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

Good day, and thank you for standing by. Welcome to the Prysmian Full Year 2023 Financial Results Conference Call. We have on line with us Valerio Battista, CEO; Massimo Battaini, designated CEO; and Pier Francesco Fatima, CFO. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Valerio Battista. Please go ahead.

Thank you very much, and good morning to everyone. Gentlemen, this is my and Francesco's 68th quarter results call. After 17 years, we are still here surviving and managing the company. So let's go with the result. You have already seen from the press release our EBITDA reached EUR 1.628 billion, with, let me say, obtaining the 10.6% margin. The net profit reached EUR 529 million, and the free cash flow, that is one of the most important chapter of our management, is EUR 724 million; ROCE, 23.1%; dividend proposal for the shareholders, and as you know, I am one of the list of shareholder of this company, EUR 0.7 per share with a 16.7% growth year-on-year. Last but not least the greenhouse gas emission. That's a very sensitive chapter for me at least, with a reduction of 33% on Scope 1 and 2 and 10% on Scope 3. The results, as you can see on the right side is growing, is growing pretty well with a strong cash generation. The cash generation is our main driver. That is there is no results if there is no cash attached to. Next, please. Flipping to Page 2. The margins of our original segmentation. Finally, in projects, the EBITDA reached EUR 300 million. The margins are not outstanding because are still at 12% in a good progression compared to the same quarter 1 year ago but not yet at the 14 plus we are engaged for. It will come, but it's a matter of time and a matter of capacity. So EUR 300 million with 12% is a good step forward towards the 5-year plan target that we confirm. We confirm also because the order book has become almost EUR 20 billion and EUR 20 billion means that we are with an output that we reached EUR 3.5 billion per year are a number of years of certainty in terms of business. Energy. Energy is the largest chunk of our business. The sales reached EUR 11.3 billion, with an organic slight decline of 1.3%. But that it's not terrifying us. It's not a bad sign. Why? Because the demand is better. Now I'm talking about January, February, since that the demand is not so bad. Of course, the slowdown of the North American market price for T&I is significant, is in place, but is largely compensated in the energy business segmentation by the power distribution. You can see also in the industrial, industrial network component, organic growth is plus 1.7%. All in all, the EBITDA reached EUR 843 million, with an outstanding 11.1% EBITDA margin. And in the Industrial & Network Components, EUR 361 million with a 10.8% EBITDA margin. Very well. Telecom -- the detriment was -- happens, guys, it's not the first time that we see the Telecom in negative swing very strong. But as well as this strong decline usually is quite strong also the pickup and the recovery. That's the life. EUR 140 million only after last year at EUR 271 million, the volume in half 2 have been very low, especially in the U.S. Moreover, we had some one-off exactly to affecting the Q4. But if it's a ticket to be paid to solve the issue, I can tell you that we are quite strongly defining our restructuring plan for the Telecom at least in Europe. All in all, organic growth, minus 1.1%, almost flat, with an adjusted EBITDA of EUR 1.628 billion, 10.6%. Very good. Now is my turn to leave the floor to the CEO designated, Massimo Battaini because you have to get more color from him because he's going to manage the company after my leave. Thank you, Massimo.

Valerio thank you, and good morning, everyone. I'd like to ask you a little bit of an effort because now we have to forget the item that we discussed thus far and get acquainted to the new segmentation, transmission, power grid, electrification, digital solution. You see the new names and the faces actually, you recognize that all of them have been work as CEO, regional CEOs in the last 5, 10 years. So they are experienced people that will bring to the center to lead the market trends and their impact in our organization in our business streams. So here is the picture of the new segmentation. I thought we were -- it was good to provide you with an historical trend. And I think '21, '22, '23 are enough years to make you appreciate what is going on in these 4 segments. So starting from transmission, you see a continuous growth in EBITDA absolute value, EUR 170 million to EUR 230 million, EUR 270 million. You also see a slight deterioration in EBITDA margin, which in '22 was a result of the high inflation that hit the business with the fixed prices. In '23, to be honest, we were not expecting this light further deterioration, which is particularly related to 1/7 of the business, the internalized business due to having innovative sun projects, whilst installation was a bit complicated by delays and other effects. And shortly, you will see '24 this 12.9% resuming around the level of 14% and building the trajectory and the way in the path towards the 15% that we mentioned to you at the Capital Market Day. EUR 273 million is not where we need to be in '27. We still have EUR 200 million to achieve, to achieve the EUR 600 million EBITDA by 2027, by the backlog that we show you in a second is the strength that we have behind this segment. And we and the confidence that we will get there. Power Grid made -- we made a fantastic job in '23. With 11.5% EBITDA margin twice as much what we used to have in the past. And us targeting EUR 390 million. And if you remember, our goal by '27, which was EUR 400 million, then you see how close we are to the target that we set for '27 and it is obvious that we hinted the fact that we will certainly beat that target much earlier than 2027. This is the result of a strong negotiation across all utilities, contracts to reflect inflation and also additional contribution coming from the smart grid, the solution system provided approach that we applied to this power gen space. Electrification also here, I think we have to acknowledge a fantastic job because we have been able to offset entirely the industrial construction, so the format C&I price normalization in North America, with additional upside in specialties, the former industrial network component, and this is visible from the level of EBITDA, which we had at EUR 800 million despite the price normalization. Digital solution is fully overlapped with the telecom business. So I will not comment further. What we can comment that the 9.4% EBITDA margin is certainly very low. '24 is expected to be higher than this 9.4%. Let me move to one important component of the transmission division, for the backlog. The slide represents the position we had at the Capital Market Day, 20 billion backlog -- EUR 20 billion, sorry, order in hand, as you remember, made of EUR 10 billion of backlog. So orders with notice to proceed and EUR 10 billion of orders, we announced to proceed with high confidence because there was solid commitment. You see that today, meaning 4 months down the road, we are very close to EUR 20 billion, namely EUR 18 billion of backlog. So we have converted high confidence, high solid commitment project into backlog in just 4, 5 months. With this big a backlog, not only we have full coverage, the revenues that we need to have in the next 5 years to achieve the EUR 600 million EBITDA, but we go well beyond 2027 in terms of coverage of the revenues and of the capacity installation and manufacturing capacity that we're going to bring up to speed in the coming years. Let me shift to another important topic for us. You see here the 2 pathways of the Scope 1 and 2, so our internal emissions and Scope 3, the mission of our cables in operations. Scopes 1 and 2, we are happy to confirm that we will increase significantly the target by 2030 from 47% to 55%, 60%. So maintaining a good pace and making the goal of 90% decarbonization by 2035 really achievable. Equally important -- even more important, I would say, for us in the Scope 3 because these are the emission of cable and operation, which are the mission-important to our customer, and we are working ending with our customer to provide innovation and innovative solution in terms of cable with a carbon footprint to help them achieve their sustainability goals. This becomes an important lever to make more -- or to generate more business opportunities with our customers. Our overall sustainability journey and program is made of 5 streams of activity. I will not dwell on the numbers, but maybe I'll draw your attention on the first stream of activity, which is the role that we have as the enabler of the digital solutions, digital transformation and energy transition by connecting homes, by connecting households with green electricity and with the digital solution. You see the 1 million homes incrementally growing as we deploy our payables to connect houses and bill. I will draw your attention also to the 2 center streams. The Scope 3 emission which I already talked about, we will -- we are heading for a minus 23% reduction in 2027. So this 23% will provide significant help to our customers to achieve their goals. And to achieve the Scope 3 emission reduction, we also work on sustainable products on recycled material on recycled cables, which is the next stream down there in the field. Last but not least, let me share with you how excited we are about the 46% shareholders, employee threshold is an unbelievable target. The '27 target is probably very easy to achieve now with a 46% already scored now. In fact, we will beat it, and we will announce it. This, including white collar staff management and more importantly, blue collar workers. Guidance. EUR 1.575 billion, EUR 1.675 billion is a short range, EUR 100 million, which is what we consider the proper guidance for 2024. Two main consideration. The midpoint is exactly in line with the results achieved in 2023. So we are confident that we will at least deliver in '24 this same result in '23 despite the normalization price in the Industrial Construction, the telecom and the rest. And it seems ended up better, we will certainly fall into the second part or the top part of the range. The second point is less visible to you. By the time of the Capital Market Day, we had in mind that for '24 a completely different number. It was actually below the number that we set for '24, below the low point of the current range. It was below the EUR 1.575 billion. So the last 4 months, 5 months, we gained much more confidence at what '24 would look like. And with a EUR 1.625 billion midpoint, I think the massive one to give you is that we have a strong confidence also for the 2025 target which you see on the right asset at EUR 1.775 billion. So we confirm our journey towards the Capital Market Day goals and this guidance, it is actually delivering this message. Free cash flow wise, of course, you see that we are well ahead not only of the 2024 Capital Market Day number, but also the 2027 -- the 2025 Capital Market Day number, it was 700. So we said also in this case, our guidance where who's midpoint is set in line with a free cash flow delivery in '23, confirming that at least we will deliver the same number as '23 in 2024, if not, better. And again, this is giving even more confidence that not only we will achieve the free cash flow target of the Capital Market Day we were certainly heading for beating this target and the cumulative number of EUR 3.2 billion in 5 years of free cash flow. Scope 1 and 2 are confirming the same target -- increased target for -- that we discussed at the Capital Market Day and Scope 3 as well. Thank you. I will hand over to Francesco for the last part of the presentation.

Thank you, Massimo. Good morning to everybody. Wrapping up, the profit and loss statement on the left part of the slide. Organic growth substantially flat, minus 1% due in the fourth quarter a sharp drop of the telecom business, specifically in North America. Adjusted EBITDA right in the middle of the guidance range, EUR 1,628 million and notwithstanding once again a sharp drop of the telecom business. You clearly see the drop in the right part of the slide where we bridge quarter-by-quarter, the 2023 to the prior year. You see that in the second half the telecom dropped compared to 2022 by more than EUR 100 million, EUR 43 million in Q3, EUR 64 million in Q4, notwithstanding the other businesses performed very well, project, energy, compensated for that and allowed us to close right in the middle of the 2023 guidance with a very significant improvement in terms of margin at 10.6% from the 9.3% of the previous year. Other very strong point that I want to remark is the net profit. Group net profit going up to EUR 529 million consider that in this net profit, we took the charge of an impairment in the telecom business, by far, the largest part in the -- our YOFC investment of more than EUR 200 million. So let me highlight very clearly that without this impairment and noncash impact, the net profit would have achieved the incredible level of over EUR 700 million, which is, I will go back to this commenting on our progress in terms of earnings per share in a while. Let's move to the cash flow. As Massimo and Valerio anticipated really strong in 2023, EUR 724 million you see that it is clearly boosted other than EBITDA, of course, by a very strong and good dynamic of the working capital, a decrease of almost EUR 200 million mainly driven by the outstanding results of the order intake in the project business, which of course brought with it some very large down payments that, by the way, will stay in place in terms of level also for the next year, and this relates to the very strong guidance of cash flow also for 2024. That's very important because in this same chart, you see that this strong cash generation is allowing us to even accelerate on our CapEx plan within, of course, the boundary of the EUR 2.7 billion CapEx of the 5-year plan, which stay unchanged. And you see that in 2023, our CapEx exceeded the EUR 600 million. And again, cash is the key because cash allows to accelerate growth, to accelerate CapEx to the leverage to pay dividends, I think, is the key of almost everything or even everything cash scheme. Let's move to the following. We just to say that to reiterate our confidence on the strong result and cash generation for the next years, we are deciding to propose to the next shareholders meeting a dividend increase in terms of dividend per share, up from EUR 0.60 to EUR 0.70, which is an increase of almost 17%. You certainly remember that at the CMD Naples, we were hinting at a 10% year-on-year increase of DPS. We are starting with a right momentum because in the first year, we are already doing significantly better or at least proposing to the shareholder meeting significantly better than this. Massimo already anticipated this, but focusing on the right part of this slide, you certainly remember the EUR 3.2 billion cumulative free cash flow that we committed to in the CMD, I think that just based on the strong achievements of 2023 and 2024 guidance for free cash flow. I'm very confident. We are very confident that we can top up that cumulative cash flow by Q1 [ if familiar ]. Let's move to close my presentation on our commitment to deliver. So where we are in 2023 compared to where we're supposed to be as a baseline of our 5-year journey of our 5-year plan. EBITDA, we already said everything in the midpoint with a weaker telecom but certainly better in the other businesses. And this once again confirms the importance of a very broad and diverse portfolio, which is our strength. Cash, cash conversion, EBITDA conversion into cash already at 45%. ROCE, 23.1%, you see significantly higher than the baseline that you have on the right -- on the green column of the slide, baseline that we were assuming as the starting point of our CMD targets. Dividend I have already commented EPS, earnings per share, very important. You also remember in this case that we were ending at an EPS growth over 5 years, greater than 10%. Well, let me tell you that the first year is starting with 33.8%. Of course, net of the impairment that I will highlight, which is certainly a good start. And the debt -- in terms of leverage, net debt on EBITDA is staying where it is supposed to stay in the corridor between 0.5 and 1x. Very good. I think I'm done with my presentation, we can move ahead with the Q&A session. Thanks a lot.

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

I have 3. I can take them one at time to make it easier. But starting with projects and thinking about sort of the 2024, can you elaborate a little bit more about how should we think about growth? I guess you have the Finland city coming on stream, but you've also been operating at capacity on the rest. So thinking about the balance there and also the mix compared to the mix you had in '23 to think about margins? And then I'll ask my other questions as we go.

Thank you, Daniela. I leave the floor to Hakan. He's here around the table. Massimo, would you like to say something?

No, no. Okay. Go ahead. So first of all, talking about '24, we are seeing, as Massimo also was explaining a growth in our letter profitability and also in terms of the absolute, we will see also an improvement because of the mix and also because of completing some of these projects that we have initiated some years ago in '23 like the Viking project. So therefore, we are going to see some profitability improvement. On the other hand, on the capacity, we are still constructing capacity, as you know. The effect of the capacity, we will not see exactly in this year. But there are some improvements -- small improvements that are coming from the DC side of the German corridors in terms of production that will be a positive effect on top if we talk about capacity overall.

One additional integration, Daniela, I think you should expect for '24 a similar growth in EBITDA is the one that you've seen '23. So the range of the EUR 50 million, EUR 60 million is what we can achieve despite the capacity is stable and more or less in line with '23, but the project mix will help us in some [ issue ] to see additional benefit will base to achieve this number. While in '25, you should expect a much larger leap in result than this [ 56 ] because in '25, there will be the first wave of a capacity coming to fruition.

Yes, Daniela, that today in projects, we have one issue still ongoing. That is the medium voltage in [ collaborate ]. This is a segment into which we are in. We have to honor certain contracts, but we are not happy at all because the margins of this business is very, very low. Why? Because we produce the cable, we give -- we make the installation, and this is a headache. Reason why our goal already decided and shared with the project team is to move to only supply only of the cable. This is in order to remove the difficulty we have using third-party installation. That is our nightmare.

My second question relates to the -- you had commented in prior quarters that the readjustment on the former tradesman installers could be sort of up to EUR 200 million of EBITDA. Just an update in case I missed it during the presentation of where do we stand in that? Is that still the right number to think and how much was the readjustment already within that?

Daniela, thank you. We confirm the EUR 200 million. In reality, we had EUR 100 million EBITDA adjustments in North America, partially offset by improvement in the industrial and construction space elsewhere in namely in Europe and LatAm in '23. And that's why we held the energy business result EBITDA in line with the 2022 number. For 2024, we expect the same 100 million, but we think that we are going to be less impacted by this normalization than the ones that come from the EUR 100 million because the start of the year is much better than anticipated, volume-wise and price-wise. So we might have a positive surprise in terms of soft landing in '24 less disrupted than the EUR 100 million that we mentioned to you a few months ago.

And my final question, just related it to the comments you've mentioned on power greens and towards '27, potentially exceeding the targets. But as we think in '24, you had in the guidance, I believe, around 10% EBITDA margin over the long run, staying flat. You've done more than that. When we think about '24, are there any headwinds that we need to keep in mind from frame agreements or from something? Or have we now resettled to a higher level already?

Daniela, we believe that we are stable at this 10% plus EBITDA margin also in 2024. '24 will be the year where we will achieve incremental EBITDA, thanks to the incremental capacity. We had some let me call it, 20,000 tons, which is 20% of the North American volume in capacity coming on stream already in quarter 1 this year. And the -- in '24, we will be the 2027 target in Power Grid, thanks to the incremental capacity and the EBITDA margin stable at 10% plus.

Your next question comes from the line of Max Yates from Morgan Stanley.

I've just got 2 questions. Just the first one is around the telecom business. And obviously, a lot of what we have talked about -- a lot of what we've talked about this year in terms of the headwinds have been in North America and the destocking, yes, I think you were saying that you were planning to restructure your European footprint, and you were thinking about taking actions there. So I guess -- my question really is how much of what we're seeing in telecom is just a U.S. destocking issue? Or actually, is there something structurally that has also changed in other parts of the business maybe Europe that has driven some of the move down in EBITDA?

Thank you, Max. My opinion, my humble opinion. The telecom, okay, have had a serious destocking in '23 is part of the game. It's very fast accelerating when the market is booming, but the boom has usually a quite quick boom later on. Now we are in the boom happens has to be foreseen. And consequently, we have to act. That's the reason for the restructuring we are planning to execute in '24. Massimo, do you want to...

Or maybe a point, Max, is that we are restructuring in Europe and not because we see a down to the market in Europe. You need to be aware that we had a few plants worldwide supporting the strong demand in North America. And the reason why we start in Europe is that because now we see this posing demand, the opportunity to implement some cost rationalization that we talked of already a few years ago, but we were not able to implement it due to the strong demand in the market. So those -- there will be a couple of plants reduction structure in Europe, one also in North America to rebalance the capacity to the demand, but also to set us in terms of cost base in a better position to leverage the growth of the market that we expect to see coming in the second half of 2024 once the subsidies from the North America, U.S.A. government to support the rural broadband will come to fruition for many projects in the United States.

Okay. And just my follow-up question is just on the free cash flow guidance. So you said kind of this year in -- well, 2023, the free cash flow was very good because you had some good prepayments, which I guess we see on the contracts you're saying you can stay at that free cash flow level in 2024. So what I'm trying to understand is, do you see free cash flow staying at that level because you have a lot more orders that -- and you're expecting a lot more prepayments or is it that actually some of the big orders that we had, things like Eastern Grid, things like the 5 billion order that you took, have you received any prepayments for those? Or are those still to come? Just trying to understand kind of where we are in the prepayment process on those contracts.

Prepayment, let me say, are above the level that we expected when we set the targets at the CMD, not dramatically above but above the above, and that's the reason of the over-performance in 2023. And it's also the main reason of the over-performance that we expect for 2024 because we are anticipating more than 1 year because the 2024 is above the 2025 target. So basically, we expect prepayments to be even slightly higher in '24 than in '23, not dramatically higher. But let me say, gradually growing at a very high level. That's the main reason, right? The rest, I think that is more or less evolving in line with all the assumptions of the CMD. Let me also add that 2023 was a bit supported by the slowdown of the sum reduction in the metal prices, which always help and that's it. Volume, as you saw, didn't grow that much in 2023. So also, this was not too bad for the working capital and when you have stable volumes and very high level of margins is a perfect combination. And by the way, strong order intake in projects is the perfect combination to generate a lot of cash. And this is what's happening.

Sure. Understood. Very quick final follow-up. Just on M&A priorities. I don't -- at least in my mind, I'm not kind of entirely clear on what your priorities would be in terms of kind of adding businesses. It's been a while since you've done an acquisition. So maybe you could just briefly talk through kind of what are your priorities and where do you really see kind of opportunities or what areas of the business, at least, would you try and add through M&A.

Okay. Max, thank you very much. I leave the floor for the potential acquisition to Massimo. It will be his job, not anymore mine.

Max, thank you. So priority-wise, I think we confirm that we will not pursue the transformational deal that we had -- you've seen us performing in the past for obvious reason the targets are not available with the same features in terms of complementarity. We will pursue deals where the commercial synergies. So to strengthen our portfolio or market share or share of wallet in geographies is the priorities. In terms of geographical footprint, we give priority one to North America. Of course, we also look at some European opportunities. And we also consider the Middle East as an area where we might resort to M&A to grow our footprint there. On the contrary, we roll out for the time being Asia Pac for obvious reason of no priority, complicated areas to deal with and no great energy transition or digital transformation projects going on in that area of business.

Yes, that's helpful. And good luck to Valerio in the future.

Your next question comes from the line of Akash Gupta from JPMorgan.

So this feels like the end of an era or maybe also a start of a new era as well. And I would like to start with paying my tribute to Valerio. Thank you very much for maintaining a very consistent and open dialogue with the entire investor community. And starting with my -- starting with my questions, the first one I have is on capital allocation. Your dividend for 2023 is ahead of the target that you have given at the Capital Markets Day. This morning, there was a Bloomberg interview of Massimo, where you mentioned EUR 1 dividend by 2027, which would imply more than 40% growth over the next 3 years. So the question is that, is this because you are changing the allocation between higher like to pay a higher dividend over share buyback? Or is this reflective of you being more bullish on the long-term demand based on last 4 months since the Capital Markets Day? So that's the first one to start with.

[ So on cash, ] Francesco. I think the EUR 1 dividend per share by 2027, I totally share Massimo's point, it's totally realistic, I think. And you are right, implies a bit more than the 10% EPS growth. It's simply based on the fact that we are generating for the time being, more cash than we thought. And we are over-delivering in terms of cash. This was the case in 2023 will be the case in 2024. I think that also in the following years, we will be at least in line with the CMD targets. But this means that the accumulated cash flow of the 5 years, which was offset at EUR 3.2 billion, maybe EUR 3.5 billion, for instance, EUR 3.4 billion, EUR 3.5 billion and keeping the same allocation exactly the same allocation in terms of M&A and buyback. You remember in terms of dividends, in terms of the leverage, of course, the absolute numbers ends up being higher, and we can afford to increase dividend a bit more and to have a growth, which is not 10%, but it is 15%, we will see going on, of course, then. That's the main reason. But there is no change in terms of capital allocation structure conceptually compared to what we were discussing in April.

And then maybe a follow-up on share buybacks. So that was also planned for capital allocation policy. When are we going to hear about how much and when you are going to start a share buyback program?

Yes, as we anticipated in Naples, share buyback is important, but it is a kind of a residual of course to M&A, which is the priority. We were very clear in April. So this doesn't mean that the share buyback is not important, of course. But we are very keen on finalizing our ideas and our opportunities on the M&A. That's why maybe it's taking some more months than we -- but frankly speaking, I expected this to take some more months to have very clear ideas on the M&A capital allocation and then depending on this first chapter, M&A, we will definitely resort on a decision regarding share buyback.

And my final one is on EBITDA adjustments. So when we look at 2023, we had EUR 143 million EBITDA adjustments. Francesco, can you comment on what shall we expect as a base case for 2024? And also, when it comes to cash flow bridge, you had a big IFRS 16 increase in lease debt in 2023. What shall we what should we expect for 2024?

Good point. for 2024, we will have some restructuring. We were saying this, especially in telecom. So I think adjustments, restructuring charges in principle will be a bit lower than this EUR 140 million but not dramatically lower because we have in Europe, specifically in Europe and in the telecom business, let me say, proactive restructuring that we think it's important to have a good position in terms of competitiveness for a recovery of the market. In the IFRS 16 impact on the debt is mainly due to a specific reason, which is not repeatable going on, which is a decision that we took to renew and prolong a lease agreement for a very important installation asset that we have, which is leased, still falls under the chapter of IFRS 16 treatment. So this provoked or triggered with higher-than-usual growth of the IFRS 16 related debt. It will be certainly lower this increase in the coming years starting from 2024.

Your next question comes from the line of Monica Bosio from Intesa Sanpaolo.

I have -- my first question is on the Power Grid. Can you give us a flavor on the expected trend in Power Grid between U.S.A. and Europe? And a general question, do you see a risk from political election in the United States? My second question is on the inter-array business, which a bit penalized 2023. Can you remind, please me the amount of the inter-array contracts? And when the contracts will be fully deployed? And third question is keeping some CapEx indication, please on 2024 as you accelerated in 2023. And I was wondering if for the telecom restructuring in 2024, if we can assume a net cash impact still in the range of EUR 140 million or if it is a different number.

Thank you, Monica. Valerio speaking. First of all, the Power Grid. The Power Grid is going very well, you have seen the numbers, and is expected to keep that trend. The trend is very positive, mostly because of the price change due to the inflation rate. The risks for -- from the election, I don't think so because the grid in the U.S. is really very weak, and the demand of electricity is growing. So U.S., one way or another, have to deal with it. Consequently, I don't see any big risk even from the election. Of course, if Trump will go to be the President, maybe a slight reduction of the speed, but not a reversal of the trend. That's my opinion. I don't know if Massimo has a different opinion.

Monica, you wanted also to know if you see a difference between North America and Europe. I think the strong demand remains more solid in North America than Europe and there is a significant difference in profitability between the American business and European one. That's why we are in the best way, expanding capacity in North America. Also, Europe is following suit. Yes, I don't see a risk at all because in North America due to election results, the grid is what I said, is support condition and the electrification of demand is so strong in North America that without continuing, at an accelerated pace, investment in Power Grid, power customers will not be able to serve their customers. So I see no issue there whatsoever.

Okay. Can I ask -- Can I have just a follow-up on the GAAP profitability between U.S.A. and Europe. What is less?

Yes. On North America is some 35% higher than the European profitability.

Mostly for a matter of competition. Inter-array. For inter-array, I would like to leave the floor to Hakan and can should or could tell you what about -- the situation of the contract for inter-array, how much contracts we have in hand and which are the foreseeable effect on the 2024 targets.

Thank you, Valerio. The inter-array business, I mean, we have to -- if you look analytically to the matter, we have 2 different criteria that affect the inter-array profitability. The one is the timing of the order intake because we went through an inflationary period that had an effect. The second one is with installation or without installation. These 2 criteria actually make the profitability more evident in inter-array. So this year, we had a majority of our inter-array were including also installation and the range of our inter-array business is in the range of EUR 200 million. So that had an effect, let me say, to deteriorate our percentage margin for this year, including as Valerio and also Massimo was saying about the installation portion, which has hit us negatively because it's outsourced and the market demand on, let me say, inter-array installation is completely a different market than it was a few years ago. So if we look forward, of course, we have a backlog of inter-array. We are reducing our exposure significantly on the installation portion. So we still have some let me say, projects that we are going to complete in '24, which have installation as part of the contract. But this is going to be also less than '23. Therefore, we also committed to have a higher percentage margin in the overall the project, let me say, transmission business for '24. And going forward, we are offering only, as Valerio was stating, inter-array cables and delivery with termination and testing without any installation. That definitely is not going to be in the same level of margins what we do interconnectors or in export cable, but it's also not as damaging as included with the turnkey approach.

Maybe Monica, you need a number. We had, Hakan said, delivered EUR 200 million worth of revenue in '23. We have only EUR 300 million worth of backlog in inter-array left from 2023. In the next 18 months, we will deliver this EUR 100 million, hopefully, in better condition because there are less installation exposure than we had in the last '23 result. The question about the CapEx of '24. CapEx '24 level is pretty much in line with our assumption of the Capital Market Day. So it remains in the neighborhood of EUR 650 million. Of course, there are some shifts in the overall picture, CapEx wise because we have less investment to promote for telecom and a certain degree of acceleration for projects because this backlog has required some additional investment to underpin the execution of this EUR 18 billion. So EUR 650 million is more or less the level of 2024 in line with 2023.

And Monica, that was your last question on the cash flow impact of the restructuring. I would say, in line with 2023, maybe slightly higher. Differently from the P&L charges because, of course, some of these restructuring just been initiated and will be mainly paid in 2024. But of course, everything is included in our EUR 725 million midpoint guidance.

Your next question comes from the line of Sean McLoughlin from HSBC.

Firstly, Valerio, a congratulations on a job well done. You've left the business in very good health. Best wishes for the future. So my first question is just coming back, Massimo, to your comments around your change in confidence in October. I mean it sounds like this has been largely driven by U.S. power grids. You're now talking about also softer landing potentially in the building cable segment. I mean is -- is it correct to say that it is the U.S. that's driven the key change in confidence? Could you maybe comment on how you've seen improvements in U.S. versus Europe and other regions versus your October comments?

Thank you, Sean. So yes, the change in confidence comes essentially from U.S. or at least it comes form Power Grid, which is more than U.S. is Europe also is LatAm and also U.S. The change, it comes also from what you said, the softer lending in the industrial construction pricing normalization in North America. But there is also another impact, which is the telecom performance, which were not completely visible at the time of the capital market day. So despite the telecom performance has worsened in the last 4, 5 months vis-a-vis what we thought it would be happening in telecom, the other 2 businesses have made us change confidence on the 2024 EBITDA midpoint and guidance.

Very, very clear. Second question, I guess your lower involvement in the offshore wind industry and focus on transmission operators, given what we've seen in the offshore wind industry over the last year looks to have been very sensible. You're now talking about ultimately reducing exposure to inter-array as well. I mean is -- I mean how are you thinking longer term about offshore wind? I mean, clearly, the growth opportunity is there, but it does sound like you've all definitively moved away or certainly have de-prioritized offshore wind over, let's say, power links for, well, transmission and grid. Any comments there?

Sean, in reality, we do not intend to reduce our exposure to the offshore wind, especially U.S. As you know, the first industrial scale offshore wind farm, we did. And we think to stay. But we think to stay on a different way. Not taking charge of the installation because the installation of an offshore wind farm is a very complicated and mixed activity between us who produce the cable, who produce the towers, who install the cable and, frankly speaking, the risk, the risks are so high having a number of actors running around this execution that is easy for the main contractor to have losses.

Let me clarify. I think there is a misunderstanding, Sean here. We wanted to stay away from the developer business in the offshore space. We are totally committed to supporting TSOs and utilities in the offshore space. So this is probably one of a misunderstanding. I think we clarified this point during the Capital Market Day by saying that our exposure in the backlog to developers business was actually marginal. So we are fully involved in the offshore business with other customers and developers because we like the solidity and the commitment of the customers. The offshore business is made of two segments. The medium voltage cable for inter-array, connecting pulse of towers and the export cable connecting the wind park to the shore. We stay strongly committed the export cable business and factoring the installation because they're a very crucial business for us and very similar to the sum of the interconnect of cable. On the contrary, as we said on the inter-array medium voltage, which is a commodity segment of the shore space, we would like to play the role of only of supply cables and not perform in the turnkey installation. I hope this has clarified this offshore position in our company, Sean.

And I would like to add one more thing. The offshore wind space is also changing. It is merging with the interconnect. Especially if you look to the North Sea and Germany, all the tenders have now a longer land sale, which is actually comprising an interconnect. So the market is actually, let me say, playing in our favor. And we are also positively involved in all these projects that are not only offshore wind of export but also a huge land sale that which gives us an additional advantage. We have no intentions to leave the offshore wind, let me say, market and we will be continuously developing products and services for that.

Very, very clear. And if I may, just a follow on. On the Brayton Point facility, I think I remember in the last call, you said that you would go ahead with that. Does that remains your base case?

Yes.

Your next question comes from the line of Alessandro Tortora from Mediobanca.

I have 3 questions, if I may. Now coming to the question Three questions. Okay. The first one is on can we get an update on the U.S. wind offshore? Because we see some retendering activity there. So I would like to understand what is happening, okay, in that market. because we saw also a cancellation for you. That's the first question. I don't know if you want to go one by one or with all my questions.

Yes, yes, answer the first one. If I may answer, Hakan speaking. Thank you for the question. The offshore wind in the U.S. is, yes, there are some changes due to the inflation. As you also know the tendering activity that has been done before was targeting PPAs, which was relatively low, if I may. Just say a few numbers, which are average in the $70 per megawatt range. Now if you look to the last tenders after retendering, you see that it's beyond $120 million, up to $170 million per megawatt, which is, I think, confirming the level of today because today's investment with the interest rates and also the inflation on the logistics and the materials, the level is quite okay after the tender. So that was due to the inflation. And I have to say also due to a completely new environment, which was built for tendering activity where there was no experience. And in this way, this has created also some, let me say, lack of conclusions in the first tender. I think currently, the market is quite good. It is proceeding. It is not proceeding as we would like to in terms of time, but it is proceeding in terms of stable, let me say, foundations, especially the PPAs and also, let me say, the intentions of the different states. So you see we -- there is a delay, but there is not a collapse, there is not, let me say, a doomsday. It's like just adjusting and then continuing the journey of the energy transition also in the U.S.

Okay. Then the second question is on the telecom business. I would like to understand which kind of EBITDA recovery excluding, I would say, YOFC we may assume this year, also considering the customer action you mentioned before, but also some recovery expected in the U.S. in the second part of the year.

For the Telecom question, I would like to leave the floor to Frederick Persson. Just in case, he joined the team to manage and to revamp, hopefully, the telecom business.

Yes. I think for this year, it is realistic to think that we can stay more or less on the level we were at 2023. If we can make sure that we stop the downturn and start to see the first signs of the market coming back, I think that's a realistic target for this year.

Okay. Just a financial follow-up on this, considering that clearly restructuring, let's say, the production footprint takes time. Is there any target we may have on at least a regime at full speed in terms of cost savings you may have in mind?

Yes. We have -- I mean, sizable savings, of course, which will come to fruition in the second half '24 once all the start will be completed and carryover in 2025. And I mean, you need to consider that factory carries some in 2 million, 3 million, 4 million worth of fixed costs. So this is the sort of sale that we can achieve from apart from rationalization. And I told you that we have listed 3 plants in scope.

Okay. Okay. And the last question is Francesco is just on boring question on level of tax rate for 2024, but also net financial charges for 2024.

The tax rate, I would say I would expect it to remain pretty stable at 28%. The financial charges, cash wise, very stable. We may have some increase at a noncash level. But what is mostly important cash wise, I would say, basically stable because we have almost fully hedged our rate exposure. So it's very well protected.

Okay. So Francesco, from this point on a P&L basis, let's say, net financial charges should be, therefore, overall stable compared to the level I saw last year?

EBIT higher at profit and loss level, EUR 20 million.

Your next question comes from the line of Roberto Campani from Amundi Limited.

Yes, on everyone. I would like to start -- and thanks to Valerio for all the great job done and the great value creation for us as a shareholder and all the best for the next adventure. And my question is related to the trend in orders and backlog. I mean the great numbers that we saw since the Capital Market Day of orders which pass from the state of solid commitment to the proper backlog with the notice to proceed. I would like to ask what do you expect in terms of dynamic for the total backlog, including both for this year.

Thank you, Roberto, and thank you for so many years of fruitful cooperation. For the backlog, I leave the floor to Hakan.

Thank you, Valerio. The backlog, of course, as we were discussing before, we solidified the backlog by having NTP, let me say, in the total range of EUR 18 billion. Of course, we will continue to solidify but there are also new tenders that are out, and we are also participating. The market is not, let me say, slowing down. So the market is going to be, I think, in the next 3 years in the similar level. But of course, the capacity is going to be the deciding factor of these tenders to be allocated to suppliers. So we think that we will further grow the backlog. It will be very difficult to say a number currently, but I can say that we will keep our market share in the -- at least for this year because then we have to check if the orders that are going to be required are going to be executed beyond the 5, 6 years of execution time that we have already saturated. So -- but also this is changing. We have discussions with the customers. They know the market that there is no capacity in the market in the short term. Therefore, they are also delaying their projects beyond 5 years. So therefore, we will continue. We will continue to grow the backlog. And the market is not as of today, we don't see any signs of reduction.

Your next question comes from the line of Gabriele Gambarova from Banca Akros.

Just a couple of questions on transmission projects. I was wondering if you could comment a little bit the very recent [ ADNOC ] and AGL, let's say, successes contracts. I mean, does this mega contract have any advantage in terms of margin of pricing or lower complexity? Anything that -- I mean could help me to better understand if they make any difference in terms of margin? And the second one is on a clarification on the 2025 production ramp-up in the cable business, if you can provide me any kind of, let's say, order of magnitude of this acceleration, it would be very useful.

Okay. Thank you very much. First of all, what about the giga projects, the one, the giga contracts [ ADNOC ] and AGL too. Better margins, I would say, yes, because the appetite of our customers have driven have led us to driven up the margins. Not rocket science, but step-by-step, better margins. Lower risk, I would say, no, the risk remains more or less the same. Not very different risks in terms of project execution, but are risks that we have been able to manage properly in the last years after [ Western Link Casino ]. And I believe that it will be the same way. Ramp-up on 2025. This depends on the capacity increase, the order of magnitude, we are adding the 2 extra voltage lines in pickup. Another in Naples. And later on, will come breakdown point. So for the 2025, I don't see significant risks. Is an execution risk, of course. I don't know if can has something more to be added.

No, Valerio, you made it very clear. The only thing also installation capacity is coming on. So it's not only the production capacity. And you have seen also our press release about Monna Lisa, and this will be also affected. Having a very, let me say, good success today as Leonardo. We improved also Monna Lisa further, and this will also add value. So we have to look all in all, in terms of production capacity plus also installation capacity that is coming on.

The tower -- the new tower in Pikkala is up and not yet filled because, of course, the need of time but is on time on the schedule that we planned for the expansion capacity in Finland. Massimo?

Maybe to quantify the impact in '25 and '26 out of these lines. So there will be half of the incremental capacity coming to fruition in '25 thanks to additional volume in Naples and in France and half of the incremental capacity we come to fruition in 2016. In '27, late, we will see the break point factory can industry. So this will give you the sense of the incremental step-by-step increase in capacity, hence in related EBITDA and contribution margin.

Gabriele, let me also add one point on the mega contracts. If we refer to the frame contracts, there is one additional point that to me is important, which is the cash profile of these rent contracts being the time between the award and the execution longer and being the down payments at the time of the award, this means definitely an improvement of the cash profile and this is significant for the entire group at the group level. For instance, the implications is larger cash flow, but also better return on capital employed, just to mention one because these large down payments are funding some of the larger CapEx that we are doing to extend the capacity. And this is improving the return on capital employed. It's a very important point. The net present value of these projects is better. You can read this in a number of ways, which are all through.

Your next question comes from the line of Luigi De Bellis from Equita SIM.

Yes. Congratulations to Valerio for this long and brilliant journey, and thank you for your support during this year. I wish you all the best. So I have 3 questions. The first one on the power distribution in U.S. saw a very good trend, in particular in margins. You mentioned the lower competition in U.S. than Europe. Can you elaborate a little bit on this if you think this situation will persist and your competitive advantages in PD U.S. and sustainability of prices and margin going forward for the PD? The second question on industrial. Just a little bit more color on which are the segments where you are seeing the highest increase in volume and margins? And the last one on the outlook. So very solid considering the environment regarding the phasing, do you expect the first half very similar to the second half or a better second half than first half considering the telecom recovery?

Thank you, Luigi. Power Distribution in U.S. Power Distribution in the U.S. has suffered the previous year because of the contract price that we renegotiated. With the renegotiation, the margins went up, and that is more consistent with the demand for the network or lower competition. Will this situation continue? I think so because there are not many actors in the U.S. market for Power Distribution. We are probably the biggest or almost the biggest. And there is definitely a strict relationship between customers and suppliers. It's different from Europe. In Europe, it's [Italian] every time. But in the U.S., is much better. So consequently, the situation I see still going on. I don't know if Massimo is different.

Property is a structural situation. There are less competitors in U.S.A. than rather in Europe. And we have a stronger relationship with customers. It is also customer more consolidated than they are in Europe. So that is brings a unique value and because newcomers have to struggle to position themselves within the utility space.

The so risk I see is that there are many lines coming into execution in U.S. And consequently, the demand will be better satisfied than last year. When it comes, when they can. Our lines will come in the second half 2024. The other competitors, we don't know exactly, but more or less, it will be a chain -- a successive chain of capacity growth. As I usually say, players have not to think to grow too much one shot because otherwise, the market may react negatively. The excess of the test of availability do not help the price Outlook. Sorry, I leave the floor to Massimo for...

Yes, up. So I mean, there are many use cases that are driving the demand in Industrial and construction segment. I can name a few of them, for sure, the data center, well-known in that segment, also we serve the solar park and the wind offshore park with low voltage and medium voltage cables, which are in many cases classified into the Industrial and construction space. And all the industrial buildings associated to the infrastructure investment in the United States. So all those use cases are bolstering the industrial discussion demand and helping us all the price high in that space. Phasing plan -- sorry, the outlook phasing is kind of balance largely twisted a little bit more towards second half but not very much. So there is probably little EUR 20 million, EUR 30 million EBITDA difference between the sum of the first half and some of the second half in terms of outlook phase.

Your next question comes from the line of Miguel Borrega from BNP Pariba.

I've got 3. The first one on E&I. Maybe some color between the margin of and the construction cable business. I just want to understand how you see the sustainability of these margins. So since the start of the pricing volume normalization, where are we now in terms of the construction cable margin? You mentioned the EUR 100 million coming up. But just in terms of the margin, how much has it reversed, if any? And then in PD, can you describe exactly what is driving that margin. You talked about pricing, but are you doing something differently internally in terms of the service that can justify the margin going forward apart from pricing?

Yes. Okay. Thank you, Miguel. So Power Distribution, yes, we consider the Margin by distribution is extremely sustainable. Not because they've been attained to a spot pricing opportunity. But because we have a frame agreement with utilities, and we have a stable contracts. And we reflected this contract all the possible cost adjustment closes to realign price to the inflation. That's the data effort, which was last in '23, we have now a stable and structural situation by which if cost inflation hit again this business we can pass it on to the market immediately and automatically. So that's why I believe that 10%, 10-plus percent EBITDA margin in the Power Grid resolution business and within Power Grid is a stable conditions, stable scenario. At the same time, today, we have a kind of industrial construction EBITDA margin similar to 10 to that of our distribution, so 9% to 10%. It will now remain that high because we said that there is a slight further normalization in prices in North America but as said before, there is a soft landing. So there will be a slight reduction to this margin, but not a massive one, maybe one percentage point. But at the same time, there is a growing demand in light of what I said before, data center renewable business investment for industrial buildings are pushing the demand up, hence helping price to remain solidly solid and high.

Very clear. And then just on the guidance, I just want to understand the moving parts. You talked about EUR 60 million improvement in projects, telecom about flat. Now you just said construction cable's slightly down, but then PD's stable. So how do we get to a flat EBITDA if most of your segments are going to be either stable or higher? So what offsets these improvements?

We have stability in telecom, as you said, the EUR 60 million EBITDA margin in EBITDA margin in transmission is the upside. We have some electrification normalization of industrial construction normalization, which is basically offset the permission business. So it's very simple. The matter you have one is very stable and the other 2 offsetted each other. And Power Grid, they would have like increased. So if this helps, we built this stable market in '25 and '24 guidance.

Miguel, we think that although the lending of the P&L former P&I margin. Now [ I'd say ] Construction margins, as Massimo said, is softer than expected, and it's actually holding up better than expected. Still, we compare to '23 to '24 compared with the first part of '23, which still had exceptionally high margins. So it's certainly better holding up. It's certainly a softer landing but it's still material the normal -- the impact of normalization. It was assumed to be in the EUR 100 million maybe it's not EUR 100 million, but it's not -- it's still very material. And as Massimo is saying, is offsetting the progress of the projects in principal the projects and the Power Grid as well.

And maybe, Miguel, to explain why we are also confident that we might end up in the top part of the range. We see that projects or transmission will over-deliver because it's about execution, and we have all the orders in hand. Telecom will rebound in the second half. We think we have done stronger and the industrial concession normalization, as we said, is going to be softer than what we thought, realized a few months ago. So there are chances that we'll end up where we said we will end up in the guidance.

That's great. And then just one last question. Can you give us some color on the CapEx? You mentioned EUR 650 million. Can you give us the breakdown between maintenance CapEx and how much of that is expansion CapEx for '24 and '25, please?

Maintenance CapEx is not such a definition that we normally have. I think in that cluster, we can consider the normal investment for IT, for sustainability. For one, for two and all the rest. In reality, all of the rest is basically for capacity expansion. Don't forget there is investment for the vessel. Monna Lisa is going to come on stream in January 2025 and there are significant investments in the transmission space and significant investment in capacity expansion in Power Grid and also in overheads lines and also in the Industrial and construction space. So let me say that 80% of this CapEx is driven by capacity expansion goals.

Again, we do not have maintenance CapEx, except very few. The main goal is the P&L we need.

So does that mean after 2026, your CapEx reduces materially to maybe, I don't know, EUR 200 million?

Yes. Maybe yes, maybe no. We hope not because demand beyond '27 is even stronger than what we see today. So we are open to all cases in case the demand reduces in power grid or transmission there will be an adjustment downwards of the budget for the CapEx. But frankly speaking, we think it will be the operating base.

Okay. Valerio, all the best in the future, and thank you again for the excellent track record.

You're welcome Miguel. All the best.

There seems to be no further questions. I would like to hand back for closing remarks.

What kind of closing remarks I can do? It's my last conference call, it's a pleasure. I hope that the shareholders will let me to stay in the board. And I wish you all the best. Thank you, and bye-bye.

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