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

Ladies and gentlemen, welcome to Mersen's 2025 Full Year Sales Presentation. [Operator Instructions]. I will now hand over to Mrs. Boca. Madam, please go ahead.

Good morning, and good afternoon to everyone, and thank you very much for joining us today. For your information, this call is being recorded, and a replay will be available on the Investors section of our website at the end of the call. So as it has just been mentioned, a Q&A session will occur after the end of the formal present today with Luc Themelin, our CEO; and Thomas Baumgartner, our CFO. I will now turn the call over to our CEO, Luc Themelin.

Thank you, Veronique. 2025 was a busy year, marked by a contrasting global environment. And we can say that Mersen delivered a solid performance under these conditions. 2025 was not uniform year across our markets, but it was a year that clearly demonstrated the resilience of our portfolio and the relevance of our global and diversified footprint. Reported sales for the full year reached EUR 1.186 million, representing an organic decline of 3.2% which is at the high end of the guidance we communicated in October. We faced strong headwinds from exchange rates with the U.S. dollar and RMB representing 2/3 of the total exchange rate impact. I would like to stress that these are only conversion impact as the group is global with an industrial presence where it sits. Throughout the year, we achieved strong momentum across several key markets, wind, energy storage, power electronics, aeronautics, rail and electrical distribution to name the most important. This helped offset the weakness in the solar and silicon carbide markets that have already commented on in previous calls. I will now turn over to Thomas, who will go into more details.

Thank you, Luc. Hello, everyone. So as you can see on the slide, the sale evolution over the year was impacted by several factors. So the first one is currency effect. As Luc mentioned, the depreciation of the Chinese renminbi and U.S. dollar to name the most important ones had a significant impact on the reported figures amounting to approximately EUR 40 million for the full year. This was partly offset or totally offset by the scope effect. Scope effect reflects the contribution of the acquisitions made in 2024 in the U.S. and also compensated by the pricing power, we reach to increase the price by 1.5% -- the effect is 1.5% for the full year. Regarding the business performance, we had a strong commercial successes in a number of markets, we will come back to that later on. And conversely, softer market conditions in solar and SIC semiconductors mentioned by Luc earlier on. So all in all, we reported a full year sales of EUR 1.186 billion, and now you can see markets by markets, what happened at our first -- my first comment is to say that our diversified end markets provide us a good level of stability, and we could compensate a decline -- a sharp decline in solar and SIC semiconductors. As you can see, we had a positive momentum in other markets fueled by strong drivers, as mentioned on the slide, first, stable and solid growth in wind and energy storage. We benefited also from a return to more stable condition in the SIC semiconductor markets with the second half of the year, much stronger than the first half. We benefited also from a strong growth in power conversion, supported by significant contracts for HVDC lines, underlining our positioning in large-scale grid investments. We had also a continued growth in -- and strong growth in aeronautics and rail. We see also some stable markets are typically EV markets. We had -- which was stable, reflecting 2 opposite, I would say, trends. from one hand, growth in vehicles. And from the other hand, decline in charging infrastructure. And then we benefited also from a very strong year in electrical distribution. So many, many markets doing well in growth, from all what I said, it represents almost 60% of total sale, the rest of the remaining part concern process industries, chemicals and conventional energies, which were globally flat compared with the last year. So if we break down this performance by geography, I will start with North America because it's by far the largest area in terms of revenue. As you can see, we were resilient with a growth of 0.7% despite the very weak demand for SIC semiconductors. On the other hand, Asia suffered from a decline of 13%, the region was strongly impacted by the solar market in China and weak deliveries in chemicals. And in the middle, I would say, Europe, the decrease is a combined but limited decrease is a combined result of strong performance in HVDC lines, aeronautics and rails which was more than compensated by wind markets in process industries, SIC semiconductors mostly. So if you -- we look now by segment, starting with Electrical Power. This segment experienced growth throughout the year with very strong drivers being rail, wind, power conversion and electrical distribution in the U.S. On the other hand, you can see that Advanced Materials segment is in decline, affected by a sharp drop in solar and SIC semiconductor, as already mentioned. We had also but to a limited extent, a small decline in chemical and process industries, which was in line with our expectation. And this was to a certain level compensated by dynamic markets such as aeronautics, wind and rail. For the fourth quarter, we experienced a minus 0.5% organic decline compared to minus 4% in Q3. So it's a significant change. This translates into a 2.2% sequential improvement in Q4 compared to Q3. We had also this quarter impact of exchange rate, which was more significant, I would say, this quarter than before, amounting to minus EUR 18 million. Just to remind you, the dollar against euro was at [ EUR 1.05 ] at the beginning of the year. And it was an average of [ EUR 1.13 ] over the year, and I would say, almost [ EUR 1.16 or EUR 1.17 ] in the last quarter. More generally, dollar was the most significant impact, but we were also impacted by the appreciation of euro compared to most of the currency. If we look at the regions, Europe had been quite resilient this quarter with good momentum in chemicals, grid, wind, aeronautics and rail that compensate for the decline in semiconductors. North America performed well with a growth close to 3%, especially thanks to electrical distribution still very strong. By segment, electrical power performed well over the period, thanks to a strong momentum in both power electronics and electrical distribution markets. Advanced Materials sales were down by 6.6% of the quarter with strong growth in wind power, aeronautics and rail markets, but still a sharp decline in solar and SIC semiconductor markets, I would say, less SIC semiconductor market this quarter compared to solar. I now turn over back to Luc.

Thank you. Now for the full year, we can be more specific. Current EBITDA margin remained at around 16%, similar to what has been disclosed in October. Current operating margin will be around 9.2% in the mid-range of the guidance disclosed in October. And finally, we have managed to reduce again the CapEx level, which will end up being around EUR 135 million. I would like to conclude with a few words on 2026. You know that we will disclose our full guidance on the 18th of March. So we will not answer precise question on guidance at this stage, but I want to underscore an important message. We are focused on CapEx discipline as was the case in 2026 already. We will continue to reduce CapEx in 2026 and this should bring free cash flow back into positive territory in 2026. All the elements we have discussed today are fully consistent with our 2029 road map despite the challenging and uneven market environment. Our strategic priorities remain unchanged. Our road map is built on the structurally attractive end markets such as electrification, energy transition, clean mobility, grid reinforcement and advanced technologies, which will continue to drive demand over the medium term. Our margin ambition are based not just on market condition, but also on the key levers at our disposal, pricing discipline, portfolio mix and operational efficiency. Moreover, we are also focused on being selective in our CapEx and disciplined with working capital to improve free cash flow. Taken together, this gives us confidence in our ability to deliver on our 2029 ambitions.

So if you have questions, please it's the time for questions.

[Operator Instructions] We have a question from Thomas Renaud from Kepler Chevreux.

Okay. I will go with the question that we have received on the platform. So the question is, are you still -- are you present, sorry, on the data center market? And what is the level of sales in this particular market?

The answer is quite difficult to give you in a precise way. But yes, we are because we have customers delivering the data center in terms of electrical protection. It's easy to find through the distribution. And indirectly, as you know, there is plenty of electronics, power electronics in data center. We are in, but it's more difficult to identify. And the trend on this market is easy to see, I would say, since 2 years in our fuses business and it's still good. I would say '26 will be nice as well.

It explains partly the growth we had the very, very good staff.

In North America.

Yes. Yes.

So one other question. One other question is, can we expect a rebound in SIC in 2026 and the same for solar?

We don't expect a big move in silicone carbine in '26. We see more something happening in mid '27 at this stage of our knowledge. Solar is more difficult to answer because there is a situation in China, not easy to understand. You -- I guess you read already some results from some Chinese company like Lanjing. They are not in good shape. They are not profitable. It seems that the -- again, this market is a trying to be reorganized by the Chinese administration soon. We will see, but we don't expect something extremely booming in solar this year.

So more question, and I will read because it's quite long question. So NVIDIA and ecosystem partner are transitioning data center power distribution to 800 VDC architecture to support megawatt scale AI racks starting in 2027. How is Mersen positioning its product portfolio, particularly liquid cooler busbars, power distribution blocks and cooling distribution unit to capture this opportunity. More specifically, are you currently engaged in design win process with hyperscalers or Tier 1 OEM for 800 VDC infrastructure? Can you quantify the potential revenue opportunity per megawatt of installed 800 VDC capacity versus traditional 54 volts 400 VAC architecture. What is your expected commercialization timeline? And when do you anticipate meaningful revenue contribution from 800 VDC-related products?

The question is coming from Mr. [indiscernible]. We need to hire you because you are extremely good in your question. First, on the power conversion in the data center, I think we will cover this new, I would say, specification. I don't think that we need more liquid cooling busbar or cooling device in this case than before. About the question about the voltage and the fact that they will move from AC to DC, it should help a little bit the fuse technology because the breaker at this time cannot really cut the current in the DC shape. But as well because we see NVIDIA on your question, people are working on solid-state breaker and it's more in the end of company like Schneider, but we are quite happy not only on data center to see the direct current coming in our market because it's more interesting [indiscernible] but in short because...

So now we have the question from Thomas Renault that he was not able to ask his question directly. Could you share with us the group like-for-like performance in Q4 excluding the solar and SIC markets?

So yes, in the Q4, it was between 5% and 6%, I don't have the precise figure. In H1, if my memory is correct, it was 3%, something like that. So yes, far better than in Q1.

So any reason why the operating margin is expected to be at the low to mid-range of the guidance while like-for-like growth came in at the top end? Is this driven by potential FX effects?

In fact, when you remember, we changed our guidance offsets at the beginning of the -- in October. We didn't change the operating margin, which was large, in fact, and we are in between -- so in fact, this is totally consistent with the fact that we have lower sales than that at the beginning of the year. We have a better margin. We have the midrange of the margin. So we are -- we have better -- we are resilient in margin, and this is especially due to the fact that we have lowered the CapEx, so we have lower amortization.

Could you elaborate on the dynamic in the process industry in Q4? And how you see this segment evolving in 2026?

Q4, it was a little bit different between the electrical power, which was really tremendous, very good, I would say, especially but we said data center typically. And it was less -- it was not so good in advanced materials segment, however, not so bad as well. It's difficult to predict in 2026, why? Because it's driven by the macroeconomic by the industrial GDP. And as you know, in electrical distribution, even if the trends in more electrification, more grid storage, et cetera, you need more electrification. So typically more of our product -- we know as well that electrical distribution, the time to market is quite between the order and the sales are quite quick. So it's a bit difficult to predict today. It's -- I can't say more. Maybe we will say more in March.

So now we'll go with the -- I think there are some questions on the phone, if I can say.

So now we have a question from Giovanni Selvetti.

I think I missed the first 5 minutes, so maybe you already said that. But I have 3 questions. The first one is that if you can, in a way, break down this price increase across division? Is it mainly price increases in electrical power or is it across the all firm? The second question is, if I look at your slide, I can see that the silicon carbide accounted for 5% of total sales in 2025 which means basically EUR 59 million, which would imply a fourth quarter of EUR 20 million, which is quite above what you reported in the past quarters. So I was wondering if you can explain why it have kind of accelerated in Q4? And what is a rough range we can expect for 2026? And the last one is on CapEx. Is this reduction in the CapEx related to, let's just say, a growth that is lower than what you had in mind? Or it's just because you think you can deliver the same growth with lower CapEx needs?

Okay. I will start with the price and the pricing. It's more important in electrical power than in Advanced Material and more important in the U.S., as you can imagine in Europe and in Asia. And in fact, you certainly note that we have -- the pricing is -- the pricing effect is more important in Q4 especially because we have some tariff, but it's limited and we totally covered this tariff increase by pricing. That is first question. The second one...