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

Good day, and thank you for standing by. Welcome to the Prysmian Group 9 Months 2022 Financial Results Conference Call. [Operator Instructions]. 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 afternoon to everyone. Welcome to the 9 months Results of Prysmian Group Conference Call. First page, the key highlights. The better ever quarter that we had in our history, EUR 432 million adjusted EBITDA in Q3 with a very outstanding performance in terms of margins. Of course, those are results that are driven by the secular trends of electrification -- across all segments, the performance, especially in energy, ENI, OEM renewables are excellent. Telecom is mostly driven by the North American performance and projects is growing in line with the expectations. Going very well. Overall, in the projects, we have a record backlog and a very good order intake. The backlog is over EUR 6 billion, almost EUR 7 billion, with EUR 3.2 billion of order intake in the first 9 months of 2022. The financial highlights of the 9 months. Sales at EUR 12 billion, with an organic growth of 15% and a very solid organic growth mostly in all the segments with almost 30% growth in projects, driven by summer in this time, a 16.1% in ENI with PG recovering and following the very big jump made by T&I. 10.3% in data network component with OEM and renewable driving the rates. Last but not least, 9.2% of Telecom with a double-digit growth, both in optical and MMS. Optical has been growing 18.2%. And -- let's have a look at the margins and the adjusted EBITDA. The adjusted EBITDA closed at EUR 1.131 million with an adjusted EBITDA margin on the sales of 0.4% and the margin growing almost in all the segments with EUR 1.131 million versus EUR 725 million in the first 9 months of the year. Q3, 10.4% adjusted EBITDA margin. Adjusted EBITDA improvement better than the 7.8% in Q3, 7.8% in Q3 2021 -- so other than the results are growing also the margins Free cash flow, everything we have been talking about have to be transformed into cash. And that's what's going. EUR 344 million year-to-date with the net debt at EUR 2.372 -- the free cash flow is generating a very good deleverage with a net debt reduction versus last year. The goal is to reach year-end a leverage ratio that is around about 1%, let's say, 0.99. That's my goal. Let's move to Page 4, projects. Our backlog is now extremely high, is the highest of the history of the company with almost lesun7billion backlog, plus EUR 4.1 billion order with long-term visibility, meaning that we have the orders, but we don't have yet the notice the proceed. We have been awarded of a number of very important projects this year. Starting from Neuconnect, EUR 1.2 billion; the extension of the Suedostlink, EUR 700 million; the 2 submarine interconnections in Spain for EUR 250 million; and the Project Lightning in the Middle East for EUR 220 million. So a pretty good level of projects awarded this year. Let's look at the right side of the chart to understand that since 2020, when you are seeing here only the year-end, when the relevant part of the project orders was related to the underground and jumped up, thanks to the German Corridors order. Now September 2022, the big increase of the order backlog comes from summary. Out of the EUR 6.85 billion order backlog, we have more or less the German Corridors chunk and the land chunk of the business that has grown not very much, whereas the summer in part has almost doubled. Let's move to Page 5 and analyze the performance across the various segments. Let's start with projects. Projects posted up 9% organic growth, moving from EUR 1.71 billion sales last year 9 months to EUR 1.433 billion this year, 9 months. With moreover, not a negligible growth of the EBITDA from EUR 124 million to EUR 149 million, whereas the EBITDA margin has grown to temper 4% in the 9 months compared to the 11.5% of the 9 months 1 year ago. So the margins are improving because sequentially, you remember that the first quarter, it was something like 7%. But we are not yet at the proper level. The reason for the improvement comes from the increase of the chunk of submarine compared to the terrestrial land. We expect another jump in the last quarter. We've got the full qualification for the 525 kt excluded the submarine for the HVDC and consequently, are we able now to quote for submarine 525 2-gigawatt capacity for line for the markets. Energy moved from EUR 7 billion sales to EUR 9.250 billion, with an organic growth of 13.9%. Out of energy, splitting in E&I and Industrial. E&I grew significantly, 16.1% organic growth. And from the industrial network component point of view, grew 10.3% from EUR 2.074 billion to EUR 2.630 billion. In terms of EBITDA, the biggest jump came from E&I that more than doubled the result of the 9 months 2021 from EUR 269 million to EUR 556 million, with an 8.8% EBITDA margin, really outstanding. This performance is driven by the market, by the growth driven by the secular trends, grid hardening, datacenters and mostly nonresidential construction. Industrial network component on the other side grew quite a lot to EUR 204 million EBITDA with an EBITDA margin of 7.8%, with a very strong growth in OEM, mostly renewable. Finally, the Telecom. The Telecom came up with EUR 1.4 billion sales, 9 months, obviously, comparable to the EUR 1.2 billion 1 year ago, an organic growth of 9.2% and a result that has improved from EUR 178 million 9 months 2021 to EUR 221 million 9 months 2022. The growth is very solid, in particular in North America, OC has better contributed than 1 year ago because maybe you follow YOFC on the Chinese market. The situation of the fiber optic situation in China is improving. The prices have been recovered, the volumes are still very high and consequently results Okay. Let's move to the following page by geography. By geography, it's quite clear from the chart that all the regions are growing. But one, especially the North American one is overperforming or the others. EMEA grew 11.2% from EUR 3.9 billion to EUR 4.9 billion, with a very excellent organic growth and a pretty decent EBITDA margin. Moving the EBITDA from EUR 226 million to EUR 268 million. North America. North America is the region that has overperformed all the others moving from EUR 2.775 to EUR 3.89 billion turnover with an organic growth of 19.9% and strong results on main businesses. The EBITDA moved up from EUR 248 million to EUR 551 million, incredible results in North Latin America. Latin America, from the organic growth point of view grew from EUR 371 million to EUR 978 million with an organic growth of 10.7%, mainly driven by the growth of renewables. The adjusted EBITDA moved up from EUR 73 million to EUR 95 million. Again, thanks to E&I, as in -- last but not least, Asia Pac that has been growing not significantly in terms of organic growth from EUR 744 million of over to EUR 861 million, with an organic growth that is only that is 1.2%, but a quite significant improvement of the results from EUR 54 million EBITDA to EUR 68 million, mostly or also because of the YOFC effect in the numbers. Finally, Page 7, the outlook. We are revising the outlook for the second time this year. We feel obliged to revise further the outlook, increasing it from the previous EUR 1.3 billion, EUR 1.4 billion delivered to you in June, at the end of the first half, to EUR 1.425 billion to EUR 1.475 billion for sake of simplicity, a center point of EUR 1.450 billion with an increase of the free cash flow guidance, too, because there is no EBITDA. There is no results if that does not translate into cash. And the cash is increasing to EUR 450 million, EUR 500 million expected free cash flow. I leave the floor to Francesco now for the details on the P&L.

Thank you, Valerio. Good evening to everybody. The usual wrap-up of the profit and loss statement. As Valerio said, a very robust organic growth of 15% plus 15% with the third quarter at the same speed more or less, the first out. Adjusted EBITDA, strongest quarter ever with a very strong margin expansion, 9.4% year-to-date. But just to give you a reference, this 9.4% is diluted by an extremely high level of metal prices, as everybody knows,- and if we do the exercise to recalculate this, for instance, based on the 2019 pre-pandemic metal prices, EBITDA margin would be around 11%, which is not only in absolute terms, EBITDA positive margin terms by far the highest level ever. You see the bridge of the quarterly EBITDA broken by -- broken down by division. Just a few comments. Projects improved very well, in line with expectations. And we have to say that the further sequential improvement is expected in the fourth quarter, which will lead us to a well-known target around EUR 24 million on the EBITDA full year for the project business. Energy business is keeping the outstanding momentum already shown nature in the second quarter and in particular, in North America without any particular sign of weakness or decline. So, I would say, stable, good and stable at the very high level. Last but not least, Telecom is also showing a very nice sequential improvement, which is evident in the bridge at the right. Also thanks, as Valerio explained, to pretty robust YC results, enjoying the strong recovery of the Chinese market. Another very good achievement is definitely the net income, the group net income and highlight to highlight that. As you see, 9 months net income of group net income at EUR 431 million, which is not far from doubling compared to last year and an exceptionally high result despite some negative effects that we had on nonmonetary items. So you see a total of minus EUR 115 million, which is a sizable even net of tax a sizable burden on the net income and which are mainly related to nonmonetary temporary items, such as, for instance, the negative change in metal derivatives fair value, which is, let me call it quite an irrelevant item because it's temporary is noncash and only resulted from the drop of the metal prices in the last few months. Let me go to the following page, the balance sheet. Working capital increased significantly compared to September 2021, a jump of approximately EUR 500 million. By far, the main driver here is not so much of the volume effect, I would say, but much more the price effect of our raw material, in particular, the nonmetal raw material inflation in principal. And this was an effect, let me say, between EUR 350 million and EUR 400 million compared to the equivalent month of September 2021. We had also a very large effect, nonmonetary, by the way, noncash coming from the dollar strengthening so the currency effect. Another one coming from the much higher metal prices, now decreasing, but still higher than last year. And on the opposite side, very positive in terms of reducing working capital work done by job done by the project division in lowering the level of working capital and in particular, collecting in the third quarter some very material down payments, which decreased the level of working capital. But apart from absolute level of working capital, it's also good to underline that this EUR 1.8 billion operative net working capital in terms of on annualized sales is around 10.5%, which is not very different from the level of last September 2021, which was close to 10%, 9.7% and 9.8%. So in terms of percentage on sales, we are not sitting on a very different number of working capital than was the case in September 2021. I like also to stress as Valerio already as I already did, the strong deleverage with net financial debt going down to EUR 2,372 million, which is a minus EUR 300 million from September 2021 and with leverage in terms of net debt on EBITDA that projected at year-end will be approximately 1x. So basically, a level of net debt that we estimate to be broadly in line with the level of our full-year 2022 adjusted EBITDA. Cash flow. Last 12 months of September, we reached the EUR 344 million. This is the usual bridge of net debt from September 2021 to September 2022. You see the items summing up the free cash flow amounts to EUR 344 million. This is very well positioned, in my opinion, to achieve the new guidance that Valerio commented, free cash flow between EUR 450 million and EUR 500 million. The reason for this is that this EUR 344 million still discounts, as you see from this slide, a high level of working capital increase, working capital change in previously of EUR 342 million. with the flattening of raw material prices, metal and nonmetal this increase will decline will flatten out on a full year basis, will be I estimate in the region of EUR 200 million. But this effect will be partially offset in terms of cash flow from a rise of the CapEx. You see here a level of EUR 310 million on a full-year base, we grew most likely around EUR 360 million, EUR 370 million. And these 2 effects will explain how this EUR 344 million will go into the region of the EUR 450 million of our guidance. Let me finally close with some quick remarks on our Q3 performance. As Valerio said, 2 significant guidance upgrade in July and now another significant guidance upgrade in -- with third-quarter results. Point number two, these outstanding results are driven by, in our opinion, very secular and very structural trends. to give you clear example, the energy transition and the digital transformation. The energy transition, as we all know, and we have commented already, is not impacting only the project business, certainly impacting the project business, but it's also impacting at a great length the energy business. We estimate that our energy business, more than 50% of that around 50% of that is impacted by noncyclical trends, so more structure, more secular trends like energy generation, data centers, like electrification. Number three, strong deleverage. And let me highlight that the strong deleverage in a new financial environment like the one that we are facing now of much higher interest rates is even more important. Let me clearly say that there is, in our opinion, no growth without the ability to generate a lot of cash. In particular, when the financial market becomes much more challenging and interest rates grow. So it's very -- it's even more important, our capability to generate cash and the leverage. And we hope it's clearly shown by our results. And last but not least, solid order intake and high visibility in the project business. This is preparing the way to the results -- top-line results growth that we target for the next few years. And the first very important sign, in my opinion, is that you may have appreciated in the backlog presentation that Valerio gave is an important change in the mix of this backlog because the component of submarine significantly increased in the last 12 months in principle versus the component of underground high voltage. And this, of course, will have a positive repercussion also in terms of margins because of simply a mix effect of margin in the future. I think I'm over with my part, and we can do well with the Q&A session.

[Operator Instructions]. And your first question comes from George Featherstone from Bank of America.

I've got a few, so I'll just ask them in turn. I wondered within some of your shorter cycle businesses, I know you just mentioned then that you're thinking most of the performance this year has been driven by secular trends. But clearly, you've got some benefits and elsewhere like construction cables that you called out in the U.S. I just wondered what you think the sustainability of that is going forward from here and maybe what the inventories are like in the channel more broadly in E&I.

Thank you for the question. Let me try to give you a very quick answer. Surprisingly... The stock in the supply chain is not or is not growing. What does it mean? There has not been a very significant growth of the output even for matters related to the supply chain instability. Customers are asking for volumes not very much, but are continuing to ask for volumes. What's surprisingly is very positive is the ability we have to pass the cost increase to the market even adding some additional margins. That's especially in the North American market.

If I may add, George, this is Juan Mogollon, and I'll just expand a little bit on Valerio's answer. In regards to your question on the cycle nature of our business. Let me just remind you that in North America, which is the biggest -- the lion's share of the growth this year, residential is less than 5%. And as my colleague, Francesco mentioned it, more than half of our energy portfolio is coming from what we consider secular trends, including the electrification such as mining, mobility, renewables, medium voltage. So I'll share with you a couple of data points that will help you formulate your own perspective. Our PV business organically grew 9% in the first 9 months of the year. And this was not just price. This is price and volume. -- our order book. Right now, we're sitting on 17% higher order book than the same period last year, and our order intake continues to be higher than last year. I do not see a slowdown in that segment, George. That's a segment that is driven by the grid expansion and the renewal projects, which I think you all would agree that it's a pretty secular trend. And the other one is the segment that Valerio mentioned is in the electrification, say, for instance, in renewables, which is for us is solar and wind. Our order book right now, we're sitting on an order book that is 25% higher than the same period last year, and the order intake continues to be double-digit higher than last year. So I feel pretty robust about the sustainability of that, primarily because over the years, we have expanded our footprint in areas that are way beyond the construction that is closer to consumer.

Okay. Here. Just one quick follow-up before I move on to next question of the 22% organic growth you saw in North America in the quarter, how much of that was price versus volume just out of interest?

Can we say that is 80% price, not to make it simple.

I think to make it simple. Yes. Again, if I may expand on that as well, George, North America, yes, the lion share is price, particularly in T&I. But let me just mention the point the fact that our volume have been flattish in Q&A. Let me remind you that again in North America, specifically in the U.S., our T&I is nonresidential. But in the PD and industrials and in the OEMs, it was a combination of both of price and volume. And the reason I'm making that remark is because the implication of that is that the mix of the portfolio. We continually graduating into richer into sustainable secular trends rather than the pure construction or nonresidential construction. -- may also add maybe a point that it is certainly true that the lion share of the North American gross price. But this doesn't mean that the market is not growing in terms of volume. It more means that the supply chain is a little bit constrained and certainly higher demand than in the past driven by the residential construction by the secular plants is pushing against a constrained supply chain, and this gives leverage to the manufacturer to pass inflation and as Valerio said, even more. So the fact that volumes are flattish or slightly growing. We have to be very clear in North America, particularly, it doesn't mean that the North American market in the energy business. So regarding our distribution in the construction and the non-expansion construction is not growing, the other way around, I would say. Okay.

Okay. And then my next question would just be on receivables factoring. I noticed that for the first half of the year anyway, by the end of Q2, you've got it to about EUR 496 million of receivables that you faced, which compared to about EUR 295 million at the end of the year last year. So I just wondered how that's evolved in the third quarter? And how we should expect that throughout the rest of the year?

Look, the level of factoring is in September is in line more or less with September 2021 is the level will increase in -- as usual, in the fourth quarter. But once again, it will be in line with December 2021. So apart from the absolute level, it's not a differential in our cash flow. So the level of receivable factoring without recourse is more or less stable, and this applies both to September and will apply also to December.

And your next question comes from the line of Massimiliano Severi from Credit Suisse.

Congrats on the strong quarter. I have one by division, so I'll go one by one, if I may. First, on energy. I was wondering if you could help us with some indications on how much of the EUR 300 million EBITDA uplift in North America comes from P&I? And secondly, if you could help us understand how much of the EUR 50 million CapEx that you put in PD North America will convert into higher sales in 2023?

Okay. Thank you very much, Matt, for your question. Point number one Out of the EUR 300 million... Additional in North America. We have seen this year is that clearly stated in Page 6. How much come from T&I? We have the exact number.

Can I give you?

Yes.

And I maybe not perfect number, but I would say 2/3, more or less.

2/3, yes, and comes mostly from price, not from volumes. So let's say that EUR 200 million out of EUR 300 million are coming from the North American price. The CapEx for PD. We have launched $50 million or $60 million [indiscernible] $60 million of additional CapEx for power distribution in North America that are coming into fruition next year, increasing the capacity of the aluminum medium voltage in our plants. So you will see -- or we will see the result of these investments during 2023. I'm right, Massimo?

Yes. To give you a bit of quantification, this EUR 60 million will add 15% extra capacity to our footprint in North America. And this translates into some, let's call it, EUR 120 million worth of revenue. As I said, this investment will kick in, in mid-next year '23. So you'll see half of this amount occurring this year, in the second half, and carryover [indiscernible] North America is actually the first we're already working on a second stage and second step because we see the great hard in demand growing and accelerating North America. So we will have a second round of investment to debottleneck and increase this capacity very soon.

Okay. Clear. Then secondly, on projects. Most of your capacity expansion, if I'm not wrong, will come online in 2024 and 2025. So I was wondering by how much can you expand revenues organically given where your backlog is right now, but capacity will come online in 2024 and 2025. And secondly, if you can get back to 2021 like margins without the benefit of capacity expansions already in 2023?

Okay. Thank you, Eric, for the question. The answer is pretty simple. As you said, the additional capacity is coming online 2024, 2025. So I don't see anything different from it as of now. From the margin point of view, I believe that by next year and the year after, we can improve further the margins, as you said. Did I answer to your question? Hakan, do you want to add anything?

I would say the biggest improvement and the capacity increase is going to be a little bit later than 25 within also 25%. But as Valerio said, in 204, we both improve a little bit of capacity. Overall, the margin, yes, we are improving the margins. You will see also sequential quarter-by-quarter, not only in percentage terms, but also we are improving in absolute terms. But to the sales number, sales number is very volatile, depending also on the raw materials and also the inflation effect. Therefore, if everything stays same, of course, there is going to be a growth, but it depends if the raw materials are going to come down, which will affect the sales going forward.

Okay. And my final one would be on telecom and the level of demand. And I was wondering, are you seeing customers maybe particularly in Europe postponing fiber rollout plans to wait for fiber prices to come down? Or is it something that you're not seeing and customers are just accepting the higher energy costs related to fiber and higher fiber price?

I leave the floor to Philippe to give this...

If you're talking about Europe, the situation of competition is still there. Not all the customers accept to bear the increase of cost that we see in our raw materials and energy, but we have been able to pass a significant part of this cost more than 50%. Then in the U.S., of course, as you know, the situation is different because the market is buoyant, and it's much easier to pass our cost to the market. Does that answer your question?

You don't see any slowdown in customer demand [indiscernible] fiber price.

Okay. I took the part of passing the cost to the market. Thank you, Massimo. In terms of demand, no, we don't see a slowdown. We see a confirmation that the countries that have to build their infrastructure are growing, and it is confirmed. We don't see any sign of slowdown even in Europe today…

And your next question comes from Daniela Costa, Goldman Sachs.

I have 2 questions actually. So the first one I wanted to ask is about projects and the topic of capacity, but just thinking recently, we've seen from one end, some of the utilities in the U.S. like Avangrid delaying some offshore projects been talking about the IRR, maybe not making so much sense at the moment given where inflation is. We've also seen a lot of players announcing capacity increases. Obviously, you have your own capacity increases, but I think JDR and XLink are reading building plants in the U.K., for example. Can you talk a bit about if we go for this more bearish U.S. offshore scenario potentially of given the companies are questioning orders? Could we be risking in 25, 26 having overcapacity? Or do you think there's enough out there to fill everyone's capacity? And then my second question just relates more to -- you've mentioned net debt below 1. I think when we go back and look over history, the only periods where you've had net debt below 1, we're probably around 2016, '17 before the general cable deal. How should we think about capital allocation once you get there because you seem to always generate cash, so I would imagine that continues to come down. Is it dividend, buyback, M&A, what's your thinking at the moment regarding what's the most efficient use of the balance sheet?

Daniela, thank you for the question. For the project question, I leave the floor to Hakan.

Okay. Thank you, Valerio. Daniela, for the question regarding first, you have different questions in the same question. The first one is about North America. There is no reduction in expectations in North America. I would avoid to discuss individual projects there, but in project business, everything is long-term negotiation. So nothing is concluded until you have the financial closure. So I think, of course, there is the right to ask for escalation on the current circumstances of the inflation towards our customer. customers. So I am sure that also our customers are doing that. Specifically, you mentioned some names that are doing the same. Because these -- the nature of these businesses are long term, I don't see anything that is threatened by these negotiations that are going on. This is, of course, my interpretation and our interpretation of the circumstances that you described. On the contrary, I feel there is another bar market, a bull market, let me say, on projects, especially in North America, as you know, California alone 4.5 gig expansion of offshore wind floating already right now, they are planning already to go to the next technology. So therefore, this is regarding the first part. I don't see any issues. -- fact about the increase in capacity, yes, everyone is increasing the capacity. I think our capacity increase was foreseeing also the expansion of the market. So we don't see also these capacity increases that are happening currently in the market as a threat. I think the market is growing more than the capacity increases that are coming into the market, as you mentioned, JB. I would not comment again about XLink because XLink is, I think, further down the road, and there are lots of things that has to happen that this project is going to go forward. I would not say that it is -- I would not comment positive or negative on it. I would just say it's not in the picture. It is one project which will feed automatically if it happens with the capacity that they are going to construct. So it has no effect on the market. But having said, I don't expect overcapacity in '25, not in '26. On the contrary, I think we have to -- first, capabilities have to increase. I see that because of office levels are increasing, there are less people, less companies that are capable of doing high voltage with -- also with deeper and longer length. So therefore, I think the specific capacity is going to be not enough. So we, as a company, also we have to evaluate further expansions down the road. I think it's completely the opposite as of today. We will see how it is going to go all together, but I see fairly the market bullish rather than.

In terms of technology, I'm quite convinced today that the next front year will be the offshore floating -- and it is a technology we are working for now in order to be ready within 2 years, 3 years not to accomplish with the market requirements.

Actually, if I can follow up on that on the floating. Do you think your peers allowable -- or will this be a market share growing opportunity for you? What's the status out there in terms of people being ready for it?

Okay. We know that the out of our peers, the ones that have been working already on the [indiscernible] have an advantage. The players of oil and gas for electrification of oil platforms. We are one of them, and I believe that, that will be the next front year. Now we are discussing about certain projects at the very early stage that may become in the order book in the next 2 years.

If I may add, Valerio, Daniela, if we are talking about the very long term because we are talking offshore wind floating, that means many things -- many moving parts have to come together. So beyond 3 to 5 years, the major growth is going to come from floating. All the fixed bottom fixed offshore wind is going to be stable, but the significant growth is going to be coming from the floating. So -- there is also the capability of developing these cables are determining factor how the capacity that is out in the market is going to be utilized. So therefore, this is another addition as Valerio sat whoever had that capability, a packer capacity will be able to play in this growth market. So we will be definitely one of them.

Daniela, about your second question, the ratio between the debt and EBITDA. We are targeting a number that is below 1 year end. Let's say one because facts prudent. I'm asking him every day, 0.99, -- no more. Let's see. The capital allocation. The capital allocation, first of all, is crucial to have the capital. Then we can debate about the capital allocation. Capital allocation may mean certain acquisitions, you have not to forget that for the projects we need to expand the capacity organically because there is no capacity available at least to us in the market because of our market share. Consequently, there will be a further probably increase of CapEx in our P&L. Having said it, our ability to leverage and to get market money from the market is still pretty good, and we may decide to make some move. Today, I don't see anything very relevant at the window.

The next question comes from Akash Gupta from JPMorgan.

[ Most ] of my question has been answered. I just have a couple of follow-up questions. The first one is on project margin in Q4. And Francesco, you said in your comments that for full year, you are targeting EUR 240 million in EBITDA for projects, which would imply EUR 91 million in Q4 and quite a step-up from the run rate that we have seen in the first 3 quarters of the year. Can you tell whether this higher Q4 contribution is coming from higher revenues? Or basically, it's driven by margin recovery even we saw Q4 last year was also quite strong quarter.

Yes. Thanks, Akash. I have to say, first of all, that a strong Q4 is very typical of the project business. In the end, this EUR 91 million, EUR 92 million that will have our adjusted EBITDA in Q4 is not much above the level of last year. This will drive a higher margin. And we estimate that the current level of margin year-to-date will increase not far from 12%, 11% between 11.5% and 12%, antlers. This, of course, is not enough is the first step in our clear target to achieve -- to go back to a level of 14%, 15%, but this will take, let me say, a couple of years. But the quarter itself it will be above 12% absolute... It's going to be Yes. In order to come to the 11%, 12%, you have... But on projects, it's very important to read the full year because it's very quarterly also driven by the installation phasing. So I recommend to look at full-year results and full-year margins because as the first quarter is low, typically over the past many years. Also, the fourth quarter is typically higher than the average. So it's very important to take a balanced view and look at the full year for projects.

And my second and last question is on pricing and inflation. I think this year, you have seen very good pricing, which has given you some boost on margins as we go in 2023, I think inflationary headwinds were going to increase, particularly on wages and energy side. So when it comes to pricing, are you looking to increase pricing further? And do you think that your customers would be -- like you would be able to pass it on to your customers? Or whether like this positive price cost that you had this year? And maybe -- like how should we think about price cost when it comes to moving from Q4 to next year in terms of your ability to increase prices for the cash.

I don't like to tell stories. And I believe that a significant chunk of the cost increase we are seeing today, and we expect to see next year. we will be able to pass to the customers. That means that we are going to keep, especially in North America and the results we currently have. So I expect a little bit reduction of the margins in U.S. because are really outstanding today, but I don't see at the same time today any reduction of the demand by the customers. So crossing fingers. Let's see what my friend here want to say.

Akash, this is Juan Mogollon. I'm going to expand a little bit on Valerio's answer because your question on pricing refers a lot to my division energy. So look, I think we have to divide this into 2 pieces. There is a short-cycle piece, which is the D&I and there is an element of price elasticity, how much can we push it before we price ourselves out. Now the answer is pretty scientific because we need to understand the elements that are driving the price and that the customers are able to continue to pass the price. For instance, the segments that are very close to consumers, we're starting to see a plateau on that like the residential. The pitas onshore cycle, like the mid-cycle, longer cycle, which is PD renewables OEMs -- it's a lot more predictable, and we're definitely not seeing a normalization there. And I think your question about how do we look at it? Look, it's a matter of price discipline. Like we instituted no longer ago this element of project selectivity, where we're not chasing just any volume. We have implemented terms and condition and escalation clauses, which allow us to accordingly adjust the price depending on the raw materials, the labor inflation and all the things that now we are seeing in inflation. The other is the element of training our commercial teste so that they are able to have the conversations with the customer. One good example of that is utilities. Most utility companies have escalation clauses and collaborating with them sitting down with them to explain it to them, we make their lives easier in order to pass the -- their price to their own customers. So the -- in a snapshot, No, I'm not seeing a deterioration of price. We are very vigilant on the short-cycle business on the T&I. And we're also vigilant not to increase so much that we break the elasticity and then we start losing volume. Does that answer your question, Akash?

And your next question comes from the line of Vivek Midha from Citi.

So I just like to cases my questions have been answered, but a few follow-ups, please. Firstly, following up on the discussion on energy. If I understand correctly, the demand remains very positive, and there's a large element of supply bottlenecks. How have those supply bottlenecks and shortages been evolving in the last quarter or so. How do you see that evolving into next year?

Thank you. How is evolving the bottleneck on the supply and demand in energy? The bottleneck is made by 2 reasons. The first one is the availability of raw materials. And the second one is the availability of labor. Whereas the availability of raw materials may improve or have improved, the availability of people in U.S., I'm saying is proves not improving at all because there is all the repatriation of certain activities from offshore that is requiring additional workloads that is not very available in U.S., other than pretty expensive. So I don't see a quick rebalance of the today's unbalance between demand and some -- that makes me reasonably comfortable that some peak in the T&I we may lose, we shouldn't lose anything on the PD expansion or in the specialties, and we are not going to lose for sure in the telco... Maybe, you may expand Panera's question, and I will expand it from the customer perspective. Look, I see customers almost every week in all continents, in the Middle East, Europe and North America. So far, I don't sense that they are concerned about the volume or the demand. I continue to hear the concerns is more focused on the supply chain and the service. And this is coming directly from the customers that I meet.

That's very helpful. My last question, please. Sorry, just an addition, what may push a little bit the break is the cost of the money and consider the level of investment our customers are ready to progress. For the time being, we don't see, we have no signs at all but is prudently is something we have to assume. My second question is on telecom. So you had another good quarter of organic growth. North America remains strong. In terms of your latest view on the through-cycle long-term growth outlook in that business and what growth rates do you see as sustainable given the various initiatives to support demand there?

I give the floor to Philippe to give this answer.

Yes. The market is set to grow 5% globally. That's what all the experts say today. And I share this -- it's also my view. What you have to keep in mind when you talk about Preston Telecom is that we also have inside shrinking segments, like copper, telecom and occasionally also an effect on specialties like we are seeing today actually because we had a very big order last year. So I can add that I see a very strong growth. We are, as you know, adding capacity to our operations in telecom in optical. If you want a more sequential number, we grew our optical telecom in quarter 3 compared to quarter 3 last year by 23%. And if I look at the same optical only in North America, our organic growth is above 30%. So we are definitely following the market more than following the market where we decide to be present and to add capacity, which is the case of the North American continent at this moment. And we don't see a slowdown of that growth in the coming years. Did I answer your question?

Yes.

And your next question comes from Miguel Borrega from BNP Paribas.

Just have 2 questions. The first one, I wanted to try to understand a little bit better the pricing situation in Energy North America. I know you've touched on demand and pricing, but it's still not quite clear to me what is allowing the situation. Maybe you can talk a little bit about competition in the market. Are you seeing the same level of pricing in your competitors? And maybe just touch on the distributors. I think a couple of them are already signaling some destocking. Are you seeing that over recent months? Or would you expect that over the coming quarters? And then more big picture, what do you think will happen next year? What can you do to offset if pricing rolls over last quarter, I remember you saying, Valerio, that the new normalized margin for energy would be around 7% and not 5%? So what gives you the confidence that if pricing really rolls over, how can you offset the impact on margins? That's my first question.

Okay. Thank you, Miguel. Let me remember you that the North American market is definitely different from Europe [indiscernible]. That's very, very clear to us, in particular, to me because I'm a European and I come from Europe. I have been working in Europe for 30-plus years, and I discovered that the North American market is a completely different market from the mentality point of view. Customers are not looking at the lowest price for each component they have to buy. Customers rely a lot on the long-term relationship with the suppliers. Suppliers are not so many, and they rely most of all on the suppliers that have the capacity and the potentiality to follow them. The price is a secondary problem for them. I like a lot this way of thinking having been for 20-plus year in Europe fighting with each customer for each single dollar or euros. So it's a different market. Then the pricing in North America is extremely high today. The margins are outstanding, will stay as they are forever. I don't believe. I think that one way or another, the market will -- one way or another will redirect the balance between demand and offer and consequently, the prices will slightly reduce, not going back at the time of 2019. That I'm quite sure Asia wants to add... Another angle to understand is peculiar to the American market. This is, as I said multiple times is not the residential market that we serve. It's a project business, market. When customer wants -- has to deliver projects so like cables for our industrial plant for a commercial center or an airport a phone, what matters the most is to have cables available in the shorter possible time or list on time. So price is not an element that we discussed with customer at this stage. And as long as this imbalance in the market between capacity and demand remains. And we think it will remain because of the point that Valerio mentioned before, scarcity and raw material will probably soften a little bit, but still will remain. At people will remain an important constraint to add extra capacity. So this item element is 2 key factors will remain. So we see these imbalances, -- so we see us well positioned to maintain the same benefit in terms of pricing, in terms of unit margin on this project T&I-type of American business. And as far as we see today, the 5 line of projects. So the business in North America for nonresidential infrastructure is still very long and active with a lot of activity going on, also fueled by the subsidies from the government, the information reduction asset and all this obese. So we don't see signals so far of possible. Last but not least, how we think to compensate. First of all, today, we are having here the CEO of North America. First of all, there are other ways to compensate the possible pressure on price or reduction of margins into U.S. And I believe that there will not be a very significant drop of it. But anyway, we are organizing ourselves in order to manage it at the best possible scenario. And the North American team is already starting to prepare counteractions in case of price reduction is going to come in place. That is not the case for tan. So just to confirm, you're not seeing any of your competitors cutting prices as of yet, North America. No, absolutely not because the imbalance between the offer and the demand is still there. The demand is higher than...

Okay. And then my last question on free cash flow, specifically in Q3. I understand Q3 is usually negative free cash flow with working capital absorption. But I was surprised to see that this year, since you had a record quarter in energy, which is much higher in cash conversion than any other segment. Can you help us understand how working capital is evolving and perhaps also going into Q4?

I believe the copper impact is now lower or correct me if I'm wrong.

And then just thinking about Q4, what gives you the confidence that you'll be able to generate roughly EUR 1 billion. There may be obviously an element of down payments from recent awards. But if you exclude the down payments from new awards, how do you think would be in Q4?

Thank you very much to you, Miguel. I have to be clear, this year, differently from the past, we didn't wait the summer to cut the stock. I gave end of the first quarter, the instruction to reduce the stock, take or leave it. And the team did it. That's the reason for the reasonably strong, I say, reasonably because it can be even better. Cash flow of the Q3. That's it. The fourth quarter, let me start from the third quarter, first taking these by piece. The third quarter, as you correctly said, has already a pretty good cash conversion, specifically for the energy business, but also very good for the project business. For the project business, it's mainly related to some down payments and our payments are driven by the very sharp growth of the market. But this year, we're a little bit anticipated compared to a normal year. In a normal year, they tend to be loaded more on the fourth quarter where we had a lot of -- we will have down payments also in the fourth quarter. But this year, specifically, for instance, we had a very large one, had a big one in the third quarter, and this helped the net debt and cash flow dynamic in Q3. The other important element was in the rest of the business, safety energy business and partially also in the telecom business, where the raw material prices started to flatten. The peak of raw material, let's keep this always in mind was reached actually springtime 2022. Since then, raw materials came down a bit, flattened and this, of course, started to help the cash flow generation already in -- going to Q4, these dynamic of generating, you mato1 billion, if not far from reality, is very typical. If you take the last 10 years, even longer, I've been CFO of this company for the last 15 years to be exact. I've always seen that this level of cash generation because our business in the end, our working capital is extremely seasonal and it is one. And also in the project business, typically, the milestones and the installation is mainly done in the late summer, early fall, and this delivers milestone and milestone collection in terms of cash, mainly in the fourth quarter. These are the 2 most important element why elements, why we generate such a large cash flow in the fourth quarter. I think it's even easier to neutralize the seasonality to always think in terms of last 12 months free cash flow. So in September, as we showed in our presentation, the last 12 months is EUR 344 million. We have to increase by, say, taking the median of our guidance, EUR 125 million. As I explained, the flattening out of raw material prices will decrease the growth will mitigate the growth of working capital compared to the last 12 months of September. So the EUR 340 million will flatten down to most likely 200. This will generate the boost that we needed to achieve our free cash flow guidance. And it will be only partially compensated by a basin capital expenditure. Miguel, I don't believe that our free cash flow is disturbing you... It is not.

And your next question comes from the line of Alessandro Tortora from Mediobanca.

I have 3 final questions. Okay. The first one is related, let's say, to the telecom profitability, clearly, excluding, let's say, YOFC, the question is, if you are happy with this 13.5% EBITDA margin? And if you -- if we can consider, let's say, something sustainable also on the back of, let's say, the energy cost? That's the first question. The second question is on -- sorry, but if you can come back also on the, let's say, Energy division. You mentioned during the call older, let's say, backlog trend for, let's say, the TV and also the other factual sector. Can you comment a little bit also trend for non-resignation? And the last question is on -- you mentioned, let's say, the prequalification of 55 for the submarine. Can you comment a little bit also on the implication? Because if I understood well, there are also some other producers that got the prequalification -- and are there, let's say, the 10 tender around the corner? Or is it something, let's say, proper for something in the medium term?

Thank you, Alessandro. First of all, the telecom market. The telecom margins, excluding YRC, have been reasonably good. I would say, I would leave comments to Philippe, but I don't see any significant shrinking of these markets. Are these margins, if I remember what your question appreciable to me... Answer is no. But I have to take into consideration the increase in cost of the fiber because of the energy build. Fibers are very, very energy intense. And consequently, the cost of energy for fiber producers in Europe is a little bit difficult. Please...

Alessandro. A few comments. If you take back the history of telecom in Prysmian and you exclude YOFC, you will see that we were operating at higher margins in the year '17, '18, then came the crisis essentially due to the Chinese dumping price. And in 2021, actually, our EBITDA margin, excluding YOFC, dropped to approximately 13%. This is where we are today. This is where we still are today. In the meantime, we had many things happening, and we were able through business and customer pruning through passing the cost increase to the customers, partly through increasing through pushing on the right geographies that were more favorable to us and to our differentiation. We are able to maintain this 13%, excluding what you have seen now for 2 years in a row. If you look at 2022 itself, there are quarters in which we do the same as last year, it was quarter 1. In quarter 2, we did not as good as last year. In quarter 3, we do better than last year. I see a quarter 4, which is less relevant in any case, more or less flattish to compared to last year in percentage of EBITDA. So I see that this 13% is rather robust. Of course, as Valerio said, the cost of energy can impact us next year. But it's still to be understood better because it's rather volatile. It's a bit early to have a definitive quote on this. So I think the 13% from what we see today is a very sustainable number. If the energy cost has an impact that is larger than our cost reduction combined with the percentage that we can still pass to the customers, then we will take a hit that is going to be something like, in the world, it's 1% of EBITDA, something like this. It's not something that is going to divide our profitability by 2. I want also to be clear on the levels of magnitude we are talking about here. Okay. 1.5% maximum. This is how I see things today. But again, I want to insist on one point, Alessandro. It's too early to have a real view on the energy cost of next year because fees are still moving.

With regard to the second question on Alessandro, -- this is Juan Mogollon. Your question about the order intake and the backlog for the non-longer-cycle business, I think you're talking specifically at TI. So -- let me just break it into the 2 pieces because they're quite different, as Valerio just said, the North America piece and the European base. In the North America piece, right now, we're sitting, as I said a minute ago, exactly in the same order book as we had last year at this period of time. And the order intake, the weekly order intake as an average, also the same. I do not expect that to decline for the reasons that Valerio also said, I'd just be a little bit more specific. Our D&I in North America is fed by more secular trends like data centers. Data centers is about 20% of our revenue in North America, and that continues to grow at a very high single digits and even double digits and also infrastructure and OEM and all the things related to the inflation reduction Act. So I feel pretty good about it. And one more thing also, the [ expected ] price so far continue to be robust. -- robust. In Europe, it's a little slightly different. In Europe, the south part of Europe in our portfolio has a big chunk of residential, we're somewhere between 30% and 40%. That we're seeing a little bit of normalization in the residential piece of South Europe. We're not dismissing that because that could be a trend. And as Valerio said, we -- our teams are getting ready for that from the standpoint of securing the -- first of all, a quality order book with a reasonable level of price. And secondly is so making sure that we capture growth in other areas in the T&I piece in South Europe. So overall, Alessandro, right now, we're sitting on an order book generally that is pretty close to the same that it was last year. I do not see a decline in the price, generally speaking, the T&I portfolio, and I see a little bit of normalization in the order intake in South Europe.

Last question you made was referred to the homologation of the 525 kV submarine. I have a sample I have received just yesterday, if I'm not wrong, as sample of the PU is a very nice cable. We passed completely the test. And consequently, we are ready to offer the system to the customers. We have been, let's say, the first, even if the French called came on board just the day after, if I'm not wrong. And we are ready to develop these systems for the customers. There are tenders for it. mostly in the North Sea. I believe that the next year, we or someone else who knows will be awarded for the first 525 DC submarine projects. That will open the era of the 2 gigahertz transmission. Hakan, I don't know if I missed something.

No. Actually, you were absolutely correct. Just to give maybe a few details. Yes, the TenneT is the first 525 kV project, the [indiscernible] project will be awarded if there is no delay in February next year. But of course, this year, we will have to complete our submission. 8 competitors, including us, has applied, one failed to delayed to next year. And the rest seems to be coming to be homologated, -- but being homologated does not mean much because you have to be able to install this cable also and you have to be also for the interconnect installed in deeper, let me say, conditions. There are many projects for 525. I'm not going to list them, but TenneT and Amprion has -- if you just follow their website, they have like maybe 10 projects going -- coming on. On the other hand, the interconnect, you know also all the interconnects that are starting from Sun cable to any big interconnect is going to be 500 because it's the lowest cost per megawatt that you transfer. So it will be a challenge for the ones that are going to claim that they will be able to do. On the other hand, it's an opportunity for us because we think that this technology is going to reduce the cost to the customer of the whole system and will enable us to further develop renewable energy for the industry.

And your next question comes from the line of Sean McLoughlin from HSBC.

Just one from me. Thinking about the Energy division and sales into segments with the secular trends, maybe the strategy to offset the impact of the cycle, how are you thinking about increasing sales here?

You're going from 50% today to what maybe 70% in 5 years' time, any guy there would be useful. And also any new product capabilities and adjacencies that you might be thinking of moving beyond the cable towards... So I believe that for this business, -- we need to be relevant for the customer segment of the other let's skip the auctions that is much more large and probably difficult field. But I believe that we can grow not because we are going to grow organically. It doesn't make sense. There is the capacity in the world. But maybe that this is a field where some consolidation may have sense. The new product capabilities are coming online, and specifically, we launched development of a new solar cable because I'm quite sure convinced at least that the solar generation is the next frontier for the energy generation gates is a more complex chapter. I don't know, Sean, if I have awarded to your question.

Yes. That's fine. You're not willing to say where 50% of the sales of energy might look like in, say, 5 years' time?

Yes, I think so. Why not. So is referring to the weight. If I well understand you, [ Sean ], of the secular trends on total energy business, which is a Well, I think to move this from 50% to 70%, frankly speaking, looks too big because it's very difficult to move percentages this way. I believe that this market, this part of the market will definitely grow more. I think that we have also a better opportunity to grow our position even better on this part of the market. So it will -- it may certainly increase above the level of 50%, in my opinion, a bit difficult to say now where it will land. It's the reason why I'm prudent on this is that, for instance, also the part of the nonresidential construction, which is not this 50% is the remaining 50%. Also, this part is growing very much. And by the way, in U.S., also this part is impacted by maybe not secular, but pretty medium, long-term trends, such as, for instance, reshoring of activities that in the United States is very, very evident. So also that part will grow and then difficult to say where the secular part will land, but both of them are very valuable part in the portfolio. And the only thing I could complement to that Francesco and Valerio is the fact that this mega trend of electrification and energization is -- , I know we talk a lot about the renewables and the things that are in the front end. But there's a number of other segments that are part of the electrification that are growing faster than most economies, mining, as an example. Mines -- , you all know the CapEx in mining is increasing because mining is a big part of enabling electrification, we play very well there. The other one is part of the mobilization. Our orders continue to grow in the railways and the rolling stock because it's part of the electrification. And finally, a little bit of the digitization, to some extent, the digitization because it's a megatrend also that all these trends, Sean, over time, I believe, will take more of the portfolio of the energy mason.to what extent and what speed, I think it's too soon to say.

And the question comes from Massimiliano Severi from Credit Suisse.

I have just very broad questions, general. The first one would be on telecom and on the fiber market or addressable market, if I think about 5G against FTTH, what do you see as the difference in the total addressable market among these and the growth trajectories that these 2 different end markets can have in the midterm, like 5 years from now or so?

Philippe?

These are 2 trends that are successive depending on the regions. Today, we are -- most of the market is still about FTTX. We see a trend for the 5G to become an additional engine to -- that is driving towards more fiber needs. And then you have another one adding to this, which is the long-haul interconnection of data centers, which is getting momentum. So you have these 3 trends that are acting together. Today, the market is still very much FTTH. 5G is starting slowly in Europe, a bit more -- a bit faster in other regions like Asia or the U.S. And then on top, you have these long-haul projects to interconnect data centers that are -- that is a fundamental asset to manage the speed and the latency of the signal between data centers. So it's -- we see more and more investments in that field. So all these 3 trends, even if in certain countries, the FTTH part is now shrinking because most of the work is done. There are still many places where it's still needed to do it for FTTH. And on top, we have these 2 other engines that are starting up. That's -- these 3 trends made the experts and myself included thinking that this market will grow definitely in the next 5 years and probably even more as a market globally.

And would I be right in thinking that, however, the 5G would be somewhat smaller than FTTH in terms of total market potential?

This is correct because when you already have an FTTH network in place, the 5G benefits from it as well. This is a correct statement, absolutely.

But the 5G will drive much higher quantity of data. And consequently, even the local networks have to be reinforced.

Yes, absolutely. And the 5G needs fiber definitely to the antenna, which was not the case to the 4G because the 5G characteristics are much more -- much higher than the 4G. So there is a nice market in front of us, I would say, in all regions. That's what I can say. One trend taking over from the other successively. So there is no reason to think that this market could shrink unless massive geopolitical big issue, but this is not what we see today. If I can, one of the most important upside, I personally see is that many, many hyper data centers are going to be built and have no sense for the customers, not connecting the data centers. We are seeing it growing in North America with specific lines with a lot of fibers to interconnect the data centers -- and that's a trend that is going to grow and is going to progress. The quantity of fibers needed in the network. If you follow our press release if you have certainly noticed that we have a project ongoing with Telstra in Australia, which is exactly all this. We are going to build a network specific to interconnect their large data centers and the lending points of their submarine cables as well across Australia, which is a very nice project and very high-tech projects as well, taking the best of our innovation. This is a trend that is emerging.

And my final one would be on floating offshore wind opportunities. And if I think about the cable that you need for offshore wind, most of the export cable would anyway lie on the bed and would not need to be flexible, I think. So when I think about the additional opportunities that you see in floating, would it be mainly the medium voltage inter-array cable that needs to be flexible? Or would it be just the final…

You have 2 chunk of cable. The traditional export -- bottom fixed, the last 2 miles, more or less, that are going to be flexible to reach the platform and all the inter-array that are going to be flexible. What does it mean that customers are not going to leave the project to who can provide them only the fixed part of the connection? But the players of which we wanted to be one of them in to provide the entire connection, flexible static, flexible and static will be the preferred ones.

There is Hakan speaking, Max. As Valerio said, the full cable, even there is a part on the export, which is static, there is also a part which is dynamic. The issue is going to be the factory joint because you will not be able to do an offshore joint rigid join between the dynamic and the static. So you have to do this in the factory to make it robust. So what is going to happen, you are going to do the full cable. So whoever has no dynamic capability, even they have the capability of the static cable will not be able to. So the market, when we talk about floating market growth, -- of course, it includes also the static market, the static part of the export cable, and this is significant. It is going to be in the long term as big as the static one as of today.

There are currently no further questions. I will hand the call back to you.

Thank you very much. Thanks to all to have been present to our 9 months conference call. I wish you all the best and to the full year results. Thank you. Bye-bye.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.