© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
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 the Nexans Full Year 2022 Earnings Conference Call. [Operator Instructions].
I would now like to turn the call over to your host, for today's conference call, Mr. Christopher Guerin, Nexans's CEO. Please go ahead, sir.
Thank you. Good morning, ladies and gentlemen, and thank you for participating in Nexans Conference Call. Here is Chris Guerin, CEO of Nexans with Jean-Christophe Juillard, Deputy CEO and CFO. We have as well Vincent Dessale, COO of Nexans and Nino Cusimano, General Counsel; as well as Elodie Robbe-Mouillot, VP, Investor Relations.
I will turn over to Elodie that will go over conference call, before we start.
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 our URD, along with the audio replay of today's call that will be posted on our website, nexans.com.
I'll now turn over - you over to Chris, who will go over the 2022 highlights.
Thank you, Elodie.
Let's go Page 5 regarding the highlights. So record year in record since 2001, very strong profitable growth, all-time high EBITDA, normalized free cash flow and return capital employed performance. And I think it's pretty strong achievement when you look at the last four years. So let me congratulate the team.
As you know, we are already focused on growth driven by value, more than volume and our transformation platform around SHIFT is, of course, generating fantastic and structural results. Our enhanced liquidity and solid balance sheet is maintained.
And we have as well - we're very proud to announce this morning that S&P rating revised Nexans outlook to positive that's confirming the evidence, the hard work of our team to strictly monitor working capital, which is a record low and shift to a cash generation mindset in enabling this robust balance sheet and liquidity.
As well to give returns to our shareholders, we proposed a dividend of €2.10 per share, which is up 75% versus last year. What you know already that has been announced. We have announced one new acquisition in the electrification market in Finland to reinforce our Nordic leadership position.
And we are preparing the divestment of our telecom system, this announcement we've done with - in parallel with Syntagma Capital. Record on subsea backlog for generation and transmission, supported by the award of Celtic Interconnected business. And as well, we keep amplifying our development into Industry 4.0. I'm very proud about this result.
We are accelerating the decarbonation. The fact that we are extremely selective on the business side that we are really focused on value growth, more than volume growth helped us to exceed our SBTi target with a minus 28% of gas emission versus 2019, and, of course, make the team very, very proud.
We have as well announced the photovoltaic power facility installed in Morocco. That's only the first step to a much bigger investment in that regard in other plants. And of course, our foundation is running very, very well. We are expanding our budget to keep improving the lives of more than two million habitants.
I will go straight to Page 7 because regarding the highlight of Page 6, everybody knows what have been announced in the last year. So as you can see, €599 million EBITDA, a record in Nexans' history. What is important is the continuous progress with a 9% ratio on sales.
Normalized free cash flow supported as well by some down payments of the award that we've just mentioned is reaching the record as well at €393 million of free cash. But let me focus your attention on the cash conversion ratio, EBITDA to free cash flow of 6%. And as well, the return on capital employed, this one is not normalized, so that this one includes the CapEx that we are putting in G&T mainly.
So we reached at group level 20.5%, which is I think one of the record in the sectors. But for the electrification only, we are reaching 29% return on capital employed coming from 9% in 2018. So pretty proud about this result.
Page 8, we are working on the implementation of the agreement to acquire REKA Cables in the Nordics, one of the leaders in Nordic countries. One as well will help us a lot on the sustainability standpoint because they are really the first cable neutral carbon - sorry, first carbon neutral cable manufacturers in Europe. So that's a fantastic news. It's about 270 people, three plants on €160 million of revenue.
We are entering an exclusive negotiation for the divestment of the Telecom Systems business. It's about €180 million revenue on 680 people. We found with Syntagma, a good partner to keep growing this business and modernizing the units and keep investing in innovation.
On Page 9, it's, of course, what generally create the singularity of Nexans versus others is our transformation platform around SHIFT. We have been able, over the last four years, supporting this great result to move many units from the red zone means poor EBITDA and poor cash conversion into the blue zone.
On the unit that are in the profit driver area, which is representing right now about 50% of our revenue are working to go to the green area. Being in the green area means 15% EBITDA on sales and a minimum cash conversion of 70%, seven-zero, which is, of course, outstanding to be there.
But more importantly, the focus of 2023 will be to about converting the unit that remain in the transformation candidate value burners area, so the pink and the red zone, which is about roughly 30% of our electrification revenue which is roughly € one billion of sales, running at 3% to 4% EBITDA.
Our aim is to convert it to 8% to 10%. So that means a significant new potential leverage to improve our profitability on the structural minor without any growth factors or cost reduction factors. And what you see in the structural result of the group with the SHIFT program on the graph, you can see that at least the 20 units that are already in the blue zone have strongly improved over the years with limited growth and very significant improvement on both EBITDA and the working capital.
Next page, that's the move from the profit driver to innovation drivers. So from the blue zone to the green zone. This is what we are doing on the SHIFT Prime. We are ahead of our transformation with seven innovation, significant innovation that have been launched over the last 24 months, bringing more than €27 million additional profit. Those innovations have been launched in 17 countries overall on all the countries that have implemented those innovation have been able to generate an improvement of 200 basis points of their gross margin.
Our revenue supported by our service revenue are up plus 14%. And we keep improving by - point our customer satisfaction. Starting from zero, two years ago, we have now more than 540,000 connected users on 37,000 connected object.
Beyond these numbers, there is a subscription model improving our margin, the potentiality of connected objects in our perimeter will be about four million connected objects. So you can see that we are only at the beginning of the journey and we will keep improving this number that will, of course, help us to move from conjectural factors to structural factors on medium and long term.
On the Page 11, very proud about this result. The team made fantastic work. That's as well the result of our E3 model, which is aimed to really converge the economical factors with the environmental factors and the engagement factors. The fact that we put a lot of pressure on reducing the complexity, reducing the distance focusing the units on the radius of 800 kilometers distance from their base.
And as well, all the actions we are doing in decarbonizing upstream and downstream transportation have been an accelerator to our decarbonization, and this is why - we were supposed to be versus 2019 at minus 7% of gas emission, and we are very proud to announce that we are minus 28%.
So that means our target that was supposed to be achieved in 2023 will be four to five years ahead. And that's a good news for the company and the good news for the planet. We will reinforce our environmental stream and to help our manager to take decision.
This is what you can see on Page 12. Now we map all our units on the different, I will say, performance level, there is the Y axis, which is about the structural context of the unit. What is the structural context is the country. You have a country that's already very well advanced in terms of energy decarbonization, which is not the case of all the others and as well the business model. Is it more aluminum and copper that have a pretty significant influence regarding their environmental performance.
So they can do a bit on that side, but with limited impact because they cannot change their allocation, for example. But what we for them is to work on the operational GHG performance score, which is about everything on decarbonation on logistics low carbon content product on anything that they can do to reduce their carbon footprint. What you see on the storm on the graph on the right is the electrification unit representation in terms of GHG emissions versus the gross margin output in 2021.
You can see that at least on the red zone, on the orange zone, we are now implementing more and more carbon quota for our low environmental performance in making sure that you are not only bringing great margin, but as well in the - you do it in a very sustainable way. So that's the aim of our, I would say, program and, I will say, performance that we will track in the coming two years.
Let's now move to the business overview on Page 14. As you can see, the group is at plus 6%. I remind that our aim is to reduce our external exposure to metallurgy. So when we do exclude metallurgy revenue, the organic growth is about 12%, 12.1%, the electrification business only is about close to 13%.
On the non-electrification business close to 10%, as you can see, with the significant improvement on the EBITDA margin for electrification moving from 10.2% to 11.9%. Regarding the next page on generation and transmission. Good organic growth, a slight reduction on the reddish EBITDA margin ratio, which is due to the changing mix of revenue in 2022.
I'm sure you will have questions. So we will comment through the questions. We had more offshore wind farm than interconnection, and this mix will evolve in the other side in the coming years. I remind that 90% of our business is subsea driven and all the announcements, further announcements that will be announced in terms of one, will confirm our very strong position on the subsea part. Backlog is at plus 51%. But I think everything on that point.
On the Page 16, we are spending a significant CapEx to increase our capacity, both in Charleston in U.S., but as well in Halden, adding two new lines here is a photography that have been taken a few weeks ago, it's on progress. We are committed to be ready for early 2024. So far, so good. Everything is on track regarding the deployment of this new CapEx, and that will be ready for the project of Celtic and Borwin six.
Let's move to Page 17. This is what I told you already in February 2021, and that numbers are confirming our prediction. The world needs to modernize the power grid, the electrical grids, specifically in U.S., in Europe and in South America. The electrical grid in those regions is more than 50 years old. And you cannot cope with a big shift from fossil fuels to renewable energy on one hand. On the electrification of our daily life with in the middle, a very obsolete electrical grid.
So all the DSO are putting a significant investment to accelerate the modernization and we have difficulties to cope with their demand. Our factories are fully loaded or overloaded in 2022, and that's confirmed as well in 2023. But it is what I told you every time. Volume doesn't make profit systematically.
So it's important as well to be extremely selective on the project, on the customer, on the product that you want to manufacture, on the density of the production. And this is all the effort that we ran through with SHIFT program on this distribution market that make us proud to announce that with the 13% organic growth, our EBITDA is up 51% and here it is the structural change. So we keep improving the profitability of that business.
And in parallel, our backlog is plus 33%. But within the back you don't have the 100% of the demand because we have as well in parallel reminding everyone that keep pricing every six months, and this is why we have difficulties to cope with a very, very high demand. And we remain extremely selective, but be sure that distribution sectors in the case of 2023, I would say, volatile environment is certainly 100% recession proof.
Regarding usage. Usage, very high level of selectivity. As you've seen as well, it's a 13% organic growth. There is some business that we have decided not to take for a question of profitability, but you can see that the profitability is increasing, up 76%.
So you have some structural effect. We told you in full transparency, we told you that in the first semester of 2022. I will let J-C coming back on those elements. I know that a lot of analysts are bidding on a very strong collapse on the usages in 2023. I'm sorry to say that we don't see that at all. The first semester remained extremely strong.
We have a slight slowdown of demand in North America, but it's more a SHIFT from residential market to commercial infrastructures and industrial infrastructure. So a slight reduction in the residential that impact the backlog. But now we have a conversion of the demand to commercial infrastructure and as well data center. So we are pretty optimistic on the demand in North America and with a very strong carryover of the pricing.
Pricing remained the same than 2022. So very confident in that area in the first semester and Europe is very strong. Europe, Middle East, Africa is very strong. So what was, I will say, the big risk of 2023 in the case of recession, at least, let me comment for the first semester because commenting over first semester will be - but for the first semester, we have almost all the backlog that we need at least backlog or confirmation of the projection from our key partners that confirm that usages will remain strong in both volume and in both pricing. And once again, we have, as well in parallel, launched a lot of actions to prevent any case of recession that will support the improvement of the margin in parallel of the strong demand for the first semester.
On the Page 19, very proud as well of the Industry & Solutions results that give us a pride to our automotive harnesses because in the context of a war in Ukraine, they have done a fantastic job to protect our 2,800 employees in Lviv in Ukraine but as well as to protect our relationships and business with our top customer, namely Porsche, BMW, Volkswagen, Daimler.
Now the crisis management, the outstanding crisis management of the team, bring them more volume and we have an astonishing result of automotive harnesses in spite of the war in 2022 with an organic growth of more than 20%. Automation and mobility remains extremely strong in the Industry business.
So 12% organic growth, 14% improvement on EBITDA, on backlog, plus 41%, and we are the record backlog on the Industry & Solutions so far. Regarding Telecom & Data. So two things. We are divesting the LAN cable on the Telecom Infrastructure, a bit disappointing Q4. It was a bit more complex because some countries are reducing their investment due to the fact that they are at the end of their, I would say, long-term plan of fiber optic investment and a slight tradition of demand, but we believe that the first semester was the first time is that are back on track. So we are confident the backlog is strong.
The reading of special telecom is a bit more complex now to read because special telecom divert a big part of its capacity to support our generation and transmission business because you know that in our high-voltage subsea cable, we are selling as well fiber optic as the complexity of the project and the very high demand on G&T. We need this fiber optic capacity to support our business. So this is why this business will not be divested because it's instrumental on the high contribution, technically speaking, to our - development of our G&T business. That's overall the view of the business.
Let me turn around the mic to J-C for the financials.
Thank you, Chris.
So if we move to the financials on Page 21, we look at the P&L of Nexans for the year 2022, you see that sales basically stand at €8.3 billion in terms of sales at current metal price, €6.7 billion standard metal price, which is an organic growth of 6.3%.
Chris explained basically the detail of the growth and the very strong performance of the electrification business and an organic growth excluding metal of above 12%. EBITDA is at record high since the IPO in Nexans in 2001 at €599 million, on the top part of the range of the guidance that we raised in October - November, sorry, 2022 from €580 million to €600 million.
You see the bridge year explaining basically the growth in EBITDA. You see that all businesses have contributed to the growth of EBITDA. We have also the impact here, obviously, on the acquisition of Centelsa that helped boost EBITDA in 2022. It's a 30% growth of EBITDA over the period versus last year.
Operating margin also extremely high versus last year, 6.2%. And then we just said that we had a correct negative impact this year due to the decrease of the copper price in the year 2022 by about €500 per ton on average, impacting the group P&L by €30 million, a loss of €30 million, where last year, we had a gain of €100 million due to the increase of the price of copper. Overall, net income stands at €248 million versus €160 million last year, which is, again, for record high net income.
If I move to the next slide and we look a little bit specifically on the electrification businesses because you know that in our equity story of 2021, we committed to grow our EBITDA on electrification by 2024 to add €150 million of EBITDA in Electrification. You see here basically the progress we have been making in 2022 for Electrification segment, improving the margin ratio from 10% to almost 13% which is a 39% growth of EBITDA for Electrification. We have - and we have been very transparent on that convertible effect that we communicated in the first half, which basically with - one-off basically represents €60 million for fiscal year 2022.
And the growth of EBITDA, is to [technical difficulty] not all impact would have been 20%. The main levers are Amplify, SHIFT, obviously, that you know well that we explain every time, all the initiatives in moving to summarize the product, services, innovations, and also, as I said, basically the scope of Centelsa.
If I move to the next slide, we look at our - basically our net debt. You see that we've had very strong cash generation from the businesses from operation. Record high €451 million, driven obviously by the strong performance and the increased margin of the businesses. We had a very strong also change in working capital for the year 2022. This change of working capital of €152 million positively impacted the cash flow.
In terms of ratio, we moved from 3.9% in 2021 of working capital - operating working capital on sales to a low level of 29% in 2022. We've had significant CapEx also in the year. You know that we have two years of EV CapEx due to the investments we are making and then adjusted for the additional lines of CapEx.
So this basically represents about half - a little bit more than half, €160 million of the €300 million CapEx of the year. We have another big year in 2023. And then after that, the strategic CapEx will go to zero. And basically, the CapEx will normalize. We had also the sale - the divestment of LAN in Hanover that brought some positive cash, I mean strong cash flow into the year.
And then after that, you have basically the acquisition of Centelsa in Colombia, explaining why the leverage basically moved from 0.2 to 0.4 in terms of ratio. So a very strong balance sheet, I would say, with extremely low leverage, and we have already reduced leverage from June to December by about €100 million, thanks to the strong operating cash flow generation.
If I move to the next slide, on Page 24, we have a quick look at the balance sheet of Nexans. So here only to say that fixed assets are growing mainly because of CapEx and the acquisition of Centelsa. Working capital, I discussed are extremely low since because of the very strong performance in monitoring, basically cash collection as well as our inventory during the year and then basically equity improving increasing in 2022 because of the net result of the year.
In terms of ratio, we continue to have very significant room in both our covenant whether it's a gearing or leverage ratio. And I have to - you might have seen this morning that we've got a good news from our rating S&P that moved us from BB+ to a positive outlook for this morning. So basically, we are getting extremely close from the objective of becoming investment grade, hopefully at the next closing.
Next slide, in terms of liquidity, when we look at the liquidity, it continued to improve. Basically, we have now a liquidity at the end of December 2022 of close to € two billion. This is explained by two things. First of all, the strong cash generation of the year. We talked, I present - I showed you that on the previous slide, very strong working capital improvement. Lot of cash flow generation in the year 2022 and also the renewal and the increase of our revolving credit facility that was maturing this year in 2023 that we renewed for a period of five years and that we upsized to €800 million.
We have this year 2023 due in maturing in August bond for €325 million that we will refinance to ensure basically the liquidity of the company we have signed in January of this year of 2023, a backup facility line with our core bank for €325 million, which is just, I would say, a backup line in case of the financial market being - closing or being difficult when we need to go to refinance our bond, we'll have the security of having a backup facility line, which is valid for 30 months and covering the amount of basically the refinancing of the bond, which is strengthening again our balance sheet. So that's basically for the presentation of the financial results. I will now move to the outlook.
So if you move to Page 27 of the presentation, we are guiding on an EBITDA range from €570 million to €600 million, which is basically a midpoint of €600 million, which is a stable EBITDA versus 2022, and I will explain you the main rationale behind that, but actually we are converting basically the €60 million of conjectural impact structural actions.
So we are not betting in 2023 in any, I would say, favorable conjectural impact on our top line. If it comes and please just explain you that the first semester looks very good. This will be on top of any of our basically guidance.
So it will be very good news. Normalized free cash flow range from €150 million to €250 million, slightly below this last year of 22%, mainly due to the timing of the big down payment we received. I remind you, we grew our backlog on subsea by more than 50%, and most of the big down payment came up at the late December 2022.
So obviously, explaining partially why the cash flow is extremely high in 2022 and obviously, a little bit lower in 2023, and we proposed a dividend per share as explained by Chris of €2.10 per share for 2022 paid in 2023 if approved by the general assembly of May.
On the next slide, just to give you a little bit of flavor when it comes to our EBITDA because I think this is a key thing on how we are targeting to achieve basically this midpoint of the range.
As I said, we will transform here, you see on the waterfall on Page 28, we will transform a conjectural and inflation impact that we have seen in 2022 with structural actions based again, like we have demonstrated in 2022, action on SHIFT Prime innovation, premiumization of our product, Amplify & SHIFT performance, SHIFT performance being as Chris presented all the units that are still below the average in terms of EBITDA and cash conversion, moving them from the red to the blue to the green. Just with those three actions here, we will offset basically any conjectural that we've seen in 2022 and inflation. Anything, as I said, which is very important because first semester looks very good right now at the same level of 2022 that will be on top and will push us definitely to the high part of the guidance that I proposed here.
So that basically concludes the financial presentation.
Thank you, J-C.
And before opening for questions, just a last slide on Page 29, you have on the left part of the slide. Our organic vision, the growth vision of the sectors to 2023, we are revising this number up because the trends versus our February 2021 forecast is much upward, specifically on Generation & Transmission.
The geopolitical context plus as well as the World decarbonation is on pleasing the demand for interconnection subsea and offshore wind farm. So the project pipeline is huge for the sectors. Nexans really to focus on the subsea only with higher margin yield.
And of course, everything will be about mastering the project calendars, executions on installations on our plant ramp-up. Regarding distribution, I think we have been certainly too conservative in two years ago regarding this growth ratio. All operators are waking up for the grid modernization everywhere in the world.
So the demand will be extremely strong for the next five years. No doubt about it and will be certainly 100% recession proof. Nexans already signed a platinum customer agreement for the next two years. We have - I'm just back from Chile meeting our copper mine producers and as well we will review with our team all our aluminum source of supply, and we have secured the access to raw material for the next five years.
And believe me, scarcity is coming up very, very soon. And we are increasing as well our capacity output. Regarding the context of usages organization. It's still, I would say, aligned with the trend that we've foreseen two years ago, but there is an amplification of the demand for the fireproof solution within the building in the context of renovation. So our aim is really to move from commodity to premium from conjectural to structural results like J-C mentioned from passive components to active components with very high potentiality of inserting Internet of Things within our offer. That concludes our presentation. So record year in 2022, a very positive outlook for 2023.
Let's open now for questions. Thank you very much.
Thank you. [Operator Instructions] We'll now take our first question from Sean McLoughlin at HSBC. Your line is open. Please go ahead.
Good morning, can you hear me?
Yes, Sean, good morning.
Good morning. Thank you. Let me start with G&T because I guess the margin has come in as a little bit of a disappointment. You say it's just down to mix. Can you confirm that there weren't any execution issues in the second half. And also, it looks like in your 2023 guidance bridge, you're not factoring in better G&T profitability. Could you just talk around kind of what margin expectations you have in 2023 for G&T.
And secondly, on buildings, you've mentioned have the conjectural effect effectively continues into the first half, it's upside to that guidance range. I mean how far forward is your visibility? Do you already have visibility to the end of June? Or is it shorter than that?
Thank you. I will give the G&T question to Vincent because Vincent is with us on the line. I will take first the question regarding usages, your last question. Yes, backlog-wise, we are fully loaded for Q1. So our visibility is at the end of March in terms of backlog but all the exchange that we had with our distributors partners last week confirmed that their vision for the first semester remain very strong.
So that's why we consider that at least the start of the year will be above our initial expectation. And of course, is what we say any contractual effect will come on top of the guidance. Regarding the G&T mix effect, Vincent, do you want to answer to Sean?
Yes, for sure. Sean, first answer to your question, there has been no execution issue in H2 2022. So business is running in terms of execution as per the plan. Regarding indeed, the margin, you have mix effect. So maybe to give a little bit of perspective, as you know, we are working on, I will say, three main segments, interconnections and offshore wind farm, and we have a small part in what we call new energy, which is a certain number of links in the new activities regarding to hydrogen, hydrocarbon and so on. And indeed, 2021 versus 2022, we had a decrease in our mix of the interconnection.
And as you know, interconnection of this long distance cables very often in deep water, so much more technical, much more installation and consequently, margin higher compared to, I would say, traditional offshore wind farm.
So just, I will say, a phasing of projects. The backlog, as mentioned by Chris, is still very sound, very balanced, very healthy because when we look to when we are doing our pipeline management, thanks to our SHIFT modeling program. We are balancing always, of course, in the backlog, the interconnection and the offshore wind farm. So just an effect moving with a lower interconnection in the mix of 2022 versus 2021.
Regarding the - just in terms of then the mix in 2023 and your margin expectations?
In 2023, the interconnection will grow up again. We will have more activity. So we will be indeed in the same range, I will say, as 2022 in terms of overall mix with a slight increase. So it will depend really on the phasing of the project of this year, but I will say no concern for the mix and the margin in 2023.
What we can add J-C.
No. What I want to say, yes, I mean, obviously completely concur with what Vincent is saying what we see for 2023 is probably be more on the line of 2022 and not yet in the line of 2021. We will see the improvement really when we start to execute the largest project on interconnections that we just got into the backlog, meaning the Celtic for instance and then DIO, EuroAsia. And that will come beyond 2023, for the most part and this is where you will start to see really an improvement of the margin. But I would say 2023 will be more in line with 2022 of what we see today.
Yes, because we're still awaiting the final award of EuroAsia. Maybe Vincent, you can comment because we will have the question later.
Yes. In fact, as you all know, we have been chosen as a preferred supplier. We have signed the corresponding agreement. This project is partially funded by EU and then by the EuroAsia project company. So everything is ready. Now it's really the overall financing of the project, which is ongoing between you, EuroAsia company and the technical company working within the project, which are in Greece and Terna Energy, which is an engineering firm.
And this, I will say, on the Cyprus government, which is also a key partner in this project. So I would say, technically, everything is ready. And now it's just, I will say, the process of the different partner to be completed normally, I will say, in the end of Q1, beginning of - in the course of Q2. So that's basically our expectation right now.
Thank you.
Thank you, Sean. Next question.
Thank you. We'll now take our next question from Akash Gupta at JPMorgan. Your line is open. Please go ahead, sir.
Yes, hi, good morning, everybody. I have three questions, please, and I'll ask one at a time. The first one is on the bridge on Page number 22. So I'm wondering if you can provide a high-level breakdown of the $61 million and conjectural and one-off into how much of that is U.S. versus Canada and within the U.S. and Canada, how much of that is resi versus non-resi, just for us to understand what is going on there. And on the same slide, where you have minus €22 million net cost. And how do you see this number moving in 2023, given the high inflation? So that's question number one.
So I will take the question, Akash. So just on the conjectural, so we reported basically €40 million in the first half, about €40 million of conjectural impact, therefore, we have about €20 million in the second half of conjectural and one-off. I would say about 60% of that is coming from additional volume than above the norm, I would say the rest is pricing. It's not U.S. because we don't have any low voltage activity in the U.S. So it's only and mainly but only Canada for us that is impacting. The reason the second half is a little bit lower than the first half is because we get to the end of the year and distributed basically have been destocking for the end of the year.
And also last year, in 2021, that we year before, we started to have also positive conjectural mix impact in Canada. We started to see that at the end of 2021. So therefore, obviously, when you bridge the two years, the impact on the second half is a little bit less than the first half. So that's - but again, the trend in terms of volume and pricing, as Chris mentioned, remained quite robust, especially on the pricing side. When it comes to the minus €22 million of the bridge, yes, definitely, this is a net of the total inflation that impacted Nexans. So we're talking about roughly €90 million of inflation impact in the year 2022.
Most of that is pass-through because we have the mechanism of pass-through that we - that you know whether our pass-through the contract or pass through updating our price list. But we have, I would say, a small basically impact mainly on our fixed cost that is not offset, I would say, by all the prices and the mechanism, and it's 2022. The way we see it in 2023 is that this number will not increase. We have strong action. We have covered already so we have pass through for most of the situation.
And we have also for the one where we were impacted in 2022, like, for example, energy cost. We have hedged that in 2023. So I would say the level of exposure we have is even lesser in 2023 than in 2022. So I'm not foreseeing this number to worsen in 2023. We have reached, I would say, we believe also we have reached a plateau in terms of inflation in most of our cost categories.
And we are not worried and we have actions to that. A big part also of the €22 million was coming to specific countries like Turkey. Turkey that has been very strongly impacted. Lebanon - Turkey and Lebanon strongly impacted by two-digit inflation rate in 2022. But again, we have mitigated that action for 2023.
And the second question is on medium voltage or distribution segment. I mean here, demand is very strong. You said you are fully saturated on capacity, and we hear the same comments from your competitors. When we look at the capacity situation and strong demand that you flagged in your long-term outlook on the last slide, is there any need for strategic CapEx in this part of the business that you may foresee in the coming years?
Yes, potentially, Akash. And I think some further announcement to come in the course of 2023, we are working on it.
And my final one is on European equivalent of IRA. There were some details out earlier. Do you see cable companies could be potential beneficiary? And do you see that you might get subsidies to fund some of the capacity expansion that might be needed in the medium term on both medium voltage and low-voltage side?
I think it's a good question. Maybe too early to say, but what we hear is that for the energy transition, you have two factors that are a big major risk of bottleneck. First, the access to natural resources because Europe has a very strong ambition, but don't have the natural resources compared to U.S. and China at least. So first point and that the cable sector starts to be as well bottleneck.
So I'm sure that we are working on it, but I'm sure that in the context of the inflation at cable could be part of a potential subsidies. And at least Nexans is working on it because - sorry to add up - Nexans is working because we are the unique cable manufacturers being this vertical integration that gives us an advantage to increase our output for recycling copper in the future, and that can give us extra benefit versus our peers. Sorry, thank you.
Thank you. We'll now take our next question from Miguel Borrega at BNP Paribas Exane. Your line is open. Please go ahead.
Hi, good morning, everyone. Two questions for me. The first one, I wanted to understand a little bit better the market environment in usage. I know you mentioned you're not counting on any conjectural effects, but so far, you've seen those continuing in 2023? And then how do you square that with Slide 28 because the way I understand this bridge is you're basically expecting those tailwinds from 2022 to reverse in their entirety in 2023, correct? Or am I misunderstanding the chart?
No, you're not Miguel, misunderstanding the chart. So right now, we basic assumption and one would say that with the news we're having about having continuous I would say, healthy H1 definitely make the chart here a little bit conservative because what we're assuming is obviously total disappearance of the conjectural inflation, replaced by the structural levers I mentioned, and that would put us at €600 million.
So obviously, with what we're seeing today, but who knows what will be H2. I mean the only question is that we're talking about H1, we don't know H2. We don't have a crystal ball for H2. But with what we've seen in H1 in if H2 is basically not a disaster, then definitely, we are already quite, I mean, positioned to say that we will be on the top part of the guidance.
Miguel, it's more a question of process is that. Our team are fully incentivized only for structural effect, not for conjectural effect. On the time of the budget that bring the guidance, it was between September and December, and everybody was talking about the coming up of the recession. So we have launched recession-proof actions. We have reinforced our structural actions in parallel, and we say to our team, we do not get at all on any conjectural factors. So that's why that this guidance it can bring some further upside if there is no recession and demand remains strong.
That is interested. And then my second question on high voltage. You achieved your goal of a backlog of close to € four billion. Can you give us an update on what to expect for 2023. Is this going to be a year of backlog execution? Or do you see backlog expanding a little bit further and where to - compared to 2022? so how do you think 2023 will fare in terms of awards?
Yes, it's a good question. First of all, it's not yet finished because EuroAsia has not been - they have not closed their financing like Vincent mentioned. So it's not yet awarded. We are the preferred supplier. We have the letter of intent. So we hope this been concluded in coming weeks, months. It's now to be - start to be a very long story, but it's a fantastic project. There is some awards to come in U.S. in coming weeks before the end of Q1 and after a significant award before July. So no, the backlog will keep expanding in the course of 2023, Miguel, significantly. Next question.
We'll now move on to our next question from Jean-Francois Granjon at ODDO BHF. Your line is open. Please go ahead.
Thank you. Jean-Francois Granjon speaking from ODDO BHF. I would just come back on the guidance. I understood that you are very confident the usages businesses for 2023. So I'm just wondering why we have so huge magnitude for the guidance for the EBITDA between the low and the high-end range. This is my first question. My second question concerns the CapEx, what do you expect for 2023 for the normative CapEx and the strategic CapEx. My third question concerns the normative margin expected for the usages division after the exceptional level reached at 12% last year?
And my last question concerns the target expected for 2024. When we see the performance last year, for the electrification businesses, we have reached nearly 13%, one-three EBITDA margin. This is the top of the range expected for two if you are well remember. So do you expect the same level? Or do you expect more than that in 2024? You have already reached, in fact, what we expected for 2024.
Yes. So I will start with the range, Jean-Francois, I will start with the question of the range. Indeed, we increased versus what we're doing - we've done in the past, the range is a little bit wider. We're talking a range of €60 million plus €30 million, minus €30 million around the midpoint. I mean there was a lot of discussion with Chris and our Board about basically where to set the range. There was - obviously, there are still a lot of discussion and question mark about the year 2023 when it comes to recession or no recession. Yes, you're right. We start to have a very good visibility on the first quarter for sure, even in the first half. We don't know about the second half.
And with what we're seeing and that things that can move one way or the other very quickly in this very volatile, we decided to slightly increase. The idea, again, is to come back in the middle of the year in July when we present our first half numbers and come back with a much more reduced range and potentially improve range if we confirm that H1 is as strong as we start to see it, and we don't see signs for H2.
So we preferred maybe to be a little bit more - I don't like the word conservative, but a little bit more - yes, a little bit more cautious about ups and downs and then come back in July and come reduce by €20 million or even more and upwards. So that's basically...
The thing is, last year about some cautious at the beginning of 2022 and you improved.
Exactly. It's exactly the same similar approach, I would say we came up with a large €40 million range, and then we came in July and we narrowed the range and we, in fact, increased the range. So basically, the same approach we're looking for 2023 because you know that we are in times which are extremely unpredictable, and I mean...
Yes, on winning as well the signature of the EuroAsia contract that will contribute as well to the result of 2023 partly.
Yes. So basically, we are very confident EuroAsia contract we signed. The question is when the EuroAsia contract will sign it will be delayed by one month, two months, three months. And definitely, that could have a little bit of an impact as well in our range. Regarding the CapEx?
Can you remind the question is on the CapEx.
I got the question. So the question on the CapEx was how much of strategic CapEx for 2023. So basically slightly less than 2022 - in 2022, we really had a split of 50% of strategic and 50% of maintenance CapEx. We are more - we have less strategic CapEx, about €130 million of strategic CapEx in 2023 this year and about €160 million, €170 million of, I would say, maintenance CapEx. And next year in 2024, it will only be the maintenance CapEx. The net CapEx were a little bit lower in 2022 because we had the proceeds the profit of the divestment of the land that basically net the CapEx to a lower level. But in terms of growth CapEx, we don't have any sale of disposal of assets in 2023.
The third question was about the normative EBITDA ratio of the usage. So within 2020, there is some conjectural effect that we will offset structural the potentiality of improving this ratio is still very high because on twofold. The first is because we still have a big part of our units that are value burners or I would say, in the red zone needs to be converted in profit driver.
And so our shift program is playing fully right now on those units. I remind you that representing a € one billion at 3% to 4% EBITDA. So this should be at least need to reach the minimum ratio of 2021, means 8% within 12 months. So that's the first improvement lever.
On the second I'm very, very happy and very satisfied on all developments we see on the innovation. Customers, our partners are asking for more. And of course, this is structurally contributing to the improvement on the margin. So very positive on the evolution of the ratio on the usage. Regarding the last question, what on the fact that we are in the electrification reaching more or less the 2024 - 2024 objective, JC?
That's a tough question. But you're right. I mean, you're right that thanks to the conjectural positive impact in 2022. Basically, we have already achieved the target of 2024. I think we feel very comfortable with structural actions without betting on any conjectural. We are very comfortable in achieving the target by 2024.
Jean-Francois?
Normally, you have already reached this level, but if understood, so you are very confident for - to improve the margin for the G&T generation businesses with between 18% to 24%. So probably you should be able to be above at least level in 2024 or after that?
Yes, sure. But I would say let's make 2023. Let's see how the world is evolving. Every year, we have - every year has a lot of crisis. After the call of last year in February, Ukraine have been invited. So we are in a permanent crisis mode. Now they are all piling up. So I'm not able to predict what is the crisis.
So I will say, we remain prudent. We do in 2023. What is important, Jean-Francois, I think and that's for all the message is keep working on the reduction of assets. We had a lot of remark last time you say yes, but we don't see any divestment. It's underway for Telecom. We hope to have some other divestment announcement in 2023. At least we're working hardly on it and as well some working on acquisition for 2024. So the retention of assets beyond the pure ratio is as well a big objective of Nexans.
Perfect, thank you very much.
Thank you.
We'll now take the next question from Rajesh Singla at Societe Generale. Your line is open. Please go ahead, sir.
Yes, hi, good morning. Thanks for taking my question. I just have one question regarding the normalized FCF guidance. So if you can talk about a bit of a bridge between around €600 million of EBITDA and around €150 million to €200 million normalized free cash flow, like any things which is having a negative impact on the free cash flow conversion in 2023 for you?
Yes, it's a very good question. You've seen that in 2022, as I presented, we have €152 million of working capital improvement. We are not seeing any working capital improvement in 2023. Number one, because mainly because the ratio we have reached in terms of working capital and sales is extremely low, and I don't see it basically getting further down.
So that's one thing. It's probably going to be stabilizing or going back to 4% - 3%, 4%. So probably, we will see, I would say, a little bit of a reversal in the working capital. We've got down payments, a big down payment that explains the high normative free cash flow - normalized free cash flow in 2022.
But at the same time, we will be consuming those down payments in 2023. We also - there is also another impact that explains the high level of cash flow - normalized cash flow in 2022. It's because we acquired Centelsa, and we had a one-off cash gain of €60 million when we acquired the asset, just to normalize the working capital on the asset and that's obviously now it's normalized, it will not repeat itself.
So the - I would say there is a conjunction of elements that basically makes the working capital improvement and the cash flow generation in 2022 quite high. That will not repeat themselves in 2023. This is why you see this difference between the two. In fact, the good way to look at it is would be to look at the average between the two years to get a better visibility on the cash conversion.
Thank you.
Thank you.
Thank you. We'll now move on to our next question from Massimiliano Severi at Credit Suisse. Your line is open. Please go ahead.
Yes, hi, thank you for taking my questions. I had two. So the first one would be on the Amplify and SHIFT programs. basically, you have now achieved in advance the targets that you had set in the 2021 Capital Markets Day, which were around €90 million from both. I was wondering how much of the value burners and transformation candidates do you think you can move to profit drivers in 2023? And maybe also, what do you think for the next years Is it everything? Or do you expect that there are some niches that you will need to exit or keep it as a lower margin business than the overall group?
Yes, Massimiliano. So organic Amplify and SHIFT is really those two programs are mainly focused on moving the profit driver into innovation driver. So it means business that are already in the range of 8% to 12% EBITDA and the objective is to move them from 12% to 15% EBITDA. So that's the aim of the program.
Regarding value burners, it's all the techniques that we use under shift performance, which is about complexity reduction, making sure that you have the good pat of your customers on product portfolio on reducing whether the cost overall. So here, the aim is to achieve their move from value burners to profit driver in Q4 2023. So to have a full run rate of improvement in 2024.
And do you expect to be able to move everything that you have? What do you expect that part of it will need to be exited or not emphasized anymore.
Yes, 100% confident that everything will be back to profit - not back will be turned to profit higher. I think what I mean as Massimiliano is that there is no exogenous factor that make them value burner today, just a question of management decisions and how we manage these businesses. So we have recently changed some managers running this unit, and we have our transformation team working with them. So 100% confident. We don't need to divest.
And just to give you a little bit of numbers, what we're expecting to generate from that transformation in 2023 is about €60 million additional EBITDA.
Okay. Okay. And my second question would be, again, on Generation & Transmission. I appreciate the issue of the mix between offshore wind and interconnection. I was wondering, would you be able to give some more granularity on the difference between offshore wind and large subsea interconnection.
Because if I think about your 24% upper end of the target for 2025. Even in 2025, most of the orders from the U.S. will be offshore wind. Yes, you will have EuroAsia, Celtic interconnector and other large interconnections but offshore wind will still be part of the mix. So I was wondering, can you maybe give some additional clarity on this margin differential between offshore wind and subsea interconnections.
Yes, I will not give you a precise number, but you have for stream in the high voltage, and that explains the mix effect. You have the loan high voltage, which is a lower margin in general versus all the high voltage business. After you have short distance wind offshore on AC technology, which is medium-sized margin up because the competition intensity is much higher. After you have a long distance offshore wind farm, which are shifting to DC technology and here, margin significantly upward.
And after you have the most complex part of the high voltage we see the subsea interconnection. So from LAN interconnection to subsea interconnection you can be in the range from 0% EBITDA up to 25%, 26% EBITDA. So that's why the mix effect is paying fully. The only thing that we can mention again is that we are - we have limited exposure to the LAN high voltage, but we still have in the mix, short distance of having farm and in the future, will shift to a long distance offshore wind farm.
And to give maybe some additional color to understand the dynamic, as you know, we are investing currently in the extension of our factory in Norway and also the same in U.S. So as you properly said, the U.S. expansion capability, capacity, we'll be able to answer to the dynamic the U.S. market. And Chris has mentioned before that we are indeed expecting some move up this year on this market and the extension of Halden is from a capability perspective is an extension, which would be ready by early next year, which can answer both to interconnection and offshore wind farm.
So which means that we will be again starting 2024 in capacity to increase the mix towards the interconnection, thanks to this extension. And for example, the mentioned Celtic award, we run on this which is an interconnection, we run on this expansion in our factory in Halden. So that's why the 2024, 2025, as mentioned by J-C, we are confident in this evolution of mix having, again, the right balance between interconnection and offshore wind farm.
And I think also to answer your question on how we ramp up on margin, what is important is the extension that Vincent just mentioned, had stable fixed costs. So basically, the mix impact of adding this revenue will increase the overall margin of the business because, again, we're adding two new lines that we generate more than €300 million of revenue but has a much more attractive EBITDA margin because the fixed cost will not move from the plant. So in fact, it will have a mixed effect very positive. What are.
Next, you have another question.
Yes, no, that was it. Thank you, very clear.
Thank you. Next question.
Thank you. Your next question from Eric Lemarie at CIC. Your line is open. Please go ahead.
Hi, good morning. Thanks for taking my question. I got two actually. First one, about this Sunrise Wind project in the U.S., I understand that Orsted has announced some impairment due to the cost inflation of the project. And I understand Nexans both in this project what could be the consequences for Nexans. This is my first question. And I got a second one on copper. You mentioned you've got visibility on the supplies for copper for the next five years, but I understand it was about it was for T&D, and wonder if you got this five years visibility as well for the rest of the world?
Vincent, you want to take the question regarding Sunrise?
Yes, I think quite easy. Sunrise is currently ongoing and no impact for us. As you know, we have a long-term agreement with Orsted in U.S., this agreement is organized with indexes and so on. So no impact for us, project running as planned and on time.
And regarding the copper, the copper is 60% of the copper supply in the world is coming from China, Chile and Peru. So when I mentioned Chile is not about - for our Chilean need, it's for our worldwide need. We are our key suppliers, namely Codelco is supplying copper for Nexans everywhere in the world.
So we have signed long-term contracts and privileged access for the - at least we'll say, for the next five years in case of world scarcity for copper, make sure that we are able to keep producing our cables and secure the supply for our key customers. So it's Chile for the world.
And you have may see this last week that we have announced also a similar agreement with KGHM, which is another mining companies. So we are extending this long-term agreement to our key strategic supplier in terms of copper worldwide.
That's right because on this will be the same for aluminum. So either there is to fall later it's the access securitization or as well. Anything we can do on the, I would say, raw material decarbonation. So having low carbon aluminum, low carbon copper, so we're working hardly on it. What conclusion is that the demand is secular, it's very strong.
We are entering in a hyper-cycle of electrification, everybody, all nations are waking up for climate change and every company wants - or each nations want everything at the same time. So one day on the certainly 2024, 2025, specifically One China will be fully boost for its energy transition in parallel to India and U.S. Just the three countries together can consume the full copper worldwide. So that will be a massive bottleneck coming up. That's for sure.
And maybe a follow-up, and you're not - you're not afraid that the scarcity will mean well, some price increase for the price increase for copper and maybe some negative impact on some projects because like a sunrise, an issue on the cost of some large projects due to copper inflation. You don't see that?
Of course, scarcity means inflation. And this is what we say to our customers. There will be a structural inflation on the natural resources that will be a carryover for the next year. There is no doubt about it. Of course, you can say that can put some pressure on the margin of the project and can delay the project, but the pipeline is so huge on each nation going on the same direction of shifting from fossil fuels to renewable energy.
You will always find customers or project or countries that will be able to absorb this inflation or to make their project happen. So no, we are confident on the fact that most of the projects will be confirmed. Of course, it will be at a different cost. And once again, in the sectors the metal effect is 100% pass-through. So that gave us, I would say, a very high shield of protection against inflation.
Thank you.
Are we finished with the question?
You'll have a last question. One last question, comes from George Featherstone at Bank of America. Your line is open. Please go ahead.
Good morning, everyone. And thanks for squeezing me at the end. A few questions for me. First one, just a clarification on the free cash flow guidance. Obviously, you mentioned that the strategic CapEx level was going to be slightly lower than 2022. So does that imply that sort of took a more traditional view on free cash flow, at the low end of your guidance would be zero or is there some of the missing pieces that I'd have to consider?
No. The normalized does not include the strategic effects but you're talking about free cash flow, all free cash flow. No, we are basically - we have a wide range, as you see on the guidance because we are talking obviously €150 million to €250 million. We are not targeting to be at the lower part of the guidance. We are more targeting to be midpoint or above part of the guidance. Definitely, free cash flow altogether, including strategic CapEx will be lower than it was in 2022, but it will not be zero.
Okay. Great. Then just maybe following on from the prior question just going back, the sort of content per gigawatt of cable in the high-voltage segment. I think you've given a range in the past of €250 million to €400 million. I just wondered how that's evolved in the current cost inflation environment. And given the price increases you probably put through in that too.
It's a good question, but I'm not sure that we have the answer. Vincent, you had the answer in - the value of cable per gigawatt evolution.
To be honest, I think for the - as you know, in a turnkey, you have around usually traditional turnkey will be for offshore wind farm around 50% to 60% of cables and the rest is installation. And inside the cable, the big part is the copper of aluminum. So I would say it's difficult to answer two questions because the aluminum and the copper, the non-sales metal are already moving ups and downs, as mentioned by Chris.
On the rest, if I can say this, the plastic, the steel and so on, the inflation last year has been in the range of - depending on the material between 10% to 15%. So it's 10% to 15% and probably 10% to 15% of the overall component. So it's not massive. Of course, the copper and aluminum can make big impact, but this one is related.
So the price rising is mainly coming from the distance to shore. We are much longer distance to short, and that has a significant effect. And as well, we are shifting to more and more supply-only to turnkey mode. So that's affected as well to the full value of the project.
Okay. Understood. Just trying to understand sort of how we square that with your comments on maybe a structural shortage of supply of copper here and the pass-through mechanism you have in your contracts. Does that ultimately mean that we need to sort of change the way we think about the €250 million element of that range. Perhaps it's not ever going to be that low again.
I didn't get the question. Can you refresh your questions? I didn't get it.
Sorry. I understand. So I mean, best, if you're getting more to supply only and therefore, most of that range is dictated by the underlying price of the metals that you're passing through, and they are structurally in short supply to your prior comments. Do we need to think then that GBP250 million to GBP400 million needs to just structurally shift higher in terms of the sort of the cable revenue per gigawatt that we're seeing in some of these projects?
Sure. Maybe Vincent, you have a comment?
I think you have two views on your question. You have a market view, if I can say this, that's for sure that if you have scarcity as we plan in terms of nonferrous metals, so typically aluminum and copper, you will have most certainly an increase in terms of actual. But as you know, we are reporting all our sales in Standard.
So which means that in terms of performance for Nexans it's a different part. So the end user will see for sure an increase of value per kilometer because you have an inflation, but for an expense, I will say, in terms of performance, in terms of margin, it's a different story because we are doing this pass-through.
I think the last element that you - which is maybe - I will not enter too much in technical details, but what you have to know also is that over the last 10 or 15 years, we have worked a lot also with our customers in order to reduce step-by-step the cost of the cable. So we are working, for example, some years back, a cable for offshore wind farm, where mainly copper.
Now we are doing aluminum. We are able to do some part of the section in copper, some part of the section in aluminum. So we are trying to find always new solutions, technical. We have launched some years back, a new type of armoring. So you have the evolution of inflation by itself.
And after you have all the technical solution that we are finding. Just again to give an example, the new vessel Aurora is able to lay two cables at the same time. So of course, this is an advantage in terms of timing, in terms of cost for our customers. So yes, you have the inflation on one hand, but on the other hand, you have the technical evolution of the solution on the turnkey, which is helping somehow to counterbalance this inflation trend.
Okay. Final question for me then would be on the distributed destocking commentary you mentioned. I just wondered when you speak to them, whether you think they've got the right level of inventory now for the forward-looking demand.
Yes. We asked them the questions on the - but I think there will be some presentation of Rexel in coming days, but we call it was Sonepar, we call our North American partners and yes, they consider that they are level from all the feedback that we received from seven distributors that the level of inventories are normal, I would say abnormal normative right now.
And there is no not foreseen any destocking effect coming up in coming months. I think there was some destocking effect in Q4 and now they are restocking because the demand is at least foreseen for the moment, higher than expected and a recession apparently delayed or more, I will say, soft than what was planned originally as of.
Okay. Thanks very much.
Thank you. Thank you everyone. Thanks for your attendance. Thanks a lot. Have a good day.
Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.