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

Welcome to the telephone conference call, Mersen, for the sales for the third quarter 2022 with Mr. Luc Themelin and Thomas Baumgartner. I'll now hand over to Luc Themelin. Over to you.

Thank you. Hello, everyone. A few words of introduction to give you before I hand over to Thomas. With the highlights of this quarter, third quarter was excellent with organic sales growth of 19% for a quarterly record at EUR 297 million. We owe this excellent result to all our markets, particularly the outperformance of our growth markets, renewable energies and semiconductors. Thanks to this performance, we are revising our full year guidance upwards. We're now targeting organic growth of around 13% and an operating margin before nonrecurring items of around 10.8%. On the investment side, the adjustment in the guidance is linked to cost inflation and the rise of the U.S. dollar. I'll now hand over to Thomas for the detail on these points.

Thank you, Luc, and hello, everybody. As you said, this is a very good third quarter. The group posted consolidated sales of EUR 297 million, up 19.2% on a like-for-like basis. We also benefited from a favorable currency effect, mainly due to the rise in the U.S. dollar and the renminbi, more marginally representing more than EUR 16 million, giving growth of nearly 28%. The strong organic growth in this third quarter concerned both our divisions as well as our main geographical areas. I'll begin with the geographical areas with Europe. Business grew strongly in all countries and in both segments, thanks to the semiconductor and renewable energy markets. In France, activity was particularly dynamic driven by recovery in the aeronautics sector. Now in Asia, growth was strong in all countries, thanks in particular to the solar and semiconductor markets. Strong growth in Korea and Japan is also noteworthy, strong growth in China driven by the catching up on deliveries after the lockdown period in the second quarter. And finally, in North America, business was very strong in both divisions and in many markets, renewable energies and storage, semiconductors, aeronautics and process industries. Now if we look division by division. The Advanced Materials division grew organically by more than 23% with sales of EUR 168 million. Several factors here. The solar market was very strong for the group as a whole. Sales in this market amounted to EUR 77 million for the first 9 months of the year, which is higher than the amount for the whole of 2021 at EUR 71 million. So in 3 quarters, we've done more what we did in the whole of last year. The semiconductor market was also very strong this quarter, both in the traditional market, silicon, and in SiC power semiconductors, with growth exceeding 30% in both segments. The improvement in the aeronautics market, which I mentioned earlier seen since the beginning of the year, continued, although we're not quite -- in fact, that is still well below the 2019 levels, but we are making progress. And finally, process industries continue to grow after 2 exceptionally high quarters. Now the Electrical Power division posted sales of EUR 129 million, with organic growth exceeding 14%. Electrical distribution in North America continued its momentum with a record quarter. Sales for the electric vehicle market also posted growth as we pushed ahead with several qualifications projects on platforms as in the last few quarters. And finally, the rail market was also more dynamic than previous quarters. If we now look at the year-to-date, those first 9 months. Sales amounted to EUR 821 million. Organic growth was 14%, and that growth was in double digits in both divisions and in all geographic zones. And this good performance leads us to raise our forecast for the full year, as Luc mentioned in his introduction. So checking this today [indiscernible] is another point. Considering our financing, we decided to bring forward the refinancing of the EUR 200 million syndicated loan maturing in July 2024 to benefit from favorable market conditions. We took advantage of the opportunity to increase the amount available to EUR 320 million from EUR 200 million previously, with unchanged margin levels in the context of strong growth in our business. This transaction extends the average maturity of our confirmed financing authorizations to almost 5.5 years. So that concludes my comments. And Luc and I are now available to answer any questions you might have.

[Operator Instructions] We have our first question from [indiscernible].

Hello. Can you hear me?

Yes, we can hear you very well.

So congratulations. Those figures are excellent. I did want to know; however, we see organic growth accelerating sharply from the second quarter figures. We know inflation is accelerating also. We also see that in your forecast, you're raising the figures for your turnover less for your margin. So have you measured division by division the inflation effect? As I mentioned, you have been passing on price rises. Do you have an amount of that's for Electrical Power?

We announced 4% over the 9 -- first 9 months for price rises. We won 3% in the first semester, so that was slightly faster. And that accelerated on the sales of equipment more than Advanced Materials and in Electrical Power. So there is more inflation. As you rightly note that the growth in our volume is a bit higher than the growth in our margin, in particular for those reasons.

So on the third quarter specifically, you haven't broken that down into exactly how much that inflation, the rise in costs in Advanced Materials -- represented in Advanced Materials and Electrical Power. You know it's roughly 4%, but you don't have anything more precise.

No, we don't have details at this stage. We will have more detail soon at the end of the year when we see the precise figures for the margin.

My second question is more about the semiconductors activity. You mentioned very good figures in semiconductors. So there's a difference between the SiC and the conventional semiconductor, we noted a shift in the markets, especially for the OEMs. How do you see things going on this market, which was very dynamic visibly? But do you fear a slowdown on this market? What -- how do you see things?

We have always said that the -- this year, silicon carbide market was going to accelerate and be bigger than the traditional market for us. But contrary to what you might read in the press with the drop in sales of computers, et cetera, a quite significant drop, we're not seeing any sign of a drop on traditional semiconductors. We have quite strong growth. And on the SiC, the growth is -- or will be higher to what we've been forecasting. So there is no sign -- no negative signs in that respect.

Even on the traditional silicon?

Yes, even there. But we have an acceleration on the SiC. That's clear. And we have good growth on the semiconductors generally for the moment.

Okay. And one last question as I am online. On the solar part, the figures are very good as well. And in history, there have been a certain number of changes, ups and downs in the market in 2014, notably. But how do you see this market? Do you think that there is still room for development? You don't see short-term risks? How do you feel about this more fundamentally?

We explained, I think, 2 years ago that we weren't really looking to expose ourselves more than that to the solar part. And one should bearing in mind, that's mainly concentrated in China. We have Chinese players who are there. We have limited ourselves to the high added value market, and we have been focusing more on other markets. In the meantime, the market itself has swollen so much. And no one really sees a downturn coming. It is a form of energy, which is going to be an increasing demand. But now it is quite possible. We're not aiming for records on this in the group, that about 100 -- we're aiming for about EUR 100 million in the group. We won't be far off that figure. Perhaps it's a good pillar, but we're not aiming for EUR 200 million. And on the electrical side, we have another strategy, which is that each large solar farm -- so there's some stakes there are less than for the materials. And in 2012, 2014, there was a crisis, which was perhaps growing pains of the solar market with the sort of bubble that formed and a lot of actors who wanted to do solar, and we're ordering graphite. And then the market structured -- reorganized itself, et cetera. So I don't think it's really at all the same thing today. There isn't a bubble there today. It's not a totally mature market, but it's more mature than that was back in those days.

The next question from [indiscernible].

Hello. Can you hear me, okay?

Yes, we can, perfectly.

Yes, you can hear me. I had several questions. The first one is whether you could come back to the level of growth in the process industries in the third quarter as compared to the second quarter. And that leads into my second question about your vision of activity for 2023 and how you see your growth drivers. But perhaps the question mark might be over the process industries. And how do you see that sector going in 2023? And how much visibility do you have with your order backlogs? You talked at the beginning of the year about 6 months of backlogs. Are you still at that sort of level today? And does that mean you're going into 2023 with lots of confidence? And my final question is about the guidance for 2023. I'm sure you'll be publishing, so -- you're going to be publishing figures at close to EUR 1.1 billion. Do you not think that in 2023, you might be able to do more?

If we look at the process industries compared to the first half of the year, we're still below that figure in the third quarter, but it's quite marginal. In -- with -- so with perhaps a price effect, but we don't see any sign of any slowdown there. No. In the past, we have even had -- we've been in touch with the automotive industry and we haven't seen any sort of sign of a slowdown this but you're quite right into business, which is perhaps whether there are no signs at the moment of any drop in the market, it's difficult to say what might happen to the process industries in 2023. That's not the easiest activity to forecast. The other growth drivers are things we feel quite confident about, as we said last time. And regarding the guidance, it is quite possible that at the beginning of the year, we might review that guidance figure.

Okay. And regarding the process industries, should we understand that there are -- we're seeing signs of slowdown pretty much everywhere, but are you -- do you think you can gain market share? Is that what explains the good levels of growth for you? Is it that you're gaining market share?