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

Ladies and gentlemen, welcome to the Mersen conference on the group's 2020 annual sales. We have CEO, Luc Themelin; and CFO, Thomas Baumgartner. First of all, I would like to wish you all a excellent 2021. So I will first-hand over to Luc Themelin, our CEO; and then we'll hear from Thomas Baumgartner, our CFO, who will comment on the figures. Luc?

Hello, everyone. Thank you for joining us, and I'm happy to announce some recent good news for the group. The year ended better than expected in terms of sales, thanks to recovery in sustainable development markets, especially solar energy and as well as electronics. And those will soon be used for electric vehicles. As you may know, we signed a large contract with the German company, Marquardt, a supplier for electronic vehicles. This is an important move forward for the group, demonstrating the interest of our clients for our specialized products in this field. Not surprisingly, the activities in the aeronautics market were greatly impacted. It accounted for a decline of over 200 basis points on our annual sales, with the steepest drop in the fourth quarter. We quickly adjusted our cost structure, and have a revised target for operating margin for nonrecurring items upwards to about 8% for the full year. We recorded strong cash flow, which allowed us to significantly reduce our debt compared with the situation in September. And now I will hand over to Thomas Baumgartner.

Thank you, Luc, and hello, everyone. So the sales for the year came in at EUR 847 million, which is an 11.4% drop like-for-like compared with the last year. We benefited from a 2% positive impact from our recent acquisitions, which were AGM Italy, consolidated as of December 2019; GAB Neumann, consolidated in March 2020; and Americarb, consolidated in September 2020. On the other hand, we suffered a negative currency effect, particularly in the second half of the year, for EUR 18 million, which is 1.9% due to the appreciation of euro against other currencies, especially the dollar, but also the Brazilian real and the Chinese RMB. As Luc mentioned, the sustainable development markets performed well, given the global context. They were stable for the year and reported growth of over 3% in the fourth quarter. So this was electronics, renewables and green transport, which represented 45% of the group sales. Other markets saw a 19% decline, in particular, for aeronautics in the fourth quarter. So if we look at our 2 biggest segments. In Advanced Materials, sales reached EUR 476 million, which is an organic decline of nearly 15% compared to 2019. As expected, the process industries, aeronautics and chemicals markets contracted. However, the solar market was driven by significant demand in China. And the SiC semiconductor market was vibrant, especially in the second half of the year. For sales in Electrical Power, they held up better, totaling EUR 371 million for the year, which is a 7.1% less than 2019 on a like-for-like basis. The same business and electrical distribution in the United States helped keep these figures in a good range, along with certain management of our supply chain. If we look at the geographic results, sales in Asia held up well, especially in China, which put an 8% growth. This is was good on the solar market. Two [ provide ] a large number of planned installations in 2021. There were also strong sales in the SiC electronics market linked to the development of 5G. India and South Korea, so far satisfactory in light of the context. In Europe, business fell sharply by 16%, especially in France and Germany due to the weight of the aeronautics and chemicals markets in those 2 countries. In North America, electrical distribution held up well, which was to the advantage of Electrical Power. However, [indiscernible] of the strong growth in process industries negatively affected Advanced Materials. Now looking at the fourth quarter. Sales dropped by 10% in organic -- currently published organic terms. Now a lot of this was due to a sharp decline in orders in the second quarter from aeronautic SiC customers, and the effects will continue to be felt in the first half of 2021. On the positive side, the main sustainable development markets, renewables, electronics and green transport, posted growth of over 3% in the fourth quarter driven by the solar market and the SiC electronics markets. Thanks to the higher-than-expected annual sales, Mersen is raising its target for operating margin before nonrecurring items for 2020 to 8% of sales. As concerned, capital expenditure. This will be lower than planned due to a necessary slowdown in certain projects. The investments will total EUR 45 million with an additional EUR 15 million for the Columbia site in the United States. Our total debt is below EUR 190 million at the end of 2020, which is well below the level in December 2019. Our financial structure is solid with good cash flow, which more than covers the repayment of a U.S. private placement in November 2021. Finally, nonrecurring items recognized in 2020 will be between EUR 50 million and EUR 55 million, which we had announced earlier. Some projects will be booked in 2021 instead of 2020. Now there are noncash costs representing EUR 30 million of this total. And most of the cash costs recorded in 2020 will, in fact, be disbursed in 2021. Now I will hand back to Luc.

Thank you, Thomas. So of course, we've been through a complicated year. And I believe that we performed quite admirably in the face of difficulties. And I remain fully confident in the group's outlook because we are well positioned, our promising markets and sustainable development, like electric vehicles and SiC semiconductors, which currently represent a modest share of our growth, but we are consolidating our positions there. We have a global presence that is well balanced and aligned with our goals on these increasingly localized markets. Also, we are rolling out a program to improve our cost structure on certain product lines. And as Thomas said, our financial structure is solid, which enables us to continue investments at opportune times on certain markets. So those are our comments, and we will now take your questions.

[Operator Instructions] Our first question, Stephen Benhamou.

I have 3 questions. First of all, the net debt, are we talking IFRS 16 or not? And what are you anticipating? But also like some qualitative comments on the figures as well. Now many industries are -- were starting to see some tension on supply lines. Are you impacted by this? And will this impact your top line?

Okay. Our net debt is -- does not include the IFRS and the rent included in that standard. They were -- but to give you an idea, they were at about EUR 48 million.

Now we're not seeing any on our supply lines. In fact, the products we purchased there are good flows. They are readily available. So I'm not sure which companies you're thinking of.

Well, in electronics or -- no, in automobiles. Okay. Well, yes, we've seen that in the press. Some -- currently, some components are starting to be harder to obtain. Can you comment on that, please?

Yes. Well, that's not impacting us. In fact, in metals or things that we need, we have no particular concerns or impact on costs. Now in 2021, the trends that we're seeing is -- are good for solar. And as we said last year, we didn't want to overly expose ourselves in this area, but demand is quite interesting, and so we keep expecting more and more. And semiconductors are continuing to be vibrant. And so coming back to something that you mentioned there for us, tension on -- pressure on supplies, it can be interesting because it means our customers will ask us to produce more. So growth continued. In rail, we hope to see some improvement. But it's true that for a while, because there was -- there were travel restrictions, well, that slowed down also the orders for new equipment. Right now, we are still waiting to see what happens in the process industries, but we do look forward to something of a recovery. So it's a true that the sales are looking good in our main promising markets. We're still working on having our products qualified by a certain client. But sometimes, this means that sales will not become effective until 2023.

So you said you won't be spending your entire -- you won't be spending your entire investment budget?

Well, we were slowed down in our -- some of our investment programs after the second quarter. But we got things back up and running in the second half of the year. Some investments take time to finish the specifications and continued discussions with suppliers, but those projects are still very much underway. And we are planning a significant investment so that we can capture the growth in some areas, and we don't want to miss those opportunities. So this is why we are continuing as well on Columbia, which will be operational in the coming year, and we're still doing more in the semiconductor market. So it's a pretty sustained program for CapEx in 2021. So there's been something of a lag, it's true, but some things will certainly continue.

Next question...

[indiscernible] What I'd like to know is the better cost savings. Is any of that going to be offset because of less travel or other lower expenses? And in 2021, could you tell us some of the elements that will impact your margins in 2021? Do you expect to be doing better?

Well, in March, we'll be able to announce our results. But you're right that, well, some costs that did not occur in 2020 will resume in 2021. Now we received some government aid to cover the partial time work of some employees. And so it's going to depend on our level of business. We received about between EUR 7 million and EUR 8 million in aid for that. We don't know to what extent that will continue. It's in the process industries where we are the most impacted, and we still have people working only partially. But at the same time, we are rolling out adaptation plans that should begin to show some effects in 2021 and then a full year effect in 2022. So we were looking at 7 -- EUR 16 million in cost reductions. So yes, there are some savings linked to the reduced activity. Now as concerns, margins, we'll be giving guidance on that in March. Our margins depend greatly on the volume of business, of course.

We have a question, Jean-Francois Granjon from ODDO BHF.

I have a first question about the splits. As business -- per business, can we see some of the -- tell us the major trends there? Second question. We saw 2.4% decline in organic growth, which was a good performance you expect to see continue. And do you consider yourself in efficiently comfortable position to recover some organic growth in the course of 2021?

Well, actually, I'm trying to see with Thomas. He's going to answer your questions. So...

Well, the split is a bit difficult, in fact. So in Electrical Power -- but electrical distribution in the United States is a good market, and we performed better than our competitors, in fact. So it's not that business was so high, but that our competitors didn't perform well. And that's usually a sector that's good for us through crisis times. Now as concerns, the products in Advanced Materials, where there is solar, worked well, semiconductor market as well. But process industries are hit harder, and this is very much tied to the economy. In electrical protection, though we had a good business in industrial fuses, in power electronics, there was some slowdown, even in China. So that's to give you the main whole lines, but there's no real logic to any of that. It's really very much tied to the different geographies. As far as growth in 2021, we won't be able to see that yet. But at the same time, we are hoping that the second half of the year could show us recover. Also, I think that's what everyone hopes, of course, so that the economies will start up again. We'll have to see what the impact of some of the stimulus plans are in the United States, in particular. So yes, hopefully, but we won't be able to say yet.

Well, already in the first quarter, it seemed that your sales were down in China. So you should start seeing a more positive effect then? Won't you be able to spot the trend yet?

Well, in 2000 -- sorry, it's 2020, first quarter was lower than 2019, which has been very high. So it wasn't so bad. In fact, 2019 was very high. So that's one thing to keep in mind. As we said, it all depends on how quickly process industries will recover. And it seems to be rebounding, but at what speed. Now other than aeronautics, which is going to stay low, probably for the first half of this year. But otherwise, in sustainable development markets, the trends are looking good. And we don't expect to see a much more negative effect on the chemicals market either. So we are seeing market trends that appear to be favorable. But it's true that we are quite dependent on our process industry activity, which hasn't yet recovered. So that's about all we can say for now, we need more visibility.

We have a question from Laurent Gelebart.

I have some questions about the chemicals and aeronautics. So we've heard that the first half of the year is going to be difficult. Can you say a bit more about that? Also, are you expecting any new contracts in electric vehicles? And then the stimulus plans in the U.S., in particular, but Europe as well. Do you expect to benefit from those?

Okay. We believe that in chemicals and aeronautics, we hit the bottom in terms of orders, but this is in reference to the same period in previous year.

Well, in electric vehicles, yes, we are working very hard for new contracts. They are in discussions and developments. We are looking at a 5-, 6-year contract for about EUR 10 million roughly. We're in discussions with carmakers, battery makers. So for me, I believe in the first half of the year, we'll be signing more contracts. But it's not easy to predict. And we can't always say very much because of our confidentiality clauses. Now as concerns stimulus plans, we did get some aid as concerns the drop in the aeronautics industry. So we were able to get some funding there, and we have a site in [ Talba ] connected to [indiscernible]. So -- but the work is moving towards a new technology, so that should be promising. And now in the United States, of course, we wouldn't get a direct aid. But if our customers are getting stimulus, then they will be able to make orders with us.

Now it's true that if -- given that we're quite present on sustainable development markets, then we believe that President Biden's new plan will be favorable in that sense by encouraging those markets.

Another question from ODDO BHF.

What about prices?

Stable. We don't expect to see any major changes in terms of prices.

[Operator Instructions]

Well, it looks like there are no more questions. So thank you, everyone, for joining us, and we will be announcing our annual results on March 11 before trading. And to see you at the auditorium of our EQHO tower if health conditions allow. But quite likely, it will have to be a virtual meeting again. Thank you, everyone, and good evening.

Thank you. That concludes this conference. [Statements in English on this transcript were spoken by an interpreter present on the live call.]