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

Hello, everyone. I'm Luc Themelin, CEO of Mersen, and I'm here with Thomas Baumgartner, CFO. So it's been pretty much a year, day for day, and March 2020 that we last joined up with you. Of course, it was nicer having people in the audience, but we'll do our best to give a good presentation. So I'll just say a few words before handing over to Thomas. So just a quick sum up of 2020. Obviously, it was a highly unusual year. So I am sure I don't have to go into any detail about that for you. Now of course, the second quarter was particularly complicated. But across the entire year, we managed to limit the decline in sales to 11%. So sales, you could say, EUR 847 million with, yes, the second quarter being the strongest drop. But now of course, we took advantage of certain governmental measures that helped. But we also conducted various targeted restructuring because we've realized that it was going to take quite some time to reach a return to a satisfactory level. Now we did not particularly lower our investments. We wanted to continue to pursue our strategic projects. Of course, it was not easy to manage certain industrial projects remotely. I'll say more about that later. I'll talk to you about what we managed to do with the local teams. Now our operating margin, of course, came down from 2019. Once again, we did manage to keep it at about 8% of sales. Now we have a very decentralized organization by nature, and we're very lucky to have very strong local teams and not a single site shut down, except for perhaps 1 or 2 shortly and, of course, the -- in the different countries, the measures -- governmental measures were different, and so we let the local teams manage that. As you can see on the slide, we have an impressive free cash flow at EUR 76 million. And of course, Thomas will say more about the debt level, which has come down. And for the coming months, we are quite confident the group is in a strong position. So we will be proposing a EUR 0.65 dividend per share. We will be recommending this to the annual meeting. So let me hand over now to Thomas for the annual results.

Thank you so much, Luc. Welcome, everyone. Let's start with the sales figure. So EUR 847 million, as you can see, which is a decline of 11.4% in organic terms under extraordinary circumstances, as you know. So overall, the group held up well, as Luc said, thanks to its positioning and sustainable development markets, which Luc will talk about later. And thanks to a good geographic spread, which allowed us to locally manage our relationships with our clients. Even at the height of the crisis, 85% of our sites were fully operational. Now Asia was a strong point for the group, a real asset. It represents 30% of our sales, particularly with China, which saw growth of 8% on a like-for-like basis. So as you can see here, the drop in business was different from one segment to another. It was higher in Advanced Materials because it is more exposed to our costs. Our net savings helped to mitigate the unfavorable volume effect. So the savings, of course, concern business at travel, operating costs and consultancy fees. But at the same time, the group did not reduce its spending on R&D. And in fact, it raised that spending across the year. Our productivity plans were efficient and allowed us to offset inflation, particularly as concerns the wage bill. So our operating margin fell by only 2.5 basis points, arriving at 8.1%. So to give you a comparison, if we look back to 2009, with the similar decline in sales, Mersen lost nearly 4 points in operating margin. So that gives you an idea of all the work that was done at this time. EBITDA margin was high, coming in at 14.5% of sales. Now our 2 segments contributed to this resilience, thanks to a quick adaptation of costs. Right. Prices remained relatively stable in both segments, and the operating margin before nonrecurring items in EP held up better for 2 reasons. First of all, the -- there was less of a decline in sales volume and also because we had launched operational efficiency plans in EP at the beginning of the year, even before the crisis hit. So as we announced last October, we booked high nonrecurring expenses, a total of EUR 56 million, of which EUR 51 million in 2020 and EUR 5 million, which will be booked in 2021. In 2020, the charges include EUR 17 million in restructuring costs that I will explain in a minute, EUR 8 million in write-down of underutilized assets, particularly as concerns of the chemicals and aeronautics markets; EUR 17 million goodwill impairment for the anticorrosion equipment unit, which is mostly concentrated on the chemicals market; and EUR 8 million for other nonrecurring expenses. So EUR 25 million of these expenses are, in fact, noncash expenses. Our financial expenses fell. We benefit from advantageous financing conditions and lower average debt. Our tax expenses were EUR 14 million. This includes EUR 4 million of a write-off of deferred tax assets with no cash impact, and this was connected to delays in expected recovered profitability in aeronautics and chemicals. Now there were no tax savings, which explains why the high -- the tax rate was high this year to around, as you can see, 23% in 2019, 24% this year. So taking into account all these elements, net losses were nearly EUR 9 million, which is EUR 12 million after including minority interest. So if we come back to our cost adaptations, there were reductions in staff and temporary workers, whereas sales were down by 11%. And as Luc said, we took advantage of government measures in many countries, allowing furloughs and a short time work. So this was -- up to 10% of staff were furloughed at the height of the crisis in April and May. The aid amounted to about EUR 9 million. So these measures allowed the group to deal with the crisis-related fall in business, but it is not enough to adapt to more structural issues. And this is why we implemented target adaptation plans. First of all, we need to adapt our resources on markets which will be durably impacted by the health crisis, and we want to improve the operational efficiency of the Electrical Power segment. Now the budget for this adaptation plan has an overall cost of EUR 22 million, EUR 17 million in 2020 and EUR 5 million to be booked in 2021. So the outlays, in fact, are reversed since we paid EUR 5 million in 2020 and we will pay the remaining EUR 17 million in 2021. So this targeted plan will bring significant savings at EUR 10 million in 2021, EUR 16 million on a full year basis starting in 2022. And so these savings should be compared to our cost structure of 2019, since last year was unusual. 2020 was also marked by strong cash generation with a conversion rate calculated before CapEx was 103% compared to 79% in 2019. Free cash flow from operations after capital expenditure came to EUR 76 million, which is 27% higher than 2019. And this fine performance is linked to 2 factors. First of all, the investment spending, which was down from the budget based on what we had announced last March, but some of this will be postponed to 2021. Now this did not prevent us from pursuing investments for strategic projects, such as Columbia, and Luc will tell you more about that. And on promising markets such as SiC, electric vehicles and for safety and environment improvements. So we also did an excellent job with our working capital requirements. We closely managed that with the -- first, we increased our backup inventory and then we readapted to the needs of the market. We were very attentive as well to outstanding customer payments, which helped us to reduce our WCR rate by 1.5 points to 20.5%. So this strong cash performance allowed us to significantly reduce our net debt. We had also decided not to pay out dividends. That decision was made at the height of the uncertainty as to the scope of the consequences of the health crisis. And so this allowed us to self-finance EUR 57 million in investments and EUR 15 million in acquisitions, GAB Neumann and Americarb, while reducing our net debt by nearly EUR 40 million. So as you can see, our debt ratios are robust. So you can see net debt-to-EBITDA at 1.65 and gearing at 33%. So our balance sheet is quite solid, and we have strong levels of cash and available credit lines, which allows us to make repayments in the coming years. And it also allows us to finance the projects that Luc will now explain to you. So I'll hand back over to him to talk to you about our priorities and outlook for 2021.

Thank you, Thomas. So last year, we were showing you solar panels. This year, we're going to talk a bit more about SiC. So we'll have a look now at some of those markets and trends. So you can see our -- we are highly focusing our investments and work in these fields, moving away from some of the more traditional areas. So -- and we know that process industries and the chemical industries will be durably impacted. So what you can see is that we've got 56% of sales is oriented toward a sustainable development. And so, in fact, what we've seen is these are promising markets, but also they are more resilient compared to more traditional markets while in times of crisis. So here are some of the trends that we expect to see in some of the submarkets for the coming year. And we'll give you more detail on this later. It's true that these are the trends that we expect to see and that are guiding our investments. Now we know that chemicals and aeronautics will not be recovering quickly. Now in solar energy, this was a real boost, a real help last year. I will come back to that in a bit more detail. Now wind energy is stable in its growth. As I see, semiconductors, a stable growth. So in silicon, it's stable. SiC, there were some shortages, but that will be trending upwards. In any case, for the medium term, semiconductors will continue to develop. And power electronics as well, we are seeing good signs of recovery. In rail, the year should be stable. So where the real question mark remains is process industries. Now we know this will -- has to pick up again after the near collapse last year. But we don't know how quickly or how well it will recover, and we don't have very precise information there. So that is still a question mark for us. And so this concerns Europe and the United States. And so it's -- this unknown is something we have to keep an eye on. Now every year, we try to keep an eye on the main markets that we're involved. So we've got solar, semiconductors. I'll talk to you more about electric vehicles as well. So here, you can see the trends here. We're on solar power. So in spite of the crisis, well, the year went fairly well here. And there is a good promise for growth there. And in particular, China is implementing ambitious programs of installing 80 gigawatts as of next year, and we'll continue that for the coming years. So that explains that steep increase. Now there's always technological advances that help lower some costs. And so you can see on the right there, the solar panels will be reduced in size. So in terms of our production, this could nonetheless require larger furnaces, which is good news for us. Now we don't necessarily follow exactly that blue curve because those are really high. What we're focusing on, in fact, is the high end, particularly the silicon pulling furnaces and isostatic graphite and insulation of felt, which are very high value-added products for us. So we are aiming for EUR 100 million in sales in the coming years. So we were already at EUR 60 million of this year. And so though you may know this a bit by heart by now, let me explain again. You've got carbon products on the left where we've got the polysilicon in the reactors. So we're already present in that part of the process. And it's true that polysilicon is very important part of the business in Asia and China. 80% of the work there is in China. They are the ones making the solar panels. Then if we look to the right, electrical panels, there's a lot of local production there. Here, we need -- because, of course, we need DC fuses and power conversion. And we are in the high-power applications where you can see that we work with TMEIC, for example. And then the usual majors in electricity, ENGIE and Schneider, for example. So you can see, we've got 75% of the business in the Materials segment, 25% in Electrical Power. And so this should bring us to EUR 100 million in sales for the group. Now for the silicon carbide market. You can see in green there. This is very much linked to the electric vehicles market and the increasing usage of SiC. Because if you look at 2020, the green segment only concerns Tesla, so the more premium vehicles. All of the others use silicon whereas we're going to see a great rise in silicon carbide. And in fact, this will be multiplied by 4 as it replaces ordinary silicon. So if you've got a good eyesight, you can see that there is a good rise there as particularly the German manufacturers really get up and running the carmakers in Germany. Now here, you can see what we do in the production of a silicon carbide. You've got the furnaces and the -- we've got a few pictures here. So that monocrystal, in fact, is that shiny half sphere, you see that, known as [ bull ], and that's then going to be sliced into a wafer. You see in the middle. And then it's going to be integrated with transistors. Now this is a very, very hard material and you need diamonds to cut it, in fact. So once the wafers have been made and polished, then you can then move into the process of making the diodes and transistors. You can see some of the names that you're familiar with, ST, Wolfspeed, et cetera. And then we get into the converter products, which is a high-performance product. And so -- and SiC is said to save 10% in energy and it saves space. So this is all very important when you're talking about integrated in vehicles. But that's not all. On this slide, what you can see here is really the challenge here and our position here. So here, you have to come up to 2,400 degrees, so very high temperatures, much higher than for silicon. And so you've got the graphite products, which we provide that are in gray. So you've got -- it's all purified. You've got the insulation. You've got the crucible. And it's very important that the graphite materials be of top quality because otherwise the wafers won't be good. So at the end of the day, we're a very key partner on this value chain. It is, by far, the most sophisticated application in which we're involved. In terms of the graphite grades, it's not a question of the machining, in fact, but the products have to be absolutely irreproachable. And so if all goes well, we should be able to reach EUR 50 million to EUR 60 million in average sales per year. So why are we so well positioned here? I mean, we're already doing -- selling for EUR 13 million. First of all, we have our history, of course, already in the United States and great links with the American pioneers. We have developed the best graphites and insulating felts working with them. And we offer them the ideal physical properties, and that means that we are well positioned to work with some of the new players in the field. We are still working very closely with them. Of course, we have great production assets. We are able to keep up with growth in terms of the graphite and the insulating of felts that we've been telling you about for several years now. And we're also present around the world, so to keep up with some of the big players and some of the new players. And there are quite a few of those. Now in China, there's a rather different application that's used more for 5G, but then there's start-ups and academic research. And so there's a lot of activity around SiC. And so all of this is very interesting for us because it's a good news for our expertise and our ongoing R&D activities. So now let's come to some of the main drivers for this growth in SiC. Here, you've got electric vehicles. So we will expect to see this market getting up to about 4 million vehicles by 2024. And by 2030, there are some predictions for 12 million vehicles. And so, of course, this means that there has to be a lot of silicon carbide and a lot of electrical protection. So electric vehicles, I'm sure you're quite familiar with this slide. Under the seat here, under all of the seats, there is the battery unit with different modules. So of course, there are cables between the battery and the engine and there's converters from DC to AC. There's always has to be a lot of auxiliary equipment as well. Then there is the charging connections. There's the onboard side and the fixed installation. So we've got protection fuses for the battery, protection fuses for the auxiliary units, and we're currently working with the partner on a hybrid fuse to be able to shut down the power connection very quickly. So these are hybrid-powered technique fuses. There's 800 volts in the hybrid-powered cars. And so that has -- you have to be able to cut that off for safety reasons very quickly. And so there's SPDs, fuses and the busbars that are all present in electric vehicles. So we are also working increasingly with battery manufacturers to be able to offer them the internal connections in the battery packs. Currently, sales are at EUR 15 million. For that, there is Tesla, BYD and some industrial vehicles. And so the idea is to get up to between EUR 40 million and EUR 70 million, if we continue to have the same success in the qualification of our products, the certification by our clients. And we have a lot of products being tested by our customers. Now it's true that car makers often have their own specific ideas about how this should be done. We have to work very closely with them. We have a first large contract with Marquardt for fuses. And then we've got [ Arrival ] [indiscernible] [ Lucid ] and others that are also entering this market. So the Marquardt contract is very interesting. There we -- and we hope for a second contract, and we should begin production in 2022. We are already in the sampling phase. So things are getting serious. We are also upgrading a dedicated production line in Mexico. There will eventually be 3 lines. There will be special teams, one in Shanghai. And so they will all be entirely focused on electric vehicles. And we hope to soon sign a partnership with Autoliv for the hybrid fuses. So there's been a lot of activity even remotely. So let me say a few words about our Columbia site in Tennessee, which is a very strategic project for us. Here, you've got the time line. 2020 was mostly dedicated to refining certain graphite grades and our first extruded pieces. So we should be ready to produce and sell these products by 2022. So when we made this acquisition of Americarb, we knew that there was a great potential and that we would also be able to transfer to them certain activities such as extrusion and the rigid felts as well. The idea there is to be able to address the needs of American markets -- from the U.S., for American markets, so that we don't have to rely entirely on Scotland to supply our American customers. So what we'll see, depending on how things evolve, is we will not also begin producing isostatic graphite at Columbia. Everything is going according to schedule, which it all wasn't easy to work because of the difficulties, but we have a very strong local team and they did everything necessary to keep the project on track. So we continued our industrial optimization, we have transferred 2 Chinese plants. There's also another one being prepared in Korea. Once again, our local teams have always been very autonomous. We implemented some new digital tools to boost productivity. So we continue all of those plans. We also integrated Fusetech, which is for European standard of fuses, and we hope that will soon become profitable. We are very good as concerns safety. So you can the statistics there, 1.54 for accident frequency, which is very, very low for our industry, so an excellent performance there. And a score of 64 on the severity rate. Then on the environmental side, we have been working for years in better managing our waste and to ensure more reutilization and recycling. So we've had set a goal of 61% for 2021, and we know we're going to reach it because we're already at 60%. Everyone's really been onboard for this improvement. And we're also working with our electricity suppliers, particularly in the U.S. And we have managed to switch 3 plants to renewable sourcing of their electricity without any notable rise in the cost. We are -- and we are reducing our CO2 emissions, and with the goal of reducing that by 20% by 2025. So Thomas talked about the payout of dividends. So there will be a dividend payment this year. And this is at the high end of our payout policy. It's at 39%. So this is EUR 0.65 per share for the shareholders. So there's perfectly normal. There's no particular obstacle to this. So what about our outlook for sales and operating margin. Well, our position has evolved a bit because it's true that at the beginning of the year, we were quite confident, thanks to some good new contracts and that the solar market is still very positive. The electric vehicle markets will be bringing in continual growth. So we still believe in that, and we're still investing in that. At the same time, the horizon is not very clear. And particularly, as concerns, the process industries. So this is why with all of -- take all that in mind, we're saying that we can anticipate sales growth of between 2% and 6% in 2021. Now of course, there was some government aid last year that will not be renewed. At the beginning of the year, there was a bit of tension on raw materials such as copper. So keeping all of that in mind, we expect an operating margin before nonrecurring items of 8% to 8.8%. And we will be upholding our investments at an ambitious level of EUR 70 million to EUR 80 million, which is necessary for the coming years to keep up with those promising markets that I've just described to you. So that's the end of my presentation. And now it's time for your questions.

[Operator Instructions] We have our first question.

I have 2 questions. First of all, about the U.S.A. With the election of Joe Biden, do you think this will be changing anything for EU since some of his plans concerns more development of electrical infrastructure, for example? So tell us what you think Biden will do for your business? And then a second question, new acquisitions. If you were going to make any new acquisitions, what type would it be and what sector or geography would it be to reinforce your position in some markets or to expand into other fields?

Well, Biden, let me take that one. Well the -- was it [ 19 billion ] and decided. There's a lot of that recovery budget is to support people in difficulties. So it's very socially-oriented. Now electrical distribution in the U.S. Last year, we were expecting to see it dip, but it didn't. And in fact, we did quite well from our Mexican plant for deliveries, and we even won market share and sales were pretty good. We did suffer in process industries and aeronautics. Process industries and construction industries, for example, metals -- metallurgy as well. So all of that is just barely showing signs of recovery. It's still a bit too soon. So it is good that there is going to be a review of the tax situation in the U.S. So I am not taking a position between Trump and Biden. And anyway, it's irrelevant what I think. But what we're always trying to do is to consolidate in our different geographies. So if we see any companies that appear to be profitable and in good synergies for us, and they can be interesting, of course, in power electronics so we've got some interesting targets as well. But nothing very significant. In fact, we really have covered with our portfolio, pretty much everything we need to develop. There could be some new opportunities, but I'm not expecting any major acquisitions to announce this year, in particular, seeing as we can't really travel easily and go out and see these plants. Well, then I don't think we'll be making many acquisitions.

Now we have received some questions. We have Jean-Francois Granjon, who sent a question in writing. He's got 5 questions, in fact. The deterioration of the operating margin in Advanced Materials in the second half of the year. What are the price effects you expect to see in 2021? What about free cash flow for 2021? And the tax rate? Then a question on SiC. You mentioned some new players. Could you say a bit more about them and will there be any competitive pressure on you? Okay. So Thomas will respond to the deterioration of margins in Advanced Materials.

Well, it's true that the first half of the year, aeronautics was still okay because there were contracts being completed, in fact. So that's why the second half of the year looked worse because there were some finish off contracts in the first half of the year. Now the EP segment improved it's margins. In fact, thanks to the adaptation plan we talked about. And this is something that Luc described to you last year. Now let me jump down to the tax rate. Well, it's not very representative of this year. Normally, it's around -- between 23% and 25%. Now there's -- now not all the nonrecurring spending we mentioned to you are deductible. As for free cash flow, we're not giving any guidance there. You know our BFR rate. So there are investments to be made that we probably won't see the same level of free cash flow. We won't have that kind of gains in BFR as we did this year. And so if you're doing any modeling, remember that there was a EUR 17 million cash out for the adaptation plan. So we shouldn't expect to see any further reduction in the debt level. And then there's also the dividend payout. Let's see, was there anything else concerned? The price -- question on prices?

Well, we don't see any downward pressure for prices. And particularly if the copper continues to increase, well, we'll have to keep an eye on that. So I expect 2021 to be stable in terms of prices.

What we can see in terms of our orders, we're not seeing prices come down. That's clear. As Luc said, the rise in raw materials can, yes, of course, be passed on and our selling price to a certain extent anyway.

Then you had a question about SiC. I know some of you out there are specialists. So by new players -- there's new manufacturers of SiC, it's not new competitors for us. It's not new players. It's new customer players for us, not competitors players. So it's true that STMicro is a new player. There are perhaps 5 or 6 in China that I've mentioned before, some of them are emerging in this market. But as I said, the Chinese market is more focused on 5G rather than semiconductor. And Corning has been bought by the Koreans, and I'm sure they mean serious business, and then there are others. We -- but it's -- these new players are good news for us. In fact, it means we're selling to new customers. It's very, very advanced, but not all of them will be successful in their new ventures. A lot of the historic players are well ahead of the pack.

Now we have a question about the price environment for isostatic graphite.

Well, again, we don't see any signals indicating that it will move, particularly in one direction or another. Some competitors lowered their prices, but we managed to hold up. And in fact, our business was doing well, thanks to the solar market. So we're not seeing any decrease there. We are not intending to raise prices immediately. We're not seeing any increase in raw materials and of the carbon raw material, so nothing out of the ordinary there.

Now concerning raw materials, we have another question. Can you come back to the raw materials impacts and to what extent you are able to pass on the prices? Or is that difficult?

Well, we've -- well, in 2020, we had no significant raw materials prices impact. For everything that's carbon-based products, the graphite, all of this is negotiated directly without any market price to deal with and now copper -- everyone's talking about the copper. There was a various sharp rise, some of that was speculative and some of that is budgeted for. And the teams are trying to pass on the increase in price to customers. All I can say is that in the past, we have always managed to pass on all or a good portion of this cost to customers. It's true that the copper price is very high right now, but there aren't any other materials that are really impacting Mersen. Well, copper is needed in the busbars, it's true. And there is an automatic indexation of the price. And yes, we have covered for this very early in the year.

Coming back to the electric vehicles, who are your competitors in the electric vehicle market?

Now concerning the products that we supply to carmakers, not the usuals -- now there are players who know how to make fuses to protect the semiconductors. So a good DC fuse has to be very fast. And so in the -- so there's Eaton Bussmann, Eaton fusion, SIBA. It's a German player, but they don't seem overly motivated here. And busbars, it's the same ones, Rogers, [ method ]. As for hybrid switches, Eaton, again, but we're pretty much the only one doing very specific products. And well, what we're looking at now is what's going on with some of the battery makers and what's going on with the inverters, Bosch might be integrating our busbars and we've been qualified by them to provide those products. So the supply chain is shifting. It's true. So fuses and busbars, yes, that's where there might be some competition.

Another question. Concerning the WCR, are you at what you believe to be a regular level?

As concerns WCR -- well, we've done this before at 25%, but it's not easy. So I can't -- that's what we're aiming for is to hold on to that percentage. It's not easy to do.

As concerns CapEx. Well, 2021, I'd say about EUR 70 million. And 2022, if you see a return of the process industries, then we will want to wrap up our capacity. And in high-growth markets, well, we will need to prepare for that. So I expect to see it at about that level. I certainly don't see it going down to EUR 40 million as it was in the old days. I believe EUR 70 million is about our cruising speed for the next couple of years.

Another question. What is your underlying hypothesis for your growth guidance?

Well, there's a lot of uncertainty out there. It's more about the pace of the recovery of the process industries, and that's what is why we've given you that bracket of growth. If it picks up quickly in the next few months, well, then it would be at the higher end of our guidance. Otherwise, at the low end of our guidance.

All right. Are there any further questions?

All right. Well, if there are no further questions, then I want to thank you again for joining us for our virtual annual meeting with hope that we'll be able to see you in-person next year. Thank you, everyone.