upper part of the slide, the last 12 months, cash flow apart from the let me say extraordinary or financial effect And I clearly refer to the Generali Cable acquisition, the 1,000,000,000 impact, the dividend and the capital increase and the IFRS 16 What really matters on this slide is the free cash flow generation over the last 12 months, as you see, over 51,000,000 apparently very low, but very important to highlight that this plus $51,000,000 of free cash flow before dividend is impacted by a EUR 240,000,000 negative impacts coming from the restructuring transaction and acquisition costs of Generali Cable, these are cash effects and also from approximately 90,000,000 cash effects negative cash effects related to the Western Link issues. So of course, these are $51,000,000 plus 240,000,000 reached almost a 100,000,000, which is, in my opinion, before the growth of EBITDA that we will certainly enjoy with the progression of the quarter. A very significant and very positive free cash flow performance.
Whereas for the lower part of the slide, as I commented, the Q1 evolution, the net financial position increase is affected by the working capital changes, which mainly stem from the seasonality also on general cable perimeter and the increase of working capital in projects. Let me conclude with a very quick summary of a debt profile. As you know, beginning of April, we refinanced our revolving credit facility of 1,000,000,000, which was due in June 2019, we refinance this with a few months of anticipation or advance And moving this maturity to 2024, as you can read from the slide, we significantly improved the average maturity of our bet, which increased the 2 on average to 3 0.7 years. So commenting the repayment made of our debt, these supplements that we don't face any significant kept maturities before 2023. And we don't face any significant capital market, mini bones, maturity before 2022.
So our debt profile is very comfortable. It's very, very longer. Let me also highlight that with the refinancing of the revolving credit facility, we enjoy an even stronger liquidity and financial flexibility than before. Let me highlight, as you see, in the left part of the slide that the interest rate is almost fully converted to fixed 8,000,000 that we are not exposed to any risk of hike of increase. In interest rate, let me also highlight, finally, that our covenants are not impacted by any projects one offs, which affects our profit and loss because these are carved out from the maybe carved out from the calculation of our covenants.
I believe I finished my presentation so we can go ahead with the Q And A session.
And the first question comes from the line of Benjamin Zekares from Goldman Sachs. Please go ahead.
Hi, good afternoon. Thanks very much for taking my question. I've got 2 questions. One of them would be around the projects and the tendering that you expect, you said that you see very strong tendering going into 2Q, and you still see the market's around SEK 3,000,000,000. And I was wondering if you could kind of give some color around whether you still see strong tendering environment in the U.
S. And Asia. And then obviously if you could provide us with any update around Viking Link that would be much appreciated. And I believe with 4Q 'eighteen results, you also mentioned a big project in the Mediterranean possibly in 2019. If you have heard any updates about that, it would be much appreciated.
And then just the second one around telecom, you obviously had very strong organic growth with Europe and North America going well, but China weaker on pricing. I was wondering if you could give any quantitative sort of color around the contributions of the different regions to the telecom growth? And if you have any visibility there, that would be great.
Okay, Benjamin. Thank you very much for your questions. 1st of all, the tendering status on projects. Provided that the answer to Viking will be no comment for whatever question is going to come. Reality, the tenders are in the market.
There are even pretty huge networks. And not only in Europe, as it has been in the last year, but also U. S. And Asia. Okay.
Taking to consideration that the Asian tenders are not of limits for us, but are not very comfortable. We consider vice versa, the U. S. Market 3,000,000 portal for us. And we are waiting for our 1st sizable orders in the next The other question for projects was related to the Mediterranean project.
Irreality, there is a big project that is going to come is expected to come into the Mediterranean sea. It's a little bit yearly in order to comment on it is there is more than one project. Franc speaking, because the connection of the island is becoming crucial for matching the 2020 commitment on the solution. So One project is under discussion. The under is drafted, but not yet in For the telecom, I would like to leave the floor to Philippe Vanil that is here around the table with me.
To explain you about the organic growth by region.
Good evening, Benjamin. So I would say that in the optical business, we enjoy double digit growth everywhere. Everywhere except one place, which is Australia. So as you know, we are mainly acting in Europe both America and South America. And in all these three regions, we grow double digit.
In Australia is the other way around. We are finishing because of the end of the NBM project that was, anyway planned. And on top, you have to add the copper traditional business that is shrinking everywhere. Except in South America where it is growing for us, really also double digit, but on the, of course, on the smaller scale. That's the color you were requesting.
I think in China, As you know, we are not acting as Prismian. So, we are China, but at this stage, at least.
To be clear, Benjamin, in telecom, we enjoyed our season for some years with the NBN project in Australia. Once when these big projects go to an end for a while or for a number of years, the market obviously has a contraction that is double digit. Just to be clear, the organic decline in Australia for telecom optical has been double digit. And is not starting with 1,
because that's the name of the game. But today, the decline of Australia is clearly offsetted by the growth that we see in North America and EMEA. That's clear.
The market overall is growing. That's a locally Yes. That's
very clear. Maybe just on the visibility aspect. Much visibility would you say you have just across regions in telecom?
The visibility on the margin of the EBITDA. We see Can
you repeat the question? Sorry, because No one of us has understood very well.
I was just wondering how much visibility you have in terms of the double digit growth continuing in the regions where you have been experiencing that growth?
We see we see solid growth in Europe and North America. Listen, double digit I don't know. We are following the market that is growing, thanks to our investments. To say now that it's going to be double digit in the long run for a long time. I don't know, of course, but
if I can, last quarter last year, in first quarter, the market for Theragamo was not very brilliant, nor we have been very vigilant. The reason why the organic growth was moderate. Obviously, on a basis of our first quarter 2018 IT moderate, it has been much easier to reach a double digit in the first quarter. That is not expected I personally do not expect to replicate quarter by quarter for the full year. The reason why when we talk about the organic growth for us for telecom.
We talk about, we talk about, single, larger issues.
Which is still our view, high single digit low double digit. It's not very far. It's not accurate enough to know now. I mean, it's too early to say. Okay.
Thank you very much.
Your next question the line of Lucy Carrier from Morgan Stanley.
All of them and I will take them one at a time. My first question was around IFRS 16, and I was hoping you could give us some indication around the full impact you expect for 2019? I mean, it's already EUR 9,000,000 in the first quarter. And related to that, I just would like to understand regarding your guidance because when you gave the guidance end of last year, there was no mention or impact of IFRS 16. Now you are keeping this guidance similar, but we are seeing a benefit.
So how should we understand that? And maybe where should that help you position within the guidance range? That's the first question.
I take this over. I think we indicated we gave an indication on the 2019 impact providing the appendix of the full year 2018 presentations, which is not very different from 9 times 4, which is the $37,000,000,000, if I were in or 36 as you want. The impact on the debt and the net fixed asset, you know, these are 100 and in 9 is the value at March end and it will decline slightly over the course of the quarters. And to be very clear, these 36,000,000 on adjusted EBITDA are not included in our guidance. So our guidance was given excluding IFRS 16 effect.
So you take the guidance at the $9.50 to $10.20 and you add up to $36,000,000 or $37,000,000.
Okay. Okay. So the current range doesn't include IFRS 16. And that was already the case of the 4th quarter?
Yes.
Okay. Very clear. Thank you very much. My second question was around Western Link. Two questions around that.
The first one is, I I noted your comment in the release saying that you expect the 2019 results to be influenced positively by the recovery effect of the negative effect of Western Link. Apologies to maybe be pushing here a little bit, but what gives you the confidence that we are not going to be seeing further negative impact on Western Link. And related to that, I know you are currently performing a repair on the Western Link cable. If you have any update on that repair, that would be helpful. But more generally, after you have done this repair, how far are we from, I would say, the commissioning phase or in other words, how advanced were you in the ramp up of the system when the issue has occurred?
Because I think what we all trying to know is or trying to evaluate is how much more risk is it around the Western Link Is it or the risk over? Is that still a little bit of risk because we are close to the to finishing all of the milestone and the ramp up? Or is there still quite a lot to do for the you to commission the project?
Okay, Lucy. Thank you very much for the question. The situation is the following: We are repairing the last four because it's, in the deepwater, consequently is a little bit longer. We expect by the roundabout end of the month, to complete the operation and to give back the line to the customers. The question is, is going to fail again the future, we are not sure for sure.
All the damages still now have been installation damages. And in a route of 7 80 kilometers of cables may happen in the installation to to create some damages. Now it's going to be other, it's going to be other faults, other damages we don't know today. For sure, in the accrual, we posted the in the year end, the $70,000,000, we took into account that something that may happen in the year. That is not written anywhere.
I would like to add one more clarification, the large damage, that is under repair. Is under investigation. So there is no conclusion about the reason of the damage, just to make sure the prior fault that we had were more on the installation.
But just kind of for me to understand maybe a little bit better. So first of all, I mean, I remember you had mentioned in the past that the maximum liquidated damages you would have to pay to now grade was 1,000,000. Out of the 1,000,000 you've passed of provision last year for Western Link, how much are we in the EUR 120,000,000? And also, I appreciate that it's a whole new project, whole new technology, you don't have the return of experience on that technology. But in terms of after you are finished with the current repair, technically, if everything was going to be kind of happening as planned, would we be close to the end of the project and potential commissioning or is there still a lot for you to do in terms of ramping up testing and so on the system?
No, okay. Just to be clear, obviously, there is a difference between the provisions we have to post and the 120,000,000 max regulated damages because there are certain costs that are not in the agnostic in exactly the liquidated damages. Having said that, the situation is the following: the line is going to be back into service, back into service. At least back to customer by roundaboutendofthemonth. We were with the customer making the acceptance test, the final acceptance test when the cable failed in April.
That's it. Now we have to restart the process or to complete the process of the the final acceptance test. Just to be more clear, we believe that by the year end, should be completed, the talk, principally taking over a certificate.
Okay. Thank you very much for that. And just so to go back on the liquidated damages, have you exhausted now the EUR 120,000,000 to be paid to national grid, or is there still potentially if there were any issue is there still a bit more maybe that could come?
Lucy Francesco speaking. Let me say that with the last provision of $70,000,000 that we posted in Q4, we are quite close to the amount. That you are mentioning.
Okay. Thank you
very much.
Your next question is from the line of Max Yates from Credit Suisse. Please go ahead.
Thank you. Just my first question would be around, YOFC. And could you just firstly give us a sense of what you're assuming in your guidance for that business? And secondly, when you show, on Page 12, the EBITDA bridge where you show YFC as a minus 4. Should we take that to assume that that is a sort of sensible run rate when we look at how the full year may evolve, or was there any sort of seasonality in that business?
I. E. Is it reasonable to believe that YOFC is down 16,000,000 for full year 2019. Okay.
Max, you for your question. YOC, it's clear that YOC is a listed company in We cannot comment for them too much. What I can say is that we plan it in our guidance, YFC to scale because it was already smelling in the air, that the market in China with that being suffered. The severe problem and what overcame our expectations is the speed. As usual, in China, everything is very fast and the drop of the prices have been faster than expected.
Okay. And I mean, maybe, maybe, Philippe, would you be able to just give us your view on the China market more broadly. I mean, the pricing decrease that we've seen, is there anything temporary in that? Or as the 5G rollout continues, should we assume that pricing from here on will just be structurally lower? Or is there any reason to assume that could improve as demand picks up perhaps the market consolidates.
Any color there would be helpful on what you see and what you think?
I think it's too early to say, Max. The point here is that, the decrease in price was clearly seen and very fast in the 1st big tender of the year. We expect the next tenders to be of the same kind, of course. Now we have to look at this market because it's a significant change. For this market after a few years of significant growth and very, very high prices because the market was protected.
Now we see a big swing, a major swing. We need to see how the different players will cope with this. We need to understand who is going to have a process that is going to enable them to be sustainable at that level of price. And we will how it will evolve. I really want to be careful here because we had one big event.
It's a big event. Now we have to analyze the market carefully. See who are the players, what are the capacities in hold, who is depending on what and see where the market grows. I certainly do not think that this year will be good in China as a level of price. Of course, the trend is there.
How long will it last? It's a question mark for me. Honestly, it's
a question mark. Obviously, if the demand in China will over, thanks to 5G Equinorpe, where recover has not dropped. No. Has stabilized It's an excess of capacity, but so that has been more than sufficient for the Chinese players to run the prices much lower than before. Just cyclical date capacity is continuing to grow like hell every quarter.
But now, this growth of capacity is going to slow down
by definition.
So we
have to
look at
could you also give us, I think you mentioned Western Link in the quarter had a million cash out related to it. Could you give us a sense of how much more cash out or where you are in terms of the cash versus the provision that you took, I. E. Is that the only use of the the provisions that we've seen taken on Western Link? And how much more of the provision do you expect to be cashed out for the remainder of the year?
What I was, Francesco Papakini speaking, what I was commenting in my presentation was I the total cash outs on Western Link for the last 12 months, going from April 1, 2018 to year to March end 2019. And these cash outs are in the region of $90,000,000 for 12 months, for the first quarter, I think the cash outs related to Western Link are not very significant. Of course, there is, there is the, let me say that our guidance related to free cash flow, the same as 1,000,000 plus -10 percent was already including all the problems and the technical issues related to Western Link with only one exception, which is the last accrual the last provision of $70,000,000. Of course, I don't anticipate that this $70,000,000 will 100% convert. Into a into a cash out because as we commented, we are taking in this 70,000,000 certain statistics and possible possible issues to come.
But of course, just the costs related to the repair that can was commenting that we are currently performing will have a negative effect. If you want a number, we can say 20,000,000 something like this, which could be not fully included in our 300,000,000 plus minus 10 percent guidance, but this just makes the guidance a little bit more challenging. But as I said, I'm confirming the the guidance. So I'm fully confident that despite this little additional cash out that we will incur due to the last April Western Link issue, we will achieve our guidance and we will be able to re absorb this little hiccup in terms of cash out in the 1,000,000 free cash flow.
Okay. And maybe just a final one, Valeri, if you could just comment on, I think, obviously, you said the tender activity tendering activity is very good. Could you talk a little bit about how going forward you may sort of think about structuring contracts differently or the way that you're sort of pricing contracts as we go forward to try and perhaps sort of build in more defensiveness versus some of the issues that we've had on Western Link. Is there any sort change in thinking about how you go about the bidding process that maybe gives more flexibility and more defensiveness against and how you perhaps have changed the way you will approach these contracts going forward, because obviously they will be very they will be sort of deep offshore, very lengthy. And so how we can maybe get some comfort that these problems can be avoided going forward?
As you can well imagine, the market is moving in the direction to create more difficulties. Prices under pressure conditions, time by time, more challenging. Our approach has been to keep a reasonable level of margin for the projects. Obviously, we are tendering. We are participating to the tender for the time being with not very good order book, order income, but we expect to be able in the next quarters to reach some important results.
For sure, in reality if you analyze our mistakes, because from the mistakes of this, of the past you have to we have to learn. We made a big mistake with underestimating the PPL Technology introduction in the Western sector. And that's a problem that we have paid, and we are still paying. So one lesson learned is no technology on big connections. Short connection, 1st of all, and then once approved, we can progress with longer projects.
The reason why for instance, the project in Greece deep water with the new reinforcement of the cable, the dynamite, we took a little project as the first step. Otherwise, we are not going to produce and install the big projects. That's the lesson learned. Obviously, the competition is becoming vice versa by time more aggressive. And makes sense because one player can be aggressive until have not a big problem.
And that's the condition we are in. The market is competitive. That's true. But we are organizing ourselves in order to be able to compete with the other players. Okay.
Thank you very much. Did I answer your question? Yes, yes, you did. Thank you.
You. And the next question is from the line of Kash Gupta from JP Morgan. Please go ahead.
I have a couple of questions as well. My first one is on growth trends that you have seen so far in second quarter. Has there been any change in trends that we have seen in Q4, Q1 that we should be aware of?
Sorry, Harsh, I didn't catch perfect for your question. The trend for the 2nd quarter seems to be in line The second quarter for the time being, we are at theendofApril. We already completed the hybrid. May June, unless something is going to happen, seems to be in line with the trend of the first quarter. With a very good market with North America, reasonably good with South America, almost stable in Europe, and Asia Pac, we are minor also going to be.
My second question is on synergies. You have realized $25,000,000 synergies in Q1. Maybe if you can talk about phasing of free main synergies of 60,000,000 in the coming quarters?
The phasing, the phasing is a little bit too much. French speaking. Of course, we are thinking to execute, and we have we are on track on the execution of the synergies. It's clear that our first tranche of synergies of 2019 has been realized with the costs of 2018. If you look at the extraordinary cost for the restructuring in 2018 last quarter were pretty significant.
In the first quarter of this year, not a lot. Why? Because we made a significant chunk year end, Now the first quarter, we are completing the cleaning, the cleaning of the of the organization. Next chapter is going to happen in the second quarter and in the third quarter. Where maybe that we are going to move also on the industrial footprint.
But it's something sensitive that I cannot disclose more than that.
And my final one is on medium term margin potential for project business. Do you think we can go back to mid teens margins or will that be an ambition given the current competitive dynamics?
I'm going to tell you what I told to my team. Guys, it is true that the prices are under pressure. No doubt. How much it depends? Project by project is a different system is a different product, consequently the margins are anyway under pressure.
The real goal to keep the profitability at the level of, let's say, 15% that is I'm talking about EBITDA margin is to have flawless executions, not to have the problems we had last year, mostly last year, obviously on Western Link, but even in some other projects. That's the goal. If we are going to have realized, sorry, flawless or almost flawless executions we are going to keep the profitability of the project business. You're welcome, Akash.
Thank you. Your next question comes from the line of Monica Bouzio from Bank of IMI. Please go ahead and ask your question.
Yes, good evening. Can you hear me?
Not very well, but we can hear
Okay. Just a minute. Okay. Thank you very much for taking my question. The first one is on the project business for the submarines.
You have indicated a size for the market of $3,000,000,000. Can you comment on your expected market share by year end, which is accounted in your current guidance. Could it be in the range of 30% or something more And can you just give us a vast indication of the exploitation of the capacity production for the submarines business? And the second one is on the telecom. Pricing is going down.
Maybe it will continue, the situation might be a little bit more can become tougher And I was just wondering, in a 3 year time, if pricing in Asia will continue to go down what is your sustainable profitability for the telecom division? What kind of profitability on a sustainable level? Do you see in a 3 year time within this new environment Thank you very much.
3,000,000,000 market. Our historical market share has been 55%. 1,000,000,000 is here. But in reality, our market share year by year can fluctuate even very much. We expect this year on the year to reach something more than 30% because our order book is not so buoyant.
And then we first as well. Then I like the actuals, and I don't like very much the forecast. Let's see which the actual will be, or it's going to be. The second point, telecom pricing on telecom and margins on telecom as of now and in the next 2, 3 years. That largely depends.
If there was not the price war in the Chinese market, I would have said to you, stable, maybe even better. With the Chinese war, open it, We'll do everything possible, and we are acting strongly on the products and costs in order to keep the profitability of the telecom business. We will succeed on it. I think so, but I'm not sure.
So you have room to improve the leaks or to improve the technology?
We are making 2 choices, 2 things. The first one is to drop the costs, farther on the standard products, on the standard fibers. To be able to compete with, even the Chinese because once the Chinese will not be able to sell bare fibers into the Chinese market or in the markets that are accessible to them, then we start to drop the prices in other markets. Probably except U. S, because in U S, they are not very welcomed.
Let's see what's happened. What we have to be sure is that we are going to be competitive, sufficiently competitive against the imported eventually fibers system, consequently, our margins could not be affected.
You
understand what I mean? Yes. Then In order to protect as much as possible, ourselves from the price war, we are developing new products obviously covered by patents that can provide a better product and a better system to our customers, avoiding or limiting much more the competition is an example of the Flex tube. I don't know if you are ready of it. Is a product that is having an extremely interesting result.
In the North American market and in the European market for the time being partly. If this product is gonna explode on the network for the time being is used mostly for the interconnect of data systems of that maybe a real upside. Okay. That is too early. I was thinking to present to you and the financial community.
The products and the characteristics of the market once
the
the penetration of this product into the market will be consistently in for the time being is a little bit different.
Thank you. We really appreciate. Thank you.
You're welcome, Michael.
Thank you. Your next question comes from the line from Sean Mc Lochlin from HSBC. Please go ahead and ask your question.
Firstly on synergies, given that you are accelerating the impact of synergies, is 175,000,000 now a conservative forecast. Secondly, just on the competitive environment in projects, just wanted to understand, I know, I get that Asian projects are low priced and highly competitive highways, the competitive environment in the U. S. Compared to your other left competitors, do these projects have different and made potentially more attractive, margin profiles. And thirdly, just on telecom, we had a comment from your competitor, the pressure on supply is now greater on fiber optical cables than on optical fibers.
Just wondering, are you seeing this change in dynamic and how is this shaping strategy? Thank you.
Thank you, Sean. Synergies. We moved up from 150 to 175 and you are already after 3 months, starting to challenge us on a further upside, not yet, no. Let me say no. The risk is that being too fast in realizing the synergies, we may disappoint the financial market because we'll quickly stabilize.
But anyway, obviously 175 we see and we consider every opportunity that may come to even rise further, but for the time being, don't ask me, is 175, and that's it. Chapter 2, Projects, U. S. Market. U.
S. Market is, for the same, being very limited. Is almost negligible, but is taking off. And that's the most important news because there are at least 2 projects that are on track are taking off and we want to be part of at least 1 of it. Let's see.
I prefer to talk once we have the ordering of the contract in The competition as well as for the power distribution of the high voltage The competition is not as strong as it is in Europe in the sense that the number of players are lower than Europe. And so it's not terrific market as Europe, at least for the E and I products. In the summary, obviously, is a new market. It's a completely new market. What I hope is that once the market has started and the Americans the market will see the the profitability of developing certain projects the market can accelerate.
3rd question. The telecom price, Philip, would you like to comment on
Yes, if I understand your question correctly, Sean, it's about the change in the availability of fiber. In the world. Yes, you are right. There was a change. In the last 3 years, let's say at least 2 years, the world was in shortage of bare fiber.
So those making cables were struggling to get the fiber. Now after the Chinese stabilization and the investments, that every any big player have done in that field, the world is not anymore in shortage. So there is availability of fiber, which means, a different scenario, depending on who you are, because you can be amongst the big players. You have those making more cables and fibers. You have those making more fibers than cables, and you have those being more or less balanced.
Prisma is quite balanced. We buy some fibers from third parties, and we also sell some fibers to third parties globally. We are probably one of the most balanced players in the world from that perspective. And so we make our fiber for ourselves. Primarily.
And when we buy some 5, then we will buy in a market that is less favorable to the buyer, for the part that we buy. So the change in the market is significant. For those having to buy fiber, it tends to be favorable for those having to sell fiber because they sell more fiber as bare fiber than as cable, it's a bit less favorable. We are quite balanced in this equation.
Thank you, Daphne.
Thank you. Your next question comes from the line of Alessandro Tortora from Mediobanca. Please go ahead and ask your question.
Yes, yes. Thanks. I have two questions if you may. The first one is on the energy project. I understood that, you mentioned before, let's say, found a pipeline for the group.
Hopefully, What I would like to understand is if you can, let's say, better picture now, the starting point So I'm referring to this 2018, which looks to be, let's say, a transition year for you. I'm referring to the top line trend, which is already negative in this first quarter. If considering the current workload, we may see a safe BARDA worsening and also on the margin side is independently from the provision you made along with the link. If you can give us, let's say, any of the clean margin for this year as a sort of starting point, okay, for 2019? And the second question is on, again, on the window shorter in the U.
S. I understood that there are some, let's say, let's call it pilot project or maybe midsized project. What I would like to understand is, let's assume this market is going to take off in the see us what's the strategy on pleasing? And in terms of production capacity, is there any possibility, for instance, if can try to switch some of your plants. You have in the U.
S. In order to supply directly, automatically, you can S. To these projects? Thanks.
Okay, Alessandro. Thank you very much. Energy projects. The energy projects, as I said, orders are gonna come. How much and which are going to be the margins.
Let's see. But we are confident be able to recover For sure, 2019 will be better than 2018, at least from the order book point of view. Margins, frankly speaking, the margins from the price point of view are a little bit under pressure. That's evident. It's evident.
And what we have to what's our focus, as I said, is to recover the execution. Because in 2018, we lost a number of millions into execution mistakes. Obviously, the projects never go totally flawless, but the problems we encountered last year have been really a little bit too much. And I'm not considering the Western Link issues. So The other projects have not been lucky, let's see.
We believe that in 2019, we have to be able to establish the flawless or almost perfect execution of 2015 60. And part of 2017. Then it's clear that in 2018, we have been a little bit disturbed by the Western Link ness, but it's something we have to manage in a way. Which was the last question, maybe Iva. Offshore.
Ah, the offshore capacity. Okay. For the time being, the answer is no. In the sense that we do not have plans for summary in the U. S.
We have plans many, but not on the sea. Consequently is an option to be evaluated if and when the market will boom. For the time being, we don't see orders yet. We see tenders Yes. But before to subject to this side, to invest in North America, for a plant, for submarine, I have to see a steady, a reasonably steady, sizable market.
Now it's not the time for CapEx for investments. This time for Making the projects and making the projects well and cashing in period.
Okay. So my severity standpoint, you, let's say, may not have any tariff, please, assuming that you are going, that to produce the cable in Europe and then shipping to the U. S. For this time?
Definitely, there is going to be tariffs, but, we have to think also that there is no that's a submarine cable production in the U. S. Yet in a mature submarine cable production in the U. S. On top of it, the installation will be, I think in the short term, in the midterm, the deciding factor to be successful in the U.
S. Market, whenever, we see some development of the market, the first step to create capabilities on the installation side. I think, it may be an effect in the long term if the tariffs are going to stay like this, but we see also that the tariffs are, can be also temporary and not, let's say, for the long term in that level, so far for the activity, what we see in the U. S, we don't see any effect of the tariffs for the offshore business in the U. S.
Okay.
Thank you. Next question comes from the line from Lucy Carrier from Morgan Stanley. Please go ahead and ask your question.
Hi, hello, again. Thanks for taking my follow-up. There was actually on telecom and, the differences between the various market I understand that the price pressure is quite strong at the moment in China, but it seems to me that historically Chinese prices were significantly higher also than rest of the world. So my first question is, is there a risk of, I would say, contamination, if I may say, of price pressure what we're seeing in China into the other market, considering that historically, they were not really working in sync. And then related to that, if we were seeing a bit of a rebound in terms of demand in China, maybe 5G, what would be necessarily the interest of Chinese manufacturer to go outside of China, especially if their price point is still a little bit higher than what it is in the other region?
Okay. You see, understood that question. It's clear that the price in China have been extremely good and now our reasonably bad. Let me use this, these words. Extremely good because when the market was going up and was a short of capacity shortage capacity in China.
The prices have been able to reach $14. Extremely high. Almost, I cannot say the double, but much more than the European or American prices. As well as went up very, very much prices went dramatically down right now. With the last tender.
That has been one tender, but is a good direction. Now the the prices today in China are low, but are slightly lower than the European prices. So, because they are not so far from the cost base. As well as Europeans, we, at the end, the Europeans are weak. And Americans too.
The margins are much better than the past but are still very limited compared to the CapEx sites to create glass capacity. You said you understand the message?
The first part, yes. I think no, I think I think I do, that's helpful. So if I understand China prices slightly lower than European prices now. How do they compare versus U. S?
And also related to that, of course, I know there's I mean, that's not the case, of course, for Y OFC, but a lot of operators in China have kind of operated in a closed market for a long time. And the staff around the pattern that they are using for fiber is not always very clear. So when you think about the potential threat from Chinese operator from Chinese manufacturers, which you've mentioned already a lot in the past I mean, how what do we think here in terms of time frame, in terms of pricing dynamic, demand dynamic, but also everything that is regulatory as well?
Yes. What you have not to forget is even the mentality of certain Chinese players. They don't care to have a matric. Sometimes they care of the turnover period. And that's really out of our way of thinking.
Alek, do you want to comment? Lucy, hello.
To your question about the possible contamination, yes, of course, because There are if you have some capacity and you are a significant Chinese player, of course, you are trying now to go outside China and create your positions in other markets that are now slightly more attractive than China in terms of price. So clearly there is an attractiveness. The point is, in certain segments of products and customers. It's feasible. In some others, it's much more difficult because you need the qualification of your customers.
You need to make sure that you are not going to infringe any Western company patents. So I'm sure they are working on this. And they are going to have to end up with some pressure on us. But as Valerie was saying, we also innovate very much. We also work a lot on our cost.
And all this has to be put in the equation. As well as the fact that we have, as I said earlier, we have to observe very well what is happening in China because maybe not all these players. I don't know what, but I say just maybe some of these players will not going will not be able to have the right cost to make it sustainable for themselves in the long run. So it's all you know, we just we are just after a big change on the market, which is a change only on the Chinese market. We have to be careful in drawing conclusions too early.
That's my experience on this market that is telling me to be a bit careful and observe for a few months. And then we will understand better.
Your next
question comes from the line from Roberto Campani from Amundi. Please go ahead and ask your question.
Actually, my question was already made from San Bernardino. It was about the East Coast spillover of prices of the telephone cable's fiber optic in the rest of the world. So that's okay. Thank you.
Thank you, Leo.
Your answer is already.
Thank you.
Your next question comes from the line from Luigi Debelis from Equita.
A quick question on the high voltage land business. Could you provide an indication of the trend expected for 2019 regarding the Sewer D Linked project, if you can provide an update on the timing.
Okay. Thank you very much, Luca. HV Land, HV Land in 2019 is going reasonably steady compared to the previous year. Obviously, should link and should this link are out of this picture because R14 to be awarded in the first quarter of next year at least the first lots. As simple as that.
For the rest, the HD Land is seen almost stable. Obviously, there are projects that are exiting from the pipeline, like the France, Italy, other projects that are coming in Nothing special. You're welcome.
Thank
you. Your next question comes from the line from Gabriel Gamba from Bank of ACROS. Please go ahead and ask your question.
Yes, thank you. Thank you very much. Just a couple of questions. One is on CapEx because I saw that, you invested around $36,000,000 in Q1. And you said that this is not time to invest much.
So I was wondering if your guidance of 250 is confirmed
Okay. The answer is very quick. The guidance is confirmed period. And we I use the CapEx level as ceiling of the CapEx. Then we have to choose which are the best CapEx to be promoted and which one have now to be promoted.
As already, I told you in the guidance of $250,000,000 year over year is now increased the ship. That is not negligible in term of amount. But until I don't see the projects coming back with order book and margins is better to crucially to be deliberate in CapEx. Unless there is a specific big order that means of additional costs. But if something enters in, something else have to exit.
Because the ceiling is that we can set on tolerances because we have not solved these sites.
Okay. Thank you. And very last question is on again on Western Link, I'm afraid Is there any I understood that there is an investigation on the reasons behind this April problem issue. I was just wondering if preveninari speaking is anything that makes this accident different from the others, only because I saw that it's in deep offshore, basically. So I was wondering if in nature, is there anything that makes this issue different from the others that were in line and so on.
Listen, I'm very I'm very transparent. On Friday, the piece of the cable that, failed arrived here. We are going to open tomorrow with the customer. I'm going to give you an answer in one direction of another, in one month because we needed to open completely. Apparently, from the external point of view, there is nothing new compared to the other faults.
But it's a very superficial valuation.
Okay, thanks.
Thank you. There are no further questions at this time. Please continue.
Thank you.
Okay. Thank you very much to all of you. And Next quarter. Thank you and good evening to everyone