Mersen S.A. (MRN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the presentation of the half year results of Mersen. We are here with Luc Themelin and Thomas Baumgartner. I'll hand over to Luc Themelin.

Hello, everyone. Thomas Baumgartner and I are happy to be with you today after another solid first half of the year. So I'll start by giving you a presentation of the period. And then, of course, Thomas will be giving you financial information. And then I'll come back to conclude with some of the challenges for the rest of the year. So as you can see here, Mersen managed to put solid results in spite of the complicated context, especially in the second quarter. Our sales are EUR 430 million, with a drop contained at 11%. EBITDA margin is indeed down from last year. But came in at 14.4% of sales. And we have a solid natural situation with leverage at 2x EBITDA. So during this period, Mersen's team mobilized to ensure continuity of business, it was a very exceptional situation, particularly in the early moments of the lockdown. But 85% of our sites were operational. The remainder were impacted by local government decisions, but most of those were temporary closures. We hit the peak of the crisis in April and May. It was in April and in Europe, with sales down 30%. Then in May, in North America, down about 35%. As it concerns payroll, we benefited from furlough measures in quite a few countries, particularly in Europe, France and even in the U.S., there was some support. 10% of our employees were put on furlough in April and May. Now some countries, such as Mexico, where we have a very good plant there, also in India, well, there was no payroll release measures for employers and this particularly hit the electrical power division. And I'll say more about that later. So we very quickly put in place strict operational cost control measures. So the last EBITDA margin remained above 12.5% of sales, even at the height of the crisis. So here, you can see a comparison of the figures. And so we entered the crisis in a strong position. And a lot of good results we're showing today are thanks to that work that was done beforehand. So you can see the free cash flow, the operating income. So during the previous years, our position has also evolved with half of our activities focused on sustainable development markets and renewable energies, green transport and energy efficiency, thanks to more compact and faster electronics. So these markets represent the future for our growth, and we'll say more about that. Another important point in this context of crisis and price wars is that we have factories placed in all industrialized countries of the world. And so we are producing locally without too much interdependence across geographic zones. Okay. So now I will hand over to Thomas, who will give you the financial performance details for the first half of the year.

So as you can see -- thank you, Luc. So -- and I'm Thomas Baumgartner. As you can see, we have first quarter down by 9%, like-for-like, the crisis were very hard in April and May, an organic decline of [ 23% ]. And in June, the contraction was contained at 6%. So overall, EUR 430 million, that's a 13% drop from last year. Now if we look at -- we look at our 3 geographic zones. We have an organic decline in Europe, that you can see on the screen. This was due to lockdown measures and the economic slowdown. For Mersen, the hardest hit markets were aeronautics and process industries. In North America, the decline there was also tied to a [ comparable ] basis. Also, the situation declined further in the second quarter, particularly for process industries. So Asia held up the best. In fact, with a 3% drop. And you can also see the work that we managed to [indiscernible] up in renewables in India. However, the lockdown was very strict there. And so things have turned around in spend, though. So here, you can see the drop in volume, the greatest impact in this context. However, there was a favorable price effect, particularly in Advanced Materials and a positive scope effect tied to acquisition of AGM Italy and GAB Neumann. If we look at operating margin, we've got 8.1% compared with the 11.1% in 2019 for the same period. So the margin, of course, was highly impacted by the drop in volume. Nonetheless, the group managed to adjust its cost quickly by putting in place strict controls on operating costs and using flexible work schedules in some countries. Now there were some cost overruns due to precautionary health measures, purchase of productive equipment and some higher logistics cost, but this was contained at 1% of sales. So overall, the impact of COVID as can -- if we look at the [ flexport ] measures, minus the overruns, in fact, it's 0.3 margin points. So that was well contained. There was, of course, work on productivity. We had a good price effect. And so overall, we had to -- we managed to also contain other costs. There are no bonus provisions and other spending. So let me look now at the different segments, starting with Advanced Materials. You have EUR 31.7 million, with operating margin at 12.8% of sales compared with 15% last year. Obviously, there's the favorable volume effect with sales down by 14% like-for-like. But we were able to adjust the cost and benefits from a favorable price effect. Now if we look at Electrical Power. We've -- here, you can see EUR 11.3 million operating -- with operating margin at 6.2% of sales compared with 10% for the first half of 2019. So of course, there was also a sharp drop in volumes. Also, there were development costs tied to electric vehicles that were higher than the previous year. And it was also more difficult to adjust costs. Due to temporary closures of the factories in Mexico, India and [ Indonesia ] without any payroll relief from those local governments. And price effects here were in fact neutral for the period. So overall total net profits are EUR 18 million. This includes nonrecurring charges and a tax rate of 25%, which is close to last year's rate. Now let's look at cash flow, which was very good, in fact, higher than the first half of 2019, even though we had to build up safety stocks to weather the crisis. We also continued our investment program, especially at the Columbia site, which is very important for the future of the group, as you know. We did however -- to reschedule our investments further down the year. And so for this year, it will be cut back for the year. And so you can see the investments of about EUR 15 million. So it's about a 20% reduction for the year in investment spending, but those will be continued next year. So we generated free cash flow even in this difficult first half of the year. And I'd like to remind you that we do always have a significantly higher cash flow in the second half of the year for various seasonal reasons. So let's look at the debt situation. At EUR 228 million, this went up a bit, primarily due to acquisitions, GAB Neumann. And also buying back certain shares as well. Here, the leverage is at 2x EBITDA. Even with the satisfying figure, even though it takes account of only the first half of the year for the EBITDA. So this means that we have a solid situation, that allows us to move forward with a positive outlook. In terms of financing, the group situation is robust, with maturities at 4.5 years, no major debt maturities until November 2021. And we have EUR 220 million in cash and credit lines. So that gives us plenty of flexibility. And so now I'll hand back over to Luc Themelin.

Thank you, Thomas. So first of all, I would like to talk about our teams who are mobilized, we're very proud of how they mobilized to deal with the crisis. This has to have been one of the most challenging events we've ever had to deal with and every country had very different situation, putting in place -- that allowed us to comply with all the local measures for lockdown and workaround. So we put together a crisis management team to monitor the situation, but the local teams were very efficient on a day-to-day basis. And so the operational side just demanded a great deal of mobilization. But of course, our very first concern and priority is to protect the health of our employees. So some were put on furlough. So we had to adapt this to each local situation and personal situations. And the group also topped up the salaries for some of those, and particularly fragile situation. In France, there were are also bonuses for those who continued working at the very beginning of the lockdown period. So these were very particular conditions, and we tried to back them up with the necessary support and extra training. We also implemented cost control measures, mostly consisting of adapting our production capacity. Of course, our indirect cost, we reduced our travel, which is normal, of course, but we also reduced other expenses such as consulting fees. But there -- we did not incur much extra expense for adapting to the crisis. And of course, kept an eye on the cash flow. So we revised our CapEx plans by postponing certain items, so there -- but there were very few outright cancellations. So these are all important projects for the future of the group and to preserve our market position now. So these projects concern our promising markets in sustainable development. As you can see, they are also the ones that help the best during the crisis, it's only a 3% decline for the half year compared with 20% drop for other markets, which are harder hit, such as chemicals and process industries. So now it's time to prepare for the future. Our road maps for each segment are still present. They're very much focused on growing sustainable development markets backed by local production capacity. In Advanced Materials, the ramp-up of the Columbia site continues and is even gaining momentum. So you probably saw our announcement about the acquisition of Americarb. So that represents $6 million in assets acquired and that will allow us to make insulating felts in the U.S. So this will strengthen our position on the semiconductor and energy efficiency markets in the U.S., which had been supported by our Scottish plants until now. So at the same time, we are cutting about EUR 2 million in investments that had been planned for Scotland. So this means we will be producing locally for the American market. We will also continue to modernize and expand our factories in Asia, particularly for the solar and semiconductor markets. So this will include some transfers of activity. In Electrical Power, we're continuing the integration of our acquisitions in 2019 with focus on developing our customer base and industrial efficiency. And we've already achieved some progress there, and we're obtaining customer certifications for the electric vehicle market as well. So this is also where we are launching new products. And it's true that we have -- we continued our intensive work for the electric vehicle market even during the lockdown period, thanks to our R&D teams. Of course, there are still quite a few uncertainties ahead. We're paying very close attention to the evolving health situation, particularly in those countries and regions where the virus is still spreading, the United States, amongst others, and India, to keep an eye on the situation there. And we also need to keep a close watch on the markets that are hardest hit by the situation in process industries and chemicals. Now there are -- some major recovery plans have been announced, particularly in Europe, that we hope will help sustain the level of demand. So we need to position the group for the post crisis of course, and prepare various scenarios for the following year. But our road map is clear for our development, and we will stay on that path. So this is with a real focus on [ sustainable ] markets, local markets and being more efficient. So it's very important to align Mersen with a green gross strength in local production capacity, as I said, and making our sites more efficient and competitive. There's still some work to be done on some of those sites. And so of course, on this path, we will be very attentive to the pace and direction of the economic recovery so that we can continually adapt our investments so that we can tackle 2021 under optimal conditions. So those are the main points of our presentation. So now Thomas and I will take your questions. I'm sure you have questions.

[Operator Instructions] We have a question from Yann Peyrelongue from Portzamparc.

I have several questions. Could you tell us about business in July? And in particular, those sectors that have been the hardest hit such as process industry? Secondly, on mergers and acquisitions, are there any new opportunities in view? And then the price effect question on prices. Could you tell us a bit more about that and the sequencing? Is it mostly in the first quarter or spread across the half year? And then you -- and what's net debt to EBITDA. So what leverage do you expect by the end of the year?

Okay. Well, Thomas will start with some of the financial aspects that concern price.

Okay. There was some full year effects from the previous year. And so some of which became neutral. So we didn't -- it's not that we raised prices, but we're benefiting from raises of the previous year, all right? So we're not giving guidance, right now. But cash flow is generally higher in the second half of the year. And we did -- well, so it's really going to depend how the health crisis evolves because we have built up those safety stocks. So we have to see how things evolve. And also, there won't be no dividend payout. And so we said, well, the investments are being spread across okay. So Luc Themelin?

Now there was a question about mergers and acquisitions. We don't have any plans for the second half of the year. It takes time, first of all, to integrate the most recent acquisitions. And so we have this very important project underway of [ transcontinental ] activities from Scotland to Columbia in the U.S. In July, you asked about July, it's hard to answer. We can say that the -- on the American side, things are working [ sparkingly ] well. But June, July, we're seeing a recovery, but I certainly -- so it's neither euphoric nor depressing outlook. So it's -- we -- what we do need to keep an eye is the block book of orders.

So you're not saying you entirely recovered the decline? Or would you expect to see that continue in the second half of the year?

Well, June, of course, we were still seeing some emergence from lockdowns, the economy isn't operating at full regime, although we are seeing recovery. But for July, it's [indiscernible] our months of July are sometimes rather middling, okay? But I don't have the figures yet for you for July. We expect that it will be a decent month. No more than that.

Okay, we did recover quickly in China, though. But it hasn't been so energetic in our other geographic zones.

We have another question from [ Gilbert Jipaum ] Company.

I have 2 questions. First, the effects on margins. So you've optimized your cost structure. Could you give us an idea of the split? Between, okay, what are purely mechanical reduction in costs and those that you expect to see continue. And your ambitions, you were talking -- you had talked earlier about growth in silicon carbide applications and solar. Can you give us some outlook for the coming years? And that you were expecting about 50% of sales in those sustainable development markets. So can you say more about that for the medium term?

On the first question, so the impact of the different measures, temporary or more permanent. All right. Okay, these are short-term measures that we have put in place, putting people on furloughs. Well, particularly if there's a state aid behind that, that's short term. Okay, and for certain other aspects as well as just in crisis mode. What we will happy to see, is it some of those measures are -- continue further along or could even become more permanent.

So the solar market and semiconductors mirrors all of that, these are growth markets. Now there are a lot of applications for the semiconductor market and for energy storage. So in earlier presentations that you see, we also include energy efficiency, we also include rail transport in some of those figures that you mentioned. So in semiconductors this is a great growth driver for us. And silicon carbide, in fact, that we thought would be rather mediocre, in fact, has been dynamic, whereas, particularly for China, in energy storage, though we've said that the sales are not that high, they are growing. So we continue to see new contracts for storage systems in solar. Now the end of the year could be mediocre because of COVID. However, the outlook for 2021 is quite good. We talked about mirrors, it's true. This is still under a lot of development. So I can say that, yes, we will continue to grow the share of our sales in sustainable development. And we've also said we're looking at some of the net figures. I'm not so sure about percentages though, percentages could evolve.