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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and thank you for standing by. Welcome to the Prysmian Group Q1 2023 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Valerio Battista, CEO. Please go ahead.
Thank you, very much, and good afternoon to everyone. Valerio Battista speaking from the Prysmian headquarter in Milan. Let's start with the general recap of our results. First quarter [indiscernible] in a nutshell has been a very good quarter, almost EUR 4 billion sales, EUR 427 million margin EBITDA, EUR 581 million group free cash flow LTM, net debt down to EUR 2,074 million. The organic growth for this quarter has been 9%. Pretty good performance, as we say, with an adjusted EBITDA margin overall of 10.7%. Very strong grid hardening organic growth with 12%, regarding, meaning, obviously, overhead lines and power distribution. The operative net working capital, we have been able to keep around about below 9%, 8.9%.
Let's flip to Page 3, and have a see of the growth across the various segments. Let's start with projects. Projects moved from EUR 406 million to EUR 563 million in terms of sales. Consequently, a quite significant growth. Organic growth at almost 50%, very good. From the EBITDA point of view, the business went up from 32 to 56. As a percentage of EBITDA, the improvement has been compared to the first quarter '22 from 7.8% to 10%, better than the previous year, but still a limited margin, I know. But we have to take into consideration that in this -- in the sales, we ramped up significantly because of 1 or 2 projects for interest rate that has been realized, has been taken as an order some years ago and has suffered of the recent cost increase with consequently a lower margin.
In the meantime, German corridors are progressing well, are on track. We have seen a very good improvement driven by submarine. And we are having a pretty selective approach to the tenders. We got EUR 1.8 billion Ijmuiden project in the Netherlands and EUR 800 million for Biscay Gulf just awarded us a few days ago. There are many others to come. We did not deliberately [indiscernible] -- we did not take this dependent frame agreement. Why? Because there was too much uncertainty in terms of real agreement on when and what was going to be awarded to us. The reason why we kept the prices pretty high -- too high in order to be awarded for it.
Let's move to Energy. Energy has seen our first quarter growth at 6.6%, still pretty good. Of course, not of the same size of projects with separately, E&I moving from EUR 1,941 billion to EUR 2,031 billion, 7.5% organic growth and Industrial and Network Component from EUR 802 million to EUR 835 million plus 5.2%. Also to be highlighted, in terms of adjusted EBITDA, the results are still very good in E&I and are improving in Industrial Network Component. Looking to the numbers, the first quarter last year, E&I was catching EUR 132 million EBITDA. This year and the same quarter, EUR 221 million. Thanks to a very sharp increase of the grid hardening, driving PD and overhead line grew 12.2% and an adjusted EBITDA, bolstered by both nonreal construction -- no residential construction and grid hardening. That's the effect mostly of the reshoring in the U.S. and the system for telecommunication.
On the Industrial Network Component chunk of this business of the energy, we have seen a quite good increase from EUR 55 million to EUR 82 million, with an EBITDA margin moving up from 6.8% to 9.8%. We have seen in that segment, the solar growing quite a lot. And I'm convinced that it's one of the horses to be followed in the next years because the solar power is generated at pretty convenient cost. And we have consequently acquired strong project pipeline.
Last, but not least, the telecom, that grew only brackets 5.7%. With a stable EBITDA, EUR 67 million first quarter last year and EUR 67 million in the first quarter '23, with a minor variation due to the participation of [indiscernible]. The secular trend in optical cable is confirmed, consequently has to grow -- is growing with periodical slowdown and that's the case today, we are seeing a slowdown, especially in the U.S. market. That is one of the most profitable why [indiscernible] slowdown. Because our customers used to plan their needs on the basis of their projects. But sometime, the reality is harder than expected to be realized. And that's the reason why most of our -- many of our customers have found a lot of stock in the warehouses. Consequently, now they have to push the break. It's exactly the same picture we have seen times ago in the rest of the market, not so much in the U.S., but in the European market.
You may remember probably the acceleration and the slowdown of the French market. This is, in a way, similar to it. What does it mean? It means that in the next quarters, most probably, this effect will -- this negative effect will disappear. But for the time being, let's stay where we are. So the total organic growth for the company has been 9%, very good, EUR 427 million EBITDA, 10.7%. We are happy with it, and we take care of the [indiscernible] .
Flipping to Page 4. What about the backlog of the [indiscernible] Projects are after the all-time high backlog over EUR 9 billion, taking into consideration the Biscay Gulf we have been awarded just last week, EUR 800 million. Now the problem is that the market is very strong, but we all have to be careful in growing the capacity very, very fast because, first of all, it's not cost. Secondly, is it can be excess of offer. And that's we have to avoid to do it. Of course, the frame agreements are designed for it to ramp up the capacity. If we have -- we are not able to see that the capacity they are asking for is not really committed by them with a contract, that is exactly what the buy side wants to have. Everyone running behind the future volume's commitment without a strict commitment and that [indiscernible].
Moving to the next page, the grid hardening. Obviously, a lot of transmission grow is going to drive a significant increase of the grid needs. Just to give you an idea, the red lines are the lines that are designed to transfer the power across the U.S. Why is that? Because in U.S., as you know, and we have already commented [indiscernible] there is not a transmission network. All the networks are for transmitting and dispatching the power in a limited region around the power generation. With the solar and wind [indiscernible], that is going to change. But in order to distribute the power [indiscernible] customers, the DSO, needs to receive power from other regions. And that's what is missing in the U.S.
Now U.S. is starting really to think about the transmission network having clear that there is not an entity in U.S. that take care of it. There is not a TSO a real TSO in the U.S. So you can see that the power distribution is growing and the overhead lines too. Why? Because in U.S., most at least for the time being, most of the transmission lines are overhead. There is not the problem we have in Europe of a lot of population and cities. So they go over [indiscernible]. We participate to this business with all the capacity we have for overhead lines and the [indiscernible] system because the [indiscernible] system may improve the transmission capability of the existing lines and of the new lines offering to customers a better performance of their network.
Finally, let me flip to Page 6, the organic growth by region. You can see that at least for us, EMEA is growing from EUR 71 million -- sorry, from EUR 1,565 billion to EUR 1,665 billion with an organic growth of 8.5%. and an adjusted EBITDA moving up from EUR 71 million to EUR 106 million. That's a very good result because finally, after having seen North America growing very much last year, this year seems that Europe is at least on the same part of North America, even if on a lower [indiscernible], North America is still pretty good. You see EUR 1,151 billion, moving up to EUR 1,214 billion, 7.5% organic growth, mostly driven by prices, but also driven by power distribution and overhead lines volumes. The margin -- the EBITDA margin for North America has reached a very high level of 17.8% in the first quarter 2023. We foresee that this margin can stay not so far from it for some other quarter.
Let's move to Latin America. Latin America is improving, EUR 290 million in the first quarter last year, EUR 306 million this year with an organic growth really modest compared to Europe and North America of 2.4%. In the first quarter '22, the EBITDA was EUR 24 million, 8.3%. Now in the first quarter of 2023 has ramped up to EUR 31 million, 10.1%. Last but not least, last and least, differently speaking, Asia Pac, where our presence is very limited from EUR 265 million to EUR 244 million with an organic decline of 5.3%.
Let's go to the next chart, the sustainability scorecard. Just to remember, you get the KPI for the SDGs have been updated by us. We are always keen in keeping our position on the sustainability, and we are working on it daily. Most of all, Cristina that is here with me, she's the driver of the sustainability and do you have something to add?
Thank you very much, Valerio. I've been extremely clear point on my side, we have been launching the new scorecard [indiscernible] in 2023, 2025, also integrated in our integrated reporting recently approved by AGM. It covers 12 KPIs. 6 of them are also integrated in our short-term and long-term incentive scheme, recently approved by the AGM. As you can see from the KPIs, which I want to be commenting now, our focus now is not only on the internal decarbonizing our footprint, but also helping our customers in their decarbonization journey. So I will...
Thank you, Cristina. [indiscernible], I have to be clear. From my point of view, the biggest goal for sustainability is the decarbonization. In the decarbonization, first of all, we have to act directly to drop our emissions, but the big role of a company like Prysmian is to help our customers to [indiscernible]. And our customers, I mean the TSO and [indiscernible] And that's what we can do, thanks to our products and processes. Okay. I give the floor to Francesco for the financial results.
Thank you, Valerio, and good evening to everybody. As usual, let's start with the profit and loss capital. As Valerio explained, organic sales growth was pretty positive at 9% in principle, positive across all the BUs. And in particular, benefited of the very visible and strong impact that we start to see from grid hardening. This impacting our PD business is impacting our overhead line business. This is the -- a little bit the game changer or the strong driver that we are seeing kicking in now.
In terms of adjusted EBITDA, a good quarter as Valerio anticipated, EUR 427 million, 10.7% in terms of margin. The reason for such a good result is, I would say, [indiscernible]. First of all, the level of margins in our T&I business related with the construction market, but also with the more secular drivers maintain substantially the same exit level of Q4 last year. And this, of course, in terms of fuel comparison Q1 2022 gave a very big side in terms of resource growth. This was number one.
Number 2 is more strategic and more related to the visible impact that we are seeing coming from grid hardening in PD and in overhead line, we are starting to see not only volume and market and volume growth, but also a very significant margin expansion and all this is also a very important driver, which has just started and that we think may go on for the next quarter and we hope even year-on-year.
Last but not least, the good signs, the positive results of the project division. The improvement has been substantial in the end, EBITDA in absolute terms has almost doubled compared to Q1 2022. With an improvement in margin, which was still not enough as [indiscernible] as certainly explained, but it's certainly a first step in the right direction.
Moving to the lower part of the profit and loss, I would also mention, an extremely low level of financial charges even lower than last year. This is very much related to the first quarter because last year, we still had in place the EUR 750 million bond, which was repaid in April 2022. And therefore, in Q1 2022, interest expense is still suffer, let me say, [indiscernible] markets, of course, the higher level of cost of funding of interest rate, which is typical of a capital market instruments [indiscernible] to banking financing of the loan financing. For the full year, we expect, as I had already anticipated, at the release of the full year 2022 for the full year 2023, we certainly expect some growth of the financial charges of the interest expenses achieving relation with a growing interest rates.
Net income increased by almost 50%, up to EUR 182 million with quite stable [indiscernible]. Balance sheet. A very good deleverage in terms of financial debt, down EUR 300 million. I would say, a solid performance of operative working capital, which is a bit increased compared to March 2022, but mainly as a result of a reduced level of receivable factoring. I would say that taking out this reduction of receivable factoring, which is in the region of EUR 180 million, EUR 190 million. Actually, working capital would have even decreased. The reason why we decided the decrease of factoring is a reason of finance cost optimization in principle. With the growing rates, we are using this factoring with more, let me say, care, because it's not the cheapest source of financing, still competitive, I would say, but certainly not the cheapest source of finance.
Wherever I say that all the other components of working capital, including stock are very much under control. Of course, we discounted a negative effect coming from the cost inflation on [indiscernible] raw materials, which affected stock on the increasing size, increasing the level of stock but we were able to compensate this through other items of the working capital.
Now gentlemen, it's time to take under control the working capital very seriously because the debt -- the cost of debt is growing and because of the risk of the market demand reduce.
Perfect. We can move to the cash flow. Very good news on this on the front as well. The LTM free cash flow even improved compared to the full year 2022, which was at[indiscernible] an increase of this EUR 22 million [indiscernible] EUR 581 million. The reason is the cash flow from operations before working capital changes, which is taking the very significant benefit from the first quarter EBITDA. And this cash flow from operations is able to -- was able to absorb the increase of working capital related with the factory level that I was explaining. And also, you see a total level of capital expenditure, which is growing gradually to the well-known level that we have set for this year and also for the next few years at EUR 500 million.
But totally generated by our own cash flow.
I can [indiscernible]. To elaborate on what Valerio anticipated, let me present this slide. This is to clarify the -- first of all, the drivers of our cash flow and also secondly, the strategic value of our broad business portfolio. I try to explain it [indiscernible] . As we all know, we are currently investing massively, I would say, in a business which is the project business, facing very strong business opportunities and a very exciting demand. By the way, as we speak, this business, is the one we've already now the highest level of return on capital within the group at about approximately 20%. Return on capital that for the project business is expecting to grow further to grow much faster. You very well know our plan to invest and grow the level of adjusted EBITDA in the time frame of 3, 4 years after the same of EUR 500 million EBITDA target. And this, of course, consequently, will drive 20% return on capital employed significantly up.
This larger CapEx plan is possible and is -- can be self-sustained, thanks to the very high cash conversion that we are having in the energy business, but differently from projects, let me say, it's pretty structural. The 85% cash conversion that we are seeing in the energy business is something that can vary over the different cycles of demand, but -- which will not change significantly over time. Whereas, of course, there is no doubt that little by little, after having executed the planning projects, the 20% cash conversion projects will increase very significantly. We improved very significantly, certainly above 50%, if you want, around 60%, I would say, if you want my best estimation.
But what is very important to say is that the reason why we are able to sustain independently without any recourse to the capital [indiscernible] the equity market, this huge growth in the project business, which is driven by energy transition is the fact that at the same time, we are having another division, a different division, which is more mature, maybe growing at slightly lower rates with a much higher [indiscernible] cash conversion. And this is the strategic benefit of having a large in our view at least of having a large business portfolio. And let me also note that despite the very large and ambitious CapEx plan in projects, the total group that you see on the right part still delivers a total cash conversion of 70%. So the basically CapEx, well known, EUR 500 million presents only in markets. [indiscernible] Valerio wouldn't agree will be only, but I'm taking the responsibility [indiscernible] 70% of the EBITDA, which is something which is consistent with the additional objective of further deleveraging our debt and potentially growing also by external lines.
So it's a very balanced equation that I'm trying to explain with one division growing faster needed a lot of -- needing a lot of CapEx. Another division, I didn't talk about telecom, but also telecom is delivering a very strong cash conversion, supplying this cash and the overall group being very balanced and being able to keep deleveraging. Okay. I don't take long with the closing remarks because it is that we deliver the most of the messages, I would say, excellent start of the year. We are very active, very satisfied with that. Grid hardening driving power distribution and overhead lines starting to be really visible. I explained that I don't want to take more of your time, the value of a broad business portfolio in terms of solid cash generation and the financial equilibrium. And last but not least, very important, having reached the all-time backlog in projects, now it's really time to focus and there is a huge opportunity to focus on execution of this backlog and deliver flawlessly execution on these projects, assuring the growth of results and the margins.
I think we can move it to the Q&A. Thank you.
[Operator Instructions] We will now take the first question. It comes from the line of Daniela Costa from Goldman Sachs.
I have 2 questions, actually, I asked them maybe one at a time. The first one is, obviously, you had strong results in 1Q. You decided to keep sort of the guidance range. I believe last year at around this time, you kind of move it to the upper end, and you're not doing it this time around. Can you explain is this like a more cautious view towards the second part of the year? What are the assumptions there given all the news flow that we are getting in some of the more cyclical segments interested in sort of what's baked in for the rest of the year and why you haven't upgraded the guidance.
Okay. Thank you, Daniela, for your question. About the guidance, I would say that the lower part of the guidance is out of scope as of today. But we don't feel yet confident to move the upper side of the guidance because we wanted to see the first -- the second quarter, and most of all, the order income for the third quarter and fourth quarter. That's the reason why we prudently have decided not to move the guidance for the time being. What I can tell you is that the lower side of the guidance is out of scope.
Okay. And maybe just following up, actually, we haven't spoken on this call so much on telecoms recently. But can you elaborate a little bit again on like destocking trend? And why do you think this is not a more permanent downturn in that market after a very strong period and also how you see margins there going forward in case it turns out that there's more quarters of destocking to come there?
Okay. Why is that? Because in the telecom business, we have already seen -- and as I used to say, we can see the path to foresee the future. So there is a point to which customers are foreseeing a growth-- an excessive growth as it was till one quarter ago. And there, there is no solidity in the forecast. That's why I wanted to be a little bit more careful. And I foresee, not a scale down, but temporarily scale down of the demand due to the fact that customers are having today a very high stock.
It's not the first time that we see the installation in the telecom is difficult. It's difficult, namely means a lot of people and a lot of time. And they forecast of the growth of the installation is [indiscernible] if never achievable. Once the stock is to the roof, customers are stopping [indiscernible] and that's what we are seeing but are quick enough also to restore the demand when the stock goes down. Sometimes frankly speaking, we have seen also customers not able to keep our stability in their needs. But that's the story of telecom.
May I actually follow up on your first answer. Because when you said you want to see Q2 to see if you can get more upbeat, what do you need to see in Q2? Like is the pricing in E&I holding, like what's been the pricing versus volume assumption that would make you get more upbeat?
Listen, Daniela, my poor opinion, my humble opinion, we need to see if the demand is going to be sufficient to keep the prices at a certain level. For the time being, and I'm talking about April. We are keeping the price at the proper level, the historical level. But we see someone else starting drop the price. And that obviously is not a very nice sign, but we have to deal with it. I don't know if Massimo wants to add anything?
Yes. Thank you, Daniela. There is some normalization in the market. We are talking about C&I in North America, which was the driver of last year [indiscernible]. So there is some normalization in volume and price. But when it is 2 traditional months to better calibrate is actually the range of the guidance or the new one which would be really centered around the top of the current guidance. As Valerio said, we excluded this bottom part by all means. We want just to gain more time to read the market normalization in T&I, but at the same time to read the market side in power distribution [indiscernible].
So we have really on the verge of these changes. Our T&I is softening a little bit, it is ramping up and to better calibrate and [indiscernible], we want to ensure that the new guidance will be well centered, probably narrow, for sure narrow, to the top side at the top range of the current one. That's why we need these additional months.
We will now take the next question from the line of Monica Bosio from Intesa Sanpaolo.
Can you hear me?
Yes, yes, we can hear you.
Okay. I have 2 questions. The first on is on the pricing trend on the project business. On the back of your statement on the additional capacity ahead, so some more flavor on the pricing trends in 2 years' time in the projects. And as for the U.S.A. E&I, I was wondering, can you give -- tell us how much of the growth was driven by the [indiscernible] I have to admit I'm ignorant on the [indiscernible], which is the size of the market and how much is pricing? And how much could be volumes upside in the coming future?
Thank you, Monica. I leave the floor to Hakan for the question about the price -- the pricing on the project business.
Monica, just to give you a flavor on the pricing. Valerio was mentioning that pricing also depends on the conditions of the project itself. So the certainty of the projects and the terms of the project. So I think that is in the market, still some of the players that are gaining, let me say, position in terms of their prior investment decisions that they have made, they have additional capacity. And in order to fill that capacity, they are lowering their price to guarantee the prior investment decision.
As you know, we were the only one which about cautiously investing, and we were basing our -- that you were taking. So therefore, the pricing for the ones we don't feel comfortable we are raising, and we don't want to participate and this is helping our competitors that have already taken early capacity increase decisions to fill with lower prices.
However, if you look to the 2-year terms and as Valerio was also mentioning, we are very selective. So we are participating significantly to the higher price market. We don't want to be a player in the lower price market. But overall, the market is going upward. There is a trend going upward. But if you look to the overall, let me say, there are also some new players that are coming in, and they are buying market. So the pricing is very dynamic, as I was trying to explain, from different, let me say, players perspective. But from Prysmian's perspective, we are very selective, and we are seeing a price trend upward, and this is the best that we can do in the dynamic pricing market.
On the medium voltage [indiscernible], we have been awarded times ago -- years ago out of 2 or 3 projects, especially in the West Coast of France that are offsetting us today. Margins are extremely low for a project that is not [indiscernible] is not a building wire. And we have to decide to take up this serious decision on the installation of these projects because probably it's better to move the supply only because we have not the asset to install the proper assets [indiscernible]. And secondly, the margins are really difficult.
So that means we are not participating in [indiscernible] but we have selected [indiscernible] into the markets that are giving us the [indiscernible] clears up. But whatever is in the backlog is on the backlog.
Okay. Got it. And thank you very much [indiscernible] Maybe I lost one answer.
How much of the growth was driven by overhead and what's the size of the market? Juan, would you like...
Yes, sure. Monica, this is Juan Mogollon. You -- I think there are 3 questions embedded into your question. Your first one was [indiscernible] Q1 how much was that increase was C&I and how much was the PV and overhead, about [indiscernible] increase -- yes. About 2/3 of that increase in Q1 came from what we call the grid hardening that Valerio explained in the grid chart. The PD and the overhead line and 1/3 of that increase came from T&I.
I think in the second part of your question was in regards to the -- how much of that is the pricing versus the volume. In PD overhead line, we continue to see sequential pricing on top of the carryover that we had last year. The T&I as Valerio and Francesco just pointed out, we're starting to see a normalization of the price of T&I.
And then your third question was in regards to the size of the market. Let me answer it this way. The demand of the market, both in PV and over headline in North America is actually higher than the capacity available in the country. Just to give you an example, in PD, we have 40% of the market right now. And the only reason we cannot grow faster because of capacity limitation. So in both segments, we are investing -- we announced $140 million CapEx in the last few months to expand capacity over the next 3 years. And as Valerio pointed out in his chart, we see that as a very secular trend because of all the issues that the U.S. has on the transmission over -- interregional transmission of energy.
We will now take the next question from the line of Akash Gupta from JPMorgan.
I have 2 questions as well. The first one is on projects where you say that you are now evaluating new capacity extension -- expansion. Can you talk about what sort of new plants are you thinking? Is it also buying another boat or, I mean, the installation vessel or new production lines? And are they more greenfield versus brownfield? And is it fair to say they will be -- if they materialize, they will be on top of roughly EUR 1 billion you want to spend in projects over the next 3 years? That's question number one.
Akash, thank you very much for your question. If you want, I can serve you the answer now. New expansions. New expansions is -- we are not talking about the new plants. We are talking about expansion of the existing plants because the ancillary systems around the insulations line are huge. And as much as possible, we wanted to concentrate in the plants we have. Let me remember that we have Arco Felice as well as we have Pikkala, and we are going to have Brayton Point. Those are the 3 main pillars of our projects development. We have decided to resize, let me say, not to totally close Drammen in Norway because it was too little for the submarine part -- and Northern, sorry, I forgot. Those are the 4 plants we are using. We are planning to increase with the EUR 500 million CapEx announced to you, the capacity of extruded projects in the 3 plants at the end. Arco Felice is ongoing. Pikkala is ongoing too. And that's it. because the North American plants will come later on, not in the medium and short term. Did I answer to your question?
And the expansion we are thinking of is going to happen in one of the European plant -- 1 of the 2 that you mentioned before, in addition to the one that we already planned for.
For the installation, installation, we have to evaluate because we have already launched the new Mona Lisa. That is the second large vessel. I anticipated you the name of the ship. We decided Mona Lisa is going to be the copy of Leonardo Da Vinci or almost the company of Leonardo da Vinci. And for the time being, we stay where we are, when and if the projects awarded to us will require additional capacity of installation, we will evaluate it. For the time being, we have not taken any decision yet. I don't know if I answer it to your question?
Yes. No, I think that, that is what exactly I was after. And the second one I have is on the solar business that you have. I think you have this Prysmian solar as part of Industrial & Network Component business. Can you tell us a bit about how much this business is in terms of size, what growth potential you have seen in the last couple of years and where -- and then where this business can grow in the coming years given we don't have those many solar-exposed assets in the sector?
Okay. Akash, I got the point. Listen, the solar, I believe, that is the next frontier. After offshore wind farms or together with offshore wind farms, the solar is one of the most competitive source of energy. And that's the reason why we decided to launch the new product, the pry solar. The growth is good because that's a number that I remember. It's 19% organic growth. The problem is that is not a very rich product, 19% with a decent margin for a product that is -- for a business that is considered traditionally as or similar to T&I. That's it. Massimo, do you want to add?
Maybe good to add that our current size in this space is EUR 400 million, EUR 500 million. And we expect this 5% organic growth to continue in the coming years. And in the wake of this convenience of solar production, electricity through solar production and wind or other sources, we're well positioned. We launched this product to complement our further range with more features for our customers for more harsh installation. So we believe that we are well placed to leverage the growth in this market.
Together with the cable, Akash, we are -- we have launched and we are testing now the system to monitor the Prysmian solar. That is an IT asset to control and to verify the production output and the stability of the solar panel systems. That's an additional features that is part of EOS business, the business...
And maybe just a final one, how does the margin in this EUR 0.5 billion revenues compares against the group average?
This is slightly higher, meaning that we are able to reach our margin for this business that is 2%, 3% higher than the traditional solar cable we were selling in the past.
We will now take the next question. It comes from the line of Max Yates from Morgan Stanley.
Just my first question was around the Power Distribution business and the chart that you show on Slide 5, which has the organic growth and the EBITDA. I guess just looking at that, what I'm trying to understand is, the business grew last year at 10.5%, it grew this year at 12%. So it's not a massive growth step change. But when I look at the EBITDA, it looks like the margins have suddenly jumped up a lot in the first quarter. So I guess my question is just trying to understand kind of what are the margin dynamics here? Because I understand the demand side. We need more of these kind of interconnection, but I don't understand so much why the margins have just obviously jumped up a lot. So would you able to give some color around that, please?
Okay, Max. I'll leave the floor to Francesco to talk about margins.
Thank you, Valerio. Mark, you have to take into account that the Power Distribution business being a business based on, at least partially, offering contracts was the business who was a little bit more under margin pressure in the past few years, I would say, in 2021 and '22. Because was the business where we struggled a bit more to update the rising to customers in relation to the impact of the cost inflation. This is now over because we came through a quite complete renewal of the frame contract. On top, there is a significant part of the market are very still a part of the market, which is not based on plan contracts but which is based on spot pricing. And we were currently able to adapt the pricing to the new level of costs due to inflation. This is to explain why in the past, the margins were low. To explain why now margins are growing is the robust demand that we are seeing. It's a typically a segment where customers are available to commit or close to compete, let me say, to volumes to firm commitments in terms of volumes for the coming years if they have capacity availability. So this gives a pretty high and long visibility in terms of volume growth. And this is the reason why we are also investing to increase capacity in Power Distribution, mainly in North America, but it gives also a pretty good visibility in terms of margin expansion. And the combination of both is extremely powerful in terms of EBITDA impact, as you have correctly noted.
Yes. Understood. Just my second question was just around these inter-array projects that you talked about diluting the margins. I mean, if I look at your projects business, it's doing about EUR 500 million of revenues a quarter. From memory, these inter-array projects are only EUR 100 million, EUR 200 million per project. So I guess what I was just trying to understand is how many quarters will we need to see before these drop out. I would assume given the size of those, it shouldn't really be more than the first half. But just any sort of feel we could get around that would be helpful.
Okay. The inter-array is a business that covers roughly fourth quarter, we need to see the exit of the old projects got at a low price that are moreover suffering of the inflation rate that we are not able to transfer to the customers. But I have to be clear that our strategy is missing the power of installation. We have not capability to restore the projects. And if we are getting projects with the installation, we have to transfer the installation to third parties. That's the reason for the very low margins in the inter-array businesses. And we wanted to change our strategy into this business. They need moving to sell...
Supplier.
To supply only. That is [indiscernible].
Clear. Very quick final question. Just on that comment you made about receivables factoring. You talked about it could have had EUR 180 million to EUR 190 million. And you talked about it being a higher cost sort of form of financing that you may be doing less of. I guess my question is, if receivables factoring is having a negative cash impact of EUR 180 million and that continues for the first -- the full year and your free cash flow guidance is reiterated, does that mean you're doing better elsewhere? Does that mean you're kind of more positive on getting inventories down? Is that you're more optimistic -- raw materials have come down, so that's helping inventories? Just trying to understand, and that looks like an additional headwind that we didn't know about when you gave the guidance. So I guess, something else must be underlying better. Is that the right analogy?
No. No, Max, is no item for which you should review or we think of our guidance because it's more a temporary effect, which is compensating some other positive temporary effect. For instance, I didn't mention this because I didn't want to go too much into detail. But in our guidance and in our 2023 cash flow projection, we have already factored, already embedded an increase -- a very significant increase of paid taxes. It's not a surprise. The fact that last year and this year as well, we are having such a strong expansion of our results definitely leading to a higher tax burden in terms of total amount. These tax payments are delayed, so -- and will mainly take place in the second part of the year because basically, in most of the countries, you pay the year after you have the tax balance the year after the year when you have earned, when you have realized the profits. And this means that right now -- for instance, this is just one example, in Q1, we are sitting on a pretty significant increase of the tax payable that will fade away in the next few quarters. So it's just to explain you that this is a temporary effect, which is very balancing some temporary effect with the opposite sign. So it's no item that you didn't consider for the guidance.
We will now take the next question from the line of George Featherstone from Bank of America.
First would be for Juan, if that's possible. I think if I go back to Q4, you said that 2/3 of the group EBITDA growth in 2022 is T&I pricing. So I just wondered if it's normalizing for me here, where do you expect it to normalize to? And what's your visibility on that? That will be the first question.
Very good. Yes, George. So with regards to the T&I normalization, to answer that question precisely, we have to think of 3 segments on T&I. And as I said before, in North America, we're not into the residential. We are into the commercial construction, and we added to infrastructure. So the commercial construction in North America, we are seeing a normalization. And at this point, we do not see any signals that it will go to the pre-COVID levels. The industrial piece of the T&I in North America is holding very well. In Europe, about 1/3 of our business in T&I is residential. In that business, we are seeing normalization faster than in North America. We do not expect that to go back to pre-COVID levels this year, which is one of the reasons why Valerio said a minute ago that we're going to wait until the Q2 precisely to see the speed of normalization. There is no question in our mind that it will get normalized. As a matter of fact, it has already been baked into our guidance for this year. The only ambiquity is on the speed of that normalization. Did I address your question, George?
Yes. That was super helpful. Just on the visibility that you have to that because my understanding is you sell quite a bit through distributors. Is that right?
Say that again. I'm sorry, I missed the second part of your question.
Just wondered what visibility you have on that normalization ultimately in that business because I think my understanding is you talk quite a bit to distribute.
Yes. Very good. In the U.S. -- and again, I'm going to break it into 2 business. In the U.S., our T&I business is 100% through distributors. And the visibility that we have with us -- with the orders coming in, and we have visibility of 2 to 3 months essentially. And Europe, we go to market, about half of it through installers, especially in the South Europe. And the visibility is more shorter, George, in that segment in the U.S., okay? But I would say, to answer your question in a very simple manner, I would say maybe 90-day visibility to see in advance the speed of normalization.
Okay. That was really helpful. And then just wanted to pick up on another comment you guys made about the evolution through the quarter within E&I. I just wanted to understand a little bit about how March and April compared to the January and February because of the demand level that you saw, particularly in T&I and also maybe for the rest of it, for the Industrial Segment too would be super helpful.
Well, we have to distinguish region by region, first of all.
Yes.
U.S., we are seeing some reduction in the demand, whereas...
In T&I.
In T&I.
Only in T&I, partially compensated by the PD growth and overhead lines. In Europe, it was already scaled down. And consequently, we don't see any significant drop. Juan, do you want to add anything?
No. I just want to emphasize the fact, I mean clarify, that is the demand normalization we see in North America is as Valerio said in PD, but -- I'm sorry, in T&I -- but in PD, not only we see higher demand, but also sequential price on top of the carryover that we already started last year, as Francesco indicated.
Of course, being the PD business that is classified in terms of pricing as on the yearly basis, the agreement with customers, mostly yearly basis. Whereas last year, we were not able to raise the prices accordingly with the inflation and the growth of the raw materials. This year, we are -- in the renewal contracts, we are able to do it and we are going to enjoy for a longer time.
Okay. That was super helpful color. Just maybe coming back to kind of one of the things I was hoping to understand a little bit more was how March and April compared to January and February, I guess, particularly in the U.S. and with T&I because a lot has been made about the rate tightening cycle and the impact that's having on construction segments, particularly from March onwards. So just trying to understand how that evolved. Was it a big step-down in change maybe within the quarter?
George, Francesco speaking. April is slightly lower than January, February and March, January and February mainly but not very significantly. A little bit more visible is the reduction of volumes in North America. It's not a big reduction of volumes, but if -- I'm talking only about T&I construction market. Exactly for this reason, we have decided to take a bit more time to better calibrate the guidance for the full year because so far, margins appear to be pretty resilient. But of course, we want to gain a few more months visibility in terms of order intake in order to be sure where to center the new guidance. But the reduction in terms of margin in April is pretty mild.
That's super helpful. And then just another 2, if that's all right. The first one would be on the comment you made about a peer in that market being a little bit more aggressive on price. I just wondered if you could talk about if that's a specific region that you're seeing that. Or how aggressive just in terms of magnitude direction that they've been particularly aggressive on the pricing? Or is it just some sort of mild competition that you're seeing?
George, this is a question I prefer not to comment because otherwise, I have to enter into clear indications of the peers that are dropping the price. Generally speaking, the appetite for the volumes drive down the prices. That's the story.
Okay. Understood. No problem. A final one then would be just on the projects commentary you meant -- made from a cost inflation pressure. I just wondered what kind of share of the backlog that you currently have you expect to see some of this coming through from, sort of directionally a share of that backlog that would have the cost inflation pressure.
Okay. So thank you for the question, George. Hakan speaking. The inflation, of course, has slowed down and has -- also the cost of services and materials have now reached, I think, a stability in the recent months. So beginning -- versus the beginning of the year, we are seeing already some improvements. Looking to our backlog, a majority of our backlog has been, let me say, awarded to us after the inflation that has peaked. There is, of course, like the inter-array business that Valerio was mentioning, which are more than 4 years of backlog presence, they are affected. And there are a few, let me say, midsized projects, but I can say that it's in the range of maybe 10% to 15% of our backlog that we are currently rediscussing and renegotiating the prices because we haven't started these projects yet. So I think if the inflation is going to stay stable and if we are going to be able to convert these 10%, 15% to a decent level of inflation, we should be, let me say, good based on our assumptions as of today. Of course, there are some inflation effects that we have already embedded into our projection, which are already in our forecast and in our budget, and that part we are renegotiating as it incurs. So -- and we are getting a good response from our customers. We have projected that at least 1/3 to 1/2 we are able to recover, and this is a good sign. I do not see that the prices are further going to deteriorate. Therefore, I think we are going to see at these smaller projects, which are -- which have been [indiscernible] 3, 4 years ago, which has not been performed, they will -- we will convert them and get them out of our, let me say, order portfolio. This is what I can say.
We will now take the next question from the line of Alessandro Tortora from Mediobanca.
I have 3 questions, if I may. The first one is on the T&I. I know we have already, let's say, discussed a lot on that. But can you give us an idea of how much T&I prices in the U.S. are down since January, if you're talking about, let's say, high single-digit decline since the beginning of the year or, let's say -- just an idea of the extent of the normalization you mentioned before? This is the first question. I don't know if you want to go one by one.
Yes, it's better. Massimo is going to give you one as well, Alessandro.
Alessandro, the T&I prices April vis-Ã -vis the start of the year, probably down 2% to 3% in the -- across the board in T&I spaces in North America. So not a significant reduction as you might see. And as we said, this will probably continue with a similar pace in the coming quarters. But we don't expect to see a significant softening in prices through the rest of the quarter.
Do not forget, Alessandro, that the inflation in U.S. has heightened quite significantly also the labor cost. Consequently, there is a certain difficulties to drop the prices very quickly. That's the reason why we see prices keeping reasonably high compared to the prices before the pandemic.
Okay. Okay. Then the second question is on the level of profitability, let's say, on the Power Distribution. Considering the outlook you mentioned on PDA about the also, let's say, also adding the overhead lines, do you believe this business can achieve again a 7%, 8% EBITDA margin, let's say, coming back maybe to a level we saw in the past for PD, considering everything you said before?
Yes, Alessandro. We definitely see a strong demand in North America, which is driving decidedly pricing up in order to see easily a 7%/8% of EBITDA margin in this business in North America, probably even further up. Then when you wake this up with the rest of the world, I think 7%, let's say, across all region is probably a fair assumption for this year and for the coming years. So with a stronger -- with definitely with a stronger uptick in margin in North America, so strong that we don't see yet where this will lead to in terms of upside in profitability.
If I can elaborate further to be very clear, we are already at a 7% EBITDA margin in Power Distribution. There is a strong difference for the time being between the North American market and the European market. So North America is significantly higher than the 7%, certainly in the double-digit margin with EMEA being much lower. So I think that with the grid hardening fueling our distribution, I think that the chance we may have also in Europe, of course, to be seen, is that the tight capacity could sooner or later bring to a pricing improvement from very low level -- by the way, from currently very low level in Europe as well. Sorry, Massimo.
No, no, sure.
Okay. Okay. Then the next one is on the industrial business. Do you see any kind of price normalization in E&I? And considering the first quarter results, do you expect the positive state mix to stay in the coming quarters? You mentioned solar before. So just to understand how we can -- let's say, we can assess the margin expansion seen in the past quarter in this division.
Listen, Valerio speaking. The industrial business has never seen price ramp up as we have seen in E&I. Consequently, in my opinion, it shouldn't see any drop -- significant drop in the margins. I would say that the margins of today are almost sustainable and are driven more by the mix than by the prices. I don't know if Juan wants to correct me but...
No correction. In fact, I just want to emphasize what you just said is -- Alessandro, is the fact that not only is more stable, but also the mix is actually shifting into more stable segments, such as the mobility and as we discussed a minute ago, the solar segments. So I would expect that business to continue to be very stable in the years to come.
Okay. Okay. And the last question, sorry, just to follow up on the factoring side. Considering the increasing cost of factoring, is it fair to say that maybe by year-end it will be, let's say, lower, EUR 200 million, so let's say, the factory level were actually lower compared to the past years?
Most likely at year-end, will increase to the pretty normal level. The normal level of factoring that we are having just to quote the absolute numbers. So it's even disclosed in the [indiscernible]
Yes. EUR [ 209 ] million...
No. No, it's the EUR 400 million. No, no, no. It's more in the EUR 400 million. In Q1, it decreased, I'm rounding the number to EUR 200 million something. The decrease that I was mentioning is [ EUR 100 million, ] the decrease, not the absolute amount. I expect this to go up again to EUR 400 million or close to EUR 400 million. I was just mentioning this to explain the specific working capital increase that you are seeing in the Q1. It's not too a big deal. That is a factory item.
We will now take the next question from the line of Miguel Borrega from BNP Paribas Exane.
The first one, again, on E&I. So the last time we spoke in early March, you had already indicated that price in North America started to come down. But the margin in Q1 still does not reflect that. How do you square that out with the North American margin of 17.8%, which is actually sequentially up from Q3 and Q4 of last year, I believe, 14%. So what is the driver for the sequential improvement in the margin if volumes and pricing are normalizing? And out of the growth of 7.5% in North America, can you quantify how much of that is volumes and pricing, if you can, please?
Okay. Let me answer to your first question, Miguel. We were talking about unexpected drop of the margins of the prices on E&I in North America because was -- where price is extremely high that we have been able to enjoy. Now it's clear that we are seeing the demand in the first quarter reasonably good, let's say, let's see -- let's say, sorry, almost stable. And as a consequence of it, we have been enjoying a pretty good performance in North America. I would not comment about the sequential improvement because the sequential improvement can come also from the mix on from -- or from other variances like the raw material costs. So consequently, let's consider the margins for the first quarter E&I North America stable. As a surprise, a little bit us too, but it's a good surprise.
Maybe Borrega, to clarify in addition, now when you look at the margin of E&I in North America '21 -- '23 quarter 1, and you compare it to 2022 quarter 1, the T&I pricing in quarter 1 this year is higher than last year -- in quarter 1 last year.
Simply because last year was still pretty rough.
Growing trend. So if you compare year-on-year, we see -- despite we see some softening prices in quarter 1 this year vis-Ã -vis January, February or December. The passing of this year in quarter 1 are still very much higher than last year quarter 1. And sequentially, we see some slowdown in T&I, but we see an increase in pricing in Power Distribution. So that explains a lot why sequentially we are better than quarter 4 last year in E&I space in North America. And if you added that industrial cable, also this year, quarter 1 '23 North America has grown significantly over quarter 4. You understand why sequentially there is a solid growth in North America, stronger versus -- very strong versus quarter 1 last year, but also significantly growing versus quarter 4 2022. Then how much of the price -- how much of this growth is pricing -- the overall growth in North America is pricing, there is some moderate growth in volume in [indiscernible] and special. There is some flattish volume in T&I. All the rest is pricing.
I was just surprised to see 400 basis points of margin improvement from the second half of last year in Q1, which is a very significant improvement in the margin when you're talking about volumes and prices sequentially down. So it means something else must be very, very strong. You talked about industrial, you talked about infrastructure. So that must be it essentially.
Yes.
Okay. And then in industrial, this is a division that you don't talk too much. Can you give us a sense also what is driving the margin? I mean you talked about some segments being stronger, solar. Maybe give us a sense of how much that represents as a percentage of the total within industrial. Any other segments that are growing ahead if pricing is strong, as, for example, in energy here?
Listen, Miguel, my opinion is that industrial is a strong, but it's strong mostly because of the reshoring the -- all the industries that are under construction in U.S. because of the reshoring. Referring and may be considered also the data centers that in U.S. are growing very much.
I would add that the applications within industrial, which had the strongest margin expansion, are the ones mostly impacted by the most secular and structural trends. If you take, for instance, all the applications related with renewables, both solar, which we have discussed before, and also wind onshore, of course, you see that they have grown very significantly in terms of revenues. They already had the some of the highest margin -- EBITDA margin within the industrial space. And on top, they expanded their own margin. So this, of course, generated a big portion of the effect that you see on the total industry business units in terms of margin growth.
We will now take the next question from the line of Vivek Midha from Citi.
I had 2 related questions following up on discussion earlier. Firstly, thank you for the breakdown of the T&I business to different parts. I was wondering if you could give us an indication of what proportion of the E&I division's EBITDA is made up by the U.S. T&I business? And then relatedly, following up from Max's question, if we were to extend that chart on Slide 5 out, how would the margin in Power Distribution now in Q1 compare to the prior peak margins before the margin pressure in 2021-'22?
What is the portion of E&I from North America?
Let's check maybe...
Yes. It's more or less 50% -- 40% to 50%. I have no...
I think we can distinguish is PD portion -- PD North America portion or total portion is probably 70%, margin-wise.
Yes.
T&I portion of North America to the total is probably 40%, 50%.
Sales-wise.
Yes. I think your question, Vivek, was in relations to our globally or specifically to North America?
It will be the global proportion. So what proportion of global E&I is made up of the U.S. in T&I?
Yes. Yes, I got that number. So it's about 40% is T&I, another 40% is the PD and overhead line, basically, 43%. Okay. These are global numbers, North America. In North America, it's slightly different. It's more T&I than PD.
You mean sales or EBITDA.
EBITDA, please?
EBITDA.
And you mean, sorry, to clarify because we are a bit confused by -- you mean the breakdown within North America or the contribution of North America to the total? Okay. In this case, if the second is correct, the total contribution of North America to total E&I is more in the 70%, 65%, which is, I would say, parity is around 60%, maybe for T&I -- between 50% and 60% for T&I and significantly higher as Massimo anticipated for PD. For PD, I go back to my comment, you have a big difference in the profitability of Power Distribution in North America and in Europe. And North America really represents 90% of our total PD EBITDA margin.
And second question is?
Now versus peak season.
So how are they today versus the peak season in the past?
In Power Distribution.
I think -- If frankly speaking. I think it's wrong to talk about peak seasons for margins in PD because as we were saying before, these are more ruled by frame contracts, so are much less volatile, are much less exposed to sudden increases or sudden drops then, for instance, the risk that we may see in the construction market in the T&I. So they didn't fluctuate significantly. They have always been in -- pretty stable over time. Now certainly, we are seeing a very high level -- or not a very high level, a growing level, let me say, which is very much build by demand. That's the -- so that is not very volatile the margins.
I would only add to that, Vivek, the fact that versus the past, the demand segment for PD has changed dramatically because the demand now is given by the green hardening, which is a more secular sustainable trend, whereas in the past, it was a totally different type of demand. So the comparison probably is...
Maybe one comment that we can further make is that in Europe, current margins in PD are very much lower than the peak level. If you go back a few years, maybe 4, 5 years, I think the margins were more than double than the current one. And based on what Juan is saying, meaning the robust demand drivers that we are seeing PD, this is a chance that some better pricing may kick in, in the next few quarters or in the next couple of years. We will see. It's a some potential upside, in my opinion, that we have.
There are no further questions on the phones at this time. I would like to hand back over to the speakers.
Thank you very much. And if there are no other questions, I thank you for participating -- for your participation to our conference call of the first quarter. And I wish you a good evening, and see you next quarter. Bye-bye.
Thank you.
Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.