Hello. Good afternoon to everyone, Valerio Battista speaking. We are here with the management team of Prysmian Group, and welcome to our Q1 2019 conference call. First page, the financial highlights. Organic growth sales went reasonably well, 1.9%, mostly thanks to a very strong performance of telecom, with almost 10% of organic growth and a solid trend in E&I. In particular, power distribution went up almost 15.7%. Regionally, North America, +5.4%, and LATAM, +6%. A quite good quarter. Adjusted EBITDA closed at EUR 231 million, 8.3% on sales, comparable with the EUR 198 million in the first quarter 2018, 7.2% of sales. Projects, not very well, unfortunately, as foreseen, because of the low order intake during 2018. Energy. Energy went well in E&I, PD, and T&I, regionally in North America. Industrial network component, almost stable. Telecom, very strong volume growth in optical cable business.
With capacity increase, we realized in fiber and manufacturing efficiency improving, increasing the output of the cable plants. On the contrary, the YOFC contribution in 2019 first quarter declined compared to the first quarter last year. The net negative one-off of last year have been EUR 9 million in Q1 2018 because the sum of EUR 20 million negative Western Link and the EUR 11 million positive one-off in telecom, namely, the translation of the last quarter 2017 of YOFC, and obviously, the famous OE provisions release. Q1 2019, we modified the IFRS, with a positive impact of EUR 9 million on the EBITDA. On the contrary, as you can see in the bottom line, increasing the debt by EUR 139 million. Synergies are going well, in line with the updated plan we gave you last quarter.
The net financial debt overall is EUR 2.9 billion, in line with expectation because of seasonality, but with the additional EUR 139 million due to the IFRS impact. Let's flip to the next page four. Sales. Sales closed at EUR 2,771,000,000 versus the EUR 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 Prysmian and General Cable. The adjusted EBITDA, on the same way, went up from EUR 198 million of the first quarter 2018 to the EUR 231 million of Q1 2019, taking into consideration the famous EUR 9 million of IFRS 16. From the working capital point of view, the working capital has closed at EUR 1,000,327, 12% compared to an historical 7%, 8%, one-digit. That is because we took, since the acquisition of General, all the working capital of General Cable, and that 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 EUR 2.9 billion, of which EUR 139 million coming from the IFRS 16. Without this impact, anyway, it has been at EUR 2,761 million. Let's go to page five, the performance of the various segments. Let's start with projects. Projects went up in terms of profitability, but not in terms of profit. As you can see, the profit went up from EUR 32 million to EUR 38 million, with an organic decline of 5.3%. That was expected because the poor order income of last year. The profitability scaled up, but simply because the project in Q1 2018 has been affected by EUR 20 million provision for the first fault of Western Link. E&I. E&I has increased from EUR 50 million to EUR 65 million, the EBITDA.
The organic growth has been 3.4%. The profitability moved up from 3.9% to 5%. Not so bad. Industrial Network component finally moved up from EUR 36 million to EUR 39 million, with an organic slight decline of 1.6%, and a profitability that moved up from 6% to 6.5%. Last but not least, the Telecom. The Telecom moved down theoretically in terms of EBITDA from EUR 80 million to EUR 78 million. You have to consider the EUR 11 million, EUR 12 million of one-off enjoyed last year in the first quarter, that is not replicable obviously this year. Or is replicable only for EUR 1 million. Consequently, the profitability went down from 20.1% to 18%. Overall, the company moved well from EUR 198 million to EUR 222 million, with an organic growth of 1.9% already commented, and an EBITDA margin that increased from 7.2% to 8%. Not so bad. Let's move to the next page six.
We tried to condense a little bit more our presentation following some suggestions. Projects. Projects have reached an organic sales negative growth of 5.3%. That was written in the stone, because with the very low order in terms of last year, obviously, the saturation of the capacity is not very strong. Moreover, we have still to produce the part of the cables that have been not delivered last year. You can see that EUR 32 million in Q1 2018 moved up to EUR 38 million in Q1 2019. In 2018, in the first quarter 2018, we accrued EUR 20 million. Of course, we have to read as written in the right side of the column projects. Excluding Western Link, our profitability went down from EUR 52 million to EUR 38 million.
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 terms of market position in 2018. The market is sound. The market is still around about EUR 3 billion. Even a little bit higher than the previous year. Last year was a little bit difficult, especially the first half. We consider to be in the good position to reach our historical market share. Energy. Energy went reasonably well with an organic growth of 1.7%. E&I, in particular, with +3.4%, moving up in terms of EBITDA from EUR 50 million to EUR 65 million, and in terms of EBITDA margin from 3.9% to 5%.
Industrial Network component, more stable, with 1.6% organic decline, but a better profitability in terms of both EBITDA, EUR 36 million that moved up to EUR 39 million, and a percentage of the sales that moved up from 6% to 6.5%. E&I, especially Power Distribution, we already commented that is going very well. North America and Latin America are going very well. The numbers you have seen are already affected by the already commented negative market position of the overhead lines in Latin America. We suffered in the second part of 2018, and we are still a little bit suffering, but we expect in the second half of the year to recover the gap on overhead lines business. The Industrial Network component overall is going pretty well, especially the elevators. Unfortunately, the automotive, is very well known to all of you, is vice versa. It's shrinking. Last but not least, Telecom.
You can see very clearly here that excluding the one-off of 2018, positive one-off of 2018, the result went up EUR 11 million, from EUR 68 to EUR 77, Q1 2019 versus Q1 2018. Obviously, if we do not take into consideration the one-offs, the results have been almost stable, and the percentage of result has been even lower from 20% to 18%. That's simply because of the one-off contribution of YOFC of the last Q4 2017, and the OE effect that impacted EUR 6 million, if I'm not wrong. From the business point of view, the business is going very well, for sure, in Europe and in North America. Obviously, you all know very well the situation of China. Where it is not so much a matter of volumes in the market, but it's much more a matter of pricing. Let's flip to page seven.
Q1 sales are going to grow by geography, because now geography have a role. The total sales have been EUR 2.771 billion as you can see on the right side of the chart. It's an organic growth of 1.9%. Geographically, let me say that North America, that represented EUR 837 million sales, went up in term of organic growth of 5.4%, with a strong performance of both of power distribution and telecom. Latin America, EUR 224 million, with a +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, EUR 1,000,484 with an organic growth that is 0. If I remove the 5.3% organic decline of projects that are completely or almost charged to Europe, the organic growth of Europe could have been 2.8%.
That's just to give you the feeling of how the real business is going. In Europe, is going very well. The telecom, without the projects, the organic growth, as I said, could have been 2.8%, or is 2.8%. Lastly, Asia Pac. EUR 226 million. We are not very big 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 three, four years, and now is a little bit declining. Let's flip to page eight. About the synergies. Synergies are going very well, that's one of our best performance, speaking. In 2018, you know that we reached EUR 35 million synergies. In 2019, the expected number is going to be EUR 120 million. A very important upside in the synergies.
As well as in 2020, we expect to go far ahead at EUR 155 million, in 2021, to the famous EUR 175 million. We are faster. That doesn't mean that we can double the synergies, but they make much more reasonable the goal to reach the EUR 175 million. Finally, the guidance. Flipping to page 10, 2019 target for EBITDA is confirmed in between of EUR 950 million and EUR 1,020 million, with a midpoint at EUR 985 million. We see telecom going well. Western Link obviously recovering at least all the negative swings suffered last year. Projects not going very well, because obviously the short order book is penalizing us. Energy is improving. The Forex is foreseen to be flat, 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 around about EUR 300 million, including after EUR 90 million of cash out because of the restructuring and integration costs. Okay. That's it. I leave the floor to Francesco for the details on financials. Thank you.
Thank you, Valerio. Good evening to everybody. As usual, I comment briefly the profit and loss statement. As Valerio said, organic growth in Q1 was quite solid, +1.9%, carving out of the negative organic growth in the project business. Organic growth ex projects was in excess of 3% overall, driven by, business-wise, a very solid E&I performance, specifically in power distribution, and even more, a very strong telecom performance, both in optical cable and multimedia and specialties. Geographically driven by North America and LATAM, as Valerio already explained. 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 important. Because, of course, it's a machine, it's an engine, which can really boost the Group's results. In terms of adjusted EBITDA grew to EUR 231 million.
In this slide, we highlight the IFRS 16 impacts line by line, as Valerio already explained, the EUR 9 million positive effect at the adjusted EBITDA and also the reported EBITDA level. Let me say, an earnings growth, which was 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 summarized bridge, recapturing all the effects from the Q1 2018 to Q1 2019, EUR 222 million, excluding the EUR 9 million IFRS 16 effect. Just to recap what Valerio already explained, the main effects are the EUR 20 million negative Western Link provision in the previous year, in Q1 2018. The EUR 11 million positive telecom one-offs in the previous year, Q1 2018, for a net negative impact on Q1 2018 of EUR 9 million.
Organically, a decrease of projects EBITDA for EUR 14 million, and a very positive, as I was saying, even better than expected growth in energy EBITDA of EUR 20 million, of telecom EBITDA excluding YOFC, of EUR 13 million, and a negative contribution or a decline of the EBITDA related to YOFC for EUR 4 million. This bridge, the EUR 198 million last year to the EUR 222 million this year, ex IFRS 16 effect. Adjustments and special items were in total positive. Negative for EUR 11 million adjustments and positive EUR 16 million special items, so a net positive effect on our earnings before tax of EUR 5 million, mainly driven by a positive change of metal derivatives fair value. Financial charges are absolutely in line with our expectation and reflects the synergies coming from the very fast refinancing of General Cable debt, which was done right after the closing of the acquisition in July 2018.
We are fully on track in terms of synergies on interest expenses. The group net income was particularly significant in the first quarter. As you see, EUR 88 million, a very sharp growth from the previous year. I flip to the following page to comment very briefly adjustments and special items. In particular, let me comment restructuring. Restructuring costs are still pretty low in the first quarter, EUR 4 million total, of which only EUR 2 million related to the integration of General Cable. A little bit more cash-wise for the restructuring cash outs were in the region of EUR 8 million-EUR 10 million in the first quarter. This is absolutely in line with the total restructuring costs over the 3, 4 years of integration that we anticipated at a total cash amount of EUR 220 million, as you perfectly know. We kept it stable despite the synergies upgrade to EUR 175 million.
I flip to page 14 to comment financial charges, in particular, net interest expenses. EUR 22 million, again, very much in line with our anticipation. I anticipate the total net interest expenses for the full year around EUR 90 million, which is a very nice drop from 2018, which was at a combined level at EUR 103, so -EUR 13 million. This comes after a reduction in 2018 from a pro forma 2017 of EUR 35 million. If we cumulate the two years of synergies, is a huge reduction of the net interest expenses. Just to quantify the synergies, total synergies are gross synergies on interest expenses amount to approximately EUR 38 million. 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.
You see that this impacts the net fixed asset and the net financial debt for the identical amount of EUR 139 million. Basically, the net debt of EUR 2.9 billion before IFRS 16 effect reached EUR 2,761 million, which is absolutely in line with our expectation and on track to achieve the EUR 300 million, ±10, of guidance in terms of free cash flow. Working capital moved significantly up from year-end 2018. This is mainly the effect of seasonality, which is a seasonality on the enlarged perimeter, including also General Cable. Includes the increase of the working capital as usual in the first quarter or in the project business, and these are the two main effects.
Whereas, compared to March 2018, the equivalent period, and of course equalizing the perimeters, working capital was pretty stable. Let me explain this better on the following page, where we tried to bridge the cash flow, better to bridge the net financial position in the upper part of the slide, the last 12 months, from March 2018 to March 2019, and in the bottom part of the slide, from year-end 2018 to March 2019, so one quarter only. Commenting the upper part of the slide, the last 12 months cash flow. Apart from the, let me say, extraordinary or financial effects, and I clearly refer to the General Cable acquisition, the EUR 2.5 billion impact, the dividend and the capital increase and the IFRS 16. What really matters on this slide is the free cash flow generation of the last 12 months, as you see, of EUR 51 million.
Apparently very low, very important to highlight that this plus EUR 51 million of free cash flow before dividend is impacted by a EUR 240 million negative impacts coming from the restructuring, transaction, and acquisition cost of General Cable. These are cash effects. Also from approximately EUR 90 million negative cash effects related to the Western Link issues. Of course, this EUR 51 million plus EUR 240 million risks almost EUR 300 million, which is, in my opinion, before the growth of the EBITDA that we will certainly enjoy with the progression of the quarters, 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 the debt profile. As you know, beginning of April, we refinanced our revolving credit facility of EUR 1 billion, which was due in June 2019. We refinanced this with a few months of anticipation, of advance. Moving this maturity to 2024, as you can read from the slide, we significantly improved the average maturity of our debt, which increased, on average, to 3.7 years. Commenting the repayment date of our debt, this simply means that we don't face any significant loan market maturity before 2023, and we don't face any significant capital market, meaning bonds, maturity before 2022. Our debt profile is very comfortable. It's very long. 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 rate, meaning that we are not exposed to any risk of hike or 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 may be carved out from the calculation of our covenants. I believe I finished my presentation, we can go ahead with the Q&A session.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, press star one if you wish to ask a question. The first question comes from the line of Benjamin Zecharias from Goldman Sachs. Please go ahead.
Hi. Good afternoon. Thanks very much for taking my question. I've got two 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 markets around EUR 3 billion. I was wondering if you could give some color around whether you still see a strong tendering environment in the U.S. and Asia. Obviously, if you could provide us with any update around Viking Link, that would be much appreciated. I believe with 4Q18 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. 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. Thank you.
Okay, Benjamin. Thank you very much for your questions. First 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 tenders, not only in Europe as it has been in the last year, but also U.S. and Asia. Okay, take into consideration that the Asian tenders are not off limits for us, but are not very comfortable. We consider vice versa, the U.S. market extremely important for us, and we are waiting for a first sizable orders in the next quarters. The other question for projects was related to the Mediterranean project. In reality, there is a big project that is going to come, is expected to come into the Mediterranean Sea. It's a little bit early in order to comment on it. There is more than one project, frankly speaking, because the connection of the islands is becoming crucial for matching the 2020 commitment on the pollution.
One project is under discussion. The other is drafted, but not yet in the making. For the telecom, I would like to leave the floor to Philippe Vanhille, that is here around the table with me, to explain you about the organic growth by region.
Good evening, Benjamin. I would say that in the optical business, we enjoy double-digit growth everywhere. Everywhere except one place, which is Australia. As you know, we are mainly acting in Europe, North America and South America, and in all these three regions, we grow double digit. In Australia, is the other way around. We are shrinking because of the end of the NBN project that was anyway planned. On top, you have to add the copper traditional business that is shrinking everywhere except in South America, where it is growing for us. Actually, also double digit, but of course, on a smaller scale. That's the color you were requesting. I think in China, as you know, we are not acting as Prysmian, so we are not impacted by China at this stage, at least.
To be clear, Benjamin, in telecom, we enjoyed a very good season for some years with the NBN project in Australia.
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 one.
Yes.
That's the name of the game.
Today, the decline of Australia is clearly offset by the growth that we see in North America and in Asia.
That's clear. The market overall is growing.
Yes
There are headwinds.
Thank you. That's very clear. Maybe just on the visibility aspect, how much visibility would you say you have, just across regions in telecom?
Visibility. The visibility on the margin or the visibility on
Yes.
We see-
Can you repeat the question? Sorry, because none 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 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.
If I can. Last year, in the first quarter, the market for Telecom was not very brilliant, nor we have been very brilliant. Reason why the organic growth was moderate. Obviously, on the basis of a first quarter 2018, pretty 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. Reason why, when we talk about the organic growth forecast for Telecom, we told about a single large digit.
Which is still our view.
High single digit, low double digit. It's not very far. It's not accurate enough to know now. It's too early to say.
Okay. Thank you very much.
You're welcome.
Thank you. Your next question is from the line of Lucie Carrier from Morgan Stanley. Please go ahead.
Hi. Good afternoon, gentlemen. Thanks for taking my question. I have a couple of them, I will take them one at a time. My first question was around IFRS 16, I was hoping you could give us some indication around the full impact you expect for 2019. It's already EUR 9 million in the first quarter. 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. How should we understand that, and maybe where should that help you position within the guidance range? That's the first question.
Okay. Hi, Lucie. I take this over. I think we gave an indication on the 2019 impact already in the appendix of the full year 2018 presentations, which is not very different from nine times four, which is EUR 37 million, if I well remember, or EUR 36, as you want. The impact on the debt and the net fixed asset, you know. This EUR 139 is the value at March end, and it will decline slightly over the course of the quarters. To be very clear, this EUR 36 or EUR 37 million IFRS impact on adjusted EBITDA are not included in our guidance. Our guidance was given excluding IFRS 16 effect. You take the guidance as a EUR 950-EUR 1,020, and you add up to EUR 36 or EUR 37 million.
Okay. The current range doesn't include IFRS 16, and that was already the case at the fourth 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 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, what gives you the confidence that we are not going to be seeing further negative impact on Western Link? 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. 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?
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 the risk over? Is there still a little bit of risk because we are close to finishing all of the milestone and the ramp up? Is there still quite a lot to do for you to commission the project?
Okay, Lucie. Thank you very much for the question. The situation is the following. We are repairing the last fault. It's in the deep water, 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, it's going to fail again in the future? We are not sure. For sure, all the damages till now have been installation damages. In a route of 780 km of cables, may happen in the installation to create some damages. Is there going to be other faults, other damages? We don't know today. For sure, in the accrual we posted in the year-end, the EUR 70 million, we took into account that something else may happen in the year. That is not written anywhere.
I would like to add one more clarification. The last damage that is under repair, is under investigation, there is no conclusion about the reason of the damage. Just to make sure. The prior faults that we had were more on the installation.
Just for me to understand maybe a little bit better. First of all, I remember you had mentioned in the past that the maximum liquidated damages you would have to pay to National Grid was $120 million. Out of the EUR 165 million you've passed of provision last year for Western Link, how much are we in the $120 million? Also, I appreciate that it's a whole new project, whole new technology. You don't have the return of experience on that technology. In terms of, after you are finished with the current repair, technically, if everything was going to be happening as planned, would we be close to the end of the project and potential commissioning? 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 million max liquidated damages. There are certain costs that are not in exactly the liquidated damages. Having said that, the situation is the following. The line is going to be back into service, at least back to customer, by round about end of the month. 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 final acceptance test. Just to be more clear, we believe that by the year-end, should be completed the TOC, that is the taking over certificate .
Okay. Thank you very much for that. Just to go back on the liquidated damages, have you exhausted now the $120 million to be paid to National Grid, if there were any issue, is there still a bit more maybe that could come?
Lucie, Francesco speaking. Let me say that with the last provision of EUR 70 million that we posted in Q4, we are quite close to the amount that you are mentioning.
Okay.
In terms of-
Thank you very much
liquidated damages.
Thank you. I'll go back in the queue. Thanks.
Yeah. Thank you.
Thank you. 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. 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 YOFC as a minus EUR 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? Is it reasonable to believe that YOFC is down EUR 16 million for full year 2019?
Okay. Max, thank you for your question. YOFC. It's clear that YOFC is a listed company, and we cannot comment for them much. What I can say is that we planned in our guidance YOFC to scale down, because it was already smelling in the air that the market in China could have been suffering. The real 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. That's it.
Okay. Maybe Philippe, would you be able to just give us your view on the China market more broadly? The pricing decrease that we've seen, is there anything temporary in that? 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 first 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 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. We will see 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 involved, who is depending on what, and see where the market goes. 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 recover, thanks to 5G.
It will help
will recover. Has not dropped.
No.
Has stabilized.
It's an excess of capacity.
That has been more than sufficient for the Chinese players to run the prices much lower than before.
Yes.
Simply because the capacity is continuing to grow like hell every quarter. That's the problem. Now this growth of capacity is going to slow down, by definition.
Okay.
We have to look at routes.
Could you also give us, I think you mentioned Western Link in the quarter had a EUR 90 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 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?
Francesco Facchini speaking. What I was commenting in my presentation was actually the total cash outs on Western Link for the last 12 months, going from April the 1st, 2018, to March end, 2019. These cash outs are in the region of EUR 90 million for 12 months.
Okay.
For the first quarter, I think that the cash outs related to Western Link are not very significant. Of course, let me say that our guidance related to free cash flow, the famous EUR 300 million ±10%, 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 EUR 70 million. Of course, I don't anticipate that this EUR 70 million will 100% convert into a cash out, because as we commented, we are taking in this EUR 70 million certain statistics and possible issues to come. Of course, just the costs related to the repair that [Khan] was commenting, that we are currently performing, will have a negative effect.
If you want a number, we can say EUR 20 million, something like this, which could be not full included in our EUR 300 million ±10% guidance. This just makes the guidance a little bit more challenging. As I said, I'm confirming the guidance. 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 reabsorb this little hiccup in terms of cash out in the EUR 300 million free cash flow.
Okay. Maybe just a final one. Valerio, if you could just comment on, I think, obviously, you said the tendering activity is very good. Could you talk a little bit about how going forward you may think about structuring contracts differently, or the way that you're pricing contracts as we go forward to try and perhaps build in more defensiveness versus some of the issues that we've had on Western Link? Is there any change in thinking about how you go about the bidding process that maybe gives more flexibility and more defensiveness against them, and how you perhaps have changed the way you will approach these contracts going forward? Obviously they will be 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. Price is 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 the past, we have to learn. We made a big mistake with underestimating the P-Laser technology introduction in the Western Link. That's a problem that we have paid and we are still paying. One lesson learned is no technology on big connections. Short connection, first of all, and then once proved, we can progress with longer projects.
That's the reason why, for instance, the project in Greece, deep water, with the new reinforcement of the cable, the aramid, 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, time by time, more aggressive. Makes sense, because one player can be aggressive until
Have not a big problem. That's the condition we are in. The market is competitive, that's sure. We are organizing ourselves in order to be able to compete with the other players.
Okay. Thank you very much.
Max, did I answer your question?
Yes. Yes, you did. Thank you.
You're welcome.
Thank you. The next question is from the line of Akash Gupta from JPMorgan. Please go ahead.
Yes. Hi, good afternoon, Valerio and Francesco, thanks for your time. 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 Q1 that we should be aware of?
Sorry, Akash, I didn't catch perfectly your question. The trend for the second quarter seems to be in line with the trend of the first quarter, giving us the confidence on our guidance. That's the reason why we confirmed our guidance. The second quarter for the time being, we are at the end of April. We already completed April, May and June, unless something is going to happen, seems to be in line with the trend of the first quarter. With a very good market in North America, reasonably good in South America, almost stable in Europe and Asia Pac, we are minor, consequently.
My second question is on synergies. You have realized EUR 25 million synergies in Q1. Maybe if you can talk about phasing of remaining synergies of EUR 60 million in the coming quarters.
The phasing is a little bit too much, frankly speaking. Of course, we are thinking to execute, and 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 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. It's something sensitive that I cannot disclose more than that.
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 project. Consequently, the margins are anyway under pressure. The real goal to keep the profitability at the level of, let's say, 15%, that is our, I'm talking about the 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, sorry, flawless or almost flawless executions, we are going to keep the profitability of the project business.
Thank you, Valerio.
You're welcome, Akash.
Thank you. Your next question comes from the line of Monica Bosio from Banca IMI. Please go ahead and ask your question.
Yes. Good evening. Can you hear me?
Not very well, we can hear.
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 EUR 3 billion. 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? Can you just give us a rough indication of the exploitation of the capacity production for the submarine business? The second one is on the telecom. Pricing is going down. Maybe it will continue. The situation might be a little bit tougher. I was just wondering, in a three-year time, if pricing in Asia will continue to go down, what is your sustainable or profitability for the telecom division?
What kind of profitability on a sustainable level do you see in a three-year time within this new environment? Thank you very much.
Thanks to you, Monica. Summary in project, EUR 3 billion market. Our historical market share has been 35%, EUR 1 billion, easy. 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.
That's the first as well. I like the actuals, and I don't like very much the forecasts. Let's see which the actual will be, or is going to be.
The second point, telecom. Pricing on telecom and margins on telecom as of now and in the next two, three years. That largely depends. If there was not the price war in the Chinese market, I could have said to you, stable, maybe even better.
Okay.
With the Chinese war opened, we'll do everything is 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.
You have room to improve the mix or to improve technology or something?
We are making two choices, two things. The first one is to drop the costs further-
Okay
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 their fibers into the Chinese market or in the markets that are accessible to them, they will 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 happens. What we have to be sure is that we are going to be competitive, sufficiently competitive against the imported, eventually, fibers from China. We know that we are able to compete, but that doesn't mean that our prices, and consequently our margins, could not be affected.
Okay.
You understand what I mean?
Yes, of course.
In order to protect as much as possible ourselves from the price war, we are developing a new product, obviously covered by patents, that can provide a better product and a better system to our customers, avoiding or limiting much more the competition.
Okay.
is an example of the FlexTube. I don't know if you are already aware of it.
Yeah.
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 going to explode on the network, for the time being, it's used mostly for the interconnections of data systems of
That may be a real upside.
Okay. Yeah.
It's too early. I was thinking to present to you and the financial community the products and the characteristics of the market, once the penetration of this product into the market will be consistently in. For the time being, it is a little bit difficult.
Okay, very clear.
It's where we are going.
Thank you. We really appreciate. Thank you.
You're welcome, Monica.
Thank you.
Thank you. Your next question comes from the line from Sean McLoughlin from HSBC. Please go ahead and ask your question.
Good afternoon. Thank you for taking my questions. Firstly, on synergies. Given that you are accelerating the impact of synergies, is EUR 175 million now a conservative forecast? Secondly, just on the competitive environment in projects, just wanted to understand. I get that Asian projects are low priced and highly competitive. How is the competitive environment in the U.S.? Compared to your rival F competitors, do these projects have different, and potentially more attractive, margin profiles? Thirdly, just on telecom, we had a comment from your competitor that pressure on supply is now greater on fiber optical cables than on optical fibers. I'm 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 EUR 150 to EUR 175. You are already, after three 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. Anyway, obviously EUR 175 we see, and we consider every opportunity that may come to even rise further. For the time being, don't ask me. It's EUR 175, and that's it. Chapter two. Projects. U.S. market. U.S. market is, for the time being, very limited. It is almost negligible, but it's taking off. That's the most important news. There are at least two projects that are on track, are taking off, and we want to be part of at least one of it. Let's see.
I prefer to talk once we have the ordering of the contract in hand. The competition, as well as for the power distribution of the high volt. The competition is not as strong as it is in Europe. In the sense that the number of players are lower than Europe. It is not a terrific market as Europe, at least for the E&I projects. In the submarine, obviously, it's a new market. It's a completely new market. What I hope is that once the market has started and Americans, the market, will see the profitability of developing certain projects, the market can accelerate. Third question, the telecom price. Philippe, would you like to comment on it?
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 three years, let's say at least two years, the world was in shortage of bare fiber. Those making cables were struggling to get the fiber. Now, after the Chinese stabilization and the investments that any big player have done in that field, the world is not anymore in shortage. 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 cable than fibers. You have those making more fibers than cables, and you have those being more or less balanced. Prysmian 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. We make our fiber for ourselves, primarily. When we buy some fiber, then we will buy in a market that is less favorable to the buyer, for the part that we buy. 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. That was very clear.
Did I answer your question? Yeah.
Yes.
Thank you. Your next question comes from the line of Alessandro Tortora from Mediobanca. Please go ahead and ask your question.
Yes, thanks. I have two questions, if I may. The first one is on the energy project. I understood that you mentioned before, let's say, a sound pipeline for the group, hopefully. What I would like to understand is if you can, let's say, better picture now, the starting point. I'm referring to this 2019, 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, let's say, a further worsening. Also on the margin side, if independently from the provision you made last year on Western Link, if you can give us, let's say, an idea of a clean margin for this year. As a sort of starting point for 2019. The second question is on, again, on the wind offshore in the U.S.
I understood that there are some, let's say, let's call it pilot project or maybe mid-size project. What I would like to understand is, let's assume this market is going to take off in the next year, what's the strategy on Prysmian in terms of production capacity? Is there any possibility, for instance, if you can try to switch some of your plants you have in the U.S. in order to supply directly or domestically, okay, in the U.S., this project? Thanks.
Okay, Alessandro. Thank you very much. Energy projects. The energy projects, as I said, orders are going to come. How much and which are going to be the margins? Let's see. We are confident to be able to recover in the next quarters, the order book. 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, you know. 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. I'm not considering the Western Link issues. The other projects have not been lucky. Let's say. We believe that in 2019, we have to be able to reestablish the flawless or almost perfect execution of 2015 and '16. Partly '17. It's clear that in 2018, we have been a little bit disturbed by the Western Link mess-
It's something we have to manage, no way. Which was the last question?
Offshore.
The offshore capacity.
In North America.
Okay. For the time being, the answer is no. In the sense that we do not have plans for submarine in U.S. We have plans, many, but not on the sea. Consequently, it's 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 decide to invest in North America for a plant, for submarine, I have to see a reasonably steady, sizable market. Now is not the time for CapEx, for investments. It's time for making the projects and making the projects well and cashing in. Period.
Okay. From a theoretical standpoint, you may not have any tariff risk, assuming that you are going to produce the cable in Europe and then shipping to the U.S., for instance.
Definitely, there is going to be tariff. We have to think also that there is no submarine cable production in the U.S. yet, mature submarine cable production in the U.S. On top of it, the installation will be, I think, in the mid-term, the deciding factor to be successful, in the U.S. market. Wherever 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. We see also that the tariffs can be also temporary.
let's say for the long term in that level. 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. Yeah.
Thank you. Next question comes from the line from Lucie Carrier from Morgan Stanley. Please go ahead and ask your question.
Hi. Hello again. Thanks for taking my follow-up. That was actually on telecom and the differences between the various market. It seems to me that historically, Chinese prices were significantly higher also than rest of the world. My first question is there a risk of, I would say, contamination, if I may say, of price pressure? Of what we're seeing in China into the other market, considering that historically they were not really working in sync. 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. Lucie, understood the question. It's clear that the price in China have been extremely good and now are reasonably bad. Let me use these words. Extremely good because when the market was going up and there was a shortage capacity in China, the prices have been able to reach EUR 14, extremely high. Almost, I cannot say the double, but much more than the European or American prices. As well as went up very much, prices went dramatically down right now with the last tender. It has been one tender, but is a good direction. Now, the prices today in China are low, but are slightly lower than the European prices. Because they are not so far from the cost base as well as Europeans. We, at the end, the Europeans are we, and Americans, too.
The margins are much better than the past, but are still very limited compared to the CapEx sides to create glass capacity. Lucie, do you understand the message?
The first part, yes. I think I do. That's helpful. If I understand, China prices are slightly lower than European prices now. How do they compare versus U.S.? Also related to that, of course, I know, that's not the case, of course, for YOFC, but a lot of operators in China have kind of operated in a closed market for a long time, and the status around the pattern that they are using for fiber is not always very clear. When you think about the potential threat from Chinese manufacturers, which you've mentioned already a lot in the past, what do we think here in terms of timeframe, in terms of pricing dynamic, demand dynamic, but also everything that is regulatory as well?
What you have not to forget is even the mentality of certain Chinese players. They don't care to have a margin, sometimes. That's really out of our way of thinking.
Yeah.
Philippe, do you want to comment?
Lucy, hello. To your question about the possible contamination, yes, of course, because 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. 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. I'm sure they are working on this, and they are going to end up with some pressure on us. As Valerio was saying, we also innovate very much. We also work a lot on our cost.
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, but I say just maybe some of these players will not be able to have the right cost to make it sustainable for themselves in the long run. 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.
Thank you very much, both.
Thank you.
Thank you. Your next question comes from the line from Roberto Campani from Amundi. Please go ahead and ask your question.
Hi, everybody. Actually, my question was already made from somebody else. It was about the risk of spillover of prices of the telephone cables, fiber, and optic in the rest of the world. That's okay. Thank you.
Thank you to you.
You answered already.
Thank you.
Thank you. Your next question comes from the line from Luigi De Bellis from Equita SIM. Please go ahead and ask your question.
Yes, good evening. Just a quick question on the high voltage land business. Could you provide an indication of the trend expected for 2019 regarding the SuedLink project, if you can provide an update on the timing? Thank you.
Okay. Thank you very much, Luigi. HV land. HV land in 2019 is going reasonably steady compared to the previous year. Obviously, SuedLink and SuedOstLink are out of this picture because are foreseen to be awarded in the first quarter of next year, at least the first lots. As simple as that. For the rest, the HV 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.
Thank you.
You're welcome.
Thank you.
Thank you. Your next question comes from the line from Gabriele Gambarova from Banca Akros. 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 EUR 36 million in Q1, and you said that this is not time to invest much. I was wondering if your guidance of EUR 250 is confirmed.
The answer is very quick. The guidance is confirmed, period. I use the CapEx level as a ceiling of the CapEx. We have to choose which are the best CapEx to be promoted and which one have not to be promoted. As already I told you, in the guidance of EUR 250 million year-over-year is now included the ship. That is not negligible in term of amount. Until I don't see the projects coming back with order book and margins, it's better to push a little bit the brake in CapEx. Unless there is a specific big order that needs of additional products. If something enter in, something else has to exit. The ceiling is EUR 250. That with a certain tolerance, because we are not so precise.
Thank you. Very last question is, again, on Western Link, I'm afraid. I understood that there is an investigation on the reasons behind this April problem, issue. I was just wondering if, preliminary speaking, is there anything that makes this accident different from the others? Only because I saw that it's in deep offshore, basically. I was wondering if, in nature, is there anything that makes this issue different from the others that were on in land and so on?
Listen, I am 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 or another in one month, because we need to open completely. Apparently, from the external point of view, there is nothing new compared to the other faults. It's a very superficial