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Edited Transcript of NEX.PA earnings conference call or presentation 24-Jul-19 8:00am GMT

Half Year 2019 Nexans SA Earnings Call

Paris Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Nexans SA earnings conference call or presentation Wednesday, July 24, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Guérin

Nexans S.A. - CEO

* Jean-Christophe Juillard

Nexans S.A. - Senior Corporate VP & CFO

* Vijay Mahadevan

Nexans S.A. - EVP of Middle East, Russia, Africa & South America

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Conference Call Participants

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* Akash Gupta

JP Morgan Chase & Co, Research Division - Research Analyst

* Daniela C. R. de Carvalho e Costa

Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team

* Lucie Anne Lise Carrier

Morgan Stanley, Research Division - Executive Director

* Max Yates

Crédit Suisse AG, Research Division - Research Analyst

* Sean D. McLoughlin

HSBC, Research Division - Associate Director of Clean Technology

* William Mackie

Kepler Cheuvreux, Research Division - Head of Capital Goods Research

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Nexans Half Year Results 2019 Conference Call, hosted by Christopher Guérin, CEO; and Jean-Christophe Juillard, CFO. My name is Ethan, and I am your event manager. (Operator Instructions) I'd like to advise all parties this conference is being recorded, and now I would like to hand over to Christopher. Please go ahead.

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Christopher Guérin, Nexans S.A. - CEO [2]

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Thank you. Good morning, everyone. Thank you to be present over the phone to listen our half year results. Here is Chris Guérin speaking and I'm here in London together with the group CFO, Jean-Christophe Juillard. On as well, Vijay Mahadevan, who is in charge of South America and Middle East Africa business units.

This morning, we report, as you can see, a solid performance for the first semester of 2019, that keep us on track for our transformation journey. As we committed to you last November with the new Nexans plan on after 6 months of intense activity, the transformation plan is already delivering significant progress in the 3 workstream that we already mentioned before, the cost reduction, the SHIFT program, the value growth initiative, mainly in Subsea, Telecom and the Industry sectors.

The first half performance marked a clear improvement with an increase of EBITDA of 19% like-for-like versus last year, demonstrating that the new reset of Nexans' focusing on this ability to execute is now under control. Let me go -- I will tell you the page I will comment. So let's go to Page 5.

So just a -- the [pitch] page saying that we have, of course, as you can see, a pretty positive market dynamic, supporting our top line because we confirm the 5% organic growth, EUR 195 million EBITDA, as I said, 19% improvement like-for-like, a transformation plan which is in line with expectations, with a positive impact estimate around EUR 48 million that we will detail in the coming page. And Jean-Christophe will come back, we'll take this opportunity to revise our guidance to narrow it a bit. We were before at EUR 350 million to EUR 390 million EBITDA, now we narrow to EUR 360 million to EUR 390 million EBITDA.

On the Page 6, just a word regarding business evolution. So pretty solid momentum in Building & Territories. We are -- we have a very high operating leverage and EBITDA of 56% above last year. This is the result of the dynamic of the SHIFT program, plus, of course, organic growth, reporting here at 7.5%, mainly coming from our, let's call, profit driver units.

In Subsea, we still have a very robust pipeline, as I already told you, for '19 and '20. We will give you some more details in the coming presentation. We do not face any execution issue. We'll come back to review on that point later. The lower volumes in Subsea in the first semester has to be attributed to the phasing of the project delivery. The long part of the business faced some difficulties because of the announcements of the closure of our German asset in Hanover.

For the Industry & Solutions segment, our EBITDA growth reached 24% versus last year. Thanks to a very strong improvement of many sectors, ship deployment program in our North American asset. And as well, the great momentum in terms of demand in the aerospace, running stock on renewable and mining sectors. Very sound momentum as well for the LAN business in the U.S. on, as usual, since 2 years, a very strong development of optical fiber cables in Europe that we will comment a bit later.

If I shift to Page 7, our consolidated sales for the 6 months reached EUR 3.4 billion versus last year. Our constant metal price, this represents a 5% organic growth, excluding the High Voltage & Projects segments with a different phasing, the growth of cables represent more than 7% year-over-year. In terms of EBITDA, so the EBITDA amount for EUR 195 million versus the EUR 153 million over the 6 months of 2018. The transformation measure undertaken with the group had an estimated impact of EUR 48 million, which, of course, offset the price cost with effect during the period, estimated at EUR 30 million. I will comment a bit more in detail that on the next page.

JC will come back in details in terms of return on capital employed evolution because it seems that nothing is moving there. We do -- we are 9.2%. He will detail exactly what's happened and as well on the net debt.

Page 8. To give a greater clarity of what's going on in terms of EBITDA evolution, we have done a bridge. So as you can see that we started -- we closed June 2018 at EUR 153 million EBITDA. We have a price-cost squeeze labor inflation impact of EUR 30 million negative, positive impact on the cost reduction initiatives linked to the fixed cost reduction that we have started overseas, mainly Brazil, Korea, China and U.S. at the beginning of the year. And as well, some improvement on [indirect] cost actions. As you know, the announcement regarding the reorganization of the group and the restructuring in Europe will take place on the second half of next year. Regarding the transformation plan of SHIFT, which is everything but fixed cost reduction. So SHIFT is working on pricing improvement, complexity reduction, business and products selectivities. This problem today is running with -- impacting more than 12 units and has generated already EUR 40 million improvement for the semester. We predict an equivalent number for H2. Value growth initiative, so dedicated project linked to already registered order backlog in Subsea, Telecom, Industry have bring EUR 12 million EBITDA incremental for the semester.

We have add up another bar there, which is what we call the conjunctural growth. So if you remind, from my presentation, the low -- last time. We have not put any specific initiative regarding the building and utilities sectors because this is extremely cyclical, and we have a pretty low visibility because of the drivers of that market in terms of backlog. The action that we have done in this first semester is to ask our profit driver units. So the one delivering more than 15% return on capital employee average to generate more growth, what they did. We were -- as well ask our value burners not to grow because their action is -- should be to reduce their sales exposure for the moment for some segments and to work on their fixed cost projects on customer selectivities, but as well to improve their mix in general. You can see that they have, as well -- grow there and generated some EBITDA which is linked to a backlog that have been registered in 2018. That's, of course, offsetted to some one-offs that we had last year, EUR 18 million that we will detail a bit later, but it's more or less within the '18, EUR 40 million of one-off pension plan for the previous discounting that has been really it is last year's. And as well some release on the bonus in 2018 that could not be applied because of the very bad performance of the group that year.

So in a nutshell, the EBITDA is closing before IFRS 16 at EUR 181 million, so 19% growth, plus EUR 15 million IFRS 16 impact. So we reached EUR 195 million EBITDA for the semester.

Let's go now to Page 9 for Building & Territories. So you can see that pretty strong growth, 7.5%, a pretty solid performance. I'm sure that we are taking market share with that organic growth, specifically in submarine South America and as well in Asia. So EBITDA for Building & Territories is reported at EUR 81 million for the first half, up 51% on the 51% versus the EUR 52 million that we have recorded on the first half 2018. So this, of course, reflects 260 bp rise in EBITDA margin from 6.2% to 8.8% on sales at constant metal prices. Of course, it's a pretty significant impact for the group.

What to be noticed is that all the segments, business areas and geographic region have shown an improved performance over the period. The cost reduction plan that we carry out in South Korea and Brazil beginning to pay off. The rich pipeline of projects as well, in terms of industrial performance that have been implemented at the beginning of last year are starting to pay off as well. Since the end of 2018, the transformation project on the SHIFT program has mainly concerned Building & Territories, that's the reason that you will see a very strong impact in that segment. We have launched our SHIFT program in Chile, in Brazil, in Colombia, Peru, Lebanon, Turkey and in U.S., so their impact in the segment has pretty significant -- significancies because on the EUR 14 million that we reported for SHIFT program, EUR 12 million is attributed to that segment Building & Territories.

I want to mention ambitioning in front of me that the transformation in Latin America has seen significant progress. Yes, let me insist on that part, significant progress, because we don't have any more losing making units in that area. So that's a pretty good performance from the local management and as well the transformation team since last October. So of course, the segment also for the benefit of a high-volume effect, as I already mentioned, we generated EUR 20 million worth of EBITDA, mainly attributed to profit driver.

If we shift to Page 10 regarding High Voltage. I'm sure you will have a lot of questions on that sector, given the information from Prysmian yesterday on Viking Links. But anyway, EBITDA margin for High Voltage remained stable year-over-year, 10%, 10.2% like-for-like, and 11.5% if we include the impact of IFRS 16, despite the negative organic sales growth of 6%. So of course, this is attributed to different phasing of the project. So overall, this generated by this segments are around EUR 324 million versus the EUR 248 million of last year. In the submarine High Voltage business, operational execution of projects are fully on schedule. After our first quarter marked by a lower cable link activities at the same time, the same period of 2018. The second quarter of this year saw a very strong organic growth, 65%. We will have, as well, a very strong Q3 for this year. So of course, because of this phasing of activity, we report a minus 2.5% on organic basis points.

For the Land High Voltage business, the group pursued its initiative aimed to restore its profitability prior to the volume. So for the first semester, we have confirmed the closure of our Yanggu Chinese high-voltage plant that are taking place right now, after honoring the last contract in the order book. In Europe, the group has announced the closure of the Hannover site. On the requisite negotiation procedure with the operating representative bodies has been completed at the end of June. So perfectly on time. So transformation plan for this business focus on improving the quality of existing projects' financial performance, enhancing our value offer for future (inaudible) in order to restore profitability. Against these backdrops, the Land High Voltage business posted minus 16% organic growth sales decrease in first half versus a 21% decrease in the first quarter of the year, but we did register an improvement in EBITDA in Q2. So the main turnaround of Land High Voltage, let me remind you, takes more time and will -- appears mainly in 2020. EBITDA for the High Voltage came up overall at EUR 33 million, excluding the impact of IFRS 16 compared to EUR 36 million on the same period last year.

If we go, if we move onto the Telecom & Data. So EBITDA margin for the Telecom & Data, we are down by 110 basis points on a like-for-like basis for the first half of 2019. So driven by a 7% year-on-year organic growth, which totaled for EUR 300 (sic) [EUR 301] million at the current metal price, on EUR 270 million, as you can see here on the slide at constant metal price. So this segment is benefiting from the impact of the indirect cost savings plans that we have deployed all over the activities. The SHIFT program, which is currently deploying in our U.S. activities, so mainly in LAN business, and as well, growth initiatives that are already showing positive impact on results, specifically in telecom infrastructure. So the optical fiber cables on submarine segments. The sales for LAN cables and system rose by almost 2%, with a steady profitability increase in North America. And the sales for telecom infrastructure business climbed to 11% year-on-year.

We do not suffer any more of a shortage of the raw material, namely fiber optics, and we start to see a downward trend in terms of fiber optic price here in Europe, specifically coming from Asian player, trying to sell their overcapacity in Europe. Regarding the sales in submarine telecom cable, pretty good semester, 18% organic growth, reflecting an upturn in business on the insurance signature of new contracts. So as you can see, EBITDA for the Telecom & Data segment came to EUR 27 million versus EUR 22 million last year. And this segment is not impacted by IFRS 16.

Onto Page 12 for Industry & Solutions. So EBITDA margin for the Industry & Solutions segment are significantly improved. So you can see that we reached EUR 56 million EBITDA versus EUR 45 million last year's. The sales amount for EUR 714 million at current metal price and EUR 600 million at constant metal price, representing an organic growth of 2.2%

I'm sure you will have a lot of question regarding harnesses, but we are pretty good, really happy to announce the pretty strong performance and resilience in that sector. So automotive harnesses turned in a better performance in the first half of the year versus last year's, both in terms of sales and profitability, with the sales rose at plus 2%, led by a very strong truck market dynamic in U.S., which is offsetting the impact of the very weak Chinese automotive market. Let me remind you, because I've seen that a lot of in your report that the sales of our harnesses business in China is less than EUR 30 million per year, so a limited impact. In Europe, the industrial reorganization project carried out in 2018 already have been completed. So a pretty strong momentum for the moment in the Industry & Solutions business. In order to save more time for your questions,

I'm speeding up a bit. So I'll let now, Jean-Christophe to comment the financial part.

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Jean-Christophe Juillard, Nexans S.A. - Senior Corporate VP & CFO [3]

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Thank you, Chris. So let's move on, Page 14. On the -- looking at the income statement, and let's see here the key element that Chris described. We'll start with the sales at EUR 3.4 billion. Current sales up EUR 150 million, which correspond to an organic growth impact, as Chris mentioned of 5% overall. The standard sales are up EUR 110 million, reaching EUR 2.3 billion. And we have a mixed effect between negative organic growth on the project side, minus 6%, and positive organic growth of 7% on the product side of the business.

The margin on variable costs remained flat from 30.9% in 2018 to 30.8%. And this is a mixed effect, and looking at the difference between the 2, which is very small. You see that there is an average increase of the gross margin percentage for the cable business, which is about 0.5%. There is also offsetting that, I would say, a different mix in the High Voltage business, where on the Subsea we've had a little bit more installation made by the vessels in 2018 than compared to 2019. So it had a slight impact on the gross margin of the segment of the business. When you compare the 2 negative impact of 0.2%. There is also a slight negative impact of minus 0.1% coming from the metallurgy business in 2019 compared to '18. And also, mix -- a global mixed effect in terms of margin that impacted minus 0.3% of total gross margin due to the fact that we had a slightly less High Voltage Subsea sales and more B&T sales and basically, the margin of the 2 business is slightly different. But overall, the -- I would say, gross margin rate is stable.

On the EBITDA side, EBITDA increased by 150 -- from EUR 153 million to EUR 195 million. There is an IFRS 16 impact in the EUR 195 million, which amount to EUR 15 million. So to make the 2 comparable. We move from EUR 153 million to EUR 181 million.

EBITDA rate increased from 7% to 8.4% of standard sales with -- mainly coming from the very good first result of the transformation plan, which started this year. The evolution over the last 12 months for an EBITDA increase of EUR 30 million, as you can see in the graph on Page 14. And this evolution can be summarized as follows. There is small negative ForEx impact, EUR 4 million. If we take into consideration the EUR 38 million price-cost squeeze, mainly inflation. We also have the contraction of the profit in the High Voltage business by EUR 21 million, with -- taking into account a very -- a weaker second half of 2018. In the last 12 months of June 2019, when you compare it to the 6 months of 2017, that was much higher.

And for all of the other business, we see a EUR 76 million additional profit generation from all of the business, 60% of that is coming from the Building & Territories business and 30% is coming from Industry & Solutions. Depreciation increased by EUR 10 million compared to 2018, EUR 13 million of that is coming from the impact of IFRS 16. The operating margin stands at EUR 113 million over the first half year of 2019 compared to EUR 82 million in the first half 2018.

If I move to the next slide, operating -- and talk about the operating income, it's down from EUR 185 million. It's down by EUR 54 million. This is explained mainly by a couple of things. The first major impact is the restructuring charges for EUR 182 million which impacted definitely, the June 2019 numbers. Out of which, EUR 154 million are related to the European project of restructuring announced from January 24, 2019. And this amount of EUR 154 million corresponds mainly to reserve for employee-related costs in Germany, France and Belgium.

On the other hand, other operating income and expenses represent a net income of EUR 15 million, mainly consisting of net gain on sales of sales of LAN in France and Switzerland.

Looking at financial charges, have remained stable at EUR 31 million when you compare the 2 periods. The cost of the debt is down to EUR 19 million at the end of June 2019 versus EUR 22 million at June 30, 2018, mainly due to the savings that generated by the bond refinancing we did in 2018 at lower cost and the convertible bond redemption in early January of 2019.

Other financial income and expenses represent a net expense of EUR 12 million in first half 2019, compared with EUR 9 million at the same time. The tax charge is up EUR 3 million at EUR 27 million during 2019, despite a negative income before tax at minus EUR 85 million. This reflects the fact that the majority of the group restructuring costs do not generate immediate tax gains. As foreseen and previously disclosed, the net income of the group is negative EUR 160 million.

Moving to the next slide, we look at the net debt over the past 12 months, with a group net debt amounts to EUR 709 million at the end of June 2019. It includes an increase due to IFRS 16 of EUR 132 million. So if we look at comparable position between June 2018 and June 2019, the increase is EUR 43 million.

As you see, there are a mix of impact here. The operational cash flow, which is mainly the proceeds that we use for the cash effect on the EBITDA is up from EUR 160 million in June 2018 to EUR 240 million in June 2019. This is mainly explained as a higher profitability of the -- mainly due to the better operational performance in 2019.

The CapEx, net of the disposal stands at EUR 243 million in June 2019 versus EUR 130 million in 2018, and includes the CapEx of the new vessel build in Norway and the Goose Creek plant conversion in the U.S. Both investment amounted to EUR 114 million over the period. The disposal amounts to EUR 60 million and are mainly related to the sale of LAN in France and Switzerland.

On the operating working capital, it improved by EUR 65 million, as you can see on the graph. Whereas the non-operating working capital is increasing by EUR 35 million, mainly due to some tax accrual and research, R&D kind of accruals. The cash out related to the reorganization amount to EUR 77 million, it includes the cash out from the restructuring plan in Europe announced in January 2019, the transformation costs from the SHIFT program as well as some other restructuring plan in progress during the second period of the year: Korea, China and USA.

The EUR 1 million cash in for equity operation affected dividend payments, employee shareholding and also some delistings that we had in Greece, so some smaller M&A production.

If we move to the next slide, Page 17, and we look at the working capital evolution. So if we exclude the High Voltage project business, you can see that the ratio of operating working capital of our current sales is decreasing by 40 basis points from June 2018 to June 2019, after already a 100 basis point decrease a year before. This positive evolution comes on the back of the 7% organic growth on the cable business.

The operating working capital is improving by EUR 65 million over the last 12 months. Despite the consumption of the down payment received in Q4 2018, Submarine High Voltage stands in a more favorable cash flow position compared to June 2018. I remind you that we had significant down payment received in December 2018 for contract in the [back alley] in the Subsea business, a total of close to EUR 80 million of down payment that we've started to consume in the first half of 2019.

Land High Voltage has aligned its working capital to the volume of its business. Even though operating working capital ratio is improving from the cable activities. Overall level is increasing due mainly to the higher volume of the business and through organic growth.

If I move to the next slide, and we talk about -- look at the ROCE, return on capital employed. So if we exclude IFRS 16, you can see that the ROCE is stable at 9.2% versus June 2018. And there is a mixed combination effect here, when we compare the 2 ROCE at the 2 period. First of all, there is an operating margin, which is on the numerator of the ROCE, which we chose the contrasting performance between the low H2 2018, very low OM in part last year, and a stronger, offset by a stronger H1 in 2019. So mixed effect between the operating margin, between the low and the high. And also on the operating capital employed, we had an improvement of the operating working capital, but at the same time, we have slightly more fixed assets due to the CapEx that we are generating, that we have spent and invested on -- mainly on the new vessels and Goose Creek transformation. So we have some positive improvement on the ROCE of 9.2%, offset by, again, the additional fixed and non-fixed assets and also the second half of the year 2018, which is a lower operating margin.

Excluding the High Voltage activities, the ROCE of cable activities reached 8.7%, which is an increase of 90 basis points versus June 2018, and it's also above the level of June 2017. The improvement of 90 basis points is driven by the increase in the operating margin. So if you look at the bridge, 120 basis points coming from the good performance, mainly of H1 2019, which is offset by the capital increase, capital employed into facility business and recurring from the higher operating working capital in the cable business due to the volume.

If I move to the next slide and we look at our key capital structure KPIs. I mean, our key financial ratio remains strong and well below our covenants. Internal charges of EBITDA decreased to 10% versus 14% in 2018, thanks to the refinancing of our long term bonds. Gearing is at 57%, is well below the 120% covenant. Leverage ratio ends up close to December '18 at 1.4x versus 1.3x. All of the covenants were amended (inaudible) to reflect the adoption of the IFRS 16 impact starting in June 2019.

If I move to the next slide, and we look at our liquidity. You see that we have a strong liquidity, which is well sufficient to cover our future debt refinancing needs. We repaid in early January EUR 269 million for the convertible bond and continue to work on our liquidity profile with a balanced schedule of repayment, while at the same time, reducing stepwise overall cost debt of the group. The application of IFRS 16 led to a net debt increase of EUR 123 million at June 30, 2019. So we have a pretty strong liquidity, including a EUR 600 million undrawn revolver lease facility. So at June 2019, we have more than EUR 1 billion of total liquidity available.

Moving to Page 21, and looking at the guidance. So we are increasing the EBITDA guidance for the year from the range of EUR 350 million to EUR 390 million communicated earlier in the year in February to a range of EUR 360 million to EUR 390 million. Free cash flow will be negative due to the impact of the restructuring and also the additional CapEx, mainly in the vessel and the Goose Creek CapEx. Net debt will be in the neighborhood of EUR 60 million. Don't forget, it includes EUR 123 million of impact due to IFRS 16. And net income will be impacted by the restructuring charges as well and will be negative in the range of EUR 110 million. We are confirming the ROCE range between 9% and 11% by year-end.

Now I can turn the floor back to Chris.

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Christopher Guérin, Nexans S.A. - CEO [4]

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Thank you, JC. I will shift directly to Page 24, just to give you an update regarding the transformation plan. Of course, significant progress, also joining us -- has been announced on the 24th of January for European activities on reorganization. So all the milestones have been reached on the implementation, is starting on the 1st September for Europe. And as I told you, Hannover, our site for Land High Voltage, will be closed in -- at the end of the year.

Indirect cost reduction have a significant impact in H1 result in all the units. Of course, we will move everything in the various control action mode for all maintenance, IS/IT value for the coming months. We are slightly delaying a working capital on manufacturing performance. Working capital is a requirement that are not under SHIFT flag right now. So we need to speed up on the second semester. We wanted to have to show a better improvement, but still a lot of things to do in some areas, but keep -- the board is moving, is rolling. CapEx reengineering. We have redeemed completely, the way to assess our working CapEx at group level with more aggressive NPV on the ROI. SHIFT transformation, as I told you, since the Q4 2018, we'll have 12 modules to our business unit that have, under SHIFT flag was already there, showing significant EBITDA impact, I told you, but as well working capital in some areas.

On Page 25, we are working as well on our second region of transformation, which is to be focused on the value chain improvement, value proposition. We are now implementing a new team for services and solutions, more than 30 people deploy all over the group. We are working with our marketings on the sales team, new value proposition for some specific segment. So I'm sure that I will be able to announce significant deals in the coming years around those segments. We are talking about smart cities, rural electrification. We already have a big deal in Africa with the Neogrid project. Renewable wind offshore, as you know, and the wind offshore is exploding everywhere in the world, Nexans wants to take a significant part of market share on that business. Of course, as well interconnection. For the recommend data, we will keep growing in fiber optic cable depending on [submarine] telecom. In the Industry & Solutions, we put a very strong focus regarding automation, specifically in Asia in terms of development on renewable onshore on solar market.

So of course, all those segments are supported by very strong world megatrends that we already did commented in November.

If I move to Page 26. And as well, of course, in regards to the award of Viking Links to Prysmian, the subsea part, we wanted to be more transparent on our work backlog and load ratio. So on the Page 26, on that page on the left part of the document, you can see in a more granular way the projects that are running into production in Nexans or will run into production in this year or next year. Of course, when you see these load ratio indicators in green means that we are loaded. So in a nutshell, the load ratio for Nexans Subsea for 2019 is about 92%. So pretty good load for 2019, and for 2020 is almost -- we reach already 90%, but we need to amend that because -- we will upgrade it because we have won another project in Umbilicals that will improve still this ratio. So very -- no problems in terms of production, on project execution for -- up through year-end 2020.

The load ratio for 2021 is about more or less 30%, so of course, we are working on the upcoming project. That are coming into force that you have are here on the right part of the page. Of course, there is a significant deals coming up, that's a fantastic opportunity for Nexans to take significant share of some of those deals.

Onto the Page 27. Since months, we are reinforcing our execution process and because of course, there is a lot of question regarding our shareholders and investors about the robustness of the executions. And I think that withstanding issue raised more and more questions about that topic. So we have more or less 3 main stage to mitigate all the risk for execution. We are reinforcing our seabed assessment, we have reinforced as well our manufacturing quality norms, methods and testings. And we have upgrading strongly our installation process to avoid risks of damage or mistakes during the installation.

As I already told you, but of course, you can understand that I cannot illustrate more than that for confidential reason, what we are doing in terms of decision modeling tool, but for subsea, what we are doing right now is that we have built a complete tool that take into account more than 35 parameters of a subsea deal, either in terms of financial terms, in terms of risk, in terms of executions that we are modelizing and because we don't want to take, I will say, any decision for the next 2, 3 years to come, just on the price of few datas. We are integrating in that modelization tool all the deals that are won by our competitors because, of course, it's important for us to predict the capacity load ratio of the sectors. And of course, this will influence our pricing strategy or project selectivity for the coming years. And of course, Viking Link today, you will saturate a big part of our competitor load, so we'll certainly influence our pricing or offset project selectivity decision in the coming months.

I will give more room for questions. I will not comment all the deals signed that we had in the first 6 months. Very dynamic semester, very intense in terms of action. I remind you that it's not only a question of strategy for Nexans, it's a question of ability to execute. So we have more than 1,200 initiatives up and are running at the group level reported every week, supported by digital tools to make sure that we don't miss anything. And everything is financially documented and linked to our EBITDA generation. So that's a very, very intense, intent process that show already the first result. We keep growing, of course, but with a very strong intensity in terms of selection of the project that we want to win on the very, very strong emphasis in terms of innovation, on pricing management. We are very happy to show a very steady performance for this first semester. And now we will -- ready to take all your questions. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Daniela Costa of GS.

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Daniela C. R. de Carvalho e Costa, Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team [2]

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I wanted to ask one question regarding the 12 plants on which you already started SHIFT, you have close to [transformation plan]. Can you give us some visibility of whether this is going to be [indiscernible]? Or what is the path? And seeming, and as you highlighted a pretty significant increase in profitability in the more cyclical divisions, I guess, as a consequence of that. Is the way we should think about the savings as well, sort of, per unit savings indiscernible going forward or not necessarily? That's my main question. And then a smaller question I wanted to ask about these one-offs that you booked, these 18 newly and on the pension-related adjustment. Do they impact the sectors -- will we have a similar one-off in the second half as well to make the whole year adjustment? And is it inside guidance? Or was it just a first half impact that from here it disappears?

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

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I will take the SHIFT one. In nutshell, we will -- for ship, we are running 12 unit under SHIFT Transformation plan. This momentum will continue. And we have in total 45 units to address. It's difficult to predict the normative improvement in terms of return on capital employed per, I would say, ad hoc modules, because you have different drivers per market. We have shown significant improvement in the B&T sectors, in the building and utilities because we are able in that, specifically in the construction part, able to revise our pricing strategy every month or every quarter. So with a very, very strong price elasticity. So of course, that's play a big, big role in terms of selection. It will not be the case when we are running that in the industry segments because we are facing yearly negotiation with key accounts. But we will have certainly a significant increase. So a bit too early to give you a normative of what will be the impact, but we still have up to 2020, end of 2020, more than 60 people working 100% on transformation. I remind you that this transformation is linked to 20 levers of transformation, coming from the best practice from private equity firm on consulting firm. It's extremely analytics. It's not about lean management. It's not about project management, is we consider that the manager of the group on -- in many companies are using only 4% of the data available in their system. The team here is working on more than 20% of the data available in the system, using as well Big Data, a monetization tool, supporting their decision. We will, certainly, at the end of the year, bring you more, I would say, granular view of what's going on in SHIFT. Of course, it's as well a Nexans proprietary, I would say, find a word, Vijay, help me,

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Vijay Mahadevan, Nexans S.A. - EVP of Middle East, Russia, Africa & South America [4]

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Propriety methods.

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Christopher Guérin, Nexans S.A. - CEO [5]

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Propriety methods, thank you. Thank you, Vijay, that we cannot disclose to the markets. But of course, it will support a very strong improvement in coming 2 years. Regarding...

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Jean-Christophe Juillard, Nexans S.A. - Senior Corporate VP & CFO [6]

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Yes, for the one-off. So for the one of the most -- the biggest part of the one-off, as Chris mentioned, was, in 2018, which explain 75% of the total was coming from the closure of the executive retirement, specific contribution plan, that had an impact, one-off impact, about EUR 14 million out of the total. The rest was many of things, mainly accrual bonuses also. We are not expecting -- we might have a small one-off in the second part of the year. But definitely not in the magnitude no more than EUR 4 million to EUR 5 million, but not at all in the magnitude that the one you've seen here in this presentation.

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Daniela C. R. de Carvalho e Costa, Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team [7]

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It is inside guidance?

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Christopher Guérin, Nexans S.A. - CEO [8]

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Sorry?

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Daniela C. R. de Carvalho e Costa, Goldman Sachs Group Inc., Research Division - MD & Head of the European Capital Goods Equity Research Team [9]

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And the guidance, the EUR 360 million to EUR 390 million includes already these assessment of the

one-off?

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Christopher Guérin, Nexans S.A. - CEO [10]

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Sure, Sure. Yes.

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Operator [11]

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Next question is from Akash Gupta of JP Morgan.

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Akash Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [12]

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I have 3 questions, please. My first question is on organic growth, and 5%, as you reported for first half. Looking at the driver for organic growth. How much of that is driven by pricing, as you might be looking to increase price to reduce value burners? And how much of that is driven by end-market growth and outperformance that you had over end-market. And given first half trends, so what do you expect for full year on organic growth. My second question is on harness business. Every day, we see another auto company profit warning and reducing production rate in second half of the year. Maybe if you can talk about your harness business in detail, how much of that is U.S., Europe and China. I think China, you already provided numbers, but maybe about U.S. and Europe. And has there been any change in your planning for that business since start of the year, given some of your customers are talking about lower production rates? And my third question is on full year net income guidance, that implies EUR 6 million, EUR 7 million net income for the second half of the year. Can you please talk about if you expect any more restructuring to be booked or any asset impairments in second half that we should be aware of?

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Christopher Guérin, Nexans S.A. - CEO [13]

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Okay. Well, I will take the 2 first questions. So regarding IT, it's really difficult to assess the price impact right now of -- in the organic growth. What you can say is that everything that you see in, what we call, contractual effect in the EBITDA improvement of EUR 28 million. We can say that 1/3 of that is coming from pricing or mix effect. It's not only price up, it is mix effect because what we determine in our portfolio in each business is what is the good fat and what is the bad fat, talking about that products. So there is a lot of impact of complexity reduction in our portfolio. So we'll take that one to be a bit more granular in the coming months because we are still processing some more in-depth analysis on the price effect. In terms of organic growth that we foresee for the year, it will be in a range between 5% to 7% in a nutshell. But of course, depending on the economical evolution of the B&T sectors in second half. Organic harnesses, for the moment, there is no change in our plan. Of course, we have to absorb this weak demand through cost reductions on as well, a strong, strong productivity actions that the team has launched in the first part of the year, that's already starting to paying off to offset this downward trends, but seems to be short to report.

Regarding the restructuring?

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Jean-Christophe Juillard, Nexans S.A. - Senior Corporate VP & CFO [14]

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So let me answer your question regarding the net income from the end of the year. So yes, there will be additional restructuring cost in the second half of the year. Definitely not the provision level that we've booked in H1, but there will be about EUR 60 million of, I would say, nonprovisionable restructuring costs that will be booked, which are mainly project-related effect as well as the different teams at consulting team that we're using right now to the transformation program, SHIFT and the other transformation. But all the provision related to the restructuring in Europe that we have announced in January has been booked in June. And the number that will be booked in the second half is definitely not of the same magnitude.

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Operator [15]

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Next question from Max Yates of Crédit Suisse.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [16]

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Just my first question is on your backlog delivery. And when you look at what you have to deliver in 2020, you have very good visibility on, I would imagine what your submarine business will look like. Is there anything when you look down the list of projects to be delivered either in terms of mix or in terms of pricing on those contracts that would mean profitability would be meaningfully different year-over-year at the same kind of load factors.

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Christopher Guérin, Nexans S.A. - CEO [17]

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No. No, Max. Nothing special to report on that. It's a more or less the same trend. Once again, we -- if you remind, I think Max you asked that question for ROC-2 project. That it is to get a lower price. And we told you that we have not changed our price strategy. If I may comment, as well on beginning because some of you report a potential low price given by our competition for that huge project. The message that we give internally is that we have a strong backlog, both in terms of value, but in terms of EBITDA generation. So Nexans will not sell off its available capacity for 2021. We don't want to deteriorate price in that very buoyant market, because we have a number of deals awards to come. So my target on like all the others, but it's not to show only a high turnover on the high backlog, but to make sure that the whole new upcoming projects are strongly contributive in terms of margin better ADMIE produce on installed and with limited risk. Because they should be accretive for our EBITDA generation. So we were delighted to work with [national lead and TenneT] for this fantastic project. The price we gave, given the size of the deal, we are already competitive versus what we did offer some times for others. But we didn't want to jeopardize our margins. So for us, the available capacity of Nexans has a price. And of course, some of our competitors have been much more aggressive, because given the fact that they were requiring load right now, right now for the end of the year and for next year. And they have exited terms of condition on liabilities that we did review. So this is certainly the why of the non-award of Nexans for these projects. So a very, very strict discipline in terms of EBITDA generation per project, a very strict discipline as well in terms of selection of the risk. We have reinforced our GRC, our thunder committee teams around subsea, to make sure that subsea will not generate any better price for the period of the 3 years.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [18]

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Okay. Maybe if I could just ask a quick follow-up on that. So should we interpret that if your load is full for 2020, and it's pretty much full for 2019 as well, that your subsea or your submarine cables are unlikely to grow next year. I'm just trying to understand in terms of sort of volumes going through your factories, is it fair to assume that your submarine business will be at a very similar level in 2020 to 2019?

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

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Yes, there will be a slight growth in 2020 versus 2019, because we had a lower start in Q1, and we were missing in this year some oil and gas project at the beginning of the year that we will not miss next year.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [20]

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Okay. And just finally on Attica, if we look at your -- my understanding is that, that project may be coming to market as soon as Q4. Does it mean that given you're effectively booked out for most of next year, it will be very difficult for you to bid on that project given that you will most likely need to start production of that in 2020 and your factory load is already full for 2020. Is that the right way to think about it? Or do you still think you can participate there even with your backlog for delivery in 2020?

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Christopher Guérin, Nexans S.A. - CEO [21]

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We still have some room to maneuver because we are upgrading our Goose Creek facilities in Charleston in U.S., transforming this specifically right now in terms of CapEx spend from land to subsea. So we will able to subcontract some of our production if needed there. But we still have some room on the MI technology. And of course, Attica is one of the project that we will follow.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [22]

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Okay. And just -- sorry, one very final brief one on your other line. I'm just trying to understand some of those one-off costs that you had talked about, I assume, looking at your other line in the first half, those probably went through that line because I think, ex-IFRS, you were running at about minus EUR 21 million in the other line. So I'm just trying to understand, as we move forward without one-offs, what is the right kind of level for this number? Whether the other line going into next year?

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Jean-Christophe Juillard, Nexans S.A. - Senior Corporate VP & CFO [23]

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Yes, if you take out the -- I mean, what we have in the other line is basically our corporate cost, yes. And basically, if you take it out of the one-offs, the number is more in the range of normal, I would say, our corporate overhead, more in the number of EUR 30 million per year.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [24]

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So that's EUR 30 million ex IFRS?

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Jean-Christophe Juillard, Nexans S.A. - Senior Corporate VP & CFO [25]

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Yes.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [26]

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And the IFRS is about EUR 15 million. So including, it's should be about...

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Jean-Christophe Juillard, Nexans S.A. - Senior Corporate VP & CFO [27]

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IFRS is [EUR 650 million] EBITDA, yes.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [28]

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Going through the other line.

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

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Going a part of it through the other line, not completely through the other line. You had a little bit of it going through the high voltage, but most of it is going to the other line in corporate, because this is mainly the rentals that the lease that we have for our corporate office.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [30]

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So IFRS is a EUR 30 million impact?

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Jean-Christophe Juillard, Nexans S.A. - Senior Corporate VP & CFO [31]

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EUR 30 million for the year, yes. for the year. I was talking here EUR 15 for the half year, sorry.

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Max Yates, Crédit Suisse AG, Research Division - Research Analyst [32]

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Okay. So it's at EUR 30 million for the full year and maybe half of that goes through other?

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Jean-Christophe Juillard, Nexans S.A. - Senior Corporate VP & CFO [33]

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More than half. Yes, 2/3, about 2/3. The other 1/3 going to high voltage.

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Operator [34]

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Next question is from William Mackie of Kepler Cheuvreux.

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William Mackie, Kepler Cheuvreux, Research Division - Head of Capital Goods Research [35]

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Firstly, could I go to Slide 23, and ask maybe you can qualitatively walk through, as you push each of the streams in your transformation plan, where you feel that you're ahead or behind with the efforts, the immense efforts that you're making? And also, you were good enough to break out the savings at EUR 48 million for the first half. Can you give an indication of where you see that savings rate for the full year against how each of the plans are evolving? That's the first question. And the second, it relates to high voltage. It's quite numerical. But if I look at the consensus expectations in your high voltage business this year, it appears that the market is expecting nearly an 18% increase in revenues in H2 versus H2 '18, and over a 70% increase in EBITDA. Just looking at the numbers I have. Maybe you can walk through the mix. I think it's against your Slide 26, the mix in the product streams going through high voltage that could drive such a big step-up in revenue and profitability in the second half.

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Christopher Guérin, Nexans S.A. - CEO [36]

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So pretty granular questions. Let's go to Page 23. So I will come on the progress. JC will give you some figures. So regarding transformation plan SHIFT. So today, just to give you the big picture for up to 2021, SHIFT plan has to generate EUR 100 million EBITDA impact positive on EUR 190 million working capital impact improvement. Right now, we are showing EUR 14 million. We were supposed to reach EUR 30 million for the year, so we are perfectly on track in terms of SHIFT dynamic and the same for working capital. The second aspect is the organic growth. So of course, we are -- we had, because we as I told you, it's a self-help plan. We don't want to factor too much optimism on the growth. So we have discounted in our plan any growth related to construction on utilities market. So of course, everything that come there in a profitable manner, I mean, extremely excited for our EBITDA and return on capital employed is on the top of our results. So we are extremely prudent on the evolutions because construction market, in some areas, start to reduce. So it's difficult to give you a number there. The only thing I can tell you is that regarding the value growth initiatives that are linked to EUR 12 million for the first semester, with the aim to be EUR 55 million for the course of 3 years. We are ahead of the plan. So that's pretty good. To this, thanks to industry and telecom on subsea, we contribute to that in the coming months and years. Regarding cost reduction initiative, it's a bit more mechanical. Maybe JC will say a word about it, but everything that occurred in the first semester is any local plan that has been launched in Brazil, Korea and China at the beginning of the year. The European plan is starting to deploy only in the second half of the year up to the end of next year. And the full impact of digital restructuring, as I told you, will impact only in 2020. So we are not delayed at all on that part. We are -- it's just a question of phasing. So we will be there for the result of 2019. On price cost squeeze is about EUR 60 million impact per year. We confirm the EUR 30 million for half year. So no change on that perspective. Some numbers, maybe JC?

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Jean-Christophe Juillard, Nexans S.A. - Senior Corporate VP & CFO [37]

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Yes, sure. So just to confirm what we're expecting to see in the second half of the year. So as Chris mentioned, so on the price cost squeeze another EUR 30 million of EUR 60 the total usually that we've seen for the year in terms of inflation and productivity gains. For the cost reduction, we've announced EUR 22 million reduction in the first half. This number will grow in the second half because there is the ramp-up of the initiative that we launched gradually during the first quarter of this year. And also, the impact, as Chris said, of the restructuring program in Europe that will start being implemented in September. So we expect this number to be about EUR 60 million in the second part of the year. And then on the transformation, I mean, the -- our view of our SHIFT program. It will deliver another EUR 15 in the second half of the year. So total of EUR 30 million for the entire year 2019.

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Christopher Guérin, Nexans S.A. - CEO [38]

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A word regarding the high voltage growth, William, just to be clear on Page 26, of course, we say it's about high voltage project, but we mentioned specifically, subsea and not the land project. So of course, the mix is a bit different there. JC?

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Jean-Christophe Juillard, Nexans S.A. - Senior Corporate VP & CFO [39]

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Yes. So definitely, if we look at the land business, so we were loss making. We had a negative EBITDA in the first half of 2019. In land high voltage, EUR 12 million EBITDA loss. We're seeing the recovery of that in the second half. So we will -- the business will break even in the second half. In terms of submarine, high-voltage generated EUR 45 million of EBITDA in the first semester, and we see this number increasing in the second semester, which is typically on the seasonality of the business. Usually the first quarter of the year is quite low and then you ramp up in Q2, Q3 and Q4, it's a bit higher than Q1. So we see more in EBITDA being in the EUR 60 million range for the second half of the year versus EUR 45 million in the first half.

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William Mackie, Kepler Cheuvreux, Research Division - Head of Capital Goods Research [40]

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If I can make 2 quick follow-ups. One relates to telecom. Can you help us understand how the dynamic of declining input prices for fiber optic cable affects your business? Is it an opportunity for you to widen gross margin? Or do you need to pass that through to customers? And yes, I'll leave it there.

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

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Pass that through to customer, I will try to not do it right now, because it's -- for the moment, we -- don't forget that we are not vertically integrated in fiber optic compared to our main competitor. So we have a supply agreement with our Japanese partner, namely, Sumitomo, with variable fix -- variable price evolution year-over-year. So here we have a pretty good deal with them. For the moment, it does not affect negatively the business is that it will improve the margin because it's pretty easier right now to find fiber optics, I'm talking here of raw material, I'm not talking cables. With a much, much better price than what we foresee the year before. Because with a very strong dynamic that China did have in the last 5 years, where they absorbed more than 50% of fiber optic capacity of the world. Now the deployment has been -- reached, I would say, maximum point. So you have a lot of capacity available for fiber optics in the world, specifically in China and India and in Europe. Potentially, it will affect the price. Of course, if there is some abilities for us to negotiate with customers to give them some benefits on that, we will do so. But we will not be affected because we are not producing fiber optics. So the question is more related to our competition.

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Operator [42]

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Your next question is from Lucie Carrier of Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [43]

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I have 3 questions, I would go one at a time. Could we come back maybe to the slide on Page 26. Just as a bit of a help, are you maybe able to kind of quantify the opportunity in monetary trends for the project that you are kind of highlighting, because, I guess, we see a very different type of carry per kilometer or per megawatt depending on the project? So for us, to have an idea of which type of a pool you're kind of looking at. And based on the comments you've made before around capacity at competitors and so on, does that mean that you think you should be able to get an outside share of the upcoming contract based on that. So that's my first question.

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Christopher Guérin, Nexans S.A. - CEO [44]

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You would have a shop on -- sorry, Lucie. We have more than 100 people connected to the core right now. I cannot discuss concretely which project is the most valuable for Nexans or which project we would like to take a significant share on our price. So I'm sorry, I cannot comment.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [45]

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I'm sorry, that was not my question. My question was whether you could kind of quantify, if you take the pool of projects as a whole, not one specific project. What you see as being the market of the project that you're highlighting in terms of value. So I was not meaning for one project specifically? And then my second question was not on specific projects, what would be your share, but you were mentioning that you think your main competitor is now kind of much more full in terms of capacity. So does that mean that you think you're going to take on the future, in the future, a higher share than your normal share of the market. But I was not talking on any specific project.

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Christopher Guérin, Nexans S.A. - CEO [46]

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No, but when you make the sum from older projects from '20 to '26, you have more or less between EUR 1.5 billion to EUR 3 billion pipeline of projects just for interconnection. You have to add up everything that upcoming in wind offshore farm with a very, very strong demand in Europe, specifically in U.K., France, and the massive demand upcoming in U.S. So the market is buoyant. Certainly, there will be lacking some capacity in different technology in coming years. Cannot comment more, Lucie.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [47]

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Okay. And my second question was, if you could comment maybe on the sequential trend you've seen in Buildings & Territories because we've seen a very steep sequential deceleration in the business. I mean, of course, there was the comp effect, but that seems to be outsized versus the convey. So is that related to price of copper? Is that related to some weakening trend in some markets. Can you give us some color, please?

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Christopher Guérin, Nexans S.A. - CEO [48]

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Yes, will do. So, of course, per geography we have just different dynamically in South America, we will take the opportunity to have Vijay next to me to give him the micro, to explain what he's doing in South America to come on that. We are also pretty dynamic in North America, in South America, in North America. We're gaining strongly in Turkey, and maybe, Vijay, you can highlight that a bit. Europe, in general, is still really very strong. But give us some color, Vijay.

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Vijay Mahadevan, Nexans S.A. - EVP of Middle East, Russia, Africa & South America [49]

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Okay. We are focused in South America and in Turkey and other MERA regions focused on execution. This has been a very strict discipline on a rigorous basis. Weekly follow-up on 3 basic axis: One is on cost reduction initiatives; second is the transformation, what we have been talking about, there is a shift, where it is really 1 of the 2 regions is Brazil and Turkey has been an example for the group. And also, on a selective basis, we have worked on organic growth where, which really clearly focuses on control over our OWCR, and particularly on cash. What we have done here in these countries is, very basically, is that reduced complexity in not only the orders but also in the process, work on a lot of SKU reduction, rationalization. Pricing and scaling rather than growth. What we have worked here is purely on scaling of selective orders rather than working on the general growth in these regions. Discipline in cash and inventory management has been one of the key factors, success factors in these 2 countries. So this is what we have rolled across all South American units, and we are seeing a lot of progress. We do continue this for other members of our units in MERA region and also in South America. So hopefully, this should be our new DNA.

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Christopher Guérin, Nexans S.A. - CEO [50]

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To complement this answer, we see -- if we can summarize why this EUR 28 million EBITDA of contractual growth could not be duplicate again in H2. First, you can see that 1/3 of this value is coming from value burners, which is linked to backlog in 2018. This will not be duplicate because we are working on the attrition on that type of business for them to really focus on the return on capital employed first to really improve their working capital as such. So this part will disappear in the second part of the year. We see as well on the profit drivers in some area, we are taking part of South America or part of Europe or in Turkey that are extremely accretive for our EBITDA. Some slowdown in terms of demand. So we believe that a part of this impact will move into SHIFT because we keep improving our EBITDA in that region, thanks to price and complexity reduction actions. But certainly, in H2 we'll benefit through less growth in B&T sector.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [51]

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And just last question was around telecom. Because you have very different businesses there between the submarine telecom, the land, the more classic businesses, can you comment on the mix impact here. And also, the visibility you have on submarine telecom because historically, that has been quite volatile in terms of a project from half year to half year. So just to have a sense, when we look at the profitability right now and the strength in terms of the organic growth, how is that sustainable? And how is also a function of mix, maybe?

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Christopher Guérin, Nexans S.A. - CEO [52]

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Yes. So we have 3-type business there, let me go to the page, I'm sorry. So we are 3 type of business. We have the land with a very, very low backlog visibility. We have less than -- it's very close to building market drivers. So we have 2 to 3 weeks backlog. So here is extremely difficult to predict the demand for the second semester. We have the telecom infrastructure. We see stable fiber optics. Here, we have a pretty strong vision of the year-end because we have almost all the backlog for second semester because it's linked to contract and goals. And there is a very, very dynamic demand right now. For submarine, still, it's still too early to confirm our H2 turnover, because we are getting some shorter-term contracts that we should have been announcing in coming weeks. But we see, in general, a strong improvement in that sectors. And that's right, that in the last 2 years, it was pretty, I would say, it was a rollercoaster in terms of backlog, but it starts to improve. So in telecom infra to give you some figures in a nutshell. 11% growth year-over-year for first semester. We can confirm a organic growth of more than 20% for H2. So still a strong demand. For special telecom it's 18% growth for this one, and we see for the amount between 14% to 16% organic growth for the second semester. I cannot be more precise, Lucie.

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Operator [53]

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(Operator Instructions) The next question waiting comes from Sean McLoughlin of HSBC.

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Sean D. McLoughlin, HSBC, Research Division - Associate Director of Clean Technology [54]

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Two questions. Firstly, if you could give the regional split of the harness sales. This is much about to previous question, that would be very helpful. Secondly, on subsea, you mentioned offshore wind. I'm just curious, understanding the volume of market you've given here on the list on Slide 26. I mean, how much more is the offshore opportunity. And specifically looking at the U.S., what is your strategy for the U.S.? Are you already bidding on U.S. projects?

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Christopher Guérin, Nexans S.A. - CEO [55]

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So the majority of harnesses business, it's, let's say, what we can say, it's about majority still in Europe, about -- we say more than 50% is in Europe, a big part is in U.S. with the truck market, and the very, very limited part is in China. So that's the reason that, of course, it's not only the volume, there is some cost occurring in the Chinese market, for Nexans. But we believe that we can maintain a resilient profitability up to year-end for our harnesses business. So I would say, no warning on that, a bit like a company like [Forissier] in France that have announced a fantastic result in spite of no growth in the last month. So we believe that we have more or less the same guidance, pretty really on profitability. Regarding high voltage, a bit, Sean, we'll have to keep your questions for the second part of the year because, of course, we are working on strong -- we are today running a strong negotiation for many deals right now in wind offshore. You've seen that Prysmian have close to EUR 200 million with Vineyard. There is a lot of deals to come that has been awarded. If you have a focus in U.S. already, to your question, awarded to offset. We have a massive market share now certainly in the U.S. market, as well Equinor and that was the news on the what which you saw on yesterday. So we are talking with those players. There is as well a big contract in U.K. that are coming into force. So too early to say. I have nothing to announce yet. Negotiations are up and running, and I hope to announce the good news in the second part of the year.

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Operator [56]

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Next question is from William Mackie of Kepler Cheuvreux.

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William Mackie, Kepler Cheuvreux, Research Division - Head of Capital Goods Research [57]

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Yes, thank you for the follow-up. It was relating to the guidance you've given on net debt for the full year. You, no doubt, have very high visibility on your capital investment plans, and you've given a specific on net income. But can you walk through some of the upside or downside risk to your target level of net debt for the year-end. I imagine most of it is based around your working capital and prepayment assumptions.

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Jean-Christophe Juillard, Nexans S.A. - Senior Corporate VP & CFO [58]

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Yes. So you clearly summarized it on net debt is mainly impacted by 2 things in the first half, the working capital, and this is due to the seasonality. As you know, we always have in our business, first 6 months of the year, where we build up more inventory, especially in the first quarter or 4 months of the year. And then that we produce and sell the inventory in the second part of the year. So you've seen the operating working capital change is significant in the first year, but that's not different than the past. So we expect that number to reverse in the second half. And definitely, I mean, there are, obviously, a level of which it could be in-house is starting back and how we are able to also apply the different SHIFT method and the transformation plan to the reduction of our working cap, because this is something we are targeting very significantly. And we are expecting at the end of 2019 to do better in terms of operating working capital on sales. And then we did at the same time of last year. We've seen already an improvement, as you've seen on the slide, that I presented, to 12.4% of sales from more than 13% last year. We want to continue to see that in the second half. So one of the, I would say, impact, I would say, would be coming from the -- our ability to make that happen in the recovery of our operating working capital. I would say, in the CapEx, I mean, it's pretty straightforward. CapEx is also the second, I would say, largest reason of our change in our net debt in the first half, and it will also be in the second half, we'll continue to have high CapEx on the 2 main ones, Goose Creek and the vessel in the second half of the year for the total year of 2 CapEx, we represent EUR 128 million. We are not -- I mean, so far, construction and plan are going on track, and we are not expecting any deviation versus our plan when it comes to construction of those 2 CapEx. But I would say that could be also another risk that we don't see. I mean, I think the rest is mainly our ability to book the remaining contracts that we have and getting like we did last year in 2018, we got EUR 80 million of down payment on the subsea business. I mean, as Chris explained, we are pretty loaded. So that we'll have a high tendering activity in the second part of the year, and we could see more down payment coming also in the second part of the year, or we could also be a timing impact between end of the year, begin of next year. So I mean, depending on how that flows into the year. I mean, you could see some changes here also on the working cap coming from the down payment on subsea business. But I would say, despite -- I mean, on the 3 variables I just mentioned, I don't think there's any other reason why our net debt should be different than the one we announced.

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William Mackie, Kepler Cheuvreux, Research Division - Head of Capital Goods Research [59]

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Was there any change in the factoring program during the year, first half?

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Jean-Christophe Juillard, Nexans S.A. - Senior Corporate VP & CFO [60]

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There's not been significant change in the factoring program so far. We are, however, diligently looking into making sure that we do this analysis on a case-by-case situation and making sure that the group level makes sense financially to do that. As you know, we have significant cash on the balance sheet and the cash we have on the balance sheet is bearing close to no interest and at the same time, we are sometimes spending money and earnings cost into putting some program to improve our working capital. We feel much more that the work is done at the plant level, and we improve inventory, working, getting paid and working with supplier rather than putting some vendor in. However, we'll continue to do it if it makes sense financially for the group, and we have not changed in the first half of the year versus previous periods.

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Operator [61]

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We have no further questions waiting.

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Christopher Guérin, Nexans S.A. - CEO [62]

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Okay. Thank you very much for everyone that been on the phone. Thanks for all your reports, support. So we are very happy for this strong performance. We meet you all in the coming weeks, and certainly for more informations to come in the Q3 or Q4 regarding new contracts. Thank you very much. Bye-bye.

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Operator [63]

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Thank you, both. That concludes the conference call for today. You may all now disconnect. Thank you for joining, and enjoy the rest of your day.