Thank you very much, good afternoon to everyone. Welcome to the first quarter results conference call of 2018 in the Prysmian Group. As usual, let's start with the highlights at page three. Financial highlights. Organic sales growth +3.1%, not so bad. Supported mostly by the underground high voltage and industrial cable growth. A high single-digit growth in optical and connectivity, a positive organic trend in T&I, if we do not consider the still effect of OCI, that is obviously negative. The adjusted EBITDA has closed at EUR 153 million, 8.1% of the sales, in line with Q1 2017. What about the segments that have contributed to it? Telecom. Further margin expansion with volume growth, significant volume growth, improved manufacturing efficiency, namely the effects of the investments we are progressing in the fiber. The YOFC results that have been very good in 2017.
In 2018, obviously, is reporting in the first quarter, the upside, we were aware of the last year. At the same time, we had the reversal of part of the bad debt provisions we did in 2016 for the OE Bankruptcy. The problem of OE. Chapter 11. Energy projects. Energy projects are going reasonably well, we have decided to take a provision of EUR 20 million that has negatively impacted the operating results of the quarter because of the Western Link project, having had a problem in the connection at the beginning of April, due to probably a problem in the shallow water cable, we will touch more deeply the point later. Forex. We had EUR 30 million of forex negative effect, obviously, OCI, I was commenting before, a negative effect of EUR 3 million.
Net financial debt closed at EUR 648 million, coming from the EUR 998 million same quarter last year, with EUR 291 million effect positive from the equity linked bond that has been converted recently. Let's flip to the financials, page four. 7B turnover, EUR 1,879 million, versus EUR 1,849 million of first quarter last year. That means organic growth of 3.1%. The adjusted EBITDA, as I said, EUR 153 million, practically in line with the previous year, despite the EUR 20 million provision release for the problem on the test of Western Link. Operative net working capital at EUR 604 million, comparable with the EUR 732 million of the same quarter last year. 8% of working capital on sales. Net financial position, as a consequence, EUR 648 million, compared to the EUR 998 million of March 2017. Let's move to page five, see that the profitability is continuing to grow, thanks mostly to Telecom, obviously, but also, properly read, the energy projects.
Energy projects has posted a pretty low EBITDA margin after the accrual for the problem in the test phase of Western Link, 6.9%, with an organic growth that vice versa has been very positive with 14.8%. As you can see, the end result at the end of the game has been EUR 21 million after the accrual of EUR 20 million we posted. The organic growth, 14.8%, has to be properly read, we have to consider that submarine, despite the EUR 20 million Western Link provision, has had a growth of 3%, consequently would have been 13% roughly without the provision. High voltage, that posted a very significant growth. Unfortunately, one quarter is not the full year, a very significant growth of 40% compared to the same quarter last year. T&I.
T&I had EBITDA margin slightly scaling down from 4.3% to 3.8%, and an EBITDA, as a consequence, of EUR 31 million, comparable to the EUR 35 million of the same quarter last year. To be noted inside it, that there is the effect of OCI, that is still declining. Compared to the previous year, this effect should be over within the first half or the end of first half. The organic growth, that globally is -2.5%, has to be evaluated taking into account that without OCI, the organic growth would have been 1.9%. It's not so bad, and most of all, that is +5% for T&I and -5% for PD. Obviously, the difference in terms of size of T&I and PD, where T&I is higher, is generating the +1.9% compounded organic growth.
Industrial and Network components, flat in terms of results, EUR 27 million, EUR 27 million, with a slight decline in terms of EBITDA margin. An organic growth that is pretty significant, 10.7%, mostly in the industrial cable segment, because network component is still suffering of the same problem of power distribution at the end, and posted an organic growth -4.5%. Oil and Gas, -2.3% adjusted EBITDA margin, EUR -1 million, with an organic decline of 9.1%. This SURF is suffering, as well as has been suffering the core Oil and Gas in the past quarters. Telecom. The very good news is Telecom, where the EBITDA margin has jumped from 16.3% of the first quarter last year to 23.5% this year. From the results point of view, from EUR 53 million to EUR 75 million, very big jump, with an organic growth of 1.7%.
The 1.7% has to be correctly analyzed, with the optical cable going up by 8%, copper cables, vice versa, going down by 25%. Fibers, that are only the fibers we sell to third parties, with a -10%, but simply because of we need of our fibers for ourself. We are not selling fibers to third parties if not absolutely needed. Overall, 8.3% versus 8.1% this year is the EBITDA margin. The 3.1% is the total organic growth, and the result is in line with the previous year. Let's flip to page six and see the EBITDA bridge. EUR 154 million was the result in 2017. Energy Projects, before the Western Link provision, posted an increase of EUR 2 million. The Western Link provision we took is for EUR 20 million.
T&I, excluding OCI, has been positive for EUR 2 million, thanks to T&I, that went up by EUR 5 million, and the PD, that vice versa, scaled down by EUR 3 million. OCI has had a negative impact of EUR 3 million, and Industrial and Network components globally had a positive impact of EUR 3 million too. Oil and Gas, EUR -1 million, as we have seen, and the Telecom, that has to be correctly analyzed. EUR 28 million upside, of which EUR 12 million are coming from the bad debt provision for EUR 5 million, and the carryover of the results of YOFC for EUR 6 million. Forex counted for EUR 13 million negative effect on the results. My comment is that the results have been pretty good, despite obviously the Western Link provisions, of which we have to better clarify to you the reason why. Who is driving the growth of the company is Telecom, definitely, at the moment.
Let's flip to page seven, General Cable acquisition. General Cable acquisition is progressing very fast, that's my opinion. We got almost all the clearances except the Brazil, that is a sub judice clearance, because there are 15 days to oppose to the clearance, and the CFE that has still to come. The closing of the transaction should happen pretty quickly. Moving to page nine, energy projects. As I said, the organic growth has been 14.8%, very significant, mostly driven by underground high voltage, partly by high voltage submarines. The business is going well. Unfortunately, during the test phase of the pole 1 of Western Link, to be totally transparent to you, an interruption of the link has occurred in the line we were testing with the customers, and has occurred probably because of a fault of the cable.
We don't know yet, because we don't have the cable already in hands. We don't know yet the reason for it. Obviously, the location of the fault is in the intertidal area, meaning where the sea goes up and down roughly by 8 meters, coming from 4 meters water depth to -4. Consequently, to a totally no water area, dry water area. It's a very difficult location. It was a very difficult location for the installation, and it is, moreover, for the repair. The repair, what we consider in the EUR 20 million, to be very clear, are EUR 3 million that are the deductible of the insurance because the repair is covered by the insurance, and the expected roughly 60-67 days of time to go to complete the repair. At this stage, we will be able to reconnect the line and to complete the testing of the 2 poles.
As of now, we cannot test the other pole simply because we do not have the return cable. Underground high voltage is going very well, with a very positive start in Asia Pac and EMEA. Indonesia particularly is driving the race. It's fine. Unfortunately, the margins are not so high as could have been in other markets, but it's acceptable. The energy projects closed at EUR 311 million, and EUR 21 million EBITDA. The EBITDA obviously has to be read with and without the provision, otherwise would have been EUR 41 million. Order book. The order book for high voltage is back to EUR 450 million, whereas for submarine has declined to EUR 1.9 billion. It's very huge, but it's not as huge as some quarters ago. Sorry. We expect in the second half of the year to see the execution of other tenders that today have been delayed for technical reasons. Energy infrastructure.
Energy infrastructure closed at EUR 790 million, with compared to the EUR 806 of previous year, with a slight organic decline of 2.5%. The EBITDA has been EUR 31 million versus the EUR 35 of the same quarter one year ago. As I said, in that chapter, we have to consider the effect of OCI. Without OCI, the organic growth could have been positive for 1.9%. Overall, the business is improving, especially in Europe. South Europe, Germany, East Europe, and Netherlands are going well. The margins are growing. I'm talking about T&I only. The EBITDA is better than the previous quarters, finally. Thanks to the CPR introduction that we have already commented in the last quarters, the volume growth is generating even more margin.
The picture is different for power distribution, where the volume slowdown in South America and Nordics are not totally compensated by the slight recovery that we are seeing now in Germany and Netherlands. We expect that that's an effect of the first quarter only. Obviously, the winter has been particularly difficult this year. We consider that the real season is starting now, with April. Consequently, the second quarter should be a good indication of the trend of the year. Industrial network component closed with EUR 369 million, coming from the EUR 340 of the first quarter previous year, with an organic growth significant of 10.7%. That's a sign that the growth of the CapEx into the industrial segment is having an effect in the cable business, too. We have seen in the previous quarters a growth of the CapEx for industrial, and now we are seeing the effects here.
The result has been positive for EUR 27 million, in line with the previous year, not better, simply because of the mix. Mix, because we have seen a positive performance in railways and infrastructures, but we have seen a decline compared to the same quarter last year in nuclear, mining, and let me add, crane. The trend is stable in the renewable, but we have a certain slowdown in wind North America because it's going to start in the next quarters. Elevator, good organic growth in Europe, but compensated partly by the weak performance in Asia Pac, as well as by the effect in North America of the exchange rate. Because all the business in U.S. that is big, we have denominated in U.S. dollar, obviously, going to euro, suffering the exchange rate effect. Automotive, going pretty well. Sound organic trend.
Strong performance in North and South America, as well as in Europe. The adjusted EBITDA has benefited from a mix improvement, and the business is improving. Finally, Network Components, not very strong in the medium voltage and low voltage. In line, by the way, with the trend of medium voltage cable, as we have seen the power distribution. Whereas the recovery in HV accessories reflect the improvement of the business in HV. Oil and Gas closed the first quarter with EUR 57 million, compared with the EUR 66 of the previous year first quarter, when the umbilicals was going pretty well, still. Today, obviously, the umbilical dropped significantly during the quarter, with a very strong price pressure in Brazil. Is expected, with the order we see, to recover in term of volumes, not in term of margins, starting from the second quarter.
The DHT is going vice versa pretty well, the downhole technology, thanks to the number of rigs that are under activation, especially into U.S. The core oil and gas cable is still recovering, in the onshore side. In the offshore and marine, frankly speaking, not yet. But with the oil price at $75, we think that the business will recover. Finally, Telecom. Telecom, EUR 317 million sales, with an organic growth of 1.7% on the previous year, but an outstanding result of EUR 75 million, compared to the EUR 53 of the previous year. In the EUR 75 million, we have to take into account the EUR 11 million one-off, represented by the effect of YOFC upside of the last quarter last year, and EUR 5 million of the provision release for OE accruals. The business is going outstandingly, with a very sharp demand of fiber cable.
The real problem is the availability of fiber, that is in shortage everywhere. Consequently, the demand is very strong. We have been growing, and we are continuing to grow in terms of capacity of the fibers, and that is helping us also to reduce the costs. The chapter of the telecom that vice versa is declining is the copper telecom, because the copper telecom in Australia, that has been very buoyant in the last years, unfortunately, it was foreseen a business that has no longer life than it. Let's go to the outlook, page 15. The outlook we are giving to the market is EUR 730 million-EUR 770 million for the full year 2018, taking into account the EUR 20 million of provisions we took on the Western Link project, on the problem in Western Link.
This guidance is linked to unexpected volume and margin telecom trend in line with the Q1. A volume trend in E&I and Industrial that should be, and makes sense, to have a trend similar to Q1. The effect of the Forex that has impacted EUR 15 million in the first quarter, not to go higher than EUR 20 million-EUR 25 million. If we look at the exchange rate of today, makes sense. Energy projects, obviously, we considered the EUR 20 million provision release, and we think that should be enough to cover the problem we had in the testing. That's it. I leave the floor to Francesco for the details of the P&L.
Thank you, Valerio, and good evening to everybody. I start, as usual, with the profit and loss statement, just to recap some notes that Valerio has already anticipated. Total organic growth was 3.1%. Actually, this has been the best quarter since 2016 in terms of organic growth, and followed an already reasonably good fourth quarter 2017, which was close to a 3% organic growth. As Valerio explained, this was driven by a quite solid growth in the Industrial businesses, even if on the lower part of the mix, which pressed a bit on our margins. Was obviously driven by the sharp growth of optical cables, very close to 10%, 8%, as Valerio explained. Also a reasonably positive performance of the E&I business, net of the excluding the OCI performance, which was positive in mid single-digit, specifically in the T&I business. I repeat, excluding the OCI performance.
Adjusted EBITDA was substantially flat compared with the previous year, EUR 153 million. Just to recap, three main impacts on this number. Two pretty negative impacts, the Western Link provision for EUR 20 million and EUR 13 million of currency translation effect, partially compensated for EUR 12 million by the Telecom one-offs. Still, netting these effects, we have a EUR 20 million negative effect net, which is burdening the EUR 153 million. This let us comment that results have been, in the first quarter, pretty solid. Of course, this is the way also to read the guidance that Valerio anticipated, between EUR 730 million and EUR 770 million. We have to consider that this guidance absorb the EUR 20 million Western Link provision. Of course, takes into account the, say, EUR 11 million-EUR 12 million of one-offs in the Telecom, also absorbs a pretty negative Forex scenario.
The assumption is that for the full year, the Forex will impact between EUR 20 million and EUR 25 million. Just to help you read correctly the guidance. Going to the lower part of the profit and loss, we have a pretty nice reduction of the financial charges that I will comment separately. We had a reduction of the tax rate as well, down to 27%. Unfortunately, the group net income was negatively impacted, as you see, is lower than the prior year, was negatively impacted by the reversal of the metal derivatives fair value, which is, as I always say, a non-cash effect, which is the result of the stabilization of the metal price after the sharp rise of the metal price in 2017. We can flip to the following page just to shortly comment that the total EBITDA adjustments decreased since last year from EUR 24 million to EUR 17 million.
Pretty low restructuring charges, waiting, of course, for the combination with General Cable. Most of these EBITDA adjustments are related, as you see, with the General Cable acquisition costs and integration costs. In the special items, you see the negative impact of EUR 26 million that I was referring to in the commenting the profit and loss statement, the reversal of the positive metal derivatives fair value of 2017. I go to the following page to comment the financial charges. Net interest expenses, which is the most meaningful line here, is down to EUR 15 million from EUR 17 million last year. This drop is mainly due to the conversion of the old 2013 convertible bond, because the conversion resulted in the fact that the last cash coupon was not due, as the conversion took place. This, of course, reduced the net interest expenses compared to the prior year.
We can flip to the following page to comment the balance sheet. Operative net working capital decreased compared to March 2017 by approximately EUR 130 million, down to EUR 604 million. There is a major non-cash effect here, which is due to the depreciation of the currencies, which is a decrease of working capital for EUR 80 million. The other pretty positive effect is the reduction of the working capital in the project business as well. On the opposite side, there was an increase of working capital driven by the higher metal price compared to last year. Net financial debt, EUR 648 million. If we add back, as Valerio explained, the EUR 291 million debt related to the old convertible bond conversion, this means EUR 939 million, like for like, with the EUR 998 million of March 2017, a reduction of approximately EUR 60 million.
Take into account that this EUR 60 million reduction of net debt was achieved with EUR 100 million dividend distribution and also a EUR 50 million shares buyback, which was executed in the second quarter 2017. Last but not least, the cash flow. Given the seasonality of our working capital, I would mainly focus on the right column, which is recapping the cash flow of the last 12 months from 1st of April 2017 to end of March 2018. The free cash flow is pretty good, EUR 257 million on a last 12 month basis, I repeat, and it is not very far from the record free cash flow, which was achieved for full year 2017, which was at EUR 276 million. Pretty solid cash generation in the last 12 months.
I think I have concluded, and we can go ahead with the Q&A session.
Thank you very much. If you would like to ask a question at this time, please press the star or asterisk key, followed by the pound on your telephone. Please ensure that the mute button on your telephone or speakerphone is lowered to signal to wait to be put through. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will pause for just a moment to allow everyone to signal. We will now take our first question from Daniela Costa from Goldman Sachs. Please go ahead. Your line is open.
Hi. Are you hearing me? I hear the line really badly. Hello?
Yes, we hear you.
Hey, you hear me. Good afternoon, everyone. Thanks for taking my question. I want to ask two things. First, we've seen the tenders for wind offshore starting in both, at least for the turbine side, in U.S. and in Taiwan. Can you comment a little bit about your expectations around these markets? When could cable orders come, and how would you be positioned in terms of capacity to supply those and gain contracts there? The second point, can you talk a little bit about CPR? It doesn't look like Energy Products sort of accelerated in Q1. Can you talk about what we have seen in terms of people getting out of the market that are compliant, pricing? Give a little bit of color on should we still expect to see an acceleration in the business driven by CPR. Thank you.
Okay. Thank you, Daniela, for your question. First of all, let's go to the tender of offshore wind farms in U.S. and Taiwan. We have heard something, honestly. We have not received any request for quotation yet. We hope that at least the U.S. will start with such kind of technology that seems for Europe to generate pretty good and cheap energy, clean and cheap energy. For the time being, it's too far away, the idea to see business coming from it. I cannot give you a very brilliant answer today, but as soon as we have, be sure that we will tell you. For the time being, we have no tender activity on it. Frankly speaking, I'm a little bit careful on it, because theoretically, we have been awarded by a customer in U.S. of the Cape Wind project that never has been realized. Consequently, CPR.
CPR is going well. Unfortunately, on a limited number of markets in Europe. For sure, we have seen a number of competitors, especially the very little one, not being able anymore to supply compliant products to the market. That is helping us and the serious competitors to grow and to serve the market properly without the dogs that are killing the prices for the volumes. We are pretty reasonably happy with the outcome of CPR. The real problem is that has not been extended seriously in the application country by country, by certain countries. That's a matter of opposition of the local cable association.
Thank you. Can I follow up on the first point, given that you don't see sort of U.S. and Taiwan very near term. What are the biggest contracts or the biggest tenders out there for the next 12 months in terms of submarine? I know we've seen news flow about Viking maybe being delayed. There's also another project called EuroAsia out there. Can you give some concrete examples of what's potentially out there in the pipeline for tendering over the next 12 months? Thank you.
Let me give you my knowledge. The knowledge is that Viking has been postponed in terms of award of tendering because of problems in the permits in the U.K. that are suffered by National Grid. The other projects, vice versa, are coming. Bigger should be another 50Hertz, as big as the first, probably. Other medium-sized project, but let me leave the floor to Massimo Battaini, that is here, in order to give you more color on the tendering activity.
Thank you very much. Hi, Daniela. Yeah, there is still a kind of active tendering movement in the market. As Valerio said, Viking has been only delayed due to a specific technical reason, which is the permitting of the land portion in the U.K. As far as the rationale and the business case associated with the project, we don't see any risk associated to it. There are other projects like SubLink, the connection U.K. and France, which are quite active. There are active project in the offshore space, like 50Hertz, mentioned by Valerio, which is a duplicate of the 50Hertz that we are just about to complete the first projects awarded to us three years ago. There is an offshore project in Holland, HKZ, quite relevant. There is, both in interconnection and the offshore, quite an intensive tendering activity.
We do expect the market in 2018 to catch up a little bit with what hasn't been awarded, has been adjudicated in 2017, where the market ended up with EUR 1.9 billion, EUR 1.8 billion worth of intake. Do expect an improvement over 2018, although Viking, which is a big size, a big portion of 2018 market, will slip into early 2019. Overall, the outlook is extremely positive and tendering activity dynamic as well.
Thank you very much.
Thank you, Daniela.
Thank you. We will now take the next question from Lucie Carrier from Morgan Stanley. Please go ahead, your line is open.
Hi. Good evening, gentlemen. Can you hear me?
Yep.
Okay, perfect. I have three questions. The first one is around the telecom. I understand that you had some provision relief in the quarter, which were small, and also some carryover from YOFC. Even if we exclude that, the margin expansion actually looks quite spectacular, especially considering the organic growth was a little bit lower this quarter. Maybe can you explain the building block of this margin expansion and specifically, how much visibility you have for the margin for the rest of the year? Of course, I'm here curious to know about the sustainability of what we've seen in the first quarter. That's question number one.
Thank you, Lucie. The provision release has been EUR 5 million, is related to the provision we took on the entire credit with OCI, is secured. The EUR 5 million, consequently, we have to release it. The margins are nevertheless very high. Why are very high? First of all, there is an operating leverage effect because the volume are going up, the fixed costs, by definition at my home are fixed, consequently cannot grow. Growing the volumes, that helps also to grow the efficiency. Thanks to the investments are we doing. If you remember, in 2014, we started, or better, we restarted to invest in telecom in fibers. We started with the aim to reduce the cost of the fibers, because we were pretty high in term of fiber costs.
The fiber cost is much better, helped by the actions, the investments we did, the improvement in the process, the volume comes with the scale effect. The race is not over. We have still to go to complete the capacity and the upside in a business that is driving the race, is growing. Just in case, today, during the board, we asked and we obtained a significant investment of EUR 110 million to be executed in the next two years to further grow capacity and reduce the cost of the fiber. The combined effect of the two, the growing capacity, the reduction of the cost, is giving very solid margins to the telecom business. We expect such a kind of level can be sustainable for the next quarters. What about the view of the market trend? Frankly speaking, everyone is oversaturated. We too.
We are moreover going to close the deal with General and consequently to increase further our capacity and our presence in the market. I don't see any problem for the time being. The real problem may comes in the future, maybe from a very sharp slowdown of the Chinese market. For the time being, is not in any forecast, even of YOFC, is not.
Okay. Thank you.
Lucie, did I answer to your question?
Yes, you have. Thank you very much, Valerio. That was very clear. The second question I had was around Energy Project.
Yes.
If I exclude the provision, the contribution was actually only stable, I would say, year-on-year. I see that in your guidance slide, where you show the arrows by division, you are indicating that you expect contribution, organic contribution in Energy Project, to be up actually year-on-year versus last year.
Yes.
How much visibility do you have in terms of the building blocks for this margin for the organic contribution to accelerate in the remainder of the year, considering it's stable in the first quarter?
Are we talking about projects overall? We expect a better contribution in 2018, compared to last year, of high voltage. A very moderate improvement, Western Link provision apart. A very slight improvement maybe of submarine.
Most of all, the progression of the trend of high voltage, the rest of high voltage. Massimo, I don't know if you have anything to add.
No, I confirm it. We have full visibility of the project, because they're all in as far as submarine is concerned. We can easily project a slight improvement in submarine. As far as voltage is concerned, we should do better than last year, because we're going to have a better result in China, thanks to the qualifications that are going on. We're going to recover the portion of the market we a little bit lost as a result of the disposal. I would say a safe visibility of some improvement in submarine, a more significant improvement in the voltage at the end of the year.
Okay. Thank you very much. My third question was just on the industry division order book, I understand that the mix at the moment is not necessarily the best mix from a margin standpoint. In the order book that you have for industry for the rest of the year, are you potentially seeing an acceleration or an improvement of this margin mix as the cyclical businesses are continuing to improve?
Lucie, let me leave the floor to Francesco Fanciulli, the responsible of products, so that you can hear directly from him the answer.
Good evening. Do you hear me?
Yes.
Thank you for your question. The picture as of now in the order books reflect the speed we have seen in the first quarter. The quality of the order book is still characterized by mid-size project while we are still waiting the big orders that should come related to the largest project that has not been released yet. Order book quality in terms of mix is still driven by transportation segment, mainly railways rolling stock. Good solar park coming, stable wind, and relatively stable crane and mining. The expectation for the year-end is to keep stable the speed as it is today, providing the release of the expected industrial project in the pipeline.
Okay. Thank you. Maybe if I can have one last question, if I may. Thank you for all of the color on the provision and what's going on exactly at the Western Link. Valerio, Francesco, from your standpoint, is this level of provision of EUR 20 million conservative enough? Are you feeling comfortable with this level?
Okay, to be clear. That's the provision that is totally in line with the risk we have today. EUR 3 million out of EUR 20 are for.
Deductible
deductible. We expect EUR 15 million the total cost of the delay, because we are going to be late two months more. Two months more times the LDs we pay per day, is a mathematical calculation. Obviously, if the delay will be longer, we don't think so. We are already on site. In the next two days, should we be able to get the cable, and to start the installation of the repair cable. We believe that's the proper provision for the damage we had.
Okay. Thank you very much.
Thank you.
Thank you. We will now take our next question from Monica Bosio from Banca IMI. Please go ahead. Your line is open.
Yes. Good evening, everyone. Can you hear me?
Yeah.
We do.
Okay, perfect. My first question is on the organic growth in the first quarter, which, as Francesco told us, was pretty good. I was wondering if you believe that this organic growth could be maintained or improved over the rest of the year. My second question is on the General Cable acquisition cost and integration costs in the first quarter. Obviously, they were quite small, just peanuts, but I was wondering if they are on top of the EUR 220 million that you announced at the time of the acquisition. The third question is on General Cable on the first quarter. The first quarter for General Cable was characterized by a negative mix in the U.S.A. and a pretty good performance in Europe. I was wondering if you could comment on this and on what do you think about the rest of the year for General Cable?
The very last question is an indication from Francesco, if it's possible, on the financial charges by year-end. Thank you very much.
Thank you very much, Monica. First question, organic growth first quarter, let's say not so bad, 3.1%. We expect that level to be sustainable in the full year.
Okay.
Obviously, it's a compound of different organic growths. We see energy projects, thanks to high voltage mostly, able to grow a little single digit, submarine flat. I'm going to give you an answer that gives information for the guidance to all of you. Sorry, that's energy projects. E&I, slightly positive despite OCI, because OCI has been seriously negative in the first quarter. In the second quarter should be with a lower level of negativity, but in the second half should be at least in line with the previous year. We have two effects. First of all, the previous year, the second half was the drama for OCI. Secondly, the oil price is now at $75. If that level of price keeps, the investments in the Middle East may restart.
How much time it will take, I don't have a very clear idea, but we are seeing a better perspective for OCI. Industrial network component, a mid-single digit growth. That's what we're foreseeing today.
Okay.
Lower, to be clear, than the 10% we posted in the first quarter. Why? Because the first quarter last year was a very low level. Today, or better, this year has been much better, but last year, if you remember, progressively, the industrial cable segment went up along the year. Finally, oil and gas, let's say more or less flat, with a potential recovery in the SURF, in terms of organic growth. The organic growth without the margins is useless. The problem of SURF is going to be the margins of the new tenders. Our competitors in South America have pushed down the price like hell, we reacted, and now we have the volumes going to come, but with very low margins. Finally, telecom, a single high digit organic growth that is better than the 1.7% we posted.
Obviously, last year, the copper telecom that has had a negative effect in the first quarter, along the year will have a lower effect. Unfortunately, it was foreseen and planned, the slowdown of the copper telecom in the last mile for NBN.
Okay.
Overall, I confirm that the current first quarter organic growth is something that we are thinking to be able to reach year-end.
Thank you.
That's the first question. Second question. Integration cost. Francesco, do you want to?
I think in substance, hi, Monica, Francesco speaking.
Hi.
I think in substance, we can say that these integration costs are included in the EUR 220 million total implementation costs. In any case, they represent, as you said, a pretty small part.
Okay.
More the integration cost for the time being, are we talking about the cost of lawyers, the cost of-?
No. Consultants.
Consultants. What about the first quarter of General Cable? Our comment, okay, has not been outstanding.
Okay.
Has not been even so bad. Obviously, is impacted by the fact that General Cable doesn't hedge the metal.
Okay.
Last year, a part of the projects for what is our knowledge at the time, they do not hedge the metals. What does it mean? That last year, in the first quarter, they enjoyed a very high level of copper. Consequently, they had a positive result from it.
This quarter, the first quarter, unfortunately, they have not been able to enjoy the same upside in the copper. Consequently, they lost. They did not realize the same advantage of last year. The business is going reasonably well, not dramatically well, nor dramatically down. There is an effect of the mix. Obviously, we have been talking with them just to understand the trend of the business. We don't see, and they don't see a dramatic effect on the power distribution as someone else has shown. The power distribution is going not very well, but not very bad, is pretty stable. Maybe a little bit of negative mix, but nothing else. What else? There is an effect of mix in North America. That's true, because the mix for special cables and for power distribution is higher in the trade.
In the trade, the margins are lower by definition. That has been, in their opinion, the little slogan. On the contrary, is improving definitely Europe, the projects, and the high voltage. That's partly, by the way, are doing for us for the France, Italy, and that's it. I'm not worried.
Okay. Financial charges.
Financial charges.
Maybe I take this question, Monica, on the financial charges. Let me refrain, first of all, from giving you an indication on the expected net interest expenses of the year-end, including potentially the combined perimeter, because it's very complex.
Okay.
It depends on the timing. It depends on a lot of accounting impacts and would be a waste of your time. What I can say is, if we reason on our existing perimeter, last year, we had at the level of net interest expenses approximately EUR 70 million.
We will enjoy the positive effect of the conversion of the old convertible bond, 2013. This, of course, should impact around EUR 9 million, EUR 10 million positive. What I can say is that in 2019, when the synergies on financial expenses will be already at run rate, after the refinancing of General Cable debt and the payment of the acquisition consideration, we will realize around EUR 30 million synergies. In my best estimate, this should leave the net interest expenses combined, net interest expenses, around EUR 100 million for the combined company. You have to add, of course, hedging costs, which is another EUR 15 million to EUR 20 million. The financial expenses, some financial expenses, amortization, the line of net interest expenses, I think that EUR 100 million for the combined entity, 2019, would be a good target to reach.
Okay, perfect. Very clear. Thank you very much.
Thanks a lot, Monica.
Thanks to you, Monica.
Thank you.
Thank you. We will now take our next question from Andreas Willi from JPMorgan, London. Please go ahead. Your line is open.
Good afternoon or good evening, everybody. I have two questions left, please. First one on the provision and the Western Link issue. When you had the original problem with the project in a different part of the cable, it was also because it was a new type of cable and something specific and therefore unlikely to occur elsewhere in other projects. Is the current fault also related to this being kind of a bit one of a kind, or what do you think it could be, and could there be an issue elsewhere where you have used a similar cable? The second question for Francesco on the net financial position at the end of the year prior to the deal happening. What do you see in terms of working capital, CapEx movement, where should we land at roughly for the end of the year?
As a starting point before we add the debt and the financing of the deal.
Thank you, Andreas Willi, for the question. I try to answer to your first question. At the end, some problem in the testing phase of a link of 900 km may happen. Obviously, with the history of Western Link, everyone is scared. We too. The point is that where, first of all, we had the fault, if any, we have to see, because maybe even an external damage. The fault, if any, has happened in the first 1,500 meters from the shore. In an intertidal area. Maybe that obviously has been a fault due to the cable. Maybe that has been a fault due to an external damage, maybe made by third parties, or maybe has been a fault that progressively came out because of a damage or a particularly hard solicitation of the cable we did during the installation in that difficult area. We don't know today.
We have to have the cable in hands and to examine and to analyze.
Yes.
Massimo, I don't know if you want to.
No, as far as the case is concerned, you said everything. Until we get the cable in hand, we cannot figure out whether this is an intrinsic cable problem or external damage. We will know this over the next 10 days. Your question was also about whether we have other application of this technology, which we don't have. This was the only cable project where we apply the polypropylene and laminate technology.
If you are hinting a possible risk, another project, not at all associated to the technology. This would be the unique project which we've done with this specific insulation technology. Did I answer the question, Andreas?
Yes, that was very clear. Thank you.
All right. Francesco, would you like to answer on NFP?
On the debt reasoning on the current perimeter, basically let me start from the EUR 436 million debt at the end of last year. I anticipate a free cash flow, let me say, between EUR 200 million-EUR 230 million. A little bit weaker than last year because last year benefited from a major reduction of working capital. This year, I think we will have an increase of the working capital. Then, of course, we have to consider the dividend, say, EUR 100 million, considering everything. A net cash flow between EUR 100 million and EUR 120 million. This would bring the debt down to EUR 300 million. Then you have to take into account the conversion. Keep in mind that EUR 17 million of this conversion took place already in 2017, and the EUR 280 million has already occurred in Q1.
This boils down to a NFP, which is, after the conversion of the 2013 bond, a very small debt in terms of NFP. Of course, you have to consider all the effects of the acquisition, including the capital increase that we want to finalize as soon as possible. I can also give you an estimate of the combined debt that I see for year-end, all including, acquisition including and including the capital increase that, in my opinion, should be slightly higher than EUR 2 billion. Between EUR 2 billion and EUR 2.1 billion, I would say. Year-end 2018, including General Cable acquisition, refinancing of the debt of General Cable, and the EUR 500 million capital increase.
Very helpful. Thank you very much.
Thanks a lot.
Long-term forecast.
2018 is not that long-term.
It's actually short.
Thank you. We will now take our next question from Tom Swift from Credit Suisse. Go ahead, your line is open.
Hi, guys. Can you hear me?
Yeah.
Yeah.
Hi. Thanks. I guess just a follow on from Andreas' question. Just seeing at the bottom of the first page on the press release saying, the possible capital market transaction in the coming months. I know you've spoken about the equity raise, but what on the debt side? Are you thinking about coming to the debt market anytime soon? Thank you.
Hi, Francesco Facchini speaking. We have not decided yet. The acquisition will be funded with acquisition financing for EUR 1.7 billion. EUR 1 billion is a term loan, EUR 700 million is a bridge financing, and then, of course, the bridge financing is a bridge financing, so it's subject to a takeout. This takeout will take place most likely in the second half of the year, in the fourth quarter, actually, of the year. Then, of course, to be decided whether the takeout will be for the entire amount of EUR 700 million or only a part of that. Too early to answer the question.
Okay. All right. Thanks very much. I just thinking aloud here. You've got the twenty-twos at two and a half, and I know they're trading all right, just thinking it might be quite opportunistic for you guys to tap the markets again there. Just thinking aloud.
No.
Yes, sure. No, sure. I agree. The interest rates on the market are very interesting. The market confirms to be pretty appealing, pretty attractive right now. Going to the market in the second part of the year will allow us to fix a pretty low interest rate. If there is, as I think it will be the case, a good window, we'll certainly take it. To be decided, the amount, because it's not a given that we will go to the capital market for the entire amount on the bridge.
Okay, got that. Thanks very much, guys.
Welcome.
Thank you. We will now take the next question from Dennis Dinkelmeyer from Goldman Sachs. Please go ahead. Your line is open.
Hi, good afternoon. My first question is regarding the Viking Link. Obviously, the Viking Link is going to be a very large interconnector, and a lot of stakeholders are involved in the organization and the decisions made regarding technologies and potentially the suppliers. Do you think that your experience with National Grid and the potential problems you had with Western Link are in any way impairing your ability to gain the Viking Link? Secondly, do you think that, given that Western Link was done with much incremental technology that's perhaps a little bit older, do you think there's any way that the Viking Link now will favor extruded lines?
Yeah.
Okay. Let me give the floor to Massimo Battaini to give you an answer.
Hi, Dennis. Regarding Viking, National Grid is involved, is one of the two customers, and the other one is Energinet. As we many times said, the Western Link experience with National Grid has actually strengthened our position within National Grid rather than weakening it. We don't feel any kind of disadvantage in participating to the Viking project, or any negative influence from the Western Link position. Viking will be a different technology than Western Link. It is unlikely that it's going to be extruded, because as Valerio said before, it is the longest connection ever, and I don't see customers ready to take on the risk of running a new technology, extruded technology at 525 kilovolt, which is the voltage of the line, in an extruded solution.
I am 99% confident that technology chosen for this connection will be the MI, the paper insulated technology, which is a very well-consolidated technology, in which we benefit from a long experience of many projects installed, one of which has been installed 50 years ago and is still running. Actually, we think we are the best positioned in terms of experience and knowhow on the MI technology, in the market. This is what we know at this stage. As you know, the award that was supposed to happen in July will be probably moved back to quarter one next year. I think the customer decision regarding technology has been already made according to the connection and the information that we get from the customer.
Thank you very much. A second question regarding the telecoms division. First, you have mentioned that there's a very strong demand in the market for fiber, and there's also a shortage. Do you think there's potentially a pricing upside to optical fiber cables, at least those were the ones that you're selling, given the shortage? Perhaps could you also comment on where you see strong demand, in which regions? Is it Europe? Is it China? Is it North America?
Okay. First part of the question. Yes and no. Obviously, there is a shortage of fiber today in the market, and consequently, the prices are slightly going up, but very slightly in Europe and U.S. Why? Because simply there is the terrorism of the Chinese entering into those markets. The Chinese, it's true that they don't have capacity, but they may try anyway to offer in the markets of the U.S. and Europe in order to prepare the future of themselves. That's why we keep the prices in line with the, I cannot say the desire of the customers, but we rise the prices very smoothly for the time being. Very smoothly. Can you repeat the second part of the question? Sorry.
You know.
The second part of the question is, where do you see strong demand for optical fiber cables? Is it mostly Europe? Is it North America? Is it China?
It's everywhere in the world. It's Europe today, thanks mostly to France, because France launched a big investment to digitalize the community. It's U.S., but it has been launched one and a half years ago. It's the reply of the telecom carrier to the projected investment of Google that has been canceled. Finally, it's China that is governmental driven and is growing terrifically in term of demand. Today, China Mobile is tendering roughly 200 million fiber kilometer per year. That is a dramatic number, and seems not to slow down, at least for the time being. We expect this demand still going to grow. Obviously, the operators are preparing their network for the 5G, but the 5G is not yet in place. Nowhere. Consequently, it's a further upside that should come in the next 5, 10 years.
Thank you very much. It's very clear. Appreciate it.
You're welcome.
We will now take the next question from Gabriele Gambarova from Banca Akros. Please go ahead. Your line is open.
Yes, good evening to everybody. Just a couple of questions from my side. The first one is on the tax rate. In Q1, you had a very low 26% tax rate. I was wondering if we can assume this level across the whole year. The second question is on trade and installers. You stressed that the CPR put somehow some of your worst competitors out of the market. I was wondering if you can quantify this aspect. I mean, the overcapacity was around 40%. Is it possible to assess how much of this overcapacity is out of the game? Thank you.
Okay, let me leave the floor to Francesco for the first question.
Hi, Gabriele. I think for the existing perimeter, it's certainly a good assumption. Actually, 27% the tax rate, not 26.
Okay.
Second question, CPR. Quantify is not easy if you consider that because it has to be done market by market. Let's take the example of the Italian market. The Italian market has three big players. We are the fourth one, or we're supposed to be the fourth one, and there are at least 20 little producers. Out of the 20, only five or six are today able to provide the CPR cables. Will they be able to join the specs? Probably, yes. When? Don't ask me because I don't have any idea about it. In my opinion, out of the total capacity, roughly 10% of the capacity can be considered today in the real CPR market out of scope. Obviously, are we coming from an over capacity of 30, 40% today? Maybe that we are around about 30.
At the same time, the CPR has obliged the producers to reduce the speed of the insulation lines, consequently further reducing the capacity output. That is another additional step forward to help the saturation of the lines. For the time being, if that's your goal, there is no clue of a potential shortage. Unfortunately, very long way to go.
Okay. Thank you.
You're welcome.
We will now take our next question from Artem Tokarenko from Credit Suisse. Please go ahead, your line is open.
Good afternoon. Thank you for taking my question. I have two, if I may. On energy projects margin, excluding the EUR 20 million one-off charge, I think the margin is still 130 basis points down year-over-year, and you flag mix and high voltage underground cables as the main driver. Could you just give us a bit of color how we should think about margin progression going forward this year?
I give you a very simple answer. Higher is the impact or the percentage of high voltage land in the combined turnover of projects, higher is the impact of the margin, simply because the margins of HV, terrestrial HV, is lower than the submarine link. As a full-year expectation, I told you that we expect a very limited single-digit organic growth. Considering that comes entirely from HV terrestrial and not from submarine, that will be flat. Obviously, that will explain a lower margin for the combined business segment. Maybe not as low as appears to be today.
Yeah.
The upside in terms of HV terrestrial has been particularly strong this quarter. In the quarters to come, we expect not to be +40%, just in case.
Thank you very much. That's very clear. My last question would be, given that some of your competitors run spare capacity this year and going forward, do you see any deterioration in pricing in the energy projects business, in the orders, and just generally on the market?
Unfortunately, yes. If I'm not wrong, some of our competitor has even told that we'd be very aggressive. Okay, here we are.
It's impossible. Could you give any color on what's the magnitude?
No. Frankly speaking, not because I do not have a idea of what means aggressivity from their side. Everything depends by the capability to compete. Obviously, project by project, the picture is different because there are projects that some competitors can do, projects that some competitors cannot do, cannot execute. I'll not be surprised to see a reduction in the margins of the projects. That's sure.
Okay. Thank you much. That's very helpful.
There is a limit for everything, okay? There is a point to which we have to say, "Okay, be free to go. Help yourself.
Let me just one thing, Artem, is not that this is new, and we've been seeing this price reduction over the last three years. It has just happened that over the last three years, we've been able to add internal action to offset and mitigate the price pressure. This action will continue from our side, on internal side, as well, the price reduction of the market will be still there. This is not an unusual trend compared to the past. As Valerio said, it varies project by project. In some situation where we are kind of a single supplier, we can compete much better. In some other cases, of course not. Additionally, bear in mind that price is only one element of adjudication. There is the technical capabilities and the thermal conditions.
Most of the time, we win or we lose based on the other two, not on the price.
Okay, I see. Thank you very much.
Thank you.
Thank you.
Thank you.
As there are no further questions in the queue, I would like to turn the call back to Mr. Battista for any additional or closing remarks.
Okay. Thank you.
We have another question from Luigi De Bellis from Equita SIM.
I see.
Do you want to take the question?
Yes.
Okay, just one second.
Yes, good evening.
Mr. De Bellis, your line is open.
Yes. Two quick questions from me. Sorry. Considering the delay in the award of Viking, how much is the expected order intake for transmission in 2018, and the market size compared to 2017? Do you expect any impact in the first part of 2019 due to potentially lower workload in 2018, or your backlog is sufficient to cover all 2019? Second question, how much is the expected contribution in the guidance of YOFC? Thank you.
Okay, Luigi. Thank you for the question.
I take the.
Late and difficult. I leave the floor to Massimo.
No. The size as Viking is an EUR 100 million project. In a normal situation, we would have faced EUR 3.5 billion, EUR 3.3 billion worth of market in 2018. Once you take out Viking, we expect now the market in 2018 to be in the region of EUR 2.5 billion, EUR 2.6 billion, EUR 2.4 billion, from many other variables. The workload for this year, we have a backlog, which is big. Not entirely sufficient to cover complete 2019, but we still have the whole of the backlog, the whole of the intake of 2018 to help us fill up 2019. At this stage, we are not worried, we are not concerned about 2019 workload. We will manage it as time goes by for the next tenders. Did I answer, Luigi?
Yes. Thanks.
Thank you. YOFC. YOFC. About YOFC. We expect YOFC to perform slightly better than this year, even if they always surprise us. Luigi, let me have Francesco speaking a very short comment on this. Of course, first of all, we expect, it's more than an expectation. We considered in the guidance the carryover coming from 2017. That's an obvious. The famous EUR 6 million that we have referred to. What I can say is that, for the remainder of the year, we are assuming that the very strong results that YOFC posted in the first quarter will more or less be in line, will continue for the following quarter. A trend in line with the first quarter.