Edited Transcript of NEXS.PA earnings conference call or presentation 29-Jul-20 7:00am GMT

At the end of June, this last month, 100% of our plants were operationally running at minimum 90% of their load, including automotive, but excluding our aerospace plant here in France. Through the period, supply of raw material was onshore. The group faced no disruption, as I mentioned, neither in copper, compounding or aluminum.

Turning to Page 8. You know that we have 2 significant strategic investments to really help us to grow in the long term. They are both on track. Our future Aurora vessel arrived in Ulstein yard in Norway on the 15th of June, 2020, after having been built for the first phase in CRIST in Poland. So I’ll remind that this vessel has a large 10,000 tonnes capacity split turntable, and it will be one of the world-leading vessel. It Is ready for complex construction task in severe weather condition anywhere in the world.

At the same time, on the North American continent, in U.S., we are upgrading our Charleston plant to build a unique manufacturing subsea cable plant that will exist in U.S.A. As you know, this plant is dedicated to win offshore business at 100% and supported by the contract we signed with SSE for Seagreen, and moreover, the 7 years frame agreement contract that we signed on export cable for wind offshore with Ørsted.

You have noticed as well that we will start to prepare our reason number 2 in terms of equity story, so — to pave the way for stronger Nexans. So here’s what you can see on the Page 9. Now we signed an agreement with the group of Mutares to divest our metallurgy plants in Germany. Prior to COVID, we have as well started discussions at the end of ’19 with the company, Leviton, with our partner in LAN system to sell our activities in U.S.A. called Berk-Tek. Berk-Tek is a leading U.S.-based manufacturers for LAN cables. And also, we’ve signed this agreement, a transaction that entails the enterprise value at more than USD 200 million, which will represent approximately 10x over ’19 stand-alone adjusted EBITDA. Berk-Tek, as reported in sales, $163 million in 2019.

We have to let you know as well that in July, we have decided to close our Chester, New York manufacturing facility in Orange County, which produces low-voltage power cables. This business site cash flow performance were negative since more than 8 years. We take the decision to close it.

If I now move to the main achievement. As you can see, we’ve seen from the reading of the IHS Markit PMI, very strong rebound in June in many countries. U.S. still remains, of course, fragile because of the COVID spread. France have a big decline in the month of April, but a steep recovery in June. And China and Korea, there’s recovery. But still — everything looks still very fragile. We have to be careful because a lot of rebound is because of very strong confinement in many countries. Construction, for example, is back to normal times right now because they have to finish the project that has been stopped suddenly.

We remain extremely prudent regarding Q4 specifically because we believe Q3 will be strong, and Q4 because of the evolution of the demand and as well Q4 because of the risk of the continuity of the COVID-19 case spread continent by continent.

If we move now to Page 12, we have updated the slide that many of you commented last time during our quarterly review. As you can see in our press release this morning, we had a single-digit decline in demand across most of the business group, excluding high-voltage project. So regarding — if we go business by business, Building & Territories — building and utilities suffered sales contraction of 8% in quarter 2 versus quarter 1. But important to notice, our sales for June month — June only has an organic growth of plus 10% versus June 2019. So I repeat, end of June 2020, just the month of June, had an organic growth for this sector of plus 10% versus June ’19. Utilities being much more resilient than construction in crisis remains more or less stable. And the dynamic of country, of course, is changing month after month. For example, France and Canada have a strong bit in June and July.

Regarding industry sectors, of course, variety of sectors, variety of evolution. Let me start from Automotive business. The Automotive suffered from a very strong decline of 77% in April. Our Automotive business represents 8% of our total group sales, but it is back to a very good level in June and July. Aerospace represent EUR 100 million of our sales. It Is down 40% on the other hand. Renewable, which is on the right side of this chart, is at plus 22% for the quarter. And as well — as we have signed very long-term agreements with rolling stock Tier 1 customer, we should benefit in the coming months of their very strong backlog. So of course, various evolutions sector by sector for the industry, but we remain extremely cautious on the future, but positive.

Regarding telecom and data, so the driver remains good, specifically for the fiber optic installations and deployments in Europe and as well in other continent, but they are suffering from lack of resources and they did suffer as well from confinement issue.

The LAN business is connected to construction market indicators, so we should follow the construction evolutions. And our subsea telecom business is on budget due to very strong backlog and no disruption.

Regarding the high voltage, as I already commented earlier, we have suffered — we have not suffered from any delays and neither any impact in that business. We had smooth execution, and we are very happy to confirm that our land high voltage business is on track in terms of financial result and in terms of transformation completion. You have certainly seen as well that the high voltage business is up 20% year-over-year for H1 and plus 55% in terms of EBITDA, thanks to a great selectivity of the business and the project we follow and as well this turnaround of the land business division.

Moving to next page on Page 13. As — I will not comment so much this slide. But as we already mentioned over the last months, the groups continue to be drastically selective on all commercial opportunities on turnkey project because the market dynamics are very strong on medium and long term. So there is no reason to discount our capacity — available capacity. So we’ve put, since 18 months, a very strict and solid revaluation process focused on risk on the technology side but as well risk on the installation side but as well financial rewards and contractor terms. So that’s the reason that we consider that our backlog debt, which is EUR 1.5 billion, remains strongly profitable, has limited exposure in terms of risk of execution on both technological aspect and installation aspect.

Moving to Page 14. In half year 2020, we have reached now more than EUR 124 million of cost reductions on our total plan of EUR 210 million. So we are on line in terms of implementations. As I say, our Hanover plant closure is down, so it’s close. So land high voltage business is on track. We have completed the resizing of the group in terms of organization and in terms of cost. On rationalization of top management layers, it’s done. We have, of course, reinforced our indirect spend reduction certainly much beyond that what we planned to because of COVID. We have reinforced the productivity. And as I already mentioned, at beginning of April because of COVID, we have set up a new crisis management process around cash conversion cycle using our SHIFT methodology techniques unit-by-unit since the first week of March, and this is the result of the free cash flow that you can see for H1.

Moving to Page 15. I have always a lot of comments and questions and remark regarding SHIFT methodology and mix question. Let me remind one thing. First, SHIFT methodology objective is to reach EUR 100 million improvement in terms of EBITDA, but as well more than EUR 150 million in working capital. We are using in-depth — analytics in-depth as well, I will say, problem-solving techniques, using as well big data. So it’s a very innovative methodology that we have set up here in Nexans, supported by 20 levers of execution.

But it’s important to notice and because I want to reinforce this message, SHIFT is not about fixed cost reduction. SHIFT teams, the transformation teams under SHIFT umbrella, are not allowed to touch the fixed cost because this is the management issue. So they are working on 20 levers. The first 5 levers is to reshape the portfolio and increase financial value. We are going in very details in terms of analytics. The second macro lever is to select the right customers on the right business to value growth. The third macro lever is to recover competitiveness margin. And the last one is about cash conversion cycle, and this is — this last item that we have decided to amplify everywhere in the group for all the units facing COVID-19 crisis.

We’ve shown you here on the graph 12 units that have been under — since day 1 of ’19 under the SHIFT methodology. You have 2 color lines here. You have the blue line, which is the turnover, the revenue of those units. So you can see that those units where we perform SHIFT entirely were representing a turnover of EUR 1.3 billion in the 12 months rolling.

And what you can see on the first graph on the right — top right is their EBITDA level since years were around EUR 100 million. And just in the year following this strict methodology, we have been able to deliver plus EUR 40 million EBITDA without any growth effect. And it’s the same on working capital. You can see that it’s exactly the same perimeter, and there is no metric in the numbers. We are talking about EUR 1.3 billion revenue. We are talking about 12 units. You can see that their working capital level, that were about EUR 400 million in the history, is now below EUR 300 million. So this methodology is working extremely well, whatever the business. Either we are in construction market, utilities, industry, telecom, we are deploying and working on an equivalent methodology for project-based business.

Also again, our teams are only incentivized on free cash flow generation and return on capital employed. So once again, SHIFT methodology demonstrate this very robust process and a great weapon for Nexans to make this transformation more robust.

Talking about transformation, let me hand over now to J-C for the details of our financials before we take your questions and before my conclusion.

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Jean-Christophe Juillard, Nexans S.A. – Senior Corporate VP & CFO [2]

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Thank you very much, Chris. So I’m now on Slide 17. So as you can see on the slide here, you’ll find the half year key financial figures for the profit and loss statement that demonstrate Nexans’ robust performance over the first 6 months of the year despite the challenging environment.

As illustrated on this slide, Nexans demonstrated its capacity to mitigate the crisis and come out stronger. If we look at — first at the sales, the group posted standard sales at EUR 2,895 million, which is negative organic growth of 9.8% versus same period of last year. Considering the COVID-19 pandemic outbreak, the lockdowns in our plants, the closures and the reduced level of commercial activity, we believe that this level is quite sound. Also, it shows that Nexans’ early shift to crisis management, focusing notably on customer engagement and supply chain was a successful move. Second, our margin rate landed at 21.5%, again, 21.8% at the same period of last year. So a quite resilient, I would say, percentage on margin.

On the EBITDA side, end of June, the business generated an incremental EUR 70 million EBITDA. As you can see on the graph, all businesses contributed to this increase in EBITDA. And without COVID-19 impact, we estimate at EUR 64 million, our EBITDA would have been for the first half of 2020 at EUR 226 million. EBITDA rate of 5.6% in June ’20 and 6% in June 2019. That demonstrate, again, the strong resilience of the portfolio as well as a significant cost reduction. We did 10% cost reduction decrease versus same period of last year.

If I move now to the next slide and we look at the EBITDA bridge and how basically we achieved the performance. You are quite familiar now with this slide. We have been presenting it now in all our communication as it is the best illustration of our efforts to boost performance under the new Nexans transformation plan. So this bridge here follows our equity story along the 3 levels: cost reduction, SHIFT program and growth initiatives.

As Chris explained previously, the group accelerated and reinforced cost-saving measures to mitigate the crisis, protect our profitability and preserve our liquidity. Clearly, the fact that Nexans has been in reorganization mode for the last 18 months was a key enabler to higher agility and allowed us to swiftly adjust our production capacity.

We have tightly managed raw material consumption in accordance with the change in demand and volume while using partial employment when possible. Fetching additional cost savings also — was also facilitated in our in-depth knowledge of our cost base.

So all in all, as shown in the bridge, EBITDA improvement was supported by EUR 49 million of cost reduction, which is, as you know, above our, I would say, trajectory on our equity story, which is circa EUR 70 million to EUR 75 million per year. EUR 19 million coming from continuous deployment of SHIFT, mainly these 6 months in the Middle East and Africa, South and North America and Asia Pacific. And then EUR 16 million coming from our value growth initiative, mainly focused on high voltage and project.

For the half year, the conjunctural growth, which, as explained before, we do not bet on, had a negative impact, mostly explained by specific political environments.

Over the past 6 months of the year, EBITDA lands at EUR 162 million, of which, again, EUR 64 million estimated from COVID-19 impact. Excluding this again, EBITDA would have landed at EUR 226 million, which again shows and imply solid improvement of 16% against the same period of last year.

If I move now to the next slide on Page 19, we look at the net income. You’ll see that the net income comes negative at EUR 54 million, which is due to EUR 18 million net asset impairment in Brazil and Germany metallurgy — EUR 14 million for Brazil, EUR 3 million for the German metallurgy. And secondly, to negative, obviously, estimated COVID-19 impact of EUR 75 million. This EUR 75 million of COVID impact, we explained it by further loss of EBITDA after tax, as I mentioned before on the previous slide on EBITDA; a depreciation of deferred tax losses in Germany, reflecting the updated business plan of our harnesses business; and finally, some sanitary expenses — spend to protect our employee and main operation, but for a small number of EUR 2 million.

So in line with our transformation plan and ongoing reorganization, we have incurred related cost of EUR 53 million negative, of which EUR 32 million is linked to restructuring plan out of the EUR 50 million we announced for this year and EUR 21 million mainly for new plants of restructuring to adapt our footprint to demand, which is part of our ongoing restructuring spending.

If I move now to Page #20 and we look at our net debt, I think we are all at Nexans quite proud of the achievement of the net debt reduction over the 6 months of the year. You see that there is an outstanding improvement of our net debt. We moved from EUR 709 million of net debt at the end of June 2019 to EUR 276 million at the end of June ’20, and that was supported by a record high free cash flow generation of EUR 370 million over the last 12 months. Thanks to an early shift to our crisis managing mode focused on cash conversion, as Chris explained, and the launch of immediate action on the operation to closely and strictly monitor working capital, we were able to reach this historical level of net debt, which represents 0.8x EBITDA versus 1.9x the same period of last year. This performance is even more remarkable. Typically, the seasonality of our business makes the first semester always quite cash negative by about EUR 200 million through increase of working capital.

The result of this action has been beyond our expectation. And despite a sharp drop of sales, as you know, and some adverse ForEx impacts, we were able to generate EUR 392 million from cash from operation, EUR 419 million change — positive change and an improvement in working capital that more than cover the cash out from the reorganization plan, mainly coming from the plan announced in 2019 and also our continuous, I would say, higher than normal CapEx level of EUR 210 million, mainly driven by our Aurora building as well as our plant in the U.S., Charleston.

If I move to the next slide on Page 21, and we look a little bit about in detail on the working capital and the return on capital employed. So as said before, we have improved operating working capital by over EUR 500 million in the last 12 months and by EUR 273 million since the beginning of 2020, strongly reducing our — strongly improving and reducing our conversion cycle time.

DIO and DSO decreased respectively by 5 and 12 days. The improvement in working capital did not — as in the past, coming from mainly subsea, but really also coming from our commodity cable operation, where all businesses improved significantly their cash conversion cycle. Overall, operating working capital as a percentage of sales decreased from 12.4% in June ’19 to 6.5% in June ’20, which is the first time such a level is reached.

Finally, in terms of return on capital employed, performance is also quite good with an improvement of 2.3 points versus June 2019, coming from the improvement in operating working capital mainly. Restated from COVID-19 impact estimated, return on capital employed would have been even higher at 13.2%.

If I move now to the balance sheet on slide — Page 22, I will not repeat but, obviously, a strong — very strong balance sheet, stronger than last year June, stronger than ’19. Obviously, the improvement in working capital, as mentioned before, is noticeable. The change in net debt, I already also commented, which is at a record low level. And as you can see here, all — obviously, the room — the headroom on our covenant for our debt are now even increasing further at a low time — low 25% on the gearing ratio and about 1x on the covenant for the leverage ratio, which is again probably the best performance on our covenants for us in a long time.

If I move to slide — to the last slide of the financial presentation and we look at our liquidity, consequently of the operating working capital improvement, liquidity is at record high level, thanks to all the actions we have been taking again on our businesses.

Cash on balance sheet stands at above EUR 1 billion. Net debt, as I commented before, EUR 276 million. Total liquidity of the group at June ’20 is EUR 1.6 billion, considering the EUR 600 million of untapped revolving credit facility. And if we pro forma this number from the proceeds of the sale of our Berk-Tek business in the U.S., total liquidity reached EUR 1.8 billion at the end of June ’20, which is again a higher level ever achieved.

That being said, I conclude the financial part and turn back to Chris for the conclusion.

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Christopher Guérin, Nexans S.A. – CEO [3]

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Thank you, J-C. So on Page 25, I know that some companies (technical difficulty) but — because it’s, of course, a very fragile government, but we decided to do one and specifically on the 3 indicators that reflects our performance.

So the EBITDA for the guidance 2020 would be between EUR 310 million to EUR 370 million for the year. Return on capital employed between 7% to 10%. And compared to our initial guidance pre-COVID, our free cash flow here will be positive, taking into account as well the very strong dynamic efforts that we have set in H1.

As a word of conclusion, I think the team make fantastic work. Once again, Nexans is demonstrating its capacity to generate the strong free cash flow in a very difficult environment. So that’s, I think, a great achievement. We are now pressing ahead and even accelerating the new Nexans plan despite this exceptional situation. We have reinforced as well our strategy around 3P: Profit, people and planet. And specifically on these topics and as well innovation, we have intensive discussion with our Tier 1 customer right now on how to reinforce services for them and to answer to all their demand.

Nexans will get stronger and ready to make as well some evolution of its business portfolio. We give you as well a signal with 2 divestments in the last quarter. We will have to choose the verticals — business vertical where we want to scale up, on where we want to build our future and divest some other sectors, where we consider that we are not the best anymore.

Of course, I’m sure you will have a lot of question about this evolution of portfolio, but I will ask you to keep them for November for our Investor Day. I will not answer those questions right now. But of course, open the lines for all the other questions that you may have regarding this half year performance. Thank you for your attention.

Now we open for — the line for the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) So our first question is from the line of David Barker from Bank of America.

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David Barker, BofA Merrill Lynch, Research Division – Equity Research Analyst [2]

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Just a couple of quick ones from me. I think you touched a little bit on the kind of trends in the businesses in June. But I wondered if you had any more color on how the U.S. behaved through the quarter? And did we see any kind of impact on demand as the second wave and cases start to rise again in the quarter? So that’s my first question.

And then a second quick one is, are you able to quantify the impacts of what short-term working themes, particularly in Europe, has on EBITDA in H1? And can you explain how you think this might roll-off in H2 and as we go forward?

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Christopher Guérin, Nexans S.A. – CEO [3]

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David, thank you for your questions. I will take the first one. J-C will take the second one.

So regarding the content of the demand, no, we’ve seen — right now, as I told you, I’d like to take construction as great indicators of the worldwide economy. What we see is very, very strong demand. We know as well that we have been able to take some market share because some of our Tier 1 customers gave tribute of Nexans on the way we handled the crisis because we know that some of the capital goods company have closed factories straight away in March and in April, where we keep our factories open. So we know that in order to thank Nexans safer during the peak of the crisis, we get back some market share.

But dynamic for Q3 in that sectors worldwide will be extremely strong. We may as well keep our factories open for the months of July and August in all the area where we have strong demand. The main concern, where we remain extremely vigilant beyond the COVID-19 potential second wave, is mainly on the Q4 because Q3 still — we are still running the project that has been launched 8 months ago. And Q4, we should see the new demand, the new project to start. And this is where we are a bit cautious, and this is as well what our customers are claiming in the last week when we made them.

Same for automotive. Automotive is — we’ve seen a sort of very strong V curve right now. But once again, we remain prudent. We have to mention as well that for the automotive, we have a big jump of our electromobility demand for harnesses for electrical cars that had the jump of 20% in the last weeks, so as well a sign of change of the demand, which is good for us because we are very well positioned on that sectors.

If I stay as well still in the automotive, we have seen that our competitors in Japan and some in Europe are facing very strong difficulties, both in terms of execution on — as well in terms of their balance sheet situation. So we may as well benefit from some market share shift in the coming months. So this is what I can tell you for the present time. Also again, high voltage business is a smooth execution. Everything is strictly on budget. So no deviation there.

On — the only sectors where we could be a bit surprised because of the evolution since more than 3 quarter is the telecom sectors because we all know that the drivers of the demand are extremely positive and strong, but the supplies remain, I would say, weaker than expected in some countries, specifically in Europe. And we have seen as well in the last weeks very strong attack from Chinese suppliers for fibers and as well cables in the European market with very, very low price. So this is certainly a sector where I remain extremely prudent.

J-C, regarding the impact on the EBITDA?

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Jean-Christophe Juillard, Nexans S.A. – Senior Corporate VP & CFO [4]

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Yes. So basically, David, as you rightly said, we’ve benefited from some government subsidies in the first half of the year due to the pandemic situation. This amounted to EUR 14 million, including — included in our EBITDA. However, at the same time, we did that — you might recall that we have decided to pay to our frontline workers a special, I would say, onetime monthly bonus of EUR 750. So that totaled about EUR 5 million of the quarter — the second quarter of the year negative impact. So the net of the 2 is about a little less than EUR 10 million.

For our expectation in H2, right now, we have — we don’t see any, I would say, strategies coming for us. We have stopped also paying the worker premium. And therefore, there is no expectation on H2 from that.

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Operator [5]

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Next question is from the line of Lucie Carrier from Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [6]

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Actually, I want to follow-up maybe on the first question that was asked, if I can press a little bit. I appreciate your view on the construction side. But obviously, there’s probably a lot more catch-up effect in this type of business that we might see in other businesses. And so I was hoping you can give us maybe overall for the group kind of what was the trend in June and what you have seen in terms of group organic growth so far in July?

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Christopher Guérin, Nexans S.A. – CEO [7]

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Yes. Let me — Lucie, let me call out a bit more the June figures because, of course, Q2 has a difficult read because of the big stop of demand in April.

So for Building & Territories, June to June, so just a month’s view, we are at plus 10.9% of organic growth June to June. So we’ve very strong demand in June and reaffirm in July as well. On August, certainly, we’ll be at very, very strong demand because for the first time since years, we keep our European factories open.

Regarding Industry & Solutions, you have seen from quarter-to-quarter, or if I have a look on ’19 versus ’20, Q2 ’19 versus Q2 ’20, we were at minus 27%. But when we look June to June, just on the monthly view, we are minus 13% for the month of June and roughly around a bit lower, closer to 10% in July. The biggest drop that we have in the Industry & Solutions remains aerospace business at 30%, but as well mining business in U.S.

Regarding Telecom & Data, we — for Q2 to Q2 year-over-year, we were at minus 21% and June to June, we are at minus 13%. In July, we are back to the level of last year. So it’s a very strong improvement in the business. I’m still a bit disappointing on the fiber evolutions year-over-year because apparently, a lot of European customers are taking the benefit of very low price from China, but maybe it will change.

And regarding high voltage, it’s a smooth evolution year-over-year. But here, it’s — we cannot really talk about organic growth because it seems to project phasings month by month. And we told you that we had a very, very strong Q1 versus Q1 ’19. More or less, Q2 versus Q2 last year is minus 2.8%. But beyond this number, there is no specific information in terms of risk of disruptions or risk of execution. It’s just the evolution of the project phasing, which is like that on Q3 will remain stable as well for high voltage.

Is that helpful or I have do a bit more, Lucie?

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [8]

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My second question was on the free cash flow. I mean, you rightly highlighted. Obviously, you had different seasonality this first half compared to the previous years, I guess, to some extent, also linked to the disruption and the contraction in the business.

When we look at the second half free cash flow evolution, how should we think in terms of working capital? And here, I’m thinking about both the advance payment on some of the project business, high voltage, but also do we need maybe to increase the working capital to kind of restart some of the cyclical businesses?

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Christopher Guérin, Nexans S.A. – CEO [9]

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Sure. I will take the question, Lucie. Thank you for asking. So basically, all the improvements we’ve made — I mean, definitely, as I presented, there is a mechanical effect due to COVID on the free cash flow that explain part of the improvement. But the most significant part is really the initiative and work that has been done by the teams to improve the number. And the true — I would say, the perfect way to see that is a percentage on working capital on sales from, again, 12% to 6.5%.

So — I mean, this is obviously a major improvement, which is a one-off, onetime improvement in our working capital that generated a lot of cash flow in this period. In the second half, our objective — we are confident in maintaining 6.5% to 7%, I would say, working capital and sales. We are expecting an increase in volume in the sales and therefore, mechanical increase in the operating working capital due to the restart of the business.

However, in terms of percentage, again, our objective is to maintain the low level of 6.5% to 7% in terms of percentage of sales. At the end of the year, we are confident that we will — despite basically what we announced pre-COVID, we will generate positive free cash flow for the year 2020 with, again, a little bit more consumption of cash in the second half, but positive free cash flow. And then after that, to be included, there is sale of the Berk-Tek business that will increase even furthermore. And before the, I would say, proceed of the sales, cash flow will be positive in 2020.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [10]

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If I may ask last question, which is kind of more mechanical. You were just mentioning the Berk-Tek disposal. Are you — considering you’re selling this in the current quarter, are you able to tell us roughly what the lack of EBITDA you will have in the fourth quarter from Berk-Tek and metallurgy? Is that — I mean, I seem to try to calculate it at about between EUR 5 million to EUR 10 million, but just wanted to have your contribution.

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Jean-Christophe Juillard, Nexans S.A. – Senior Corporate VP & CFO [11]

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Sure. Let’s put it this way. It’s a EUR 20 million EBITDA business. It will be off our financial in September, so you can calculate about 3 months — 3 to 4 months of lack of EBITDA on EUR 20 million average EBITDA. So it’s about EUR 4 million basically we’re missing.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [12]

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And metallurgy was not…

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Jean-Christophe Juillard, Nexans S.A. – Senior Corporate VP & CFO [13]

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That contributed, In fact, slightly negative EBITDA.

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Operator [14]

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Next question is from the line of Sean McLoughlin from HSBC.

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Sean D. McLoughlin, HSBC, Research Division – Associate Director of Clean Technology [15]

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Just wondering about CapEx, related to Lucie’s question around cash flow. I mean, any changes to previous communication? More caution or more confidence on your spending through the rest of the year and into 2021?

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Jean-Christophe Juillard, Nexans S.A. – Senior Corporate VP & CFO [16]

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So CapEx, again, there’s 2 big parts of the CapEx. Roughly, the CapEx before COVID was EUR 300 million. That was our plan for this year. About, I would say, EUR 160 million — EUR 150 million of that — about half of that was strategic, I think, I mentioned. On those 2 CapEx, we are on track. We will spend the cash in the year as planned. So no change on that.

On the remaining EUR 150 million, that’s basically maintenance CapEx in our businesses. We have, obviously, with COVID looked very carefully at every, I would say, euros of those EUR 150 million, making sure that we were spending wisely the money and there was a necessity to do that. And we have reduced that number quite significantly, about EUR 60 million. Again, not obviously endangering the business. Mechanically, the fact that some of our plants in the second quarter were running at lower productivity meant that there was lower need for maintenance CapEx due to lesser utilization of the machine. Between that and as well the scrutiny and the careful decision on investment, we’ve reduced CapEx by about EUR 60 million versus the total target of the year.

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Sean D. McLoughlin, HSBC, Research Division – Associate Director of Clean Technology [17]

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And just a question on electromobility, I think it’s quite a supportive trend. If you could just discuss — I think you’ve said in the past that certainly, there might be lower cable content in an EV versus a traditional IC, but it’s higher quality. Is that still the trend? Is it a higher-margin switch for you? And is this a potential area where you see kind of more involvement also through M&A in the future?

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Jean-Christophe Juillard, Nexans S.A. – Senior Corporate VP & CFO [18]

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That’s a good question. Thank you, Sean. No, I will not say that the electromobility is still to the better margin. It’s more the reverse because we are not yet at the scale level of what we have on the combustion side. So there is still a lot of significant effort on investment, both on car manufacturers and harnesses makers to make that business profitable in the long run.

So we are more in the ramping up CapEx phase on this business. It is less wires, but more complex. And once again, we are not — Nexans is not supplying in the way of Renault, which is a small car. We are supplying — and with all respect I have with Renault, which has a record in terms of electric car production, but we are supporting only the German car manufacturers, so namely Daimler and BMW on those effects. So it’s pretty big and important sizable hybrid cars. So the demand is pretty strong.

Do we have any plan of M&A on that sectors? Not right now. We want just to benefit the fact that we have a very strong balance sheet and as well a very profitable business in this harnesses world to take the opportunity of some competitors that are suffering a lot before COVID and even more during COVID. And we have a lot of customers calling us to support them in their model deployment. So for the moment, we remain open to discussions to get market share, but we are not on the M&A road for them on this business.

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Christopher Guérin, Nexans S.A. – CEO [19]

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But it is true to notice that one of the impact of the COVID situation, it accelerated the share of electrical mobility in the sales of our harnesses businesses, which is quite high today versus what it was before and versus our main competitor, which is, we believe, a good thing.

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Operator [20]

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Next question is from the line of Akash Gupta from JPMorgan.

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Akash Gupta, JPMorgan Chase & Co, Research Division – Research Analyst [21]

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I have 3 questions, please. Maybe first one on the guidance. I mean. It’s quite useful that you started and you came out with the guidance when some of other companies are not. But I’m just confused with this because your range EUR 310 million to EUR 370 million is wider than what you gave originally before COVID-19, and then you also have 4 nos in terms of what is excluded from your guidance.

So if we exclude these 4 nos in terms of change in macro, change in COVID-19 situation, market demand, second wave, then can you please help me explain or understand what needs to happen for you to reach on the lower end and what needs to happen for you to reach (inaudible)? So that’s question number 1.

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Christopher Guérin, Nexans S.A. – CEO [22]

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Akash, thank you for your question. Yes, I mean, we purposely took a wide range because of the current situation. And the — I mean, as you know, a big part of our business is on the commodities and still very potentially impacted with low visibility and very short-term backlog. So this is why we have decided to increase the range.

We usually communicate ranges about EUR 40 million wide, and we thought it was — in this current time, we preferred to give a range than not give a range or not give any guidance. We preferred to give a guidance than no guidance, but we purposely decided to increase the guidance — the range of the guidance.

Obviously, our target is to be within the guidance and to be at the midpoint of the range. This is our objective. And I would say the fact that we have also some disclosures, just again reinforce the fact that the market today and the environment is still extremely fragile with extremely low visibility. We’re hearing very mixed signals about very low Q4 — good Q3, low Q4, and potentially low Q1. Probably could be at the level of the Q2 we’ve had. So I mean, it’s — again, it’s very uncertain, and we felt that a wider range was making sense.

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Akash Gupta, JPMorgan Chase & Co, Research Division – Research Analyst [23]

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My second one is on working capital. So you said you expect 6.5% to 7% level to continue in second half of the year. Maybe if we look at a 2, 3-year view, then could you sustain this low level — low working capital level to 2021 and 2022?

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Jean-Christophe Juillard, Nexans S.A. – Senior Corporate VP & CFO [24]

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That’s the objective, definitely. I mean, I think, again, as Chris explained, we’ve done a very in-depth job with the businesses over the past semester, over the past 6 months and mainly in the second quarter, plant by plant, operation by operation to both shift our portfolio and focus our priorities and resources to our top customers, not addressing again the 17,000 customers the same way we’ve been doing in the past, focusing on the top one. That’s one thing.

And then, obviously, the second thing, very strict target in terms of inventory management and cash conversion cycle. I mean, this is something we are reviewing with the Executive Committee of the company on a weekly basis. And we are — and this is why we are confident that this level, whether it’s 7.5% — 6.5% or 7%, I mean, to be seen. But definitely, our objective is not to go back to the level prior to this year and above 2-digit percentage.

So to answer your question, confident that next year, it will be the same kind of level in percentage of (inaudible) sales.

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Christopher Guérin, Nexans S.A. – CEO [25]

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And if I may add, Akash, Chris speaking, is that we took this crisis as an opportunity to show that the SHIFT methodology that we apply in some units could be a very huge benefit for all the groups. So we took the working capital SHIFT methodology and apply it to 80 units, 8-0, at one go during 3 months. All units received from their management cash conversion cycle objective. This — they will — they are receiving as well cash conversion objective for September and for December because the objective is not to make window dressing of our account, but to sustainably improve the cash conversion of all the business. And we have as well reinforced strongly the training around cash management for all our top executives, taking the benefit that they were at home office and certainly have a bit more time because not traveling, to keep learning and reinforce the financial acumen on that topic. So it was, I think, a great time for this element.

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Jean-Christophe Juillard, Nexans S.A. – Senior Corporate VP & CFO [26]

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And I would like to add, Akash, on top of that, the achievement of the working capital at the end of June, there are no, I would say, artifice or any short-term one-off goals taken to reach a target. We have not extended payable for instance, nothing — not trying to pay — not pay suppliers at the end of the months to improve our position. We have not done that. We have not increased furthermore vendor financing or factoring of receivables to, again, try to improve the picture at the end of June. So all of that really is — all the improvement is really done again on the sustainable way, as Chris mentioned, on the business side and mainly managing cycle times and inventory.

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Akash Gupta, JPMorgan Chase & Co, Research Division – Research Analyst [27]

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And my final one is on 2021 target. So I see there is no mention of ’21 target in today’s release. So maybe if you can update on where do we stand on that?

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Christopher Guérin, Nexans S.A. – CEO [28]

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Akash, can you give me a name of a company that commit on its 2021 target right now?

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Jean-Christophe Juillard, Nexans S.A. – Senior Corporate VP & CFO [29]

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I think for (inaudible), it’s a difficult question. Legit for you.

No. I mean, we said that we would communicate on 2021 when we do our Investor Day in November. We said that in July we will communicate the guidance for 2020. And in November, we will talk about ’21 and the new equity story of the company.

Just — not giving any numbers, but just to give you some information about where we stand today. We believe that basically, 2020 is kind of a year on hold for the company in terms of the equity story.

But as soon as ’21 confirms that it goes back to, I would say, more normal track, where we will be back to our EUR 500 million. Might not be ’21, might be ’22, but it will be in excess of the EUR 500 million anyway for the simple reason that we have, again, done a lot of work in advance on the cost reduction that are sustainable improvement on our cost base.

And you see here, first 6 months, we’ve done, on the 6 months alone, EUR 49 million improvement in our cost base, which is above, I would say, our normal improvement year after year on our equity story. So this is — this will be sustainable and we’ll continue to benefit from that. And at the same time, we are now — starting now. In fact, we’ll have the full impact in ’21, has a positive impact also in the additional subsea capacity that we are building.

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Operator [30]

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Our next question is from the line of Artem Tokarenko from Credit Suisse.

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Artem Tokarenko, Crédit Suisse AG, Research Division – Research Analyst [31]

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I have 2, please. My first one is around the EBITDA bridge. Can you help us with understanding that — the EUR 64 million COVID-related impact? Well, how much of that is coming from volumes? How much from some cost and efficiencies? And also thinking about H2, how much more P&L cost savings you expect to deliver this year?

And my second question is around the pipeline in high voltage business. Would you say that there are any changes to the pipeline because of COVID or because of the green deal, maybe on the opposite — more positive side? And also, are there any big projects you’re working on for H2 this year?

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Jean-Christophe Juillard, Nexans S.A. – Senior Corporate VP & CFO [32]

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Yes. So I will take the first question, Artem. First question is regarding EUR 64 million. It’s purely volume. It’s really looking at what we achieved in ’19 in terms of sales and volume when the company was operating on a normal, I would say, circumstances with plant running at 75%, 80%, 85% of capacity. We looked at, obviously, all the plants we shut down for weeks — 1 week, 2 weeks, 10 days, depending on the plant and the situation as well as some of the plants where we reduced capacity from 80% and 85% to 50%. So this is really — the EUR 64 million is purely a volume impact. It doesn’t include anything else. It’s a mechanical calculation from, I would say, what we budgeted this year and what we achieved last year when the company was running on a normal path.

In the cost — for the second question on the financials, on the cost reduction side, I will not give you a number of what we would do in H2. Definitely, we will continue to work very hard in improving our fixed cost base. We have definitely done, as you see, a big part of the job already in H1. We’ll continue to do that. But what I can say is that our total cost reduction will be higher than last year and will definitely put us in a situation where we will achieve the number. If you recall the number, the commitment on our equity story is EUR 210 million cost reduction in between ’19 to ’21. We are almost — I mean, way above at 0.5 point of the 3 years. We’re above that half of the EUR 210 million, and we will overachieve this number at the end of the equity story.

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Christopher Guérin, Nexans S.A. – CEO [33]

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Yes. And Artem, regarding your question on the pipeline, so — of course, we — as you can see on the Page 13, our load is pretty strong up to mid-2022 for our Halden plant in Norway. The same for our plant in (inaudible), which is fully loaded up to 2021 — the end of 2021. Charleston, U.S.A. is 80% loaded — between 70% to 80% loaded, thanks to the deal that we have signed for 7 years with Ørsted. We are, of course, starting to discuss some big interconnection projects in North Connect, NeuConnect. That is worth grinding, but there is as well a very, very strong demand on wind offshore.

For the moment, we have not felt any delays in terms of execution, neither demands for wind offshore business, neither yet on amplification. But given what all the government are announcing everywhere in the world, we are very positive, maybe not in the short term, but on medium terms on the development on specifically wind offshore business. So we make sure that we keep our capacity open for big moves on that direction.

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Operator [34]

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Our next question is from the line of Benjamin Terdjman from Kepler.

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Benjamin Terdjman, Kepler Cheuvreux, Research Division – Research Analyst [35]

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Yes. I just have a quick one, kind of a technical one. So since you are selling German metallurgy and Berk-Tek, should they be pushed under IFRS 5 after H1? And therefore, does your EBITDA guidance consider the disposals?

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Jean-Christophe Juillard, Nexans S.A. – Senior Corporate VP & CFO [36]

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So the answer to the question is yes. They are under IFRS 5 in H1. You can see in the balance sheet, we have EUR 27 million in the 9 assets held for sale. So they are included in — they are treated as IFRS 5.

In terms of guidance and EBITDA, it is included. The only — we’ve included in the EBITDA and the ROCE guidance. It is not included in the free cash flow for the reasons that we communicated our equity story before our M&A and equity transaction. So we wanted to be consistent with our equity story. This is why we say positive. Obviously, if you include that and you add that, the cash will be very positive.

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Operator [37]

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Next question is from the line of Jean Granjon from ODDO BHF.

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Jean-Francois Granjon, ODDO BHF Corporate & Markets, Research Division – Analyst [38]

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Just few questions, please. The first one concerns with trend for the H2. Could you give us some more color regarding what do you expect for the organic growth for the second half after the minus 9.8% for the H1? Do you expect to reduce this decrease during the second half?

My second question concerns the objective for the cost-cutting plan on the SHIFT plan. So you expect that you undraw the EUR 10 million for the cost cutting and on road for the SHIFT plan. Do you expect more than that due to the acceleration of the plan? And can you give us some — what do you expect until 2021?

My third question concerns the costs or the exceptional costs. So there was EUR 53 million exceptional costs in the P&L during the first half. What do you expect for the second half?

And my last question concerns the fiber optical market. Could you just remind us what is your position to this market? And you mentioned some more secure or cautious comments regarding the market due to competitors. So what do you expect for this market — fiber optical market, sorry, trend for next quarter?

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Christopher Guérin, Nexans S.A. – CEO [39]

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Okay, Jean-Francois. So thank you. We have 4 questions. J-C, I propose that you take number 1 and number 3, which is about organic growth for H2 and about cost reduction. And I take number 2 and number 4, which is about the shift on cost reduction and fiber.

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Jean-Christophe Juillard, Nexans S.A. – Senior Corporate VP & CFO [40]

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Sure. So — about H2 and organic growth on H2, so definitely, the way we see the year is Q2 was the very low point because Q2 by itself, we had a flat Q1, negative organic growth in Q2 of 19%. Negative 19% in Q2. We foresee Q3 to be slightly better than Q2, but not obviously breakeven. I mean, flat organic growth. We’re still in the range of minus 10%, 11% for Q3, and then slightly better, but still negative — single-digit negative for Q4. Obviously, the trend for that — the main trend of that are the following: no impact on the high voltage, as we discussed, whether it’s land or subsea. We see slow recovery on the — despite a good month of June, as Chris described, we saw — we see slow recovery on the harnesses business. This continues, I would say, impact in the third and fourth quarter before it comes back to a more normalized level in ’21.

We have also in the industry group some businesses that are quite heavily impacted. I name, for instance, the aerospace business, which, as you know, is not that significant in the total portfolio of Nexans. It’s about EUR 100 million of sales, but quite contributive in terms of EBITDA and it’s a profit driver in the company. And a lot of the volume goes to Airbus, and Airbus right now is in a difficult situation performing orders and so on.

So we see, at the same time, a rebound in rolling stock and industry automation in-between. So there are pluses and minuses, but globally — and same thing with telecom and data. The recovery will not be immediate and not starting for the fiber installation, for instance. So it will take a little bit of time. So it’s — I would say we see more, I would say, progressive improvement, but continues, I would say, negative organic growth versus a very good H2 we had in 2019 on most of our business, except high voltage.

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Christopher Guérin, Nexans S.A. – CEO [41]

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Regarding the second question on cost reduction and on SHIFT, yes, we have in the initial plan an objective of cost reduction of EUR 210 million. We will certainly reinforce these numbers in the months to come. We have already taken some actions on some units to reduce the cost. There will be no announcement in terms of restructuring because I think the restructuring we’ve done a year ago, which is still under — in motion is very strong help right now to face the crisis. But here on there, we will reinforce cost reduction in some areas and some businesses where we consider that medium-term demand will be weak.

Regarding SHIFT program, potential slight delays in terms of EBITDA generation because — in H2, but not yet confirmed because we’ve put all the focus of the team on the working capital improvement. And I think you have seen also, again, the noticeable change in terms of ratio of working capital. This is thanks to shifting. So very, very strong focus on working capital, more than EBITDA, in Q2 and as well in Q3, Q4. So — but we are very confident to achieve the target in 2021 as planned for SHIFT program.

Regarding the question…

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Jean-Christophe Juillard, Nexans S.A. – Senior Corporate VP & CFO [42]

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Okay. So the question on the bridge EBITDA, we have indeed a negative impact of EUR 15 million, which is not due to COVID. That is why — I mean, it’s not excluded on the far right of the bridge. It’s mainly due to political situation that we have experienced mainly in Lebanon, which is — which started way before COVID and not COVID-related. Lebanon is a country in political crisis right now. It’s a quite strong contributor. It’s not very large in terms of sales, but it’s quite contributive in terms of profit making. And right now, we see disruption in that country impacting the business.

The other part was in — the other part of the EUR 15 million impact was coming from the Building & Territories in North America. We implemented SAP beginning of the year — end of last year, beginning of the year and we had some disruptions due to SAP in H2 of 2019 and we explained a little bit of that, but the most part comes from Lebanon.

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Christopher Guérin, Nexans S.A. – CEO [43]

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Regarding the last question for fiber optic, our exposure is about EUR 200 million. So we know that we have a lot of questions here and there on that sector, but we have — we are not a leader because we are far away from the top leaders of the telecom sectors that are namely Corning, CommScope, Prysmian, Sumitomo, Fujikura, Furukawa. We — so — but we are a niche player with great profitability.

We have — for the year to come — for the months to come, we are okay. We are positive because we have already signed contracts with our customers. So the price are fixed. Volume as well as market share, I will say, is fixed. But we are wondering what will be the evolution midterm in that sector. The demand will be there. But once again, as I told you each time, volume doesn’t make profit systematically. And the big question is what will happen from all the capacity available in China, both in fiber and cable where all these Chinese suppliers spreading their product everywhere in the world sometimes, but very, very low price and very, very low quality. So we are talking with our teams to get their vision of the future price evolution on these sectors. But also again, very limited exposure in the meantime.

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Jean-Francois Granjon, ODDO BHF Corporate & Markets, Research Division – Analyst [44]

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And could you consider a possible disposal for this sort of business?

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Christopher Guérin, Nexans S.A. – CEO [45]

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As you’ve seen, we have decided to dispose half of our telecom business in U.S., specifically because it was LAN copper type product. So very mature products and customers want solution now. So there was only 2 solution: either we acquire an equivalent of Leviton doing the [connections], to move from components to solutions, either we are divesting our cable part. This is what we have decided to do.

For fiber optic, of course, we are a small player. So that’s a question strategically speaking, and we get back to that point in November. But we — there is as well a positive thing here is that in fiber, we are doing both the connectivities, accessories and as well the cables. So we are able to provide a full system offer for our customers. So that help us well to follow the demand of the customers, which was not the case of LAN copper.

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Operator [46]

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Next question is from the line of Lucie Carrier — sorry, it’s from Luigi De Bellis from Equita SIM.

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Luigi De Bellis, Equita SIM S.p.A., Research Division – Co-Head of Research [47]

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Just one question for me on the high voltage. We have seen very strong margins in first half. How much do you think is sustainable in second half and also looking into next year, considering your production schedule, the activity, installation and backlog?

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Jean-Christophe Juillard, Nexans S.A. – Senior Corporate VP & CFO [48]

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Yes. Luigi, so indeed, we have seen very good H1 in terms of margin in high voltage mainly in subsea. There are 2 drivers that explain the good performance in EBITDA for high voltage over the 6 months. The first one is on subsea. The execution of the project went very well. Margin is in line with expectations, but we’ve had, I would say, the good surprise, one could say. Now we had a lot of repairs in the first half of the year. We did 4 repairs, and repairs are basically damaged cables that you need to fix very quickly because there are significant losses for the user — the seller of electricity and the user of the cable. So those are extremely profitable, I would say, work. We’ve done 4. Usually, we do a little less than that, probably 1 or 2. I would say, 2 per year. And we did much more. So that definitely helped, I would say, H1 performance in subsea and boosted margin EBITDA on the first half. Difficult to say what will be H2 and next year in terms of repairs because by definition they are accidents that you cannot foresee.

The second driver, which is explaining the total high voltage performance also, is compared to last year at least, and that will continue with the improvement of the restructuring of the LAN part. We were still — we were — in 2019, we lost EUR 24 million in that business, EUR 12 million in the first half, EUR 12 million second half. We are, as per our plan, even following our restructuring efforts on this business. So mechanically, there is also big improvement in the performance — financial performance of the total division due to the restructuring of that business.

So I would say that the — so to explain, I would say that H2 is likely going to be at a lower level of margin in subsea than in H1, unless we get more repairs again like we did in first half and difficult also to say for ’21. But ’21, we have larger project also with good installation. So we should see a good level of margin in ’21 in subsea.

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Operator [49]

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Next question is from the line of Lucie Carrier from Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division – Executive Director [50]

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Thank you for taking my question, but Luigi just asked it. So I will go back in the line.

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Operator [51]

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Our last question is from the line of Akash Gupta from JPMorgan.

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Akash Gupta, JPMorgan Chase & Co, Research Division – Research Analyst [52]

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It’s on Charleston factory. So currently, you are using for Seagreen project in the U.K., and this factory is for — subsea for offshore wind projects in the U.S. My question is that maybe if you can talk to us about the outlook for some of these offshore projects will be confirmed? And how soon do you expect you will start producing cable for U.S. offshore wind project?

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Christopher Guérin, Nexans S.A. – CEO [53]

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Yes. We have decided to launch the first batch of production of Charleston with the Seagreen project. We like this project because it’s a pretty big one, but we don’t want to use Charleston to supply Europe. Of course, it will be a bit against our initial philosophy. So the objective is really to turn as much as we can, more than 80% of the capacity of this unit for North American-based project. That will be the case in 2022. The first production of offset will start in the Q4 2021 on their own time.

Thank you very much. We thank you for your attention. We have a lot of questions, but I think now we spent more than — kind of over 30s. We want to manage your times. We take a lot of calls afterwards and in the next days. Thanks, again. Stay safe. Have a great summer break. Thank you very much. Bye-bye.

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Jean-Christophe Juillard, Nexans S.A. – Senior Corporate VP & CFO [54]

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Thank you very much.

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Operator [55]

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So that does conclude our conference for today. Thank you all for participating. You may all disconnect.