Letter to stakeholders

The results for 2017 are in line with our expectations, with more or less stable organic sales for the year masking a fourth-quarter acceleration. Profitability was up, with a good increase in Adjusted EBITDA and a significant improvement in margins for the high-tech high value-added businesses of Energy Projects and Telecom. The robust order intake for submarine cables and systems of around one billion euros confirms the Group's technological and market leadership. We have won important projects, like the cabling of the first offshore wind farms in France and the IFA2 interconnector between Britain and France. The progress in margins has been assisted by the insourcing of important project execution activities, and by a more profitable mix. The Telecom business has continued to see strong growth in demand for optical cables, supported by the development of broadband networks and the initiation of investments in 5G.

Group sales amounted to Euro 7,901 million, posting an organic variation of -0.1% assuming the same group perimeter and excluding metal price and exchange rate effects, with a fourth-quarter improvement (+2.9%) thanks to double-digit growth in Telecom's optical business and recovery by E&I and Industrial & Network Components. The most significant contributions to the growth in Adjusted EBITDA came from improved margins in the strategic businesses of Telecom, up to 17.0% (from 14.0% in 2016), and Energy Projects, up to 17.8% (from 15.9% in 2016). This positive progress absorbed not only the effects of negative performance by the subsidiary Oman Cable Industries, but also the adverse impact of exchange rate movements (a negative Euro 11 million compared with 2016). EBITDA climbed 1.9% to Euro 657 million, after a total of Euro 76 million in net expenses for business reorganisation, net non-recurring expenses, other net non-operating expenses and General Cable acquisition-related costs, while the Adjusted EBITDA margin on sales was stable compared with 2016 at 9.3%.    Adjusted EBITDA has thus reached a new high of Euro 733 million, after the 2016 record of Euro 711 million, hitting the target range Euro 710-750 million, and allowing the Board of Directors to propose a dividend of Euro 0.43 per share. Other important factors benefiting profitability have been our focus on operational and organisational efficiency, optimisation of manufacturing footprint and a favourable sales mix particularly for Energy Projects and Telecom. 

Like in the previous year, the Group has continued to develop its growth strategy by concentrating investments in high value-added tech-driven businesses, with the creation of centres of excellence and expertise, while pursuing manufacturing efficiencies in its lower value-added segments.  A total of Euro 257 million was invested in 2017 (Euro 233 million in 2016). The Group is currently engaged in a three-year Euro 250 million investment programme to expand its global production capacity to meet growing demand for optical cables for the development of new high-speed telecommunication networks. The Group has continued the drive to make its industrial footprint more competitive through the Fast Forward Operations Project.  

R&D expenditure amounted to Euro 84 million in 2017, in line with 2016. Prysmian Group's growth strategy revolves around its commitment to R&D. In 2017, the European Investment Bank (EIB) and Prysmian Group announced the finalisation of a loan for Euro 110 million, to fund the Group's European R&D programmes over the period 2017-2020. Also thanks to EIB financing, Prysmian has been able to step up its level of investment, with cable technology proving it can make a decisive contribution to the challenge of digitalisation and the development of more efficient and environmentally sustainable power grids. Innovative optical fibres, ecofriendly cables with higher carrying capacity and ratings, and technologies for monitoring grid operating conditions are just a few of the areas on which we are focusing. The EIB loan is particularly earmarked for research on innovative materials involving the use of nanotechnology, systems for monitoring and managing underground and submarine networks, new cables and materials for more sustainable solutions and hybrid power-telecom cables. It will also serve to finance the development of new products, like underground and submarine power transmission cables and systems, high voltage P-Laser cables, cables for the renewable energy sector, high-performance optical fibres, cables for FTTH and FTTA applications, connectivity and development of smart cables and systems for sensing, monitoring and management. New investments will allow us to achieve even more significant results for the development of energy and telecom networks, like those obtained in recent years, including the new 600 kV P-Laser cable, the 600 kV XLPE and 700 kV PPL HVDC cables and the new 66 kV cable for energy applications, and for use in broadband networks, the new Flextube, the optical cable with the highest fibre density in the world. Work also continued in 2017 on the PryCam electrical grid monitoring technologies developed by Prysmian Electronics, which are proving very successful.

Financial year 2017 marked a further acceleration in Prysmian's acquisition-led growth, confirming the Group's vocation to act as an aggregator on a global scale, raising the quality and competitiveness of the entire cable industry. The merger agreement reached with General Cable represents another fundamental step forward in this direction, and follows in the wake of a series of other important recent transactions. These include the acquisition of the assets of Shen Huan Cable in China, with the aim of pursuing an independent growth strategy in China, that of Corning's copper data cables business in Germany and, less recently, the acquisitions of Gulf Coast Downhole Technologies in the USA and Oman Cables Industry, now both at an advanced stage of integration.

Human capital development and business organisation are areas in which the Group is at the forefront for its innovative people development policies and initiatives to promote diversity and equal opportunities. Over the course of 2017, the Group operated several talent development and recruiting programs for both employees and potential candidates: over 5,100 employees attended training courses at the Prysmian Group Academy and the new Manufacturing Academy; more than 48 new high-potential recruits embarked on careers in the company with the "Build The Future" Graduate Program, now in its seventh year. The "Make It" program for engineers and technicians, now in its second year, and the new "Sell It" program for high-potential young sales professionals have resulted in the recruitment of 57 and 48 experienced operations and sales specialists respectively. One of the main initiatives in 2017 was the "Side by Side" project, aimed at increasing women's participation at all levels of the organisation, at fostering a culture of inclusion and respect for diversity and at promoting diversity and meritocracy within the business. Also fitting into this context is the YES - Your Employee Shares - scheme, which in its first four years has seen a more than 53% uptake by 7,400 employees in 28 countries, who have thereby also become investors in the company in which they work.

Sustainability plays a central role for Prysmian Group, which is committed to promoting a business model that integrates economic, social and environmental responsibility in all aspects and activities of the Group. A strategic approach focused on listening to and actively engaging with all the Group's internal and external stakeholders, constant attention to the evolution of the global and industry context, as well as the ability to think about the future in terms of environmental and societal responsibility, translate into a Prysmian business model based on the concept of shared values. A key strength of this approach is constant monitoring of the Group's sustainability performance throughout the value chain, intended not only to evaluate performances ex post, but also to develop a proactive attitude in decision-making processes, that can anticipate and seize new opportunities.  As leader in the energy and telecom cables and systems industry, the Group best expresses its approach to sustainability by directing its growth strategy towards key issues such as: sustainable, technological innovation of its solutions, environmental responsibility of its production processes, attention to workplace safety, development of talents, and management of relations with customers and local communities in which the Group operates.  Framing all this are the staunch principles of ethics, integrity, transparency, anti-corruption and respect for human rights that characterise Prysmian's way of doing business and are materially reflected in the Code of Ethics and the policies applied throughout the Group.  In 2017, Prysmian gave wide visibility to sustainability issues through targeted communication activities and campaigns, communication tools like the "Sustainability Yearly Overview" and the related website, and the events in Pikkala (Finland-February 2017), and in Delft (Netherlands-November 2017), dedicated to a selected panel of stakeholders.

These combined positive performances have allowed us to achieve our guidance targets once again in 2017 and to propose our shareholders a dividend of Euro 0.43 per share. Lastly, looking to the future, I reiterate our satisfaction for the General Cable shareholders' approval of our acquisition proposal and confirm our expectation of closing the transaction by the third quarter of 2018. The approval of the Euro 500 million capital increase will give us greater financial flexibility and also allow us to look at other targeted acquisitions in line with our growth strategy.