Mersen S.A. (CBE.SG) Earnings Call Transcript & Summary

Can you hear me okay?

Yes, we can hear.

As far as the process industry is concerned, what is your -- what are your perspectives? What is your outlook? I know that sometimes you tell us about your backlog. Is your backlog consistent with the past? And how do you see your backlog on electrical distribution? And I also have 2 questions on growing markets. You talked about ACC deliveries. How much are we talking about by the end of this year? And how much -- and how does that compare to your initial expectations? And as far as contract renegotiations with customers, could you tell us about Soitec and Smart chips because that seems to be on hold.

Well, as far as price effects are concerned, it's 1% on the 2 semesters, no real changes. As far as EP is concerned, I think that's a very good question, especially a couple of months ago, maybe a bit less today. Electrical distribution progressed significantly with a strong backlog. And of course, things could change. But there are no tariffs that apply to products coming from Mexico. We think, as we said before, there were a lot of orders post COVID. We struggled to deliver. then orders declined. Things are now picking up again. We're back to better order levels. That's what I can say. And I can pick up on the other questions. I took some notes. I noted your questions. On the process industry, it's a bit less than last year, even though levels are still quite good. As far as electrical distribution backlog, it's not very high currently, but the dynamics are very good. North American electrical distribution orders are good. As far as ACC is concerned, the forecast at the beginning of the year, the one we decided to keep. We're going to be multiplying the speed of production by 10. So ACC's perspectives are the same, and we maintain them, especially in October, November and December. SmartSiC and SiC, there is no reason for Soitec to go faster than the SiC overall market. They're all produced for electric vehicles. Demand has declined. We explained this last year. Smart is following that trend. We have a question from BNP Paribas. Can you hear me? Yes, we can hear you. I have 3 questions. First question on electrical vehicles and SiC. Generally, you give us some guidance about the -- or breakdown of sales for those segments. And then as far as electrical power is concerned, you talk about a negative mix effect. Electrical distribution did well. I'm not sure I understand where the negative mix comes from then. My last question has to do with your guidance. You're towards the high end of MA for H1. Why are you not increasing your guidance for the full year? Reported sales guidance, looking at the current ForEx. Why are you confident to keep your reported sales guidance? Does that mean you expect to reach the high end in terms of organic growth? Well, EUR 25 million in solar in H1. SiC a little under EUR 30 million. We did EUR 11 million in Q1, and the last one is EUR 15 million. So that's to your first question. That's the breakdown. I'm not sure I understand what you mean by negative mix. We had a decline in sales in markets where we had very good margins, solar and SiC. And on electrical power, we had a rebound of U.S. electrical distribution in Q2. Q1 was a bit weak. So we have an excellent trend. But for the full half, first half, H1, it's a bit weak. And sorry, I forgot your last question. The last question was on guidance and the expected margin. You said between 9% and 9.5%. Why not more? The impression is that H2 is looking quite good. Why not a bit more? Well, amortization primarily, we're investing quite heavily. So the amortizations are going to increase. Okay. How about sales? ForEx should be less positive. Are you maintaining your reported sales? And -- do you still think you would be at the high end in terms of organic growth when the reported sales should be stable or positive based on foreign exchange, which back then was much better. If we take today's ForEx and we compare it to the foreign exchange we had when we published our guidance, -- there is a EUR 50 million gap. When we published the guidance, it was EUR 105 million, and that's what we said. It's -- right now, it's at EUR 115 million or even EUR 117 million. So our guidance remains the same. It says based on the ForEx of that time, sales will be stable or positive. We talked about the positive organic effects. There is some uncertainty around the process industries. That could be the tariffs, which are not going to impact us directly, but they're going to have an impact on overall economic growth. And solar is eventually going to pick up again. We're still not seeing this in orders today, but it will eventually come. So we decided to stick to our guidance. Question from Jean-Francois Granjon with BHF. You mentioned the contract, EUR 35 million contract. What does that represent? How does that compare to the rest of the backlog? And how is it going to contribute to growth? You said this is a very buoyant segment. Second question, -- the margin of Electrical Power has been very good. I'd like to understand -- you mentioned the difference of plus 8%. Things were stable at the beginning of the year and really picked up. How do you explain this? And what are the trends for H2? And I'd like to come back to Jeremy's earlier question. If we make the assumption that H2 -- I heard what you said about amortization, but if we assume H2 will be better than H1, we could be above 9.5%. This is not to be outruled. I'd like to hear you on this. As far as free cash flow, we're seeing negative cash flow for the full year, but positive cash flow in H1. Do you think we can expect to come back to positive cash flow before the end of the year? Well, No, it will be negative for the full year. And sorry for disappointing you. Cash flow has been good. But we spent EUR 65 million in industrial CapEx. We said the target was between EUR 160 million and EUR 170 million. So we have an additional EUR 100 million in CapEx to come. We have the adaptation plan we have to pay for. We have the dividends to pay out. So all in all, I guess my answer to your question is that our debt is going to further increase in H2, but less, less than what we thought at the beginning of the year. Thomas explains the very good performance of electrical distribution. Historically, margins are good. There are 2 business units. The second business unit is power electronics. And there were some productivity pockets which we were really able to improve, which much, much better profitability on some products and locations. There's still some work ahead, but I think we've really made some substantial improvements and margins today are very good, really very good. GDC contracts on this slide, as you saw, we had EUR 35 million of outstandings. This covers the 2 years to come. So that gives you a bit of a flavor of how much that represents for the company. And 4 years ago, it was 5. So we don't really know where we're going. There are some periods where we have very big contracts and other periods where we have -- well, we don't. But I think that on average, things are going to continue and grow. Electrical Power is growing in H1. My impression was you were saying the opposite, Jean-Francois. It was flat in Q1, but up in Q2 with more GDC contracts more in Q2 than Q1. And it was a rebound in electrical distribution. It was negative in Q1, and it became positive in Q2. So sequentially, Electrical Power has really made nice progress. And we're today nearly at 4% growth in terms of reported sales, which also explains improved margins for H1. I heard what you said about the margins. So do you think we could still be slightly above 9.5%? Well, we're maintaining our guidance. And we -- as I said before, we still have a lot of investments in H2. So amortizations are going to significantly increase. So we have no reasons to change our guidance. What's the EV sales for H1? Could you -- about EUR 15 million. We have a question coming from English from Mr. Giovanni Selvetti.

Can you hear me? Yes. So I have 2 questions. The first one relates to silicon carbide. You say that you expect an improving number of deliveries in H2. I was wondering if it's more deliveries with the same customers or if you're expanding the customer base? And the second one is really that if we look at the profitability of the Electrical Power division, it's historically high. And I was wondering if you think you can keep the same margins in H2 and in the years to come.

So I'll pick up on your second question. I'm going to answer in French. We have interpretation into English. So yes. We don't give guidance by division for the half year. We give an annual guidance, nothing more. And what I can say, however, is that for Electrical Power, we have additional areas to improve our profitability as we move forward. On EV, for example, we're still negative in terms of margin because we haven't yet reached the expected volumes to cover the costs of the teams that are working for us today. But moving forward, Electrical Power can continue and improve its margins, but that's a global trend. As far as silicon carbide customers, they are always the same. We have no significant newcomers, significant or nonsignificant. The customers we serve are the same ones and demand varies with ups and downs. We know them all. That's the same. We have no additional questions, audio questions. We do have questions, however, that are asked on the chat. We have one question on the chat on mergers and acquisitions. Are you looking at any external growth opportunities in the U.S.? The answer is no, not at all right now. We said no additional acquisitions in 2025. Next question, following the Paris Air Show, what have been the contracts yielded? Well, the Paris Air Show is not a show where you pick up new contracts. There are big announcements, contract announcements for Airbus and Boeing, but we meet with our customers on a very regular basis like Safran, Liber and that's where we discuss our future. But we don't specifically sign large deals during the Paris Air Show. The Paris Air Show is an opportunity to meet with potential other international customers. Our footprint is so global that it's mainly an opportunity for us to meet up with customers. Again, trends -- overall trends are good. Next question. What is your business potential in defense? Well, it's a bit complicated. We deliver parts on the Rafale aircraft. 2 aircraft per month are produced soon 3, but we have interesting perspectives for the years to come. We're talking about EUR 50 million worldwide for that segment. Information is not always easy to collect, but that's roughly the number. Maybe EUR 100 million in 5 years, but I don't really know and have any specific details on this. But the trends are looking quite promising. I have one question on silicon carbide. If the silicon carbide market were flat in 2026, would you be able to redeploy capabilities elsewhere? Well, we expect 2026 to be not a huge market. As we said last year and the beginning of this year, we expect things to really pick up towards the end of 2026, but mainly in 2027. We have a lot of capabilities to address the SiC market. We don't have any technical issues. What we need is a market. It's a product which is very much very similar to others. So the investments in SiC can be used in other applications, but we expect -- we would want the SiC market to pick up. One question on CapEx and investments. What are the big investments ahead of us in what geographies and what segments? That's a tough question. We're closing our EUR 300 million investment plan for SiC and electric vehicles. most investments in the U.S., some investments in Europe as well and a bit less in Asia. Let me remind you that our geographic footprint is such that we produce where we sell. So we're able to address local markets. We invested significantly in India, for example. And in the future, we will invest where necessary, wherever there is growth. Our #1 market in terms of sales is the U.S. So I guess, for that reason, we're likely to invest more in the U.S. Here it comes a general question. What is your market share? And what are the trends, market share trends? Well, we're in multiple markets. graphite, I think we're #1 in terms of size. It depends on geographies. I think we think we have between 30, 35. The average, it's probably 25. On the Electrical division, it's a bit more difficult. We make fuses, but we have big competitors in the U.S. I think we're #2 market share probably in the vicinity of 30%. In Europe, things are a bit more fragmented. We're we have significant market share and in power, we're #1. But again, the market there is also very fragmented, also fragmented by geography. So I think we're probably talking about 15% market share. As far as adding market share, I think we were able to capture some growth more than our competitors because we're in the right location. We have competitors who are very good in Germany, very powerful in Germany, but they're not really benefiting from the U.S., India or Korea. So I think that worldwide, we're picking up more market share than some of our competitors that are more regional. What I would like to add to that is that the reverse of that is that we invested a lot in our graphite production capabilities. What's impacting our profitability and operating margin, mainly because of amortizations. -- when things pick up again, then we will be in a much better position to gain additional market share because some of our competitors will, at that point, really be lagging behind in terms of investments and catching up will take time. We have no further questions on the chat at this point. And we have no additional questions on the phone. In that case, ladies and gentlemen, I would like to wish you a wonderful summer. We will see you and speak again on October 23 for the Q3 results. Bye-bye now.