Nexans SA

PAR:NEX

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, good morning, and welcome to Nexans' Third Quarter 2022 Financial Information Conference Call. As a reminder, this conference call is being recorded. [Operator Instructions]

I would now like to turn the call over to your host for today's conference call, Mr. Christopher Guérin, Nexans' CEO. Please go ahead, sir.

[Christopher Guérin, executive]

Thank you. Good morning, ladies and gentlemen, and thank you for participating in Nexans' conference call. I'm Chris Guérin, CEO of Nexans. With me are Jean-Christophe Juillard, Deputy CEO and CFO; Elyette Roux, Corporate VP, Chief Sales and Marketing Officer; and Élodie Robbe-Mouillot, VP, Investor Relations.

I will turn you to Élodie for the conference call rules.

[Élodie Robbe-Mouillot, executive]

Thank you, Chris. I would like to remind participants that statements made during the conference call which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Readers and listeners are strongly encouraged to refer to the disclaimers which are an integral part of our URD, along with the audio replay of today's call that will be posted on our website, nexans.com.

I'll now turn you over to Chris, who will go over the third quarter 2022 financials.

[Christopher Guérin, executive]

Thank you, Élodie. And I propose that we move straight to Slide #5 in regards to the Q3 highlights. So as you can see, I'm very delighted to confirm today Nexans' solid financial trajectory on top line momentum, supported by our disruptive SHIFT transformation program and, of course, our solution new offering that Elyette will comment.

Of course, both together, the transformation on our new service and solutions enable Nexans to deliver sustainable results, structural result, and now we are equipping our units to be recession-proof in case of recession in 2023.

For the first 9 months of 2022, Nexans' Electrification business generated an outstanding organic growth of 16.2% versus 2021 same period. What is important to remind you that it's a majority of this organic growth is coming from value generation more than volume consumption.

The third quarter organic sales growth was plus 10% -- 10.3%, in line with the trends observed in the first half of the year, with 16% for the Electrification business only. And it's important to note this because we are still managing the crisis in Ukraine, that our automotive harnesses is up 37% for the quarter, supporting by growing market share and confirmed by the fact that Nexans has very, very well managed this Ukrainian crisis versus competition, and that enabled us to get more share from car manufacturer.

So today, our solid and structural performance is a bedrock, upon which we have decided to upgrade for the second time -- yes, second time of the upgrade in 2022, our full year financial guidance, and I will let J-C comment this part.

We are consistently progressing on our strategic intention to become a pure player of electrification. We have reached now a record in Generation & Transmission backlog, with visibility further enhanced by our recent subsea awards. Elyette will comment after me how we are accelerating through SHIFT Prime, the growth in connected objects and users, fostering new recurring revenue model based on, of course, the value-added product and solutions but as well as subscription model.

Another important pillar of our strategy is obviously sustainability and corporate responsibility. Our E3 innovative model, E3 where [indiscernible] stands for Economic, Environment and Engagement is now deployed across almost all units to find a good balance and equilibrium between those 3 elements.

Let's move to Page #6. You've seen that Nexans has been very vocal on energy debates on many forefront. We were the main sponsor of the Climate Week in New York. We hold as well our third annual Climate Day in New York City to talk about U.S. energy transition, which is booming right now, and with more than 900 people connected and as well customers being with us in the room in New York.

We have as well done the same exercise in Canada with what we call Change the Current, is this new type of events that Nexans will do in many places of the world to make sure that energy transition and electrification is our -- is at the forefront of all the debate on the economic exchange.

We hold, as well, our Suppliers Day to strengthen the strategic relationship with our suppliers. We have not only asked to be competitive. We asked them as well to bring new innovative solutions on new way to manage sustainability between the 2 companies.

Talking about sustainability, let's move to Slide #7. We keep progressing on our sustainability agenda, big focus on carbon and especially on deploying our E3 model across all the units, which is, for the moment, ahead of schedules.

You see here some progress from our strategic stream. Nexans joined the Circular Plastics Alliance in Q3. Circularity of our project has been developing and will keep being a strong point for us where we combine our R&D expertise with manufacturing capabilities. And more important, we keep amplifying our recycling capabilities. More to come on this topic in 2023.

We are accelerating our CO2 emission reduction, and I have to be as well transparent. The fact that we are more value-driven than volume is helping us to find a new way to accelerate this CO2 emission reduction. And that's notably in Canada, where we have been able to reach already our 2030 CO2 emission targets in Canada. So it's a fantastic result for the team.

There is as well one recognition, and we are very delighted for that, that we need to highlight. This is the EcoVadis appointing us Platinum. So Platinum means we are part of the top 1% company in our field having this recognition for the third consecutive year.

Let's move to Page #8 to talk about the very high dynamic that we have in Generation & Transmission. You can see that we continue to convert very healthy on risk control contract for our Generation & Transmission backlog, which reached to a new record high this quarter as we announced new subsea awards, notably Borwin6, a wind offshore project off the coast of Germany.

We have so converted the installation of the Revolution project as part of our Orsted frame agreement in the U.S. up to 2027. So we had only before the production supply only. Now we have both production and installation.

You know that we have been selected as preferred bidder for EuroAsia Interconnector. Today, right now, negotiations are still ongoing. More to come in the coming weeks.

And the third element, which is as well very important for us because that confirm our leading position in U.S. Being the sole U.S.-based cable manufacturers, we remain a top-of-mind partner for ever-growing U.S.-based offshore wind farm industry, like and confirmed with the new EPCI contract that we signed for Empire Wind 1 with Equinor and bp.

So the project pipeline remains extremely strong. The most important is that projects are not equal in terms of quality, means margin yield, technological risk or contractual term exposures. So Nexans remain highly selective to feed our state-of-the-art assets with the right, what we call, platinum project.

I'm sure you will have questions on these specific elements, but now let me now turn to Elyette that will explain how we implement our SHIFT Prime program to deliver a structural growth in the long run. On these elements, I think, maybe, please, I want to have your full attention because that's a very important element for the benefit of our 2023 result, to make sure that we are not facing conjunctural, I will say, increase, but turn everything to a structural mode.

Elyette, now it's for you.

[Elyette Roux, executive]

Yes. Thank you, Chris. So SHIFT Prime. So for those of you that are not familiar with this transformation program, SHIFT Prime is a methodology designed by Nexans to premiumize our offers and convert innovation through marketing into EBITDA. We have built this recipe to launch and scale innovation through marketing in order to increase the value generation for our customers and to generate by 2024 EUR 50 million incremental EBITDA.

SHIFT Prime is all about value creation, thanks to superior service level, brand equity, smart innovation, including enriched offers and digital services and partnership with key players. SHIFT Prime is powered by a new sales and marketing operating model, including design labs, and with the objective to provide a platinum experience to our platinum customers and partners.

As we have explained in our CMD, we are moving from cable to solutions. We are seeing growing traction for our new solutions connecting both our users and our offers in power distribution and usages, starting with our Nexans' digital apps connecting customers with our products and providing additional services for energy savings and CO2 emissions reduction. Our MOBIWAY range, our new smart packaging family to simplify cable installation, will keep growing in 2023. Finally, our ULTRACKER digital suite that we announced this year, providing services on our connected objects like cable drums, is enabling optimization of planning and operations before, during and after cable installation. Finally, we have more than 380,000 connected users globally and, thus, a solid foundation for new recurring revenue model.

Now as you can see on Slide 10, we have 2 concrete examples of innovation monetization through recurring revenue with our platinum accounts in power distribution and usages. So let me drive you through the first one. In power distribution, utilities can benefit from the peace-of-mind asset management offer. It encompasses the ULTRACKER suite, which already reaches 20% penetration rate at our platinum utilities. Through monthly subscription and MOBIWAY's smart packaging in leasing, it includes end-to-end field services such as scrap management or training. We ambition up to 2% recurring revenue on platinum utilities DSO sales by 2024.

Now on the second example, in usages, we are deploying a smart packaging leasing offer with our MOBIWAY range connected with digital apps and loyalty program for our customers in the residential market while we are connecting with ULTRACKER in the tertiary market. There, we ambition to generate up to 5% of recurring revenue through platinum distributor sales by 2024.

So in a nutshell, with this new business model, Nexans is developing a consistent recurring revenue based on services and solutions that contribute to a platinum experience with our customers in the Electrification value chain.

Now I will hand it over to Jean-Christophe, who will comment business sales in the first 9 months of the year.

[Jean-Christophe Juillard, executive]

Thank you, Elyette. So we're moving now -- [ we will jump ] to Page 12 of the presentation. You have here on Page 12 the snapshot of our Q3 and 9 months organic growth and sales performance.

So I'll start with the 9 months. So we report a 6.7% organic growth for the group, 9 months 2022 versus last year. If you look outside of metallurgy, you know that purposely, as part of our strategy, we aim to decline this metallurgy business. So if you look at the growth of the -- I would say, the other part of the business, excluding metallurgy, the organic growth for the 9 months is close to 15%.

On a quarterly basis, Q3 versus Q3 of last year, the organic growth is 10.3%. And excluding metallurgy, the growth is more than 18%. So a quite strong momentum from this third quarter that continued in line with the first 2 quarters of the year.

Interesting also, very important for our strategy, is our Electrification businesses, and they grew 16.2% on a 9-month basis, which is again carried on all our element on the Electrification chain. All have been growing significantly in the quarter and the year.

Now if we deep dive a little bit into the business segment, and I start with -- on Page 13, with Generation & Transmission, our former High Voltage & Projects business. Sales have been increasing by close to 17% 9 months versus last year. The growth is obviously coming from a good project phasing and the new capacities in our plant in the U.S., Charleston, and also the addition of our new vessel, the Aurora. And at the same time, you know that we are right now increasing capacity in high voltage with the expansion in Halden as well as in Charleston, and both are progressing according to plan.

Important to notice also in the high voltage segment, the adjusted backlog is reaching a record high of EUR 2.4 billion at the end of September '22, which is a growth of 55% versus September last year. And again, extremely important, as Chris mentioned earlier, the mix is positive in terms of profitability and risk assessment. We have now a very strong visibility in the pipeline of project on high voltage until late 2024, and new significant awards are expected before year-end.

If I move to the next slide and we look at Page 14, Distribution, which is our former Territories business, medium-voltage cable, mainly with utilities. Growth is supported by the successful renewal of several framework contracts with large DSOs, such as Enedis, for instance. And also impacting -- I mean, explaining the growth is a growing grid investment across North America and Europe. In that Distribution sector, most; more than 80% of the organic growth is coming from value.

If we move to the next page, Usages, 16.5% 9 months '22 organic growth, reflecting the outstanding performance in all our markets and also supported by growth in value and not volume. Strong demand, new product launch and amplified solution explain basically as well as pricing action explain the performance.

Of course, as we had, and we explained that in detail in the first semester, you know that part of the great result of the first half of the year in the Usages low voltage business was coming from some conjunctural impact. We continue to see strong momentum. We continue to see strong momentum in the third quarter as the market is really continue to be booming in North America, where we've seen a 55% growth in that market from the first -- in 9 months '22 for the -- year-to-date '22 versus last year. Obviously, we don't know when -- how long this will last, but we continue to enjoy this very beneficial situation.

If we move to Page 16, and we look at our non-Electrification businesses, mainly Industry & Solutions, Telecom & Data, starting with Industry & Solutions. A nice rebound versus the second quarter, 13.4% organic growth 9 months '22 versus last year. As Chris mentioned, auto harnesses have been very strong, 22.8% growth for the 9 months, mainly supported by growing market shares despite the Ukrainian crisis. And basically, all our customers in that segment recognized the strong performance of Nexans.

Automation is one of the segments in industry that has been also doing very well, 19% growth. Shipbuilding, 28% growth. Mining, 16% growth. On the other side, not performing as well, Rolling Stock, mainly impacted by the situation in China, has been declining by 5%. Backlog remains very good and is up 37% on the period.

Telecom & Data, this is a segment, I would say, out of the portfolio that has been a little bit softer than the rest of the group. LAN cable had a good momentum in Europe, but Asia was quite affected by lockdowns. Telecom Infrastructure was supported by some business momentum, mainly in the U.K., and the third quarter performance is really reflecting customer inventory building in Europe. Special Telecom backlog is down, mainly because consuming -- we have been consuming the extraordinary backlog over the first part of the year a year ago, and now it's coming back to a more normalized situation, and it should pick up again in the last quarter of the year.

So that's for the brief description, I would say, of the organic growth and sales of our businesses. I'll move now to Page 18. And that good performance of our revenues basically pushed us to increase the guidance for 2022. As you see, we have both increased the guidance and narrowed the guidance. We moved from EUR 560 million to EUR 590 million as previously announced in July to a new range of EUR 580 million to EUR 600 million EBITDA. And normalized free cash flow, which is a cash flow adjusted, I remind you, from strategic CapEx, from one-off tax impact as well as divestment of land entity. Normalized free cash flow is increasing from EUR 200 million, EUR 250 million to EUR 225 million, EUR 275 million. This is again the second time this year that we are doing an upgrade, demonstrating the strong performance of Nexans and our very high confidence in basically doing a great year 2022.

Now that's over, I'll turn the floor to Q&A.

[Operator]

[Operator Instructions] We will take our first question from Miguel Borrega from BNP Paribas Exane.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

A couple of questions for me. The first one, just on the pricing environment in Usages. I remember you saying that you were a price follower of one of your competitors and did not see pricing as sustainable. Has there been any changes from your competitors? Are they adjusting prices by any chance and we will follow at some point? That's my first question.

[Christopher Guérin, executive]

Yes. Miguel, it's Chris. Yes, you know that we are talking here about North America only. We have one of our top competitor named Southwire, which is certainly price leaders on the -- #1 in the market over there. We have not yet seen any sign of change on the price dynamics, neither in terms of demand in North America. So for the moment, everything is as it was in H1.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

That's great. And my second question on Industry & Solutions. Obviously, the business is performing very well, specifically in auto harnesses. Have you reconsidered selling this business? And if not, what would actually change your mind? And given that it is doing so well, any update on the carve-out?

[Christopher Guérin, executive]

I will -- there is no -- we will not change the strategy from 1 year to another. In that case, it's not strategy anymore. It's tactics. And once again, let me reinforce the fact that our strategic intention is supported by a 10-year forecast of demand and market analysis on electrification.

The main message that we had during our Capital Market Day is that we are a strong believer that the next 10 years are the years for pure player: pure player of telecom, pure player of automotive, pure player of industry, pure player of electrification. So it's not a question of financial optimization.

We will not change our way of doing on our objective to divest just because our business are doing good. We already say that all the business that we want to divest are doing good. It is not the problem, but they need an owner -- a future owner that will keep develop them, make acquisition in their field, make more CapEx than what we do. On our side, our aim is to reduce the complexity of how we manage the company, reallocate the R&D resources and our CapEx capabilities to Electrification only to -- like it was our motto to simplify the way we run the company to amplify the impact.

So no change. Carve-out is still processing. As we told you, Miguel, and to all your peers as well, is that harnesses and telecom are the 2 candidates for soon divestments because they already carved out, and this will take a bit more time because of its complexity.

[Miguel Nabeiro Ensinas Serra Borrega, analyst]

And just my last question on the backlog for projects is now EUR 2.4 billion. Can you give us an update where this may go, just taking into account the projects you were recently awarded or as preferred bidder?

[Jean-Christophe Juillard, executive]

So there's 2 major -- so first of all, the new project that we -- that entered the backlog in Q3 is Borwin6. The 2 projects that we are -- which will be tendered and will be awarded to us -- or not to us, but we are positive about expectation are EuroAsia that we discussed, which is not in the backlog today, which is a EUR 1.2 billion contract. And then there will be the award of [ Celtic ], but we -- that's another one that will be coming at the end of the year, not necessarily to Nexans, but that's another project.

So definitely, the activity in terms of tendering is high. There's a couple of big projects coming up that could have a significant impact on the backlog, depending on our -- I mean, obviously, EuroAsia, we are a preferred supplier, so that's an edge, I would say, versus the other. But potentially, I would say, backlog could significantly grow between now and the end of the year and reach a record level for Nexans.

[Christopher Guérin, executive]

What is important, if I may add as well, is that compared to some others, whatever will be the number at the end of the year, which will be certainly significant, 90% of this backlog will be subsea-driven, which is -- and only 10% land-driven. And I think it's an important information because we always buy -- put everything in the same bag, subsea interconnection, offshore wind farm, short distance, long distance and land high-voltage interconnection. Nexans' focusing is on -- doesn't want to discount this capacity, so we want to focus on, first, subsea interconnection and long-distance DC-type cables for offshore wind farm. This is our top priority.

[Operator]

We will take our next question from Daniela Costa from Goldman Sachs.

[Daniela Costa, analyst]

If I may ask 3 questions. First, I wanted to follow up on your commentary that you aim to transform the conjunctural you have this year, which, by the looks of what you just mentioned on the prior question, you will have some in 2Q as well into structural, and check if is that enough, you think, to offset maybe the cyclicality you will see backlog is down on telecoms and it's down on construction. Do you think 2023 earnings will -- you can still end with them up year-on-year? That's my first question.

The second question I wanted to ask was on cash usage and sort of how shall we think about like dividend into the end of the year given your raised free cash flow guidance, and of course, we already knew about the CapEx plans before. So just any color you can add on that.

And the third one is just wanted to check. There's been some news flow out in some of the U.K. press regarding a problem on some underground cables that you're connecting, I think, in Scotland. Can you confirm if there's potentially any sort of one-off risks coming from that? I know it's underground. So it's probably like less margin-impactful, but it sounds like it's 800 kilometers of cables. So I just wanted to make sure that there is nothing that sort of potentially can impact one of the results from an execution point of view.

[Christopher Guérin, executive]

Thank you, Daniela. J-C, you can take...

[Jean-Christophe Juillard, executive]

So I will start with the first question regarding the conjunctural part and potential growth of our earnings for 2023, Daniela. So right now, just for the situation, we don't -- still don't see any slowdown, as I mentioned, for Q3. Q4, definitely, the last quarter of the year, is always a specific quarter due to the fact that most of our distributors and customers are reducing their inventory and stock for the end of the year. So there will be definitely a slowdown.

But we don't see this today. As of today, we don't see this slowdown as being, I would say, a change in dynamic in the business but just again an adjustment for the end of the year. Distributors will reduce the inventory, but they will continue -- they are continuing to sell and to do a very healthy business. So we'll see how it evolves through the beginning of next year. But so far, I would say the signals are still okay -- are still strong.

I would say, obviously, there's a lot of questions about potential recession in '23. We are -- in Nexans, we started now to prepare ourselves for downturn next year, with strong measures and actions ready to be engaged in terms of fixed cost reduction, in terms of accelerating the transformation of our value burners. We talked a lot about value burners in the past. We are doing acceleration on turning them around. Obviously, Elyette, as she explained, is also pushing a lot of actions that will deliver next year.

So we believe that if recession is not too -- I mean, mild recession, I would say. No one obviously knows what will be next year. But if recession is mild recession, we believe we will be in a situation to continue to deliver and to continue our transformation. And we -- obviously, you will -- if all the conjunctural impact stop next year from the first day of the year, obviously, the growth of earnings will not be the same we've seen in '20 -- from '21 to '22, definitely.

But again, we are -- I mean, in our vision today and in our view, today, we continue to see a more moderate growth of earnings. But we don't see a flattening or a decrease of the earning for '23. That's how I can answer the first question.

I think your second question was regarding the cash increase guidance and if we had any, I would say, insight regarding dividend. Definitely, I mean, as we announced -- as we explained and announced during our CMD last year, our objective is to grow our earnings according -- or dividend, sorry, according to our earnings and our cash flow generation. So there will be -- right now, obviously, we have not yet decided what will be the dividend for next year, too early. But definitely, our, I would say, objective is to grow the payout ratio. We said that we will have a payout ratio above 20%, growing year after year. We will continue to grow the payout ratio and, therefore, increase the dividend payment for next year.

[Christopher Guérin, executive]

And regarding the third question, it's about our project Viking in a wind farm in the Shetlands. So we are talking about medium voltage-type cable, so it's not high voltage. And that's why that customers on Nexans have seen some visual anomalies detected on some part of the drums that have been supplied. So we don't want to take any risk. Quality is our top objective for those projects. So we have suspended the installation, and we have a team here right now checking all the drums one by one. And if there is anomalies, of course, everything will be replaced. We are talking about -- it's a small order. It's not significant, and there will be no effect that will -- that can impact 2022 result.

[Operator]

We will take our next question from George Featherstone from Bank of America.

[George Featherstone, analyst]

My first is a bit of a follow-up from some kind of sort of things you've heard already. But clearly, you've seen demand has been sustained at a relatively high level for a prolonged period now, ahead of the growth rate sort of business that you'd outlined at last year's CMD. So I just wanted to understand if you've done any work around how much of the growth that you've seen across the business this year is really structural and related to those electrification trends that you've called out before that's perhaps at a higher level than you originally anticipated versus the sort of continued rebound effect related to demand recovery coming out with pandemic. That will be the first question.

[Christopher Guérin, executive]

Yes, George, I will take it. This is Chris. You have to split it in 3 different parts in the electrification ecosystem. As we mentioned during our Capital Market Day, there is the foundation of a hypercycle in the electrification for the next 20 years. Can be slow down sometimes because of recession, but the foundation of a hypercycle are there because of the shift of the fossil fuels to renewable energy, because of the unprecedented needs to renew the electrical grid. And that's fundamental. Each nation need to modernize their grid rapidly. We are -- in Europe and in U.S. specifically, we are suffering from 15 years of underinvestment in the electrical grid. And there is as well the electricity consumption that keep growing on the usage part because electrification is the fastest way to decarbonization.

So that's for sure. The last 10 years were all about tech. The next 10 years, it will be all about electrification and decarbonization. So the foundation are extremely structural.

Now regarding the resiliency of our business portfolio, what we can say is that the first part is Generation & Transmission. Here, we are in the high voltage, where subsea, everything, is contracted, everything is hedged. It's just a matter of execution on recession. It's on -- I would say it's recession-proof because customer will not delay that project because of a recession. There is a big, big fight right now from all customers for production slots. So this -- you can consider that this part of our portfolio is extremely robust and, I would say, antifragile.

The second aspect is Usages. Usages -- sorry, Distribution. Distribution with the utilities market. Here is the unprecedented requirement to renew the grid. If you take the last major economic recession in 2009 with the subprimes, these sectors has been extremely resilient.

So first answer is that this sector is resilient. Second, our frame agreement are not sufficient to support the demand of the customers. They keep asking more than 20% of more cable right now that we are not able to cope with because of lack of capacity. So I do not see neither Distribution be fundamentally affected by recession.

The only element in the electrification that can be -- only part that can be affected by recession is certainly the Usages because it's directly linked to construction. We see already a slowdown in construction in U.S. We see some slowdown as well in part of Europe for the construction.

But in parallel, what we didn't have in the last 10 years, the renovation is booming. The shift from PVC cable to fire-resistant cable, so premium cable is very, very, very high. So we believe that there is a buffer from potentially downturn of new construction by the renovation. But of course, we are listening, like you, our top customers, Legrand, Schneider Electric, Rexel, Sonepar, all those customers that are very well ahead in terms of information of what's going on. For the moment, all of them remain extremely positive.

So from the information that we have today, I believe that Q1 will remain strong. Question mark on Q2 for this sector. That can go down very, very fast. But we don't have much information. You can see that the backlog in these sectors, even if we don't have a big visibility, it remained stable overall. So for the moment, no sign of recession, but the most important is to get prepared.

[George Featherstone, analyst]

Okay. Second question would just be turning to that Usages backlog. Clearly, it does remain high, but it's shown some decline if you look on a year-on-year basis. I guess, obviously, some price effect in there, too. Is this a function of lower lead times and the supply chain improving the deliveries? Or is it a signal that perhaps the business has reached the cyclical peak and now moderate that to more normalized levels in the coming quarters?

[Christopher Guérin, executive]

No. First, we have more than 30% of our order intake, which is taken during the month and shipped during the month, the same month. So that you don't see that -- so you are not able to see that in the backlog.

The fact that we have amplified our complexity reduction model everywhere in the units, of course, improve significantly the internal lead time and the customer lead time. So that means that we are able to move from a make-to-stop to -- or make-to-order to a make-to-availability. That means that the inventory turn is going much faster than before.

So you're right. I think it's the right comment. The backlog for these sectors is certainly not an indicator as such. The main indicator is the order intake, which is, for the moment, still robust.

[Operator]

We will now take next question from Sean McLoughlin from HSBC.

[Sean McLoughlin, analyst]

If I could just understand a little bit more about the negative organic growth you're seeing in telecom, which seems, I guess, to be the only weak part. I mean, firstly, how are you seeing that trend into the rest of the year? And how is the pricing environment as a result of weaker demand? That's my first question.

[Christopher Guérin, executive]

Yes, Sean. Thank you. Price environment remained stable in the telecom sector. The backlog, that decrease that you see in this field is related to Special Telecom. We have shipped major project in the last quarters. And now we need to bring back new orders. But as well, we had to put some internal orders in our Special Telecom activity for our high voltage subsea business so -- which is an interco move that should -- you don't see that in the backlog.

What I can tell you is that we will announce certainly very important award in the Special Telecom field and the magnitude of the business, of course, in Q4 and Q1. And the activity for Special Telecom between interco business plus external business, it will be fully loaded next year.

So no problem there. And it's the same dynamic than Generation & Transmission. The foundation are very, very strong. So fully loaded on telecom.

[Sean McLoughlin, analyst]

And another question on offshore wind. We're hearing in the U.S. that some projects might require higher PPAs, that the -- let's say, the very aggressive bids that we've had against the rising equipment prices are causing potentially some delays. I just wanted to understand from your perspective if you're seeing anything around this.

[Christopher Guérin, executive]

We heard about it. We know that some of other customers that we do not supply had some delays. But I will say so far with Orsted and Equinor, we have not heard anything, and the dynamic is very, very strong. Charleston is running full speed. We have to make sure to execute on time our OTIF, our delivery for those projects. So we have no discussion of any kind of delays at this moment.

[Sean McLoughlin, analyst]

Perfect. My last question, if I may. Just wondering around the recurring revenues. I mean, realistically, how quickly can this grow? And what percentage might -- what is the potential of recurring revenues as a percentage of sales as you go forward?

[Christopher Guérin, executive]

Elyette, it's for you.

[Elyette Roux, executive]

So as you know, as part of the SHIFT Prime program, we are actively working now for some years to grow our base of connected objects and users to engineer this new recurring revenue model, which is supported by our innovation and all the different launches that we've done in the past months related to product and solutions. So basically, what you know is that we have also grown our connected objects by more than 30,000 today globally, and this is really like the foundation for accelerating the growth in recurring revenue model in the coming years.

[Christopher Guérin, executive]

But the potential is huge because we have now a digital factory of more than 50 people. To be honest, sometimes, I don't understand them because it's a very new profile for Nexans, real geek working in the scrum mode. So all these new techniques that -- which is new for our cable industry.

And the benefit from the -- for the customers in terms of IoT development is huge. And that's a fantastic opportunity for us to go to premiumization because we want to turn our passive components into active components. And of course, and this is part of our structural change. We want to develop new kind of revenues and, of course, margin lever, thanks to subscription model.

So more of those connected objects will be connected to our drums, to our product. More revenue will be generated at that level. And of course, the level of margin is not at all the same than what we have on the physical products. So we are now turning into a phygital mode. The demand from customer is very high. The leadership of Nexans on this field is really now recognized with Elyette. The difficulties we have is to answer to all demand. So we need to scale up very, very fast our digital team and marketing team in that regard.

[Operator]

We will take our next question from our participant Massimiliano Severi from Crédit Suisse.

[Massimiliano Severi, analyst]

My first question would be, if you could help us clarifying how much of the 22% organic growth in Usages in Q3 comes from the conjunctural effect of pricing in North America versus what comes from more structural measures like SHIFT Prime that you already implemented.

[Christopher Guérin, executive]

J-C, you want to take it?

[Jean-Christophe Juillard, executive]

Yes. What I can tell you is that if we look at -- just to give you some different figures. If we look at 2021 and 2022 in comparison, year-to-date, for the full year and the estimation, I would say, for the full year of '21 versus '22. '21, we did EUR 231 million of sales in North America. We're expecting to do about EUR 340 million this year. EBITDA margin was 11%, and now it's 25%. So I don't have the exact number to your question, but I can -- you can do the math and see how basically we have increased EBITDA margin by 14% where basically revenues increased by about EUR 100 million.

[Massimiliano Severi, analyst]

Extremely clear. And my second question would be maybe on Distribution. North America is up 57% also here, but you mentioned that the conjunctural effect is mainly in Usages. So I was wondering, in North America, this big increase that we see, is it on frame agreements that last couple of years? And how much of the sales in Distribution are covered by frame agreements versus more spot pricing?

[Christopher Guérin, executive]

It's more than 80% of the sales are covered by frame agreement.

[Massimiliano Severi, analyst]

So here, the pricing in North America would be expected to be more resilient than Usages?

[Christopher Guérin, executive]

Yes, but we don't have the same, I would say, inflation on the price in that sector compared to building part.

[Massimiliano Severi, analyst]

Okay. Makes sense. Perfect. And my last question would be on the Generation & Transmission side. If you could help us understand better what is exactly hedged in the high voltage contracts because raw materials are clearly hedged, but there are escalation clauses covering also employees' cost inflation and energy cost inflation. Or we have to go back to customers to actually make sure that you get paid for that inflation as well.

[Jean-Christophe Juillard, executive]

So yes, so there is not one straight answer to this question because it depends on the project. It's a project-by-project situation. What I can tell you is that, definitely, everything which is raw material is a pass-through. So that's for sure. Then after that, energy cost, labor cost, transportation cost and other type of cost, it really varies, change from, say, business to business.

But obviously, on the older contract, we don't have many escalation clauses on all those cost line. So we are going back and basically talking to the customer when appropriate. But on the new ones, obviously, all this year, as you know, is a big tender year. And on the new tendering we're doing since now a few months, obviously, since the market have changed significantly, we are including basically escalation clauses -- more escalation clauses on our cost structure in the new project. So I would say that today, our backlog is pretty well protected versus most inflation situations.

[Operator]

We will take our next question from Jean-Francois Granjon from ODDO.

[Jean-Francois Granjon, analyst]

The first question concerns the backlog of Usages on the slide. So we see a limited decrease by 5% for the backlog. So can you give us more color about that? Do you expect a more limited depreciation or downgrade for the coming months for this business?

The second question just on EuroAsia. Do you expect to gain the award at the end of this year or next weeks? Could you give us some more color about the timing?

The third question -- so the question is already asked. But could you come back on the trend for 2023? So are you okay with the fact that you could have a moderate growth but growth for the top line and for the earnings?

And the last question, could you make an update on the timing for the M&A for the acquisition expected and for the disposal expected?

[Christopher Guérin, executive]

Thank you. So Jean-Francois, in regards to the Usages, it is what I said just before, we are strongly improving our internal lead time for shipments. So we have a -- the backlog is one of indicators but does not reflect the fact that when you receive an order on the first day of the month on that you supply on the third week of the same month, it's not reflected in the backlog. So this part of sales of -- within the month, supply is increasing big time. And that's good for us. That's the impact on the working capital, and that means the inventory turn is going much faster.

To be extremely clear on this Usages part, 2022, we have everything in backlog up to December in terms of visibility. So the big question will come for 2023. Of course, we'll have more information on Q4. But we see all the orders that we need to produce up to the end of the year.

The second question was EuroAsia. EuroAsia, difficult for me to comment because we are in the negotiation right now, so I cannot give you much information because customers say, we have publicly announced that you are preferred bidder, but we don't want any further information in the status of the negotiations. So very active on many, many aspects, technical, financials, legals going on. It's a huge project. It takes time. So I cannot give you more information on that front. And we have other projects in parallel in the same kind of process.

[Jean-Francois Granjon, analyst]

Sorry. And you confirm on the fact that you could be able to reach EUR 4 billion for the full backlog in the coming weeks?

[Christopher Guérin, executive]

Yes, we -- this is the aim here. This is aim. But of course, take into -- we have to take into consideration that we are really very, very advanced in Q4. Still a lot of points opened, more on the technical aspect because it's a huge project. So yes, we aim to close all the deals that we are negotiating right now by the end of the year.

Third question was for you, J-C.

[Jean-Christophe Juillard, executive]

Can you remind me, Jean-Francois, please, what is your last question?

[Jean-Francois Granjon, analyst]

The 2 last question is the trend for 2023. So could you expect some limited or moderate growth for the top line for the earnings in 2023 despite the context?

And the last question concern the timing for the M&A, sorry, the acquisition and the disposal.

[Christopher Guérin, executive]

I would take the M&A, you take the growth, yes.

[Jean-Christophe Juillard, executive]

So for the growth, so definitely, as you know, we're not betting on top line. So I mean we will prepare our 2023 with very moderate growth on the top line because, again, this is not the aim of Nexans. This is not our strategy. Our strategy is, as you know, value-oriented. So the real question is, will we be able to continue to grow on the earnings side, on the EBITDA side, on the cash flow generation? And this is what I answered earlier, I think, to Daniela's question.

I mean, definitely, unless we have a very strong recession coming up, that obviously will impact us like it will impact everyone. But right now, we are putting all the actions in place to be, I would say, as much resilient as possible for 2023. We have demonstrated that our model based on value is more resilient than obviously betting on volumes and top line growth.

So we have strong action in place. I mentioned some of them. We continue to have businesses which are performing below the average of the group in many areas, about EUR 1.8 billion of sales, still below the average earnings of the company. So we are actively working on them to -- we're using SHIFT to turn them around and be ready for 2023. So there will be significant value coming from that action.

Then we continue, as Elyette described, to push a lot on transformation, moving up the value chain in all the segments of SHIFT Prime. So -- and then at the same time, we're getting ready, if situation gets bad, to work on us first as we did success -- and preserve our cash flow as we did successfully during the worst crisis, which was 2020.

So top line, I would not bet on top line. But definitely, we will maintain and we are aiming at continuing to grow earnings next year.

[Christopher Guérin, executive]

Yes. And to give a bit more color on -- additional color on what J-C said. To give you an example, Jean-Francois, is that last July, we said to our teams, we don't want you to spend hours and days on the -- working on budget, on scenario of what could be the growth generation next year. We prefer that you spend your time in launching actions on work streams to be recession-proof. How do you absorb the energy inflation? How do you absorb the labor inflation? How would I -- what type of competitiveness levers do you launch? How can you accelerate all the actions on SHIFT Prime and as well new innovation that we plan to launch in 2023 to face this recession? So our team is not in a budget mode, try to work off what could be next year. They are already in action mode to prepare in case of recession.

In regards to M&A, we believe that it's the right time for -- more time -- a good time for divestment. So when it's a good time for divestments, maybe not a good time for acquisition. If any -- we can look at the small-, medium-sized acquisition, if we see any opportunity.

So we are still focusing on divestments. On recession, of course, could be an important, I would say, opportunity next year on the acquisition side if suddenly the multiples are a bit affected from some of our peers because of the recession impact. So in that case, we are welcoming recession for our acquisition strategy, but we are more in a divestment mode for the moment.

[Operator]

We will take our next question from Akash Gupta from JPMorgan.

[Akash Gupta, analyst]

I have a few as well. The first one is on high voltage and more on the capacity expansion side. I think it was the last year Capital Markets Day when you announced intention to double capacity. And since then, you have been quite on that front despite some of your competitors have announced further capacity increase given the strong pipeline of high voltage projects. So my question for you is that, given the booming demand for high voltage, when do you think you may need to further increase capacity? And I think the question here is more in the likelihood of strategic CapEx being continuing in '24, '25 period. Or do you not see that as a scenario? That's question number one.

[Christopher Guérin, executive]

Yes. Thank you, Akash. First, we were one of the first to announce and as well NKT to be transparent on the capacity expansion because both companies have seen first this big boom on the high voltage. There is a time of announcement. There is time of execution. So we are running now into execution of doubling our capacity in Norway and reinforcing our capacity in Charleston to be ready at the end of 2023. Everything is on track. That's the good news.

It's not easy right now to build a subsea expansion plan because of the inflation of raw material, because of the scarcity of labor. So I think right now where we are very proud is that everything is on track.

We'd be careful to further announcements because of the dynamic of inflation on material that we see everywhere in the world. And once again -- and you know that by -- [ you know, Akash, is ] that the sectors have EUR 20 billion pipeline in front of them, in front of us.

So in terms of volume-wise, it's extremely positive, and we are very, very happy about it. But the way we classify each project on the customers, we consider that 1/3 is really top platinum ones on the 3 pillars, which are margin yields, technological fit and contractual term exposure. So we want to have the right equilibrium and balance in terms of capacity versus those specific projects, not all the others, because there is a lot of project. And you've seen that in the past where Nexans do not want to bid because of the risk.

So it's the balance of not having the biggest backlog but extremely subsea-driven, extremely healthy in terms of these 3 pillars. And as well you have to take into account the fact that the demand is there. There is no doubt about it, but the offer could be a big, big constraint. So in each project, the first question that we ask ourselves is, do we have the raw material access to supply those customers? Because in coming years -- not now, because China is down, but in coming years, '24, '25, raw material scarcity will be a big, big, big talk. So we have to make sure that we find the right balance between the 2.

[Akash Gupta, analyst]

And maybe just a follow-up to that. So is it fair to say that you may be willing to lose some market share in the medium to long term because you want to be more selective?

[Christopher Guérin, executive]

Yes, Akash, the word market share have never been used in Nexans' wording for the last 4 years, never. I'm coming from the sales field. So we -- and we've learned as well. We have not been so good between 2009 and 2018 on the -- everybody was talking about market share that time. I say now market share word is banned in Nexans because market share doesn't mean if it's accretive or not accretive for our free cash flow.

So what we are challenging -- where we are challenging our sales force today is making sure that EUR 1 at the sales on the top line convert to a very high ratio of -- conversion ratio of free cash flow. This is the only thing that matters, is conversion to free cash flow. So growth for growth, not anymore in Nexans.

[Akash Gupta, analyst]

And my final one is also on high voltage. So in the U.S., we had seen passage of Inflation Reduction Act, which gives domestic production tax credit. Do you think your Charleston factory could benefit from additional tax credit for local manufacturing? And are you having any conversations with customers in that regard?

[Christopher Guérin, executive]

Too early to say, but -- too early to say. But I think it's a good question that you need to keep for next time because we will have a more elaborate answer. But that's for sure. We see now a very strong dynamic to -- in U.S. to be local for local, both on carbon footprint, on both for tax exemption.

So being local right now for Nexans is a key leverage to get more business there. Nexans is shining in U.S., thanks to our presence there. There is no doubt about it. And we are [ loading ] for the next 4 years or 5 years. It gives us the opportunity to sign much more contract than what we have in the backlog in the coming years to take this opportunity of this implementation. And of course, all U.S. legislation will help us in that regard.

Thank you, Akash. We have a last question.

[Operator]

We will take our last question from Rajesh Singla from Societe Generale.

[Rajesh Singla, analyst]

Maybe a couple of them. So the first question is like you had made a very interesting comment in your discussion earlier that it's a good time for divestment, not a good time for acquisition. So do you think that we are already at the peak of the cycle in the cable industry that's why it's not good time of acquisition because we are getting all the assets at a very high valuation multiple and we're looking for a challenging time in 2023 that's why it's not a good time for acquisitions? So maybe your insights -- a bit more insight into that.

[Christopher Guérin, executive]

Yes. Of course, taking the Electrification ecosystem, in the Generation & Transmission, what you can see there, you're talking about EuroAsia, Tyrrhenian Link, all these projects that has been negotiating with the customers. And it's essentially Nexans on [indiscernible] -- on the forefront is -- for those is big interconnection subsea business, you need a very, very solid balance sheet. So -- and as well, you need the leading-edge vessel that are our 2 vessels in Nexans on -- our vessel in Nexans and the vessel of our colleague in Italy. So there is no doubt that the complexity of the project is very favorable to the 2 big players that we are and putting a lot of pressure on the others. There is no doubt about it.

Regarding the usage on the part, a lot of our competitors are benefiting to conjunctural effect, 80% or 90% of their profit. They don't have these structural power that we are putting in place for the last 2 years because it takes a lot of energy. Everything we do on marketing, in service and solution takes a lot of energy. So if they are not recession-proof, of course, their profits will collapse at the same speed that they have inflated in the last month. So that will give us some benefit.

And the last part is we've seen a lot of regional players start to suffer in terms of raw material access. We were, last week, with the top, top management of Codelco to finalize our major agreement of the next 5 years of privileged access on first supplies on copper when copper really becomes scarcity.

So the combination of the contractual effect plus the stringent difficulties on raw material access should affect the multiple. But the foundation of Electrification remains extremely robust. We are now in the momentum of 20 years investments. But I will say only the big player will survive.

[Rajesh Singla, analyst]

My next question is probably on the Building & Territories segment, if I can. So if you look at the pre-COVID and post-COVID, so we are talking about, say, EUR 280 million kind of EBITDA in Building & Territories segment versus EUR 130 million EBITDA in 2020. So there is a very significant jump in EBITDA in Building & Territories, like around -- and margins have also improved by 400 basis points. So -- and earlier you mentioned that a significant part of the growth -- or most of the growth in 2022 was driven by conjuncture effect or, I would say, like pricing effect, although there is no major volume growth you witnessed in 2022.

So how much of this 400-basis-point improvement in margin and this pricing effect could continue in 2023? And I believe if you can share some insight like how much of this EUR 150 million jump in EBITDA in Building & Territories is driven by volume growth and how much is driven by your transformational impact and how much is temporary in nature to that extent.

[Jean-Christophe Juillard, executive]

Yes. Thank you for the question. No, definitely, I mean, the key thing is this year number, when you compare to, say, a normalized number for Usages, Building & Territories is definitely pushed by conjunctural.

But just to remind you, I mean, the conjunctural is very well-known and very localized, exceptional, I would say, situation. It's really linked to North America, namely Canada, mainly Usages and residential. So it's very specific. We know exactly where it's coming from. And I gave earlier in the call the numbers of how revenues and EBITDA have been growing in that specific market, specific business of Nexans.

But overall speaking, I mean, the business in Usages is doing very well in Nexans, structurally speaking, thanks to our transformation, thanks to all the work we've done now for 3 years. We look at South America, Centelsa, for example, the new acquisition we made, is overperforming EBITDA. EBITDA has been growing by 200 basis points versus when we acquired the business. Other countries like Peru, like Chile, even our existing business in Colombia are doing very well. Brazil is doing fantastic. We have -- we start to see recovery in Lebanon. That was a very difficult market for many years due to the local situation over there. APAC, Australia, New Zealand, fantastic year.

I mean it's a global, I would say, improvement in the margin. A little bit of good demand for sure. But globally, it's mainly coming from the -- from all the efforts that have been paying off.

So I think the only part that you need really to put aside is what I gave -- the number I gave for the North America, Canada part that might not repeat itself in next year. I think all of the other parts of the business and the growth of the -- both the -- I would say, the top line, but again, the growth of the top line is the growth of the top line. But the organic growth itself is mainly pricing, and the growth of the EBITDA is structural. And this will continue unless we have obviously a collapse next year that is like the one we've seen in 2020 with minus 11% top line situation. But I mean I would say with even a very conservative approach on the top line, all the structural changes will continue to pay off, except that conjunctural part that obviously we cannot control.

[Christopher Guérin, executive]

Yes. I think it's important to, as well, highlight the fact that our salespeople are not incentivized on sales development, not by volume. They're incentivized on the margin generation, on the free cash flow associated to the margin. So that changed completely perspective is what I said to Akash. The market share is not a topic. Certainly, the market share of our platinum customers or platinum project is a topic. There is no doubt about it but not the overall market.

So the most important for us is to make sure that they are injecting structural pricing which is supported by solution and innovation that will not collapse because the demand is down. So we are reinforcing our collaboration with our platinum customer. It's important as well to mention that in 2019, pre-COVID, the revenue was supported by 17,000 customers. And right now, we are running with only 4,000 customers. So of course, that gives us a more key account management model approach, being much closer to those customers, developing more sales, more innovation and making sure that each euro of sales that are on top of our result is converted into free cash flow.

So that's a very important element. That's all about SHIFT program, all about SHIFT program. And this is why it's a major differentiator versus our competition.

[Rajesh Singla, analyst]

Okay. Maybe a follow-up question on this. So in the last couple of years, we have seen a significant damage to the supply chain. And all these margin expansion -- a significant part of this margin expansion could be attributed to the shortages across the segments, what we have seen so far. So assuming that the supply chain is easing and probably we'll have a better supply chain in the next couple of years, so do you see the downside risk to the margins what we -- with what we generated in 2022?

[Christopher Guérin, executive]

I don't see -- to be honest, I don't see tension going down on the supply chain. Of course, that was a sort of a bullwhip effect post COVID. But now we are entering in the phase of very, very critical supply chain risk of disruptions because of raw material access. Just the geopolitical situation of Europe put a big, big, big, I will say, tension on the aluminum.

Most of the alumina, the powder that we need for -- to produce aluminum is coming from Ukraine and Russia and some other countries. So access is very complex. The production of aluminum is requesting a lot of energy. And because of the energy inflation, some of our suppliers are reducing their capacity because they are running at loss.

So no, I don't see the supply chain back to normal in coming years. And for the moment, it's okay, I would say. But do not forget that the Chinese economy is down. When the China will wake up, it will recreate a lot of tension on the raw material. It's -- for example, China, we know that China will suck the equivalent of 60% of the copper demand worldwide for their energy transition. So here, there will be a big, big, big problem when China will wake up.

Thank you. I think a lot of questions. Thanks a lot for your attention. As you see, Nexans is still always on top in terms of financial results. I would not say bullish, but we say that we are running very, very well, supported by our structural transformation. Get prepared for recession in 2023, so making sure we are always there for our financial result achievement. More information to come in the next months. Thanks for your attention. Bye-bye.

[Operator]

Thank you for joining today's call. You may now disconnect.