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

Hello, and welcome to the Mersen 2023 Half Year Results Call. [Operator Instructions] For your information, this session will be recorded. It will be led by Mr. Luc Themelin, Chief Executive Officer; and Thomas Baumgartner, Chief Financial Officer. I will now hand over to Véronique Boca. The floor is yours.

Good morning, everyone, and thank you for joining this conference call. The press release as well as today's presentation and the half year report are all available on our website. As you were just told at the end of the presentation, Luc and Thomas will be available to answer your questions, either directly on the conference call or by using the chat. You can put all your questions through the chat as we go. Without further ado, I'm going to hand over to Luc Themelin.

Thank you, Véronique, and good morning, everyone. It has been a remarkable half year for Mersen, also a semester rich in events. We have again beaten our half year sales record at EUR 608 million. We signed major contracts with Wolfspeed for the SIC semiconductor markets and with ACC for the supply of bus bars for electric vehicle batteries. So these contracts and many others are really the foundation of our 2027 road map which we presented in March with the aim to achieve sales of EUR 1.7 billion by 2027. And as you know, to give us full strategic and financial flexibility, we launched a successful completed capital increase of EUR 100 million. So let's come back to the first half results. As you can see, all markets grew, especially the semiconductors and solicium semiconductors, which were the main grown -- growth drivers. And there are some interesting highlights with the growth in the process industries, which remained solid. The aviation sector, which continues to recover, railway above 2019 levels. Last but not least, in chemical with good bookings, there again to ensure good sales for the current year. Let's now look at our growth markets, because beyond the half year performance, it is important to understand how we see future growth. Starting with EV, we achieved EUR 10 million in the first half, and we're continuing to win major deals for both fuses and bus bars. The growth of this market is confirming and we are very well positioned. The first bus bar production line is currently being qualified in our St Bonnet plant for ACC and production lines are being set up as well in Mexico and China. As regards, the manufacturing of classic semiconductors like silicon-based ones for computer memories, microprocessors, sensors as well there. Mersen is enjoying steady growth despite the temporary slowdown in global demand, mainly in memory. Major investments are underway in the U.S., in Germany as well and in Korea. And thanks to our presence at key process stages, Mersen should not feel any particular downturn in this business. For silicon carbide semiconductors, our growth in the first half was incredible. We reached EUR 43 million in a single half year compared with EUR 52 million for the full year 2022. Obviously, this is partly due to deliveries to Wolfspeed, but the market as a whole is also very dynamic. Let me remind you that semiconductors are essential to the development of electric vehicles. As you know, we have a very unique position in this market, thanks to long-standing relations with Wolfspeed, which enabled us to develop the best graphite and insulating soft belts with the right physical properties as demonstrated by a major contracts signed recently. Last but not least, in renewable energy's growth is more limited. As we announced earlier, Mersen wants to focus on top-of-the-line solar market. Our aim is not to necessarily keep pace with the growth in the market as a whole, but to allocate capacity in China for our most high-end customers. Over now to Thomas to take us through the key financial information.

Thank you, Luc, and good morning, everyone. Let's start with some information on sales. First, as you can see, organic growth was 18% -- plus 18% for the first half year. This growth comes from both divisions, 19 for electric, for example, now if we look at growth by nature, you can see that volume and mix were the biggest contributors. Prices contributed approximately for 5%. Let's now come back to the main indicators of the half year. EBITDA, up 16% for over EUR 100 million, which is 16.5% of sales. Depreciation and amortization remained stable at 32% for the half year. It should be noted that the investment program was very, very dense during the first 6 months, but commissioning has not yet been completed. It will be carried out in batches over the next semesters. And we should see a significant increase in depreciation. As a result, our operating margin before nonrecurring items rose sharply by 25% to EUR 69 million, margin increased by 80 margin points. So be forward going into the details of our operating margin, I would like to highlight the ROCE for the half year at 13.3%. So we're in a very favorable situation on June 30. CapEx, very high but well below the level for the next 6 months. And we are fully benefiting from the utilization of our production capacities. So our ROCE will not remain at this level for the full year 2023 as the CapEx will be much higher between EUR 150 million to EUR 200 million for only EUR 60 million for the first half. So all investments are not yet fully operational. Going into the increase of our operating margin, 80 basis points, as I said, it can be explained mainly through volume growth and pricing power. Volume represents 2.6 points in margin. As Luc said, it comes from various markets. Second, we have seen significant inflation in energy prices, raw material prices as well as wages, which is something we planned we knew, and this was offset through productivity and above all, price increases. We are benefiting from onboard price effects which was -- were passed in 2022. We continued in the first half to increase prices, especially in the electrical segment. And we should be able to further benefit from this in our margins for the second half. So the margin also includes additional costs which I would describe as exceptional or temporary costs. First of all, linked to the ramp-up of our Colombia plant. There are development costs on the project with Soitec and costs coming from the creation of the dedicated electric vehicle team. All these costs have a temporary impact on our P&L as they relate to sales, which are still relatively low but which are set to increase over the next years. Let's now take a look by division, starting with Advanced Materials. As you can see, advanced materials was able to maintain very high levels of recurring operating margin, with a strong volume effect as well while observing the additional cost of ramping up the Colombia and Soitec projects I just mentioned before. Price increases and productivity plan were partly offset the effects of inflation. Just coming back now to the margin of Electrical Power, which also rose sharply, thanks to a favorable volume mix effect and thanks to the positive impact of price increases, margin of 10.7%, which does include the additional cost of setting up the electric vehicle teams. Net income also significantly up with growth over 25%. Financial expenses were higher than last year due to the exceptional increase of interest rates nearly 4%, which is very significant, very considerable. But on the variable portion of our debt around -- it represents about 30% of our gross debt. It also includes a tax rate of 23%, which is very consistent with previous fiscal years. Operating cash flow also improved significantly compared with H1 '22, which was largely impacted by high working capital requirements. This year, working capital stood at 22.9%, as you can see, 22.9% of sales, which is down 2% -- down 25%, sorry, versus June 30. The group benefited from contract advances in the semiconductor markets. Conversely, the rise in inventories was due to strong business growth in the building of safety stocks to ensure a good start to our long-term SiC semiconductor and the electric vehicle contracts. Last, but not least, we made higher tax disbursements than last year, in line, again, with our earnings growth, of course, and due to the nonrecurrence of favorable 2022 effects on our tax payments in China and in North America. Overall, cash flow from operating activities rose sharply to EUR 39.2 million for the first half year compared to EUR 5.3 million at June 30, 2022. So as we announced, CapEx rose sharply, EUR 62 million versus EUR 33 million in June 2022. You can see that 55% of the amount of the first half is coming from our 2027 road map. The balance includes other growth projects, maintenance, safety as well as environmental projects. As I have already mentioned, some of these investments have not yet been launched, so their amortization has not yet started. Furthermore, CapEx should be higher in the second half of the year as we have indicated in our guidance. At the end of June, group's net financial debt was down EUR 52 million to EUR 189 million. We benefited from the capital increase net of expenses, that is for EUR 96 million, and we've reinvested this in significantly higher investments as part of the company's growth plan. Our financial structure remains very solid with a leverage ratio below 1, 0.98 to be precise. Last but not least, before handing back to Luc, a quick word on our liquidity, liquidity profile. As you can see, the average maturity of financing is 4.5 years. Major installment or maturity for reimbursement, I should say, is in 2026 with the refinancing of the Schuldschein. In addition to that, we have EUR 320 million of undrawn confirmed lines and EUR 50 million of available cash. In other words, once again, we have a very solid financial structure, which will allow us to pay for our future investments. Back to Luc for conclusions.

Thank you, Thomas. So as you've seen all indicators, we've just presented looking good with increased confidence and we were able to increase our annual guidance, organic growth between 10% and 12% versus 5% to 10% previously, operating margin between 11% and 11.2% of sales versus 10.5% and 11% previously. CapEx is still forecasted to be anywhere between EUR 150 million and EUR 200 million. So the good results, obviously, confirm the 2027 plan, which we announced back in March. Our road map is still active, the objective being EUR 1.7 billion in sales with operating margin before nonrecurring items between 11.5% and 12.5%, EBITDA margin between 18.5% and 19.5%, and an ROCE between 12.5% and 13.5%. So much for the main comments on today's publication. Thomas and I are now available to answer any of your questions.

[Operator Instructions] The first question is from [indiscernible]

Hello. Can you hear me okay?

Yes, we can hear you loud and clear.

Okay. I have several questions. How do you expect inflation to evolve for the rest of the year? You announced 4% at the beginning of the year. Is that still the case today? Or are you seeing a drop in prices, which could cause you to revise this number? That was my first question. My second question on production capacity. 1.2 billion in production capacity for the full year, what are your expected capacity increases? And what would be your capacity expectations for 2023? I have 2 additional questions on utilities and energy markets. We've recently heard about the challenges of the wind industry. Could you tell us how much you're exposed in this segment? Last but not least, a question on solar. Could you tell us about your growth perspectives of solar in China?

I can pick up the first question. The inflation is still -- we're going to be quite consistent. We expected 6% in wages and the overall number was 4%, which we would offset by price increases. So some raw material prices and energy costs have declined, but we do not expect major changes. Moving on to your question on production capacity. I imagine your question pertains to materials on rigid felts, especially. So we anticipated that this year, demand was going to go up. And things are going quite according to plan for silicon carbide. Our capacity plan is proportionate to demand. In other words, our capacity will be slightly higher towards the end of H2. But the objective behind this is really to prepare for next year. So there will not be a major increase or peak between now and the end of the year. We're just preparing and gearing up for next year. The EUR 1.7 billion plan is for 2025, 2026, 2027. So in wind, we provide the blades and so it is very contingent on the number of mills that are installed. We're also delivering for new equipment, but 90% of the sales are coming from existing mills, wind mills. And so depending on wear and tear, we provide equipment for generators. This includes a lot of carbon fiber, glass fiber for blades. The high-end market is doing very well. It is actually slightly up at the end of H1. For solar, you're absolutely right. We're working very closely with China. We have several projects in China. There's really 2, 3 projects we've been working on very actively. Then we have the U.S. as well and India. We have more projects in France, for example, but 2 major projects in India. And there are a couple of big ones as well in the U.S. with expected sales not before 2025. So they will -- it's not -- they're full contracts. It's not contracts where we have a little portion. It's major contracts with panels with very interesting projects for us. We're monitor those -- monitoring those very, very closely. They're not on the road map. But if they do develop, it will be a small bonus for us.

How much additional sales would you expect to get?

It's difficult to say. Maybe we could develop this in a few months from now. I don't think we're quite there yet. What we do know is that projects right now are not sufficiently advanced to give you any clear numbers.

Next question from Julien Onillon from Stifel.

I have 2 questions. The first one is on EV. And silicon carbide, you mentioned EUR 10 million for EV last year, EUR 20 million. Are you seeing -- are you expecting something different? Are you expecting growth in the -- in H2? Because I think I was expecting more growth -- the silicon carbide, as you said, very significant growth, EUR 43 million versus EUR 52 million for the full year, EUR 22 million. What do you expect to be the final result for the full year 2023? Do you expect this growth to continue? With knowing that you have -- your capacity at one point will reach its limits, that's my first question. My second question pertains to other markets -- other segments, including Chemicals, chemistry. You said the performance has been relatively good for H1 with good perspectives for H2. Are you seeing any of your chemical customers challenged because of the current context? Have they -- have any of them revised their guidance? And do you think some orders could go down so much for chemical industry for process. The numbers were good. What are your perspectives? And how do you see the market going forward? H2, namely. Are there still favorable price effects to be expected? Or do you think that the price increases were passed on? And do you think there could be price drops? Sorry, lots of questions.

Thank you so much. We're going to take the questions one by one. Sales for EV. I can answer the question. We've known for a while now. We don't know what will be the full year results. EUR 20 million, EUR 22 million, I think very close to last year. The qualifications or especially for fuses will coming in 2024 and mainly 2025. So the results really come a year after that. So don't expect 30 or 35 by the end of this year. I think it will be for next year. For silicon carbide, as you said, very significant growth. I don't think -- maybe we'll do a little more than H1 in H2. We have a few large players in this industry. They have been adjusting their demand. But I think we're probably going to do a little over what we did in H1. So the bookings are looking good for 2023. For 2024, we don't really know. What we're seeing is that a lot of -- there are a lot of projects in the pipeline in the chlorine industry, for example, in the chemical sector. So we're not expecting a contraction of the chemical industry markets. Global sales is about 10% of the total market volume. A lot of this includes services and maintenance. What we're seeing is that orders are not necessarily increasing. We had a lot of orders last year, not quite the same this year. And we are not expecting strong industry growth for H2. I think we've reached somewhat of a plateau. This is why we set a guidance between 10% and 12%, even if we had 18% in H1. We don't have the favorable price effect to expect. We're actually continuing to increase prices. And so I still expect a favorable effect. But if you were only looking at the variations, versus last year, last year, we had already increased prices. So the favorable price effect this year is not what it was. We think that it could be 4% for the full year, but not 5%. I don't know if I was clear.

Yes, you were. It was very clear. So what you're seeing is that there is a basis effect or a baseline effect. The price effect will not be as significant in H2. The volume effect has reached a plateau, so is my understanding. I guess the question is, are you going to continue and increase your prices right now versus a month ago, for example?