Good day, and thank you for standing by. Welcome to the Prysmian Group first quarter 2022 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Valerio Battista, CEO. Please go ahead, sir.
Thank you very much, and good afternoon to everyone. Valerio Battista speaking. We are here to comment on the first quarter 2022 results of the Prysmian Group. First of all, the results. The first quarter went very well. In terms of organic growth, in terms of numbers, everything went well. Excellent start of the year, with results further confirming the relevance of a well-balanced business portfolio and geographical footprint. We have seen an outstanding performance of the energy segment, having a very significant boost from it. We have seen, at the same time, the performance of telecom going very well, especially in North America, and the telecom went really very well.
Finally, on projects, we are gonna comment later about the performance of projects, but to be noted that we accumulated other EUR 1.5 billion orders, namely the NeuConnect and the Project Lightning in Middle East. Overall, 11.4% organic growth, EUR 288 million EBITDA, and over EUR 1.4 billion of new orders in projects. Let's flip the page and go to the financial highlights. Sales closed in the first quarter at roughly EUR 3.7 billion, with an organic growth, as I already mentioned, of 11.4%. By segment, 14.7% in E&I, with sound trend across all the regions. 7.9% industrial network components, with an excellent performance in OEM and renewable. Finally, 7.4% in telecom. The projects posted a 13.6% total organic growth.
From the EBITDA point of view, EUR 288 million, with an EBITDA margin globally of 7.8%, with margin improvement. We have been able to accumulate EUR 75 million increase, adjusted EBITDA versus the first quarter 2021. Because in 2021, we closed the first quarter at EUR 213 million, this year at EUR 288 million. The adjusted EBITDA margins at 8.7% in first quarter 2021, with the 2021 metal price, and 7.6% in first quarter 2021 at current metal price. To be honest, we have seen also a positive Forex impact of EUR 15 million, roughly. Free cash flow. That's the reverse side of the medal. Free cash flow has been not totally outstanding, with EUR 86 million of free cash flow LTM, and the net debt closed at EUR 2.380 million.
Why is that? Simply because with the raw material increase, the impact in the inventory has been pretty significant. Moreover, we have been carefully accumulating some additional stock in order to protect our customers from all the disruption, potential disruption of the supply chain. The operating net working capital has been pretty high, even if on annualized, sales is still at 8.8% versus the 8% of one year ago. So as a percentage, didn't grow very much, but in euro terms, that is what counts. Unfortunately, we cumulated, if I'm not wrong, EUR 300 million of additional working capital. That is foreseen to be dismantled during the next quarters. Let's flip another page to page five, and let's have a look of how this business has been moving region by region. You can see the organic growth by geography.
10% in North America, not so bad. North America represented 35% of the total group, 14% in EMEA. You remember that EMEA was the one being late in the recovery. Now EMEA has accelerated, whereas North America continued to be very sound. 5.3% in Latin America and 8.6% in Asia Pac. By business, 14.7% in E&I, industrial and network components 7.9%, 7.4% for telecom. The organic growth of the projects we will touch later has been extremely good. As I always said, the organic growth of projects has not to be measured quarter by quarter because it doesn't make any sense. Overall, the organic growth of the group has been 11.4%. Let me move, flip the page to page six.
How we reached the outstanding result of EUR 288 million EBITDA from the EUR 213 million of the same quarter one year ago. Forex limited increase. We have suffered a lot of cost increase for raw material, distribution, transport, everything, but we have been able to move it to the customers with the price and mix of the energy to the customers that have been increased more than the costs we suffered. That is a traditional, let me say, trend. Higher is the cost, higher is the price. Is a raw material driven business. Moreover, sorry. The telecom price and mix has improved, and the EBITDA of projects has improved. Not sufficiently or not as much could have been expected, but still EUR 3 million more than the previous year quarter.
Finally, some negative efficiencies and fixed costs, more so because of the inflation. Overall, an outstanding results. That's my judgment. The supply chain has been really running well, and that's thanks to the stock of raw material we have decided at the end of the year to build in order to protect our customer service. Customers are recognizing it to us. Geographical and business mix, together with pro-product management, supporting the results. The decision we took in 2018 to definitely increase our participation to the U.S. market by taking over General Cable is now really paying off, and we are very proud of it. We are very happy, very happy to be in U.S., very happy to participate to the development of U.S. economy, and let me say even well rewarded by the market. Let's flip to page seven. Projects. Let's go to projects.
Projects organic growth has been very good. We even got other EUR 1.4 billion in the first quarter of 2022, namely the NeuConnect interconnection between Germany and U.K. The second one, the Project Lightning in the Middle East to power some offshore platforms for EUR 220 million. Do not forget that in our backlog are not included yet EUR 5 billion projects awarded but not yet accumulated in the backlog, because we adopt as the notice to proceed. We introduce in the backlog only the projects with a notice to proceed, that are operative. Let's have a look at the backlog in the center of the page. The firm orders in the backlog are EUR 4.2 billion. As I said before, there are other EUR 5 billion projects that have been awarded but are not in the backlog.
A significant chunk of the EUR 4.2 are underground high voltage projects, whereas the rest is somewhere else. We have also an update for German corridors that maybe we are going to touch later. Because we are producing, we are shipping, and there are already, if I'm not wrong, 120 km of cables ready to be installed in the German territory but waiting for the decision by the customer to start the installation. The market is growing. It was expected to grow. It's growing fast because from the EUR 3 billion of the last four, five years, is really going to the EUR 8 billion of today. Even yesterday, last year, the market was roughly EUR 8 billion.
It's not excluded, I don't want to promise anything I have not under control, that this market is going to grow further on, even to over EUR 10 billion. In that environment, we have the commitment to maintain our market share. That is, let's simplify, 35%. To do that, obviously, we have to be good or perfect in execution. We have to have the assets, we have to have the capacity available, and this is the capacity that is coming on stream in the next quarters. Thank you. Let's move to page eight. The performance by segment. Projects. Projects moved from EUR 314 million to EUR 406 million. Outstanding. +31% of organic growth. Now, we have been suffering a lot for the organic growth of the projects. Now we have the organic growth, but we don't have yet the margin.
One step at a time. The margin went up from EUR 29 million to EUR 32 million. Obviously, with such high turnover, we suffered in terms of EBITDA margin. That went down from 9.3% to 7.8%. We recognize our defect. Why is that? Installation activities, but even more than installation activities, there are three factors. The raw material cost increase that we have not passed yet to the customers, and we have not EUR 1 accrued for the price revision with the customers. Why? Because we do not have a written agreement, apart from the methods. Consequently, our job today is to start negotiations with our customers to get the recognition of the inflation we have been suffering in the first quarter. The result of it, we'll see year end, or better. Time by time, the projects are gonna be completed.
Second chapter, we had a one-off because we are not perfect. In the telecom submarine, we had a one-off. On Crete-Attica, we made the high voltage line, but we made also a telecom cable that we have been obliged to remake. That has been EUR 3 million extra costs that we suffered in the first quarter of this year. Finally, the seasonality is not the first year, will not probably be the last one, into which the first quarter margin of the projects is a little bit below the average. That's something that every year happens, and this year has happened too. Let's move now to energy. The energy, especially the E&I, has given us an outstanding value.
We closed the sales with EUR 2.8 billion, compared to the EUR 2.1 billion of the same first quarter last year, with an organic growth of 12.1%. In particular, E&I moved up by EUR 500 million, from EUR 1.4 billion to EUR 1.94 billion, with an organic growth of 14.7%. The EBITDA margin of the segment has reached 6.8%, a very high value that is almost comparable with the level of EBITDA margin we have seen in 2007, 2008. Something in brackets, pretty significant, but not usual. Nevertheless, I'm every day almost asking to the team in North America how long it will stay. For the time being, we see orders coming, prices stable, the demand is strong, consequently what I have to tell you. Let's enjoy.
Second chapter, industrial network component. From EUR 648 million to EUR 802 million, with an organic growth of 7.5%. Very good. Very good because the numbers here are littler than the E&I, but the business is more solid, more steady. Consequently, I hope that this is the effect of the rebound of the economy that is gonna stay for a certain number of quarters. These are driven by OEM renewable, mainly renewable, that is growing quite significantly. Last but not least, the telecom. The telecom moved from EUR 382 million to EUR 432 million, with an organic growth of 7.4%. The growth has been solid. The margin improvement in optical, in particular, has been in North America. The margin moved from EUR 58 million to EUR 67 million, with EBITDA margin improvement from 15.2% to 15.6%.
Sound, very sound trend for the telecom business, especially in North America. Overall, 13.6% organic growth, sales from EUR 2.8 billion to EUR 3.7 billion, and the result that went up from EUR 213 million to EUR 288 million. Let me say more than appreciable. Let's have a look of the trend by geography. As I said before, finally, EMEA has started to rise. You see the sales EUR 1.1 billion, EUR 1.2 billion in the first quarter of 2021, EUR 1.56 billion this year, with an organic growth of 14.1%. Telecom and construction market, the T&I, are the two drivers of this growth. The strong growth in OEM renewables in the industrial segment is a good sign, in my opinion, because after the very quick boom of the construction market, the economy has to be written.
has to be redone, sorry, also on the industrial part of the business, which is what is happening. North America. North America is under a boom, a boom of construction, of infrastructure, everything. Sales went up from EUR 868 million to EUR 1,151 million, with an organic growth of 10%. The result, that is what counts in our opinion, went up from EUR 87 million, not doubling, but almost, to EUR 142 million. With a strong result on all the segments and maximum performance in T&I and Telecom, helped moreover by EUR 11 million of Forex impact. Latin America. Latin America, we're talking about numbers that are definitely lower than the two big regions, EMEA and North America.
Are we talking about EUR 226 million versus the EUR 290 we reached this year, with an organic growth of 5.2% and a result that went up from EUR 21 million to EUR 24 million? Last but not least, Asia- Pac, where our presence is limited, increased the sales to EUR 265 million, coming from EUR 210, with an organic growth of 8.6%. EBITDA went up from EUR 18 million to EUR 19 million. We suffered, and we are still suffering, frankly speaking, from the impact of the lockdown in China. Even if for us, China is important, but it's not so significant in terms of numbers compared to the total group. Flipping to page ten. The Value for All plan.
The board has decided to promote and propose to the AGM the participation of 25,000 workers to the Value for All program. What does it mean? That we have the long-term incentive for the management that is represented by 700 people. The MBO, management by objective, that has seen a participation of 3,200 white collars. We decided that to share or to offer the possibility to share the results of the company also with the workers. Because at the end, who make the hard job every day and night are the workers. That's what we did. That has been overwhelmingly accepted, let me say, by the shareholders in the AGM. We are very happy, and we are starting to offer to the workers that opportunity. Let's move to the outlook. Oh, okay. First quarter, 288.
Now, what's gonna be the full year? 288 times four makes a very big number. We are not yet ready to revise the guidance, even if I understand that you expect sooner or later to be revised. We would like to see the second quarter actual before to do it. Most probably we will do, but be patient. Don't be too much in the hurry. I am quite confident that we are gonna revise the guidance. Before to tell you, it's useless to give you an updated guidance three months after having given you the guidance. It's even not serious. Let us see what's the trend of the market.
If the trend of the market appears to be in line with the first quarter. If that is going to be confirmed in the second quarter, at the July meeting, you will see an upgraded guidance. How much? You will know at the time. Finally, the free cash flow that has not been brilliant. I've been pretty nervous because of it, but we are still confident that we are gonna be maybe in the lower part of the range, but we are gonna be able to match the original guidance. Thank you very much. I leave the floor to Francesco Fanciulli.
Thank you, Valerio, and good evening to everybody. As usual, I start from recapping our profit and loss statement. As Valerio said, record sales, record results for the Q1, the strongest ever. EUR 3.7 billion, close to EUR 3.7 billion sales, with an organic growth of 13.6%, including also projects. Very positive in all the businesses. As Valerio said, more than 30% organic growth in projects, around 15% in E&I, 8% approximately in industrial, 7% in telecom. That's a very nice set of organic growth across all the segments. Of course, the EUR 3.7 billion sales are also boosted by a pretty giant metal price effect and also other raw material price effect, and on top, even currency effect.
Adjusted EBITDA, as I said, the strongest Q1 ever at EUR 288 million, boosted in particular by a very strong performance of the energy business, mainly E&I, but also, as Valerio already stressed, very, very satisfactory in the industrial business. Telecom delivered very good results, definitely above the level that we expected for the first quarter, and Valerio already commented the improvement of projects as well, EUR 3 million above last year with slightly lower margin. Let me draw everybody's attention on this, that we are talking, in any case, of a Q1 for the project business that in terms of EBITDA represents approximately 13% of the expected result for the full year.
This doesn't mean that it is insignificant, but of course, it means that we certainly don't make, and this is true for every single year, we don't make the full year results in the project business in the first quarter. This is very clear. As Valerio also anticipated, the total margin at 7.8% is extremely good if we consider the dilution on the EBITDA margin coming from the metal price increase. The restatement of that with last year metal price-adjusted margin of 8.7, which is more than 1% growth from the prior year, which is huge on EUR 3.7 billion sales. We enjoyed also a pretty positive Forex effect, EUR 15 million, which is however, certainly not the largest part of this improvement.
Very negligible adjustments, negative for EUR 3 million, not even worth to be mentioned. What I like to comment is also the strongest Q1 ever in terms of net income with EUR 126 million, almost doubling compared to the previous year. Let me go quickly to the balance sheet. Of course, our balance sheet under the pressure of increasing metal price in our raw material was a bit inflated, very evidently, with an increase of the total operating working capital in the region of EUR 287-EUR 290 million. As Valerio said, as a percentage, that's an increase, but it's not a huge increase because as a percentage on annualized sales, it went from 8% in March last year to 8.8%.
The main reason for this increase is definitely the raw material price increase, which had a total effect, including metal and non-metal, not far from EUR 400 million, March last year to March this year. The inventory build or the safety inventory cushion that we built in order to secure our procurement flow and our supply chain from any potential disruption. That, by the way, fortunately, we didn't see that far, so far. That's why we are also confident that we'll be able to recover these few days of extra stock that we built in the remainder of the year. Last but not least, we managed to keep to contain the increase of working capital, thanks to very good receivable and payable management.
We gained approximately 4 days of summing up the decrease in receivables, DSO, and the slight increase in payables, DPO. We gained overall 4 days, which is close to EUR 100 million. It's real money. All this, of course, is reflecting in a level of debt that we didn't like for March 2022, slightly above the level of last year, but that I'm still very confident that we will recover by year end. Having said this, I come to my last slide, which is the last twelve months cash flow, EUR 86 million, certainly not brilliant because of the EUR 345 million increase in working capital over the last twelve months that I have already commented. The level of debt slightly increasing compared to March 2021.
I think we are still in a position to land within the guidance. Of course, it will not be easy, or it will be difficult, let me say, to land in the high part of the guidance. As for free cash flow, that's quite obvious, because this EUR 345 million working capital increase, and in particular, the raw material impact, will not go 100% away from now to year end, but will be partially reabsorbed. We have to do a good job in normalizing the level of inventory. We have to keep very good receivable management. I think that the, let me say, middle part, the median, or maybe slightly below the current visibility, of the midpoint is still very feasible.
Under such a pressure of raw material price increase, I think it's even better than delivering the top of the guidance in a normal environment, frankly speaking, in terms of witnessing our cash generation capacity.
Anyway, we already gave the instructions to the companies that they have to restore the level of working capital by the summer, possibly at the proper level. Because the risk is that, if inflationary mode will turn, the cost of raw materials may drop and our inventory have to be deflated.
Yeah. There is only one assumption that I like to spell out in order to land within the free cash flow guidance, and it's quite obvious. That the metal and other non-metal raw material price increases don't keep growing very significantly because this, of course, will make it impossible, let me say.
That seems not to be the case as of today.
Seems not to be the case. Very good. I think we can go to the Q&A session.
Yeah.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Once again, star one if you would like to ask a question. Your first question today comes from the line of Monica Bosio from Intesa Sanpaolo. Please go ahead. Your line is open.
Good afternoon, everyone, and thanks for taking my questions. The first one is on the E&I segment and in particular the T&I segment. What kind of growth are you incorporating in your assumptions in your targets for the second part of the year for the E&I? I'm asking this because maybe the market is expecting some slowdown due to the macro scenario. I know that you are going to offset, more than offset with projects, but just a question on the expected growth on E&I in the second part of the year at the organic level. The second one is on the margin. You didn't disclose any financial detail on the contract with Telstra.
It is in Australia, my bet is that the contract can carry higher margins than the average one you usually have in the telecom business. The third question is on the lawsuit in the U.K. I was wondering if you have already accounted for some provision on this and if you can give us some flavor. The very last is on telecom. If I adjust telecom for YOFC contribution, the underlying margins of telecom seem to me decreasing. Margins in America are rising. I was wondering if you can share with us what are the margins in North America and what are the margins in Europe that I'm expected to be down, just to check. The last one, if I may, for Francesco, it's a housekeeping.
Can you please give us the final full year impact from Forex at the top line and EBITDA level? Thank you very much.
Okay, Monica, thank you very much for your list of questions. E&I or T&I, better, organic growth forecasting. What we include in our assumption for the full year guidance. Of course, we are including in our guidance what we have in hand. We are not including a progression or a stability of the market trend in the second half. We have already the orders with prices booked by the customers for the second quarter. Consequently, we see the second quarter or the first half overall, pretty good and solid. The lesson learned is that never say never.
Mm-hmm.
Meaning that if the market turns down dramatically, customers are used to cancel the order and to place orders at a lower price to someone else. Never say never. Anyway, we are very careful on it. The assumptions we have is that the market for the first half will be reasonably buoyant. The second half, my perception is that we have to be more careful because the cost of money is increasing, because the economy is suffering, the real economy is suffering the effect of the war in Ukraine, and consequently, we have to be a little bit more prudent. Overall, first half, good, second half, more cautious.
Okay.
Second question. Telstra margins. You are right since you can be part of this meeting, the management team of Prysmian because you know the market perfectly. The Telstra margins are very good. We are very happy to be the number one supplier of Telstra. We had some meetings, me personally too, with the CEO of Telstra, and they are absolutely focused on executing this project, of course, with our support. To be honest, the fibers will be partly provided by Corning, meaning that
Okay.
Our 12,000 kilometers of cables, I'm very transparent. Our 12,000 kilometers of cables, 144 fibers each one, if I'm not wrong. The cables will be produced by us. One of the two cables will be produced with our BendBright XS fibres. The other cable will be produced with Corning ultra-low loss fibres, but will be produced by us. Nothing else.
Okay.
Very, very transparent. The U.K. antitrust suit. This has been very new of yesterday or two days ago. The application has not yet been notified to us. We don't know its content and cannot therefore speculate on the content. What we can say is that promoting a class action is a complex process. First of all, there has to be a permission to start the class action to be granted by a court. That is not simply a formality, it is a quite complex process. Secondly, the class action will need to prove that there has been an overcharge, and the European Commission decision does not mention any kind of overcharge.
Mm-hmm.
Mention that the cable makers have been agreeing on something that they shouldn't. Third, the class action will need to prove that such alleged overcharge have been passed to their customers. Have been passed to our customer, to the customer of cable makers and from the customer of cable makers, namely the utilities, to the end customers. That is not easy, but never say never. We have no accruals for the time being because we have no idea of what to accrue. Most probably in the quarters to come, we will size, if any, the potential risk of this class action, and we are gonna put something in our balance sheet.
Okay.
Telecom. Which was the question on Telecom?
The margin adjustment.
The margin adjustment because of YOFC. Philippe, do you want to give an answer? I have not.
Yes, I can answer. Hello.
Hello.
The first thing we have to say about Telecom is, we have a capacity that is quite busy. As you know, we have also reinitiated to grow our capacity approximately one year ago with a few projects of increasing capacity. The more our new capacity comes into play, and it will be progressive in the coming quarters, the more we have room also to improve our margin because we do not so much increase the fixed costs. That's one element, so capacity matters. Second thing is, inside the capacity that we have, we try to grow selectively in order to offset the raw material cost and energy cost increase that we see from our suppliers. This is progressive. As you know, we are a serious company.
When we have a contract with someone, we manage the contract, and we discuss about increasing the prices as a consequence of our cost increase. All that takes some time. It depends on the market, it depends on the customers. We do not let down our customers. I have to say that we see a higher, faster reaction in North America than in Europe from that perspective. As you rightly say, the prices are better in North America than in Europe. Still, it's true that Europe is changing and is improving with time. I would not say that Europe is a problem, but there is more pressure on the margin in Europe than in North America, this is true.
We dedicate a larger part of our capacity to North America than in the past, also for that reason.
Anyway, when our customers, especially in Europe, refuse totally to debate about the cost increase of raw materials, the approach we have is, pretty strong. We have stopped completely the shipments to Telecom Italia. Just to mention one.
Got it.
The Forex effect on the full year for the EBITDA. Francesco, I leave the floor to you.
Ciao, Monica.
Hi, Francesco.
The just rough estimates on the EBITDA this year, of course, provided that the current level of Forex will stay in place for the remaining part of the year, will be between EUR 40 million and EUR 45 million positive. Slightly decreasing in the second part of the year because last year there was already a strengthening of the US dollar towards the last part of 2021. On sales, I would approximate that around EUR 300 million, the Forex effect. Of course, much larger is the full year effect of the metal price, which is quantifiable in EUR 1.4 billion, which is the equivalent of EUR 400 million in the first quarter. For the full year, we forecast a total metal price effect of EUR 1.4 million.
This, of course, the two combined effect will plus the organic growth, which is very substantial, will drive our sales substantially up, most likely not very far from EUR 15 billion.
Thank you. Very useful. Thank you very much to all of you.
Thank you, Monica.
Thank you.
Thank you.
Thank you. Your next question comes from the line of Max Yates from Credit Suisse. Please go ahead. Your line is open.
Thank you. Just on the first question, just on project margins, could you walk us through exactly sort of which costs are inflating here? Because my understanding was on the raw materials that you agree the amount of sort of raw materials that will be needed and you price that into the contract. I was just trying to understand better kind of which the raw materials or what was really affecting the margins from a cost standpoint. How from our side should we get confidence that when you have these negotiations with customers to try and sort of increase the prices, how should we get confidence? Or is there anything you can point us towards to give us confidence that customers will actually accept those if there's no legal obligation?
Okay, Max, thank you for the question. I try to give a first answer, then I leave the floor to Hakan Ozmen, that is here around our table, for more details. What happened, that, the projects have a quite long life. From the time we get the order, we subscribe the contract with the customer, till the time of execution, there are months, sometimes years, of waiting time. Usually, the raw materials do not grow quickly as it has been in the last quarters. We are in front of a very extraordinary event. Whereas the metals are adjusted, hedged, the other raw materials that are not negligible in, not totally negligible in the, in the projects, just in case, the fuel for the ship can generate swing of some EUR millions. We have no adjustment clause with the customer. You are right.
Contrary, we have not the legal right to get it, but it's a matter of negotiation.
Now I leave the floor to Hakan because he can give you more color on how we are gonna negotiate.
Okay. Thank you, Valerio. Let me start with the raw materials overall. The raw material, as you know, has increased significantly. This is bringing down the EBITDA margin percentage wise. Because if you have higher costs, you have higher sales, and percentage wise it drops, even if you keep the same absolute margin that you expected from the project. This is one element that drops the percentage margin. The second question is about the confidence on the value that we would be able to generate due to the negotiations. I mean, Valerio explained it very well that there are these increases on multiyear projects, but these increases are not happening immediately. These increases happen along the way during the project execution.
You cannot claim any, you know, value from the customer that has not been hit into your account. On the other hand, we do percentage of completion method. We are evaluating the full project based on some scenarios of raw material that is definitely having an effect when you start a project in calculating your calculated margin. But in reality, when you execute these projects, you have the possibility after the execution to have discussions with the realized costs to talk to the customer. Because you cannot talk to the customer currently for the full project saying that, "Look, the raw material prices have increased, and we would like to negotiate." This doesn't work because we don't know what is going to happen in the coming years.
Once we finish a quarter or once we finish a realized completion, then we have the opportunity to have discussions with our customers. I mean, you're absolutely right that we don't have legal rights, but you know also in the market that there is a significant increase. It's an extraordinary situation. I think for the sake of the completion of the project and for the quality of the work that we are giving to our customers, it's in both benefits to realize good value generation for them and for us. I think if you ask my confidence level, I feel pretty confident.
If you are going to ask me if I will be able to recover the full amount, this would be a little bit too much ask for the customers. We will definitely, as time goes by, after we complete some portion of the project, we will be having discussions with our customers to recover. Just bear in mind that also the percentage that is coming out, I think, is not the most important parameter in our let me say project business. It's more the absolute margins.
Yeah
... that we are driving. I would focus on the absolute. The absolute actually was in line with our expectations for the quarter. Valerio also explained very well that we had one hiccup on the telecom side, which also created some distortions for a quarter. As Francesco was saying, it's a very small, insignificant quarter for us to evaluate for the full year.
Yeah.
Hakan-
Okay.
May you give an-
And-
Sorry, Max.
Yeah.
May you give to Max the example of the stainless steel?
Yeah. For example, we have in some projects, we are using stainless steel in the armor. I mean, if we are going to think about, as you know, the nickel price is in extreme levels, you know. On the other hand, the nickel price also has come down by 15% in the last two weeks. It is very volatile. What we are definitely discussing with our customers is, in case we have significant swings, and in this case, we are after the execution of the project, we are discussing and realizing these, the value generation for both parties as I explained.
If you would update all our costs based on today's value, expecting that also the future is going to be like this, then we would definitely create a big assumption and a big swing that would be reflected in the, you know, in this year's numbers, but also in the coming year's numbers. We are more applying the right methods, the percentage of completion methods, but with prudency that we will one day recover it, but we are not reflecting it into our actuals. This is the method that we apply.
Okay.
I don't know if you got it clear.
Understood. No, that's helpful. Just one very sort of quick follow-up just on projects revenues. Obviously, you've had a very strong start to the year, sort of slightly more than EUR 400 million. You were quite keen to sort of help us maybe not get too carried away. I mean, on the revenue side, do you think that that's. I mean, do you think kind of you can be. Because obviously you have a very large backlog.
I guess I'm trying to understand the revenue phasing of that backlog for this year and next. I guess sort of particularly into next year, when you think about your phasing of projects, when you think about the capacity that you're bringing on, is it reasonable for us to think that maybe you're kind of EUR 1.0 billion or EUR 1.8 billion of revenues for projects, and then you go to sort of EUR 2.2 billion, EUR 2.3 billion? I know you've got this ambition to get to kind of around EUR 3 billion in the next five years. I'm just trying to understand a little bit about phasing as we go into 2022 and 2023.
If I may say, the first quarter in terms of revenues is reflecting, let me say, a good example for the full year. We are going to see an increase for this year. Definitely it's not going to be like last year. We are going to see an organic growth. Again, our business is very much second half loaded. Second half is the most important half for projects. The first quarter is always under pressure if you look also in the past years. Second quarter is going to be where we are going to build our installation and operations and production. Third and fourth quarters is the area where we are completing majority of our operations for multi-year projects.
For this year, we have multi-year projects only for, let me say, a shorter period of time. We have not started the mega projects yet. There are a few that we are definitely starting with the engineering, but the big projects are coming from the next year's perspective. I can prudently tell you that we are going to grow the sales value in the coming years. Also, if you look to our backlog and you will see also that some capacities are coming along in the coming years. Your assumptions are not far away, I can say.
Okay. Understood. Thank you very much. I'll go back in line.
Thank you, Max.
Thank you. Your next question comes from the line of Daniela Costa from Goldman Sachs. Please go ahead. Your line is open.
Hi. Good afternoon. I have a couple of questions as well. I wanted to just check and clarify on the projects again, on sort of on the margin decrease. You've talked about the various elements, but I was wondering if you could help us understand the magnitude of what's more relevant. There's this issue with the pass through. There's also the phasing issue and the telecom issues. Can you break down sort of what's the most relevant? Then also on the phasing issue on underground, can you talk us through which project is this? How significant? Just give us a little bit more color. I guess what is it technically that is just a timing or is there anything in terms of the technology? That's sort of the first question.
Then the second question I wanted to ask was regarding, I mean, we've on the wind offshore side, in terms of outlook, obviously we've all seen very big gigawatt increases, by many market participants in terms of what's the outlook. But we have also seen the turbine companies, facing like delays and, what's the risk that if we have an outlook in the wind offshore side that is delayed, that cables will also be delayed then, and which type of delays would make overcapacity for any of the market participants a worry? I was wondering, yeah, on those, on those two things mainly. Thank you.
Hey, Daniela Costa. Thank you very much. I leave the floor for the answer to Hakan Ozmen. That is more on the ball.
Thank you, Valerio Battista, and thank you, Daniela Costa. Daniela Costa, actually, between the lines, Valerio Battista explained already the delta variation that we have seen in the first quarter. He was mentioning about EUR 3 million in telecom. I mean, you can count that as, you know, as given. The EUR 3 million is an additional margin that we did not have for the one-off mistake or installation mistake that we have done. I have to say that, you know, telecom is a very particular business that we have inherited from General Cable, and we started last year to install also telecommunication cables as a turnkey.
I don't see this as a big hiccup, but I see that sometimes you see these operational problems that then you may see. We don't see that on the energy side, which we are pretty, let me say, stable. The EUR 3 million you can add and you can count that as a percentage rise to reach closer to the last year's percentage. Of course, there is also the raw material and copper increase, which is also having an effect at least from 0.3%-0.4% margin on the overall margin erosion. It's not actually a margin erosion. I will just underline that. It is a margin percentage erosion, not absolute margin erosion.
Apart from the telecom, we have maybe a very little, maybe a EUR 1 million-EUR 2 million delta that comes due to the cost increase that Valerio was mentioning that we will be recovering from the future, hopefully from the future. Keep in mind that we are doing percentage of completion. The EUR 1 million-EUR 2 million cost increase is only effective on the percentage of completion from a bigger amount on the full project. Let's not confuse that the price increase on materials is only EUR 1 million-EUR 2 million. It is not. It is much higher, but the effect in one quarter and in a lifetime of a project inside one quarter, it has an effect of a few million.
Therefore, I don't see a significant, let me say, margin erosion. Of course, there is also no margin increase. Again, this is the first quarter. We will hopefully and also, we are planning to recover. On the operational other delays that you were mentioning, how the outlook looks. Yes, we are seeing that the turbine manufacturers are under pressure. Under pressure not only from the capacity perspective, but also on the raw material increases, they are under pressure. If you look to their margins, they are significantly eroding margin because the unexpected growth of these costs will not be able to pass through to the market immediately.
On the other hand, the budgets of the utilities and the TSOs is also having a big impact. I give you a very simple example. The price that we were quoting for a project was maybe in the level of EUR 100 last year. It has increased by 30% this year due to the raw material only. If you look at this as a budget for a big project that they have to execute, this is putting a lot of pressure also on the TSOs to execute projects. We are going to see some delays. We are, let me say, relatively better positioned because we are more in the long-term backlog. We have more interconnect business which are not depending on the turbine businesses.
This is a good balance of portfolio. On the other hand, we are hearing that some of our customers would like to delay, and we are discussing these delays. So far, I can say that we have not received any significant requests, but there are here and there some requests that we are managing with our customers. I think the interconnect business is relatively more solid in timing, and this is giving us a better portfolio management overall.
Thank you. Very clear. On the, if I may have one follow-up, sort of on the interconnect. What are the next big tenders? Is there anything sizable this year or next?
Yeah. There are some projects. You know, we have discussed about EuroAsia for a long time, and this project is still live. This is going to happen according to our discussions from the customer within this year. Again, this is the grants have been given, and also the European Commission has announced the budget allocated for that project. I think it's in the hand of the customer to decide on the technology and also on the overall profitability of this project. I think a project like EuroAsia is in due course. There are significant big projects that are out in the market.
You must have heard about the Singapore-Australia connection, which is a huge project that is out. This is also another interconnect that may come within this year, maybe because these mega projects are difficult to predict. On the other hand, there are also similar but smaller projects that we are chasing. I will just give you one example in North America. That is the Lake Erie project, which is another interconnect. Potentially, it may be coming out for this year's decision. We will see how, you know, the authorities are going to decide on that. We even hear from the market, and we have also seen announcements that the authorities have given a green light to proceed for that project.
There are going to be minor other interconnects that we will hear. I think the biggest are the ones that I have mentioned.
Thank you.
Thank you. Your next question comes from the line of Akash Gupta from J.P. Morgan. Please go ahead. Your line is open.
Yes. Hi, good afternoon, everybody, and thanks for your time. I have three as well, and I will go one at a time. The first one I have is on projects, and I think you have explained very well on weakness in Q1. My question is that what sort of margins shall we expect for the rest of the year and for the full year? I mean, last year you did 13.2%. Then if we have to look into constant metal price, how much lower margins for this year could go compared to last full year? That's question number one.
Okay. Akash, thank you very much for your speaking. It's clear that the reason for the low margins in project has been already explained. What's the expectation for the full year margin? For sure, not to keep the margins at the current level. Our order provides us a certain confidence that the margins for the full year for the projects will not be similar as the first quarter. How much it will be? To tell a number, I would say 1% less than the previous year. Because mostly the inflation. Maybe that the turnover will be higher, but the percentage of margins will be lower. At the end, what I can take care of most of all are the euros. Because the margins, you are not able to put in the bank. That's the sentence I frequently tell to my team.
Obviously, it depends also on how much of the inflation on the raw materials are we gonna be able, time by time the projects are gonna be completed, to obtain from the customers. I don't know if Hakan Ozmen want to give more color on it.
Valerio, you explained it very well. I agree completely what you said. The only thing, Akash, I would like to say, I'm in this business for 29 years and, if you look through the copper and other material increases and reductions, I think, and we did also in the past, to evaluate what is the value creation of us. The value creation is excluding the metals. Our sales are dropped up or down, depending on the metals. In the recent, we see other materials adding further stress into the percentages. Therefore, I understand that question, but I really would like to reiterate what Valerio said.
The percentages in our business, especially on the EBITDA margin, is a good estimate, but is not, you know, an absolute, let me say, key figure that we have to consider. The absolute values, the US dollar or euro values, are the ones that we have to consider.
From the absolute value point of view, we can confirm that we are not gonna be very far from what we have been engaged with the market.
Exactly.
+EUR 30 million on the previous year, EUR 40 million on the previous year.
Correct.
Thank you. My second question is on telecom business. If you can provide split of Q1 organic growth between price and volumes, and what are your expectation for the next coming quarters in terms of volumes, and is there any room to more further increase prices given where commodity prices have gone? Basically, what I want to understand is that what is the upside versus Q1 levels on growth in telecom business for rest of the year?
For that question, I leave the floor to Philippe Vanhille, if you don't mind, because he can answer you better than me.
Hello, Akash. The telecom organic growth gives you an indication of us growing in reality, not so much in terms of volume. You see it in our presentation. You see that the telecom is contributing in this quarter, essentially in terms of mix and price, and not so much in terms of volume. That's the reality of quarter one. It's made of two things. It's made of increasing the prices, talking to our customers for them to accepting to increase the price that we see, or at least to absorb the cost that we see, of course. Second, we also do some selection in the way we do business.
We give priority to the customer better accepting to absorb the price increase, the cost increase, sorry. That's made by customer and also by geographies, which gives essentially a priority to North America compared to Europe, because the conditions of the market are better. That's how we do it. Now, the rest of the year is made of an increment of capacity that is going to come online progressively quarter after quarter. We will see some volume growth this year. We will keep the same policy, and the more we enter into the year, the more our contracts will have been renegotiated from the cost perspective. I do not expect the demand to slow down in telecom this year at all. I would expect more the opposite, at least for the optical part.
I'm positive that what you see is a sustainable level for telecom this year. Don't forget that our business in precision is not made only of optical. We also have inside the organic growth that you see in telecom, we have a shrinking copper business. We have a relatively stable Datacom business, which is doing good as well. The organic growth that you would see isolating the optical business only would be double digit, approximately, twice the organic growth of the average organic growth of telecom.
Thank you. My final question is on the medium-term prospects, particularly for energy business. I mean, one of your competitors called for supercycle in front of us in cables or electrification, given the current geopolitical events will likely accelerate renewable transition. On the other side, we are seeing that higher inflation is impacting decision making at customers. Maybe if you can help us reconcile, like, how do you see the medium-term prospects. On one side you have geopolitical events that are supporting demand, and on the other side we have these inflation concerns that may take some time. Then if we have a supercycle ahead of us, then how do you feel about your current capacity.
Like, do you think you need to increase more than what you previously planned? Any comment on that would be great. Thank you.
Thank you, Akash. Let me leave the possibility to Massimo to give to you an answer.
Akash, thank you. We need to consider that these energy trends are not only visible in project business. It is true what Nexans said and what we say ourselves. There are trends impacting the rest of the business, energy products, for example, power distribution, low voltage, which are resulting from the electrification and decarbonization trends. We have positive prospects in power distribution definitely, not just in North America, where strong evidence of this growth happening there as we speak and continuing in the next year, so that we have actually invested in capacity increase in North America, and this capacity will come to fruition in 2023, first half. Also in Europe, we notice the significant uptake in medium voltage cables demand due to decarbonization of the grid.
It is true that inflation will probably put on hold some of the projects, probably less profitable ones. I don't see this having a significant impact on our positive prospect for the future coming from these trends. This will also impact the industrial cable business or the special cable business, where we see stronger order intake from the OEMs, crane and mining cables, solar cable especially. Also, this business is driven by electrification trends or energy transition trends. Overall, some delay probably due to inflationary impact, but the underlying growth is still there, is still positive, and it is still remarkable in terms of trajectory.
The risk today is the inflation, because our customers are seeing their projects going up quickly in terms of value. That, together with the increase of the cost of money, may freeze a little bit the sharp increase of the demand that we were seeing.
Thank you.
You're welcome, Akash.
Thank you. Your next question comes from the line of Vivek Midha from Citi. Please go ahead. Your line is open.
Thanks very much, everyone, and good afternoon. I had two questions, please. The first is just a follow-up on the project margin discussion. Given the cost inflation backdrop, I'm curious for new tenders that you're participating in and the projects coming into your backlog, how do you see margins progressing within that backlog? The second question is on energy and infrastructure and the good underlying margin momentum you saw there. Based on the chart, it looks like you're overcompensating for raw material inflation. So how sustainable should we think about this? Do you think you can structurally improve margins in energy and infrastructure closer to where they were before the financial crisis? Thank you.
Okay. First of all, the projects. It's true that almost every day the team here is debating about the tender process approval, tender price approvals. We are very well updated. Yesterday, we just in case organized the TPA meeting to debate about how to price the projects, a certain project. I would like not to mention it. The tendency is to try to raise a little bit the margins, not very much. Due to the fact that our order book is very huge and the risk of not being able to quantify for a long life of the projects exactly the increase of the costs in doubt, we prefer to take the risk to lose some projects than to get projects with too low margins. Because at the same time, the risks are still there.
Even if the projects we were debating yesterday was not anything new from the technical point of view. I see the project margin rather stable. Not going to increase, but possibly going to recover the drop related to raw materials. I don't believe, honestly speaking, that the raw materials will continue the race to go up, as it has been in the last six months. Consequently, our margin should be more reasonable in the next quarters. Thanks partly to the recovery that we are gonna get, hopefully from the customers, partly because of the stop of the increase of raw materials. If the raw materials are not gonna stop the rise, the problem is gonna be another one. That many projects will be canceled, and that's even worse.
The second question, if I got correctly, is the assumptions about the E&I trend in contribution margin, in EBITDA margin. That's
Yes, that's right. Thank you.
That's a completely different chapter, because we are coming from the sky and the risk is to land hard. I don't think so, but today the orders we are getting are still at a very high margin, at least, as I said, for the second quarter. What about the third and fourth quarter? Being me a little bit pessimistic, I don't believe that we'll continue to be so buoyant, but never say never. I foresee a slight decline of the margin. What we have to take care of is that in case of a drop of raw materials, customers will be easily changing the suppliers, canceling the order to have to who has already the order, and trying to put the order to someone else at a lower price with no penalty.
That's the real risk, because once you are hedged, you may take the risk to lose hedging costs, hedging value. That's what I'm pressing the team to analyze continuously. Overall, for the second half or for the full year, I believe that E&I will not be at the level of the first quarter. Maybe a little bit below. Then we have to see how looks like the third quarter and the fourth quarter in the order intake, so that we can foresee the trend, the real trend of the margins for E&I. For the time being, we enjoy the party. Did I answer to your question, Vivek Midha?
Yes. That's great. Thank you very much.
You're welcome.
Thank you. Your next question comes from Renato Gargiulo from Stifel. Please go ahead. Your line is open.
Yes, good afternoon. Still on telecom margins. In the U.S., can we assume, if I understood, a rise in price effect during the year? And in terms of your approach of being more, let's say, selective in terms of customers, are you also accepting to, in some situations, lose some market share versus competitors? Or how is the business environment in your reference market? Thank you.
Philippe.
Yes. Hello, Renato. Yes, in the U.S., we are increasing prices. The answer is clear yes. We do not have total control on our cost side of things. We have to say this. But we are able to pass this cost increase so far well to the market. Here, yes. The answer to your first question is yes. The second one is also yes. There are places where we deliberately choose to lose market shares because the economic equation in certain specific places doesn't make sense for us, so we leave it to others.
Just for you to know, Renato, today the board has approved the conversion, the CapEx for the conversion of the Jackson facility in the U.S. Jackson is a facility that is today doing MMS copper cable.
Yes.
We have proposed to the board to remove completely all the copper equipment we have there, possibly moving part of it into Lawrenceburg that is specialized for it, and to fill the factory with telecom optical equipment in order to raise our capacity, because we have no capacity and we would like not to increase the plant.
Let's say to complement what you just said, we are reshuffling our footprint in the U.S. in order to grow our capacity without losing any business in any segment, but growing the optical side and really using each and every square meter that we have on the territory.
Not only the square meter, but also the people.
Yes.
Because in Jackson, we have 160 people, if I remember well, very much fidelized, and we would like to offer them a future thanks to the optical cable production.
Okay. Thank you very much. If I may just another quick one on M&A. Are you seeing any opportunity also in terms of bolt-on deals like the one you did last year? Thank you.
It's not the season, Renato, today. Because everything is extremely expensive, everyone is looking for valuations that are out of the moon, and consequently, it's better to make money, cash in hand, and then we see.
Very clear.
We need to see, first of all, someone that is gonna suffer before to move.
Okay. Thank you. Thank you very much.
You're welcome, Renato.
Thank you. Your next question comes from the line of Miguel Borrega from BNP Paribas. Please go ahead. Your line is open.
Hi. Good afternoon, everyone. Thanks for taking my questions. I've got two. First, on energy, can you perhaps comment on the breakdown between how much of the 15% organic growth was volume-related and pricing-related? And can you give us some color on how the mechanics of the price increases work? Are these immediately implemented, or is there a lag? Perhaps some color on the difference between energy and infrastructure. And when did you start exactly increasing prices? Was it last year or just at the start of this year? Just to understand if there is a carryover effect in Q1 from last year or if it's all new price increases.
Hi, Miguel. I leave the floor for the answer to Massimo Battaini, our COO.
Miguel, hi. The first question about the volume and pricing contribution to the 50% growth is almost all of it pricing. Pricing means a price increase, general price increase above inflation and part of inflation. We have basically trading a similar volume as last year with some differentiation, different geographies, diverse geographies, but overall, the volume is sort of stable. To explain you better how this price mechanism works, there are different mechanisms depending on the business. In T&I, we have a daily quotation system, and every while we change prices in the market to reflect, of course, the inflation and maybe to go beyond inflations. We have no contractual agreement with anything on T&I. It's a daily price business.
On the contrary, in power distribution, medium voltage and low voltage, we have frame agreement. In some of these frame agreement, there are cost price adjustment clauses. When cost goes up, we have an automatic recognition of the cost inflation into prices. In some cases, we have to renegotiate and ask for price adjustment to reflect, for example, energy or metal and premium costs and so on. In specialty cable business is similar. We have a fixed price for projects, and when we suffer from inflation, we renegotiate. At telecom, we already cover it. Telecom is midway between T&I. The business we deliver to distributors is partly daily. The business we deliver to operators is with frame agreement at fixed price. Now, third point was your carryover impact.
We started working on prices since many months ago. In quarter one this year, we had some benefit coming from quarter four last year, as well as the price negotiation obtained in quarter one this year, we benefit quarter two this year. There is a carryover for sure, quarter by quarter. We change the price today, and we deliver product in a month or two months. It is obviously a situation which a carryover effect. What I said before is relevant to explain that in T&I, we have an immediate effect because it's a major spot business.
When we come to the framework agreement, telecom, power distribution, special cables, we have a time lag effect because we have to wait for the inflation to happen, then we renegotiate, and then we have a price improvement. Hope I covered your question, Miguel.
That's great. Thank you. My last question, just on free cash flow and the negative working capital in Q1. You commented on the metal impact being a headwind, but last year in Q1, we also saw a major increase in copper prices. I believe Q1 last year, copper prices went up 50%. This year, copper prices are only up 20%. Yet the working capital impact is much higher this year. Can you walk us through what is going on there? What is different from last year? What segments or products are you stocking up? And what kind of other raw material inflation are you seeing that is causing an impact on inventory apart from metal, I mean. Thank you very much.
First of all, technically, what we are commenting is the so-called last twelve months, which is the impact of metal, in this case, from April 1st, 2021 to March 31st, 2022. It's true that last year in the first quarter, the impact was maybe larger than this year, but still this is out of scope. What is true is that the effect on a full year base of the metal in 2021 was larger. It's also a last twelve months than the last twelve months March. The impact is the one that I was mentioning. This impact will be partially reabsorbed during the year.
Because of course, as we said, it mounted during last year. In the second part of the year, in the next nine months, will be not slightly, materially reabsorbed, and this will help to rebalance our cash flow to substantially the guidance level.
Then besides just the raw material, we had all the inflation from raw materials which were not actually there in quarter one 2021, which has started to rise in quarter three, quarter four 2021, with a significant uptake in quarter one this year. Raw materials mean ethylene, polyethylene, premium price for cathode and for rod. All these other elements, the metal, have impacted heavily our working capital in the last six to nine months.
Yeah. As a matter of fact, I would say that the metal impact in the last 12 months is likely more than 50% of the total. Massimo Battaini is right. A very substantial part is driven by other raw material.
No metal.
No metal.
No metal components.
The big difference compared to the first quarter last year is due to the other raw materials.
Not to mention energy. Also energy and transportation costs, those belong to inflationary impact to our business.
Yeah.
Thank you very much.
You're welcome.
Thank you. Your next question comes from the line of Alessandro Tortora from Mediobanca. Please go ahead. Your line is open.
Okay. Thank you. Hi. Good afternoon, everybody. I have three questions. The first one is related to the initial statement regarding the energy projects market and cable demand for interconnection and wind offshore. With the possibility, let's say, to see a further increase in demand, can you give us or give me an idea of the implication you may see? For sure, this is a market that probably could go through, let's say, full indexation of the main, let's say, material for the project execution. But considering also that currently we're in a situation of sort of tight supply, which sort of trends do you see in terms of also technology that in theory Prysmian can push also some other cable makers?
Just understand that considering the imbalance between supply and demand, in theory, cable makers could drive towards, let's say, a more balanced portfolio projects, let's say, in terms of risk and technology. This is the first question. The second question is on, you mentioned before German corridor. Is it possible that considering all the geopolitical crisis, let's say, we are leaving Germany could speed up a bit the installation, let's say, on the German corridor side? The third question is only, let's say, on the accounting side. Can you give us a guidance on the adjusted EBITDA, which was, let's say, pretty low, which is good, but just to have an idea of the adjustments you see by year-end of this adjusted EBITDA adjustment. Thanks.
Mm-hmm.
Thank you, Alessandro. Valerio speaking. First of all, the projects. Yes, I mentioned the fact that the market for projects looks to be even higher than the EUR 8 billion we have foreseen. That's very good. What are the problems and the opportunities? The problem is that there is no capacity in the market. You can ask me, "Why don't you raise the prices?" I ask it too. Having said that, what we need is to keep the trend we have seen today, because there is no capacity. To build the capacity, our additional capacity is going on stream by 2024, not tomorrow morning. We are overbooked today. Fully booked. Both in terms of cable capacity and in terms of installation capacity. Consequently, we are happy with it. We need now to raise the margins and to properly execute what we have in hand.
In the meantime, we are working on the new projects. What I mean, you mentioned the new technologies. The new technologies basically are two, the 3,000-meter depth, and the first example will be the Tyrrhenian Link going to touch 2,400 m. The second one is gonna be the model, the new 3 GW, 2 GW project, 525 kV. As soon as the 525 kV DC submarine is gonna be homologated, there will be a number of projects in the North Sea going to increase significantly the capacity of generation and at the same time to decrease the cost of that generation. We are gonna quote, most probably before the summer, some of those projects. I hope that our homologation, our PQ test, is gonna be completed by the summer, by August.
That's the next step from the technological point of view. The second question you make was related to-
German.
German corridors. To do that, no, I cannot project. In the visible appendix, you have a chart.
Slide 19.
Slide 19. If you go to the visible appendix, slide 19, you can see that we have already produced 160 km of cables, fully tested with the factory acceptance test, 140 km, and 120 km are in Germany in the stocking place of our customer. Now, I'm not happy. I'm not happy because we have 120 km already produced, but no practical installation. The installation shouldn't be a very big issue because it's a land installation of an extruded cable. I'm not quiet until I will see the physical result. The customer is very happy. We are happy, in brackets, too, but I wanted to see the line up and running, and that will need some time yet.
This is one of the problem for the low margins of the projects, because the entire chunk of the installation of the land high voltage, of which German corridors represent the major part, has not been realized. We are compensated in terms of cost by the customers, but we are not enjoying the margins. That's something we have to debate with the customers, because once we are late in terms of execution, we are penalized by the liquidated damages. If they are gonna be late, they are not. And we lose the margins. Ultimately, it's something that to be discussed during the negotiation with customers, but it depends on the behavior of the competitors. Mm-hmm. Did I answer to your question?
Yes. Yes. Thanks.
Just in case, we are making the PQ test and the type test also for the 525 kV DC extruded. Because the ones that we are shipping in Germany is P-Laser, perfectly tested, no. But we have the sibling to be executed. That is, XLPE. The XLPE is under type test, is doing well. The internal type test has been passed. Let's see.
Okay. On your last question regarding the adjustments, as you said, very low in the first quarter, EUR 3 million only. For the full year, I would expect between EUR 25 million and EUR 30 million, still significantly lower than last year, which were close to EUR 50 million, EUR 49 to be exact. Completing also my answer on the non-monetary items. We have a positive effect on the first quarter profit and loss, as you see, of EUR 11 million, which is mainly coming from the change in metal derivatives fair value. These technically will be reabsorbed throughout the year, so could go down to zero.
Of course, I'm assuming stability in the metal price. Whereas the share-based compensation element, which was EUR 15 million negative in Q1, our best estimate is that on a full year base may go to EUR 45 or 50 million. This to provide you the full picture even beyond what you specifically answered.
Okay, thanks.
Welcome.
Thank you. We have one more question, and the question comes from the line of Roberto Campagna from Amundi. Please go ahead. Your line is open.
Hello, everyone. Sorry to bring you back again on project. My question is about the possibility, I don't know, for future contracts to include basically escalation cost clauses in a way to protect basically your profitability and even the risk of execution which is embedded in a pricing of this kind of contracts. What's your point of view about this, please?
Thank you very much, Roberto, for your question. I understand your question. Obviously, it's been already debated even internally. From one side, we don't want to take the risk to cannibalize the projects. On the other, it's clear that the inflation, when happens so sharply, is a problem to be managed. I believe that Hakan wants to tell something about it.
Right. Thank you, Valerio. Roberto, it is definitely, you know, it's very easy to think about the solution in a situation where, you know, things are going up and we are debating it as Valerio was explaining, but not only internally, but we are debating it also with the customer. The main problem is indexing in our business for multiple variables is very difficult. On the inflation side, you know, sometimes we are talking about multi-country connections. If we are going to start inflating or adjusting inflation according to our cost, then we have to disclose also our cost elements. This is going to be, you know, a start for the commoditization of our products.
This is, let me say the basis. One part is this. The second part is that the indexes are not 100% in correlation with our costs. We have to find the best perfect synchronized index, and that is also sometimes not happening. We try with various customers to agree on some indexes which really from time to time is not following exactly, you know, the trends that we see in our costs. I think even if you index sometimes, it's also very difficult for the customer to evaluate the tender results. What is going to be the price and who is going to be the winners? They have to have standardized indexes for everyone so that we are able to...
Otherwise, if we are indexing and the other competitors are not indexing, which, you know, in my experience, it happened also in other businesses, then you have, you know, it's additional terms and conditions that you put into the contract, which is also not giving you an advantage. While you were trying to cover, then you have the effect. I think the best solution so far is the market price. You know, the market price should reflect all the expectations up to a level of cost that is sustainable. Beyond a level of cost, then there should be clauses that allow you to renegotiate like the conditions that we see, or war conditions.
This is an easier part that we can integrate, we can discuss, and we are discussing with our, let me say, customers. However, it is very difficult apart from the metals, which is relatively trivial to put in, which has been already embedded. The rest is very difficult. We didn't give up, and we are discussing. Some customers are relatively positive, some customers are not willing to. I think the best would be, you know, to have adjustment clauses after, you know, significant events. This would be my, let me say, suggestion.
Apart from that, we will see case by case what we can apply, and if also the market is going to follow us, because, as you know, we are not alone in the market.
Okay. Thank you. Thanks.
Thank you. I will now hand the call back for closing remarks to Valerio Battista. Please go ahead, sir.
Thank you very much. I wanted to thank all of you for the participation to our first quarter 2022 conference call. Have a good evening or day. Bye-bye.
Thank you.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.