Nexans SA

PAR:NEX

Earnings Call Transcript 2019-Q1

[Operator]

Good day, everyone, and welcome to the First Quarter 2019 Financial Information Conference Call hosted by Christopher Guérin, CEO. My name is Adrian, and I'm the Event Manager. [Operator Instructions] I'd like to advise all parties that conference is being recorded. And now I'd like to hand over to Christopher. Please go ahead.

[Christopher Guérin, Chief Executive Officer]

Good morning, everyone. Thank you to be present over the phone to listen our Nexans quarterly result. This is Chris Guérin speaking. And I am sitting here together with the group CFO, Jean-Christophe Juillard. As you can see regarding the press release, quarter financial information concerning sales only, but let us give you a brief summary on more color picture before opening the floor to your question in regards to the situation of Nexans.This morning, we have reported a strong growth for the first quarter, above 10% organic sales growth for cables and wire activities, reflecting, of course, a dynamic start to the year in order roughly. A 10% organic growth a year, right -- year-over-year is definitely the sign of a buoyant start. I'm also defer to say that Q1 2018 was a low comparison results. But we can be satisfied about this growth for the reason it is all spread over all the business group on geographies for wire and activities.I will now let Jean-Christophe comments in details per activities and I will highlight after all the progress of our transformation plan before getting your questions. Jean-Christophe?

[Jean-Christophe Juillard]

Thank you, Chris. So I will go a little bit in the detail of each of our segments of business. I will start with the Buildings & Territories & segments. So the sales from Q1 are EUR 455 million at constant metal price, which represents a 14.5% organic growth. If we look in more detail in the Building & Territories on the building low voltage cables, they have been growing -- the segment has been growing by 17%. That is the same quarter of last year. It has been a strong quarter in all of our European countries, except in France and record level in sale in North America, mainly in Canada, with a record month of March of plus 30% but also a strong month in the U.S.On the low medium voltage cables for utilities, this segment is up by 12%, with strong activity also in North America, both Canada and the United States, but as well as in Europe plus 10%, notably with quite good project in Switzerland.Looking at the Telecom & Data business. The sales for Q1 are at EUR 132 million at constant metal price, representing a 7.2% organic growth. The LAN systems and cable business is slightly down versus the last year. Situation varies between the market. If we look in North America, we saw a good growth of plus 3.5%, driven by the sales of copper cables, where in sales, the sales decreased in Europe by 4.5% and Asia by 11.5% (sic) [ 11.9% ].On the telecom infrastructure, which are the sales to telecom operators, sales are higher than last year by 16%, mainly boosted by Europe 15%, as we see also some pressure with the supply of optical fiber. We see also in the Telecom & Data business a good growth in the -- special Telecom, which is a source of LAN cable connecting the platform to the robust -- robots that grew 7% versus last year same quarter.When we look now at our Industry & Solutions, sales are totaling EUR 296 million at constant metal price, which represent a 1.9% organic growth. On the automotive inside Industry & Solutions, the automotive harnesses business, the sales are up 4.5%, with strong demand for truck cables in North America, offsetting the lower demand in China for cable for car manufacturing.The market for cars in Europe has been stable on the first 3 months of the year. We've seen a slight reduction in demand in Q1 with railway -- cable for railway being down 6% and cable for shipyards also being down versus quarter of last year by 11%. And finally, the cable sales in -- for wind farms and mining cables are up in North America despite a lower, also, environment on the Oil & Gas business.So all in the hold of the cable business, as Chris said, sales are up 10.1% organic growth versus first quarter of last year. When we look now at the High Voltage business, the sale has amounted to EUR 126 million at constant metal price, which represent negative 8% organic growth versus first quarter of 2018. If we split and we look first in the sales in land high voltage, they decreased by 21%. Definitely the closing of one of our site in Germany -- the another site in Germany that we announced in January of this year is impacting productivity and the execution of 2 projects we have in the plant.On the submarine high voltage business, sales are slightly lower than last year, minus 2.4%, but this is mainly due to the scheduling of project execution that will only start in the second quarter of this year, mainly talking about the NordLink project. Also important to notice that the boat vessels have been in maintenance for a couple of weeks in the first months of the year, which obviously delayed first quarter sales in the year versus the rest of the year.Also, important to notice that we have a high -- continue to see a very high tendering activity in the submarine high voltage business, with many projects to be awarded in 2019. With this overview of our sales first quarter by segment, I'll now give the floor to Chris, who's going to talk with you about the transformation plan.

[Christopher Guérin, Chief Executive Officer]

Thank you, Jean-Christophe. So rest of the transformation plan, the go-live of the New Nexans is now effective and well on tracks. The New Nexans '19-'21 plan launched in November 2018 has been rolling out and is on schedule. So just give you a brief overview of the plan. So regarding the SHIFT Transformation plan I have the [indiscernible] expand, of course, all the methodology that we have been proven in terms of research in Europe from the prior 2015 to 2018.Now it's fully rolling out everywhere in the world of Nexans, not only dedicated to struggling units in terms of reserve but as well all entities, even the one profitable. We expect to optimize, engine all the value creation during the time frame of the plan in all those units, both in terms of working capital improvement and EBITDA improvement. To date, we have 12 modules, 12 activities that has been rolling out. We have, of course, a weekly monitoring of this program at Group's Ex Com every Friday, and we have 60 people assigned to the program on the full-time basis.We have as well in the last 6 months trained more than 150 people regarding this methodology. I just came back personally yesterday from an audit of the program in Brazil for all our business units where the program has been launched 5 months ago and have met already significant progress, both in working capital performance and EBITDA evolution.So that was the part of SHIFT. Let me give you a highlight on cost reduction. So you know that information on consultation procedure has been launched on the 24th of January in regards to restructuring. So that should come to conclusion by mid-year with, of course, all the fixed cost reduction that we have presented to union partners for each entity.I expect this to show quantifiable results, more specifically on the second semester. But we have done already significant reduction in overall indirect expense at group level. The SHIFT plan is about business selectivity. So as part of the New Nexans strategic direction for '19-'21 period, and important changes are historically noted in our first Q towards selectivity in both capital investment initiative, commercial opportunities on all projects. This was all started with the aim to accelerate our movement up to the value chain.To this extent, growth is not the only KPI as such, also this Tier 1 comes with a very strong growth, which, of course, we're always happy to take. I would like to confirm that this growth is not taken to the detriment of the margin. And there is no commercial project as business -- as big as this can be, will be taken if it's not correlated with the whole of that we're implementing in regards to selectivity. So each project, each contract, each important negotiation goes through an evaluation process now focusing on overall risk, the financial rewards, the contractual terms and finally, overall fit -- how it overall fit with the New Nexans plan in terms of price generation, EBITDA, return on capital employed and free cash flow generation.So in conclusion, as you can see it's pretty brilliant start in terms of growth. Nexans Transformation program is well on track. All the market dynamics at present are very positive in all businesses and in all geographic -- geographies, helping us, of course, to better select the profitable business of the project for the coming months and for the coming years. We don't want to have a long speech because I am sure that you have a lot of questions. So now we are ready to take any questions that you would like to express. Thank you.

[Operator]

[Operator Instructions] Your first question comes from the line of David Barker.

[David Barker, Equity Research Analyst]

David Barker from Bank of America, Merrill Lynch. Just a few quick ones from me. Can you comment on the pricing trends you've seen so far in 2019 subsea? Are they kind of as weak as you will expect it given the pickup in competition your competitors have been talking about?

[Christopher Guérin, Chief Executive Officer]

Thank you, David, for the question. No, there is no difference involved for the month in regards to the price. What we see is that we have a very important quotation pipeline right now. So at least whatever the competition will do, we are pretty strict in our price, I'll say, diligence and power. Because what we may see in the coming years is potential bottleneck issue in terms of capacity in some of the technology. So we are extremely, I will say, prudent in giving any reduction on price because as you know and I already said that 2019 is fully loaded for Nexans in subsea, 2020 as well almost fully loaded, just waiting to get some additional orders on the recourse but the majority of our capacity is loaded. So we are working only on 2021 with a lot of project going on. So no specific risk at this time, no aggressive pricing for Nexans.

[David Barker, Equity Research Analyst]

Okay. And then just another quick one. You've had another, I think, another good strong quarter for the auto harnesses business, which I suppose was bit of a surprise given the weak auto data we've seen globally. Well, why do you be able to be so resilient here. Are there any one-offs that we're not aware of or the truck demand in the U.S. just that much stronger?

[Christopher Guérin, Chief Executive Officer]

Christophe...

[Jean-Christophe Juillard]

So definitely the truck has been -- the truck in the U.S. and North America in general has been quite strong and definitely offset, that I would say, more than offset the impact we've seen -- the reduction in demand that we've seen in China. And also we've been quite resilient in Europe where with the European market we've been able to deliver and basically maintain the volume and the -- and so globally speaking definitely the answer to the question is the truck business in the North America and also most of the -- the largest part of our business is still in Europe and it has been maintaining its share.

[David Barker, Equity Research Analyst]

Okay. And then just one more quick one, and I'm not sure how much you'll be able to give us on this, but the Viking tender that has been submitted and preliminary indications have been sent out. Are you able to give us any further visibility on where you are with the contract or when we'll hear more?

[Christopher Guérin, Chief Executive Officer]

No. Sorry, David. We cannot tell [indiscernible]...

[Operator]

Your next question is from Annabel Asquith of Morgan Stanley.

[Annabel Asquith, Research Associate]

I will have 2, please. And the first one is, I was wondering if you could please give us some more detail on the HV tendering activity you've been seeing so far in the market? And I know you mentioned that this is expected to be stronger this year than in 2018. So just a little bit of color on that would be great, please?

[Christopher Guérin, Chief Executive Officer]

So. Yes, organic is retendering. So we have -- just to give you some color of our activities and we have -- in 2019, we will have, of course, major project going on in terms of installation. We have Nordlink, NSL, Mindanao, East Anglia One, we have pretty significant project. In 2020, we have the NSL that we carry on LAN cable on C2. And we have already more than EUR 2.5 billion of quotation right now on business to be awarded before from now up to mid-2020, so pretty significant. So we are working right now to determine how can we finish the best manner in terms of cash management and profitability. The remaining capacity that we still have for 2021, and of course, working on 2022. Beyond the Viking Link project that, that there is as well a lot of major project like the Attica, Crete Cyprus or [indiscernible] project, which is worth EUR 2 billion. So it's pretty major. The question will be more on the technology of order project. So, of course, there is still a lot of discussion on some of the project, either if there will be MI or XLPE, but anyway for the moment, we are pretty optimistic on all the project going on.

[Annabel Asquith, Research Associate]

Great. And then my second question was, we understand from a recent article in a French newspaper that you were targeting EUR 420 million to EUR 450 million EBITDA in 2020. I was just wondering if you could give us some details around the assumptions here both from a top line and from a margin perspective?

[Jean-Christophe Juillard]

We will not at this stage give guidance about 2020. But definitely on our road to EUR 500 million in 2021, you would see -- you will see definitely a growth in the midpoint coming in the middle of year. So we will have, I would say, linear growth between now and to reach the EUR 500 million. That -- so we could expect and at least definitely in 2020 versus what we will achieve this year.

[Christopher Guérin, Chief Executive Officer]

We are perfectly aligned with what we have introduced in last November. So now you can already modernize the evolution of that tariff because we gave you the impact of each pillar, cost reduction, SHIFT and organic growth impact in EBITDA year-over-year. So that give you the range of 2020, that I did mention during an interview.

[Operator]

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

[Sean D. McLoughlin, Associate Director of Clean Technology]

Firstly, if you could maybe help us by disclosing the subsea backlog or the high voltage backlog at the end of Q1. Secondly, land high voltage, the U.K. announcement recently suggest that you're making significant inroads in this business. Are we here as a trough for this business? And how is the outlook for land high voltage looking through 2019 tendering activity? And thirdly, just looking at construction rather remarkably strong growth across different geographies, if you could just talk a little bit about, maybe what is the secret sauce here, is this down to new products? Is this down to different pricing strategy with customers? Anything that is -- just to help us understand what is driving this? And how we might see this continuing through 2019?

[Christopher Guérin, Chief Executive Officer]

Okay. Yes. Thank you for the question. So back to the backlog. We have contracted significant amount of orders in the last 6 months more than EUR 450 million of order for Subsea and Land. So our backlog at date is about EUR 1 billion for subsea and EUR 260 million for the land, which is -- in terms of subsea it's 2 full years of backlog. And for Land High Voltage, it's about a year of backlog roughly, which is -- show a significant improvement over the rest year because in general for the land we were only at 6 months backlog. So we have a stronger visibility on both business.Regarding B&T, well we know that there was a lot of market that were pretty low in Q1 last year, specifically in South America, in the Peru, Brazil and Columbia. All those units are extremely dynamic right now. We have, as well, revised our pricing strategy not to get market share but in the gross factor what is important to mention is that you don't have only a volume factors but you have as well a price factor, bringing on more services, enabling us to have a higher premium. We see, of course, overall pretty strong dynamic in Europe in Nordic countries because we had a pretty soft winter that really help us versus last year to have more installations for building activities and as well in U.S., where the market is pretty -- still dynamic.So that more -- for the moment, the building activities is on the same evaluations on trend than the Q4 last year. So pretty dynamic.

[Operator]

The next question is from Jean-Francois Granjon of ODDO BHF.

[Jean-Francois Granjon]

Jean-Francois Granjon speaking from ODDO BHF. Just could you -- just come back on the land businesses trends. So you mentioned you had some visibility -- more visibility with the backlog. So what do you expect after the strong growth for the Q1? This is my first question. And another second question, I just want to come back on the B&T businesses. What do you expect after the so strong first quarter? The third question, what can we expect for the organic growth for the full year 2019? And the last question regarding for ForEx, I'm little bit surprised by the low impacts of the ForEx in the Q1 despite the strong acquisition of the dollars compared to also. Could you give us some details, probably suppose that the other currency go down, so -- but the impact was very limited for the Q1, so could you give us some more details regarding the ForEx impact for the group?

[Christopher Guérin, Chief Executive Officer]

So regarding the land. Thank you Jean-Francois for your question. Regarding the land, we had a pretty soft start but as Jean-Christophe did mention, we had when he announced also joint plant of course, it's a pretty bad news for the people and for the units that has been impacted. And in Germany, in our another plant, which is part of the project of restructuring we had very, very low productivity given the first 2 months. So we had some important delays at the end of February that we are catching up since March. So that's a pretty good sign. So we believe that offer significant improvement by H1 regarding the volume. So that's the first question.Regarding the activities, as we have made some -- still follow on we've made some significant loss in 2018. We are extremely strict regarding the quality of project that we are calling, both in terms of risk, in terms of technology, in terms of cash management and in terms of price. So we had to learn from our past failures. So we are extremely diligence on the project that we're choosing. Whatever the size, it is not because -- we are talking a lot about SuedLink and certainly SuedLink is a fantastic project that may load capacity of -- for the years -- for the next 3 to 4 years. But beyond the size, I want to make sure that whatever the project, the profitability is there. So the objective is really to yield the capacity of Nexans for better cash and better profitability.So that's what's going on. The evolution regarding the construction market for Q2 still -- always difficult to predict because in building activities and utilities activities you have a backlog of few weeks. What I can mention is that up-to-date and beginning of May, this activity is still pretty good. In terms of organic growth impact year-over-year, it will not be the same impact because Q2 was better last year than it was in Q1. But the activity remains pretty dynamic in all geographies, still in all geographies. Jean-Christophe, there is a question on the ForEx.

[Jean-Christophe Juillard]

Yes, sure. So yes, in fact when we look at the spread of our -- the different currencies where -- in the country where we do business, I mean, what we've seen in the first quarter is an appreciation. Many of the U.S. dollar and the Canadian dollar that generated some positive impact, significant positive impact. But at the same time, we've seen depreciation of some other currency in countries where we do business. The largest one will be in Turkey, where we've seen a quite strong depreciation of the Turkish pound versus the euro and the dollar as well. And also in a lesser extent in Brazil and Norway, where the 2 currency have also been reducing. So in fact you have definitely a mixed impact with 2 very strong positive impact, again, in North America offset by mainly Turkey and also Brazil.

[Operator]

We currently have no questions awaiting. [Operator Instructions] We do have another question, has just arrived, from Artem Tokarenko of Crédit Suisse.

[Artem Tokarenko, Research Analyst]

Just 2 for me, please. Firstly on industry business, just wanted to check how Q2 started, whether you've seen continuation of strong trend in Automotive? And whether you've seen improvement across rail or any other segments? And my second question is around year 2019 guidance. At Q4, you announced EUR 350 million to EUR 390 million EBITDA target, but I didn't actually find it in the press release, just wanted to confirm you reiterated?

[Christopher Guérin, Chief Executive Officer]

Okay. Thanks for the question. So regarding the industry business. So what we see right now in the industry business overall. So well, of course, you have the analysis part, which is our main exposure for the Automotive market. And as already JC commented, we are -- we have the limited exposure because, of course, we are pretty dynamic on the truck markets in U.S., which is still buoyant. We have been able to compensate as well the decline that we have seen in China and for the moment, there is no specific worries regarding the models on the platform that we will start to supply in the coming months or for the year.Of course, we are extremely vigilant of the Automotive evolution. But regarding the industry overall, so Oil & Gas Business is still pretty low. We have already some signs of recovery in many areas, but we are still prudent on Oil & Gas. What we can mention is that the mining market is back. It's back in North America, it's back in South America. So that show us a very high load right now in our plants. [ IOL ] space, we are the main suppliers of airbus industry. So here, of course, still a steady -- strong load to cope with. We see as potential sign of slowdown in automation market but certainly a bit too early to say, certainly it links to the reduction of the CapEx in Automotive. But in general, the auto -- the industry is pretty dynamic. JC?

[Jean-Christophe Juillard]

Yes. So regarding the guidance for 2019, so we indeed confirmed the guidance we gave and -- at the end of last year, and we confirmed during our February 14 result presentation, which is EUR 350 million to EUR 390 million. Our objective is to narrow that guidance when we'll come likely in the H1 result in July to give a better visibility about all ending for the year. But yes, it's confirmed.

[Operator]

In fact, we have no further questions waiting. Sorry to interrupt again. We have another question coming from Luigi De Bellis of Equita.

[Luigi De Bellis, Analyst]

Just one question for me on the Telecom business. You mentioned a tight supply conditions for optical cables. Could you elaborate on these? And generally speaking, do you see risk of increasing competitions from Asian players in this business in the coming future? And if you can elaborate on the outlook for this business for 2019?

[Christopher Guérin, Chief Executive Officer]

Luigi, it's great question. So yes, there were some pressure that with -- on the fiber, so just to remind you one thing, which is important, is that we are doing optical fiber cable, but we do not produce fiber optics as a whole material. We have a joint venture agreement with Sumitomo, which is one of our main suppliers with long-term contract on the long-term pricing for this material. So what we see in terms of trend is that there is less and less pressure to come on capacity for optical fiber, which is not the case for the cable. So to get the whole material is not the situation that we have foreseen -- what we have seeing last year. So there is an improvement. Secondly, what we see right now is that there is a very strong competition on the supplies of fiber everywhere in the world. So, of course, all the player that are vertically integrated may suffer from price reduction for the whole material, which is not the case on the cable part for the moment because of the pretty tight capacity available on the market for the cables. But there is 2 dynamics that we have to mention. So whole material, there is less and less pressure to get your fibers, still strong on the cable part. But for the moment, the overall demand for fiber is pretty strong.

[Operator]

No further questions waiting.

[Christopher Guérin, Chief Executive Officer]

No further. So I think we will end the coats -- the call, sorry. So we know that we have a lot of questions regarding High Voltage. I want just to conclude with that. We have been in transformation. We are as well working on transformation of Subsea. We have been building a pretty innovative modernization tool to determine what are the best way to win in terms of capital investment, margin output, cash management, capacity, technology to sit on risk and taking, when I say, risk, it's not only about technology, it's about geopolitical risk. So we're factoring everything and as well the terms and condition to redetermine what are the best deals to win. Now what happens to our competitors with some critical project, we have enforced the willingness to strengthen the business selection process. So this is what we're doing right now. So it's pretty important job of the team in the last months. Regarding Subsea, the pipeline is so strong that there is no worry, neither being inpatient. We are progressing with method. This is the message that I'll pass to the team, let me repeat again, there is 2019 and 2020 are fully loaded. We are slightly -- we're working on the remaining capacity still a variable for '21 and '22, but as I told already to -- by answering your question, the pipeline quote is extremely dynamic. So we are entering now in the yield management mode in order to enhance our value pricing capabilities for all market. Thank you very much for your presence and for your questions. And wish you a very nice week. Thank you.

[Operator]

Thank you, Christopher. That completes the call for today. You may all now disconnect. Thank you for joining. And enjoy the rest of your day.