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[January 27, 2014]
Nexans cashes in on growth opportunities in Europe [Oil & Gas News]
(Oil & Gas News Via Acquire Media NewsEdge) NEXANS provides cable and cabling solutions for power, automotive, aerospace, shipbuilding, oil and gas, and nuclear industries. The company's key products include, power network cabling, telecom network cabling, indoor cabling, industrial cabling, and cable marker supply. Strong market position in the international cable manufacturing business, coupled with innovation capabilities and broad product portfolio, offer competitive advantage to Nexans.
However, increasing debt and high trade receivables remain a cause of concern for the company. Nevertheless, growing energy demand in Europe; strong growth prospects in emerging economies; strategic acquisitions; and new contracts provides strategic growth opportunities. Economic scenario, regulatory environment and company's involvement in legal proceedings could offer additional challenges to achieve desired growth, says GlobalData in a strengths, weaknesses, threats and opportunities (SWOT) analysis of the company.
STREMGTJS Product Portfolio: Nexans develops, manufactures and sells a comprehensive range of cable and cable solutions for industries such as power production, transmission and distribution, automotive, shipbuilding, nuclear power, aerospace, airport infrastructure, oil and gas and petrochemicals, material handling, mining, photovoltaic, railway infrastructure, port infrastructure, nuclear, building, rolling stock, telecommunication networks, data centres, local area networks, wind farms, automation, banking, security services and storage area networks. The group is technically capable of handling large project requirements, which helps in generating higher revenue.
Nexans is a participant in major submarine interconnection projects, which include the power link between the Spanish islands of Majorca and Ibiza, covering115 km at a depth of 750 metres. In 2012, it won a contract for a power link between Italy and Montenegro.
In offshore wind power, Nexans is carrying out the cabling of facilities at London Array (630 MW), Lincs (270 MW) and Sheringham Shoal (315 MW) in the UK. It is also supplying cabling for Northwind off the coast of Belgium (216 MW). With a broad range of product portfolio and applicability of products in various industries, the group serves a broader customer base, which helps it to maintain stable revenue streams.
Key Focus Area: Innovation: Nexans leverages its research and development (R&D) activities to gain a competitive advantage in the highly competitive market. The group focuses on developing new materials and technologies related to cables and related accessories. Nexans has over 600 patents under its name. It applied for 78 patents in 2012. It maintains a well-established R&D structure with two broad levels.
At the first level, the groups' four R&D centres undertake upstream research activities in their respective areas in collaboration with external universities and external research centres. Besides, the centres are responsible for developing and fine-tuning new technologies and providing technical support for various activities related to polymers, special enamels for winding wires, plastic optical fibres, deep-sea technologies, advanced metal alloys, and superconductors, among others.
The group has its R&D centres in Lens and Lyon in France; Nuremberg in Germany; and Jincheon county in South Korea. The second level consists of 24 development networks that correspond to the 24 market segments identified by the group with high growth potential.
Nexans ... a leading player in the global cable industry The group incurred €75 million ($101.5 million) for its R&D activities in 2012. Thus, strong focus on innovation provides the group an edge over its competitors and helps in improving its operational performances. Besides, new product and technology adoption strengthens Nexans technical capabilities and provides a source of future revenue.
Improved Financial Performance: The company reported an enhanced financial performance, which reflects its operational efficiencies. For the fiscal year ended December 2012, Nexans reported total revenue of €7,178 million (at current non-ferrous metal prices) (€4,872 million: at constant non-ferrous metal prices), as compared to €6,920 million in 2011 (€4,594 million), indicating an increase of 3.7 per cent. The improved top-line performance was supported by segmental performance which registered sound operational figures. Improved financial performance will help the company to manage working capital through retained earnings besides supporting investments and expansion plans.
Geographical Footprint: The group operates facilities, plants and offices in most of the key geographical markets, which helps understand the local markets and their supply chain. This enables Nexans to quickly respond to market requirements and achieve better customer serviceability.
The group's operational base spans across 40 countries and it has sales and marketing activities worldwide. Nexans benefits from its presence in mature markets such as the US, Canada and many European countries and in emerging markets, which offer huge growth potential.
Geographically, Nexans categorises its operations into five segments, namely, Europe; Middle East, Russia and Africa; North America; South America; and Asia-Pacific. For the fiscal year ended December 2012, Nexans generated 56 per cent of its total revenue from Europe, followed by 15 per cent from North America; 13 per cent from Asia-Pacific; 9 per cent from South America; and 7 per cent from Middle East, Russia and Africa. Thus geographically diversified operations help the group to improve the scope for revenue generation besides mitigating the risk of economic downturn in a particular geography.
WEAKNESSES Increasing Debt: High indebtedness becomes a cause of concern based on the quality of debt raised and the amount of interest paid. For the fiscal year ended December 2012, the company recorded total debt of €1,489 million, as compared to €1,166 million in 2011, indicating an increase of 27.7 per cent. Of the total amount, €425 million falls under current debt; while €1,028 million forms part of non-current debt.
This could impair its ability to obtain financing for working capital, capital expenditure or general corporate purposes, especially if the ratings assigned to its debt securities by rating organisations were revised downward. Also, currency fluctuations also play a major role in debt and interest calculation.
It could restrict the flexibility of the company in responding to changing market conditions and make it more vulnerable during times of slowdown. Another major consequence of the debt is that the company would need to allocate a substantial portion of the cash flow from operations to pay the principal and interest on debt, thereby reducing funds, which could be used for expansion through acquisitions, expansion of product offerings and for marketing.
Increase in Trade Receivables: Trade receivables carry a risk of turning into bad debts besides increasing the working capital requirements which in turn carries a cost component. For the fiscal year ended December 2012, Nexans trade receivables stood at €1,415 million. Although, trade receivables declined marginally by 3.1 per cent but still formed substantial part of company's revenue and current assets. In 2012, the company's accounts receivables formed 38.83 per cent of current assets and 29.04 per cent of total revenue (at constant non-ferrous metal prices).
This shows Nexans carries its business to a large extent on credit. Trade receivables represent the money owed to the company by its customers and needs to be collected based on the terms of contracts. If the recovery time (average collection period) for receivables is high, then the company needs to finance its working capital from other short term sources of fund.
These sources carry a cost component related to finance and interest charges which increases the expense for the company and hence reduces the profitability. The credit sale also carries risk of turning into bad debt. Under both the conditions, the profitability of the company is affected. This will have a negative impact on company's expansion plans.
OPPORTUNITIES Increasing Adoption of Sustainable Technologies: With rising population, urbanisation and industrialisation, the energy demands are rising, but there are major bottlenecks to meet the demand in efficient and sustainable way. Several governments are considering sustainable development as a key goal in ensuring continued growth, while protecting the society, environment and the economy. Industries and several companies are also considering the utilisation of sustainable technologies and resources for future growth.
Aircraft, automotive and rolling stock manufacturing companies are searching ways to save weight, as lighter vehicles consume less energy. Urban transits are opting for advanced train control measures to move passengers faster and safely. Shipbuilding companies are looking forward to reducing their carbon footprint, reinforce safety onboard, and operate in extreme conditions, and port authorities are demanding shore-to-ship power for reducing pollution. Airports are aiming at higher levels of public security and safety, and are upgrading their data networks.
Energy producing companies are aiming at environmentally-safe generation, enhancing transmission and distribution network, preventing blackouts, and incorporating green energy sources using smarter grids. Telecommunication network operators are aiming at transferring data at higher speeds. This provides a huge opportunity for the group's already existing technologies and solution offerings.
Some of Nexans offerings under sustainable technologies include Datagreen cable, a lighter cable for ships, cars, trucks and planes that reduce fuel consumption and greenhouse emissions; Alsecure, a fire safety cable that can be used for sustainable construction; Windlink solutions for wind turbines; Keylios solutions for photovoltaic projects; Hypron, a lead-free eco-friendly cable use in refinery and petrochemical industries; Shore-to-ship power cables, a hybrid cable that provides power to ships for cleaner ports. Thus, increasing use of sustainable technologies across the world coupled with the group's cable and related offerings in the field will further strengthen Nexans as a leading player in the global cable industry.
Strategic Initiatives: In 2012, Nexans made certain strategic investments in the form of acquisitions and new facility development to enhance its operational base. It acquired AmerCables Holdings (AmerCables) in March 2012, for purchase consideration of $275 million (renamed Nexans AmerCables). AmerCables is one of the leading producers of cable in the oil and gas, mining and renewable energy markets.
Its products include mission critical and highly engineered cables for harsh environment. It offers various engineering field and support services. It has strong presence in North America, with growing presence in China, Australia and Latin America. The acquisition will enhance Nexen's capabilities in the oil and gas, renewable energy and mining markets. The booming unconventional oil and gas industry in North America could lead to increase in demand for AmerCable's products, thereby enhancing Nexen's visibility in the continent.
In September 2012, Nexans concluded the acquisition of a 75 per cent stake in a joint venture Shandong Yanggu New Rihui to enter energy infrastructure market in China. In June 2012, Nexans started the construction of its first high voltage power cable manufacturing plant in North America. With an initial investment of $85 million, the first phase of the facility will focus on the manufacture of underground power cables up to extra high voltage (EHV) levels of 500 kV. The plant will begin operation in 2014. Earlier in June 2011, it signed a Memorandum of Understanding (MoU) with Alstom Group for joint venture operations in Morocco.
The joint venture was formed in December 2011. Both parties have 50 per cent interests each in the joint venture, which will augment Nexans presence in the international railway infrastructure industry. Such initiatives will help the company to improve its operational performance and revenue stream.
Connecting Europe Facility: The European Commission's (EU) plan to boost the European networks, transport, energy and digital networks is a major opportunity for the group in the European market. In October 2011, the EU adopted a plan worth €50 billion to strengthen the European networks, including transport, energy and digital networks. EU under the project 'Connecting Europe Facility (CEF)' will finance several projects to integrate and strengthen Europe's energy, transport and digital backbone.
Besides, this project will help adopt greener technologies that will promote cleaner transport modes, high speed broadband connections and facilitate the use of renewable energy in conjunction with the Europe 2020 Strategy. The project will also integrate the internal energy market, and reduce EU's energy dependence and enhance the security of supply.
Under Connecting Europe: Transport, CEF project includes investment of approximately €31.7 billion to upgrade the region's transport infrastructure, and remove bottlenecks. The investment plan comprises investment of €10 billion for transport projects in the cohesion countries, and remaining €21.7 billion for all member states for investing in their transport infrastructure.
Positive European Electricity Market: Electricity consumption levels are rapidly growing across Europe. According to in-house data, in the Netherlands, the total electricity generation is expected to increase at a CAGR of 3.9 per cent. Electricity generation in Austria is expected to increase at a CAGR of 2.6 per cent during 2010-2020. Austria's total installed hydro power capacity is forecast to increase at a CAGR of 2 per cent to reach a cumulative installed capacity of 15,066.9 MW by 2020.
Besides, during 2010-2020, the total electricity consumption of Germany is forecast to increase at an expected consumption level of 599,177.4 gigawatt hours (GW) by 2020, compared to 526,865 GW in 2009. As a result, total electricity generation is expected to increase at a CAGR of 3.9 per cent to reach 949,331 GW in 2020. During the forecast period 2010-2020, the total electricity generation is expected to increase at a CAGR of 2.8 per cent to reach 432,846.1 GW in 2020.
In Poland, due to expected steady economic and industrial growth during the forecast period 2010-2020, total electricity consumption is forecast to increase to 157,347.4 GW in 2020 at a CAGR of 1.3 per cent. Besides, According to in-house data, the UK electricity market is expected to see a moderate increase in total generation during the forecast period 2010-2020 at a CAGR of 2.4 per cent. Such increase in generation capacities would require huge investments on transmission and distribution equipment such as cables and other related equipment.
Potential Opportunities in Emerging Economies: The economic growth in Indian and Chinese markets creates huge opportunity for Nexans. With a population of more than 1 billion each, China and India's infrastructure needs are massive. With rapid urbanisation in these two countries, China and India are expected to spend close to $803.5 billion for infrastructure projects by 2012.
China announced in 2008 its intention to spend $540 billion on its infrastructure needs over the next few years, according to the International Federation of Consulting Engineers (FIDIC). The Indian Prime Minister also declared an investment of $1 trillion on infrastructure during the 12th Plan (2012-17), which would double the current plan figure. The share of spend on transportation (roads, railways, ports and airports), which stood at 33 per cent of total infrastructure spend in the 11th Plan, is expected to double in the 12th plan, and could be approximately $1,000 billion. Brazil also intends to spend about BRL67.8 billion on infrastructure in the coming years.
In February 2012, Nexens was awarded a €5 million contract by Tata Power's Strategic Electronics Division (Tata Power SED) in India. As per the terms of the contract, Nexens will provide specialised medium-voltage and low-voltage airfield lighting cables for Tata Power SED's Modernisation of the Airfield Infrastructure (MAFI) project. Tata Power SED is collaborating with the Indian Air Force for the project. It will supply thousands of cables for 30 Indian Air Force bases across India. Thus, the group could look forward to strengthening its position in these two potential markets.
New Contracts: In 2013, the company was awarded various significant contracts, that will help it maintain its financial revenue stream at par with the previous year. In May 2013, Nexans was awarded a €25 million contract by Subsea 7, an offshore energy utility, to design and manufacture direct electrical heating system for subsea pipelines serving the Lianzi oil field development located between the Republic of Congo and the Republic of Angola.
During the same month, it received a contract by Sinohydro Corporation, China, to supply extra high-voltage power cable link for Ecuador's 1,500 MW Coca Codo Sinclair hydroelectric project currently under construction in the Amazon Basin. In April 2013, the company received a contract from Persada Engineering, Malaysia, to supply an electro/hydraulic subsea umbilical for Sarawak Shell Berhad's F29 field development. It received a contract worth €11m from State Grid Corporation of China (SGCC) to supply a high voltage power cable system.
In February 2013, Nexans was awarded a three-year contract by Portugal's DST Telecom Group to supply an aerial extractable cable system to deploy high-speed broadband fibre to the home (FTTH) in rural areas of the country. During the same month, it signed an agreement with Westermost Rough, London, to deliver and assemble medium-voltage submarine cables for the Westermost Rough wind farm. The order includes 53 kms of submarine cables.
In January 2013, Nexans was awarded a €80m contract by Nalcor Energy to provide submarine high-voltage direct current cable in the province of Newfoundland and Labrador, Canada. The contract includes manufacture, supply and laying of approximately 100 km of subsea HVDC cable and accessories to interconnect Labrador and Newfoundland, which will deliver power from Muskrat Falls in Labrador to the island of Newfoundland. Such contracts guarantee a secured revenue stream for Nexans.
THREATS Environmental Regulations: Nexans is subject to various national and international regulations. One of the key regulations is the European Reach Regulation (Registration, Evaluation and Authorisation of Chemicals). The group must ensure that its products meet the Reach standards. It is involved in the establishment and maintenance of required procedures and practices which suit the regulatory requirements for the purchase of raw materials, new products design, and production and marketing of cable. Any changes in regulation, or the imposition of additional regulations could adversely influence the group's operations and may result in substantial compliance costs.
Economic Slowdown: The company could face several challenges due to global economic slowdown. Its operations are subject to the effects of global competition, geopolitical risks, economic environments, including inflation, recession, currency volatility and actual or anticipated default on sovereign debt. The global economic downturn and the uneven recovery are likely to pose challenges to the company in the next few years.
The global recovery is facing challenges related to tough economic environment in the Euro area and weak business environment elsewhere. According to a recent forecasts published by the International Monetary Fund (IMF), global economic performance is set to rise by 3.5 per cent in 2013 and 4.1 per cent in 2014. In industrial nations, macroeconomic growth will remain modest at around 1.4 per cent crease in tempo to 2.2 per cent in 2014. In the US, overall growth of 2 per cent in 2013 will be weaker than in the previous year.
Within the Euro zone, negative effects from southern Europe will continue to hamper development, resulting to a 0.2 per cent decline in economic output for 2013. An increase of 1 per cent expected in 2014. According to the German Institute for Economic Research (DIW Berlin), the German economy is only due to expand by 0.9 per cent in 2013 as a result of a weak start to the year.
The Austrian economy is expected to recover over the course of 2013 and 2014 after the period of stagnation in the second half of 2012. It is likely to achieve real growth of 1 per cent in 2013, rising to 1.8 per cent in 2014. Growth in advanced economies is expected to be lower, mainly due to adverse spillovers from the Euro region. Such sluggish economic growth could constrain some of the group's operations.
Involvement in Legal Disputes: Nexans is involved in various legal disputes with regard to regulatory, product, contracts, technical and other commercial disputes. Involvement in litigation adds to costs, which could have an adverse impact on the operations and financial position of the group.
In July 2011, Nexans and its subsidiary Nexans France SAS were served with a notice related to anti-competitive behavior in submarine and underground power cables sector from the European Commission's Directorate General for Competition. Nexans is also facing similar investigations by the Competition Authorities of the US, Brazil, Canada, Australia and South Korea.
The group created a provision of €200 million for the fines expected to be imposed by Directorate General for Competition. In 2012, Nexans provisions stood at €232 million, as against €229 million in 2011. Involvement in litigation could impair company's financial position if any significant fine is imposed.
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