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

Ladies and gentlemen, hello and welcome to the presentation of Mersen's Half Year Results presented by Luc Themelin and Thomas Baumgartner. So before I hand over to Luc and Thomas, I'd like to remind you that the presentation and press release are available on the website. And after the presentation, you can ask your questions of Luc Themelin, CEO, and Thomas Baumgartner, CFO. So you can use either the conference call or the web chat to ask your questions. I hand over to Luc now.

Thank you, very much. I'll start with a quick summary of the half year, which has been very good for the group. We started with 11% organic growth in the business which has enabled the group to reach EUR 524 million in sales, which is a record for Mersen for a half-year period. We can also see income from operations for nonrecurring items increased by 90 basis points. And the EBITDA is at EUR 87 million, representing a margin of 16.6%. So again, a good performance. So let's say a few words about our markets. You can see for North America, to begin with, the rate growth there at 16%, the process industries were very dynamic and in particular for the electrical distribution sector, which reach a record level of EUR 50 million in first half. In the semiconductor market, also very active as is the wind power industry. We saw good performance in the transport market, particularly aeronautics and electric vehicles. Now looking at Europe, organic growth, 11%, this was in both divisions. And as in North America, these industries were dynamic along with renewable energies and power. And we are also seeing renewed vitality in aeronautics. If we look at Asia, 7% growth, nonetheless impacted by China still relative to confinement measures. So this slowed down activity for the period. But there was a great half year for the solar market and the business in semiconductors. Growth is also quite dynamic in Japan as well. Overall, you can see that we have good growth, particularly in solar and wind as well, to a lesser extent also in semiconductors and also in transportation. So growth was driven in part from a 3% price increase, but mainly from volume growth, which is very good sign for Mersen now. So now, if we look at our main growth markets, and we already talked about this in March of course, they trend here, as you can see, it's very strong for solar. We expect that this will come down a bit for the second half of the year, not because the market is stagnating, but just because of certain cycles. So we are also focusing our deliveries to our more high-end customers. So we are also expecting good trends in 2023. We know also that there is a new silicon fab announced in Europe, so this is all good news for Mersen. Okay. In SIC semiconductors, no growth in the first half of the year coming of a very high-end business comparison. But in second half of the year, this will improve. And in particular really picking up in 2023. As for electric vehicles, we have a 5 new certifications or awards by manufacturers. So particularly for fuses but also working on batteries as well. So now let me hand over to Thomas for the main financial data.

So let's have a look at some of our main indicators. As you can see, we've got EBITDA at 22%, which is nearly EUR 87 million, 16.6% of sales. So that's a 90 basis point improvement. Growth in operating income is also up, thanks to our investments. And then the depreciation is up because of the investment programs and start of the Columbia plant. So there have been additional volume so that our operating margin is also getting 90 basis points. So a margin of 10.5% and EUR 55 million in growth. So if we look at our operating margin, this was mainly explained by higher volumes and prices. So Luc mentioned volumes. So that explains the 2.9 margin of growth. And we have been able to raise price, which has more than offset inflation, the cost of raw materials and energy. Yes. And so our, also our productivity efforts have helped offset inflation. So overall it is very satisfying to see the group's ability to neutralize inflation in this way through prices and productivity. Another important point to note is that we have of course exceptional costs, but which are temporary, primarily related to the start of production at the Columbia site. So those costs will come down. And then also we have been putting in place a dedicated electric vehicle team to prepare for demand. And so in the case of the EV team, cost will be higher because we are still in hiring phase. So as I've said, all of these costs go away on our profit and loss statement. But at the same time, this is for our investments. And then there is the depreciation that I mentioned early in my introduction. So let's look at the different divisions, starting with advanced materials. Growth and operating income was over 30%, with operating margin of 15.1% sales. You see there's a very strong volume effect, have increased prices to compensate for energy and raw material costs. And we will continue to increase that price to follow continually increasing costs. In the United States, we've absorbed the startup costs at Columbia plant as well increase in appreciation related to those investments. As for electrical power division, here we have a positive volume effect. The inflation on raw materials and wages was only partially offset by price increases and product related plans. Price hikes in the first half of the year will be particularly noticeable in the second half of the year. The division has also observed a cost related to the electric vehicle market related to the news. Now if we look at net income, improved significantly with growth of over 41%, with a tax rate of 22%. Financial expenses are lower than last year, thanks to our improved financial terms with the latest U.S. PP. So now let's look at the cash flow from operations. This was impacted by the high level of working capital. I'll explain this. First of all, working capital rises with the increase in sales and orders, of course. So this plays on inventories and payables going ahead. So we saw continuing unfavorable seasonality in the first half but at the same time -- well, this is in comparison with 2021. There was a payment of sizable bonuses, for example, for the year 2021. And explanation is increase in inventories linked to the Columbia site and also to secure raw material supplies in a tight supply chain for some product lines. So inventories have not been going up much in the second half and the working capital also should remain -- well now stands at 25% of sales, which is of course higher than the exceptionally low rate in June last year. As a result that cash flow is EUR 5.3 million compared to EUR 46.2 million at the same time last year. So you can see that there is a net financial debt, is at EUR 241 million with cash flow that I just explained is taking into account EUR 33 million of industrial CapEx and EUR 3 million investment in our IT systems. The financial structure remains very solid. Of course there is the dollar effect. So we've got our net debt to EBIT ratio of 1.53. And our provisions for retirement plans have come down thanks to the rise in interest rates. If you look at our liquidity profile, you can see that the maturity of our financing is 5.7 years. The major maturity will come in 2026 with maturity financing of the short term. In addition there is EUR 60 million of available cash and EUR 165 million of undrawn confirmed credit lines in 2024. So in short, we have a very solid financial structure. And now I'll hand back over to Luc.

Thank you, Thomas. So as I mentioned, our indicators are quite positive as is the outlook. And this is why we have also raised our guidance for organic growth between 8% to 10% compared to 3% to 6% previously and an operating margin of around 10.5% of sales. And the growth of the EBITDA margin growth of around 50 basis points. There we are confirming our level of industrial CapEx, even higher than that. And as for sales, we will be expected to have more than EUR 1 billion in sales. We expect still very good markets in SIC and electricals. And so the roadmap is -- also requires that we continue to achieve our CSR objectives in terms of the environment and employment and other CSR criteria. So we are particularly working on responsible purchasing and limiting our emissions, lowering water consumption and improving waste recycling. And of course, continue to develop our human capital. Those are our main comments. And now Thomas and I will take your questions.

[Operator Instructions] First question, Thomas Hornville.

My first question is the graphite, you've got your -- can you explain if there will be any opportunity loss? And can you tell us if Columbia is on route to perform as expected? And can we expect to see challenges on the electric vehicle market? So -- and what about raw materials? What are you anticipating there? Are you seeing any lowering of raw material cost? And yet another question about your goal for 2025, will you be able to achieve 50 basis points if you're expecting sales of over EUR 1 billion? That seems very conservative to me.

Well, I'll start with some of the first questions. So let me try to sum it up real quick. Decided to focus particularly on the very side of tech. We have a very profitable business, and so we were able to deliver well in the early part of the year, apply added value. So that's what we want to focus on. We do want to increase our capacities at Columbia to meet demand, but we don't want to overexpose ourselves. And so there is no opportunity, lost opportunities there. The market is quite strong. We've got 15% market share that we believe is very solid for the future. As for graphite, we're #1 or #2 in fact. So we've got -- and we've got some very long-term business there. As for Columbia, it's starting up, but it will take 1 year or 1.5 to get -- to raise this capacity in isostatic graphite. Currently we're focusing on extruded. 2025, you made a comment, and you asked about operating margin. Yes, we are being prudent, but it is above 11%. We don't really have any basis to give you figures statement from that. So we need to monitor the trends in the EV market. And then there's of course inflation where we need to see -- and energy prices, we'll have to see how that continues to weigh on our margins.

We told you that there are still some incremental costs for Columbia, but of course the sales will begin and bring us the benefit of that. So those costs, of course, will be offset. As concerned raw materials, as we -- yes, as you know -- I mean, copper, aluminum and silver. So yes, there was a slight drop in the prices and we'll try to take a bit of that. So yes, of course we want to take advantage of that. And then, well, next year -- well, that's for the electrical division. As for advanced materials, we've seen higher rises in raw materials as for the price there. And so -- but yes, we have been tensioned on these rises in our selling price. So variations are not quite the same between the 2 divisions in fact.

[Operator Instructions] Question from Stephen Benhamou of BNP.

I have several questions. First, the break down of the top line and the main drivers in terms of volume and price and the product mix. And so do you expect that to remain the same in the second half of the year? Second question, could you give us idea of the order backlog? And also do you expect any further improvements in productivity?

So -- well, you can see there's, as concerns the top line, you can see there's no scope effect here. So the volume was the main driver. Well, we'll have to see how the foreign exchange impact is. So what do we expect? Well, in the second half of last year, we were already raising prices. So we're continuing to do that. You feel the effect a bit later. We expect that -- we expect about [indiscernible] percent increase in the prices. Right now, as you know, as I've said, we don't get the effects of that immediately. We've got a backlog of about 6 months for now. So that's good. We have a good outlook in terms of the backlog. And we do have orders backlog continuing to 2023 deliveries, so in the next year. [indiscernible] chemicals market.

Well, coming back to question on the backlog, how did you sign for that? If you signed in February, March, you -- what if your costs go up [indiscernible].

[indiscernible] the prices of the backlog, except if there were clauses for these revisions at the same time when we raised prices. So yes, there is a bit of a lag. We said this before. So we've raised the prices a bit and [indiscernible] related to the increases in raw materials prices.

Yes. Yes, so we ourselves have been raising up prices. As for the deliveries for 2023, yes, some of those have price revision clauses. And you also asked a question about productivity. I'll try to answer that. But we continually work on productivity. In general [indiscernible] this was offsetting inflation. This year [indiscernible] what we expect to see, we know particularly for salaries, yes, we have to continue our efforts there. So yes, productivity will have to keep improving.

All right. And I have another question, please. So your -- well, you gave your guidance, but do -- are you seeing any wait-and-see attitudes on the part of some clients for 2023? I mean, you're -- you said you're pretty secure for 2022 in terms of [indiscernible]?

Well, we have various markets, some are very dynamic. That will continue to be buoyant. SIC, in particular for semiconductors as -- continually seeing strong growth. So, and we also have already for next year. And particularly SIC, I mean, there are -- there's a real demand there linked in particular to electric vehicles. So even though if there is a slight downturn in the economy, nonetheless manufacturers of electric vehicles are all putting in place their new manufacturing platforms. And otherwise, we don't see customers adopting wait-and-see attitude. So in spite of the context, the orders are still coming in, the United States very well, and renewable energies of course. So we don't expect to see any need [indiscernible] there, all in relation to climate change and addressing those issues. Perhaps in process industries, you're right.

Those orders tend to come well in advance. Now in aeronautics and transports, it's a significant drop during the crisis. But they need to play catch-up now. And so even if there is an economic downturn, they are coming off very low.

[Operator Instructions] A question from [indiscernible].

I'd like to come back to process industries and the working capital. And it's [indiscernible] United States. We are seeing a slowdown in GDP growth. Can you explain also about your market share? You've talked about volume increases.

No, there's [indiscernible] in process industries. First of all, in the U.S. good performance in electrical distribution. We have our production in Mexico. What we are seeing is, well, our clients don't want to have too much inventory. But of course since the economic recovery demand picked up. And [indiscernible] is driving demand. But we can really only tell you what the current situation is. There are no particular signs for the U.S. or Europe for a slow down there.

And we have a very and well balanced distribution of our sales.

And another question, please. On the working capital requirements. So are you at a peak at your inventories? What about cash flow? So are you seeing any positive trends for the second half of the year?

Yes [indiscernible] in June tends to be less favorable time of the year in terms of working capital. And then there's also the payout bonuses in April which also weighs down on us for the first half year. And so December is generally better than mid-year at that level.

Okay. And the final question [indiscernible] you talked about the increases at -- for Columbia. So you've made quite a bit of [indiscernible]. What are your expectations?

Well, we took about EUR 85 million to EUR 90 million total CapEx, total. So these will not come down for a few years. This is going to depend [indiscernible] on several of our markets. So it's all based on the [indiscernible] but we are still investing to keep up with the SIC market. And always investing in the most profitable market.

For several years now we've been noticing the rise in demand for SIS, for semiconductors, so the marketer is getting structured. So clients are already beginning to plan for 2024 [indiscernible] so that's good news for us. So, so we expect to see sales and deliveries and we have to invest to achieve that. Also we do have some [indiscernible] capacity. But the business continues a pace. So it's going to depend on the end market and how profitable it is. So but we will be [indiscernible] to invest further.

And another question, [ Louis Duiel ] of [ Odo ].

I have a question. The operating margin for [indiscernible] and gross there compared to 2021 [indiscernible]. And, well, I partly had an answer to the CapEx [indiscernible].

In electrical power, we are coming off very high basis of comparison, but the level is very good, still very high. So I've explained what were the impacts on our operating margins. We kind of explained that earlier. But [indiscernible] inflation offset by raising our selling prices. So you've got that explanation.

Now inflation. Yes, that has been of course integrated into our plan for CapEx. So for [indiscernible] I can't say too much about 2023 [indiscernible].

[Operator Instructions]

All right, then. Well, if there are no further questions, we wish you all a great summer. And so the next meeting, October 26, after the closing of the market, to announce the sales figures for the third quarter. Thank you, everyone, and goodbye.

So the conference is now over. Thank you very much.