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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good morning, and welcome to Nexans' First Half 2023 Earnings Conference Call. As a reminder, this conference call is being recorded. [Operator Instructions]
I would now like to turn the call over to your host for today's conference, Mr. Christopher Guerin, Nexans' CEO. Please go ahead, sir.
Thank you. Good morning, ladies and gentlemen, and thank you for participating in Nexans conference call. I'm Chris Guerin, CEO of Nexans. With me Jean-Christophe Juillard, Deputy CEO and CFO; and Elodie Robbe-Mouillot, VP, Investor Relations.
Let me turn over to Elodie for the conference call rules.
Thank you, Chris. I would like to remind participants that statements made during the conference call, which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Readers and listeners are strongly encouraged to refer to the disclaimers, which are an integral part of URD, along with the audio replay of today's call that will be posted on our website, nexans.com.
I now turn you over to Chris, who will go over the first half highlights.
Thank you, Elodie. Let's now turn to our presentation on Page 4. Once again, as you can see, we are very proud to announce a remarkable performance, achieving a record high EBITDA and record high return on capital employed, thanks to our unique value growth execution model despite facing some one-off, as you have seen, in the Generation & Transmission business, but that we will comment a bit later.
We are a strong believer that our Distribution and Usages businesses can turn into premium market in the midterm. This is why we continue to make strategic acquisition to elevate our Prime offering. I will elaborate a bit more on this part. You've seen as well our adjusted backlog. Our risk and reward model approach helped us to grow selectively in terms of assets and projects within the G&T business. So our efforts are reflected in this impressive adjusted backlog, reaching EUR5.2 billion.
That will be reinforced further with the EuroAsia project award that has been announced mid-July. At our core, we value sustainability, understand its significance in overall Nexans business strategy. Our E3 operating model ensures that our sustainability commitments will be fully aligned with the business growth, and I will comment again some new targets that we have announced at the General assembly.
Let's turn now to Slide number 5. Moving to our financial performance. As you can see, a step forward in terms of achievement, if you remind in H1 2019, we were around EUR170 -- EUR190 million of EBITDA, of course, COVID time in 2020 -- '21, EUR220 million -- H1 2022 around EUR308 million. Now we reached a EUR354 million of EBITDA.
Just a footnote here, our EBITDA now exclude the impact of IFRS 2, which is about a EUR7 million. JC will comment on that later during the presentation. Normalized free cash flow stands at a very high level at EUR281 million, reflecting solid operational performance and of course, a high down payment in the G&T business related to TenneT specifically, driven as well by our results from operations, we continue to have a step-up in return on capital employed. We finished this semester with a return on capital employed around 21%, which is an increase of 38 basis points for the group. And as you can see, in spite of the G&T disappointment for the semester, we have an outstanding return on capital employed for the electrification business but -- at 27%.
Let's turn now to Page 6. The rumor regarding our portfolio evolution. We successfully, as you know, completed the acquisition of Reka Cables in Finland last January with a multiple around 5 times EBITDA before synergy, illustrating our disciplined M&A approach. So when you look at Centelsa and Reka, we have already acquired of EUR500 million revenue as part of our strategy to grow our electrification portfolio. And we will continue in the coming months as we see some potential slowdown of the market in some businesses, and this can bring some new opportunities in terms of M&A.
We worked together with GC in Colombia a few weeks ago, I'm very, very impressed by our Nexans team, Centelsa team on the fantastic integration of Centelsa in all terms, operational, future all, financial point of view. The synergy target at $12 million by three years already one year in advance. So that confirmed that our integration process is doing very well, and that shift is a very powerful levers to turn around or improve company's financials.
A word on innovation on Page 7. We are also continuously creating new growth drivers with offers going just beyond cables on pure product. Those offers are representing a growing part of our distribution and usages businesses and generate a structural margin generation. SHIFT program delivered for the H1 about EUR13 million EBITDA, overall the step-up of the Prime offer in all regions, in all verticals are going forward and thanks to our development of repeatable offer region by region.
More specifically, and we are highlighting that for the second time, the Nexans’ Fire Safety offer is a combination of our fire safety cables plus digital solution, including sustainability. And this is exactly a great example on how the combination of our cable and solutions come together to solve customer pain points in the building market. To reinforce the message on the fire safety, we have the second episode of our offer through a video that we can launch right now.
[Video Presentation]
So this is the second video of our Fire Safety offer. We have a reputable model, which is deployed region by region for this specific approach.
Slide number 8, back to Generation & Transmission. The CapEx expansion plan for Halden is moving forward, to be ready for the first quarter 2024. As you have seen yesterday night, we have just announced the investment in the new cutting-edge cable-laying vessel to support our record project backlog and meet the global installation needs for both offshore wind farm and interconnection market. This unique vessel will be built on the capabilities of Nexans Aurora. But with an announced loading of 13,500 tonnes loading capacity, the ability to lay four cable simultaneously to meet new customer requirements specifically for large-scale projects and this vessel will be delivered in 2026.
On Page number 9, turning now to our sustainability journey, where we have a very good start for the year. I wanted to highlight that what we introduced in the climate strategy at our general assembly, the fact that we strengthened our GHG emission reduction commitment, bolstered by our unique approach on the E3 performance model.
As you have seen, we are committed to a minus 29% of emission reductions for the Scope 1 and 2, minus 19% for those countries and up to minus 46% for Scope 1 and 2 by 2030. Thanks to, of course, our focus on value growth more than just volume. Just to give you an example, our natural resources consumption have significantly reduced for this semester versus the semester of last year.
Let's now go to business overviews on Page 11. As you can see, electrification organic growth is slightly down, mostly impacted by the exit of the Umbilical business in the Generation & Transmission vertical. So if you expect -- if you exclude the impact of this closure on stop of Umbilical business, the organic growth of the group would have been 3%.
Non-electrification business is growing up with strong dynamics while we continue in the meantime to reduce the metallurgy exposure to the external market in order to reduce the dilutive impact of this business. Both profitability of the business are improving strongly with the exception of G&T, that hypes up the EBITDA margin at 10.7%.
If we go now in detail slide by slide, business by business, Generation & Transmission on Page 12. So Generation & Transmission sales came at EUR384 million for the first half 2023, which is, of course, down by 10.3% compared to the first half 2022, reflecting the ongoing exit of the Umbilicals activity. As anticipated, unfortunately, I mentioned in Q1, the EBITDA was impacted by a combination of different elements. The unfavorable mix of the project versus the first semester of last year on phasing on -- unfavorable mix of phasing as well with less interconnectors business, the ramp-up cost of Charleston which impacted some project progress and now is completed. So past issues of those -- of the one-off of Charleston are behind us. Some inflation cost on some legacy contracts that we had to absorb and as well some impact on the margin linked to the delays of the EuroAsia awards that was expected in the course of the first semester have not been signed in July.
The H2 will remain affected by still some of those elements even though the headwinds are expected to gradually ease and the ratio will improve, but I'm sure you would have questions on GC. We'll be happy to answer.
On the Slide 13, as you can see, orders remain strong and sequentially growing with the TenneT frame-agreement award, which is one of the top largest in the history of the group. Under this frame, we'll deliver three turnkey 525kV project. This initial value is about EUR1.7 billion with some major subcontractor work to be added once each project specific call off will be signed. So that call can go -- what I mean is that it can go up to EUR2 billion. What is reflected here is on the backlog is that if you add up the EuroAsia that has been signed mid-July, our backlog at the end of July will be at EUR6.6 billion, which is, of course, a record for Nexans, 88% growth versus the end of December 2022.
What I want to highlight as well is that we are certainly one of the biggest backlog subsidy-driven in the world because, as we mentioned here, 97% of our backlog is subsidy driven. So Umbilical is shrinking big time because of the exit and as well, we are reducing our exposure to land high-voltage business that are lower margin generation.
On Slide 14. Turning now to Distribution. Sales were up 4.3% organically. This segment is benefiting from the expanding green investments. And we need to renew our power grid, both in Europe and in North America and then associating cables press accessories. What is very impressive is this record of EBITDA generation, and this is a very long time that we have not seen a double digit in Distribution. So this substantial margin expansion reflects the successful transformation of our SHIFT program and the fact that the vast majority of our equipment are fully saturated, thanks to a very strong demand.
We have made as well significant progress in the deployment of value-added solutions. Now we have more than 850,000 connected users coming from zero, two years ago. So of course, this is -- keep growing and generate recurring revenue and recurring margin. We are very proud about it, thanks to our innovation team.
On the Slide 15, Usages. Usages was down minus 20% -- minus 2.8%, resulting from a selectivity and prioritization of structural performance. We don't look at -- we don't look for volume. We want to make sure that our EBITDA is -- can resist some downturn. We've reached a record of EUR137 million, with both in absolute value and as well as record in percentage with a 15.4% EBITDA margin for this business, which is the sum of dynamic market for -- on conjunctural effect for the first semester, successful transformation effort, which is the big part, strong pricing power and as well the rise of the Prime offer. And we'll get certainly some questions because we see some slowdown in some markets that may affect the second semester that give us some prudence in our guidance.
In regard to the non-electrification, mobility and mining benefited from a very solid momentum, as you can see. We have launched as well SHIFT performance for the value burners activities that have generated a significant uplift of the margin. We see a soft -- softening in automation orders versus last year's high level which could be a sign of as well economic slowdown for the next coming months. Auto-harness’ double-digit growth with a very strong ramp-up project in the US and the increased deployment of shares in the electrical vehicle. Metallurgy is down, as we already announced and we see that telecom is experiencing -- sorry, a modest decline in revenues.
Let me turn now to JC for the financial.
Thank you, Chris. So if we move now to Page 18, we look at our financial performance for our P&L. You can see, and Chris discussed -- explained about our organic growth, minus 0.6%, mainly driven by two things. The G&T decrease because of the exit of the Umbilical, reduced sales on umbilical by EUR100 million versus last year same semester last year. And the second one is obviously the continuous decrease of our Metallurgy business for the strategic reason we've been explaining since now 2021.
So if you exclude those, basically, the organic profit is quite strong. EBITDA stands at a record level of EUR354 million, which is 10.7% EBITDA margin, first time favor for Nexans to reach double-digit EBITDA margin and definitely completely aligned with our targets that you recall from our equity story to be between 10% to 12%. We are already there this semester closing.
I just would like to mention, as Chris said in the introduction, that now our EBITDA is excluding the IFRS 2 charge. It's a charge that for employee benefit long-term employee plan, equal shares distributed to employees. It's a non-cash expense. And to be, I would say, with the same treatment than best practices we have been decided now to exclude that because obviously, this chart is becoming meaningful at a share price around [EUR50] (ph) per share. It represents EUR7 million in the EUR354 million EBITDA.
Operating margin very strong. Reorganization cost slightly above last year, mainly coming from the cost of exiting the Umbilical business and the layoff plans. Operating items way below last year. But last year, if you recall, we had two exceptional events. I mean one exceptional event, which was the sale of our land in Hanover in Germany, which came with a profit of EUR50 million, that obviously did not repeat in 2023. And we have also less core-ex impact, about a flat result on core-ex this year versus a gain of EUR25 million last year.
Net financial expenses higher as well, mainly coming from the cost of debt, which has been increasing due to interest rate highs and the fact that we had also issued a new bond in the first quarter of 2023 before we repaid the maturing bond of May 2023. And therefore, we had a little bit of overlap on the cost interest.
Income tax in line and basically we're coming from an net income from operation of EUR134 million, which is at par from last year if you exclude the one-time gain of last year for the sale of the land. If you look on the waterfall here, you can see that basically the contribution of the businesses in the EBITDA growth, strong contribution, as Chris explained from Distribution and Usages offset by Generation and Transmission, which is mainly the back of EBITDA coming from the Umbilical business as well as basically some inflation and ramp-up cost in Charleston that we occurred in the first semester of this year.
If I move now to the next page, to Page 19. As we always do, I'm presenting here the electrification EBITDA change between '22 and '23 by levers, by the different axes of our basically value transformation. So basically, in terms of net costs, which is the net between cost improvement and inflation, we are positive. We have been able to pass through all of the inflation to the -- to our customers. And at the same time, get some material savings on cost, mainly in purchasing and industrial savings.
Amplify and SHIFT, which are the key of our transformation are contributing both EUR23 million for Amplify and EUR30 million for SHIFT, growing basically the most accretive margin businesses in terms of volume for Amplify and SHIFT, which is a transformation of our still low performing units and as well are moving our units to innovation with more innovative products and IoTs.
Strategic CapEx is also one of the levers coming from the new extension of Halden. We started to do some survey and some studies and therefore, started to generate a little bit of profit yet on this strategic new addition. Generation & Transmission, I mentioned, is mainly due to the drop of the Umbilical, plus some adverse effect on some margin of the project in the first half, mainly in Charleston, but also on inflation costs. And then after that, some conjunctural reversal, which are some one-off also in D&T businesses, and D&U normalization, Distribution and Usages normalization. Margin came up at 13.3%, which is a 100 basis point increase of margin for the electrification business in the first semester of ‘23 last year.
If I move now to the next slide on Page 20 and we look at the net debt evolution. So our leverage is slightly reducing from 0.4 times to 0.3 times EBITDA. So basically, the strong cash generation from the businesses, EUR237 million, plus some meaningful positive change in working capital, mainly coming from the down payment received at the end of the second quarter, the TenneT down payment we received EUR150 million definitely helped basically the cash generation of the semester.
CapEx remains quite high, EUR148 million, including that, we have EUR89 million of strategic CapEx, which is completion of additional -- addition of expansion in Halden that will be completed by the end of the year. Other meaningful cash out to the dividend, obviously, to the parent and also the acquisition on the M&A box of Reka that Chris mentioned earlier in Finland.
If I move now to Page number 21 and we have a look on our balance sheet. So we continue to have a quite strong balance sheet with a meaningful basically, I mean, very good working capital level and basically a total financing of EUR2.4 billion. When you look at the ratios, we have lot of room on our covenants, slight increase in the gain ratio, mainly coming for the -- on the net debt and also the leverage ratio is decreasing due to the cash repayment.
If I move now to the next slide and we look at our equity on Page 20 -- sorry, liquidity on Page 22. You see that we have a very strong liquidity position, close to EUR2 billion. When you add up the cash at the end of June, plus undrawn EUR800 million revolving credit facility, EUR2 billion. We have the next maturity date for our bond -- on the coming bond is the one maturing in April of 2024, EUR200 million. Nothing more in the remaining of 2023. And again, a very strong cash position of EUR1.2 billion at the end of June.
Now I will move to Page 24. In the light of the very strong performance of the first half of 2023, we have decided to raise the guidance both on EBITDA and normalized free cash flow. Obviously, this guidance includes the contribution of Reka for the second semester. So we increased from EUR570 million to EUR600 million to a new range of EUR610 million to EUR650 million. And cash flow -- normalized free cash flow increased as well by about EUR70 million on the lower part of the range and EUR50 million on the upper part of the range, and you see the basically tailwinds and headwinds. Obviously, now that we have for the year, we are getting more and more comfortable about the performance for '23 and optimistic about it.
That being done, it concludes my financial section and I turn on the mic to the operator.
Thank you. [Operator Instructions] And our first question comes from Daniela Costa from Goldman Sachs. Please go ahead.
Hi, good morning. Thanks for taking my questions. I have two. So first one, just a clarification, I guess, on some of the things that you've said in high voltage. Can you give us some view how quickly these -- some of these headwinds can erode. I guess there's some like inflation ramping up of Charleston mix that you should have high visibility on, I guess, because of the backlog. So how steep can be the resolution of these headwinds?
And on high voltage as well, maybe you explained and I missed it just right now. Those EUR20 million project-related expenses that you've exceptionalized, can you just repeat? I -- probably sorry, I missed it. Why is this not considered operational and is exceptionalized? And then the second question related to just your outlook commentary. Can you maybe break it down between usages, industrials, distribution. How are you -- what are you assuming inside your guidance for pricing in the second half versus volume and the sort of visibility you have? I know you mentioned some slowdown commentary. But yeah, just those two points. Thank you very much.
Thank you, Daniela, and good morning. Good morning, Daniela. So I will take the first question on G&T and the headwinds. You're completely right that some of the impact that we've seen in the first semester will not repeat themselves. Obviously, they are one-off in the second half, and we did it on those we mentioned specifically, for instance, delays on some projects in Charleston that basically drove to healthy liquidity damages recognition in the first half of the year that are now fully booked in the financial that the -- we'll not keep it on sale going because the project is over. So definitely, those are one-offs, and they are quite meaningful more than EUR10 million, EUR13 million to be precise.
We have also some inflation that impacted the margin of the project on the project, some of the wind offshore projects that entered the backlog before COVID or right at the beginning of COVID. We're not completely immune, I would say, against type of cost inflation. The margin of those projects has been adjusted. Obviously, when you adjust the margin of the project, you have to take the rate it on the margin this year to adapt and one-time impact on your margin, impacting your P&L. And therefore, I mean, this is now -- we now get to the level of margin in the second half, but we will not get the first one charge impact of the adjustment. So obviously, this is behind us as well.
And then the last thing, which is making a big difference between H1 and H2 is if we were anticipating to get the [indiscernible] tied to the first half, which is a very strong margin provider for the company and for the business segment G&T. And that same thing for project side in the second semester. I mean, at the end of the month of July, it was not -- it is not included. Anything is not included in the first half numbers, and this is definitely lacking into the numbers. Definitely in H2, there will be a catch-up effect and substantial, I would say, contribution of Aurora in the second half of the year.
So this is -- these are the main elements that obviously will give us more visibility and we are expecting a better performance of the G&T margin in the second half for the reason I just explained. However, I mean, it will remain below for the year or what we've seen in the previous year in terms of the variable level of the first half of '23.
Yeah. One we can add, we see that Charleston legacy contracts are a bit behind us. We have load-out source work and we just started the production of the very, very big contract of [indiscernible]. So a lot of things should normalize in terms of production. But it's very complex to ramp up new factories in a country that have no legacy in the offshore wind farm subsea cable. So good luck for the future investments, but I think we hope that for us, it's behind us.
Regarding the question -- regarding D&U, I think you're right to separate the two together because it's indeed two different dynamics. In regards to distribution and utilities, all nations are working up at the same time in regards to their very obsolete electrical grid. And we have, in all countries, specifically Europe, North America and South America, very, very high demand, which is, for us, resilience in case of recession. So the numbers that you see right now as it's a frame agreement on call off, maybe not on growth because it's a question of installation phasing that will remain for the next semesters.
Wherein in usage, we have seen a degradation of demand strongly in North America, which is, of course, things are normalizing. We kept our pricing up. We have seen as well some degradation in Peru and Chile and as well Australia. A slight slowdown in the Q2 in Europe, nothing significant for the moment and a strong growth in Africa in Lebanon. Of course, we remain prudent because we have some signs of downturn in some regions, and this is why we are anticipating those downturns by recession-proof actions on our cost base to make sure that it will not impact our margin. So that's the answer to this question.
Thank you. Sorry, just a follow-up on the first part on G&T. You talked now through most of the items on that bridge. But Umbilicals, can we confirm -- just confirm how much of a drag there will be, if any, still in the second half? And also the point on the EUR20 million exceptionalized, if you could -- maybe I missed that again.
So on the Umbilicals, so definitely, most of the decrease is coming both in the first half. There will be a remaining decrease in revenues in the second half, but not to the magnitude of the first half.
Maybe, I can give you the value of our Umbilical backlog. In Q2 last year, it was about EUR200 million. And in Q2 this year, it's about EUR16 million. So it’s -- we are really on the way of the exit.
And sorry, the other question on G&T, I did not understand. Can you repeat please, Daniela?
No, I was just clarifying again, and I might have missed it earlier. On those EUR20 million that are project related that you put below the line, they seem operational. So just interested on why did you exceptionalize.
Yes, exactly. No, this is one project called Umbilical project that we are manufacturing in Halden. It's definitely impacted in completion due to the termination of the segment Umbilical. And therefore, between the announcement of the restructuring, I would say, of the Umbilical and the completion of the project, the significant departing loss of engineers, people and inefficiencies. And therefore, we -- all the, I would say, ex-core losses on the projects were basically connected to the shutdown of the Umbilical of the line of business.
Therefore, I mean, typically, when we had a situation like that, if you recall, when we shut down Halden in 2019, we had couple of planned projects that were in the same situation. We are able to move those costs in structure. Now the -- since COVID, basically, it's not permitted anymore to move that to restructuring. So we have basically created a line in our P&L called specific operating items, and we basically moved that outside of EBITDA because, again, we want EBITDA to be a comparable merger over time. And those costs are linked to the restructuring discontinuation of this Umbilical business and therefore, are not operational. So not -- I mean, reporting them in EBITDA would not be comparable with what we've done in the past and was not -- is not part of our internal rule of basically reporting operational performance, but it is in EBIT, earnings before interest and tax.
Got it. Thank you for clarifying.
Thank you, Daniela. And by the way, this is the same way that many other companies do it. You look at our competitors or you look at Prysmian, [Schneider Electrical] (ph) do the same thing basically excluding nonoperational non-repetitive -- I mean, operational but linked to restructuring items outside of EBITDA. Thank you. Next question.
Thank you. And we now move on to our next questioner, which is George Featherstone from Bank of America. Please go ahead.
Hello. Good morning, everyone. Thanks for taking the questions. First one, just on the G&T margin, just maybe a little bit more clarity if we could possibly get it. Could you help us with what the underlying margin is for the business in H1 excluding the Umbilicals impact, you've done it with the organic growth. Can you just help us with what the margin would be for the G&T business in H1 without Umbilicals? And then more broadly in that segment, there's been some messaging from a few developers that there’s delays in the offshore wind market due to rising costs. I just wondered what, if any, risk you see in your backlog as a consequence of that?
Hi, George. So we'll start with the first one. The underlying margin is -- would be similar to the one we reported. It has an impact on the EBITDA volume, value of the EBITDA, basically, obviously, the fact we removed about the EUR100 million of sales. It does not have a meaningful impact on the change in the percentage of margin business. Do you want to take that?
Regarding the -- yeah, we've seen some messaging on some -- showing some developers on the consideration of a delay of major projects. So far, based on our backlog, we are not concerned.
Okay. Thank you. And then in the distribution business, you've obviously seen a significant improvement in profitability. Clearly, demand is strong. But you've talked in the past as well about renegotiation and framework agreements. So I just wondered if there's been any impact from that yet and how much of your business in this area is on these new framework agreements?
It's -- the vast majority of our business in distribution is supported by a long-term framework agreement that have been renegotiated. But as well on top of that, we have launched -- we have performed SHIFT in many of our units that have not been under this program in the last three years. That improved through complexity reduction, the generation of EBITDA percentage on free cash flow generation. So I will say with the renegotiation of the frame agreement plus the equipment saturation plus the SHIFT performance that we are on structural margin basis.
Thank you. And then final one, just on the portfolio. I just wonder if you could give us an update on the telecom disposal and also the plans for the auto-harness’ disposal. I think you last commented on this that you might be able to do something with that business by the end of this year. Is that still a time line that's relevant?
Yeah. So regarding telecom, the transaction is ongoing and should be disclosed in Q3. Regarding harnesses, we put on hold because business is going very, very well. We plan to reach EUR800 million EBITDA -- sorry, EUR800 million revenues by 2024. The situation in Ukraine doesn't ease the process. We have received some offer, but that was not for us enough, I would say, attractive to dispose that business. So what we do is that given the volatility of Ukraine, we have duplicated our equipment in another countries in order to ease the work and carry on to SHIFT from Ukraine to the other countries. And this application as well reduce the risk of our businesses of automotive harnesses and that will certainly improve the quality of the offer that we should receive next year. In the meantime, as harnesses will not be proceed this year. We have another activity in the slate, which is very well on progress and that should be announced on the Q4 of this year as a disposal.
Okay. Thank you very much.
Thank you, George.
Thank you. And up next, we have Sean McLoughlin from HSBC. Please go ahead.
Thank you. Good morning. Just to, I suppose, dig a little bit more into G&T. I mean thinking of 17% to 24% target that you gave us last year, I mean we're clearly a long way from that. And just looking at your backlog, I suppose at which point does that mix shift, let's say, structurally towards giving you a 17% to 24% target range? And at which point is, let's say, higher inflation actually baked into all your forward margin assumptions for G&T. That would be the first question.
I will take the question, Sean. So definitely, as you rightly say, we're quite a long way for that. But we have modeled basically our backlog -- the current backdrop we have, including EuroAsia and TenneT, the two latest contracts that are meaningful contract because both of them represents more than EUR3 billion, EUR3.5 billion of future sales. And we have looked at with the margin we know on those contracts and the rest of the backlog, how this backlog will basically deplete itself in the coming five years. So basically, what I cannot tell you to answer your question precisely is that starting 2026, we will be above 17% and then we will reach gradually -- more than 22% by 2028. So this is the latest we've done information. In the meantime, between now and 2026, we will ramp up progressively to get there, but the big change will be 2026 for sure.
Thank you. I guess on the new vessel, can you give an indication of the total CapEx and when you will spend that?
Yes, sure. So the total expected CapEx for the new vessel is EUR270 million. We'll start expanding part of that this year in the second semester for about EUR60 million. The bulk part of it will be next year in ’24 for EUR130 million and the remaining portion will be in 2025.
Thank you. And lastly, on distribution, you talked about the recurring revenues, 850,000 connected users today. I mean what proportion of your revenues would you say are recurring in distribution? And what is your target of connected users from that base today?
I’d say it's about roughly 5% and the objective is keep growing. Keep growing because that's half of the strategy to make sure that we can resist to any fluctuation of demand in terms of margin generation and what we -- what we see is that we are a bit alone proposing those offer to our customers that are very, very well exited. So we'll keep growing above 5%. Our team has a very strong incentive to increase that part.
Thank you. I mean just maybe -- just in terms of your penetration of -- just to put that kind of 850,000 into some context.
Sorry.
The number of connected users today, what kind of penetration is that would you say of, I don't know, new sales or existing...
Well, we can’t say that. Let's look at the ULTRACKER with the 40,000 connected objects for the distribution, our potential -- the captive market that we addressed can reach a total of 4 million of connected objects. So we are only at the beginning.
Thank you.
Thank you. And we're now moving on to our next question, which comes from Eric Lemarie of CIC. Please go ahead.
Yes. Hi, good morning. Thanks for taking my question. I got two actually. The first one, regarding your guidance in EBITDA this year, if I'm not mistaken, the low end of the guidance implies an EBITDA margin decline in H2. But is there any reason why it should be scale? That's my first question. And second question on acquisition, you mentioned your intention to pursue acquisitions, but I was wondering whether it is still pretty for you as you can plan to deal with, with your current backlog.
Sure. I'll take the first question. So definitely, as you rightly say, we're expecting second half to be -- I mean, it's not we're expecting it's just we are lacking visibility as we -- I mean, as we review the usages and distribution, most likely businesses. We started to see -- we've had a very, very strong first quarter performance in both segment, distribution and usages as well as Industry & Solutions.
Second quarter started to slow down a little bit in terms of volume. We've seen mainly in some of the areas in the world where we had the most strongest, I would say, for the past 18 months, strongest volume and pricing increases. We've seen some slowdown in the month of May and June that are continuing in the month of July. And you know that on those businesses, the visibility is quite short term. Couple of weeks on me. And therefore, we are remaining cautious about what could be the situation if volume continues to drop in the third quarter and if prices could often drop.
We are quite resilient, we believe, on prices for the reasons that Chris described about basically our transformation, our ability to move up in the value chain in our product. So we have not touched at all or very limited impact on prices so far despite some volume changes. But obviously, the situation remains uncertain, I would say, for the -- at least for the last quarter and the second part of the third quarter. So definitely, we're taking a little bit more prudent approach when it comes to that. And the second impact to that is, despite we believe on G&T that most of the impact of the first semester are behind us.
We still continue to trade or recognize margin on some of the projects that will be completed in the second half of the year, beginning of next year at a lower margin level for the reason I explained. And therefore, that will not necessarily extend or compensate the potential drop in distribution and usages. So for those reasons, we remain cautious, I would say, for the second half. Hence, the guidance the way we presented today.
This is a bit our trademark since -- for the last five years. So make sure that we reach our numbers, but as well anticipating potential risk on remaining prudent in the guidance. Regarding your second question on the acquisition. Of course, fully -- full blast on electrification, but two different universe. In the high-voltage business, we have played -- we have decided to play organically with the, add an expansion with Charleston with Aurora, with the new second vessel that we just announced. It's an organic -- I will say, choice.
Whereas in distribution and usages, of course, we keep investing in some organics and we'll make some announcements in the coming months, specifically on distribution business. But this is where we play as well in organic. We still have a lot of potential of consolidation in that market because of a multitude of regional players that are certainly a bit worried about the evolution of the demand in 2024, and that gives us a great opportunity to accelerate our acquisition dynamic in that field. And this is what we see right now, really, our team is fully loaded on the M&A stream. So I think we'd be very happy to announce another acquisition in the incoming months.
Yeah, thank you.
Thank you. Our next question now comes from Akash Gupta from JPMorgan. Please go ahead.
Yes. Hi, good morning, everybody. A few questions from my side as well, and I'll go one at a time. The first one is I have is on these investments in high voltage. And Chris, again, I mean, we can see the need for investments given the backlog, which has gone up at you and your competitors. But what was the surprise for me was that when we look at your competitors, they're also investing in new capacity as well as vessel. When we look at your announcement, it is only about the vessel. So maybe if you can elaborate on -- are you -- does this mean that you may be still open to increase capacity further in the future, if required? And probably that may take lower lead time than getting a new vessel, which is why you are announcing the vessel before and shall we read this that you may be -- you may be open to an idea of increasing further capacity in high voltage? And then the follow-up of that question was also -- for JC that, how shall we think about the strategic CapEx for the full year? I mean it was, I think, EUR77 million in the first half. And now I think you're saying there would be EUR60 million, if I understood correctly for vessel. So what is the new number for strategic CapEx for the full year?
Thank you, Akash. Yes, we answer to your questions. So first of all, the G&T business has to be taken in different parts. We are lowering massively our exposure to land high voltage. That means you need to compare subsea to subsea. So it means -- our colleagues have invested in both land and subsea -- new capacity. We make a massive investment in Halden that will be open in Q1 2024. What I can tell you today is that Halden is loaded at more than 90%, 9-0, 90% up to 2027, including, of course, net on EuroAsia. And that was -- the difficulties that we have is that with this full loading of Halden plus as well Charleston because we are full up to 2027, we were lacking installation capacity.
So we are just resynchronized installations versus production, given the backlog that we have today. What I can tell you is now with the new capacity of Halden, the ramp-up of our investment in Charleston are fully synchronized with this balance with the third vessels. Do we need to announce more CapEx? Not right now because let's execute properly what we have. Our choice is to be 97% subsea-driven considering the level of margin on the lower exposure to massive competition in that field because you know that interconnection, we are roughly three players on offshore wind form five or six that generates a higher margin. So that's the -- I will say, the answer that we can bring today, Akash, for the moment. JC?
Yes, for the question on the strategic CapEx, Akash. So in the first half of 20 -- of this year, 2023, we spent EUR90 million, 9-0, of strategic CapEx for the continuous extension of our two new lines in Halden. In the second half of 2023, we'll spend EUR120 million, which is basically half of that will be the completion of the additional line in Halden and then will be -- there will be operation in the beginning of '24. And EUR60 million for the new vessel for EUR120 million, which brings basically the total strategic CapEx for 2023 total to EUR210 million.
Thank you. And my second question is on organic growth. So if I look at the electrification business, and you say you had 3% organic, excluding Umbilicals, is it possible to get a rough idea of how much of that was volume versus pricing? Thank you.
It's majority pricing. Majority pricing because first of all, our team are not incentivized on volume. None of the team. None of the manager is incentivized on the volume. They are only incentivized on value growth. So that's the aim. And this is why we have been able to reduce the natural resources consumption roughly by minus 10% over the first semester. Because the new logic of our target definition is strong incentive on the financial ratio for all business units, means EBITDA, return on capital employed and free cash flow generation.
On the other hand, we force them of reducing their carbon footprint. So we put carbon cutter for the majority of the unit. So the double constraints of improving your profit while in the meantime, reducing your carbon footprint does not allow to think in growth in volume. You need to make sure that your economical model, your customers and product portfolio will fit the both aspect profitability increase and carbon emission reductions. This is the E3 model that we are populating everywhere in the company and at for the moment, running very, very well.
Thank you. And my final question is on this fire safety cable. Thank you for giving this additional information on the margin profile. Can you say what is the penetration of this fire safety cable in your usage segment today? And when we look at the medium-term potential, let's say, in three or five years, what penetration do you see down the line? Thank you.
It's about -- roughly today, we are at 15% overall of our revenue. And we have compound annual growth that we foresee around 13% to 16% depending on the area. I remind you that in Europe, it has been forced by regulations. New build, new construction build requires HFFR product, so fire safety proof. It's coming up as well in South America. It will come up as well in North America a bit later. So today, the market is about -- for fire safety, about EUR3 billion, and we expect this market to reach a EUR9 billion overall in '23 -- sorry, in 2030 worldwide.
Thank you.
Thank you, Akash. Next question.
And we're moving on to our next questioner, which is Miguel Borrega from BNP Paribas Exane. Please go ahead.
Hi, good morning, everyone. A couple of questions from me. First, on your guidance. I remember you saying that you're assuming a complete reversal of the cyclical or conjunctional tailwinds in 2023. Margins that actually went up sequentially for usages and distribution. So I would assume some conjunctural effects. But when I look at your bridge on Slide 19, there's a negative effect from the conjunctural effect, negative EUR8 million. So just want to confirm, conjunctural is now coming down and you still expect the remaining EUR53 million to come in the second half of the year because last year, the positive effect was EUR61 million. So are you expecting EUR53 million down in the second half? Thank you.
So Miguel, yes, I mean, definitely, first of all, let's talk two seconds about first half. So we had a first quarter in line with 2022, meaning extremely strong in terms of volume and pricing in all of the region of the world for usages. Then we started to see a decline in the second quarter. Hence, there's a slight negative number that you see in the bridge of the slide. We've seen so far the volume decreasing. If I take an example, for instance, for North America, and Canada, mainly where we've seen and we've been reporting in 2022, very strong volume and pricing. We see, for instance, that the volume in usage in North America in the second quarter declined 38%.
And if you look on the quarter-to-quarter from Q2 -- Q1 to Q2, 36%. So definitely, a very -- a quite strong decrease in terms of volume. However, I will mitigate that a little bit because the level was so high, just to give you information, 50% above the normalized level of 2019 if we exclude 2020 for COVID reason. So we remain quite -- we continue despite the decrease in Q2, which is impressive in terms of number. We remain quite high and therefore, not knowing what will be Q3 and obviously, Q4, it's -- we have discounted that.
To answer your question, yes, it's not in the guidance for the second half, explaining why basically, we see a second semester which is much lower than the first semester. The second aspect I talked about volume. The second important impact is obviously pricing because we had double effect of volume -- high volume and high prices. We have not yet touched the prices in Q2 despite the volume decrease. If the volume was continue -- going to continue to decrease, obviously, we will have to reduce prices as well to a certain level, despite we believe again that since thanks to our transformation, we can remain at a decent level of pricing, but we might have to touch prices as well. And therefore, pushing a little bit even further the decrease.
So this is why, I mean, when we put our guidance together, as we have always done, and this is why we keep favoring such a wide range in the guidance and maybe just the objective of converting conjunctural of '22 to structure for '23. That's what we're doing. We have just increased the guidance because, again, we had a very strong Q1. So that's the way we took a little bit of, I would say, cautiousness into our guidance, second half performance on usages. And distribution is a little bit different because, again, we are a lot on some agreements which are giving us more visibility than usages, but -- and distribution is doing very well, and we don't see necessarily the same, I would say, volatility -- potential volatility on usages in second half. But definitely, usages, I mean, we don't know much further, I would say, the month of September right now.
Okay. Thank you. And then related to your guidance as well. So what changed essentially that led you to increase the guidance because I noticed the EUR7 million of share payments, share-based compensation taking out of EBITDA, plus the EUR20 million of additional costs. So basically, if you exclude that, that's EUR27 million plus the integration of Reka, that the EUR30 million you are increasing the guidance. So is that what explains the upgrade?
First of all, so the share price -- the share-based plan, you're right, the EUR20 million now because the EUR20 million would have not been in EBITDA anyway. Again, before we always treated restructuring. So it was not part of EBITDA. This is not a difference. This is the same treatment that we always do. So we cannot take that as an explanation because it would have not been part of EBITDA anyway. So the share price, yes, is a difference. That's EUR7 million. That's about EUR17 million expected for the full year. The rest is basically the reason we increase the guidance again is because we, first of all, we've had a strong Q1 in low voltage, very strong Q1. That we need to take into account in the first half result. The second part is definitely we signed EuroAsia, which give us obviously, very good news for our financial performance in the second half. And that came basically late into the -- late into the semester, beginning of the second semester. Without EuroAsia, probably we would have not been as, I would say, excited and increasing the guidance to that level for the second half of the year. So EuroAsia is definitely a big contributor of the reason of why we increased the guidance for good.
That’s clear. Thank you. And then on G&T, I understand the temporary effect in 2023. But you're now saying the margin guidance EUR17 million to EUR24 million will be essentially after 2026, which is kind of a change in what you said last year that from now on, the margins would be in that range. Is that because when you adjust for cost inflation, the projects that you execute until then will have a little bit more cost than you were expecting? And then kind of what confidence do you have that after 2026, it will still be between EUR17 million and EUR24 million. So what kind of protections are you having in that sense?
Yeah, Miguel, it's Chris. Just to remind you that I say that everything that we are taking in the backlog is in the range from 17% to 24% EBITDA guidance, which is confirmed by the fact that 97% of our backlog is subsea based but we still have legacy contracts that has been taken by the formal team before us. So we are still executing projects that have been signed in 2018. We had as well on a project in UK that we signed in 2020 with a massive part of civil work that have been impacted by the inflation. And we say that the margin guidance upgrade what we said is after 2025, starting in '26. But that's as well related to the backlog, the fact that your backlog is -- our backlog is massively loaded with long distance offshore wind farm plus subsea interconnection drives ultimately with those, I would say, tunnels of EBITDA generation. Of course, you can have execution issue. What we have not modernized properly is the ramp down of our Umbilical business, the difficulties of the ramp-up of building new factories in US, that's for sure, that's impacting certainly a normalized EBITDA around 14%. But the backlog that we have today goes in that direction.
Yea. I completely confer to that. I mean I think with probably on our side the mis-expectation impact -- a negative impact on the -- of the shutdown of the Umbilical in terms of turbulences into the Halden plant as well as difficult to ramp up the first contract in Halden in 2022, if we did not see. So -- to answer your question, the EUR17 million to EUR24 million, we definitely lost a year in doing that. We are more expecting first to do that starting -- beginning of 2025. We'll now talk about ’26. So yes, we've lost a little bit of time due to, I would say, again, the unexpected situation in Halden due to the ramp-up and the impact of the Umbilical shutdown.
That's a fundamental question. I mean we go ahead on that. That's for sure. It's what we discuss with our Board of Directors as well because it's not only an improvement of the margin through the backlog is as well a massive scale, not Nexans only, but of the sector. Because when you think the backlog of the three players, three main players in that sector in 2019 was about EUR5 billion on the go to go -- on the reach to EUR20 million to EUR25 million. So the backlog of the three main players have been multiplied by five.
So when you look at the agility of Nexans, we were at EUR600 million revenue. And now we'll be on the direction of EUR1.5 billion revenues. It's a massive scale up that require as well to rethink the process, the standards, the routings, needs new skills. And this is it. I have not mentioned it and give me the opportunity to mention it, please. This is why we have announced as well a management change where we ask -- we are very happy that Pascal Radue from GE Hydro joined Nexans because he faced in the last 20 years of his general electric experience, those issues and he know how to handle it, this massive scale-up. And Pascal will start on the first of September, supported by Vincent Dessale to make that change smooth in the coming years. But of course, it's the first time in the history that G&T faced such growth. And that's the fundamental change versus the last years.
Yeah. And when you look at the backlog today, I mean, there's the size of the backlog completely changed, obviously, like you said, please, moving from EUR2 billion only 24 months ago to EUR7 billion, almost EUR7 billion now. So it's a massive change with new capacity, with new vessels with everything. And again, we have not foreseen necessarily the impact of the transformation. But when you look at the size of the backlog, it's not just the size of the backlog, it's also the complexity of the backlog. Instead of having 50 -- 40 projects or 50 projects in that backlog, we have now that big backlog, less than 10 projects.
So the complexity reduction of the backlog and therefore the execution issues we might be facing will be quite different and much better in the future than what it is today. But we are in this transformation period. And again, we've lost one year due to the issues on that. But when we look at the size of the backlog, the less complexity of backlog, the margin on the project we have on the backlog, this is why we are quite confident that the future years will show significant improvement in margins.
Thank you very much.
Thank you.
[Operator Instructions] And we're now moving on to Jean-Francois Granjon from ODDO BHF. Please go ahead.
Yes, good morning. A few questions from me. So the first one, could you come back on the margins expected for the G&T. So I understand that you are more optimistic for 2026 and above. So -- but what do you expect for '24, '25? Do you expect a slight improvement compared with the current level reach for the first half? So do you expect some, I would say, probably more than 14% to 15% EBITDA margin for G&T. My second question concerned also the margin for the distribution and usages with a huge level reach for the H1. So do you consider that this level are sustainable for the coming years? And I would ask additional question after. Thank you.
So yes, I will take the first question on G&T. So definitely, G&T, we've seen improvements in the second half that will improve the margin versus what we've seen in the first semester for the reason I described and the contribution of EuroAsia. We see obviously further improvement in 2024 to reach again the level above 17% in '26, and that will be gradual from ‘24 and ‘25 to [indiscernible] we see basically 2 points improvement to get to the level.
Regarding distribution, yes, we consider this sustainable, but you can have some up and downs in the organic growth, which is linked to the frame agreement call off on the phasing of installation, you are in a favorable -- right now, we are in a favorable Q3 phasing of installation. And we have a strong winter, maybe Q4 will be a bit lower in distribution. But what we can say is that volume and price have been -- are good for the next two years. So you should not have massive change in distribution. So it's a very resilient business, and we are very happy. And is what I told you, I want to -- this business to shift to a double-digit horizon. And this is what we did. And now that means that we will be ready to make some further investments to support the growth in that sector. Usages, you still have a mix of structural transformation, but as well some conjunctural effect. Difficult to tell you exactly what will be the percentage normalized and second semester on '24, but we want to remain in the range between 12% to 15% in average even if there is a downturn.
Okay, thank you. Other question regarding the financial costs. We saw a strong increase for the first half to which EUR38 million. So what do we expect the increase for the rate. What do you expect for the full year? Another question regarding the CapEx. Could you just come back on the CapEx expected for this year? And what do you expect for 2024 for all the CapEx for all the group?
Yes. So I will start with the CapEx question for '24. So in 2024, we'll have remaining, we will have no more remaining strategic CapEx on the Halden extension, but we will have the new vessel we just announced. So that will amount about EUR140 million. And then after that, we'll have about EUR200 million of, I would say, maintenance CapEx. So that would get us to a total of about [EUR360] (ph) million for cash for CapEx for total CapEx envelope for 20 -- for the year 2024, and then will start to reduce.
For the operational financial charges. So basically, financial charges definitely increased significantly due to -- I would say part of that is one-off, and part of that is, I would say, coming from the interest increase, interest hike. And we have about EUR14 million additional cost coming from interest increases. And also, as I said, one of the fact that we issued a new bond and then we repaid the old bond and there is a period of time where we had double interest chance. And that's, for the most part, we have a little bit of ForEx impact as well into this number. So I would expect the second half of the year to be slightly below due to the fact we will not have double the bond cost of about EUR30 million, I would say, in terms of [indiscernible] second half, that would give us about EUR65 million to EUR70 million of financial charges for the year.
Okay. Perfect. And just two last questions. The first one on the backlog you mentioned on the press release on the presentation, the backlog evolution for distribution and usages compared to the presentation. So could you give us some color about the level of trend for the backlog for dissolution usages. And the last question, regarding 2024 on the plan, your plan between '21, '24 presented a few years ago. Do you confirm the target between 10% to 12% EBITDA margin expected at the end of the plan in 2024. Thank you.
So I will take the first -- second question, the question on the target. So we are already there because we just -- we are at 10.7%. And again, we continue to see improvement in all of our businesses and except for G&T for the first half. But again, explained the reason and why now we are confident that we will recover gradually but we will recover. And then the fantastic transformation in usages and distribution. So definitely, unless there is a significant recession next year that basically drops everyone's top-line to a very low level. But I would say, in current environment, we are very optimistic that we will be inside -- well positioned inside that range of 10% to 12% next year, yes.
Yes. On regarding -- we don't give specific numbers regarding the backlog on the annual. But what I can tell you is distribution is based on frame agreements and the consumption of the volume signed in the frame government is going much faster than what we can deliver. So demand remains extremely strong in all regions in North America and Europe, specifically and as well Africa. Regarding usages, it's difficult to predict. The only thing I can tell you is that, as I mentioned at the beginning is we see a degradation of demand in North America part of South America and Australia, a slight slowdown of Europe, but we see as well that the new permits in Europe are down 15%. So that means that Q3 and Q4 will not be fantastic. And a part of it is compensated by a very strong demand in Africa and Lebanon. And I gave you more than that at the moment.
Okay, thank you very much.
Thank you, Jean-Francois. I think that was the last question. So we wish you all a very great summer break and for the one that we will not see or not meet in the coming days during our roadshow. Thank you for your attention.
Thank you. That concludes today's conference. Thank you for [indiscernible] and you may now disconnect.