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

Good day, and thank you for standing by. Welcome to the Prysmian Group H1 2022 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Valerio Battista, CEO. Please go ahead.

Thank you very much, and good morning or good day to everyone listening to me. First half '22 financial results of Prysmian Group. Okay. Let's start with Page 2 of the presentation, the key highlights. Has been the strongest quarter of the history of the company, EUR 411 million EBITDA in the second quarter with a remarkable performance in Q2, following the very good performance of Q1. Results are driven by energy and telecom. More or less, but all the businesses have been doing very well with an outstanding performance in the Energy division, especially E&I and OEM renewable. The performance in Telecom is driven by North America. You will see later that the North American market is the ones driving the rise. Projects. Projects is progressing well with EUR 55 million adjusted EBITDA in Q2, reaching more or less higher 9.6% if I remember well, first half EBITDA margin. The orders are coming. The Projects pipeline has got EUR 2.4 billion of projects awarded in the first 6 months, namely NeuConnect, the second German Corridor and the Spanish -- the 2 projects in Spain. So Projects are continuing to come. The financial structure has been reinforced or better made more sustainable in the long term with a EUR 1.2 billion sustainability linked at the terminal signed with banks, 1 week ago. Okay. Let's move to the Page 3. Total sales, let's name it, EUR 8 billion, EUR 7.95 billion, with an organic growth of 12.5%. Very solid organic growth, driven by E&I with a 16.5% growth and the sound trends all over the regions. 8.7% is cyclically is the business that is following E&I. And the industrial network component, NWC industrials have an excellent performance, both in OEM and renewables. Telecom. Telecom posted a growth of 6.6%, driven mostly by the growth in Optical. Finally, 14.3% has been the organic growth of Projects, very good. Adjusted EBITDA, let's name it EUR 700 million because we are not at the supermarket and an EBITDA margin of 8.8%. Margin expansion with EUR 229 million adjusted EBITDA increase versus the EUR 470 million of the half 1 '21. So a significant increase of the adjusted EBITDA margin -- sorry adjusted EBITDA money. The margins had an improvement of 100 bps, that is not negligible from 7.8% to 8.8%. Finally, the adjusted EBITDA margin reality has to be considered 9.4% if we consider the price of the metals last year. Last but not least, what we found at the bottom of the cycle, EUR 174 million free cash flow last 12 months with a net debt of EUR 2,330 million. The working capital management has mitigated the effect of raw material price increase entering into our balance sheet. The operative net working capital now is at 8.4% of the annualized sales. Let me remember that by the year-end, this number is something 1 little digit, 3% to 5% usually, but it's a matter of seasonality. Let's move to Page 4. Page 4, the organic growth by regions, by geography. As you can see on the top left. North America is the best region today with 18.7% organic growth. That's an extraordinary ramp-up made in the first half. And if you look at the first quarter, it means that the second quarter has been further accelerating. EMEA follows with 11.1%,-- then Latin America, 9.8%. Asia Pac, let's see -- let's say, 0. Zero, why? Because in the second quarter, the COVID and the restrictions related to it, especially in China, have reduced the level of the business quite significantly. Now the problem seems to be over. And in the third quarter, should we see a gain reincrease of the organic growth in Asia Pac. Looking at by business. E&I is increasing -- has increased from the first quarter to the first half to 16.5%. Industrial network component from 7.9% in the first quarter to 8.7% in the first half and Telecom from 7.4% to 6.6% in the first half. So overall, the organic growth of Prysmian Group has increased from 11.4% to 12.5%. Going to 2 projects. Flipping to Page 5. I cannot say that we inaugurated the plant in Somerset in Brayton Point, but we received the visit of the President Biden to support as in the communication of the new plant in U.S. The new plant is going to be construct in the next years and have to be operative more or less by 2026. In the meantime, we will supply the U.S. customers from Europe. New orders, EUR 2.4 billion new orders in the first half. The biggest one, as I said before, is NeuConnect, EUR 1.2 billion, the Project Lightning in the Middle East for 2020. The extension of the doubling of SuedOstLink for EUR 700 million and 2 submarine interconnection for EUR 250 million. Overall, and you can see on the right side, bottom right side of the chart, the firm orders in the backlog as of today, EUR 4.3 billion, but there are other EUR 5.8 billion that are awarded to us, but waiting for the notice to proceed. So all in all, we have for the projects an outstanding backlog. All the segments are going well. Page 6, Projects. Organic growth of 28.4% from EUR 681 million to EUR 922 million. This is the result of the very hard job we did in the last 2 years. Now the orders are in, and we are starting to deliver. Finally, EUR 87 million EBITDA in the first half versus the first half '21 at EUR 76 million. The EBITDA margin is not yet outstanding. The accumulated in the first half is 9.4%, but the second quarter posted a margin of 10.7%. So it's still far from the 14%, 15%, we target as a margin for this business but is improving. Industrial network component and the E&I, from EUR 3 billion sales to EUR 4.194 billion with an organic growth of 16.5%, very good. And we will see that out of the various regions, the North American market is the ones that has driven this performance. What I wanted to note for you is that PD is going to follow. That's the history. The first one to take off is E&I, the second one that follow is power distribution. Industrial network component, industrial network component has posted a significant growth of 8.7% from EUR 1.3 billion to EUR 1.7 billion in the first half with an organic growth of 8.7%. The results went up from EUR 99 million to EUR 130 million first half/first half, with a strong growth in OEM and renewables. So in what I would say, except China, where the lockdown and the health issues related to COVID has slowed down the demand. Finally, Telecom moved from EUR 802 million to EUR 911 million with an organic growth of 6.6%. And an EBITDA that's moved up from EUR 123 million to EUR 138 million. Again, here, North America is the pilot of the group, is the geography that is driving the growth. Let me leave the floor for a while to Juan for Page 7.

Very good. Thank you, Valerio. Good afternoon. Good morning, everyone. This is Juan Mogollon, responsible for the Energy Division. With this slide that you see I'm going to try to provide more visibility to the composition of the Energy Division perhaps that you have seen in the past. Most importantly to the end markets and the economic drivers that fuel the performance of that division. I will try to be as comprehensive as possible within the reporting guidelines of the company. So if I take it to the center of the slide, you will recognize the 2 businesses there in the middle that Valerio just mentioned it, the Energy & Infrastructure and the Industrial Network Components. And as you would know, within the E&I, we have the PD, the overhead lines and the T&I segments. So let me expand a little bit on the green shaded area that you see in the middle that we categorize as secular trends, secular segments. The big circle on the left on the top left is roughly about EUR 2.7 billion, in which about EUR 2 billion of that is power distribution and overhead transmission with mid-range margins. The segment is fueled by, as Valerio just mentioned by the grid hardening expansion. And as you all know, also by the solar and the onshore wind expansion. And just to put it in perspective to what it means to Prysmian Energy. Just in the first half of this year, PD and Prysmian expanded almost 30% over the same period last year. Our backlog is 33% over the same period last year, and our order intake weekly remains at about 10% versus last year. We do not foresee segment slowdown anytime soon. In fact, we're seeing utility companies clearly increasing CapEx to support the Net Zero targets. Even with inflation and the policy consideration. I would also like to mention referring to this segment that our complete basket of product offerings makes a huge difference to our customers. And a good example of that is the recent contract that was awarded to our colleagues in North America, by Berkshire Hathaway Energy. It's an investor-owned utility company that you would all recognize. This was a $100 million contract, which would include not only power distribution, but also on the ground, low voltages and overhead transmission line. And again, it's a power of the portfolio that makes a difference here. If we stay on the green box, within the secular segments. Let me move to the right a little bit to refer to the industrial component network component, which is industrial and network component, which is a segment that generates roughly about EUR 2.5 billion at mid-range margins, what I would consider, okay? And let me expand on a couple of events that Valerio just indicated a higher growth in the first half. The first one is the renewables, which would include solar and wind. This is a bucket of about EUR 700 million with double-digit margin growing, I'm sorry. And we continue to capture the growth in these segments. And these are 2 segments where Prysmian has the most comprehensive production footprint in the industry with a wide range of products suitable to the local requirements. And for those of you that follow both of these segments, you would agree that both of the segment will not slow down any time soon. I'd like to touch on a couple of other segments in these secular drivers, one of which is the one that we don't often talk about, which is the mining. We sell about EUR 120 million annually at double-digit margins, high double-digit margins. And we're looking at about at least 20% growth this year. And I say that based on the backlog that we have and the order intake. And I say that because we are all seeing -- and those of you that follow the mining industry would agree that we're all seeing an unprecedented demand for major minerals and not just copper, but also lithium and nickel, which is driving CapEx's [ pie ] for the next 3 to 5 years. And obviously, behind this is the electrification and electrical vehicles and the energy transition. I'd like to make a remark on the fact that we are -- we have relevant share in this market. And we have a very comprehensive product of -- [indiscernible] products to serve different mining applications. I would also like to mention the -- another segment that we often don't talk about, which is the railways and rolling stock, which you see within mobility. This is another secular trend, enabling electrification. We sell about EUR 200 million annual in this segment, high double-digit growth and growing at double digit. And this is another one that is expanding in CapEx in the next 3 to 5 years, again, primarily because of the urbanization and the CO2 reduction targets. And again, we have relevant global market share in this segment with a unique basket of product. And this is an area with high barriers to entry because of the product qualifications. I'm going to quickly move to the middle of the slide, which is the residential construction segment. And as you can see, this represents about 20% of our energy portfolio or roughly about EUR 2 billion that you see represented in the middle circle. And I would like to point out the fact that in North America, residential is less than 5% of the T&I business. And finally, as the last bucket categorized as nonresidential. And this is a combination of institutions like schools, health care and local infrastructure, the majority of which is in North America and to a lesser extent in Europe. So in a nutshell, I would like to highlight 2 key points about the composition of the Energy division, okay? Number one is the fact that more than 50% of the revenue and margins are driven by secular market segments. And number two is the fact that the diversity of our portfolio makes us a strong player in the electrification. With that, I'll pass it back to you, Valerio.

Thank you very much, and we flip to Page 8. The geographical presence before and after the General Cable acquisition. Before General Cable, our revenues in 2017, we took 2017 as a reference, was roughly EUR 8 billion with EMEA representing 67% of the total revenue. After General Cable, the first half '22 has more or less the same number, EUR 7.9 billion sales, of which, EMEA represents 51%, you see on the right. And North America is 33%. At EBITDA level, more or less the picture is the same for 2017, with EMEA representing 70% of the total EBITDA, but in the after General Cable acquisition, you can see that it's North America representing 50% of the EBITDA of the group, 49%, whereas EMEA has decreased to 37%. My opinion, that's a very important pillar to recognize that the move in North America has been very profitable for Prysmian. Flipping to Page 9. Again, you can see by graphical by geography, the performance of the company. And you recognize easily the very high spike of North America from EUR 166 million to EUR 335 million, almost more than double the result of the group in North America, whereas the other regions with the exception of Asia Pac, have been improving significantly anyway. The sole flattish performance is the Asia Pac, it was affected by the COVID crisis in China during the first half. Last but not least, the consequence of everything we have been looking for. Our previous guidance released at the first quarter debate was EUR 1.010 billion, EUR 1.080 billion. It was too early to at the time to rise this guidance. Now we have a more solid perception of the market and our capability in the market to make money. The reason why we decided to rise significantly to guidance 2022 from the already set numbers to EUR 1.3 billion, EUR 1.4 billion, with a midpoint at EUR 1.35 billion. What does it mean? That if the market will continue to be stable in the second half, we see the possibility to reach EUR 1.4 billion. In case of slight deterioration, in term of pricing portfolios, the midpoint is a reasonable landing point. If we are going to have a serious deterioration of the market in the second half, maybe we are going to reach the lowest part of the guidance, EUR 1.3 billion. As a consequence, the free cash flow has to be updated, and we basically removed the lower part of free cash flow. Moving from EUR 400 plus or minus 15%. That means plus or minus EUR 60 million to EUR 400 million, EUR 460 million. So the upper side of the guidance. Of course, the value of the raw materials and the working capital are still under pressure. And that's the reason why we choose to expect a landing point in the upper side of the range of the previous range, but not to increase significantly that range. Thank you very much. I leave the floor to Francesco for the details of the financials. Thank you.

Thank you very much, Valerio, and good evening to everybody. As usual, I start with a recap of the profit and loss statement. Organic growth, as Valerio explained, was very good overall, including the project divisions was above 14%, in line with the first quarter and also showing a pretty good growth in the power distribution business which we have strong expectations also for [ leg ] quarters to come, which is obviously driven by what we believe is a long-term trend of grid expansion. The adjusted EBITDA reached a record level, in particular, the second quarter following an already very good first quarter. Margin expansion has been spectacular, let me say, with a growth of 100 basis points from 7.8% to 8.8%. As Valerio explained, restating metal prices at 2021 level. EBITDA margin of to 9.4%. If we go a little bit back in the past, and we seek for the metal price that we have, for instance, before the pandemic in 2019, our EBITDA margin would exceeded the 10%, by the way, significantly, which is a remarkable achievement. Of course, this was also impacted by some positive ForEx effect, you see the detail in the bridge top right for the first half total impact coming from currency translation of EUR 48 million, mainly in the second quarter, which accounted for EUR 33 million positive impact. All the businesses performed very well. Of course, the lion share of the growth came from the energy division, but also telecom gave an excellent contribution. I have to see about expectation the initial expectation we set with our old guidance and also projects are showing a flawless execution and progressing well on track to achieve the full year target. Moving to -- down in our profit and loss, I would say, adjustments are pretty limited, also driven by lower than the past restructuring charges. Nonmonetary items are a bit heavy impacted by the drop of the metal price, which impacted, in particular, our metal derivatives fair value for the part of them, which is not treated under [ Asia ] counting. Financial charges, as already commented in the first quarter grew but only as a consequence of the extraordinary positive component, which was in place last year in first quarter, in particular, which was related to the issuance of nonconvertible -- or the convertible, sorry, bond in Q1 2021. Other than this, in the first half, net interest expenses were quite stable compared to last year and will be also rather stable in the second half of the year. And also good news coming from tax rate because dropped, as you see below 30% to 29%. Tax rate driven by the sharp increase of our profitability in U.S. enjoying and nominally a lower tax rate U.S. than the average of our group. And this allowed -- all these effects combined allowed our net income, which for a first half record result at EUR 259 million growing almost doubling, maybe not doubling, but growing [ 70%, 80% ] compared to last year. Let me comment briefly on the following page of the statement of financial position, the balance sheet. Just to explain a little bit better the growth of the operating net working capital growing from EUR 939 million to EUR 1.4 billion, approximately, so a total growth of close to EUR 500 million. Very simply, this is the effect of the metal price rise. The recent drop of metal price is still not reflected in our working capital. So eventually, if it stabilize, we will see this in the second half of the year. For the time being, we have been impacted by the sharp rise of metal price in the spring time, let me say, the period of March, April, May. Other than these also the price increase of nonmetal raw material had a very large impact in terms of growing our working capital. I would quantify some of these 2 effects, pretty close to EUR 500 million, so justifying the entire growth of our working capital. Our net debt was in line with our expectations. As you see, EUR 57 million lower than the equivalent period of last year and also around EUR 50 million lower than in end of March 2022. Moving to the cash flow. Our cash flow is still, as Valerio said, a bit under pressure because of the raw material price increase and the related impact on working capital. Nevertheless, it is improving significantly on a last 12-month basis compared to the last 12-month basis in -- as of March 2022. You remember that we had the last 12 months free cash flow of EUR 86 million, and this is moving up to EUR 174 million. This improvement is mainly driven by the very sharp growth of our earnings, our EBITDA, whereas the increase of the working capital is still pretty much at the big level. This last EUR 360 million, if you go back to the presentation we gave 3 months ago, it's not very 2 months ago actually, it was not very different at that time. So the improvement of free cash flow is mainly coming from the improvement over the last 12 months adjusted EBITDA. This doesn't mean that we are not improving our working capital. We have taken very strong and effective actions specifically in our inventory, reducing the days of inventory. But in terms of cash impact, positive impact, we will see the effect mainly starting from Q3 and even more in Q4. All this to say that, as you saw, we have slightly improved our guidance as what I explained, taking out the lower part and pointing a range from EUR 400 million to EUR 460 million, of course, this range is also pretty much sensitive based on the level of the raw material price, in particular, the metal price. I move to a slide that we wanted to introduce to explain a little bit the work that we are doing to reinforcing to strengthen our financial structure. The main transaction that was finalized at the beginning of July has been the refinancing of the old term loan for EUR 1 billion that we did through a new term loan slightly higher than the previous one, EUR 1.2 billion. The good part is that this is also partially linked to ESG targets, which is very important for us because it reinforced through finance solid and concrete finance transactions, our commitment to sustainable growth. Looking at the strengthening of our financial structure, the new term loan extend our average maturity very significantly. Before the EUR 1.2 billion term loan, our average debt maturity was 3 years. Now it moved to 4.5 years. And as a result of a full hedge of the EUR 1.2 billion term loan, you see that also the component of fixed rates out of our total gross debt moved up to 70%, which is quite a comfortable position in the current environment of inflation and rising interest rates, which is protecting us significantly. Let me close my presentation with some little -- as Valerio clearly outlined our results have been outstanding in the first half. And this has been driven by our very strong customer focus, which leveraged on -- let me call it, a fast and flexible supply chain, fast and flexible operations that in a situation, in a market situation of product shortage of scarcity, of course, put us in the condition to catch -- to fully catch the market opportunities and also the pricing opportunity. All these point 2, as explained, was based on a very broad business portfolio, highly exposed to secular trends. I think that Juan clearly explained that this secular trend exposure is not only present in project and telecom, which is quite obvious, energy transition for project and digital tradition for telecom, but is also clearly there in the energy division, and I don't want to repeat what my colleague, Mogollon already explained, but some drivers, long-term drivers like grid expansion, like renewable power generation, like data centers, like electric mobility is a very clear and solid -- are very clear and solid examples of this. And last but not least, 2 final points. I think that our focus on cash, which is relentless and which has always been there, and now it's even more there, I think that now is even more crucial in the current challenging environment from financial point of view, rising interest rates, rising inflation. So I think it's even more a point of strength for our company. Last but not least, the project business is executing flawlessly as a huge visibility, Valerio mentioned the EUR 10 billion total visibility if we add up -- if we add up the backlog with orders which will convert into backlog in the next 18 months and is very well on track to deliver results, not only for this year but even more important results that we expect to be delivered in project in the next few years. I think I'm over with my presentation and we can go ahead with Q&A session. Thank you very much.

[Operator Instructions] We will now take the first question -- and the first question comes from the line of Daniela Costa from Goldman Sachs.

If I could ask 3, actually, that would be great. On 3 businesses actually one by business. So starting by the projects. I wanted to check with you regarding your commentary, obviously, the margins are still subdue versus your 14% to 15%. Your -- one of your peers yesterday talked about 17% to 24% margin. Of course, there are some differences because they report on constant copper sales. But anyways, I think even adjusting for that is materially higher than how you view things. Can you talk about how much of that difference is just mix differences or you don't really -- what you think about those numbers? That's question number one. Question number two, I wanted to check on the very helpful split of the energy projects between structural and nonstructural. Can you comment at the moment, I guess, both sides are at very, very elevated levels. Where are inventories at distributors? What's the drop in the non-secular part that you include within, I guess, you said you're bottom end of your guidance has a severe drop versus the top end. But if you could just explain how much is from those businesses and what's the situation in terms of risk of destocking there? And then third part on telecoms, the U.S. market has also been very strong. We're seeing high fiber prices again. But when we look at development on the build-out of the U.S. network, what do you -- where do you think we are in that cycle of build-out? Is 2023 the peak? Is it -- is there growth beyond 2023? And how are you managing your capacity on -- on the back of that?

Thank you very much, Daniela. Let me answer first of all, to your first questions, differences versus Nexans maybe because they are better than us, I don't know. For sure, in our project division, we don't have only the submarine energy. We have the land interconnections that have, by definition, a lower margin than the submarine. Anyway, I leave the floor to Hakan to give you a more detailed answer.

Okay. Thank you, Valerio. Actually, you hit the nail on the head. First of all, as Daniela, you said, there is the copper value effect, which is significant. I mean, you have to extract that value. Then the second is the mix of the projects that we have, as Valerio stated, the land portion of the high voltage. And then you see also Submarine Telecom and also we have the third business inside our project business. But having said so, as well, there is also the seasonality that I can say we are building at the very beginning of the year. And then as you see also in the past, the second half is much stronger. So if we put all these elements together, we come also to a level which is not on the 14% level, but at least we come to a 12% level, which we will see. If we add also the couple delta, we may get also some percentage points from there. But again, you have to look also when the orders have been taken. The orders that we are completing currently have been taken 1.5 years ago, which the market was a little bit different than today. So -- and therefore, there is also a time lag. At the time we were taking orders, our competitors were losing the orders because they had built before for that period. Now they have fresh orders, and we are going to most probably be able to push through all the orders for this year that have relatively, let me say, a longer period of order entry and financial close expected. So -- but having said so, the 24% margin that you're also with the extrapolation of the copper is really a good level. I don't think it is a sustainable margin for the long term. We think the sustainable level is in the 14%, 15% level. And this is what we are going to show in the midterm.

Okay. Let's move now to the second question, energy, the inventory of our cousin, of the distributors. We try to keep under control. But obviously, we have not the crystal ball. I believe that the inventory of the distributors is not so high, has increased, but now they are trying to start to keep in line with their balance sheet availability. Is the drop expected in the cyclical part? I would say, yes. When? I don't know. For the time being, especially in U.S., the market is still pretty buoyant, but will not stay forever. That's sure. That's the history. And as a consequence of it, we consider that next year at least, should we see a decline of the EBITDA of the segment. I don't know if Massimo or...

I want to just add that, yes, the residential will soften probably at the beginning of next year. But in residential, we have a stronger presence than in nonresidential segment, which will follow different dynamics. So we might see some retreat in the margin [ BTD ] margin of the T&I, T&I residential, which is mainly Europe, already maybe quarter 4, quarter 3, quarter 4 this year slowly in fact in North America. The rest of North America based on industrial plants so residential opportunities airports, commercial building, institutional buildings and all the rest will probably hold longer in terms of profitability. But as you see -- as we said many times, we have to watch and see what happens the next 2 quarters.

The third question is about telecom, and I would like to leave the floor to Philippe Vanhille.

Hi, Daniela, and good afternoon, everybody. The U.S. market, as we see it, is far from being at the peak. It's a market that has been -- the optical market of the U.S. has been growing for 20 years with a couple of years of exceptions due to a specific context. But it's been growing in the long run. And we see the building of the broadband infrastructure in the first 1/3 of its construction, I would say. So there is still a long time of growth in front of us. We are absolutely certain of that. As you know, we have a strong position in North America in this segment. And so we are preparing ourselves for long-term growth in this market. I think I answered your question, Daniela.

We will now take the next question. And the next question comes from the line of Vivek Midha from Citi.

So just following up on the questions on energy. I'll go one at a time. Firstly, could you maybe break down the Q2 organic growth performance in Energy into pricing and volume components? And I think you said that you're still seeing July quite buoyant in the U.S. Is that also true in July in Europe as well?

Thank you very much for your question, Vivek. I give you a very sharp and direct answer. Most -- very most of the growth is price. The physical volumes that is what is used to connect has grown very minimal, differently from 2007, 2008. When vice versa, the growth was the boom of the construction market, thanks to the loan, thanks to the financing. So the -- here the problem is the availability and the reliability in serving customers. That gave us a price upside, especially in North America. We are very happy with that. It will stay, I doubt, but let's enjoy until it's [indiscernible] . I don't know if Massimo or Juan wants to add something to it.

The price is the effect or the pure effect of the cost inflation. In the T&I space, you are benefiting from a great ability to pass through the cost inflation and premium price, especially the scarcity that we mentioned in the previous comments that exists and remains in the market. And since this growth has not happened. So this profit growth has not happened through volume, we don't foresee a great deal of change in volume or in profitability as long as the cost inflation remains in place. As we said before, we will monitor this concentration next 6 months and hopefully this might not disappear as a bubble which burst that's happened in [ 2008 ].

We believe that, obviously, part of this advantage, we are catching today maybe appear next year may reduce, but will not be or shouldn't be similar to the event in 2009 when the bubble burst, because that was a bubble created by the financial market over investing in construction and mortgage.

That's really helpful. The second question is just on the project business. Thanks for the color on your order intake. Could you maybe give us an indication on the level of capacity utilization covered by the backlog as things stand? Do you have any room to take in further orders in the next couple of years? For execution in the next couple of years?

Vivek, we are fully booked everywhere. This week, we authorized a transformation of a line in Finland to increase the capacity for projects. But maybe Hakan wants to add something on it.

So Vivek, as Valerio said, we are booked for the capacity as of today for the ones which we have. But we are also investing, as you know. And we have, I think, made this also in the prior discussions available, we are investing into a new plant in U.S. We are increasing our capacity in Finland. We are increasing our capacity in Gron. So we are investing in Arco Felice in Napoli and also, we are doing some smaller investments internally as Valerio was stating. So we are open for new orders, and we are discussing for new orders. And beyond that, we are also discussing further expansion, which is not now as a decision, but we are also evaluating that. So to your question, definitely, we are taking more orders. But now the thing has a little bit changed because it was a little bit more of a shorter term game. Now it becomes a very long -- mid- and very long term game.

We have simply to evaluate or better our customers are going to evaluate, which is going to be the effect of the money cost increase that they are going to have due to the increase of the cost of the money.

We will now take the next question. And the next question comes from the line of Monica Bosio from Intesa Sanpaolo.

The first one is on the energy project. I remember that in the first quarter, you were starting to renegotiate the energy price increases with customers according to the work in progress of the project [indiscernible]. I was just wondering if you can give us an update on this? The second is on the energy products and especially as for Europe, P&I residential which accounts at 30%, 40% of the business. I know that it's a difficult question. But is there a way to protect the margin in case of a severe slowdown of the economy in Europe? Or do you plan -- would you plan to do some restructuring in this case? The third question is on the revenue -- it's for Francesco. I remember that in the last conference call, Francesco guided for revenues in the range of EUR 15 billion, if I remember well, just a check on this from him. And the very last is on the supply of energy. Do you see potential issues from the energy supply side going forward for 2023? And if yes, how are you moving to deal with this?

Thank you, Monica. First of all, the project cost inflation negotiation, we have started. And for the time being, we accumulated something like 4 million upgrade from customers. Most of the [ answer ] are okay, complete the projects, and then we will discuss but they are reasonably open to discuss. Four million are not [ unreachable ]. Second chapter, T&I Europe residential, is there is a way to protect margins in case of severe slowdown, difficult question, Monica. That's a very difficult question. My opinion is that you can do it if you have a significant market share position in the market, market by market, not Europe overall. Because -- that's what we are seeing in Spain. After the General Cable acquisition, there was a certain pressure inside the company to resell the T&I of General Cable in Spain to someone else. But frankly speaking, I refuse it, simply because now we have a very significant market share. We have definitely the market leader in Spain. And we can manage with the customer a different relationship, where we are very little in terms of market share, we are [indiscernible] nobody and we can drive [indiscernible] even the stability of the market. I'm not saying that where we have a significant market share, we will not be obliged to give up some of the margins to our customers. But the slowdown will be little for sure. I thought this is over extraction for the time being? No. Not at all. Francesco?

Yes. Maybe the indication...

EUR 15 billion only?

Sorry, I think, of course, it's very sensitive based on the -- depending on the metal price. I think that EUR 15 billion -- from EUR 15 billion to EUR 15.5 billion, I would say, with the current level of metal price will stabilize, lower than, of course, a few months ago with that level of revenue, we would have reached the EUR 16 billion most likely.

Last question, supply of energy and the issues from gas possible stoppage. Okay. We -- in order to protect our key plants in Europe, namely the submarine plant. Okay. Pikkala is not an issue because it has the certainty of the supply. The possible issue can come from Arco Felice, where we produce electricity with gas. For that reason, we have already prepared a plan that it was already in our mind to convert Arco Felice from the gas to the electricity. And that will help us to match the commitment of the gas consumption reduction required by EU.

We will now take the next question. And the next question comes from the line of Miguel Borrega from BNP Paribas Exane.

I've got a few. Just first on energy, you talked about EBITDA likely coming down in 2023, but I'm just wondering what will drive that since most of the performance was price. So what drives prices down if volumes have been stable over the last few quarters? And inventories at the distributors are not that high. I suppose lower copper prices won't impact your margins and especially because most of your exposure in the U.S. is nonresidential, where as far as I can see, KPIs are still okay. So what will drive those prices down, if it's prices? And then you talked about normalized margins in projects between 14% and 15%. What would be in energy?

Okay. Thank you, Miguel. The price maybe I didn't say that it's going to decline. I hope not. But if in case it is driven by the demand from one side, because the demand may go lower. We have seen even time into which the demand for cable has been lower. But most of all is the inflation driven by the metal price and the other raw materials. The other raw materials are still high and are not foreseen to go down significantly. The copper price was down, despite was foreseen shortage of copper, it's possible. It's possible that the price will slow down, not very, very much until the raw materials are so high. What are the normalized margins in energy? I give you my opinion, 8%.

And then on projects, can you maybe elaborate on the mix within what you're executing right now. So maybe a breakdown of what's interconnections, what's offshore wind, what's land? And how do you see that mix changing in 2023, perhaps comment on how much the German corridors will represent as a percentage of total EBITDA within high voltage, just to understand a little bit better how margins may evolve?

I leave the floor to Hakan for the dazzle.

For this year, on the submarine side, we are completing the Viking project. And we will still have some work to do beginning of next year, but limited. Then we have some, let me say, French projects that we are currently doing. This is on the floating and also on the -- [indiscernible] and exports. So these projects are taken most probably around 3 years ago, these projects, excluding Viking. Viking was taken 1.5 years ago. So then we do the Turkish Crossing that will finish also beginning of next year. So -- but the majority of the work and the production is going to be done this year. Then we have already started the Vineyard project, as you know, and we are starting installation also in the third quarter, and it will go beginning of next year as well. So if we are looking overall to all these projects, you can understand also from the -- excluding the Turkish Crossing, all these projects have root some years ago as an order entry. And if you look to the coming year, we have a mix which is geographically also distributed. So we will have, of course, the Middle Eastern project. As you know, the ADNOC, we will start Dominion. We will start also some portion of our Tyrrhenian Link. We will do, hopefully, some projects in the Mediterranean that we have already announced in Spain, and we will follow up also with some projects increase. This is, let me say, a mix that is relatively young, new. And then if we look to the German Corridors, there is a ramp-up in production versus last year for this year and we will further produce, let me say, into the next year relatively with the higher volume. The question is not on the production side, but is more on the installation side, which we don't think that the installation will start next year. So overall, the high voltage mix is going to be richer in the coming year in terms of German Corridor production as a volume but we are still waiting for the installation that is going to come. But having said so, I'm sure you understood that our business is growing. And in terms of also marginality going forward due to the time. So on that, I can tell you.

Great. If I can squeeze in just one more question. Can you just update us on the situation of sourcing aluminum. The last time we spoke, I think there were some issues with your supplier [ Ørsted ].

Massimo?

Yes, Miguel, thank you for the question. I think we are good to go with current footprint of suppliers, no other issue at all, actually from resolve from Russian suppliers. To understand that we have activated other sources of aluminum as a backup, and we are going to probably dismiss the sources in the coming weeks and months because we don't need them. So we are fully covered, we don't see any particular instance of criticism in this regard.

We will now take the next question. And the next question comes from the line of Massimiliano Severi from Credit Suisse.

I have 3,multi- division. I'll go one by one, if I can. The first one would be on projects. I appreciate that subsea interconnections are the higher margin ones because of [ installation ] and very high voltage cables. But -- if I think about the fact that for interconnections land, you can use HVDC and higher technologies, while for HVAC offshore, you are using HVAC and lower voltages. How should I think about the margin difference between offshore wind and land high-voltage interconnections. Are they similar? Or is one much larger than the other?

It depends Massimiliano. In reality, the German corridors have a similar margin to the submarine. The other interconnectors land usually are lower. But remember that today general corridors are the first 525 DC interconnector. So that's the reason for the higher margin we see in German Corridors, unfortunately, depressed today by the absence of the installation.

And if I may add, Valerio, the classification that you have done, DC versus AC depends also our exposure to DC and AC. We are a company that is more exposed in the order book on the DC part and our expertise is on the DC part. So when we are quoting for offshore wind, the mix of the DC is higher than the AC. We -- lately, we are preferring to have less exposure to the standard AC cable up to 220. But the new AC project, which go up to 275 offshore. Of course, they are also different because it's a different project and a different product. So all in all, the DC project offshore wind are interconnect, they are relatively richer than any AC cable that we do. And then I skip the inter-array cable because this is the lowest of the range, which has been commoditized.

Yes. Yes, it makes sense. And then my second question would be maybe again on the Energy Products energy division. And if I look at E&I and the split within secular resi and nonresi. Maybe in terms of margins, you commented on like on the secular margins. But if I think about the mix going forward and more like a mid-cycle margin for the 3 separate segments that you highlighted. But how should I think about margins for the 3 different buckets?

You mean midsized margin? Mid-cycle.

Yes, mid-cycle. Like average sustainable margins between secular residential and nonresi?

It depends on the mix in E&I. Because T&I is much more competitive, is much more accessible and as a consequence, a lower margin. You know that in T&I, we used to have something like 5%, 6% of EBITDA margin. PD is slightly better and is improving today. It depends on the cycle. Today, everyone all the utilities are looking for power distribution in order to distribute the electrical power to the customers because the demand is growing. And we are fully saturated on the power distribution assets at least in Europe and U.S. In U.S., we have also decided to increase the capacity. In Europe, not yet but may come in the future. I don't know, Massimo, do you want ...

Let me give another information Massimiliano and also normally T&I residential has the lowest margin of the 3. Then you have T&I nonresidential and eventually PD. But then this, if I take one single geography. This applied to a single geography makes sense. You can have geographies in which you make even more money in generalization than other geographies or they're in PD or the T&I nonresidential. So within the same space within same country, it makes sense to rank T&I, residential the lowest and T&I highest. But then you can have other geographies where you have a PD the lowest or the T&I in the recent country. So it's a bit valuated the answer depending on the geography. But overall, given our exposure in T&I, nonresidential, we have a very good margin, given the fact that we are present in North America, which is a very structured market in terms of profitability.

Perfect. Very clear. And my last one would be on the Telecom division. And if you could maybe split the growth that you had there between price and volume. And if maybe you could comment on whether price increases that you're seeing in the market are just enough to meet higher commodities energy prices or they are actually much larger, so there is a much -- an increase also in the gross margin of -- in the fiber business?

Philippe, do you want to give an answer?

Yes, Massimiliano. First, the market is growing in telecom in all regions. So China is back to a peak. The U.S. market is really growing very strongly. Europe, to a lesser extent is also growing, but it depends on the countries. Our growth, our organic growth in optical, in telecom. I want first to remind you that it's not only optical. We also have inside telecom, the decline in copper business. That is, of course, not of the same size, but we have to mention it because we have inside our numbers to absorb the shrinking of the traditional copper telecom business, which is, of course, shrinking everywhere, but not, of course, offsetting at all the growth of optical. Optical growth is made of volume, but as far as passing the increase of prices to the market, we, I would say, a good quote would be that in optical, we nearly pass -- we are nearly are able to pass through the cost increase that we see in our raw materials. And the rest is done by giving priority to the right regions and the right customer in order to optimize our profitability. That's how we drive the business today. So we are investing not to lose market share globally. So we keep our market share globally. And we give priority to the regions that are the most likely to absorb the cost increase that we see. You see basically that our margin in percentage are rather stable, and this is what I said recently. We had a reduction of our margins in telecom 1 year ago, and it's been flattish, slightly up I would say. And this is due to our way of managing. But it is important to be able to do this in the context of a growing market because then you have a volume effect. I don't know if I really answered your questions, Massimiliano. Forgive me if it's not exactly the answer you were expecting.

Yes, no, very clear. Maybe just if I can briefly follow up. How big is still the copper business that you have relative to optical, roughly speaking?

Roughly speaking, the copper business is...

10%. 1/10.

Slightly -- about 1/10. Yes.

We will now take the next question. The next question comes from the line of Akash Gupta from JPMorgan.

Most of my questions have been answered, but maybe a couple of follow-ups. The first one is on power distribution business in North America. And maybe if you can elaborate what is causing this unusual situation where the volumes are not growing that much, but prices. Prices have gone up. Is this a situation driven by shortage of aluminum, which is generally used in power distribution cable or any other polymer or material that is used? Or is this just because of lack of capacity because some of the companies might have rationalized capacity when the demand was not there before? And how do you see like maybe -- maybe I'll answer that but then I'll have a follow-up on that.

Hello, Akash. Valerio speaking. In U.S., the -- what is happening is the following. We have had [indiscernible] all the cable makers have had any many problems in the supply chain, shortage of aluminum, shortage of other plastics and raw materials linked to oil, damages to the system to produce the PVC or the other component. So supply chain that has been disrupted. In the meantime, the demand for power distribution in the U.S. is growing, is growing why? Because of the electrification that's a very clear trend that has started not very fast for the time being, but it's rising. The equation of the 2 is creating a sort of shortage. And consequently, all the raw material cost increase can be easily passed through. Obviously, we have been suffering in the first month because certain contracts were medium-term contracts. And it was not so easy to update the price. But at the end our customers are so keen in getting from us, the volumes, having no other possibilities, more work that are available to rise the prices in order to catch with their commitment. I don't know if I answered to your question, Akash?

Yes. No, I think that is a perfect answer I was looking for. And then maybe a follow-up on that is on the demand. And you have seen that demand is picking up on electrification. And here, we are talking about medium voltage cables. And what is driving this? Is this like small tiny solar projects that are getting connected with the distribution grade? Or is it data center or because I mean, we don't see that much on housing side, but just wondering if you can elaborate what are the driver for growth and how sustainable these drivers could be in the next couple of years?

Akash, I suppose that you have been in U.S. many times as me. And the grid in U.S. is quite poor. Quite poor means that the needs of refurbishment, the needs of renewal. In a moment like the ones we have now when the demand of electricity is strong. Everyone is trying to move step by step from gas or other sources of energy to electricity. Companies understand that there is a need for power distribution network. And that's what is happening is starting to happen. My opinion is that we are at the beginning of the transition. And the trend of increasing power distribution demand is going to be further on in the next years.

Valerio, allow me to add one thing, the electrification is certainly an important driver of the power distribution demand -- but don't forget the fiber solution deals with low voltage and media voltage cables, which are needed to transmit the energy once they have all cable is transmitting power for the generation. So one of the significant driver is the energy transition, which is not just to be identified in our energy project space. In the energy space, especially in power distribution, we see strong signs of market growth driven by the energy transition. So the renewable generation requirements, all countries which insists in project business for submarine connection, interconnectors and high voltage land connection also need the rest of the chain with medium voltage and low voltage. So that's the final users are connected. And if the net users are households or no residential building data center, mobile antenna, which requires a lot advantages, there are plenty of needs of electricity, which are driven by electrification and energy transition. So don't just assign the energy transition driver to the energy project space in our company.

And my second question is on Telecom business. If I'm not wrong, then this fiber production is quite energy-intensive given you have to take the fiber out of glass. And given this energy crisis in Europe and gas rationing, maybe if you can elaborate on, do you see any impact in your European fiber production down the line? Or that might get priority and maybe that is not relying on gas and maybe a source of electricity or power. So maybe if you can walk us through impact on your telecom optical fiber business in Europe from potential cash shortages from here?

Akash, you are right. The fiber is very energy intensive. Then have to be -- the price has to be updated because there is no way. No one can produce the fibers without energy. Then our choice has been to move from energy from gas and electrical energy from gas to electrical energy from the network. That is a little bit more costly, but is clean. And that's the choice we made. Fortunately because with the Russian crisis, there is the risk to lose the gas. I don't know if Philippe wants to add anything.

Yes, I just would like to that in context. It's true, of course. But as you know, the fiber prices in the market are also increasing. And this increase of fiber prices in my view, are essentially due to passing the cost increase to the customers. So it's a consequence of that -- the consequence of being a high energy consumer for fiber makers drives the price of fiber [indiscernible]. We had a very massive reduction of fiber prices in 2019 on the worldwide market. Now we are back not to previous levels, but we are back to a kind of an intermediate level, which is essentially due to cost increase for the manufacturers, it's much more of a cost increase than the lack of availability of fiber that is driving this price increase.

We will now take the next question. And the next question comes from the line of Alessandro Tortora from Mediobanca.

Okay. I have 3 brief questions. Okay. The first one is on the free cash flow side. What I would like to understand better is I see, let's say, the recent correction of copper. What I don't understand is, at which extent, let's say, you are basically factoring in any tailwind from these lower copper pricing. Your indication of let's say, some potential upside you are keeping in and monitoring the copper price. So this is the first question. The second question for just a follow-up on the telecom side. Considering the strategy of selecting clients basically selecting growth. Is this the reason why you see, for instance, next year, a further year of growth of, let's say, with the margin improvement and profitability we saw this year? And the third question is on PD. For what basically I heard in this call, your idea is that compared to, let's say, the past cycle, we should have -- your clients in the power distribution being, how can I say, less volatile and believing in structural investments and therefore, let's say, this chunk of the business, this EUR 2 billion sales should be more resilient in a negative, let's say, cycle? Is it correct?

Alessandro, thank you very much. Let me leave the floor to -- for the free cash flow to Francesco.

Good evening, Alessandro. I would say that we are factoring in the current level of copper price or metal price in the high part of the guidance, the EUR 450 million then difficult to say if it will be EUR 450 million, EUR 470 million. But ballpark number, I think that in the high part of the guidance, we are factoring it in. We have to remember that whenever the metal price decrease significantly, the other no metal raw material didn't decrease that much. Sometimes, we underestimate the effect that the other raw material have on our working capital that I explained, were massive. Were very, very impactful in the first 6 months. And this is not decreasing. On top of that, any decrease of the metal or nonmetal, takes sometimes before expanding in terms of change to our cash flow and our working capital, but above all cash flow. So we will not see this effect immediately, but we will see it in -- maybe in the fourth quarter, in my opinion and some of these if we stabilize the current level of metal prices, we will even see it next year. So that's why, all in all, I think that it is realistic to say that in the EUR 460 million if the metals stabilize, we have a good chance to get to the top level of the guidance.

Second question Alessandro is on Telecom. Philippe, it is yours.

Yes. Alessandro. Yes, we -- the selected growth is a geographical selection more than a customer selection. First, we address our capacity increase in the markets where we see the evidence of sustainable growth for the coming years. In particular, as we mentioned earlier, North America shows that evidence. There are also other places showing the dividends, but of course, North America being also large. It's one of our priorities. And this will continue for years. So next year, to answer your question, I cannot answer precisely at this stage. But I would say, I'm expecting the same kind of growth as we are seeing this year.

We may be changing the geography because, for instance, the Telstra investment in Australia that was expected to start right now.

Slightly delayed.

Is slightly delayed, but is going to come.

Yes, we have, let's say, we have North America as a very large market growing with confidence that it will grow for in the long run. We have this project in Australia. The Australian market is, of course, much smaller, but it's a place where we are -- we have an important position. And then in Europe, also some markets are growing, and we will address them. Europe is in a differentiate, more fragmented as always and also, it's a market where the competitiveness, the competition is tougher I would say.

Because there is still a minimal presence of agents that tends to drop the price easily.

A little bit more than me more...

Okay. Just enough to mention, but [ they're light ] even if the Chinese are out. the Indians are in.

Inside the telecom growth that you see, as I said earlier, you have approximately 1/10 of Telecom that is copper and shrinking. You have 1/3 of telecom that is enterprise business that we call MMS, which is not growing at the same pace. It's a more single-digit growth. Then inside the optical business, you have different phases of growth depending on the regions. I can tell you, for instance, that in North America, our optical cable business, in Q2, for instance, has been growing against previous year, more than 40%.

Alessandro, your last question was about PD, if I remember well.

Yes.

We see customers more stable. That's true because the stability of the supply. Consequently, the sales are more resilient, especially in North America. In Europe, customers are a little bit more flexible, trying to catch the lower price from a secondary supplier but we tend not to follow them and frequently they come back. I do not mention the customer because it's not nice, but there is a customer that is a big customer for us and has been after our request of price adjustment due to the raw material cost increase at the beginning rejected, then we negotiated more favorably, and we got a good agreement.

I can understand maybe. I have some idea. Okay. And just if you may, just a curiosity. You mentioned before, let's say, German corridor installation, let's say, in standby. If we look at the extension you signed now for the SuedLink project compared to the past, basically, did you put a close letter at a certain point, you will start installation whatever will come?

No. That's not the case. We put a clause of price adjustment in case of serious variation of the raw materials that was not the case in the first contract, and they are paying the cables. Consequently, no way. sooner or later, they have to install it. They pay the cables, and they pay for the time being, also the people in standby, we have agreed with them to have in Germany for this installation.

Because it's an expansion -- because it's an extension, it is a part of the first because the first is volatile. The second is volatile also due to it's not a separate standalone project. So from that perspective, you cannot oblige, it depends very much on the permit. And the volatility is not on the second one because now we know more or less from the customer when they are going to start in installation. The extension is more firm. So we don't feel like this is something necessary.

We will now take the next question. And the next question comes from the line of Sean McLoughlin from HSBC.

Just 2 quick questions from me. Firstly, on the EBITDA guidance. The range has increased despite being 1 quarter further into the year, which I suppose implies a greater level of uncertainty compared to Q1 results. Where is this concentrated? You've talked about construction demand, but I wondered if -- is there greater uncertainty on projects? Is this driven in other industrial end markets or maybe even telecom? Just any color there.

No, Sean. The reality is that we are growing in terms of results across the board. We have a better result from projects that is expected to improve further in the second half. We have E&I market, especially in U.S., that is very buoyant and probably sooner or later, will shrink but not for the time being. And considering we are enjoying it. And we expect to be able to reach the year-end before to see the slowdown, if any. Last but not least, the telecom, we commented quite largely, the demand is good. The prices have recovered. We are able to pass to our customers the cost increase that we are suffering, especially on the fibers.

Valerio, if I can comment further, [indiscernible] Francesco speaking. I -- as we tried to explain in the slide related to the guidance, the EUR 100 million range from EUR 1.3 billion to EUR 1.4 billion depends exclusively 100% from the condition in the second half of the energy market. And this is what we try to write in that slide. So this means to give a very straightforward answer to your question that projects and telecom are not variable in this guidance. So we didn't assume any specific variation of the outlook of neither projects nor telecom. The only range is related to the energy market. And the reason why it even grew a bit larger from was EUR 70 million in the old guidance to EUR 100 million is, of course, that we had such an upside in the energy market that any change of the condition of these markets can be backfilled. That's the...

It's the energy business the ones that may change from the top of the guidance to the bottom.

Yes. The second question is just on the order backlog. I mean 5-plus billion of orders that are expecting into the backlog over the next 18 to 24 months. This is unusually large. I mean is this simply down to the level of the volume of order intake that you've had? What is missing to add these to the backlog?

I tell you my opinion. In my opinion is the appetite of the customers to get the volumes. There is a shortage of availability for the high-voltage and DC and AC. So they prefer to put an order waiting or making us waiting for the confirmation with the notice to proceed in advance. That's good for us, but it's not good enough because until we don't have the -- the notice to proceed for us is void.

We have 2 major, let me say, reasons not to put them into the backlog. The one is, if it is a TSO, usually, they don't have financial issues to finance the project, but they are waiting to get the approvals for the macro permit. So therefore, there is one block that awaits the permit to proceed. Then there is another block that has approved the financial, but has to be concluded the financial closure has to be done. So therefore, when the final closure of the finance budget is given, then they tend to give us the [ NTP ]. So 2 major roadblocks permits and financial close, but they are completely 2 different customer groups. A majority of our TSOs, they have already the financing ready. On the other hand, on the developer side, they have both as that equates to complete.

Yes. You wouldn't think there's any risk of any of that EUR 5 billion not converting into -- on the backlog.

Let me say that out of the EUR 5 billion, 80% of it. We can say that it's not an issue. We have only potentially 20% of the backlog that may need especially in the circumstances as of today, with the increase of the interest rate justification that these projects from the financial close are good. So I don't see any significant risk in the backlog that it is not going to happen. But I mean the 80/20, we can say, rule of thumb that this is going to be. And you are going to see also in the coming second half that some of these projects are going to come into the backlog, too.

There are no more questions at this time. I'd like to hand back over for final remarks.

Thank you very much. No final remarks from my side. And thank you very much to everyone who have been to our call. Bye-bye.

Bye, thank you.

Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect.