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

Hello, ladies and gentlemen, and welcome to the presentation of the annual sales of Mersen. [Operator Instructions] I'll now hand over to your host, Luc Themelin, CEO; and Thomas Baumgartner, CFO. Over to you.

[Interpreted] Thank you. Hello. I'll be reporting a few words of introduction to present the highlights of the past quarter and the past year. Obviously, the symbolic milestone of EUR 1 billion in sales has been passed in 2022. And this is a great satisfaction for us at Mersen, and we haven't finished yet. Our growth markets were once again major contributors to growth, in particular, solar this year, which exceeded EUR 100 million in sales; wind power, which exceeded EUR 50 million; and electric vehicles, above the EUR 20 million mark; and semiconductors for silicon and silicon carbide, over EUR 110 million. The year was also marked by a very good performance in the process industries for both divisions. And thanks to these performances, which validate our strategy, we expect current operating margin for the year to be around 10.9%, slightly up on the previous guidance of 10.8%. I'll now hand over to Thomas, who will go into detail on these different points.

Thank you, Luc, and good evening, everybody. It has been a great year and the fourth quarter, second half of the year, with organic sales up by 19%, a similar quarterly growth figure to the third quarter. Quarterly sales of EUR 294 million, also close to the record level of the third quarter. This quarter, we benefited from a favorable currency effect, although slightly less significant than in Q3, at EUR 7 million or 2.9%. Total group growth in Q4 was therefore, 22.7%. As you have 2 divisions and the main geographies all saw strong growth. We'll begin with the geographies. Business in Europe was up strongly in most countries and in both divisions. The semiconductor and renewable energy markets, particularly wind power, were very dynamic. In France, in particular, business was buoyant, driven by aerospace and chemicals. In Asia, with also the renewable energy and semiconductor markets, which were buoyant. In China, very strong growth in solar energy offset the lower activity in chemicals, railways and the electricity sector. In North America, activity was very dynamic in both divisions and in a large number of markets, renewable energies, green transport and semiconductors. Electricity distribution also grew strongly, benefiting from favorable price trends. So looking by division, Advanced Materials grew organically by almost 20%, with sales of EUR 162 million, driven by 3 strong markets. Firstly, solar energy for the group as a whole. Sales in 2022 exceeded EUR 100 million, as Luc mentioned. I would remind you that on the material side, we mainly supply at 75% of the group in this market. Growth was also significant in semiconductors, in particular, with a strong acceleration in silicon carbide semiconductors in the fourth quarter; and finally, the strong momentum in the process industries continued. The electrical car division posted sales of EUR 132 million, with organic growth of over 18%. Electricity distribution in Europe and the U.S. are still very dynamic, buoyed by price increases. And growth was also very strong for electric vehicles, as expected. We posted EUR 20 million in sales in this market. On the other hand, the electric market in China was down in the final quarter. Over the year, sales, therefore, hit EUR 1.115 billion, showing organic growth of more than 15% on 2021. About 5% of that growth is due to price increases. Taking into account the favorable exchange rate effects are mainly due to the rise in the U.S. dollar and the Chinese renminbi, growth was almost 21%. So as Luc said, this good performance allows us to raise slightly our operating margin guidance for the year as a whole. And we are now expecting 10.9%, up from 10.8%. That concludes my comments, and we're now available to answer any questions you might have.

[Operator Instructions] And the first question.

I had a first question about that effect on growth. Is this just the price increases -- is this just carrying on the costs? Or are you also increasing the margins slightly? That's my first question regarding 2022. And for 2023, could you say what risk factors there might be for your activity, looking at things as they stand today? And one final question in the more medium term. So there was communication statement [ STMicro ], do you have more news about your partnership? And what can we expect for your sales figure in 2023?

And for the first question, the second question is very complicated to risk factors. We often talk about the geopolitical environment and have done so for about a year. That remains the same. We finished the year with good bookings for orders, which suggests the start of the year should be strong, but there are still many more months to go this year. And we will have to take things as they turn, but I can't really say more for the moment about 2023 as a whole. Nobody really can. Just on that question. So you talked about the price rises from last year, which will carry over to this year. So about 2% of the -- so there is inflation, which will be important next year, high next year. And there will also be energy costs, which are going to be quite high in Europe. So that regards to the inflation and prices. Regarding your first question, we'll give a more detailed answer, but on the whole, what we can say that the cost of inflation in 2022 were passed on in 2023, we'll have to increase prices more to cover the whole amount of inflation and that is something, which isn't clear yet and which we will be working on this year in the hope of passing on some more price increases. And Soitec. So the announcement in Soitec and SG, obviously, is a positive factor, although it's not really a surprise given the position of STMicro in that market. So we aim is -- to be able to proposing to Soitec for 2024 in the specifications -- and with specifications and quantities that are reasonable and which pretty much match the demand from Soitec. We have some turnover in 2023, but as it's a partnership, that doesn't really [ care ] for much more development. And in 2024, more certainly, there will be more in terms of sales. But our objective is to bring out the industrial product. So there's quite a lot to be done on the plant and on the equipment to be set up to meet the requirements. And we also work with STMicro on traditional products, and they were already a very good client for us.

And the next question, over to you.

I have two or three questions. The first one is you talked about EUR 110 million for silicon carbide, et cetera, you did EUR 47 million in on traditional electronics, semiconductor, EUR 36 million last year on SiC. We know that there is a boom in SiC. So can we have the breakdown of that EUR 110 million, how that breaks down? Is there more SiC? And so specifically for that. And also to come back to, you mentioned investments that need to be made in 2023. What type of investments are going to be necessary to continue growing at a good rate on the silicon carbide, and from -- also, what do you need to do to keep up with growth on that market? The second question is to come back to that price effect and more specifically, regarding electrical protection and possibly fuses that there is turnover in Q4, which is very high, with organic growth of 4%. And you mentioned an important price effect. But what is the price effect, specifically on Q4 compared with the volumes in that division? And to what extent today -- or how do you see the prices going -- prices notably of copper? How do you see that going over the next 3 to 4 months? I imagine you're hedged on this. So how do you see prices evolving in this very specific area, notably of fuses, which does represent a large part of that division?

So regarding the price effect, we track the price effects not on our global sales. And in Q4, there was an acceleration of about 6% of the price effect. And more generally, that is broken down between Electrical Power. And the question of the -- regarding whether we can continue to increase, that's a valid question. You did mention copper. Copper is tending to be perhaps more favorable at the moment than it was at the start of year, but that's not just copper, there's also inflation on some other components. And on energy as well, although that has less of an impact on fuses than on other things. So we need to increase prices further, and we're working on that. But as the beginning of 2022, it's not going to be easy, but we're doing everything necessary. And -- so we saw on the silicon carbide, 50, up from 36 with an acceleration at the end of the year. We haven't really been expecting that sort of growth at the beginning of the year in our roadmap, but that was the acceleration, which suggests things are positive for the future. But we need a couple more months to work on this to see what we can do to cover demand for 2023 and then looking forward to '24, '25, '26. And we're in discussion with one of the big players, so you can imagine who and to try to see what we can do, what amount to invest in what type of products for that market. So it takes a bit of time. It's a bit complicated. There are a lot of companies which are very ambitious for the deliveries of electric cars for '24, '25, '26, but that is a sector that is very promising.

And there's one final question. Regarding solar, you mentioned that there was strong growth there in 2022 with EUR 100 million. We know that a few years ago, there were some pretty sudden downturns in that sector. So what's the impression you have today about the market? Do you think there is a risk of excess capacities? Or do you feel quite at ease with this? And do you think that in 2023, it's going to continue to grow after this strong growth this year?

We have decided where our ambition was to be at EUR 100 million. A large part of that comes from the materials in that EUR 100 million. We've capped our production in solar in China at a certain level because we have other ambitions, other markets. So we're not going to go up to EUR 200 million, perhaps EUR 110 million might be possible, perhaps even EUR 120 million, but not much more than that in the graphite product. So we have lost some market share locally necessarily. As you said, they were staying focused on the very high tech side, where we think that the Chinese are going to have some difficulty penetrating the market. There is growth, that is there. I don't know exactly what is being announced for the coming 3 years, but big growth figures. I don't have the figures yet for 2022, but we're not particularly concerned or worried about that EUR 100 million figure. It won't go down to 20 like it did in 2012, but we are attentive to this. There is a competitive sector, which is quite considerable. We feel quite confident about this and we work on quite complicated applications. So the coming growth, if there is any, in 2023 is more likely to be on the electrical protection than on the graphite side because on graphite, you're going to stay at the same level of sales in principal yet exactly. There's a little bit room for an [ inverse ] room for growth, but not the sort of growth that we saw this year. As we announced, we have -- the idea is that the graphite part isn't in North America, it's not in Europe, it's in China. So increasing our production capacity in China would be complex for -- and with the risk of being too focused on that market. So that seems -- so perhaps there's less risk on silicon SiCs. So that's why we're tapping that growth on solar.

And we have another question.

My question is also about renewable energies globally and notably on solar, to have some indications about the growth that we can expect this year. You've already answered to some extent. But could you explain a bit the geographical exposure of the group to renewable energies? What is the weight of China? What is the rate of the other geographies?

Solar. For the materials part, out of that 100 figure, 70%, 80% is on materials. And -- as practically all in China, where we have partnerships which are quite sound. The rest is linked with the electric products, these are worldwide. So if you look at the big countries, which are doing the big [indiscernible] installations facilities, the U.S. is installing quite a lot and Europe. So we're not everywhere, but -- and our clients often are Chinese, and our Chinese clients then export products all over the world. So they're not just buying for China. And for wind, that's much more global, worldwide. And the aftermarket is more open in the U.S. So that's perhaps 2/3 in North America, a bit less in Europe. And we also work for the OEMs, [ Novex ], Siemens. So you know who those players are. We delivered to them. And there are also people who manufacture generators. I won't explain the whole chain, but there, that's more European.

And the support plans for that sort of sector in the U.S. that [indiscernible] in the future, the plans to support local production, would that encourage you perhaps to invest in the U.S. or Europe in coming years?

For when -- are you talking about wind energy sale or more generally?

More generally.

Solar, once again, the cell manufacturers are in China. So we have to stay effective and keep up our performances with our 4, 5 big clients in China, where we have our [ plants ]. So it's a direct link there. And then obviously, the end market for solar energy needs to continue growing, and it looks like it is and to grow. And wind energy, sometimes we see it difficult to install wind turbines in certain places, they can [ pick up ] small discussions, whereas with solar panels on the rooftops, that's perhaps [ simpliciting]. Perhaps solar is going to develop to grow more. And I think it's the graphite side that will be [ soon on ] wind where at EUR 50 million, which is quite good because we've been about EUR 45 million for quite a few years. And we are working on the aftermarket, where the machines are getting bigger and bigger. So the -- but that is a business we're going to continue working on that not require particular investments we have, the team is there. We have everything we need. And also, we can deliver anywhere. And if there is more solar production in the U.S., obviously, we are capable of delivery. We're very good on hydro in Brazil as well because there are lots of dams there. We have a subsidiary in Sao Paulo, which can deliver to them, even those sales figures are less than for solar, but that is also part of the things that we offer.

And the next question from ODDO.

So the first question regarding China. You mentioned the slow activity in some sector. So what are things looking like for 2023? And my second question is regarding the prices, but can we consider that there's a positive spread in 2023 with price increases, which will be enough to offset the rising costs? And could you also talk about the ACC contract, which was announced recently? That's a big contract. Did you talk about the terms and conditions of that contract and the CapEx that you're writing in the budget? So how is that going to be organized over time?

For the prices, we're beginning with a -- see, that's an important contract for us, our first, really in batteries, with a very big manufacturer. So we've done things for upmarket vehicles. But here, we're talking more about some mass-produced vehicles, about EUR 50 million on the line to deliver that contract for this year. So we'll have some years at EUR 40 million. It won't be divided equally over all the years, but [ directs us ] a certain number of parts. It's an innovative product, the one that we do master. In 2023, I think that the end of the year, there will be a few that will be coming off the lines. And the real quantities will be coming up in 2024 and 2025. And that's when ACC's platform will really be tapering through to [ '27, '28 ]. And we are also working with them on -- of the applications. It might not be finished. We're very happy to -- we think that's a really good reference for us and can enable us to develop. So we're rather happy with that. Regarding China, yes, obviously, the things are sluggish on the solar energy. It's more in the Electrical Power division. For example, we have the investments in new equipment for rail and high-voltage power lines for power transfer around the country. That's where there aren't too many projects. In fact, the problem probably started the year before. So as things stand, there's nothing really fantastic going on in those sectors, but it will pick up again. And ACC, I think it's going to be more end of 2024, I should say, for the production perhaps the prototypes [ earlier ]. And regarding the prices, what I was saying is that it's -- our objective is to offset inflation. We're not there yet, but I think we have a lot of products which are made to order. We are close to our clients. We have innovative products. I think we have all the things we need to be able to manage this, and we managed in 2022. So I hope that we will achieve the objective of offsetting inflation. But as things stand, that isn't the case yet for the prices that we have.

And the next question from BNP.

I have two questions. Could you come back to the solar business, you said that you really focused on the high-tech segment where the Chinese competition is less. Could you tell us what that really corresponds to? What type of product that means? And secondly, in your pitch, we feel that you do feel quite confident. You're working on a new roadmap, as you said you need a few more weeks to fine-tune the figures. But what -- how do you see things when -- which do you think you'll get back to us when you do the annual figures or for the figures for Q1, when do you think we will have a new roadmap?

For the annual figures, you should get the roadmap regarding that question. And for the high tech in solar, in fact, little by little, the Chinese have been going on -- coming up with equipment for furnaces to make ingots of silicon for the rectangular plates and save increase the size of their furnaces enormously in 4 to 5 years. And when you increase that, you also increase the size of the graphite parts and the components around them. And it appears that our Chinese competitors are having difficulty proposing those large dimensions. They can produce a few, but the larger sizes are more complicated for them to produce. And when you increase the size of the furnaces, they're also increasing the size of the cells. And for the thermal treatment at the end, they need to do heat treatment and once again, the frames they need at the size where they also have difficulty producing. So we feel that they are making some progress on this, but it's not that easy. And then there are other parts in the furnaces, which are very exposed to the [ sickle ] vapor, and that's the same we perhaps can handle that a bit better than they can.

We never know whether we are clear when we're talking about -- with technical yet. Can you explain that to someone who isn't a specialist like me? You explained that very well. And I know we asked this already and sort of, but is that having the objective for the coming -- for CapEx for the coming 3 to 5 years. But for 2023, are you expecting a big acceleration to prepare for 2024 and 2025? Or is it going to be more in 2024, 2025 that we'll see the big acceleration in CapEx? And if there is a big acceleration, will that mean raising debt, perhaps increasing capital? How do you see yourselves financing that ramp-up?

That's a lot of questions. At the moment, we're discussing with the clients. We have very dynamic markets with acceleration. And today, we're discussing with the clients. And the idea is to contractualize and to [ cash ] commitments from them because when you're talking to clients -- obviously, we try to get commitments to know where we stand to make sure it is serious. But for the moment, I can't really say more. Regarding the ramp-up, there will be one, but I think it's still too far ahead of that to know exactly when or how that will be financed. I hope I can tell you more about that when we present the annual figures. And on the funding of that ramp-up, we'll see.