Prysmian S.p.A. (PRY) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Prysmian Group First Half 2021 Financial Results. [Operator Instructions] Please be advised that today's conference is being recorded, Wednesday, the 28th of July 2021. And I would now like to hand over to your first speaker for today, Valerio Battista. Please go ahead.

Thank you very much, and good afternoon to everyone. Valerio Battista speaking. Let's start with the first half 2021 highlights. Page 3, key highlights of the first half. Very good recovery of the trend in telecom and energy business, thanks to -- mostly to the fastest business, T&I, OEM, Renewable and Automotive. On the other side, cost efficiency and price management to balance the raw material price increase that we have seen since the end of last year. Last but not least, the order income in projects that has been very wide, EUR 1.2 billion of new orders, which we have to add the EUR 60 million we have announced today for the inter-array budgets with Ørsted on the basis of contract that we signed some time ago, a few times ago. Let's flip the page to Page 4. What about the EUR 1.2 billion of new orders in half 1? The first one is the biggest single project ever awarded to Prysmian. Frankly speaking, there are other projects that have a similar size, but this is at the end, the big. $900 million for the SOO Green, the connection -- the link interconnection in U.S., along the railway, that is going to connect the Midwest, where green power is generated to Chicago area. 440 kilometers of HVDC 525, and that's a very good project because I believe that is one of the first interconnection projects in the U.S.A. The second one is Sofia. Sorry, it was Sofia with 440 kilometers of HVDC. Just in case, the SOO Green is a project that is going to be realized with the same cable of German corridors, the 525 DC excluded. Sofia, 440 kilometers of HVDC, submarine export cable to connect a very big offshore wind farm to the main grid in U. K. Then Turkish crossing, the 2 submarine link -- power link in connecting Europe, Asia and the other one across the Izmit Gulf. And last but not least, the Ibiza-Formentera. Other than, as I said, the EUR 60 million awarded today to us, signed by us today of inter-array projects with Ørsted. Okay. Let's move to Page 5, the financial highlights of the first half. Sales at EUR 6 billion with an organic growth of 10.5%. Notably, 15.5% has been the telecom support. Telecom is confirmed to be able to come back and is coming back. 10% vice versa on E&I, driven by a very strong T&I, 38.5% in Q2 and 9.3% industrial and network components with a very good performance in terms of organic growth. The adjusted EBITDA, EUR 470 million, reasonably good, my opinion, higher than the pre-COVID level for Energy business. The margins, at the end, if you look at the percentage, are slightly lower than the same period of last year, but you have to consider the effect of inflation coming from the copper metal increase. So the turnover has grew a lot, but net of the copper price increase, obviously, the increase, the growth has been -- sorry, a little bit lower. Finally, the free cash flow, EUR 447 million with a net debt of EUR 2.387 billion. The last 12 months free cash flow has reached a very high amount. Obviously, it's expected to scale down a little bit during the rest of the year as usual. Let's flip to Page 6. Page 6 is showing the performance by segment. Projects. Project is still the slow part of our activity. Why? Because the order income is rebounding now. And consequently, we are going to see the growth of the market for projects, the growth of the market, the growth of the results in the next quarter. Starting from Q3, I believe that the projects will deliver higher results than the past, the same quarter last year, or the previous year. The recovery has started. The acceleration is expected in the second half driven mostly by submarine and German corridor execution. Just for you to know, tomorrow morning, if I'm not wrong, we are going to start the mass production of German corridors in our plants. We completed all day homologation and also all the tests that we were planning to do in order to be comfortable with a mass production of thousands of kilometers of this cable, and we succeeded consequently. Now we start. The energy side. The energy side grew 9.5% in terms of organic growth from EUR 3.58 billion to EUR 4.55 billion, out of which, more or less, both E&I and industrial and network components moved on the same direction with the same speed, 10% organic growth for E&I and 9.3% for industrial and network component. The organic growth of T&I has been very strong. And as usual, the T&I market is the fastest. [indiscernible] is the first one to recover, is the first one to stay down. On the industrial and network component, we have seen a very strong growth in OEM, automotive and network components. On the E&I, as I said, the P&I mostly, whereas the PD has not been able to replicate the performance of the second quarter last year. Why? Because in U.S., not here, the incentives were pushed for a very strong volume growth that this year has not happened and was already planned not to happen. Telecom, finally. The telecom business has increased the sales with an organic growth of 15.5%. On the other side, the performance of the business that counts the EBITDA, moved up from EUR 101 million to EUR 129 million. As you can see, the contribution of the share of net income coming mostly from YOFC, has increased a little bit, but because of the carryover of the last quarter of the previous year. We see a reasonably good telecom activity, especially in certain markets. Overall, the total sales of the group has accounted for EUR 6.34 billion versus the EUR 4.9 billion of the first half of '20 with an organic growth of 8.5%. Let's have a look at the following Page 7 about the volume recovery. The volume recovery has been pretty strong, pretty strong. And you can see that the energy volume has been, in June, higher than the June '19. That's a very good indicator because it means that in the second half, we hope that this trend will go ahead, will continue. And by June has reached a higher level than 2019. Not very much but higher. On the telecom side, vice versa, the growth of the volume, 5 kilometers I'll be talking here, has been good, but not enoughly good to reach the 2019 record. Because 2019, as you may remember, has been an extremely good first half because of the shortage of fiber. And consequently, the volume were very high. Now we see a significant recovery of the volume, but not at the level of '19. In the second half, we expect the telecom, in terms of volumes at least, to be able to surpass the '19 volume of the second half of the year. Let's move to Page 8. If you look at the white boxes, what we lost first half '19 -- '20 versus '19 is the same that we recovered this first half versus '20, minus 10.6% for E&I, plus 10% for E&I this year. So the scale down of the volume of 2020 has been completely recovered in the first half of '21. The same more or less, even a little bit more for industrial and network component that moved to EUR 1.349 billion coming from EUR 1.122 billion in the first half 2020. But if we consider first half of 2019, it was EUR 1.248 billion. So overall, the total energy scaled down almost of 9.6% in the first half last year and this year has recovered certainly more or less the same. If we look at the profitability of better EBITDA margin, it's even more. Why? Because if you consider the value of the metal that obviously do not contribute in term of the results, EUR 159 million, it was the E&I, the EBITDA 1 year ago. Last year was EUR 147 million and this year has closed at EUR 169 million. So the EUR 169 million is 5.5% of the sales. But in reality, if we utilize the copper of 2020, the same marginality would have been 6.9%. So higher than the 2 correspondent periods of '19 and '20. More or less, similarly is the industrial and network component. What does it mean? That the copper price effect, the metal effect has increased, inflated the sales and the margins have been a little bit diluted by this effect. Overall, the total energy went up for -- from EUR 3.580 billion in the first half 2020, that has reduced 9.6% organically. And the first half 2021 recovered in completely this level with an organic growth of 9.5%, more or less the same, even better is at the level of EBITDA. Let's have a look at geographical trend. The geographical trend has something different because whereas Europe, EMEA, let's say, has improved significantly, 11.3% organic growth from EUR 2.046 billion to EUR 2.584 billion. The EBITDA went up very good, very well, from EUR 99 million to EUR 150 million. In North America, unfortunately, it has been the trend driving the gain in the last 3 years. Unfortunately, due to the slowdown of the power distribution investments, we have seen reduction of the EBITDA from EUR 199 million last year to EUR 166 million this year. Has to be noted anyway that the exchange rate affect the result of 2021 versus 2020 by EUR 15 million. So 50% of the decline comes from the exchange rate. Latin America and Asia Pacific have been able to rise the performance significantly. For Latin America from EUR 25 million to EUR 46 million with an organic growth of 32.5%. And Asia Pac from EUR 16 million to EUR 32 million with an organic growth of 11.3%. Overall, the total performance of the group moved from EUR 419 million to EUR 470 million with an organic growth of 10.5% despite projects did not contribute particularly in the first half. We expect project that is still the missing upside coming into life in the second half. So we are going to see in the second half the -- finally the acceleration of the projects. The outlook. The outlook was EUR 870 million, EUR 940 million. We decided to raise this outlook to EUR 920 million and EUR 970 million. So a significant upgrade of the guidance, reflecting more or less what the market we have seen and are we able to perform. The free cash flow we left untouched, and that may be something that sounds unusual because technically, we should have increased the free cash flow. I understand perfect. But why we didn't do it? Basically, later, Francesco will be more detailed. But basically, because there are a number of projects and the related advance payments going to come in the last quarter. And it's pretty easy to see one or some of these projects shifting in term of award and in term of cash income, advancement payment cash income from 1 year to the other. And that's the reason why prudently, we took the decision to leave the guidance as it was. I'm quite sure that, as usual, we are going to close on the upper side of the guidance. The last chart, Page 11, is to explain you why we are pretty happy to be in all the segments and all the region of the cable market. Why? Because have a look at the trend of the last 5 years. The trend of the last 5 years explains that whereas energy and projects -- sorry, telecom and projects have been not particularly exciting in term of performance in the last 3 years, now are going to increase. But in the last 3 years, has been energy that has helped us to keep the performance around about EUR 951 million. Let's keep on aside the 2020 that is obviously the year touched heavily by the COVID. And the same content comes from the geography. The geography, as you can see is Europe is the ones that EMEA has scaled down in the last 2 years, now is going to increase. And the North America has been able to compensate this reduction growing. Now that North America appears to be ready for a little reduction. Europe is [indiscernible]. And not only Europe, LATAM, too and APAC, okay, APAC [ is solely to Sofia in best of administration ] of the company. Overall, in the 5 years, we have seen the segments, the 3 segments, generating a significant cash. And the cash is different because you can see energy has a very high cash conversion, whereas projects and telecom for 2 different reasons are segments that need of heavy -- significant investments in order to keep the position in the market, continue to properly run. You see that the cash conversion of energy is 83% versus projects and telecom, 65%, 66%. Anyway in 5 years, the overall free cash flow of the company has been -- sorry, in 4 years, EUR 1.338 billion with dividend for EUR 407 million to the shareholders. Thank you very much for your time, and now I'm going to leave the floor to Francesco Facchini for the details of the economics, the financials.

Thank you, Valerio, and good evening to everybody. As usual, let me start with the profit and loss wrap-up. As Valerio said, sales grew very significantly from the lows of 2020 striking by COVID, of course. Total sales were driven up also by a very strong copper price effect in 6 months 2021 compared to the 6 months of 2020. The total effect of copper price was above EUR 800 million. This also explains the effect that Valerio was already mentioning in terms of margin dilution. Organic growth reached 8.5% ex projects 10.5% with very strong in the second quarter, almost 17% growth. I would say strong across all the segments, in particular in the Trade & Installer business but also in Industrial and OEM business and of course even more in the Telecom business. The only business which scaled down a bit from the previous year is the overhead lines and our distribution business, specifically in North America. And Valerio already mentioned that last year, in Q2, we reached the PV in North America, very high peak also thanks to the [indiscernible]. EBITDA, EUR 470 million, plus EUR 51 million from the previous year, a very solid Q2 and excellent base in my opinion to deliver on our new guidance despite a EUR 22 million currency effect in the first half, negative, of course, which will become quite neutral in the second half. We expect due to the dynamics of ForEx this year and last year this EUR 22 million to remain pretty stable in the second half because the dollar has already weakened significantly in the second half last year. Margins, EBITDA margins reached 7.8%. However, it's important to say that restating sales for the above EUR 800 million copper effect that I was mentioning before, the 7.8% would exceed 9%, and that's a very high EBITDA margin in absolute terms. I think we are still capitalizing a lot on the excellent job on the costs, both fixed costs and also operations cost, the plans that we have done also last year under the pressure of the COVID-impacted results in the COVID season. In the box top right, you see the dynamics quarter-by-quarter for each segment. First of all, you see how projects is starting to recover and actually posted the second quarter slightly above the previous year. That's just an anticipation to a much stronger recovery that we expect starting from Q3 based on the very strong order intake that we have commented. Energy is also accelerating, of course, compared to pretty low level in Q2 2020, but it's also correct to mention that in Q2 2020, the power distribution business in North America was reaching a real peak. So this plus EUR 20 million in the Energy business EBITDA that we see in Q2 is particularly remarkable if we think of the negative impact that we had in this specific segment, that would be the North America. Telecom is accelerating as well from Q1, plus EUR 12 million in Q2, specifically compared to the previous year, driven by very strong volumes across the board, across all the regions and driven also by [ year-to-year ] margins as a matter of fact. And all in all, the EUR 257 million EBITDA of the second quarter, as I was saying, is an excellent base to deliver on the Europe guidance. Our net income improved also very significantly, EUR 162 million group net income in the first half, more than doubling compared to last year. And other by the -- other than the operating result and EBITDA, it was also driven by very positive dynamics below the operating result line. Specifically, we had no impact coming from any government this year differently from last year. We had a very low level of financial charges, also thanks to a positive impact, which followed the issuance of the new convertible bond. We had an improved tax rate, 31% despite a very negative impact coming from the U.K. tax rate increase due to a reform -- tax reform in U.K. And all this contributed to driving up our group net income very, very significantly to a very satisfactory level. Let me now move to the balance sheet on the following page to commence the strong and solid dynamic of the working capital, operating net working capital. Compared to the June 2020, the equivalent period last year, it went down by EUR 150 million despite a huge negative impact coming from the metal effect, more than EUR 200 million, EUR 230 million to be exact. We were able to more than offset this huge effect, thanks to a very strong trend of working capital, a downtrend of working capital in the project business, which generated a very significant cash flow over the last 12 months. Of course, it will change a bit in the second half but for very positive reasons because, as we said, activities in projects is going to speed up significantly German corridors, the execution of the newly taken orders in the submarine business. And this, of course, will not allow the sales level of positive dynamics of working capital as the one that we had last year. This explains why the -- as Valerio anticipated, the free cash flow for the full year will move down from the current EUR 447 million last 12 months to a level that we think will be pretty consistent with the guidance even if -- certainly, in the upper part of the guidance. The net debt as a consequence leveraged down significantly, EUR 130 million compared to June 2020. We have to consider that within this decrease, we were absorbing EUR 130 million of dividend distribution, EUR 85 million of EHC acquisition and also more than EUR 100 million of antitrust penalties and settlements. So of course, it's not as nice as the free cash flow, but we were also distributing cash to our shareholders and acquiring. Even if not a huge acquisition, still not insignificant acquisition. And all these delivered with a debt reduction. Let me move to the final page before opening the Q&A, the cash flow, EUR 335 million last 12 months, which bridges with the EUR 447 million if we consider the antitrust cash-out penalties and settlements for EUR 112 million, where you see highlighting one of these box. The reason of the scale down on a full year base, let me say, EUR 300 million plus potential in the higher part of the -- the highest part of the guidance is the contribution of working capital, which was still positive at EUR 121 million generating cash in the last 12 months as of June, but most likely will become pretty neutral for the full year 2021. So losing these positive EUR 120 million, despite the growth, the improvement of the full year EBITDA in line with our guidance will be difficult, of course, to stabilize a level of free cash flow above the EUR 400 million like the one that we are seeing now as of June. Of course, we will try to deliver the best we can. On top, some, of course, uncertainty, which is always there regarding the order intake of projects. And more than the order intake, I would say, the exact timing of the downpayments related to the new potential orders, which may fall in December rather than in January, and it's very difficult to present. But unfortunately or fortunately better, these amounts of downpayments are very significant. So can move the cash flow of the single year very significantly with no real change because what we do not cash in December, we will cash in January. So I don't really see any meaningful difference for the company investments. I think I'm finished with my presentation. We can go ahead with the Q&A session.

[Operator Instructions] The first question today is from Max Yates from Crédit Suisse.

Just my first question was on the SuedLink projects because we're hearing quite mixed messages on the permitting potential delays to the project. So I just wanted to understand. Firstly, could you give us an update on how the permitting process is going and conversations with the customer on the time line? And then also, obviously, if it's a EUR 1.8 billion combined projects, it's about EUR 360 million per year over 5 years. I just wanted to understand if you think you'll be at that run rate of revenues in 2022. Or because of these delays, it might take a bit longer to get to that kind of EUR 360 million run rate. That was my first question.

Okay. Thank you, Max, for the question. Let me note only that the delay for German corridors, at least for the time being but I don't see any other reason to change it, is only on the installation side. Consequently, that's the reason why we are going to start the mass production tomorrow morning. But for more details, I leave the floor to Hakan that is here with us and they can better detail the situation.

Thank you, Valerio. Thank you for the question, Max. The SuedLink or we can say all the 3 projects had some delays yes. Definitely, the installation is one that is affected by the delays because of the permits, as Valerio said. In our program, we see some reduction in our projections, but not that is going to affect our internal and also, let's say, projections, internal projection. And when we look to the EUR 360 million that you were mentioning, of course, you can dilute that at the back end with the 2 years of expected delay on the 2 projects of the German corridors because one of the projects have not yet announced a delay that can happen. The reason is a positive reason, the delays of the premise, which is actually the customers, the TSOs, they want to have one permit for the second tranche of investments as well. So the second German corridors, they want to have the permit together with the first at the same time, which the authorities have requested. And we see that as a positive news actually to enable and open up for the second tranche of the investment. So from that perspective, we are planning. And at the beginning of this speech, Valerio explained that we are industrializing and we have completed our industrialization. So we are starting the production for one of the projects as foreseen. And for this year, we are on track with our expectations on the production.

Okay. So just so I understand that correctly. So it might be more prudent to spread out the EUR 1.8 billion over 6 or 7 years rather than over the [ 5% ]. Is that the right interpretation?

Yes. What I would do, I would spread it to 7 years. And I would spread the last, let's say, tranche, which is the installation of -- to the additional 2 years rather than to spread the whole project into 7 years. Does it make sense?

Yes. Yes, that makes sense. And just my second question was on the Telecom business. It feels like as we've gone through the year, you've become kind of more constructive on that business than when we started. And I guess I just wanted to understand sort of maybe from a high level what had really changed. Is it that you've done better on your internal cost actions? Is it that the pricing discussions have maybe been less severe than we thought or maybe from the initial kind of -- or the most recent tenders on the ground in China, we've actually seen improvements there. I'd just love to hear a little bit about kind of what's going better from your perspective.

I will refer to Philippe Vanhille to give an answer to you.

Max, I guess your question is about the margin more than the volume because we expected that growth of volume, especially in North America. So the answer is made of 2 things. First, the mix. We have a very strong growth in North America. That's one effect. And you know North America has a different price pressure compared to Europe. That's one. The second element is that we were able to keep on maintaining some contracts longer than the others and longer than even we expected for a certain while because the newcomers with low prices might need a little more time to get into it after qualification of their products, setting up the supply chain, et cetera. That was part of the possible time differences we could see, and that was part of the uncertainty. It went in the right direction for Q2, clearly. So these are the 2 main explanations high level, I would say.

Okay. And maybe just a very final one on the same topic. Do you feel like the margins that are being generated now fully reflect the challenges in the market and the challenges with pricing? Or do you have any concern that maybe we've kind of pushed some of the margin pressure sort of to the right, and that's something that still needs to feed through into the business? I just want to get an understanding of whether the margins today really reflect kind of what you see outside in the market in terms of price competition?

Yes, yes. I understand very well the question. The point is that we are going to see in the second half the new prices more than in the first half. That's clear. For the contracts that we have recently signed, we have lower prices than before. So when I say we had the positive kind of news that we were able to keep these prices longer, at some point, these prices will kick in. So we will see them. And the price pressure will be there and is going to be there, in particular in Europe as it is a market, as you know, where they are quite low prices, in particular from Asian suppliers. So I'm very confident about the volumes. I'm -- then on the margin, if you look at our Q1, a number that you have, and our Q2 excluding YOFC, you see between these 2 quarters a difference of a few points of margin, let's say, from 13% to 15%. Q1 -- the last Q1 was without YOFC, somewhere in the range of 13-point-something percent. This Q2 is around 15%. And this is the range in which we play because it depends -- we have contracts with no fixed volume. So depending on how much of the volume our customers will ask us, it will change our mix, and this is the range we are playing with. It's -- I'm not expecting anything dramatic. It can go slightly better, it can go slightly worse, and this is the uncertainty of telecom but we have been describing for a while. What is clear is that the prices are not shrinking anymore. There is a stabilization of prices even in Europe now, which is something positive I want to mention because it's what I see on the market.

Our next question is from Lucie Carrier from Morgan Stanley.

I have a few and I will go one at a time. I wanted to come back to the contract awarding of SOO Green in the U.S.. And generally speaking, I was hoping you could discuss maybe with us the prospects you're seeing in high voltage in the U.S. on the land side and also how does that compare in terms of the investment that we are seeing on the offshore side because there's a lot of emphasis on offshore wind in the U.S. and maybe a bit less on the land side, but the SOO Green is obviously quite sizable. So I just wanted to get your take on that.

Okay. Hakan is going to give you the answer.

Okay. I mean first of all, the offshore wind is really departing in the U.S., and we see the activities are significantly, let's say, increasing and also the permitting process and the involvement of the local government is going into the right direction. And we had already announced the vineyard, as you know, that the permits are on the way, and it will be -- at the last quarter, it will happen, the production and the installation. So of course, all these offshore wind, let's say, systems that are going to be put in place is not going to be able to survive on its own because when you change the source of energy generation, then you have to also build the backbone to transfer this energy into the right location. What is actually happening with the SOO Green because in the Midwest, as you know, there are lots of solar farms and also wind farms, which are onshore wind farms, and the energy is there but you have to transfer the energy safely, which safety is becoming a bigger concern in the U.S., meaning underground table. So in that respect, SOO Green is going to be one of the first that is going to secure the energy transfer safely from the new technological energy generation, which is the renewable energy. The same is going to happen with the offshore wind part because you are going to carry the energy to the shore, but you need the infrastructure to deliver the cable, deliver the energy with the cable to the destination where the energy is needed. So there are lots of activities that we are seeing, and planning is happening. But I think it will be the second step after the investments are going to be solid on the offshore wind, the utilities, which are, let's say, going to complete that planning. And as you know, the Biden administration is also supporting that, so it is in the plan. There are some plans that we are also part. There are some links and, let's say, connections in offshore and also onshore. And I think SOO Green is going to be the first one that is really significant as a milestone in the industry of transmission.

And just as a follow-up to that maybe. Can you help us understand the position you have now in land high voltage in the U.S. because historically, it is quite a small business for you and also kind of the profitability profile because we tend to see your North American business being more profitable than your businesses in the rest of the world?

Sure. I mean, our business so far is restricted to AC cables in the HV, High-voltage arena in the United States. As you know, we are -- about 30% of the market's requirements is performed by our Abbeville facility and our team in the North American organization. So the -- what we are talking about is the DC technology, which is a differentiation to the AC for long-distance energy transfer. So from that perspective, the HV environment is changing. AC in the United States was only short distances and for critical areas. All the rest is the DC technologies overhead, as you know. And therefore, this landscape is changing. And we -- with the Abbeville investments, which we are also now planning to improve to make it available for DC technology, which is going to support the -- SOO Green is going to be, let's say, creating additional exposure because we have 2 vertical lines, as you know. We have 2 vertical lines. And one line, we were not using for the high voltage, which we are unlocking now to use for the high voltage. We are expecting that there is going to be a growth overall.

Okay. My second question is also a little bit more long term. You are getting increasingly a lot of investor questions around the need to invest in power distribution notably on the back of a faster penetration of electric vehicle. What is your take on that? And can you maybe highlight your position also in this area on a global basis, then maybe it's a bit more relevant to U.S. and North America?

Lucie, Francesco speaking. Can I ask you to speak closer to your mic because we hardly hear you? Francesco speaking.

Yes, sure. Can you hear me better now?

Also speak louder. Repeat it in some way.

Can you hear me better?

Not very much.

Not very much.

Try again, maybe speaking a bit more slowly because we -- the volume is very low. I don't know why.

Can you hear me better now?

Let's try.

Let's try.

All right. What I was asking was about the need potentially for increased investment in power distribution to accommodate the increased penetration in electric vehicles. I was just curious to have your take on that, whether you see something accelerating there? And what is your offering to accommodate potentially the increase in EV penetration?

Okay, Lucie. I think that we have been able to catch your question. Valerio speaking. Yes, the answer is yes, because we are seeing definitely strong demand of power distribution even substituting, especially in California, the overhead lines with underground. So we are investing. Just in case today, we have authorized significant investment to increase the capacity for power distribution of America and high voltage, too, because we believe that the market is continuing to grow. Did I answer to your question, Lucie?

Yes, yes. And maybe if I can ask one last question, which is a bit more short-term oriented, is around the metal prices and the dilution on profitability. I mean, historically, you have been able to pass these raw materials impact relatively well. Are we just seeing now a bit of a delay? Or you feel the market or industry structure are different now than what they used to be?

I think we are -- our margins, Lucie, and our results are clearly showing that testing to the market and managing price in regard of the raw material spike, the raw material increase that we are seeing has never been and is not a big issue. Of course, we had some maybe temporary impact coming from raw material increases, but they quickly faded out in our profit and loss because we are able to quickly adjust our level of pricing. These are for the nonmetal raw materials. For the metal raw material for the copper, and I would say that it is even less the case because we are proving to be able to fully pass the copper pricing to the market, which has always been the case. Also, in this case, of course, there can be some very short debate but not really affecting the big picture. Of course, when you have in 1 half in 6 months almost EUR 900 million copper price effect on the sales, we have to be very careful to look at the percentage, to look at the EBITDA margin as a percentage of sales because it really means nothing in the sense that it is very clear that our margins have improved, by the way, have improved even significantly. This happened in Energy business, across more or less all the segments. It's a pretty stable margin in the Telecom business, even if maybe in the second half will suffer a little bit, but I believe we remain at a very good level. And the scale of the projects, which is going to increase significantly from the second half, will definitely deliver margin improvement. So I think that restating these margins with the last year or 2019 copper levels will end up already this year with some of the highest margin that we have ever realized under the new perimeter, combining also general cable.

Our next question for today is from Akash Gupta from JPMorgan.

I have a few questions as well. The first one is clarification to Lucie's question because my understanding on raw materials, particularly copper, is that at the time when copper prices go up, your margins mechanically come down because your EBITDA or your value-add will going to remain the same, but your revenues number will go up, which will mechanically reduce the margin. And on the other way around, when copper price is going down, it will improve your margins because your sales figure will go down and value-add will remain the same. Can you confirm if that is the case or my understanding is not correct?

No, it's exactly Akash -- Francesco here. It's exactly what I was trying to explain that this year, specifically in the first 6 months, the sales has been inflated by EUR 870 million, if you want to have the exact number in terms of copper price with a very material effect in terms of EBITDA, therefore, restating -- therefore, the margins decreased very much, but it's a pace to decrease. It doesn't mean anything. As a matter of fact, if you calculate the margins at a stable copper price, you have a very material increase of the margins. And it's very important that we give this message very clearly that our margins, also due to the very good job done last year under the pressure and that's a huge pressure of the volume drop of the COVID season, our margins have improved, and we are preserving our level of margins. That's the reality.

And the next one I have is on this SOO Green project in the U.S. I believe this is not in your backlog, given your backlog hasn't moved quarter-on-quarter. So maybe if you can clarify on that. And then the question I have is that given on one side, you have some delays in SuedLink and particularly on the installation side, we may have to take into consideration a couple of years of delays. Can we say that some of these delays on revenues may be offset by execution of SOO Green? And if you can also say when do you expect to start this project in terms of revenue recognition?

Hakan speaking. Thank you for your question. Regarding the SOO Green in our backlog, it's not in our backlog because we are waiting for the markets to proceed, as you know. We never take a project which has no [ NTP ] into our backlog. The second question was the German corridors delay, is it going to be compensated by the SOO Green? No, there are 2 different projects running differently. And we have not foreseen 1 or 2 to compensate each other. Therefore, we are investing into the capacity in the U.S. to be able to produce SOO Green -- majority of SOO Green in the U.S. So the delay in the German corridors, I would not be able to say more than what I told before. It's on the installation, which is going to dilute the, let's say, the yearly sales and margins at the back end. So in our projections, so far, we are fine. But I cannot say that everything is going to be certified with the permits with this delay. There may be shortening or there may be also further delays, but we will see in the future. Currently, we are starting the production and we are -- and we will continue the production. And therefore, from that perspective, there is no, let's say, correlation or any compensation possibility with the SOO Green. It's an additional project on top of the existing capacity utilization we have, and it's a complete different path and unlocking capacity in the U.S. We were using that capacity for medium voltage. We were using that capacity for AC high-voltage. And as Valerio explained, we are investing. And today, there was a decision to invest a little bit further to unlock some of the high-voltage capacity and also the medium voltage capacity that is going to be affected due to the SOO Green projects.

Just for you -- Valerio speaking, Akash, just for you to know, we have presented and debated with the Board a number of investments because we needed to invest definitely for the growth of the market. The investments will touch North America, will touch [indiscernible] and will touch probably also [indiscernible]. We needed to increase the capacity to follow the market and to increase our capacity following the demand of the market. After having seen that the market is really expected to grow, our estimation is that the submarine market is going to be 2.5x the previous average 5-year consumption. We have decided to invest, not to lose the trade. So in the next 2, 3 years, you will see not minor increase of the CapEx. Partly, obviously, we are going to try to reduce other CapEx in order to compensate. We expect our CapEx to ramp up around about EUR 300 million, EUR 350 million instead of the EUR 250 million, EUR 300 million of today. That's why because we need to increase the capacity of the high voltage to follow the market -- the medium voltage market in U.S. and the submarine especially. So if the market ask, we are going to follow the market. That's it.

And maybe Hakan, just a follow-up. I mean my question was more in regards to the total project revenues. I'm aware that for one project, you will produce cable in Europe and one for you'll be producing in North America. But when I look at the project segment revenues, if you have any impact from and some pushout of German corridors in Europe, can you offset it to this project in the U.S. in terms of the revenues for the land high-voltage segment? Or that is not going to be possible? So that was the question originally.

Listen, Akash. First of all, the German corridors. I don't believe that the German corridors will be delayed significantly. There will be a partial delay 1 or 2 years of the installation only. Consequently, that will impact moderately our prospection of the sales. On the other side, there are many other projects interconnectors on land and via sea that are coming that will more than compensate the potential delay of German corridors.

Your next question for today is from Vivek Midha from Citi.

I had a couple, one short term, one longer term. So firstly, if I could follow up in terms of the monthly sequential trends you've been talking about. What have you seen so far in July, if you're to share that? And secondly, another question on the SOO Green project. Could you maybe give us any color on what sort of competitive dynamics for bidding you're seeing on these kinds of contracts to the U.S., how it sort of compares to the bidding you see in the European market?

The trend in July for the business is pretty positive. The demand, especially for E&I, is still strong. No news, that's my opinion. But obviously, my colleagues may take other positions, if any. I believe that Massimo Battaini wants to give some color to the -- to your question.

Yes, Vivek. So I confirm that we're seeing, not only in July, but the first 6 months a stronger surge of the [ China ] demand, which will definitely sign -- signal a stronger demand of our distribution, we will probably follow in second half of this year. So we'll have the all business fairly strong volume-wise and performance-wise in 2021 relative to 2020, but also relative to 2019. So T&I today is more performance than what it was in 2019 pre-COVID. We see also in the industrial segment, so special cables a stronger demand because all projects that were put on hold last year are gradually resuming pace and order intake has started to ramp up quite significantly. And so I think this cover well the energy space, has been already commented by Hakan and we see a similar trend. As you know, in the business [ T&I ] picks up with 3-, 6-month delay, all the other segments will follow through, so PD and their volumes. In telecom, I think Philippe has already covered this. We've seen a stronger demand comparison in relative to last year, in optical cables, but also in MMS. And we see this trend continue in the second half, and July is confirming this trend continue in the second half. I don't know whether we answered the question, Vivek.

Yes.

There is a second question that you asked, I think, Vivek, about the bidding process in the U.S. versus Europe. Is that correct? Do you want me to comment on this?

Yes. That would be great.

Okay. I mean, first of all, when it's high tech, like 525 kV, the bidding processes is similar. The only distinction which comes from the bidding process is, is it a TSO or a developer. So the developers are different looking from a different perspective because of their financing agreement and financing requirements versus a TSO, which is already financed partially by themselves, partially by the government. So from that perspective, there are some particular fees on both, but the high-tech investments like the 525 kV DC dictates the bid. So I can say that even the process may be a little bit different, but the result is the same. So if you are able to produce and develop a cable that is high tech, then you have more, let's say, opportunities as we have seen versus the German corridors and also SOO Green.

[Operator Instructions] Your next question is from Miguel Borrega from Exane BNP.

I've got 3, please. The first one on projects and just coming back on what you said last quarter about more capacity in the market may be impacting pricing and margins. Can you comment on what you have seen over the last few orders in the first half in terms of the implied margin? Is that kind of higher than what you've had historically? And then I can just ask the other 2. On free cash flow. Your guidance basically implies around EUR 580 million in the second half. Can you walk us through what you're thinking about working capital? You mentioned a few downpayment in Q4. Am I right in assuming that you're expecting a broadly neutral working capital position on your cash flow for the full year? So reversing the EUR 500 million from the first half? And if you could also quantify the impact from copper on your working capital? And the last one on energy. You mentioned during the presentation that the cash conversion is 83%. Can you maybe break it down between infrastructure and industrial? Because I imagine there would be a significant difference there as well.

Okay. Thank you very much for all your questions. Let me start with the first one, the capacity increase. Yes, we needed to increase the capacity, and we have been the last to run for it because we were having already a bigger capacity than competitors. Now that we see the capacity filled, we are thinking to follow the trend of the market and not to miss opportunity in the -- for the customers. We have seen not for the time being a significant price pressure. The prices are almost stable. And I believe that the demand, if it's true, as it is, that is going to grow so much, probably there will not be opportunity to price reduction in the next quarters. I don't know if Hakan has a different vision.

No, I agree completely, Valerio. The price -- the capacity had an effect. We spoke about last time that pricing has come down, and we have pressure. But as Valerio said, it has stabilized. And we are seeing for the high-tech projects, let's say, the bigger projects, less pressure on the price. But the smaller project is always depending on the competition level, and the offering of multiple players is always under pressure, but we don't see that in the big ones.

Then there was a second question, I leave to Francesco for the...

Thank you, Miguel, the free cash flow for the second half. Of course, as usual, due to seasonality, working capital will decrease in the second half, no doubt about that. The reality is that it will decrease a little bit less than it decreased in last year, that's important. And therefore, the EUR 450 million, say, free cash flow last 12 months, I would see as of June, will decrease towards the level indicated in the guidance. Again, I'm pretty confident that we will manage to keep it above EUR 300 million and maybe also in the very high part of the guidance. We have one specific reason for that. The dynamic of working capital in the project business. Last year, due also to the lower level of activity and order intake in the previous quarters and previous years, we didn't have this very high level of activity in terms of project execution, I mean, in the second quarter. And therefore, the level of the working capital was dropping dramatically it was -- in the positive sense, it was improving, it was decreasing very significantly. This year, as I say it very positively, of course, with the start of the German corridor and with the execution of the submarine orders, which have been newly taken like the Turkish crossings that we have an example of Sofia, which are pretty much -- which are projects with a pretty much shorter time to market. So whose execution will already fall in the second half, yes, maybe the working capital of the submarine will also decrease but not certainly in line with them. And this explains, again, why the EUR 450 million last 12 months free cash flow of the -- as of June that will drop down to the level indicated in the guidance. The second point was related to the copper impact, the copper impact on working capital. I think I was mentioning this during my presentation is the total impact in the last 12 months as of June, almost EUR 230 million. So it's huge. It's huge. This impact will decrease a bit on a full year base 2021 for the simple reason that the copper price increases started already in 2020, in the fourth quarter to be exact. So I would estimate that it could go down from EUR 230 million to EUR 180 million, EUR 190 million. I'm giving you rough estimations, that I think are pretty much correct. This on a full year base, meaning from December 2020 to December 2021, still EUR 180 million is still a huge effect that we are, of course, doing our best to offset in terms of free cash flow delivery, thanks to inventory management, overview management and the good work done by the project division in executing and reaching milestones and collecting cash at the relevant milestones. Then the third question was on cash conversion. I would say that the cash conversion of the Energy business is very similar in its different components. E&I, industrial business, I wouldn't -- I believe it's not very much different. Let me highlight and emphasize how important this cash conversion is to stabilize our cash generation in a period of time, and I believe Valerio was mentioning this, I mean, in the next few years, when we will certainly go into a higher level of CapEx, specifically for the project business. So this means that if we take this cash conversion rate and we project them over the next 2, 3 years, definitely, the cash conversion rate of the project will drop even more, will not remain at 60%, will certainly drop. And I say this once again, positive, because we have very good investment opportunities, whereas I believe that the level of cash conversion of energy will remain stable. And I hope that also the level of cash conversion in telecom may remain stable or even increase because the bulk of investments in telecom and in fiber specifically, we have already done over the last few years. So telecom has always been a pretty good cash-generative business. I think it will keep being a very good cash generation. So I'm -- but this once again to explain the complementarity and the fit of our businesses, not all in terms of different cycles, some mega trends which needs to be stabilized by a more mature and stable business like the energy, but also in terms of financial balance because a company only exposed to one of this business, take the project business, well, when the business changed direction, it's not an easy company to sustain or to stabilize. So we are very happy to be in this complementary framework.

Our next question today is from Monica Bosio from Intesa Sanpaolo.

I hope you can hear me. There are just a few questions left. As for U.S.A., on the back of the SOO Green project and of the statement from Hakan, I was wondering if it's too early to give us an idea of the size -- of the potential size of the underground cable market in the United States. And when do you expect this market will be -- will ramp up? I can imagine it could ramp up along with the infrastructure plan of Biden. But just your color on this. And from the financial side, I would like to ask Francesco, just a housekeeping, the projection for the tax rate for the full year and maybe an indication on the copper price on the net revenues over the full year. I can imagine that the second part of the year will be definitely better in terms of copper because there is a better comparison base.

Thank you, Monica, for your questions. Valerio speaking. My opinion, obviously, I don't have the crystal ball, but there is not a transmission entity in U.S. SOO Green is one of the first interconnectors on land that is going to develop a transmission network between regions from Midwest to the east coast. It will not be the sole. Other will come for sure. If U.S., the private companies will trigger other projects, it's possible because SOO Green has told us that they have the license to connect via the railroad whatever they want. Consequently, it may be that the railroad right of way will become or could become if SOO Green is going to be successful as execution, and that's sure, a decent way to realize a common infrastructure in the U.S. territory. That is an infrastructure that the U.S. is going to need because all the power generated on the [ coast or the 2 coasts within 10 year ] have to be distributed inside the country. That's not an option, it's something that has to come. So I'm pretty optimistic on it, and that's the reason why today we have approved thus quite significant investments in our plant of Abbeville in U.S.A.

Okay. It's still too early to define a size of the potential market, that we should see later?

The size of the potential market, it may be bigger as you want, billions, but it's really difficult to predict.

Monica, taking over your additional questions. The tax rate, I believe, on a year basis, we are remaining quite stable, around 30%, 31%. Always remember that a quarterly tax rate is by definition the best estimate of the full year tax rate. So if our financial statements are correct as they are, 30%, 31% should be an appropriate estimate of full year...

Okay. It seems to me a little bit better.

Go ahead.

It seems to me a little bit better than initially in anticipation. Maybe I'm wrong, but...

No, no. It is -- you are right. It is better because our results are better. And normally, when the profit before tax improves, specifically in some geographies which are more on the border line and geographies with low profitability and switch in terms of profit before tax or net income, sometimes are at a loss like it happened in 2020. When this gets into positive black figures, of course, the tax rate tends to improve because when these are at a loss, you don't provide for deferred tax assets, which is conservative, of course. It's prudential but it feels like this. So it's very normal when the results improved the tax rate tends to go down, and I believe that it can further go down EBITDA but over the next few years. Then the copper price and the sales. I'm happy to say that I hope that we may be able to exceed slightly the EUR 12 billion level in terms of sales on a full year basis. Of course, this is very much pushed by the copper price, Valerio said this. Our forecast is actually going slightly above the EUR 12 billion, which is -- of course, this is based on the current level of copper price. The copper move significantly, the picture will change. And the copper effect on a full year basis is difficult to estimate. But what I can say is that in the first half, it was EUR 864 million, just to give you the exact number. In the second half, it will be much lower than this because the copper started to rise in the last quarter. I tend to believe that it may be estimated approximately at 50% of that. So my best estimation would be a full year copper price effect on sales of EUR 1.2 billion, EUR 1.3 billion. But I can be right or wrong, plus, minus EUR 100 million usually.

Our next question for today is from Renato Gargiulo from Stifel.

Well, the first one is about Eurasia, if you have any update about the potential timing of the award of the project. The second one is a follow-up on CapEx. Can we assume already some higher CapEx, some step-up in the second half of this year compared to your previous plans? The third question is on submarine business, considering also the recent orders. You were saying Turkish crossing saw Sofia, et cetera. Do you have -- can you give us an indication about the expected utilization of production capacity for the submarine in the second half of the year?

Okay. Thank you, Renato, for your question. Valerio speaking. First question, what about Eurasia. We have been talking probably too much about Eurasia because we have started to talk about these projects almost 1 year ago, and we are still in the middle of the sea. That's my opinion. That's because the route is touching Cypress and Cypress is a very sensitive location in the Mediterranean. That's the reason why there are also political problems to be overcome. I'm quite sure that sooner or later, these problems will be over -- solved. But for the time being, it's a project that we have in our expectations, but not very quickly to be awarded. The last expectations is for an award in the second half of the year, but I'll not be surprised to see the -- a further delay into the project. I don't know if Hakan wants to comment on it. But...

Yes. One additional -- I mean you explained it very well. One additional news that is already public, the European fund has approved EUR 100 million to the project, so that makes the project more solid. That means the European community overall is expecting and putting that project as strategic. The important is, of course, the technical solution for Cypress. And I'm not going to mention the difficulties, political difficulties, which Valerio has mentioned. But we are following the customers' time schedule. And so far, they are sticking to the time schedule. That's what I can say. And we see the EUR 100 million as a positive step forward for the project.

If Eurasia will be awarded, we expect to be part at least of the award. Second question about the CapEx. The CapEx for 2021 will not be touched seriously. So consequently, the previous guidance on CapEx stays the same. What we are going to be obliged to touch is the CapEx of '22 and '23, especially if we are going to apply for the new submarine plant in U.S. In that case, obviously, we have to dedicate a significant chunk of CapEx to this step-up. I will give you the information when we are going to be sure to do it. The decision is already almost taken. But having not yet the location defined, I tend to be prudent. The third question is about the submarine business, if it's expected the utilization to grow. Frankly speaking, I've been talking to you telling that the utilization for the [ excluded ] cable was not filled completely. Now with the Turkish crossing with the...

Sofia.

Sofia, the capacity is filled on. Starting from last quarter, if I'm not wrong, and you can correct me, and obviously, the first half next year, the [ excluded ] capacity is filled as well as the [ paper ] capacity. We are going to run at full capacity. And that's also the reason for the increase of CapEx and the investments. I told you we are going to authorize or we have already authorized for the increase of capacity for [indiscernible].

Okay. If I may, just a quick follow-up on telecom, just a confirmation. So based on your current visibility until year-end, can we say that the geographical mix may remain approximately the same than the first half? Or do you expect anything material, anything material change?

Yes, I would say yes, but Philippe can be more detail.

Yes, yes, I confirm.

Our next question for today is from Alessandro Tortora from Mediobanca.

I have 2 questions left from my side. The first one is on the telecom. I know it's difficult, but I would like to understand if you have any feeling or sentiment on, let's call it, restocking or installation pace of your clients? And if you have any feeling of a level of stocks, okay, of your clients or from a distribution level. The second question is on the energy projects. Considering everything we discussed in this call next year starting with the margin, let's say, you are assuming for this year, is it a year balance between production installation if we also think about Viking or, let's say, all the discussion we had? So just an idea of what's your view on the overall margin for projects, let's say, next year.

Okay. I leave the floor to Philippe for the first question about the stock of our [indiscernible]. That is a very difficult question.

Alessandro, from what we see after a stock building during the fiber shortage in 2018 essentially, we had a very slow destocking for -- that took many quarters, and I would consider that the destocking must be more or less over now. I believe we are, from the stock perspective at customers, back to normal. If the demand grows, it will mean that there will be a growth for us. We still need -- just to say because it's a very significant event for my business. We will see very soon, I think, in August, the China mobile tender, that is, as you know, very important and that will set the scene for the balance between offer and demand in China, but given the importance of China in the world in general. So it -- we will know -- we'll have a better view on the demand after summer. But as far as stock is concerned, I would say, destocking is over now.

Okay, okay. And if I understood well, you mentioned during the call that as of today, overall, prices bottomed -- not bottomed out, but bottomed? Is it right?

Yes. Let's say, we see a stabilization of prices in the new tenders, is what we see.

The second question was related to energy projects. And in that case, I leave the floor to Hakan to answer.

Okay. Regarding the project, can you define again quickly? I would like to be more specific to your question. Could you restate your question, please, so that I can give more details?

The margin expectation in 2022 in projects.

'22 versus '21. This is the expectation. Okay. Let me answer this in 2 ways. First of all, the effect of the capacity utilization. We are still working for the '22 order backlog to be filled. As Valerio was saying, the first 6 months are booked, and we are still working on some projects to be acquired for the second half. So depending on the, let's say, order book or order we are going to receive and if we are going to be able to fill, which we think that we are going to do, we are expecting an increase versus this year. But how much this increase is going to be, we are going to make these decisions and also based on our order book at the end of the year. But the expectation is, as Valerio was saying at the very beginning, that we are seeing improvements in our results and which we are going to solidify in the second half, and we hope that this is going to transfer itself also into the full year '22 versus '21.

Our next question for today is from Daniela Costa from Goldman Sachs.

Most of my things have been answered, but I would like to ask you, your competitors have talked increasingly a lot about like service business and repairs. Some of them even have specific divisions now for that. I was wondering if you could give some perspective on how big do you think the size of the market can be given some of interconnectors are getting quite old and there's a lot of them and whether that's something you're also -- has actively pursuing, would be interested in and perspectives there.

Okay. I assume that you're talking about the project business, service business. So I'm going to refrain myself to explain only on the project business. And you're right, the service business is becoming a standard in our environment. We have 2 kinds of, let's say, markets that we are exploring. One is majority of the new projects already foresee inside also a service agreement, which we are taking part of. So therefore, when you are talking about the big projects, the customer is already asking us to supply our service contracts. And the service contract is not comparable to the majority -- to the big contract. But if you are, let's say, comparing, we can say about -- it's about 3% to 5% of the total contract is a service contract, which you can then multiply with the years of, let's say, useful lifetime. And then there is another part of service that is requested from some customers that have already installed the cable for a long time, and they are now asking ready crew in case something happens to be emergent -- in an emerging way to go and to take care of the repair. So that business is, I can say, is a little bit slow because the customers are not really decided on the fixed fee that they have to pay to have a standby crew. So therefore, this market is currently slowly growing. I can say very slowly, and I cannot say that it's a significant market yet. The utilities have to -- and the TSOs have to make their mind around to do fixed fee agreements for the crews that are sent back. But overall, I see a good trend, and the service business is a part of our business, and we are focusing on that. And our focus is majority is in 2 ways. We do ad hoc repairs that we are doing for the last 10 years. Whenever our customers break down, we have crews that are not based on a service agreement but on an ad hoc basis, we do that on an order basis. And then the other one, which is now becoming as a standard is the attachment of service agreement on top of a full turnkey project. This is happening.

And actually, if I may, just a follow-up. I think you commented on EuroAsia specifically, but I might have missed it. But what other large tenders are out there that we should be paying attention for the next 12 months?

Yes. As I said before, we consider the project actually started a bit late.

I mean other...

Eurasia.

Part of Eurasia.

There are big projects in the horizon, yes. I mean, first of all, if you look to Terna's investment plan, one of the project is with Tyrrhenian link, so that one is already announced by Terna into the market that this project is going to happen. It's a big project. And then there are some projects that we are following which is in the Middle East. As you may know, the ADNOC project is also in the market, well commented by the investors and also contractors. Apart from that, we are seeing big projects of the wind farms in the U.S. that are in the tendering phase. When we talk about a tender of a wind farms in the -- depending on DC or AC, but it ranges in the EUR 300 million level. So there are multiple ones which are currently under tendering. So I can say that we are seeing significant activity on the big tender, let's say, offering.

Our final question for today is from Gabriele Gambarova from Banca Akros.

A single one is again on the U.S. and on interconnectors. I was wondering if the SOO Green and other possible opportunities, I mean do you expect them to carry higher margins vis-a-vis the European projects? Or do you believe they are balanced? I mean they are in line with the European projects? [Multiple Speakers]

Just a simple answer to you. We see the margins of the U.S. projects interconnector land, very similar to the European one. Obviously, the information to the market related to the German corridors are well spread all over the work and consequently is already I referenced. What I can tell you is that the margins in U.S. are not going to be lower than the German corridors one. Very strictly aligned.

There are no further questions.

So being no other questions, I thank you all of you. I thank all of you for participating to our first half 2021 results. It has been a pleasure, and have a nice evening.