Good day. Welcome to the Prysmian First Half 2018 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Valerio Battista, CEO of Prysmian Group. Please go ahead.
Thank you very much. Good afternoon to everyone. Welcome to the Half 1 2018 financial results of Prysmian Group. Starting with the financial highlights, as usual. Half 1, organic sales growth closed at +2%, excluding General Cable. That's thanks to high single-digit organic growth in optical and connectivity. A reasonably good positive organic trend in T&I and other cable divisions. On the other side, we have to note, sorry, that including General Cable, the organic growth has been 2.7%, thanks to the fact that General Cable has been able to post a +4.4% organic growth, driven by projects in Telecom. EBITDA. The adjusted EBITDA closed at EUR 339 million, 7.8% of sales, having inside the EUR 25 million contribution of General Cable for the month of June, being a pretty good result in the month of June for General Cable. Driven by energy projects.
Whereas, vice versa, Prysmian posted the famous EUR 70 million, EUR 20 plus EUR 50, you already know, in the first, the EUR 20, and EUR 50 in the second, for the Western Link project. The Telecom has seen a very good margin expansion, helped by volume growth, manufacturing efficiency, YOC, and Brazilian bad debt provision reversal. The provision we posted for a bad debt that we have already partly in Q1. The business has been impacted heavily by Forex. That cost EUR 24 million in term of translation effect. OCI, net of Forex effect, still in the second quarter, had EUR 5 million negative impact on the previous year. That is going to disappear mostly, starting from the third quarter. Net financial debt, EUR 3 billion and EUR 14 million, comparable with EUR 1 billion in Half 1 2017, because of the EUR 2.5 billion investment due to the acquisition of General Cable.
The EUR 500 million capital increase successfully realized in July 2018 is not yet in the number of June. Let's flip to page four. Page four, the key financials of the company. As we did for the acquisition of Draka, here are we reporting the reported numbers on the left of each part of the chart. The full combined on the right. Let's start with the reported that are the official numbers. Sales at EUR 4,364 million, of which EUR 381 million coming from General Cable, with an organic growth of 2%. If we look at the full combined, consequently taking into consideration the entire first six months of General Cable, the sales would have been EUR 5,382 million, comparable to the EUR 5,660 million of the first half 2017, with an organic growth of 2.7%. The related EBITDA.
Related EBITDA reported EUR 339 million, quite significantly, in reality, below the first half 2017, impacted obviously by the EUR 70 million Western Link provisions we did. 7.8% of sales. The full combined could have been EUR 413 million, of which EUR 314 million coming from the perimeter of Prysmian and EUR 99 million coming from the perimeter of General Cable. The EUR 314 million of Prysmian, again, obviously has been impacted by EUR 70 million Western Link provisions. Working capital. The working capital jumped, obviously, after the acquisition, to EUR 1.069 billion. Coming from EUR 640 million, that was the same seasonality one year ago. Obviously, we add EUR 700 million from the new perimeter of General Cable. As you probably know, General Cable was not able to have a performance in terms of working capital on sales at the level of Prysmian. That has been particularly good in June 2018, at EUR 361 million. We are working on it.
As a consequence of the working capital of the cash out for acquisition, our debt tripled compared to June 2017, from EUR 1 billion to EUR 3.014 billion. The net debt without the acquisition of General Cable could have been EUR 467 million. Let's have a look at General Cable sales and adjusted EBITDA. The sales of the first half of General Cable have been EUR 1,799 million, comparable with EUR 1,722 million of the first half last year, with an organic growth of 4.4%. Consequently, the organic growth of the business in General Cable is not so bad. Thanks also to North America. What has to be noted? That General Cable enjoyed a quite good season in the first half for projects and Telecom, mostly in Europe, other than a good performance in construction and automotive in the U.S.
On the other side, the lower sales in overhead transmissions, both in North and especially South America, and a lower demand for the utility industrial cable in the U.S. and Europe, have been, vice versa, scaling down a little bit the performance. Going to the EBITDA, we have to consider that one year ago, in 2017, General Cable closed at EUR 204 million EBITDA, with a first half at EUR 113 million, consequently more or less 50%. This year has closed at EUR 99 million, EUR 14 million below the same period of the previous year. We have to take into account that converting the results of General Cable from USD to EUR, we have lost EUR 9 million of Forex effect. Let's flip to page six. Are we talking here about the sole Prysmian perimeter?
We have seen the adjusted EBITDA, looks at the total at the beginning, of EUR 314 million, comparable with EUR 364 million of the previous year. The total organic growth of 2%, with the EBITDA margin that posted 7.9% compared to 9.2% of the previous year. Let's look at the various segments. We see that Energy Projects has been the main decline, from an EBITDA margin of 17.2% of the first half last year, down to 7.4% EBITDA margin this year. E&I scaled down a little bit, from 4.5% to 3.6%. Industrial networks component, from 8.3% to 7.7%. Oil and Gas, recovering a bit from a value that is very, very limited. Telecom. Telecom made the boom from 16.8% to 21.8%, thanks to various reasons that we will see later.
From the EBITDA point of view and the organic growth point of view, the energy projects posted a +1.8% in terms of organic growth. The EBITDA, as we have already said many times, went down from EUR 118 million to EUR 50 million. If we could be able to add back the EUR 70 million provisions, the profitability of the energy projects could be considered stable at EUR 120 million. E&I had a limited but positive growth to 0.2%, with a reduction of the profitability from EUR 74 million to EUR 61 million. We will analyze later the reasons why. Finally, Industrial Networks component, with an organic growth in the first half of 4.8%, posted a EUR 59 million EBITDA versus the first half one year ago at EUR 62 million. Oil and Gas, starting to recover a little bit with an organic growth of 0.8%, EUR 3 million comparable to the EUR 2 million of the previous year. Finally, Telecom.
Telecom that enjoyed a very good organic growth, 4.4%, moving from EUR 109 million EBITDA to EUR 141 million. Let's have a look at page seven of the EBITDA bridge of the first half 2017 versus the first half 2018, but at the contrary, first half 2018 versus first half 2017. You see in blue the numbers related to the Prysmian perimeter, and in gray the number of General Cable. The total full combined, in the first half 2017, was EUR 477 million, scaling down to EUR 413 million in first half 2018. What to be noted? Perimeter of Prysmian, EUR 65 million is the reduction of the EBITDA in the perimeter of Prysmian, of which EUR 70 million are coming from Western Link provisions. Consequently, apple-to-apple, except Western Link, the project perimeter has improved EUR 5 million on the previous year. E&I, negative impact for EUR 7 million. Basically coming from Oman Cable.
EUR 5 million positive for the Industrial Networks component and Oil and Gas. We've already put in here the Oil and Gas. Telecom moving up to EUR 41 million thanks to the very good business, but also to extraordinary one-off effects that accounts for EUR 12 million and are related to the carryover of YOC 2017 results. YOC closed the accounts after our close-up, and consequently, we have been obliged to move into the first quarter, the effect of it. Finally, the Forex. The Forex counted EUR 24 million in the perimeter of Prysmian, and just to keep the eyes on the Forex, other EUR 9 million are in the General Cable perimeter. Consequently, the total perimeter, fully combined, has been impacted by negative EUR 33 million due to the Forex. Going to the General Cable perimeter, we have two different effects.
North America, that went down in terms of performance of the business by EUR 16 million, and Europe, that went up, vice versa, by EUR 11 million. Latin America, technically flat. Let's flip to page eight. The integration and the synergies, how are going with General Cable? Now, three months later, we have a little bit more clear idea, and we can confirm that the new organization we announced one week after the closing and the streamlining of the management staff organization is going ahead and is planned to generate the synergies expected. Financial synergies, vice versa, we already realized, refinancing the debt of General Cable with much cheaper lines. The working capital, we are working on it, obviously, because we, at the same time, don't want to damage, in any way, the service to the customers.
We are optimizing the supply chain and the suppliers, and rationalizing the suppliers, especially in terms of payment terms alignment. We can confirm the target by 2022 in terms of synergies for EUR 150 million, of which EUR 90 million have to come from the organization. Procurement are going to be EUR 40 million, and the footprint that will take place starting from next year for EUR 20 million, with total costs of EUR 220 million. Let's start with the analysis of the various segments, and let's start with Energy Projects. Excluding General Cable, obviously, the sales closed at EUR 684 million, comparable to EUR 687 million of the first half of 2017, with an organic growth of 1.8%. Let me remind you that the first quarter, the organic growth was very high, it was 14%, but simply because it's a matter of execution of projects.
The adjusted EBITDA, unfortunately, vice versa, instead to be EUR 120 million, closed at EUR 50 million because of the EUR 70 million Western Link provisions. The adjusted EBITDA, consequently, has been impacted by the provisions for Western Link, but the performance of the underlying business is reasonably stable. Underground high voltage has, vice versa, posted better results, thanks to the growth in APAC, South Europe, and South America. U.K. and Netherlands, vice versa, slowing down. There are good news, let me say, on the progress of the corridors in Germany, because the tender is now on the table, and we are going to participate, obviously. The order book, last but not least, is not so buoyant, simply because the season in the projects, as you probably know, is difficult. It's difficult because of the delay in big tenders, and today, our order book has scaled down for the summer.
Not vice versa for high voltage, where it is progressively recovering. Moving to page 11, Energy and Infrastructure. Obviously, again, everything excluding the General Cable perimeter. Energy and Infrastructure closed with sales at EUR 1.681 billion, compared to the previous year that was slightly lower, with an organic growth of 0.2% positive. In the first quarter, it was -2.5%. The business is recovering a little bit. The organic trend is positive, and due to the volume recovery has been in North America and in main countries in Europe. The adjusted EBITDA has been impacted obviously by Forex and the slowdown in Middle East. Sorry, I forgot to comment the adjusted EBITDA, EUR 61 million, compared to the EUR 74 million of the same period one year ago. You can note that the gap in terms of profitability for EUR 7 million came from OCI.
Overall, looking at the bottom right side of the chart, you can see that the organic growth has been again, net positive after many quarters of negative trend. The signs are not so bad overall. We expect that E&I, especially in Europe, is going to recover. We have to consider that E&I is based on two sub-segments, Trade & Installer, that is doing reasonably well in Europe, but even if impacted by the Forex and the Middle East crisis, the power distribution at the end of the story, after many months of reduction, has found probably a bottom and is expected at least to stabilize. Let's move to Industrial & Network Components. Industrial & Network Components business closed at EUR 764 million, from the EUR 739 million of the previous year, with an organic growth of 4.8%. Let me remember that in the first quarter it was a peak of 10+%.
The EBITDA related to it, EUR 59 million, comparable with the EUR 62 million of the previous year. It has increased significantly, too much significantly maybe, in the first quarter. In the second quarter, more stable. What to be highlighted by the sub-segments. Specialties OEM and Renewables have been stabilizing. There is still the effect of the mix of these businesses, with lower margin businesses like Railways and Rolling Stock that have been increasing, but other businesses pretty strong, pretty important, like Nuclear and Mining, going down. Geographically, we have seen an increase in Australia, Argentina, and Europe. Elevator, finally, after some quarter of difficulties, is starting to re-accelerate. You remember that Elevator has been suffering of the crisis of the construction market in China and partly in North America.
The North American market, and other than Europe, that is continuing to grow, is able to more than offset the slight crisis of the Chinese market. Automotive is reasonably positive, thanks to the volumes in North and South America. The adjusted EBITDA benefited of volume effect, footprint rationalization, and cost reduction in Europe and North America. Last but not least, the Network Component that posted a good performance in volume in China and medium voltage products in North America. Let's move finally to Telecom. Telecom closed with EUR 645 million, practically the same number of the previous year, with a +4.4% organic growth in first half. In Q1, it was +1.7%, consequently, it's continuing to grow.
The result has been extraordinarily good, EUR 141 million, 21.8% EBITDA on sales, but enjoyed EUR 11 million of one-off effects due to the reversal of the bad debt provisions and due to the postponement of the last quarter results, last quarter 2017 YOC results. Overall, the demand is very strong. We are continuing to grow at a rate of almost 10% year-on-year, quarter-on-quarter. Prices are stable, and the capacity is growing. Consequently, we expect in the next quarters to continue such path of growth. Moving to page 14. Page 14 is a more detailed picture of General Cable perimeter with the view of the full combined entity. Consequently, the full year. North America, or better, let's start from the global, are the numbers that we have already seen. Sales at EUR 1,799, obviously in euro, compared to the EUR 1,722 of the previous year.
The first half, the organic growth in general has been pretty good, with a +4.4%. That's thanks to Telecom, Projects & Construction in Europe, and Construction and Automotive in the U.S. The adjusted EBITDA, vice versa, closed at EUR 99 million versus the EUR 113, consequently lower than the same period of last year, but that has been affected by the translation effect due to exchange rate. Let's have a look of the three regions. The three regions moved in a different way. As you can see from the column, North America went up, slightly up, in terms of organic growth of 1.7%, but posted a significant reduction of the EBITDA. Why is that? Basically, because two reasons. First reason is the exchange rate that counted quite significantly, EUR 8 million of scaling down.
The second reason, we have not totally clearness of it yet, in the first quarter last year, General Cable, that doesn't hedge or was not able to hedge the orders, has enjoyed a quite significant, something like EUR 7 million, of metal effect. Technically, the orders they got with the new copper that was rising, were covered with products with a lower copper in the stock. Europe, vice versa, went up 16% in terms of organic growth from the sales point of view, and went down significantly in terms of performance, in terms of EBITDA, going to the EUR 20 million you can see in the center side of the chart, moving from 9 to 20. Very good performance in the first half of the European perimeter, mostly thanks to the projects and NSW.
Finally, Latin America, basically flat, a minus 2.1% organic growth with a result that is physically EUR-wise stable on the same period of the previous. Last chart, the outlook. The full combined outlook stayed the same. EUR 860, EUR 920, with a midpoint of EUR 890. We expect Prysmian to be able to close in the range of EUR 680, EUR 720. The General Cable perimeter in the range of EUR 175, EUR 190, with an exchange rate of 1.2, and the synergies to be in between EUR 5 million and EUR 10 million, and that's confirmed. The report, as a consequence, will take into consideration only the seven months of the results consolidated for the General Cable. Which are the assumptions behind these numbers? Volume and margin growth in telecom, more or less similar to the first half, and we have the sign that is a solid growth.
The volume trend, more or less stable, similar to the Half 1. The adverse ForEx impact will slow down because we counted on a very large amount of money in the first half. In the full year, we expect it to be able to reach EUR 40 million adverse ForEx effect. That is a very huge number. The synergies target will come. We are doing, we are acting, and we are quite confident that will come on top of the results of the two perimeters. That's all. Thank you very much. I leave the floor to Francesco Facchini for the details of the financial report.
Thank you, Valerio, good evening to everybody. As usual, I start from page 18 with the profit and loss statement. You see here the Half 1 2018 reported with the contribution of General Cable for the month of June, compared to the Half 1 2017. As Valerio commented, organic growth remained pretty positive at 2%. Of course, organic growth here is referring only to the Prysmian perimeter, slightly down from the 3.1% in Half 1. Adjusted EBITDA reached EUR 339 million, with a contribution of EUR 25 million coming from General. Therefore, on Prysmian perimeter, EUR 314 million, down EUR 50 million from the EUR 364 million last year.
Summarizing some indications that Valerio Battista already gave, I can say that we had headwinds in the region of EUR 100 million, including, of course, EUR 70 million of Western Link provision and EUR 24 million of Forex, also the drop of Oman Cable in the first half. These are the headwinds. These were offset more or less 50% with some positive drivers, among which, by far, the most important was the very sharp growth of the telecom business. We saw an EBITDA growth of EUR 41 million, but also some recovery in the EBITDA of the T&I business, of the industry and network component business, also of Land high voltage.
Below the adjusted EBITDA line, we had adjustments of EUR 46 million, rising from EUR 31 million, obviously driven by the first restructuring costs related with the combination, also related with a EUR 27 million impact coming from acquisition integration costs, also some first profit and loss effect of the purchase price allocation. Financial charges decreased from last year down to EUR 46 million, despite the huge impact of the debt and the related financial costs for the pure month of June. The main reason for this, I will comment later a little bit more in detail, was the conversion of the 2013 convertible bond for EUR 300 million, with the decrease of the associated financial costs. Net income reached EUR 82 million, slightly down from the EUR 113 million last year.
Once again, by far the main effect are the Western Link provisions for EUR 70 million, net of tax, of course, the acquisition and the integration costs for EUR 27 million that I will comment. We can flip to page 19, where we see the detail of the adjustments that I was referring to of EUR 46 million. Restructuring cost increased to EUR 14 million, out of which EUR 4 million coming from General Cable perimeter. I would indicate that, including this EUR 14 million, we have approximately EUR 6 million that we can put in direct relationship with the reorganization and with the combination Prysmian General Cable. EUR 32 million of other non-operating costs. EUR 32 million of other non-operating costs, rising from EUR 7 million. As you see, including the EUR 27 million costs related to acquisition integration and the inventory step-up release for EUR 5 million.
This is the effect which is related with the application of the inventory step-up as part of the purchase price allocation. Of course, the utilization of part of the stock, which was stepped up in the month of June, generates a negative impact in terms of profit and loss. We can go to page 20 to comment the financial charges. As usual, the most relevant line is the net interest expenses, which were quite stable at EUR 33 million versus EUR 34 million last year. These numbers are reported numbers, of course, with the inclusion of General Cable for the month of June. This stability is the effect of the positive effect coming from the conversion of the convertible bond, which is partially offset by the interest expenses associated with the EUR 2.5 billion additional debt for the month of June, of course, related with the acquisition.
The good news here is that we completed, as Valerio mentioned, the refinancing of General Cable debt very quickly and very successfully in around 45 days, and that we are absolutely seeing in the profit and loss, the synergies coming from this debt refinancing. Just to give you an indication, fully combining the two perimeters for the entire year, we see a reduction of interest expenses from 2017 to 2018 in the region of EUR 30 million. In 2017, if you combine both perimeters, you come to total net interest expenses of EUR 137 million, compared to what I estimate will be the combined net interest expenses for this year at EUR 107 million. This EUR 30 million includes around EUR 15 million of financial synergies, which is the first part of the financial synergies realized this year.
We will have a more or less equivalent part, which will be achieved in the first half 2019, for a total estimated financial synergies of EUR 30 million, as I was already anticipating in the last calls. We can flip to page 21, where we have the balance sheet. I apologize for the slightly complex presentation here, but we couldn't do any better than this. You see the consolidated balance sheet for the month of June, and you see also, in this case, the contribution which is coming from the consolidation of the new General Cable activities. The purchase price allocation exercise is ongoing. The provisional goodwill is still very high, is EUR 1,466 million. You see here in the second line.
This, I expect, will go down significantly because we are working, as I was saying, on the assessment of the General Cable assets step up, in particular, tangible and intangible assets. Whereas for the time being, we have mostly taken into account the negative purchase price allocation, reflecting the refinancing of General Cable debt at fair value, which are, of course, negative in terms of equity effect. I expect the goodwill in the end to go down to a level between EUR 1 billion and EUR 1.1 billion. We will see the final result of the purchase price allocation.
The operating networking capital increased, of course, due to the consolidation of General Cable, whereas on the Prysmian perimeter, the performance was really good, with a pretty significant drop of the working capital due to some non-cash effect, like the Forex and like the Western Link provision effects, but also due to a temporary increase of the tax payable related with the assignment of the old LTI scheme. The LTI scheme, which referred to the period 2015 and 2017, and with the tax payments related to this. We had a positive impact in the month of May/June, which is already offset in the month of July. I define this a very temporary effect. As Valerio commented, the net financial position closed slightly above EUR 3 billion, also benefiting from this one time or temporary effect on tax payable, which is quite significant because amounts to EUR 70 million.
Last but not least, on page 22, you see the bridge explaining the move from the EUR 436 million NFP year-end 2017 to the EUR 3.014 billion debt at the end of June 2018. The first two columns represent the impact of the acquisition. EUR 1,332 million is the consideration paid for the shares of General Cable, including EUR 43 million of transaction costs already paid as of June. EUR 1.215 billion related to the refinancing of General Cable debt. A positive inflow, referring to the EBITDA, close to EUR 300 million to the reported EBITDA. An increase of working capital close to EUR 300 million, the CapEx for approximately EUR 100 million. The financial charges paid for EUR 39 million, the taxes paid for EUR 45 million, and the dividends, of course, for EUR 103 million.
Last but not least, the benefit, quite material, EUR 283 million, coming from the 2013 convertible bond conversion, which took place in March 2018. I believe I completed my presentation, and we can proceed with the Q&A session. Thank you.
If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, make sure your mute function is turned off to allow your signal to reach our command. Once again, that is star 1 to ask a question, and we will take our first question from Daniela Costa from Goldman Sachs. Please go ahead.
Hi. Good afternoon. First of all, thank you my question. I have three things I wanted to ask about. The first one was in terms of backlog for energy projects. I see, sort of on your slide 10, that you had a slight drop in backlog in June. You have also, over the last few weeks, gained, I think, quite a few small, medium-sized projects. I was wondering how you see evolving the backlog, if we can still expect the backlog to be up year-on-year this year, or what is your view that? That's question number one. Question number two, wanted to ask you about, obviously, this set of results are how have you seen sort of the end market trends evolving since then, particularly on the more cyclical side of the business?
The third question goes towards the working capital benefits or optimization that you have a potential to do in General Cable. Understand last time, when you comment on the deal, you still needed to look into the details. Now that integration seems to be progressing quite fast, can you give us some guidance in terms of sizing what the potential working capital benefits will be in terms of quantitative guidance? Thank you very much.
Thank you, Daniela, for your questions. Let me try to give you an answer. First of all, starting from backlog. It's clear that our backlog went down. No way. I believe that the backlog of all the players in the projects went down in the first half 2018, because the market has been very poor in term of project assignment. How I see the full year. For sure, it will be a difficult year from the side of the project awards. Simply because two big projects are mostly Viking is going to be delayed. Is expected to come in the summer 2019, consequently is EUR 1 billion that is not going to enter into the backlog of anyone. We got the project of the offshore wind farms in France, that's good. Is not in the backlog yet because we got in August.
For sure, there are projects that have started, they have not been assigned yet. Even the Saudi/Egypt, theoretically has been assigned, but practically is not in the backlog of anyone. Is a quite tough time from the market perspective point of view.
The underlying reasons for the development of these projects is still in place. The cost of the energy generated by offshore wind farms is definitely lower than the fossil fuel production. We expect that the project business will revamp. In addition to it, let me note that there are rumors, more than orders for the time being, of some projects coming into the area of Taiwan, some projects coming into the U.S. area. That may trigger, finally, the market opening even in other regions. Second question, the end market trend in the, let's say, commodities or fast runner is going better, is clearly stated by the trend in T&I. Not yet of the PD. Obviously, the market is still enjoying a pretty good level of activity in North America. Not yet a full recovery in Europe.
Overall, I don't see a bad situation because the financial market is really available to finance acquisition of real estate assets today, back after 10 years. Consequently, I believe that there is going to be a revamp. Last but not least, the working capital benefit coming from General Cable. This May, we said to the market that we expect to find some good results, and I can confirm. I can confirm because we have been already started in U.S. to negotiate with suppliers, different payment terms, and to clean up a little bit the stock. Clean up, meaning that we are producing less than we sell. Simply that. There is no way. That's a chapter that has to be resolved. I cannot say this year, but as a maximum, next year. How much? We said something like EUR 150 million.
I am trying to post the goal for the team to recover the entire cost, to recover from working capital, the entire cash out of the restructuring costs. EUR 200 plus million. Period. Clear enough, Daniela?
Yeah. Thank you very much. If I can just ask one follow-up. I think one other thing you had mentioned regarding the deal was the plant that General Cable had in Germany, and how important that was for SuedLink, and you mentioned SuedLink, some better news there. Have you started sort of the investment on the upgrade of the plant? When will we see some cash deployment from that, so the outflow?
Okay. We have to be always careful in injecting money in the assets. If the orders are not going to come, we have the depreciation to pay. To be clear, next week, we are going to be there with the board of Prysmian to present to the board our ideas, what we would like to do. It's obviously a significant investment that will start only if and when the SuedLink and SuedOstLink will be awarded, or at least when we are going to be sure that the projects are going to be awarded reasonably quickly. We have to consider that the tender came out now. The first orders, we believe that will not come before the first half next year. Consequently, there is time. There is time for us to complete the investments, and for the competition to get the homologation, for all of us to get the homologation.
Mm-hmm. The investment is, you mentioned it would be a significant investment. What sort of type of CapEx increase should we expect?
Listen. I know NSW because I've been there at the time of the due diligence. It is a quite big plant. It is good. It is good for telecom, it is not good yet for energy. We need to build a tower, probably with lines similar to Pikkala in Finland to produce extruded extra high voltage cables with long lengths. That's the goal. Don't ask me details, because the same things that I'm going to tell you are going to be listened by competitors, and I don't like it.
Fair enough. Thank you very much.
Okay. You're welcome.
Our next question comes from Max Yates from Credit Suisse. Please go ahead.
Hi. Thank you. My first question is just on Western Link. Obviously, you've said today that you don't think you need any further provisions based on what you've seen. Maybe if you could give a little bit more color on what you've been able to uncover since the announcement, then maybe some quantification around how much of the EUR 50 million or the EUR 70 million synergy from the first half is remaining, that you're able to use on any repair work or any further delays. That was the first question.
Okay. Max, the situation is the following. The first problem occurred, we posted EUR 20 million of provisions, we absorbed almost entirely. Have to be clear that the provisions are more absorbed by the liquidated damages than the real cost of the repair. The second provision has been EUR 50 million, I already told you that we were posting such amount, having one fault, because we were doubtful to be able to solve the issue of the fault in a very complex area. Is a intertidal area in Wales, where during the day you have the sand, during the night, you have the water. It has been a nightmare repairing it. Reason why, we repaired it, we had another fault.
The decision has been, that has been driven even by me, to be absolutely careful in repairing the fault, without any, let me say, stringent timing to solve the problem. Liquidated damages, we have not been caring of it. We solved it well. We repaired it well, the link, despite the logistic problems we were facing. We did it with three ships. That costed us a lot of money. Part of the management around this table was there mid of August to follow the repair personally. The repair went well. Unfortunately, after one month of operation, of testing, another little fault occurred in the land side of the circuit. You have to consider that a circuit of 800 kilometers may have many problems in terms of installations that derate later during the first time running of the link, some problem.
In that case, the fault has occurred between two connections of two reels of 1 kilometer each one, on the land side. That occurred 10 days ago. Here we are. The people are already in the field. The fault has been found. We have not yet the piece of cable to have a clear understanding of the reason for the fault. Maybe water penetration. For sure is a fault that occurred into the joint of the land part. Nothing else. The cost of repairing it is limited. In terms of liquidated damages is high. The provisions we posted of EUR 50 million were in excess for the repair of a single fault of the fault we were having. Consequently, in certain sense, we already posted the provisions for the fault occurred now.
To be clear and honest, fully honest, the cost of the first repair has been higher than expected. Consequently, there are no provisions that can be released. It will be strictly enough to cover the next repair. Did I answer to your question, Max?
Yes, that makes sense. I guess understanding this, there's a very small cost or a very small amount. You are confirming ultimately that you don't think you'll have to take any more provisions related to this, right?
Okay. If you consider small, EUR 10 million-EUR 50 million, it's small.
Okay. There is the potential.
Mostly driven by the liquidated damages that runs very fast.
Okay. Understood. Just in terms of your subsea backlog or your submarine backlog of EUR 1.75 billion, are you able to give us some clarity on how much of that is for delivery next year? Also, I think previously we've heard about a potential contract with 50Hertz coming to market in the second half, and I was wondering if you could give us any update on negotiations progress, any risks of delay with that contract? That was my second question.
Okay, Max, thank you very much for the question. Let me pass the question to Hakan Ozmen, the responsible of energy projects.
Good afternoon. Regarding the first part of your question, the backlog that we have, which is EUR 1.750, including also potential further additions to the backlog, we will be able to generate, of course, these are very preliminary numbers, but a reduction in our sales versus this year, for the coming year. We don't expect, if of course, significant delays are going to occur into the additions into our backlog, we don't expect that significant reductions are going to occur for the coming year in the execution. Regarding the second part of your question, the 50 Hertz project is out, and is going to be beginning of October. We will be bidding for the project. We don't see any delays. We are ready, and we will be on time. From that perspective, looking forward, we feel, of course, depending on the conditions, that this project is going to be continuing.
And will be-
Max, let me remind you that we executed the first 50 Hertz that counted for EUR 800 and some millions. We executed, let me say reasonably well, but the customer should say it. That is a credit I hope the customer will take into account. The competition is hard. The competition is hungry, consequently, it will be not easy to get the project. It is something like EUR 500 million we would like to put into our basket before the year end.
With that 50Hertz or with that contract, obviously the backlog is lower going into next year. With that contract, should that give us visibility on flat submarine revenues of about EUR 1 billion for next year? Because some of the revenues would be booked for 2019, or is there still some risk on revenues for next year?
Let me say yes and no, in the sense that the 50Hertz coming in will help definitely the backlog, the execution in the factories to reach the EUR 1 billion. We are going to have a slight gap in terms of paper cable. That is not 50Hertz. Meaning that 50Hertz will have a longer life than 2019. If we are not able to get a paper project within mid of next year, we are going to have a slowdown in terms of sales for the paper cables. How much? I cannot tell you now.
Okay, just very brief final one. I think you've talked about previously on net financial position that you were on a pro forma basis aiming to be between EUR 2 billion and EUR 2.1 billion, including the capital raise by year-end. Is this target?
Hope to do that.
Does this still stand?
Hi, it is Francesco Facchini speaking. I have an update on this, unfortunately, because the slowdown of order intake that Valerio was mentioning this year, and also of course, the costs and the liquidated damages associated with the Western Link, is generating a significantly worse cash flow anticipated for PowerLink, for the energy project business in the second half. Currently, we see a net financial position for year-end, which is more in the region of EUR 2.3 billion-EUR 2.35 billion.
Okay, very clear. Thank you.
Welcome.
Our next question comes from Akash Gupta from JPMorgan. Please go ahead.
Hi, good afternoon, Valerio, good afternoon, Francesco. I have a couple of questions, please. My first question is on General Cable, where basically performance improved quite significantly sequentially in Q2 versus Q1. The question I have here is, can you talk about net price cost situation at General Cable, and should we not expect upside in second half? You had EUR 99 million in first half in EBITDA, and essentially your guidance is implying EUR 76 million to EUR 91 million in adjusted EBITDA in second half. Maybe if you can talk about why should we expect lower EBITDA in second half than first half. My second question is on synergies. You are reiterating EUR 150 million, and by looking at the details, it looks like you are on top of this EUR 150 million number.
Maybe if you can talk about when should we expect update on synergies and maybe similar to previous Draka acquisition, where you raised the synergies. Is it reasonable to expect upside to the synergy level at some stage?
Thank you very much for your questions. Let me start from the second question, I leave the floor to Francesco for the first one.
Yeah.
Synergies. We counted EUR 150 million. We strongly believe into it. We are looking for better opportunities. For the time being, I'm not able to spend any additional EUR on it. The synergies, other than talking about it, have to be realized, and to be realized need of a lot of effort. I don't want to promise anything that I don't see really in the medium term. We acted absolutely fast, faster than any reasonable expectation. We announced that one week after the closing, the new organization, two weeks after the closing, we were having here in Milano the top 450 managers of the entire group. We clarified immediately who is in charge of what and which are the goals to be reached. Now we have to do it, and that's need of time. On the way to do it, maybe we will find something better.
I know that you know the Draka story, you would like me to do the same, let's find it. I believe that something better can come, needs of time to be found, analyzed. What I can tell you for the time being, what is happening, is that from the market perspective, we are not suffering a lot. What does it mean? The customers in, at least in South America and the U.S., are not disturbed too much of our acquisition. Obviously, the sole customers that have already told us as expected, we are not going to confirm you, probably, the total market share you are going to have combined, are the European utilities. That it was planned. That's what I can tell you from the synergies point of view. I would like to leave the floor to Francesco because maybe I lost some point.
Good evening, Akash. Regarding the part of the guidance related to General Cable, which is included in our guidance. I would say that the current picture that we see is absolutely in line with the midpoint of that guidance. Let me explain this. As you correctly stated, we have indicated the guidance of General Cable between EUR 175 million, EUR 190 million. Say the midpoint is EUR 182 million. In the General Cable results that you see in the actual, you have conceptually to add also the synergies, because let me simplify, most of the synergies that we are realizing are on the perimeter as we speak of General Cable. You should add to this EUR 182 million, also the EUR 10 million synergies, which is the third portion of our guidance. Say EUR 192 million.
Based on this EUR 192 million, putting this in relation with the EUR 99 million generated in the first half of EBITDA, you are right saying that we see a second half of General Cable stable/slightly declining versus the first half. The main reason is not North America. North America had a pretty tough, I would say, first half, mainly because of margins, not because of volumes, which were pretty good. The main reason for this drop is Europe. Europe, as you saw from the number, had an excellent first half, mainly driven by telecom and the energy projects business, so NSW, mainly. The second half is much less loaded in terms of project delivery and project execution. Therefore, we forecast for the second half of General Cable Europe perimeter, a significantly lower second half than the first half.
All in all, the result will not be materially different from this EUR 99 million of the first half, maybe slightly lower, your assumption is correct, that it will be slightly lower.
Thank you.
Welcome.
Our next question comes from Alessandro Tortora from Mediobanca.
Yes. Of course, thanks. Good evening, everybody. I have, let's say, two questions, if I may. The first one is on the submarine side. If you can, let's say, clarify, sorry, the projected sales of this division for the next year, because, let's say, excluding the impact of provision for this year at top line level, my reference number for 2017 is this around EUR 1 billion, sorry, for, let's say, this year 2018. Just to understand, sorry, the reduction projected in the submarine, assuming, let's say, your order pipeline that you mentioned before. The second question is on the cash flow generation for this year. I understood that you mentioned, let's say, lower level of advances this year. What I would like to understand is the CapEx, okay, spending for this year, taking into account that overall you spend around EUR 100 million in this first half. Thanks.
Okay. Thank you, Alessandro, for your questions. Chapter one, obviously, the submarine projects let's say next year may be not able to reach the EUR 1 billion. It depends largely of the Viking project. I told you, we may have even an order book that is larger, but if there are not paper-lead key projects in the queue, we are not able to saturate our capacity of Arco Felice. If that happen, there is no way. We are going to suffer. Maybe six months, who knows? For sure, or almost for sure, we are realizing now the NSL contract. Till June, the factory is full. If Viking is not going to come to us at this time, there may be a gap in term of output that will be translated automatically into a gap in term of sales.
Second point, the cash flow. It's true. Due to the fact of the very limited order income we enjoyed this year, as a consequence, we are suffering a lower level of advanced payments for the projects. That has been the plus that generated to us a very, very low, if not negative, working capital on sales for the projects.
Having no the orders, having no or limited advance payments, our working capital on sales will not be so nice as it has been in the last years.
That's the reason for the advice Francesco is giving you in terms of net financial position year-end, or working capital year-end. It's going to be worse than foreseeable, not forecasted, foreseeable. Is a temporary effect? Yes. Is a temporary effect that we think with the executions and the completion of a certain number of milestones of projects next year, in the first half, should be recovered. Depends. We need of some order in terms of submarine projects. On the positive side, we can consider that vice versa, the land high voltage is improving. Even for the land high voltage, we have orders that have advanced payments inside. Obviously, we cannot compensate the swing, the significant swing, if any, of the submarine cable.
Alessandro
CapEx. Sorry, just to tell you the CapEx. The CapEx is a very easy solution. We are investing heavily in the telecom. We are limitedly investing in all the rest of the business. I said, "Okay. Let's put a cap to the CapEx, and the cap is EUR 250 million. Period." The best investments will come in, the worst will not enter. As simple as that. Because the cash has to be protected anyway. Moreover, whereas in telecom, we need of CapEx to expand the production, and it's very expensive. In projects, as of today, there is not a lot of investment to be done. If not, the ship and maybe NSW. The investment in NSW is not a matter of 2019, probably only limitedly in 2019, if we'll be approved internally. Francesco, go on.
Just to add specifically to your question that the level of CapEx and related cash outs for the second half will be pretty much in line with last year. I don't expect that there is any change, neither positive nor negative, because in both years, 2018 and 2017, we had in the first half, as you are seeing, a CapEx in the region of EUR 100 million, and we plan to land that CapEx in the region of EUR 250 million. The second half will be a little bit more loaded as it was last year. No change.
Okay. Because, clearly, you have a General Cable CapEx, right, in the second part of the year?
Yeah. The 250 that I am mentioning is all in. It is including everything.
Okay. Thanks.
Once again, that is star one if you would like to ask a question, and our next question comes from Sean McLoughlin from HSBC. Please go ahead.
Thank you. I have three questions. First, on telecom, you are still seeing strong margins and stable pricing implies that demand is robust. As you look into 2019, how do you view this? Do you still think you may need to even ramp further to match demand, or do you see potentially risks of overcapacity? Second question, the mix drag effect in your industrial segment, how long do you think this will continue? I believe you were suggesting that this will improve in 2019. How does General Cable change your overall industrial exposure? Lastly, just a word on your new chairman, if you expect continuity or strategic change. Thank you.
Okay, thank you very much. Let me forward your question on telecom to Philippe Vanhille, that is in charge of telecom.
Hello, Sean. Yes, 2019 for telecom, what we see is a market that is going to keep on growing globally, worldwide. In particular, we have no doubt that in our main markets that are North America and Europe, the market will be still growing more or less at the same speed as today. We are therefore following our plan, which is to keep our positions by growing at more or less the same speed as the market. That's my answer to your question. Basically, the perspectives in Europe and in North America are quite good. China has been showing some signs of change, maybe not because we don't know what the China Mobile tender will tell us in the last quarter of this year.
In any case, in China, we do not directly operate, and we do not see any major consequence for us in the short term.
Let me say that in addition to what said Philippe, that anyway, it's not easy for the Chinese to come to Europe or U.S. For U.S., we forget. Even in Europe is not easy at all because today they are selling in their market with a price that is 20%-30% higher than the level of prices in Europe or U.S.
When it comes to this, yes, of course. We didn't have an opportunistic attitude on the market. We are operating at prices that are not in the high end of the range. We also feel that we can sustain our margins for that reason, because we are not operating in the spot price market. We have secured long-term contracts with our customers, and we also work on our cost in parallel. We are quite confident that our margin can be sustainable.
The second question, the situation of the mix in the industrial cable. That's a more difficult question because it's a very differentiated mix. Overall, let me say that we are seeing now some improvement in one of the main pillars of the profitability of our industrial cable. That is the crane cables, where we are the market leader, and has been suffering a lot in the recent years, in the last two years. Now we are seeing some new order coming in, and we expect, consequently, a reasonable recovery in the next quarters. I don't know if Francesco Fanciulli that is here around the table wants to comment on it.
Hi, good afternoon. I simply confirm the Valerio sentiment. As of now, we envisage a growing path very much similar to the current one. We are posting an organic growth around 5%, most probably shall be also the path for the next year. While in terms of application mix, we see a good stability with a smooth improvement on the EV special segment, particularly coming from some release of some formerly blocked interesting project on the crane business.
Let me add, Sean, that General Cable, from the special cable point of view, is a pretty good addition, let me say. Especially in North America. Their position in North America is quite important. The margins are reasonably good, and we expect to be able to leverage on the different portfolio of products we have, the two companies, with the base of the combined customers. I think that can be a good addition that may help us to compensate the potential reduction of market share in Europe for some utility. At the end, our idea of EUR 150 million synergies take into account also a potential downside on the market side in Europe. This was the forecast, the idea. Compensated partly by some additional synergies on the sales side of combined sales.
That at the end is one of the The special cable is one of the outcome we see today.
Okay.
Sean, can you repeat your third question? I am not sure that we were getting this.
Yeah. It was just a comment on your new Chairman, really.
Oh.
A change of strategy or continuation. Any first thoughts?
Okay.
The Chairman.
Sorry. I was not following the question. The new Chairman. The new Chairman has been nominated, Claudio De Conto. Claudio De Conto has been with the board for nine years. Eight years, going to be the ninth, the next one. No doubt, he's one of the most knowledgeable manager in our history. He knows very well the cable because he was the CFO of Pirelli at the time cables were into Pirelli. Consequently, he knows perfectly the business. He has been following and being responsible of the control committee. He has been following all the details of the business in the last eight years, and that is a big help.
To be clear, there is no implication in terms of any change of strategy. The reason of the change is just that Mr. Tononi had to release his assignment within Prysmian due to other assignments, which are, by the way, very well announced and known by the market, namely Chairman of Cassa Depositi e Prestiti. That's the only reason, to be very clear and simple.
Unfortunately, Massimo has been obliged, in a certain sense, to resign, and we have been obliged to substitute him as a Chairman. It's not for sure a change of strategy that has driven the change of the Chairman.
Sure. That's very clear. Thank you.
Sorry, I was missed your question.
Once again, that is star one if you'd like to ask a question. We'll take our next question from Roberto Campani from Amundi. Please go ahead.
Hi. Good evening, everybody. Just your opinion, what happened with Western Link? Do you think it may cause any reputation problem going forward, particularly in execution, and give back some advantage to your competitor? It's something that nobody else will be able to comply with? In the worst case scenario, which I think looks unlikely, but if the company should put in a position to reproduce part of the cable, what would be the damage? The negative impact it would mean.
Okay. First of all, the Western Link has been repaired or is under repair. As of now, we don't have any evidence that there has to be additional accruals. Consequently, the accrual we did is sufficient to solve the issue. It's not the first time that a very long interconnection is going to fail during the testing phase. Just to, maybe you were not following us at the time, but the Basslink project had five faults, if I remember well, before to be separate. May happen. That's the reason why it does not surprise us so much. Obviously, we took the risk, correctly or incorrectly, we did it, to execute a project of 800 kilometers with a new technology. We failed, or better. In the execution, we found problems that were not foreseeable at the beginning. Now we are paying the bill of it.
It's a risk that obviously has been pretty significant, is impacting our accounts today. From the reputational point of view, I have to say that probably no other companies could have been able to react as we did to the mess. Because it has been a mess. Maybe you remember 2014. I remember very well. The effort in terms of technology, assets, people, and company overall has been very huge. If the customers and the market are going to recognize it to us, I hope. I hope seriously. I think that it is happening. At least we have been able to demonstrate to our customers that we are totally serious, even if this project today is EUR 200 million below the expectations or higher in terms of costs than the expectations. We didn't give up. We are not going to leave the customers alone.
That's a quite important pillar for the customer. I believe. I hope. There was a second part of your question that I missed?
Possible.
No, it was about the-
The cost of the phase. Yeah.
If you need to reproduce part of the cable, what will be the-
We don't see the reason for it, frankly speaking. Also because the damages that have generated these faults are problems of installation. Obviously, going to install 800 kilometers of a cable, you may have one, two, three damages here and there. Some of those damages we have found at the beginning, some of them are coming out later. To reproduce, it may be. If we reproduce, then we have to reinstall, and we are back to square one. That's the reason why we are very skeptical on this kind of solution. Obviously.
Yeah, pretty clear. Thank you.
You're welcome.
Our next question comes from Tom Swift from CreditSights. Please go ahead.
Hi, guys. Francesco, I guess this is a question for you. Are you thinking about tapping the debt markets anytime soon? I know you have the acquisition loan that's lasting, I think it's a two-year maturity, but just thinking about, one, the liquidity levels, and two, also that one of your competitors, they also got a bond out a couple of months ago, and it was at an interesting time for them. Just your thoughts on whether that's a possibility over the short term. Thank you.
Yeah. Thank you for your question. I don't believe it's a good timing now to tap any capital market because the credit spread have increased very significantly. I think that for this couple of year, we are enjoying a very good bridge financing of EUR 700 million, which is, by the way, one of the most competitive funding source that we have, with a step up in terms of spread of margin, but even if you average out the margin across these two years, believe me, is really very competitive. We have already hedged almost 50% of that, basically converting a variable interest rate into a fixed rate. I think that we may wait for a better time. By the way, given the cash generation, I don't think that we would look into a full refinancing of the bridge through capital market, in the capital market.
Okay. Thanks very much.
Welcome.
Welcome.
Once again, press star one to ask a question. Our next question comes from Luigi De Bellis from Equita SIM. Please go ahead.
Yes, good evening. Just one question on Western Link. I don't know if you can answer, but I will try. When do you think, when do you expect full completion and full commissioning of the Western Link projects based on the information that you have today? Thank you.
Okay, Luigi. Thank you very much for the question. When? It's difficult to say, but as of now, before year-end, theoretically, should we be able to get the full commission. Now, full year, because we are going to complete the repair within, let's say, one month. We have to restart the test of-