Good day. Thank you for standing by. Welcome to the Prysmian Group Q1 2023 financial results conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded. I will now like to hand the conference over to your speaker today, Valerio Battista, CEO. Please go ahead.
Thank you very much and good afternoon to everyone. Valerio Battista speaking from the Prysmian headquarter in Milan. Let's start with the general recap of our results. First quarter 2023, in a nutshell, has been a very good quarter. Almost EUR 4 billion sales, EUR 427 million margin, EBITDA. EUR 581 million group free cash flow LTM. Net debt down to EUR 2 billion and EUR 74 million. The organic growth for this quarter has been 9%. A pretty good performance, let me say. With adjusted EBITDA margin overall of 10.7%. Very strong Grid hardening organic growth with 12%. Grid hardening meaning obviously overhead lines and power distribution. The Operative Net working capital, we have been able to keep round about below 9%, 8.9%. Let's flip to Page 3 and have a see of the growth across the various segments.
Let's start with projects. Projects moved from EUR 406 million - EUR 563 million in term of sales. A quite significant growth. Organic growth at almost 30%. Very good. From the EBITDA point of view, the business went up from EUR 32 million -EUR 56 million. As a percentage of EBITDA, the improvement has been compared to the 1st quarter 2022, from 7.8% - 10%. Better than the previous year, still a limited margin. I know. We have to take into consideration that in the sales, we ramped up significantly because of two projects for inter-array that has been taken as an order some years ago and has suffered of the recent cost increase with consequently a lower margin.
In the meantime, German Corridors are progressing well, are on track. We have seen a very good improvement driven by submarine, and we are having a pretty selective approach to the tenders. We got EUR 1.8 billion IJmuiden project in the Netherlands, and EUR 800 million for Biscay Gulf just awarded to us a few days ago. There are many other to come. We did not deliberately take the-
TenneT
... the TenneT framework agreement. Why? Because there was too much uncertainty in terms of real agreement on when and what was gonna be awarded to us. The reason why we kept the prices pretty high, too high in order to be awarded for it. Let's move to energy. Energy has seen a 1st quarter growth at 6.6%, still pretty good. Of course, not of the same size of projects. With separately, E&I moving from EUR 1.941 billion - EUR 2.031 billion, 7.5% organic growth, and industrial and network component from EUR 802 million - EUR 835 million, +5.2%. What to be highlighted, in terms of Adjusted EBITDA, the results are still very good in E&I and are improving in industrial and network component.
Looking to the numbers, the 1st quarter last year, E&I was catching EUR 132 million EBITDA. This year, in the same quarter, EUR 221 million, thanks to a very sharp increase of the grid hardening, driving PD and overhead lines grow 12.2%. Adjusted EBITDA, bolstered by both non-rail construction, non-residential construction and grid hardening. That's the effect mostly of the reshoring in the U.S. and the system for telecommunication. On the industrial network components chunk of this business, of the energy, we have seen a quite good increase from EUR 55 million - EUR 82 million, with an EBITDA margin moving up from 6.8% - 9.8%.
We have seen in that segment, the solar growing quite a lot. I'm convinced that is one of the horses to be followed in the next years, because the solar power is generated at a pretty convenient cost. We have consequently, a quite strong projects pipeline. Last but not least, the telecom, that grew only, in brackets, 5.7% with a stable EBITDA. EUR 67 million, the 1st quarter last year. EUR 67 million the 1st quarter 2023, with a minor variation due to the participation of YOFC. The secular trend in optical cable is confirmed, consequently has to grow. Is growing, with periodical slowdown. That's the case today, we are seeing a slowdown, especially in the U.S. market. That is one of the most profitable. Why the slowdown? Our customers used to plan their needs on the basis of their projects.
Sometime, the reality is harder than expected to be realized. That's the reason why many of our customers have found a lot of stock in the warehouses. Consequently, now they have to push the brake. Is exactly the same picture we have seen times ago in the rest of the market, not so much in the U.S., but in the European market. You may remember probably the acceleration and the slowdown of the French market. This is in a way similar to it. What does it mean? It means that in the next quarters, most probably, this negative effect will disappear. For the time being, let's stay where we are. The total organic growth for the company has been 9%, very good. EUR 427 million EBITDA, 10.7%.
We are happy with it. We take care of the cash flow. Flipping to Page 4. What about the backlog of the projects? Projects are at the all-time high backlog, over EUR 9 billion, taking into consideration the Biscay Gulf we have been awarded just last week. EUR 800 million. The problem is that the market is very strong. We all have to be careful. Have to be careful in growing the capacity very, very fast because first of all, it's not possible. Secondly, it can be an excess of offer, that we have to avoid to do it. Of course, the frame agreements are designed for it to ramp up the capacity.
If we are not able to see that the capacity they are asking for is not really committed by them with a contract, that is exactly what the buy side wants to have. Everyone running behind the future volumes commitment without a strict commitment. That's may create overlay. Moving to the next page, the Grid hardening. Obviously, a lot of transmission grow is gonna drive a significant increase of the Grid needs. Just to give you an idea, the red lines are the lines that are designed to transfer the power across the U.S. Why is that? Because in U.S., as you know, and we have already commented many years ago, there is not a transmission network. All the networks are for transmitting and dispatching the power in a limited region around the power generation. With the solar and wind generation, that is gonna change.
In order to distribute the power where is needed, customers, the DSO, needs to receive power from other regions. That's what is missing in U.S. Now, U.S. is starting really to think about the transmission network. Having it clear that there is not an entity in U.S. that take care of it. There is not a TSO, a real TSO in U.S. You can see that the power distribution is growing and the overhead lines too. Why? Because in U.S., most, at least for the time being, most of the transmission lines are overhead. There is not the problem we have in Europe of a lot of population and cities. They go overhead easily.
We participate to this business with all the capacity we have for overhead lines and the E3X system, because the E3X system may improve the transmission capability of the existing lines and of the new lines, offering to customers a better performance of their network. Let me flip to page 6, the organic growth by region. You can see that, at least for us, EMEA is growing from EUR 1.565 billion - EUR 1.685 billion, with an organic growth of 8.5%, and an adjusted EBITDA moving up from EUR 71 million - EUR 106 million. That's a very good result because after having seen North America growing very much last year, this year seems that Europe is at least on the same path of North America, even if on a lower scale.
North America is still pretty good. You see EUR 1.151 billion moving up to EUR 1.214 billion, 7.5% organic growth, mostly driven by prices. Also driven by power distribution and overhead lines volumes. The margin, the EBITDA margin for North America has reached a very high level of 17.8% in the 1st quarter of 2023. We foresee that this margin can stay not so far from it for some other quarter. Let's move to Latin America. Latin America is improving. EUR 290 million the 1st quarter last year, EUR 306 million this year, with an organic growth, really modest compared to Europe and North America, of 2.4%. In the 1st quarter 2022, the EBITDA was EUR 24 million, 8.3%.
Now in the 1st quarter of 2023, it has ramped up to EUR 31 million, 10.1%. Last but not least, or last and least, differently speaking, Asia Pac, where our presence is very limited, from EUR 265 million - EUR 244 million, with an organic decline of 5.3%. Let's go to the next chart, the sustainability scorecard, just to remember you that the KPI for the SDGs have been updated by us. We are always keen in keeping our position on the sustainability, and we are working on it daily. Most of all, Cristina, that is here with me, is, she's the driver of the sustainability. Do you have something to add?
Thank you. Thank you very much, Valerio. To point on my side, we have been launching the new scorecard covering 2023, 2025, also integrated in our integrated reporting, recently approved by the AGM. It covers 12 KPIs. Six of them are also integrated in our short-term and long-term incentive schemes, recently approved by the AGM. As you can see from the KPIs, which I won't be commenting now, our focus now is not only on the internal decarbonizing our footprint, but also helping our customers in their decarbonization journey.
I will-
Thank you, Cristina. Gentlemen, I have to be clear. From my point of view, the biggest goal for sustainability is the decarbonization. In the decarbonization, first of all, we have to act directly to drop our emissions. The big role of a company like Prysmian is to help our customers to decarbonize. By our customers, I mean the TSO and DSO. That we can do thanks to our products and processes. Okay, I leave the floor to Francesco for the financial results.
Thank you, Valerio, and good evening to everybody. As usual, let's start with the profit and loss recap. As Valerio explained, organic sales growth was pretty positive at 9%, in principle, positive across all the BUs. In particular, benefited of the very visible and strong impact that we start to see from grid hardening. This impacting our PD business, is impacting our overhead lines business. This is the... little bit the game changer or the strong driver that we are seeing kicking in now. In terms of adjusted EBITDA, a good quarter, as Valerio anticipated, EUR 427 million, 10.7% in terms of margin. The reason for such a good result is, I would say, threefold.
First of all, the level of margins in our T&I business related with the construction market, but also with the more secular drivers, maintained substantially the same exit level of Q4 last year. This, of course, in terms of pure comparison with Q1 2022, gave a very big upside in terms of results growth. This was number one. Number two is more strategic and more related to the visible impact that we are seeing coming from the grid hardening. In PD and in overhead line, we are starting to see not only volume and market and volume growth, but also a very significant margin expansion. This is also a very important driver which has just started, then we think may go on for the next quarters, and we hope even years.
Last but not least, the good trend, the positive results of the project division. The improvement has been substantial. In the end, EBITDA in absolute terms has almost doubled compared to Q1 2022, with an improvement in margins, which was there, still not enough, as Valerio certainly explained, but it's certainly a first step in the right direction. Moving to the lower part of the profit and loss, I would mention an extremely low level of financial charges, even lower than last year.
This is very much related to the 1st quarter, because last year we still had in place the EUR 750 million Eurobond, which was repaid in April 2022. Therefore, in Q1 2022, interest expenses still suffered, let me say suffered in brackets, of course. The higher level of cost of funding of interest rate, which is typical of a capital market instrument such as the Eurobond, compared to the banking financing or the loan financing. For the full year, we expect, as I had already anticipated at the release of the full year 2022, for the full year 2023, we certainly expect some growth of the financial charges of the interest expenses, which is in relation with the growing interest rates.
Net income increased by almost 50%, up to EUR 182 million, with a quite stable tax rate at 31%. Balance sheet, a very good deleverage in terms of financial debt, down EUR 300 million. I would say a solid performance of operative working capital, which is a bit increased compared to March 2022, mainly as a result of a reduced level of receivables factoring. I would say that taking out this reduction of receivables factoring, which is in the region of EUR 180 million-EUR 190 million, actually, working capital would have even decreased. The reason why we decided this decrease of factoring is a reason of a finance cost optimization in principle.
With the growing rates, we are using this factoring with more, let me say, care, because it's not the cheapest source of financing. Still competitive, I would say, but certainly not the cheapest source of financing. Whereas I would say that all the other components of working capital, including stock, are very much under control. Of course, we discounted a negative effect coming from the cost inflation on the non-metal raw materials, which affected stock on the increasing side, increasing the level of stock, but we were able to compensate this through other items of the working capital.
Now, gentlemen, it's time to take under control the working capital very seriously, because the debt, the cost of debt is growing, and because of the risk of the market demand reducing.
Perfect. We can move to the cash flow. Very good news on this front as well. The LTM free cash flow even improved compared to the full year 2022, which was at EUR 559, an increase of this EUR 22 million up to EUR 581. The reason is the cash flow from operations before working capital changes, which is taking the very significant benefit from the 1st quarter EBITDA. This cash flow from operations was able to absorb the increase of working capital related with the factory level that I was explaining.
Also you see a total level of capital expenditure, which is growing gradually to the well-known level that we have set for this year and also for the next few years at EUR 500 million.
Totally generated by our own cash flow.
Absolutely. I can turn this. To elaborate on what Valerio anticipated, let me present this slide. This is to clarify the, first of all, the drivers of our cash flow, and also secondly, the strategic value of our broad business portfolio. I try to explain it briefly. As we all know, we are currently investing massively, I would say, in a business which is the project business, facing very strong business opportunities and a very exciting demand. By the way, as we speak, this business is the one with already now the highest level of return on capital within the group at about approximately 20%. A return on capital that for the project business is expecting to grow further, to grow much further.
You very well know our plan to invest and grow the level of adjusted EBITDA in a time frame of three, four years up to the famous EUR 500 million EBITDA target. This, of course, consequently will drive that 20% Return on Capital Employed significantly up. This large CapEx plan is possible and can be self-sustained, thanks to the very high cash conversion that we are having in the energy business. That differently from projects, let me say, is pretty structural. The 85% cash conversion that we are seeing in the energy business is something that can vary over the different cycles of demand, but which will not change significantly over time.
Of course, there is no doubt that little by little, after having executed the planning projects, the 20% cash conversion projects will increase very significantly, will improve very significantly, certainly above 50%, if you want. Around 60%, I would say, if you want my best estimation. What is very important to say is that the reason why we are able to sustain independently without any recourse to the capital market, to the equity market, this huge growth in the project business, which is driven by energy transition, is the fact that at the same time, we are having another division, a different division, which is more mature, maybe growing at slightly lower rates, with a much higher currently cash conversion rate.
This is the strategic benefit of having a large, in our view at least, of having a large business portfolio. Let me also note that despite the very large and ambitious CapEx plan in projects, the total group, that you see on the right part, still delivers a total cash conversion of 70%.
The basically CapEx, the well-known EUR 500 million represents only, in brackets of course, Valerio wouldn't agree with me only, but I'm taking the responsibility to say only 30% of the EBITDA, which is something which is consistent with the additional objective of further deleveraging our debt and potentially growing also by external lines. It's a very balanced equation that I'm trying to explain. With one division growing fast and needing a lot of CapEx. Another division, I didn't talk about telecom, but also telecom is delivering a very strong cash conversion, supplying this cash and the overall group being very balanced and being able to keep deleveraging. I don't take long with the closing remarks because I think that we deliver the most of messages. I would say excellent start of the year. We are very happy, very satisfied with that.
Grid hardening, driving power distribution and overhead lines starting to be really visible. I explained that, I don't want to take more of your time. The value of a broad business portfolio in terms of solid cash generation and financial equilibrium. Last but not least, very important, having reached the all-time backlog in projects, now it's really time to focus, and there is a huge opportunity to focus on execution of this backlog and deliver flawlessly the execution of these projects, assuring a growth of the results and the margins. I think we can move with to the Q&A.
Q&A.
Thank you.
Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one one again. We will now take the 1st question. It comes from the line of Daniela Costa from Goldman Sachs. Please go ahead.
Hi. Good afternoon, everyone. Thanks for taking my question. I have two questions, actually. I ask them maybe one at a time. The 1st one is obviously you had strong results in 1Q. You decided to keep sort of the guidance range. I believe last year at around this time you kind of moved it to the upper end, and you're not doing it this time around. Can you explain, is this like a more cautious view towards the 2nd part of the year? What are the assumptions there, given all the new flow that we are getting in some of the more cyclical segments? Interested in, sort of what's baked in for the rest of the year and why you haven't upgraded the guidance?
Okay, thank you, Daniela, for your question. About the guidance, I would say that the lower part of the guidance is out of scope as of today, but we don't feel yet confident to move the upper side of the guidance because we wanted to see the 2nd quarter, and most of all, the order income for the 3rd quarter and 4th quarter. That's the reason why we prudently have decided not to move the guidance for the time being. What I can tell you is that the lower side of the guidance is out of scope.
Thank you. Maybe just following up actually, we haven't spoken on this call so much on telecoms recently, but can you elaborate a little bit again on like this destocking trend and why do you think this is not a more permanent downturn in that market after a very strong period, and also how you see margins there going forward in case it turns out that there's more quarters of destocking to come there?
Okay. Why is that? In the telecom business, we have already seen, and as I used to say, we can see the past to foresee the future. There is a point to which customers are foreseeing an excessive growth, as it was, till one quarter ago, and there is no solidity in the forecast. That's why I wanted to be a little bit more careful. I foresee not a scale down, but a temporary scale down of the demand due to the fact that customers are having today a very high stock. It's not the 1st time that we see that installation in the telecom is difficult. It's difficult, namely means a lot of people and a lot of time. The forecast of the growth of the installation is rarely, if never, achievable.
Once the stock is to the roof, customers are stopping the developments, and that's what we are seeing, but are quick enough also to restore the demand when the stock goes down. Sometimes, frankly speaking, we have seen also customers not able to keep a stability in their needs. That's the story of telecom, huh?
Thank you. May I actually follow up on your 1st answer? Because when you said you wanna see Q2 to see if you can get more upbeat, what do you need to see in Q2? Like is it pricing in E&I holding? Like, what's been the pricing versus volume assumption that would make you get more upbeat?
Listen, Daniela, my poor opinion, my humble opinion, we need to see if the demand is gonna be sufficient to keep the prices at a certain level. For the time being, and I'm talking about April, we are keeping the price at the proper level, the historical level, but we see someone else starting to drop the price. That obviously is not a very nice sign, but we have to deal with it. I don't know if Massimo wants to add anything?
Yes. Thank you, Daniela. There is some normalization in the market. We are talking about E&I in North America, which was the driver of last year results. There is some normalization in volume and price. We need these two traditional months to better calibrate exactly the range of the guidance of the new one, which will be really centered around the top of the current guidance. As Valerio said, we excluded this bottom part by all means. We want just to gain more time to read the market normalization in E&I, but at the same time to read the market upside in power distribution with Arden. We have really on the verge of these changes. Our E&I is softening a little bit, PD is ramping up.
To better calibrate and avoid that we miss it, we want to ensure that the new guidance will be well centered, probably narrowed, for sure narrowed, to the top side, to the top range of the current one. That's why we need these traditional months.
Understand. Thank you very much.
Thank you, Daniela.
Thank you. We will now take the next question. From the line of Monica Bosio from Intesa Sanpaolo. Please go ahead.
Hi, good afternoon. Can you hear me?
Yeah, yeah, we can hear you. Monica, ciao.
Yeah, okay. Good afternoon. Ciao. I have two questions. The 1st one is on the pricing trend on the project business, on the back of your statement on the additional capacity ahead. Some more flavor on the pricing trends in two years' time in the projects. As for the USA E&I was wondering, can you tell us how much of the growth was driven by the overheads? I have to admit, I'm ignorant on the overheads. Which is the size of the market, and how much is pricing, and how much could be volumes upside in the coming future? Thank you very much.
Thank you, Monica. I leave the floor to Erkan for the question about the pricing on the project business.
Hi, Monica. Just to give you.
Hi.
A flavor on the pricing, Valerio was mentioning that pricing also depends on the conditions of the project itself. The certainty of the project and the terms of the project. I think there is in the market still some of the players that are gaining, let me say, position in terms of their prior investment decisions that they have made. They have additional capacity, and in order to fill that capacity, they are lowering their price to guarantee their prior investment decision. As you know.
Mm-hmm.
We were the only one which was cautiously investing, and we were basing our... that we were taking. Therefore, the pricing for the ones we don't feel comfortable, we are raising, and we don't want to participate. This is helping our competitors that have already taken early capacity increase decisions to fill with lower prices. However, if you look to the two-year term, as Valerio was also mentioning, we are very selective. We are participating significantly to the higher price market. We don't want to be a player in the lower price market. Overall, the market is going upward. There is a trend going upward.
If you look to the overall, let me say, there are also some new players that are coming in, and they are buying market. The pricing is very dynamic, as I was trying to explain, from different, let me say, players' perspective. From Prysmian's perspective, we are very selective, and we are seeing a price trend upward. This is the best that we can do in the dynamic pricing market.
For instance, Monica, sorry, Erkan.
Yes.
on the medium voltage inter-array, we have been awarded the times ago, years ago, about of two or three projects, especially in the West Coast of France, that are upsetting us today.
Yeah.
Margins are extremely low. For a project that is not, Our Lady of Lourdes, but is not a building wire, huh? We have to decide to take this serious decision on the installation of these projects, because probably is better to move to supply only. We have not the assets to install, the proper assets we don't have, and secondly, the margins are really different.
That means we are not participating into these markets, but we are selectively participating into the markets that are giving us, better, let me say, results. Whatever is in the backlog is in the backlog.
Okay. Got it. Thank you.
You're welcome.
Thank you very much. For what, the overhead? Maybe I lost one answer.
How much of the growth was driven by overhead, and what's the size of the market? Juan, would you like to give us-
Yes, sorry.
Yeah, sure. Hi, Monica. This is Juan Mogollon. I think there are three questions embedded into your question. Your 1st one was for North America in Q1, how much was that increase with T&I, and how much was the PD and overhead? About 2/3 of that increase in-
Yes.
Yes. About 2/3 of that increase in Q1 came from what we call the grid hardening that Valerio explained in the grid chart, the PD and the overhead line. 1/3 of that increase came from T&I. I think the 2nd part of your question was in regards to how much of that is the pricing versus the volume. In PD overhead line, we continue to see sequential pricing on top of the carryover that we had last year. In the T&I, as Valerio and Francesco just pointed out, we're starting to see a normalization of the price of T&I. Your 3rd question was in regards to the size of the market. Let me answer it this way.
The demands of the market, both in PD and overhead line in North America, is actually higher than the capacity available in the country. Just to give you an example, in PD, we have 40% of the market right now, and the only reason we cannot grow faster is because of capacity limitation. In both segments, we are investing. We announced $140 million CapEx in the last few months to expand capacity over the next 3 years. As Valerio pointed out in his chart, we see that as a very secular trend because of all the issues that the US has on the transmission of inter-regional transmission of energy.
Yeah.
Okay. Very clear. Thank you very much.
You're welcome.
Welcome.
Monica.
Thank you. Very helpful. Thank you.
Bye.
Thank you. We will now take the next question from the line of Akash Gupta from JP Morgan. Please go ahead.
Yes. Hi, good afternoon, everybody. I have two questions as well. The 1st one is on projects, where you say that you are now evaluating new capacity expansion. Can you talk about what sort of new plans are you thinking? Is it also buying another boat, or I mean, the installation vessel or new production lines, and are they more greenfield versus brownfield? Is it fair to say they will be, if they materialize, they will be on top of roughly EUR 1 billion you want to spend in projects over the next three years? That's question number one.
Akash, thank you very much for your question. If you want, I can serve you the answer now. New expansions. New expansions, we're not talking about the new plans. We are talking about expansion of the existing plans. Because the ancillary systems around the installations line are huge, and as much as possible, we want to concentrate in the plans we have. Let me remember that we have Arco Felice, as well as we have Pikkala, and we are gonna have Brayton Point . Those are the three main pillars of our projects development. We have decided to resize, let me say, not to totally close Drammen in Norway because it was too little for the submarine part, and Nordenham. Sorry, I forgot. Those are the four plants we are using.
We are planning to increase with the EUR 500 million CapEx announced to you, the capacity of extruded projects in the three plants at the end. Arco Felice is ongoing. Pikkala is ongoing, too. That's it. The North American plants will come later on, not in the medium short term. Did I answer to your question?
Yeah, sorry Valerio, and the expansion we are thinking of is going to happen in one of the European plant, one of the two that you mentioned before, European plant.
Yeah.
In addition to the one that you already planned for.
For the installation, we have to evaluate because we have already launched the new Mona Lisa. That is the second large vessel. I anticipated you the name of the ship. We decided Mona Lisa is going to be the copy of Leonardo da Vinci, or almost the copy of Leonardo da Vinci. For the time being, we stay where we are. When and if the projects awarded to us will require additional capacity of installation, we will evaluate it. For the time being, we have not taken any decision yet. Akash, I don't know if I answered to your question.
Yeah. No, I think that is what exactly I was after. The second one I have is on the solar business that you have. I think you have this PRYSOLAR as part of industrial and network component business. Can you tell us a bit about how much this business is in terms of size? What growth potential you have seen in the last couple of years, and where and then where this business can grow in the coming years, given we don't have those many solar exposed assets in the sector. Thank you.
Okay, Akash, I got the point. Listen, the solar, I believe that is the next frontier. After offshore wind farms or together with offshore wind farms, the solar is one of the most competitive source of energy. That's the reason why we decided to launch the new product, the PRYSOLAR. The growth is good because that number that I remember is 19% organic growth. The problem is that is not a very rich product. 19% with a decent margin for a product that is, for a business that is considered traditionally as or similar to T&I. That's it. Massimo, do you want to add?
Maybe to add that the Our current size in this space.
The size, yeah.
... is EUR 400 million-EUR 500 million. We expect this 5% organic growth to continue in the coming years. In the wake of this convenience of solar production, electricity through solar production and wind or other sources. We are well positioned. We launched this product to complement our product range with more features for our customers, for more harsh installation. We believe that we are well-placed to leverage the growth in this market.
Together with the cable, Akash, we have launched, and we are testing now the system to monitor PRY-CAM solar. That is an IT asset to control and to verify the production output and the stability of the solar panels systems. That's an additional features that is part of EOSS business.
Maybe just a final one. How does the margin in this half a billion revenues compare against the group average? Thank you.
It's slightly higher, meaning that we are able to reach a margin for this business that is 2%-3% higher than the traditional solar cable we were selling in the past.
Thank you.
You're welcome.
Thank you. We will now take the next question. It comes from the line of Max Yates from Morgan Stanley. Please go ahead.
Thank you. Good afternoon. Just my 1st question was around the power distribution business and the chart that you show on slide five, which has the organic growth and the EBITDA. I guess just looking at that, what I'm trying to understand is the business grew last year at 10.5%. It grew this year at 12%, so it's not a massive growth step change. When I look at the EBITDA, it looks like the margins have suddenly jumped up a lot in the 1st quarter. I guess my question is just trying to understand kind of what are the margin dynamics here? I understand the demand side. We need more of these for kind of interconnection, but I don't understand so much why the margins have just obviously jumped up a lot.
Would you be able to give some color around that, please?
Okay, Max. I leave the floor to Francesco and to talk about Max.
Thank you, Valerio. Good afternoon, Max. You have to take into account that the power distribution business, being a business based on, at least parts, partially on Framework contracts, was the business a little bit more under margin pressure, in the past few years, I would say in 2021 and 2022.
Was the business where we struggled a bit more to update the pricing to customers in relation to the impact of the cost inflation. This is now over, because we came through a quite complete renewal of the Framework contracts. On top, there is a significant part of the market, or there is still a part of the market which is not based on Framework contracts, but which is based on spot pricing. We were currently able to adapt the pricing to the new level of costs due to inflation. This is to explain why in the past, the margins were low. To explain why now margins are growing is the robust demand that we are seeing.
Is typically a segment where customers are available to commit, or close to commit, let me say, to volumes, to firm commitments in terms of volumes for the coming years if they have capacity availability. This gives pretty high and long visibility in terms of volume growth, and this is the reason why we are also investing to increase capacity in power distribution, mainly in North America. It gives also a pretty good visibility in terms of margin expansion. The combination of both is extremely powerful in terms of EBITDA impact, as you have correctly noted.
Yep, understood. Just my second question was just around these inter-array projects that you talked about diluting the margins. I mean, if I look at your projects business, it's doing about EUR 500 million of revenues a quarter. From memory, these inter-array projects are only EUR 100 million-EUR 200 million per project. I guess what I was just trying to understand is how many quarters will we need to see before these drop out? I would assume, given the size of those, it shouldn't really be more than the first half, but just any sort of feel we could get around that would be helpful.
Okay. The inter-array is a business that covers roughly 4th quarter we need to see the exit of the old projects got at a low price that are moreover suffering of the inflation rate, that we are not able to transfer to the customers. I have to be clear that our strategy is missing the power of the installation. We have not capability to install these projects. If we are getting projects with the installation, we have to transfer the installation to 3rd parties. That's the reason for the very low margins in the inter-array businesses. We wanted to change our strategy into this business.
Okay. just very quick f-
Maybe moving to.
Supply only.
To supply only.
Clear.
Of course.
Very, very quick final question. Just on that comment you made about receivables factoring. You talked about it could have had EUR 180 million-EUR 190 million, and you talked about it being a higher cost sort of form of financing that you're maybe doing less of. I guess my question is, if receivables factoring is having a negative cash impact of EUR 180 million, and that continues for the full year, and your free cash flow guidance is reiterated, does that mean you're doing better elsewhere? Does that mean you're kind of more positive on getting inventories down? Is that you're more optimistic as raw materials have come down, so that's helping inventories? Just trying to understand, kind of that looks like an additional headwind that we didn't know about when you gave the guidance.
I guess something else must be underlying better. Is that the right conclusion?
No, no, no. Max, is no item for which you should review or rethink of our guidance because is more a temporary effect, which is compensating some other positive temporary effect. For instance, I didn't mention this because I didn't want to go too much into details, but in our guidance and in our 2023 cash flow projection, we have already factored, already embedded an increase, a very significant increase of paid taxes. It's not a surprise, right? The fact that last year, and this year as well, we are having such a strong expansion of results is definitely leading to a higher tax burden in terms of total amounts.
These tax payments are delayed, and will mainly take place in the 2nd part of the year, because basically, in most of the countries, you pay the year after you have the tax balanced the year after the year when you have earned, when you have realized the profits. This means that right now, for instance, this is just one example, in Q1, we are sitting on a pretty significant increase of the tax payable that will fade away in the next few quarters.
It's just to explain you that this is a temporary effect which is rebalancing some temporary effects with the opposite sign. It's no item that you didn't consider for the guidance.
Okay, very clear. Thank you very much.
Welcome.
Thank you. We will now take the next question from the line of George Featherstone from Bank of America. Please go ahead.
Hi, everyone. good afternoon and thanks for taking the questions. First of all will be for Juan, if that's possible. I think if I go back to Q4, you said that 2/3 of the group EBITDA growth in 2022 was T&I pricing. I just wondered if it's normalizing from here, where do you expect it to normalize to, and what's your visibility on that? That would be the 1st question.
Very good. Yeah, hi, George. In regards to the T&I normalization, to answer that question precisely, we have to think of three segments on T&I. As I said before, in North America, we're not into the residential. We are into the commercial construction, and we are into infrastructure. The commercial construction in North America, we are seeing a normalization. At this point, we do not see any signals that it will go to the pre-COVID levels. The industrial piece of the T&I in North America is holding very well. In Europe, about 1/3 of our business in T&I is residential. In that business, we are seeing normalization faster than in North America.
We do not expect that to go back to pre-COVID levels this year, which is one of the reasons why Valerio said a minute ago that we're gonna wait until the Q2 precisely to see the speed of normalization. There is no question in our minds that it will get normalized. As a matter of fact, it has already been baked into our guidance for this year. The only ambiguity is on the speed of that normalization. Did I address your question, George?
Yeah, just thank you. That was super helpful. Just on the visibility that you have to that, because my understanding is you sell quite a bit through distributors. Is that right?
Say that again, I'm sorry. I missed the 2nd part of your question.
Just wondered what visibility you have on that normalization ultimately and in that business, because I think my understanding...
Yeah.
-is you sell quite a bit through distributors.
Yeah, very good. In the US, again, I'm gonna break it into two pieces. In the US, our T&I business is 100% through distributors. The visibility that we have with that, with the orders coming in, and we have visibility of two to three months, essentially. In Europe, we go to market about half of it through installers, especially in the South of Europe. The visibility is more shorter, George, in that segment in the U.S.. Okay? I would say to answer your question in a very simple manner, I would say maybe 90 days visibility to see in advance the speed of normalization.
Okay, thank you. That was super helpful. Just wanted to pick up on another comment you guys made about the evolution through the quarter within E&I. I just wanted to understand a little bit about how March and April compared to the January and February in terms of the demand level that you saw, particularly in T&I, and also maybe for the rest of it, for the industrial segments too, would be super helpful.
Well, we have to distinguish, region by region, first of all.
Yep.
U.S., we are seeing some reduction in the demand.
In T&I.
In T&I. Only in T&I. Partly compensated by the PD growth and overhead lines. In Europe, it was already scaled down and consequently, we don't see any significant drop. Juan, do you want to add anything?
I just want to emphasize the fact and clarify that is the demand normalization we see in North America is, as Valerio said, in PD, I'm sorry, in T&I. In PD, not only we see a higher demand, but also sequential price on top of the carryover that we already started last year, as Francesco indicated.
Of course, being the PD, a business that is classified in term of pricing as on the yearly basis, the agreement with customers, mostly yearly basis. Whereas last year, we were not able to raise the prices accordingly with the inflation and the growth of the raw materials. This year, we are in the renewal, renewed contracts, we are able to do it, and we are gonna enjoy for a longer time.
Okay, thanks. That was super helpful. Can I just maybe coming back to kind of one of the things I was hoping to understand a little bit more was how March and April compared to January and February, I guess, particularly in the U.S. and with T&I, because a lot's been made about the rate tightening cycle there and the impact that's having on construction segments, particularly from March onwards. Just trying to understand how that evolved. Was it a big step down in change, maybe, within the quarter?
George, Francesco speaking. April is slightly lower than January, February and March. January and February mainly, not very significantly. A little bit more visible is the reduction of volumes in North America. It's not a big reduction of volumes, but I'm talking only about T&I, yeah? Construction market. Exactly for this reason, we have decided to take a bit more time to better calibrate the guidance for the full year. So far, margins appear to be pretty resilient, huh? Of course, we want to gain a few more months visibility in terms of order intake, in order to be sure where to center the new guidance. The reduction in terms of margin in April is pretty mild.
Okay, thank you. That's super helpful. Then just another two, if that's all right. The 1st one beyond the comment you made about a peer in that market being a little bit more aggressive on price, I just wondered if you could talk about if that's a specific region that you're seeing that, or how aggressive just, you know, in terms of magnitude direction, are they being particularly aggressive on the pricing, or is it just some sort of mild competition that you're seeing?
George, this is a question I prefer not to comment, because otherwise, I have to enter into clear indications of the peers that are dropping the price. Generally speaking, the appetite for the volumes drive down the prices. That's the story.
Okay. Understood. No, no problem. Final one would be just on the projects commentary you meant from made from a cost inflation pressure. Just wondered what kind of share of the backlog that you currently have you expect to see some of this coming through from? Is it sort of directionally a share of that backlog that would have the cost inflation pressure?
Okay. Thank you for the question, George Featherstone. Hakan Ozmen speaking. The inflation of course has slowed down and has also the costs of services and materials have now reached I think a stability in the recent months. Versus the beginning of the year, we are seeing already some improvement. Looking to our backlog, a majority of our backlog has been, let me say, awarded to us after the inflation that has peaked. There is of course, like the inter-array business that Valerio Battista was mentioning, which are more than four years of backlog present. They are affected.
There are a few, let me say, mid-sized projects, but I can say that it's in the range of maybe 10%-15% of our backlog that we are currently rediscussing and renegotiating the prices because we haven't started these projects yet. I think, if the inflation is going to stay stable, and if we are going to be able to convert these 10%, 15% to a decent level of inflation, we should be, let me say, good, based on our assumptions as of today.
Of course, there are, you know, some inflation effects that we have already embedded into our projection, which are already in our forecast and in our budget, and that part we are renegotiating as it incurs. We are getting a good response from our customers. We have projected that at least 1/3 to a half we are able to recover, and this is a good sign. I do not see that the prices are further going to deteriorate. Therefore, I think, we are going to see as these smaller projects which are, which have been on off three, four years ago, which have not been performed, they will, we will convert them and get them out of our, let me say, order portfolio.
This is what I can say.
Okay. Thank you very much.
Thanks to you, George.
Thank you. We will now take the next question from the line of Alessandro Tortora from Mediobanca. Please go ahead.
Yes. Good day. Good evening to everybody. I have three questions, if I may. The 1st one is on the T&I. I know we already, let's say, discussed a lot on that, but can you give us an idea of how much T&I prices in the U.S. are down since January? If you are talking about, let's say, a single digit decline since the beginning of the year, or let's say, to just have an idea of the extent of the normalization you mentioned before. This is the 1st question. I don't know if you want to go one by one.
Yeah, it's better. Massimo is gonna give you an answer, Alessandro.
Alessandro, T&I prices April vis-à-vis the start of the year are probably down 2%, 3% in the, across the board in T&I spaces in North America. Not a significant reduction as you might see. As we said, this will probably continue with a similar pace in the coming quarters. We don't expect to see a significant softening in prices through the rest of the quarter.
Do not forget, Alessandro, that the inflation in U.S. has hidden quite significantly also the labor cost. Consequently, there is a certain difficulties to drop the prices very quickly. That's the reason why we see prices keeping reasonably high compared to the prices before the pandemic.
Okay. Okay, thanks. The second question is on the level of profitability, let's say on the power distribution. Considering the outlook you mentioned on PD, but also, let's say also adding the overhead lines, do you believe this business can achieve again a 7-8% EBITDA margin, let's say coming back maybe to a level we saw in the past for PD, considering everything you said before?
Yes, Alessandro, we definitely see a strong demand in North America, which is driving decidedly pricing up in order to see easily a 7%-8% of EBITDA margin in the business in North America, probably even further up. When you wake this up with the rest of the world, I think a 7% play across all region is probably a fair assumption for this year and for the coming years. With definitely with a stronger uptake in margin in North America. So strong that we don't see yet where this will lead to in terms of upside in profitability.
So-
If I can elaborate further, to be very clear, we are already at a 7% EBITDA margin in power distribution. There is a stronger difference for the time being between the North American market and the European market. North America is significantly higher than the 7%, certainly in the double-digits margin, with EMEA being much lower. I think that with the grid hardening fueling power distribution, I think that the chance we may have also in Europe, of course to be seen, is that the tight capacity could sooner or later bring it to a pricing improvement from very low level, by the way, from currently very low level in Europe as well. Sorry, Massimo, if you don't want.
No, no, sure.
Okay. Okay, thanks. Thanks for this as well. The next one is on the industrial business. Do you see any kind of price normalization here? Considering the 1st quarter results, do you expect the positive stage mix to stay in the coming quarters, you mentioned solar before, to just understand, how we can, let's say, how we can assess the margin expansion seen in the 1st quarter in this division? Thanks.
listen, Mario speaking. The industrial business has never seen a price ramp up as we have seen in E&I. Consequently, in my opinion, I shouldn't see any drop, significant drop in the margins. I would say that the margins of today are almost sustainable and are driven more by the mix than by the prices. I don't know if Juan wants to correct me on that.
No, no. No correction. In fact, I just want to emphasize what you just said is, Alessandro, is the fact that, not only is, more stable, but also the mix is actually shifting into more stable segments such as the mobility, and as we discussed a minute ago, the solar segments. I would expect that business to continue to be very stable in the years to come.
Okay, thanks. The last question, sorry, just to follow up on the factoring side. Considering, the, let's say, the increasing cost of factoring, is it fair to say that maybe by year-end will be, let's say, lower EUR 200 million or so, let's say the factoring level fractionally lower compared to the past years? Thanks.
Most likely at year-end will increase to the pretty normal level.
Oh.
The normal level of factoring that we are having just to quote the absolute numbers. It's even disclosed in the.
Yeah, EUR 29 million, EUR 29 million and EUR 200 million.
No, no, it's 400. No, no, no. It's more in the EUR 400 million.
Okay.
In Q1, it decreased, I'm rounding the number, to EUR 200 million something. The decrease that I was mentioning is EUR 180, the decrease, not the absolute amount. I expect this to go up again, to EUR 400 or close to EUR 400. I was just mentioning this to explain the specific working capital increase that you are seeing in the Q1. It's not too of a big deal. That is, factoring.
Okay.
Item.
Okay. Okay. Thanks a lot.
Thank you. We will now take the next question from the line of Miguel Borrega from BNP Paribas Exane. Please go ahead.
Hi. Good, good afternoon, everyone. Thanks for taking the questions. The 1st one, again on E&I. The last time we spoke in early March, you had already indicated that pricing in North America started to come down, but the margin in Q1 still does not reflect that. How do you square that out with a North American margin of 17.8%? Which is actually sequentially up from Q3 and Q4 of last year, I believe 14%. What is the driver for the sequential improvement in the margin if volumes and pricing are normalizing? Out of the growth of 7.5% in North America, can you quantify how much of that is volumes and pricing, if you can, please?
Okay. Let me answer to your 1st question, Miguel. We were talking about unexpected drop of the margins, of the prices on E&I in North America, because was where prices extremely high that we have been able to enjoy. Now, it's clear that we are seeing the demand in the 1st quarter reasonably good. Let's say, sorry, almost stable. As a consequence of it, we have been enjoying a pretty good performance in North America. I would not comment about the sequential improvement, because the sequential improvement can come also from the mix on or from other variances like the raw material cost. Consequently, let's consider the margins for the 1st quarter E&I North America stable. That has surprised a little bit us too, but is a good surprise.
Maybe, Valerio, to clarify, in addition. Now, when you look at the margin of E&I in North America 2021, 2023, Q1, and you compare it to 2022, Q1, the T&I pricing in Q1 this year is higher than last year, in Q1 last year.
simply because last year was.
Last year we were on a growing trend, no. If you compare year-on-year, we see despite we see some softening pricing in quarter one this year vis-à-vis January, February or December, the pricing of this year in quarter one are still very much higher than last year, quarter one. Sequentially, we see some go down in T&I, but we see an increase in pricing power distribution. That explain a lot why sequentially we are better than quarter four last year in E&I space in North America. If you add that in industrial cable also this year, quarter one 2023, North America has grown significantly over quarter four, you understand why sequentially there is a so-solid growth in North America. Stronger versus very strong versus quarter one last year, but also significantly growing versus quarter four 2022.
How much of the price, how much of this growth is pricing, the overall growth in North America is pricing involved? There is some moderate growth in volume in power distribution and spatial. There is some flattish volume in T&I, all the rest is pricing.
Thank you. I was just surprised to see 400 basis points of margin improvement, you know, from the second half of last year in Q1, which is, you know, a very significant improvement in the margin when you're talking about volumes and prices sequentially down. It means something else must be very, very strong. You talked about industrial, you talked about infrastructure, that must be it, essentially.
Yes.
In industrial, this is a division that you don't talk too much. Can you give us a sense also what is driving the margin? I mean, you talked about some segments being stronger, solar. Maybe give us a sense of how much that represents as a % of the total within industrial. Any other segments that are growing ahead? Is pricing as strong as, for example, in energy here? Thank you very much.
Listen, Miguel, my opinion is that industrial is strong, but it's strong mostly because of the reshoring. All the industries that are under construction in U.S. because of the reshoring. Reshoring and maybe considered also the data centers that in U.S. are growing very much.
I would add that the applications within industrial which had the strongest margin expansion are the ones mostly impacted by the most secular and structural trends. If you take, for instance, all the applications related with renewables, both solar, which we have discussed before, and also wind, onshore of course, you see that they have grown very significantly in terms of revenues. They already had some of the highest margin, EBITDA margin within the industrial space, and on top they expanded their own margin. This, of course, generated a big portion of that effect that you see on the total industry business units in terms of margin growth.
Thank you very much.
Thank you, Miguel.
Thank you. We will now take the next question from the line of Vivek Midha from Citi. Please go ahead.
Thanks very much, everyone. Good afternoon. I had two related questions following up on discussion earlier. Firstly, thank you for the breakdown of the T&I business into different parts. I was wondering if you could give us an indication of what proportion of the E&I division's EBITDA is made up by the US T&I business. Relatedly, following up from Max's question, if we were to extend that chart on slide 5 out, how would the margin in power distribution now in Q1 compare to the prior peak margins before the margin pressure in 2021-2022? Thank you.
What is the portion of E&I from North America?
Let's check maybe if it.
Yeah, it's more or less 50%. 40%-50%.
I think we can distinguish is, PD North America portion or total portion is probably 70% margin-wise.
70, yeah.
The T&I portion of North America to the total is probably 40%, 50%.
Sales-wise.
Yes. I think, I think your question, Vivek, was in relations, globally or, specifically to North America?
It would be the global proportion. What proportion of global E&I is made up of the U.S. T&I?
Yeah. Yeah, I got that number. it's about 40%. it's about 40% is T&I. Another 40% is the PD and overhead line, basically. 43%. Okay? These are global numbers, not North America. In North America, it's slightly different. It's more T&I than PD.
You mean sales or EBITDA?
EBITDA, please.
EBITDA.
Sorry, to clarify, because we are a bit confused. You mean the breakdown within North America or the contribution of North America to the total?
Yes.
Okay. In this case, if the second is correct, the total contribution of North America to total E&I is more in the 70%, 65%. Which is, I would say, pretty is, around 60% maybe for T&I. Between 50% and 60% for T&I, and significantly higher, as Massimo anticipated, for PD. For PD, I go back to my comment that you have a big difference in the profitability of power distribution in North America and in Europe.
Europe. Mm-hmm.
North America really represents 90% of our total PD, EBITDA margin.
Yeah. Second question is?
Now versus peak season.
How are they today versus the peak season in the past?
In power distribution.
I think it's, frankly speaking, yeah, I think it's wrong to talk about peak seasons for margins in PD, because as we were saying before, these are more ruled by Framework contracts, are much less volatile, are much less exposed to sudden increases or sudden drops than, for instance, the risk that we may see in the construction market in the T&I. They didn't fluctuate significantly. They have always been in pretty stable over time. Now, certainly, we are seeing a very high level or not a very high level, a growing level, let me say, which is very much pinned by demand. That, that's the. There is not very volatile, the margin.
I would only add to that, Vivek, the fact that, versus the past, the demand segment for PD has changed dramatically because the demand now is given by the grid hardening, which is a more secular, sustainable trend. Whereas in the past, it was a totally different type of demand, so.
Yeah.
The comparison probably is.
Maybe one comment that we can further make is that in Europe, current margins in PD are very much lower than the peak level. If you go back a few years, maybe four or five years, I think that margins were more than double than the current one. Based on what one is saying, meaning the robust demand drivers that we have seen in PD, this is a chance that some better pricing may kick in in the next few quarters or in the next couple of years. We will see. It's some potential upside, in my opinion, that we have.
Thank you very much.
Thank you. There are no further questions on the phones at this time. I would like to hand back over to the speakers.
Thank you very much. If there are no other questions, I thank you for your participation to our conference call of the 1st quarter. I wish you a good evening, and see you next quarter. Bye-bye.
Thank you. Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.