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

Ladies and gentlemen, welcome to the presentation of Mersen's first half year results presented by Luc Themelin and Thomas Baumgartner. Hello, everyone, and thank you for joining us for the Presentation of Mersen's First Half Year Results of 2021. The press release, today's presentation and the half year report are available on our website. After the presentation, Luc Themelin and Thomas Baumgartner will take your questions via the telephone conference. So I'll hand over to Luc now.

Thank you, Véronique. Thank you, everyone. Just a quick summary before I hand over to Thomas. So here, you can see excellent performance in sales in the first half of the year with 7% growth compared to last year across all of our geographic zones. A lot of this is tied to our renewable -- our sustainable development markets where you can see growth of 11%, which is 56% of our sales. Volume effect and mix is favorable. Optimization plan, this explains 150 points of growth in operating margin. And at the same time, we are pursuing our CSR roadmap with a quantified commitment. So I'll hand over to Thomas now for the main financial details.

Thank you so much, Luc. Hello, everyone. So let's start with the sales. What you can see at top right, okay? So we're talking about the second quarter. You can see there's a strong rise here, organic growth at 15%. This turnaround was particularly notable in Europe and North America, 2 regions that were heavily impacted by the health crisis at the same time last year. So if we look at the half year trend, as you can see here, all geographical areas reported growth starting with Europe, but we see a growth of over 6%, thanks to recovery in the process industries and good momentum in electric vehicles and the power electronics market. As expected, aeronautics remains at a low point, shrinking even further compared to the first half of 2020. Since as you recall, aeronautics was only impacted from the second quarter. In North America, we saw very strong growth in electrical distribution and process industries and sales were also brisk in the electronics market. As for Asia, there was a 7% growth, all the more impressive since our sales in the region has held up last year. Growth was driven in particular by China, thanks to the solar and electronics market; and also by India, which had been hard hit by the COVID crisis last year. And if we look at the rest of the world, our growth was satisfying. That only represents a small percentage of the group sales. And you can see this performance is explained in particular by some important deliveries in South America in the chemicals sector. So that was for sales. This allowed us to significantly improve our profitability. You can see our operating income increased by more than 20%, reaching EUR 43 million, which is 9.6% margin. The increase in our margin is mainly due to the increase in volumes that combined with a favorable mix effect, especially in Electrical Power division. And so let me point out a few elements: First of all, the adaptation plans announced in October 2020 are starting to produce a positive effect. And I'll come back to that a bit more and talk about some of the cyclical impacts. Second fleet productivity gains more than offset rising costs, mainly in wages. And this is the result of our operational excellence program at all of our sites. And thirdly, we did see cost increases for certain raw materials in Electrical Power, particularly as concerns copper. So we began raising our selling prices in the first half of the year and are beginning to offset the negative effects of these raw material costs. And our prices will increase further in the second half of the year. And last point, there was a negative effect related to bonus provisions, which are higher this year because results were higher, whereas last year, we were in the midst, in the worst of the COVID crisis. So let me come back to our adaptation plans. And you can see the structural impact and the cyclical impact here. As you may remember, we announced last October that we were launching an adaptation plan that will generate structural savings, and we are particularly on course in the first half of the year. So we've had a EUR 4 million in savings, and we are expecting EUR 10 million in savings for the year and EUR 16 million for the full year thanks to these plans. The costs are also in line with the plans at around EUR 22 million. There were EUR 17 million engaged last year and there are EUR 2 million from this half year. And there will be a total of EUR 5 million for the entire year 2021. And now the only thing that's changed on the plan is the timing of the cash outlays, which will be more spread out. We had planned for EUR 17 million in 2021, but we have EUR 7 million that will be shifting onto 2022. So now let's look at the cost and gains associated with the health crisis. So first of all, in relation to last year, well, we are no longer benefiting or very little from any subsidies or saving some short-time work. On the other hand, there were low exceptional costs. And we made savings on travel in January and February 2020. So overall, for the first half year, all of these elements are generating a slight negative -- a net negative impact of EUR 1 million compared to last year. So if we look at things beyond the COVID impact, looking to 2022 and hopefully return to more normal life. Some of the travel and traditional costs will return. And these cost will be offset by the full year effect of our savings generated by the adaptation plan that I just mentioned. Now if you look at the different business segments, we'll start with Advanced Materials on the left. You can see operating income at EUR 33.7 million with an operating margin of 13.6% of sales compared to 12.8% from the same period last year. This can mainly be explained by a slightly favorable volume effect and the positive impact of the adaptation plan. As for Electrical Power, here, you can see operating margin increased by 310 points compared to first-half of 2020. This was due to a positive volume effect, a favorable product mix and the positive results of the adaptation plan. Increases in raw materials were partially offset by price increases as I just mentioned. So overall, our key segments have improved their margins. As we look at net income, it has improved significantly with close to over 50%. This takes into account some nonrecurring expenses and a tax rate of 25%, which is quite close to last year's level. Now let's look at cash flow. Operating cash flow above 4 -- CapEx was up significantly at EUR 46 million. Now every year, our cash flow is generally higher in the second half of the year. So it's already a very good level. And this flow includes the outlays from the adaptation plan of EUR 5 million as I mentioned earlier. The WCR rate was 20% in sales, which is an excellent level, strongly down from the rate of 2020, which was abnormally high due to the compiling of safety stocks during the health crisis. And we have also continued our investment program, in particular, at the Columbia site, but also in the semiconductor markets. And so the investments will be higher in the second half of the year. Now if we look at the debt, at the end of June, the group's net debt was at EUR 184 million, which takes into account the EUR 9 million for acquisitions. So overall, our financial leverage improved to 1.4x EBITDA, which is a level that has never been reached in the last 10 years. We also strengthened our liquidity profile by setting up a new USPP with funds available in October and a 7-year debt and a 10-year debt at very favorable conditions. On the graph on the left, you can see our repayment profile at the end of December 2020. And so you can see that the most -- the highest maturity is around 2021, '22 and '23, you can see before our EUR 130 million short-signed in 2026. The graph on the right, you can see the market in green can be refinanced by our new financing shown in blue on the graph. So coming from this USPP and marginally a trend of the long-term commercial paper, so they are thus moving nearly EUR 100 million of credit loans to distant maturities. In addition, there's EUR 80 million of available cash and over EUR 200 million of undrawn confirmed lines. So in sum, we have a very solid financial structure that allows us to finance our development in our growth markets. And now Luc will talk to you about those.

Thank you, Thomas. So if we come back to the aspects of the business, in particular, this sustainable development market, in the first half of the year, you can see our different markets. There was -- well, the rail market didn't contribute because it has not recovered yet as quickly as expected. But in the semiconductor market, and I'll give you more details about that, the recovery is quite good. So as we presented in March, you can see the figures here, some of the initial trends that we anticipated. Now at end June - early July, where you can see the new positions, you can see a lot of arrows trending positively. You can see the semiconductors, the power electronics, the silicon carbide market and good development and some of the key points that were problematic at the beginning of the year such as a process industries. Well, here, we're keeping an eye on developments. But in the past 3 months, we've been seeing positive signs, and so we're quite confident there, which is why the hours are now trending upwards. Also, well, we were being perhaps quite cautious at the beginning of the year, but things are going well. Now if we look at solar, well, there's nothing particularly new here to announce. The -- we're at about 145-gigawatt installation expected on the market. This includes a significant growth in China. As you know, our presence on the market -- well, we are providing to manufacturers of cells. We're very much oriented at the high end of the market. And there's a lot of change in the size of the solar cells. So we're very present here with a composite material market, so very good growth there. Now we have been cautious about the second half of the year because there might be some tighter supply chains for silicon, so we're expecting modest growth there. But for the medium term, we are still aiming for total sales of around EUR 100 million a year for solar. Now if we look at power electronics, as you know, our positioning here, we have a legacy of a long relationship of co-development with silicon carbide SiC pioneer, so that allows us to stay at the forefront. And we have expanded our client offer. We had some new players on the market that we're working for and particularly some of those are focused on the 5G market. So you can see strong increases. After 2020, that was fairly stable, so EUR 20 million for the first half of the year. So if we can do the same thing in the second half of the year, then we'll be pretty close at the lower end of our bracket. And an important point to note here is, our involvement in a European project called Transform, which is being led by the Bosch Group. The aim here is to improve the SiC technologies to serve the emerging markets here. So we're not working directly with Bosch, but rather with the Soitec, that you're probably familiar with. Their technology is in crystals in a way that allows them to produce much more and with the target, particularly in the electric vehicle market, and we are present as concerns the substrates. And I'm sure we'll be able to give you more information in the coming year. So on electric vehicle markets, we have been certified by some major manufacturers. And so in particular, we are working with Marquardt. We are in the preseries. They are a preseries production. So things are moving well there. There's a lot of demand. And we are also strengthening our partnership with Autoliv, who has an 800-volt vehicle platform. And so we are working with them for the project hybrid fuses. We are also present on battery pack manufactures. We are expecting the figures to be even a bit better than expected. So we are still aiming for EUR 40 million overall annual sales. So in parallel, with development in those markets, we are also pursuing industrial optimization, in particular for growth markets that's in China and Mexico to be able to deliver customers. And semiconductor in Asia, we -- well, we're having to change plans because existing plant was too small. So we'll be transferring some teams there. Columbia is on track for extruded graphite. And so the process is being finalized there. We should be able to have sales very quickly there. And we are also working on efficiency plans in EP by moving a plant that was in Czech Republic. So that will be transferred to Fusetech. And then we have some scattered plants in China, for example, the ChangXing, where there will be a closure of a plant so that we can have a more concentrated, more high-performance production facilities. And we are also modernizing our information systems as a new ERP version being rolled out across the group as well as CRM and manufacturing execution system. Now in parallel to all of that, well, we are pursuing our ambitions in terms of our CSR goals, particularly working on recycling. We have set ourselves some very strong targets to reduce the intensity of our greenhouse gas emissions by 20% by 2025. And of course, all of the teams are very much focused on this because a 30% of LTI criteria based on CSR objectives. And so we are also very satisfied that we have been recognized with MSCI rating that has improved over the past 2 years, thanks to all of our internal efforts. So in early July, we revised our guidance in light of all of these positive indicator. So we reconfirm that. So you can see organic growth between 6% and 8% and operating margin now at 9.2% and 9.6% compared to the record of 8% to 8.8%. So those are our main comments today. And of course, Thomas and I are now here to take your questions, sir.

[Operator Instructions] We have a first question.

I have a first question about electric vehicles and your optimism for 2021. Could you explain that? Okay, we know there's the Marquardt contract, it's true. And so I'm wondering why the optimism because you've talked about, well, the medium-term objectives. And then secondly, another question on margins. You gave us the new figures. So can we expect you to be revising your guidance further upwards? And the third question is on cash flow. Can we expect the working capital requirements to be very different in the second half of the year? And you talked about the CapEx, can you give me a bit more detail about that?

On electric vehicles, yes, we are optimistic now so we're expecting 15 million. It might be 16 million or 17 million. And there will be some more quantities to deliver for bus bars, for -- that's our higher sales than expected and in fuses as well quite a few, delivers, [indiscernible], for example, in France. But that's just one example. So we feel that these are very positive signs. Thomas, your question on margins.

So now we did have a favorable product mix in the first half of the year, particularly in electrical distribution. Now that's always a little bit difficult to predict for the second half of the year. But yes, you're right about, well, the prices. Yes, we will continue to raise prices. It's true that our raw material costs, of course, shift a great deal. In electric vehicles, we will be boosting our facilities there. So there will be a cost line for that. So it's to that, our guidance is currently, well, we were reconfirming what we said earlier this month. And now coming on to the working capital requirements. Well, we're at excellent levels there. No, I don't think we'll be doing better. As for investments, as for CapEx, we will maintain our plant levels. In the second half of the year, there will be a more cash outlays related to the adaptation plan.

I have 3 questions. Could you come back to the adaptation plans. The cash cost, why EUR 10 million less in 2022? Also, could you say more about the chemicals and aeronautics market and the decline there? Could you say more about that? And third question is that margin of 14 -- 15% for China will continue. The interpreter apologizes, hearing several voices at the same time.

Okay. There isn't a reduction in the cash outlays. It's just spread out more because certain -- some spending had to be postponed. But in fact, it's the same. It's the same amount as originally announced. It's just distributed differently. The interpreter apologizes. I'm hearing several voices at the same time. This is still Thomas Baumgartner speaking. So it's just a different distribution of the cash outlays.

In aeronautics, we've really hit bottom. The beginning of the year, well, we saw no recovery. We're still well off of the 2019 levels. But we could see some good surprises there, but it will come slowly, I believe, with the OEMs. As for the chemicals market, it's more to do with the scheduling of projects. We are starting to see some new projects, but we won't see the impact from that until 2022. This takes time to get back up and running. In fact -- but I think, yes, we have hit a low very point in chemicals, but -- so we'll have to wait for both of those markets to recover. There was also question about margins around 14% in Advanced Materials. Hopefully, 15%, it could happen. But we'll be able to say more about that later in the year. What I can say is that in Advanced Materials, we will probably have higher amortization than previously with -- but with current investments, we should be able to see more margins, but this will take time. There's a lot of investment underway to achieve that.

The operating margin, is this due to less of a volume effect? Another question. The impact of raw materials, is there a greater risk in the second half of the year? And what about tight supply chain there? Coming back to the margins and to guidance because well, you're already at the higher end, what you announced. Or do you expect to be more prudent towards the second half of the year? And the chemicals market, why was -- I believe that there are downward trends, further downward trends there. And finally, you talked about orders picking up. I know you don't have a whole lot of visibility.

About the Chemicals market, well, it's not as good as we have hoped at the beginning of the year. It's a bit down from what we had expected in March. Nonetheless, given the figures and the trends, I think, things will be better in 2022.

As concerns margins in Advanced Materials, yes, well, there is a volume effect that is quite different with BP for various reasons because process industries were lower and are recovering. Whereas in electrical distribution, it's recovered very quickly. And Advanced Materials is harder hit by the aeronautics and chemicals markets. Also, the adaptation plans will be bringing more results in the second half of the year. Now in raw materials, particularly, copper and silver for the Electrical Power, of course, change quickly. But for us, currently, we don't expect to see any deterioration in particular. As I said, we are going to continue to raise prices in the second half of the year. But we nonetheless remain cautious on the margins. But we do know that we'll be having more costs tied to the Columbia plant, which is why we're being cautious about our guidance on the margins.

Could you come back to the raw materials?

Well, okay, sometimes, some components, there can be problems. But I think we've seen the worst of the tight supply chains. Now the products are available. Maybe the prices will budge.

And I had a question about the order levels, your order backlog. Do you expect to see in the immediate any new important orders?

So you mean for the group overall? Well, as for the group, we're trending quite well, now that things are looking good there. But once again, we're looking at the good sales levels. And so as you know, this is all reflected in our guidance. As for amortizations and acquisitions, we have continued to keep an eye on various targets. It's true that's we were able to go and visit certain sites of interest. But for now, well, there are 2 or 3 things that we're still considering. But for 2021, no. As for the valuation, this is going to, well, depend -- this depends more on the sectors really, rather classic valuations. Some companies are highly specialized, other -- but no particular project, certainly nothing for the rest of the year.

Are there any other questions? [Operator Instructions] We have another question. We're waiting for the question. The interpreter is not hearing the question.

Two questions. First of all, congratulations for the first half of the year. Could you come back to -- you talked about some industrial reorganization. Could you -- or optimization, could you say a bit more about that? And also, okay, you were clear about the M&A. But are you thinking about certain fields in any cases even if you don't have any particular targets? Tell us what are the types of things that you're looking to add to your portfolio?

Well, I think, we said a lot in the presentation. But in our scope, we're not looking in particularly new product lines. Nothing significant. As for our announcements about the different plants, as I mentioned, Czech Republic closing down, that were being shifted elsewhere. We are moving some plants in China sometimes because we wanted to, but sometimes not. For example, in graphite specialties, well, we are having to move to a different industrial site because the city authorities want that site. But that's something that does happen regularly in China. And sometimes, while we make the shift ourselves to areas where we can develop a more modern site, we'll have access to a better labor pool and this is what we're doing in SPDs. We also restructured in India, our industrial footprint there. And I think we're pretty much set for the next 5 years. And nothing else in particular to tell you about Europe or the United States. So no major revolution there. There's a lot of human resources being put in place for Columbia so that we can very quickly -- why that's good production levels and yields. That's what we're working on right now. So that's already quite a bit, in fact. For our teams, this is a lot of work. There's a lot of transfer of technology involved. And then the -- well, the IT systems is a huge amount of work. So we are modernizing it. And well, it's a lot of work to roll out a new IT system. So if you combine all of that with our good product lines that we continue to expand. Well, that gives you a pretty good picture of the situation that we update you on regularly.

I have another question. Could you tell us about the integration of your most recent acquisitions? Could you tell what's going with the teams and just an upgrade there?

Well, in the USA, at the Columbia site, the America, while this is an industrial transfer that's been completed. In fact, no particular problems there. On the -- now with Soitec, the partnership was there, let me tell you what Soitec is trying to do is the smart cup using SiC in order to make a better usage of an ingot, which currently makes 10 wafers. And with Soitec's technology, we could get 100 wafers, which is very significant. And this could help boost the electric vehicle market, and this is why Bosch is leading the project. So the Soitec product does require a substrate -- well, but it requires to take a cheaper substrate, in fact. And this is where Mersen comes in to develop other high-tech substrate, but which could cost less. And so Soitec would use this Mersen substrate to make its wafers for electric vehicles, which will be cheaper, but more higher performance. This is very complicated. But this is what -- this is where we have an important role to play.

If I could get to another question for Thomas, please. Okay. We heard about CapEx requirements, what I'd like to know is the margins in EP. We talked about the mix effect. Is there -- what is contributing to that, in fact? Also, could we say that we could -- I mean, everything that you put in place now will allow you to achieve some structural improvements in the margin with all the actions that you've undertaken in terms of cash flow and the rest?

Well, the short answer is, yes. Our adaptation plan is very structural. We worked very hard to improve the profitability in the EP division to have a better product mix. And as you can see, we are continuing to conduct various actions, which might seem small separately, but which add up to and contributes to improving the margins in EP. But of course, there's always more improvements that can be made. As concerns WCR, it's currently at a historically low level. Things are going very well. And as we said, there was a bit of pressure on the supply chain earlier, but less now. And so if we look a little bit further down the line, well, it's true that we could see the WCR rise a bit because that is typical for us in the second half of the year. So I don't know if I've answered your questions or not.

Well -- yes, well, it seems that your WCR is really driven by your earlier efforts, so I was just really wondering if that would be lasting?

Yes, it's true. We really changed the cash culture in the group. That is something along with our operational excellence plans. Always it means that we're doing better management of our inventories. So that helps the cash and we have really changed our cash culture there. And this is what helps us manage well our WCR.

I do have another question. Do you have any indications to... The interpreter apologizes. She did not hear the first part of the question, and I'm not sure what the question is. I'm going to have to wait for the answer. The sound is very bad for the question.

Well, if you look at this slide, you've got figures there for each of our CSR targets. And every quarter, we take stock of the situation in terms of waste recycling, for example. So we're getting close to the 60% of waste recycled. Okay. Look at the safety, health and safety, good performance there. So -- and this really ranks us amongst the best in the industrial companies. So SIR is severity rates. I mean, these are very good. We have few very accidents, and they're not too severe. Now in terms of waste, of course, we need to do better. And we are proceeding set by step. We've got a lot more women in management now, if we look at diversity. It's a challenge in our business. So we're aiming for 25% to 30% managers. So we're getting close to the lower end of that bracket, but it's not easy to do. So we continue to take stock of our actions. Now if we look at emissions, we're not -- we don't have very high emissions, first of all. But we're always careful about where we buy our products from, but we've been doing that for some time now. So the group doesn't have any major hurdles here. We are in line with legislation in the different countries, but we're always working to improve. I'm not sure what else I can tell you. All right, then. We'll hold and enjoy your holidays. Okay. Well, I think we might have some more questions first. So let's check and see if we have any other questions.

[Operator Instructions] Apparently, there are no further questions.

All right then. Well, there's no further questions. Wishing you an excellent holiday. And we have a plan for our next announcement. It will be October 27 after trading. So thank you for your questions, and we look forward to communicating with you soon.

Ladies and gentlemen, this is now the end of the conference. Thank you so much for listening in. You can now disconnect. [Statements in English on this transcript were spoken by an interpreter present on the live call.]