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

Hello. Thank you, and hello, good afternoon to everyone. Welcome to our first half 2023 integrated results. Let's start. First half 2023 highlights 2 main chapters. First of all, EUR 8,003 million sales with an adjusted EBITDA of EUR 878 million, a free cash flow of EUR 567 million. Organic growth 4.8%, declined compared to the first quarter, I have to admit, even if it's still quite strong. Adjusted EBITDA margin 11%. Net debt shrinked to EUR 2,065 million. In addition to these indicators, we added the indicators related to the greenhouse gas emission. We have been able to reduce almost 10% compared to the first half of 2022, our equivalent CO2 emissions, and we have 12.6% of materials that comes from recycle. Overall, a very good result with investment-grade rating assigned by Standard & Poor's for the global ratings. That has been an outstanding result for us. Let's flip to the next page. The margins are expanding all over the businesses. Let's analyze more in detail. Projects. Projects rose 23.5% organically, with moving from EUR 922 million up to EUR 1,177 million, with the adjusted EBITDA that moved up from EUR 87 million to EUR 129 million, reaching the already commented 11% of EBITDA margin. That is not the goal. The goal, as we said, is roughly 12%, have to be reached by the year-end for the full year. What can we comment on it, on this segment? That the improvement is very solid. The orders are coming. Now we have to execute it. The execution is the key of the success -- of the real success. And today, I can inform you that we have almost completed the Viking Link installation testing. We have not yet taken over certificate because we are waiting for it in the next phase. So let's move to Energy. Energy overall increased from EUR 6,118 million 3.4% organic growth due to -- nowhere in reality due to the metal price went down, but not so much, EUR 5,969 million. But the results have been, again, outstanding. What I mean that the performance on E&I has been pretty good with an organic growth of 2.8% at EUR 4,080 million and with EUR 446 million EBITDA, 10.9% of EBITDA margin. In the E&I, what can we comment? The comments are that the growth is fine. Of course, we are seeing a little decline in the T&I, right? May I say more than compensated by the PD and overhead transmission line increase, positive, whereas the construction market is reducing a little bit. All the rest of E&I is continuing to grow. It's written in the footnote, T&I normalization in North America. Normalization, not collapse. Industrial & Network Components. The turnover moved from EUR 1,714 million to EUR 1,728 million, with an organic growth of 5.3%. The EBITDA ramped up to 182 compared to the EUR 130 million in the first half 2022 with a pretty good EBITDA margin, 10.5%. Overall, the improvement has been in OEM and solar as well as in wind. Solar is growing. OEM is continuing to be stable and the wind is growing, too. All the businesses that are related to renewable are growing. Last and the least, unfortunately, the Telecom. Telecom has been the sole segment that has been shrinking in the first half from EUR 911 million sales in the first half '22 to EUR 857 million in the first half '23, with an organic decline of 5.2%. The performance has not been extremely good, I would say. But the EBITDA margin is still pretty good, 14.8%. Now as I used to say, the percentages you cannot put in the bank account. And consequently, we are not very happy, but we have to analyze the reasons why this is happening and not only to us. The volumes are slowing down mostly because the North American market and why that's my perception, frankly speaking, because last year, on the wave of the enthusiasm for the coming rural broadband and expansion of the network, our customers have acquired a lot of cables. As usual, the Telecom players do not have the control of the stock or they have a control that is a little bit poor. Reason why, when they saw the stock at the roof of their warehouse, they stopped buying. And that's what we are in today. Has to be noted that in the Telecom business, we have experienced in 2019 in Europe, the frequency and -- the frequency is much higher. The frequency of the [ swings ] is much higher than the Energy business. So I'm not scared of it. Today is as it is, but I'm quite sure that during 2024, the market will restore and [ whereabout ]. Overall, outstanding results, let me say it, EUR 8 billion sales, EUR 878 million EBITDA, with an organic growth of 4.8%. Let's flip to the next page. The next page is telling the story of the Projects, Projects that as you have seen is growing very much. We -- and you'll see from our balance sheet, we have invested almost EUR 0.5 billion in the last 12 months. Why? Because the orders -- the firm orders in the backlog are at EUR 9.1 billion, but we got even other EUR 5 billion almost of new orders -- EUR 5.4 billion of new orders. Of course, in those EUR 5.4 billion, we have included the 2 U.K. projects, EGL1 and EGL2, that accounts for EUR 2.56 billion (sic) [ EUR 265 million ]. So it's a significant chunk and that has not -- the contract is not yet defined completely. But we are almost sure that by the year-end, we will be able to sign the final contracts for these projects. So overall, the Project business is going very well. The problem is the execution. We have not to fail in execution. Across the regions. Across the regions, I can say that EMEA went pretty well. 5.5% organic growth, moving from EUR 3.3 billion to EUR 3 -- almost 3 billion again, with a 7.3% EBITDA margin, EUR 240 million EBITDA, not so bad for Europe. Whereas North America definitely richer than Europe has generated an organic growth moderately negative, minus 0.6%, but still a very high EBITDA margin, 16.9%, EUR 406 million EBITDA. Latin America, almost stable, let's say. And Asia Pac growing a little bit with an almost negative organic growth, but growing in terms of results from EUR 32 million to EUR 40 million. ESG. We introduced being an integrated report. We introduced some parameters that we used to monitor continuously quarter-by-quarter and month-by-month. The number one -- the first line is reporting the CO2 emissions that from my point of view is the most important chapter of the ESG KPIs. And most of all, what is crucial are the tonnes of CO2 that -- or CO2 equivalent that we are emitting in the atmosphere. Last year, we counted for 665,000 tonnes in the first half -- of which in the first half, there were 342,000 tonnes. This year, in the first half with equivalent volumes, we have emitted 309,000 tonnes, are still a lot for the people and for our children. But we are absolutely engaged to reduce it. The other important chapter from the ESG point of view are the recycled materials. Basically, what we are able to recycle is the polyethylene for the jackets and the copper and aluminum for the conductors. Last year, we closed with 10%. This year, we rose at 12.6%. So let's say that we are still at the beginning, but we are on the right way. There is the other chapter that is represented by the number of women in the job grade over 20 and the percentage of white collar women overall in the total hired people. That's the sole parameter where we have not been able to improve. But I have to say that sometimes it's not easy to find women available to be hired in an industrial [ company ]. Outlook. What are we going to propose? We are upgrading the guidance. You may remember that our original guidance we gave at the beginning of the year was EUR 1,375 million, EUR 1,525 million with a midpoint at EUR 1,450 million compared to the EUR 1,488 million [indiscernible] correct that we realized last year. Now we have been debating internally, but also with some of the investors about the guidance. Now finally, we feel more comfortable to give you a new guidance even if, of course, is a challenge. And we are ready to rise to EUR 1,575 million as a minimum, with a maximum at EUR 1,675 million. Of course, the range is little than the past. Why? Because simply, we are -- we have definitely a higher certainty of the results. Having increased the guidance of the EBITDA makes sense to review also the guidance for the free cash flow. And the guidance for free cash flow that was EUR 450 million, EUR 550 million with a midpoint at EUR 500 million is now settled at EUR 550 million, EUR 650 million, increasing the guidance of free cash flow by EUR 100 million. The increase of the guidance is not negligible, gentleman, are EUR 175 million on the midpoint at EBITDA level and EUR 100 million net on the free cash flow. So it seems to me that we are on the right way. Finally even if I, for many years, have been postponing or neglecting the Capital Market Day, I'll have the pleasure to host all of you that wants to participate to our Capital Market Day, the 5th of October 2023 in Naples, having the pleasure to see our ship, our Leonardo da Vinci cable-laying. Cristina is crossing the fingers because, of course, the ship is working and the risk is that may not come on time. But okay, I leave the floor to Francesco for the details of the financials.

Thank you very much, Valerio, and good evening to everybody. As usual, I'll go quickly through the profit and loss statement. As Valerio said, organic growth reached 4.8%, declining a bit from the 9% organic growth of quarter 1. And as anticipated, the main decline came from the Telecom business, which posted a quite significant drop in the second quarter, driven by the North American market and also softening of the T&I business, mainly in U.S. as a combination of volume and price. On the contrary, in terms of organic growth, Projects performed really well, high double digits. But also the other businesses of Energy, our distribution on the Overhead Line and Industrial & Network Component achieved a very sustained pace of growth. EBITDA achieved a very satisfactory result, as Valerio anticipated, EUR 878 million, 11% EBITDA margin. A stronger Q2 you see in the top right box, the evolution of the quarters, Q1 and Q2, in relation to the prior year. You see that Q2 was EUR 451 million, EUR 40 million above an already pretty strong second quarter of 2022. Projects posted a very significant improvement compared to a much more challenging Q2 2022 than the first quarter of 2022 that you all remember was a bit weak in terms of margin, specifically. Energy, also in this case, compared to a pretty challenging base of Q2 '22 performed further EUR 33 million improvement, as Valerio anticipated. This is coming from -- this is highlighting the result of a very well balanced portfolio within Energy because it's the result of the softening of T&I that I was anticipating in particular in North America, more than compensated, as you see, by the growth of results in Power Distribution, Overhead Line and also Industrial & Network Component, and this delivered an additional growth of EUR 33 million. The drop of Telecom by EUR 13 million is the consequence, of course, of the drop of volumes that I was already commenting, which took place in the second quarter. I also like to note to you that the ForEx effect starting to be slightly negative in the second quarter. This highlights are, in my opinion, the quality of our results, EUR 11 million negative compared to last year versus a positive translation effect, which was in place in Q1, most likely for the second half, if we consider the current level of the U.S. dollar euro exchange rate, we have to expect a slightly negative impact compared to the first half, which is, however, embedded, of course, in the guidance that Valerio anticipated. Going to the lower part of the profit and loss, you see that financial charges have been very stable at EUR 54 million. I expect a moderate increase in the second half because, of course, in the second half, will discount a bit more the increase of interest rates on the pretty small portion of our indebtedness, which is at variable rate, which is not swapped to fixed rate, which is in the region of 25%, however, quite a small portion. Taxes. The tax rate is stable at 29% and group net income achieved a very significant level in one half at EUR 405 million, which is not doubling, but not very far from doubling from the prior year. Let me flip now to the following slide, statement of financial position, balance sheet. The net financial debt came down to EUR 2,065 million, down by EUR 265 million compared to the equivalent period of the June 2022. The net working capital, as you see, was quite stable, around EUR 1.4 billion, quite stable compared to June 2022. This stability is positively affected by an impact, which is material and that I'd like to mention, in the region of EUR 130 million of the sell-to-cover. This basically has to do with the sale of Prysmian shares, which was done by Prysmian in order to face the tax liability, the tax payment of the -- on the manager of LTIs, which is due in July. So basically, these proceeds of these sales were transitorily sitting on our balance sheet from mid of June to mid of July. This was a significant amount, EUR 130 million, and this was translated into -- it was translated into a payable -- into a tax payable to be exact. And this was deflating, was reducing artificially, if we can use this word, the level of working capital. And that's why I will come to this in the last 12 months free cash flow, we prefer to exclude this EUR 130 million impact from the last 12 months' free cash flow. So the number that Valerio was already anticipating EUR 567 million last 12 months free cash flow is excluding the EUR 132 million positive sell-to-cover effect, which is, in a way, already gone because end of July is already -- has already disappeared. The stability, the increase of the working capital, taking out the effect of the sell-to-cover is mainly driven by an increase of the inventory level, increase of receivables also as a result of a lower level of receivable factoring, which is partially compensated, but almost entirely compensated by the drop of working capital in the Project business, which, of course, is benefiting from very large and positive down payments because of all those. Let me flip now to the cash flow, EUR 567 million. As you see, the EUR 132 million positive sell-to-cover effect in the working capital is excluded from the sum, which leads to EUR 567 million. These last 12 months' free cash flow is substantially in line with the last 12 months of Q1, was EUR 580 million, if I remember, and is discounting a level of CapEx, which is growing. You see EUR 498 million, already very close to the EUR 500 million level. The EUR 222 million increase of debt, which is highlighted in the last column after and which is not related to cash outflow, is mainly related with the impact of IFRS 16 for half of that, more or less. The other half is related with the currency translation impact on our cash and cash equivalents. And this is actually, of course, with the treatment as that of all the leasing facilities, both financial and operating leases. Let me conclude with some closing remarks. As Valerio said, solid, given outstanding, I would say, half one results and a very significant upgrade of the guidance, both EBITDA and cash. And this, in my opinion, highlights the quality of our business portfolio and the balance of our business portfolio. We have a clear example in these results of how the strongly performing Project business and our Distribution and Overhead Line business and strongly performing Industrial business more than offset the weakness of Telecom in this quarter and also the start of softening, the softening on -- of the T&I business mainly in U.S. So that's very important for us, this kind of -- I don't call it diversification. I call it balance of the business and geographic portfolio. Strong cash generation. We are -- let me say very simply that we are getting into a new scale here. You certainly remember Valerio and myself mentioning many times the EUR 500 million free cash flow dream. Now we are at EUR 600 million. And it's not a dream because it's already an achievement.

And we have to rise again.

Exactly. This is by definition, by definition.

So we yet not over.

Yes. We are getting really into a new scale. And as Valerio explained, I consider a very good achievement to have reached an investment-grade rating with Standard & Poor's specifically in Q2, which is even more important in this period of time, which is a little more and more and more challenging from a financial point of view with high inflation and rising interest rates. So for us, it's absolutely important to rely upon this investment-grade rating now. Last but not least, we focus very much our ESG performance. And this is delivering very tangible results, for instance, very tangible results in terms of CO2 emissions and in terms of circular economy. So the portion of recycled material, which is also important for our customers. And I'd also like to say that this also one proves how these strong ESG results and focus is highlighted and disclosed in a more and more integrated reporting, where we are, as you see, more and more combined financial performance and ESG performance. Perfect. I think I'm over, and we can go ahead with the Q&A session now.

[Operator Instructions] First question is from the line of Max Yates from Morgan Stanley.

Could I just ask firstly about the North American business? And you've had another kind of good step-up in EBITDA in that business by about EUR 70 million, yet you're talking about the kind of construction business in North America starting to slow. So I just wanted to understand kind of should we assume that most of that EBITDA improvement has come from businesses other than North America T&I? Or how would we sort of think about that step-up? Where does it really come from?

Okay, Max. Just -- I'm going to give you a very simple answer. It doesn't come from North America only. But still, North America has a quite significant position. Massimo, would you like to give more details on it?

Thank you, Valerio. Yes. Max, first of all, actually on North America, not the T&I is softening as we said in North America in quarter 2 relative to quarter 1. The other businesses that are coming along and matching in terms of profitability and volume improvement is Power Distribution and Special Cables. As you notice -- you will notice that during quarter 2 compared to quarter 1, North America has rather been stable. We indicated that despite the softening of T&I happening -- started happening in quarter 2, we had a full offset of this softening with additional margin generated by Power Distribution, namely grid enhancement, grid expansion and special cable business despite also the softening that's happening there. So it is stronger driver related to grid hardening and special cables related to businesses, equipment, OEMs, installation and so on, have been able to offset the data to slightly decline in the business. Indicated also these businesses are in North America. By the way, the North American normalization T&I is the result because they are not sold. We keep saying that into the residential space on the industrial plant building's reshoring activity space, which is still very resilient price-wise and volume-wise, despite the cost of capital and despite inflations.

Yes, that's helpful. Just maybe a very quick follow-up because I think it's the question that sort of we get asked the most, which is just around if you look at the step-up in your North America business, is there any way we can separate kind of what is related to some of those structural drivers? So whether it's solar, whether it's kind of reshoring initiatives and whether you can frame for us kind of the portion of EBITDA that is maybe at risk that you think about kind of potentially normalizing maybe in the coming kind of 1, 2, 3 years? Is there any way we can kind of break out of your guidance? What you see as kind of extended potentially over earning and what you view as more structural?

We -- our view, Max, is that the growth of the grid hardening and the special cable business will continue. It is very solid. And our view is that -- also in '24, we see full offset of the T&I continuous normalization or is the carryover of what has happened already in quarter 2 this year into next year with grid hardening, power distribution, power overhead lines and special cable business. So we cannot tell you the split in terms of share of business, but you will see even or notice, the underlining trends because the overall results will remain solid, stable. And actually, we believe that with the reshoring activity and the other electrification cases, the recent 5G and on the rest, that the T&I volume will further strength in the coming years. So we might see an upgrade in North America overall performance driven by a recovery of the volume in T&I and the strong profitability increase in the other segments of business.

Okay. Helpful. And just one final quick one on Projects. So you talked about a 12% approximately Projects margin for this year. I guess what I wanted to understand is, I think you've talked about Viking Link sort of potentially having a margin impact. You've also talked about some inter-rate contracts, which you'll be rolling off in the third quarter. What I'm curious to understand is if we exclude those from the margin this year and we think about those being replaced with more profitable backlog, is there any way you can frame to us what kind of margin improvement that would drive going into next year just by a function of those dropping out?

I leave the floor to Hakan to serve you the answer.

Thank you, Valerio. Thank you for the question. Yes, you're right. Inter-rate cables are the lower range of our, let me say, margin offering into the market and to our investors at the same time. So -- and these orders were taken quite some time earlier. And also the Viking was a big undertaking before all the inflation effect and also the difficulties of the long execution time that we had. Now if I exclude these 2, I would not be completely, let me say, correct, but I can give you an approximation, these would affect our percentage at least by 1 point. But of course, then the question is, if there is another upside replacing these versus our normal rate of percentage, we could see another percent on top. But it is very early to give you an approximation for the coming year. But the only thing that I can tell you as we had said also in the past, this business deserves 13%, 14% of margin in the mid-term. And we are opting for that. If the market is staying as such, we can go also beyond. But it is early to say the beyond part, but I can say that we have a solid 12% with the existing portfolio for this year.

We'll now take our next question. This is from the line of Akash Gupta from JPMorgan.

I have a few as well. And the first one is also on North America. Valerio, when I look at the Slide #5 and look at your first half margins in North America, 16.9%, I mean, probably you and I both know that these margins are unlikely to be sustainable in the medium- to long-term view. Maybe I was wondering like when it will normalize, what do you think could be a good level for us to think about in this business in the medium to long term? And on the same topic, I also wanted to ask one of your listed U.S. peer reported results yesterday, and they had 500 basis points gross margin decline in second quarter, while if you look at your North American margins, you are still pretty good. So maybe if you can also explain the discrepancy between what is driving this performance at yours, while some of your competitors are turning a bit more cautious on U.S. outlook? That's question number one.

Okay. If you -- Akash, thank you for the questions. If you consider the other big North American competitor, of course, we are acting in 2 different segments, namely T&I, distributors for construction. But whereas we are working on distributors, serving them with aluminum cable, the voltage and medium voltage. The competitor you are referring to, I suppose, is acting on copper. Copper construction, copper cable for construction market and, consequently, are much more volatile and low -- potentially low margin. Sooner or later, the cycle goes to an end. And that's the end of the construction market in U.S. For us is mitigated because our participation to the industrial business, but it's written in the numbers that the market is reducing with speed. How long it will take? I don't know. I don't know, you either. But the U.S. economy has always been able to change quickly the approach, revamping rapidly from the bottom and increasing quickly the performance. So I'm not scared very much. Of course, we have to consider it because it's something that we have always to take into consideration. Reason why? Today, we are happy, but cautious that in North America for T&I market, the party may be over or may become softer. Frankly speaking, I'm not scared of too low because on the contrary, the Power Distribution is growing very well and the Overhead, too. Consequently, Energy in North America overall has a long way to go because the network in the U.S. is pretty unstable and unhealthy. The investments there have to be realized. Did I answer to your question, Akash?

Yes. No, I think that helps a lot. And the second one I have is on Projects, and I'd like to look at this more on a rolling 12 months revenues. And here, if I look at rolling 12 months revenues now, you are at EUR 2.4 billion compared to EUR 1.8 billion a year ago, and we have seen very, very strong growth already in last 4 quarters. The question I had was that when we look at the next 4 quarters, can we replicate this type of growth in the next 4 quarters? Or what is the indication, because you have a very high backlog? So I'm sure -- I suppose you've a good visibility, but just wondering if you can help us what sort of growth we are going to see in revenues of Projects in the next 12 months.

I said to you during the presentation. It's clearly a growth that is written in the stone. It will take a while to shrink, but the growth of Project is secured. It's secured by the order backlog, but moreover, by the continuous debate we at all level are having with customers. Customers are really keen in securing the capacity. The problem is how fast are we going to follow. I don't like very much to be fast in that because the risk is that if the market is going to turn sooner or later, it will, we have not to be too much exclusive, simply that. But for the time being, in the horizon, I can see today, I'm not talking about orders, I'm talking about the horizon of the business. My opinion is that 5 to 10 years are secured. Hakan, would you like to add something?

Yes. Valerio, you said it very well. The beauty of the Project business is that you have visibility. And the backlog is the guarantee of the visibility if you execute well. So you see that we have a strong backlog, and there is a strong backlog not yet converted into real backlog, but it is still waiting some conclusions of terms agreement, which will also add to the backlog in the coming months. And if we say this, the next 12 months is, I can say, guaranteed versus 5 years or more horizon because we have a visibility which is pretty long. So therefore, the 12 months, I think, is there. But I just want to underline the backlog is not only -- the only driver. It's also the capacity. And the main ramp-up in the capacity is not going to be next year, but the year after. But of course, next year, we are seeing some, of course, growth but the main growth we are expecting after next year.

Execution. Akash, the real goal is to make a perfect execution now.

Yes. No, I think that's very loud and clear. The final one I had was in North America Telecom CapEx outlook. I mean I'm sure you have seen the press reports that some of the large telecom operators are maybe facing big cost to clean up the lead pollution coming from the very, very old telecom wires or cables. How do you see this maybe adding to the slowdown in North America we are seeing? And how any implication on Prysmian Telecom business? Any thoughts there would be appreciated.

I leave the floor for -- the answer to Philippe that is here.

Akash, yes, of course, we've seen that. It's a bit early to answer. So the investigations are ongoing by our customers in the U.S. What I know for sure is that first, it's about very, very old products. Second, I understand that it's less than 10% of the installed cables that they have in the U.S. And we don't really know the consequences that this lead could have actually on the reality of the field. So it's a bit early. I do not expect an impact on us from what I know today. I think it's -- it would be more a bit prudent to take an appointment in the next quarters to update you on this because it's very recent, and it's quite technically a bit complex item. So let's be careful here and say we rediscuss in the next quarters because I don't think anyone really knows what it's about. For sure, it's very old products. And for sure, it's a limited impact compared to the footprint that our customers have in the U.S. That's all I can really say today.

Overall, Akash, I'd be very surprised if it will create to some of the players -- to our customers losses. Maybe that will -- they'll be forced to substitute those cables that are at least 30, 40 years old, even more, more rapidly.

Yes, I think that could be the conclusion, but let's -- we will update you.

And that with common sense.

Yes.

We'll now take our next question. And this is from Daniela Costa from Goldman Sachs.

I have 3. I will ask them one at a time. But starting out, you mentioned sort of the EUR 500 million historical dream on free cash flow. Now you have way bigger backlog. You mentioned on the -- what run rate where the margins could get to in Projects. What's -- do you have a reference point that you can give us now where do you think when this backlog is when we're at 25%, 26% and this is in sort of steady-state execution of the backlog? Where do you think should be a fair place to be? That's my first question.

Daniela, you know me since years. Never enough. Now we are at EUR 500 million, a new target for free cash flow have to be the net profit.

You mean 100% cash conversion?

No, no, no. Not exactly. Net...

Of net profit is logical, should be close to 100%. But I think there is -- let's enjoy the EUR 600 million level. Let's also keep in mind that in -- of course, we are on a very nice and satisfactory path in terms of cash generation because it's a very positive combination of elements, very high margins, strong volumes in some businesses, but as you have seen, not overall huge growth, which is also pretty good for working capital. We have also slightly declining level of raw materials, metals, for instance. We have large awards in the Project business, which is, of course, now reaching our cash position and our cash flow significantly. So all this is very positive. Let's also keep in mind that in the next years, we will need to take significant investments to face all this. This is very positive. I mean this positively because it will be certainly a very good use of cash then I tend to believe that there is no organic CapEx, which can deviate us from a steady growth of our free cash flow. So -- but let's wait a little bit before fixing or setting the next level, next from the EUR 600 million, which is already a fair achievement, a fairly secured achievement for this year. And I think that the Capital Market Day that we'll hold in early October will be the good occasion to update this.

Daniela, anyway, you know that I like the very simple highlights. If it's true that we are going to reach EUR 2 billion EBITDA, EUR 2 billion EBITDA, the same way I did the EUR 500 million free cash flow. EUR 2 billion EBITDA minus EUR 500 million CapEx as a minimum, minus interest and taxes. It's something around -- between EUR 700 million and EUR 1 billion. This is my opinion. Then obviously, I leave the floor to my colleagues.

To execute.

To execute. I did my job.

All right. This is great color. Actually, sort of the other question I wanted to ask is as you mentioned in the beginning, very different cycles and volatilities between Telecom and Energy. And can you remind us sort of what are the cross links between these businesses? Why does it make sense to have them together?

It's a matter of synergies, basically. When I took over the Energy cable, Telecom was completely separated. And we merged before the transaction with good result. In the merger, we have been able to reorganize the combined entity quickly, reducing the cost of discharge. Now the size of the Telecom is not big enough yet to sustain its own organization because the independent organization from Energy all around the world needs a lot of people, a lot of organization and consecutive costs. That's why we are keeping that together. Maybe that if the size of Telecom will grow and can grow only via acquisitions, at least, we can consider they possess risk. Philippe has just...

No, yes, Daniela, in terms of markets, there are also some synergies, I have to say. It's not only about cost. We see the emergence of some hybrid solutions that need both Telecom and Energy products in the market. And also everything that is related to sensing, for instance, is important for the smart grid, for Hakan's business, for -- run the business and we need fiber in this solution. So there is also a product synergy on top of the cost synergy. Just to add some color.

Yes. Sorry to complement, Philippe, there are real use cases in the market where both Energy cables and Telecom cable are needed for the use cases. Data center is the main. For data center, maybe electricity is to be run to run the servers and optical cable to sharing information. 5G deployment is also a strong use case where electrification is required for the device and plug up with antenna. And besides the use cases, most of our customers in the United States distributors would like to buy common products or the full spectrum of product from one supplier. So we are unique in this sense. We can provide this customer with the Telecom cables and Energy cables, not necessary for the common use cases, but because customers want to have a one-stop shop position with price. So that is the main reason business-wise why we keep this on top of the internal synergies, consequently, to bring operational synergies. The market is converging in this sense, Daniela.

Daniela, are you satisfied with our answer?

Yes, very satisfied. My last question is quite quick and it's just a clarification. I mean when you mentioned the high voltage 13%, 14% or maybe higher margin, you're talking Project margins there that you're seeing in the backlog? Or you're talking the division? I'm thinking specifically you have to ramp up a new plant around that medium time frame that you talked of '25, '26, I guess, when you were talking about the EUR 2 billion. But this is also coincidentally when probably your U.S. factory comes on stream. And we've just seen your main player trying to ramp up their own U.S. factory, your main peer, and then having sort of temporary lower margins. I just wanted to make sure the timing this sort of '26 time frame when U.S. comes is when you -- what you are kind of talking about that there's no hit from bringing new capacity on into the margins.

Daniela, ramping up a factory for submarine cable is never an easy task. It will take time and a lot of problems to be solved. Consequently, I'd not be surprised if we are going to try to evolve. But if there will be some delay or some reduction of the margins temporarily, but that's the life.

Okay, Valerio, if I may add to the question, the 13%, 14% is, of course, in a stable condition. And this will -- we are targeting this not very long, very far. So first, we have to go up to the 12% level and then the 13%, 14% is going to be on a capacity that is up and running. There are, of course, also some considerations, as Valerio was saying, if the production is going to have some hiccups, but we are also counting on some precautions that we will avoid to have these. On top, it's not only the plant, but we have to have good contracts. The delays of the plants can create problems into the contract. So if you have better position in the contract, then you can avoid also these effects in your P&L. So I think our capacity, if everything goes right, the coming, let me say, '25 is going to be the year where we are going to have capacity increase. The first step-up. And these are for the existing, let me say, fast facilities, we are adding lines into the existing facilities, which is relatively, I'd say, relatively, it's not easy but relatively easier than a greenfield facility. So therefore, we are counting very much on the step-up on '25. And then hopefully, we will see '26 and '27, another step-up. That doesn't mean that in '25, we are going to stay where we are in '23. We are also going to grow, hopefully, if everything goes right, but the big step-up is on '25.

We'll now take our next question. This is from the line of Monica Bosio from Intesa Sanpaolo.

I have 3. The first is now the company is fully deleveraged. And I was wondering if you can share with us some considerations regarding the capital allocation ahead in terms of external growth and if you're going to plan at some acquisition, in which field would you be keen to finalize an acquisition? The second question is on the Telecom segment. When do you feel that destocking might come to an end? Could be beyond 2023 or maybe just close to the last quarter of the current year? And I have another one in the -- as for the solar business, can you please quantify in the industrial renewables segment, which is the portion of the solar business for you?

Thank you, Monica, for your question. Point number one, is true. We are going down in terms of leverage. I like a lot because I don't like a very high level of debt. And most of all, I like if the company generate cash. If the company does not generate cash, the results are not results. What about the capital allocation from now on? First of all, we have to deal with the increase of CapEx. You have seen that in our balance sheet in the last 12 months is already almost EUR 500 million CapEx. It may be sufficient. It may be even insufficient. It depends on the development of projects basically. But for the time being, I used to keep the max level of CapEx around EUR 500 million. When we are going to see that the market is continuing to grow? Of course, we have to review it. M&A, once you have the cash, you have the pleasure to think about even M&A. Till yesterday, it was a suicide because the first goal is buy cheap. And that's a hitch that the government is sustaining, right? Maybe that you are going to increase the value. If you buy high, you have good probability to lose money. So in M&A, till yesterday, everything was very expensive. And the counterparties were looking at valuations that were out of the moon. Now if we have the money, and you have to have the money at the proper time, we can look around and see if there is someone that is in financial problems. Listen, we closed 2 big deals, the first one Draka, and the second one, General Cable. When? The first one, Draka, comes after the big bubble of 2008 and the consequent slowdown of the market the year after. In 2010, end of 2010, beginning 2011, we have been able to close the deal. More or less the same for General Cable. It's only when the market changed, the interest rates are high and the debt for someone is too high. That's the good season to buy. So we are not having yet anything substantial events. But we are -- we have the balance sheet to do it. That's the point number one, In which fields? That's more difficult to say and I prefer not to tell you because otherwise our competitors will understand and maybe will act against us. Thank you. For point number two, I leave the floor to Philippe.

Hello, Monica. The slowdown of the American market, as we understand it, is due to 3 things. First, an overstocking during '22, as Valerio said. This is the first main reason. The second reason is that the public funding in North America for broadband networks have been taking more time than expected to become a reality. So the first one in terms of deal of time is still going to take a few months. So I'm expecting still a couple of quarters of destocking. On the second one, the President Biden said that it should be all available concretely on the field by mid-'24, the EUR 42 billion of public funding for the broadband network. So this -- the second one is more mid next year. The third element, which is much more difficult to predict is that there is, of course, also an effect of the cost of money on the investments. And you know the interest rate better than me, and the interest rates are still being increased regularly and that can delay further. So the ballpark answer to you is I think it will last until more than the end of '23. My best guess today would be half mid-'24 seen from today, with the uncertainty linked to the cost of money that is not, of course, under our control at all. And this is essentially for the U.S. market.

Third question, the solar. Juan, would you like to give an answer to Monica?

Thank you, Valerio. Hello, Monica, this is Juan Mogollon. So in regard to the solar, I want to expand a little bit on that so that you can get right to the -- yourself in the -- the answer to your question. So if you think about our segment of renewables that includes solar and wind, we think of it in 3 pieces. The photovoltaic cables that go into the panel, then the specialty cables that are in the power and the nutshell of the wind turbines and then the medium voltage cables that connect the parts into the grid. About -- that whole chunk is about EUR 800 million, of which about half is in the solar -- excuse me?

Sorry, can you repeat the EUR 800 million?

EUR 800 million. Yes, in the segments that I just mentioned with the solar and the turbines and then the medium voltage. Specifically to your question on the solar, it's about half of that, and that includes the photovoltaic cables that are close to the panel as well as the medium voltage. Before you start doing the math, we sell some of that through the PV channel and some of that through the industrial channel. And also a small portion of that, specifically in North America, sub-Europe through T&I.

We'll now take the next question. This is from the line of Alessandro Tortora from Mediobanca.

Yes. I have, let's say, 3 quick question, also some follow-up. So the first one is on the Telecom that you discussed just before. Considering what you told on the destocking in the U.S., but also the other factors, is it fair, let's say, to assume by year-end probably that Telecom could get, let's say, organically speaking, a decline in the high single-digit area? So just to have an idea of what's your updated expectation on Telecom. That's the first question. The second question is on the CapEx. Considering what you already spent in the first half, clearly a CD LTM, but just a confirmation that this year, you are going to have this, let's say, EUR 700 million impact in terms of cash out for the CapEx? And the last question is on Germany. I read the newsletter, okay, from Prysmian where it seems that installation in German corridors should start in the second part of the year. So I would like to have, let's say, the confirmation of this message.

Thank you, Alessandro, for the question. First question, Telecom, it's fair to assume that year-end, we are going to have a single-digit organic decline. Philippe?

The answer is yes.

The answer is yes. So the brutal answer is it's a simple and clear answer. Sorry. In the second half.

Second one.

Second, CapEx. This year, EUR 300 million cash out.

EUR 500 million.

EUR 500 million. Third question, Germany, installation is going to start in the second half this year. Hakan, question is for you.

Okay. The installation is going to start next year. We announced this in the newsletter that we have sent out. But specifically, third quarter '24, there are still discussions about if we can anticipate because the German politicians are putting a lot of pressure to the TSOs. And we are trying to find solutions together with the customer to enable their targets. So officially, I can say that '24 September is the current -- what we can see as, let me say, in our programs.

I would like to start the installation this year. But unfortunately, it's something not viable for our customers in terms of permits. As simple as that.

We'll now take our next question. This is from the line of Sean McLoughlin from HSBC.

Firstly, on returns on cash flow, would you give back to shareholders in the absence of M&A cash that you generated above CapEx? And secondly, a broader question around the investment grade credit rating. You've talked of this as an enabler of strategy. Just to understand a little bit, what does this actually change apart from, I guess, cheaper debt or maybe wider availability of debt instruments? Are there maybe some concrete areas or examples that you can give where that would be -- where that would make a benefit?

Thank you, Sean. Return to the shareholders, of course, are not our money. We cannot split between the management and the money of the shareholders. And as a consequence, if no M&A, I doubt we wanted to keep too much money in the pocket because we can become a target and consequently, a buyback or other instruments may have a sense. Frankly speaking, I believe that in the next 12, 24 months, someone will come to the door -- some of our competitors may come to the door, looking here and there. And in that case, the cash is going to go. For the second question, I leave the floor, in my suggestion, to Francesco.

Sean, benefits of investment grade are very clear. I'll give you some practical examples. First of all, there is an issue or there may be an issue of access to capital markets that we have seen very recently. When the war Russia-Ukraine broke out, it was totally impossible for a non-rated issuer to issue a new capital market transaction like you trade your bond, for instance. And now -- even now, the accessibility will be extremely limited for a non-rated player and certainly at a very significant cost. A little bit differently from the convertible bond market, which traditionally is more accessible also to non-rated players. Secondly, there is a clear issue of cost. Whereas for the loan market, loan market I refer to the bank market, yes, there is an advantage coming from being rated, but this advantage is not huge, is I could quantify this in a few tens of bps, all right, 20, 30 basis points. In terms of capital market issuance, again, euro -- straight bond in euro, I think that's the difference between an investment-grade issuer. A non-rated issuer now is certainly higher than 1 percentage points, which is a huge thing on our last bond that we didn't, by the way, refinanced, which expired last year, was EUR 750 million. Of course, now there is no -- we have no real need to resort to the capital market for bond transactions because we are very -- we are generating a lot of cash, we are very much focused on our earnings and organic growth that we can self-sustain ourselves. But of course, strategies evolve. So in case of need to issue a bond, the advantage that we face in this environment is very, very significant. If we look back a few years ago, the advantage was not this big. And this, by the way, explains why I take the responsibility of this. I have always a little bit postponed the rating process because the concrete advantage that we would have achieved 2, 3 years ago was not as evident as it is now. Now it's very big, very big.

We'll now take the next question. This is from the line of George Featherstone from Bank of America.

I'd just like to start, if I can, on...

Sorry, George, we cannot hear you very well.

Can you speak up, George?

How about now? Is that better?

A bit better.

A bit better.

Okay. Hopefully, it comes okay. I just want to follow up a little bit on the comments that you've been making about the U.S., in particular the T&I business. You talked of normalization. Where do you think that normalization goes from here? And do you have a sense of where the market ultimately ends up? And also, can you talk a little bit about sort of competitive dynamics in that environment? There's at least 1 pair of yours, you've cut prices, again, I think, in the quarter at a double-digit rate, and that seems to be to kind of satisfy a certain level of volume. So I'd just like to hear from you what your thoughts are on that.

Okay. Thank you, George, for your question. At least for the first question, I leave the floor to Massimo.

Yes, George. Thank you for the questions. So the normalization, we think will continue for the next couple of quarters. It is worth saying that what is said before about the competitors, it's not applicable to us. So we haven't seen that. Certainly, a 30% reduction in price that a competitor that you are hinting at as of from quarter 2 over quarter 1 because we are in a completely different space. We are not in the residential market. We are actually in the residential market for a limited share. So we monitor their market. But we again confirm that the price reduction in the market has been the one the competitor has mentioned is actually a SOFR. But luckily, we are only 5% in total revenue exposed to the market. So what we've seen is a completely different scenario. We've seen a 5% to 10% price erosion in the space we are in. We think that this type of percent will continue with another 5% to 10% over the next 6 months. And then that could be the end of the story. But bear in mind that we are in different spaces. The residential market in Canada, of course, very, very much under pressure, in U.S. as well is a different market than the one we are in. The industrial plant business, the commercial buildings, the infrastructure market is a different business base. The market demand is still very strong, supported by infrastructure investments by the taxes from the government. And the price erosion is only happening because the supply chain has normalized, not because the demand is weakened. That's why we think that the trend of price erosion that we see so far will continue, but to the extent that I mentioned. I hope I answered all your questions.

Yes, I didn't -- sorry, there's a couple of things I didn't quite get then. Firstly, the competitor I was talking about, they have about 1/3 of their business in the U.S. is residential. So it was -- I was kind of hoping that you could give us a little bit sort of indication what you're seeing in your other markets. But I think I heard you say 5% to 10% price erosion. Is that right that you saw in the last quarter?

Yes. But in our space, George, in the residential space, I confirm what your competitor has said, 25% to 30% reduction of prices in the compact cable business for residential use. And as I said before, we are only 5% in revenue as opposed to the market. But we watch it. In our space, so in the 94% remainder of our revenue, we've seen only 5% to 10%, right.

Okay. That's really helpful. Then in -- sorry, yes. So then in the Project business, there's been a lot of news flow recently about offshore wind project cancellations and delays. I just wondered if you see any risk in your backlog and then maybe you could talk to what customers might be saying to you around this.

Hakan?

Okay. Thank you, Valerio. We are talking about a big, big, big, let me say, market where there are some waves in that big market, which does not affect the size of the market. I don't know if I was clear because the market of offshore wind is growing significantly. Therefore, you're going to hear some project delays or some project cancellations, which you are mentioning and you are referring to, I guess, but it's not going to affect the total market overall. So from our perspective, we don't see any, let me say, significant fluctuation affected by the single event that is happening. So we have a solid backlog. Of course, when you look to our backlog, which is very, very strong, there may be some 1, 2 small changes, but it will not affect the substance. So this is the same effect also in the market. So I don't -- we are not affected by these changes as of today. And I don't see that this will have a significant effect also in the totality of the market -- of the world market. But of course, we will see, we will hear and we are hearing some cancellations, which is normal after the inflation and also the interest rate, but the market is very solid. This is what I can say. And our backlog is also very solid.

At the end, [ George ], that's the result of our prudency in showing a backlog that is based only on projects with notice to proceed and advanced payments. So the worst case is that we are going to keep the advanced payment.

And also cancellation fees.

And cancellation fees. But we are not -- we have not sold what was not in our hands. That's our style.

Okay. I guess the one project that sort of would come up was the Commonwealth Wind, offshore wind farm. I think some developers there are actually paying to have that PPA canceled. So is that something that -- certainly, it's rumored in the press and you have this not official. Is that something that customers are -- when you think about the slots that are available, you can work around if they want to defer and maybe come back at a later date?

Okay. I can comment on Commonwealth Wind. But of course, offshore wind is -- has different stakeholders. One stakeholder is the lease owner, the other stakeholder is the buying party, the PPA contract holder, and it's a complex environment. The -- what is happening with Commonwealth Wind is very well known in the market that the PPA has been canceled and, therefore, it's under renegotiation through the new tender that is coming out in Massachusetts. But the lease area is there. So that means the energy is going to be produced. But who's going to be the buyer is going to be decided by these tenders. So from our perspective, first of all, Commonwealth Wind is not in our backlog just to underline because as Valerio said, we are only putting into our backlog the projects that have NTP. So there is a large chunk of, let me say, projects that we are having on top of the backlog that is waiting to be transferred to the backlog. And therefore, this is, for us, it's not effective on all the, let me say, projections that we make. And regarding the Commonwealth Wind, I am sure that in the beginning of next year, the -- let me say, the picture is going to be clear and we will see. But still, we are part of the contract. So we are still -- if there is going to be built a wind farm and the energy is going to be sold to one of the states, not necessarily to Massachusetts because it's a strategic area, we will be building that with our cables and we are going to do that. So it's a little bit complicated to understand the mechanisms of offshore wind, but especially in the U.S. because it's very new and it's a little bit different than the other countries. But overall, first of all, it's not in our backlog. Second, if there is going to be a wind farm, we are the one who's going to connect it.

We'll now take our next question. This is from the line of Miguel Borrega from BNP Paribas Exane.

I've got one on E&I and the second on high voltage. So let's first with E&I. I just wanted to understand the sequential margin increase. So from Q4 to Q1 to Q2, you've seen sequential margin increases in E&I. So what drives this? Because if I look at Q2, organic growth was negative and even in North America in the first half was also negative. You've been talking about pricing coming down for some quarters now. And you mentioned down 5% to 10%. What about volumes? Are volumes also down in North America, in E&I specifically? That's my first question.

I'll leave the floor to my friend, Juan, to give you an answer.

Miguel, this is Juan Mogollon. So your question, there is about 3 questions embedded, so I'll try to break them down into pieces, okay? Your first part of the question is in regard to the sequential price -- I'm sorry, the sequential growth from Q4 into Q1 into Q2. And then there is another piece of it has to do with the growth in terms of how much is volume and how much is price? Okay. So let me break it into 2 pieces. In the E&I business, essentially, we have 2 segments, which is the T&I and the PV and the Overhead Line. The PV and Overhead Line in the last 3 quarters that you mentioned is we have seen sequential growth, primarily on price. Volume has been about flat because remember, we have said in the past that it's the volume in PV that has been constrained by capacity, capacity, which will be expanded next year. However, we continue to gain a structural price, a price that is embedded in the contractual agreements that are in our order book. The piece of T&I, yes, we ask my colleagues and Massimo and Valerio have said in the last few minutes, we have seen some deceleration, in fact, some softening of the T&I piece in Q2. The volume has been about the same, I would say, maybe a little bit of softening in Q2 in the volume. I'm going to stop now because I want to make sure that I addressed your specific questions.

Yes. That's great. And then a follow-up, just to confirm on your guidance that it doesn't integrate the big normalization in the second half. So kind of stable performance in the second half versus first half.

Yes. First of all, I don't like the word normalization because it's defined differently by different people. But let me tell you what I call normalization, essentially more like a moderation of the price based on the tension between supply chains and the bank. Now in the U.S., we've seen some of that. And as Massimo said a minute ago, our U.S. market is not the residential. If you compare it with our peer companies, they have seen a more dramatic, but that's because they're closer to the residential piece of construction. Our T&I in North America is primarily infrastructure and a big chunk of data centers. On that, we don't see a dramatic, what you call, normalization. I don't see that coming back in the near future to the pre-COVID era, as an example.

Yes, there is a point, Miguel, to make. You were commenting the stabilization of second half versus first half in relation to the overall guidance. If you look at the guidance, that kind of will be true because we've done almost EUR 100 million first half. And even if you see the top of the range of the solar guidance, this will imply another EUR 800 million in the second half. So there is some normalization in the overall company performance, which is, as we said before, related associated to this T&I normalization, which will be partly offset by the other segments. Also Telecom will come in with some continuation of the softening. So the second half, that doesn't at all confirm stability, although we believe that we may end up with a better number similar to today. So I think that was important to set a little onset for the guidance, right?

That's very clear. And then secondly, on high voltage. You had a few big awards recently. What can you tell us about the implicit margin of those projects? Would you consider them higher margin versus previous ones when at the time you were tendering? Or is it more a question of being fully loaded in the future that makes a difference to get to that 14% and perhaps beyond margin? And then maybe some thoughts on the terms and conditions of these awards that are going to be commissioned in 2028, 2029. Obviously, a long time away. So if terms and conditions changed in any way, just to understand how comfortable you are to fix the price on those projects so many years away?

Hakan, you're free to give an answer.

Yes. Thank you, Miguel. First of all, everything is relative. I mean if we look to the pricing 4 years ago, of course, there is an improvement. And when we are targeting 13%, 14% of EBITDA margin, yes, these projects do reflect flawless -- in case of flawless execution, a superior, let me say, EBITDA margin in the range of 13%, 14%. If everything goes well, as we said, it can be also more. But having said so, let me say, the -- I cannot specifically tell you about how much the margins are, how much they are better. But I can confirm that they are because there is a different market. As you know, 3 years ago, it was, let me say, a buyer's market. Now we are in a seller's market because of the demand and supply situation. And when you look to the Ts and Es, of course, they are reflecting the same. So the conditions, of course, as Valerio said, we are very selective in taking orders. And we are selective not only in the price but also in the terms and conditions. And if the projects are not reflecting the required terms and conditions that we are seeking or the price is not enough in -- according to the market condition, we prefer not to take it.

And then in terms of the -- those contracts to be awarded in 2028, 2029, I mean, just to understand how comfortable you are with those fixing the price so many years away.

I can tell you, we have learned a lot during this inflation season. We went through an unprecedented inflation season. And we learned and we integrated into our customer -- into our contracts. And also, our customers have learned a lot from that situation because our customers learned that they need us to complete their ambition, their targets. And therefore, I think with the new contracts we have, first of all, we are more precautious. Second, we know what can happen with inflation. And third, we have some mitigation measures inside the contract. So therefore, we feel comfortable for the future. But again, you never know what is going to happen in the market. It can be that we are going to see another unprecedented situation. Then we will face that at this time. But as of today, we feel very comfortable.

[Operator Instructions] We'll now take the next question. This is from the line of Vivek Midha from Citi.

I have one question following up. You have exposure to data center vertical in your different businesses. What trends are you seeing in this vertical in the near term? And do you expect midterm benefits of investment in artificial intelligence capabilities? And if so, when do you expect this to kick in?

Vivek, I'm sorry, but I did not understand very well your question. I don't know if Philippe has understood because the line is -- your line is a little bit disturbed.

I think -- I mean you asked about the trend in data center, whether the artificial intelligence development will serve, of course, to bolster it, and that's for sure. We'll see a growth in trend in data center, especially in United States, in some European countries. It's a trend that we'll monitor closely because, as we said, we are the unique player able to service this segment with energy cables, with a voltage and megavoltage to electrify the building for the company, the office cable data center and with the inside plant optical cables and copper cables. It's a great market opportunity for us and we are on top of it.

Okay. Massimo got to the point.

Yes, I could add, Vivek, that we are already addressing very much this segment, and we see it growing. There are -- we see also growing projects that are about interconnecting hyperscale data centers, one to the other that are already on and very public and we participate into this market, yes. So yes. We consider that one of our main -- one of our main engines for both Telecom and Energy in the coming years, as Massimo just said.

And there are no further questions at this time. So I will hand the conference back to the speakers.

Thank you very much. Thank you to all for having been participating to our first half conference call. It has been a pleasure as usual. And next time, it will be -- see you in Naples at the Capital Market Day. Bye-bye.