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

Hello, everyone and welcome to Mersen's 2023 sales presented by Mr. Luc Themelin, who is the CEO; and Thomas Baumgartner, who's the CFO. This conference is recorded. [Operator Instructions]. Without further ado, over to Mr. Luc Themelin.

Hello, everyone, and a happy new year. We're very pleased to welcome you to Mersen's 2023 results. A few words to introduce you to another yet record-breaking year. We set a new annual sales record at EUR 1.211 billion. Thanks to this good performance, which confirms our strategy, we're forecasting operating margin of approximately 11.3% for the year, which is higher than previously announced. We're, therefore, perfectly in line with our 2027 road map. So we've set a sales record in 2023 despite unfavorable currency and scope effects. The most significant impact is obviously the conversion into euros at the Chinese RMB and the U.S. dollar which has negatively impacted our sales approximately EUR 40 million for the full year. And to a lesser degree, we've also had a change in scope linked to the disposal of a small operation in Germany, which we already mentioned last October. Looking at organic growth. As you can see, we've had a solid momentum since 2020. In 2023, organic growth is plus 13%. The fourth quarter was very sustained with organic growth of 9%. As a reminder, the company posted organic growth of plus 18% in the first half, 9% in the second half, due to a much higher basis of comparison in the second half compared to the first half. For the full year 2023, each quarter amounted to roughly EUR 300 million. Over to you, Thomas.

Thank you. Thank you so much, Luc. Hello, everyone. This was indeed a record year across all geographies. We're going to start with North America, where growth has been the most dynamic, the most sustained as you can see. The 2 segments contribute; semiconductors and process industries. Electrical distribution including -- included in the process industries was very active also mainly supported by price increases. Business in Europe also grew strongly in both segments driven by semiconductor, rail as well as aerospace. In Germany, business has been very buoyant in particular, thanks to chemical industry and semiconductors. In France, growth was mainly driven by aerospace. Growth has been somewhat more modest in Asia. China and India really drove growth, thanks to, respectively, the semiconductor and chemicals markets for China and rail and wind power sectors in India. However, the electro protection market has declined, especially in China because of a less favorable economic environment. Last but not least, the rest of the world sales growth is a result of business deliveries in the Chemicals and the Middle East, which was weighted by the nonrecurrence of some major deliveries in the chemicals in South Africa and Morocco, in the previous year, 2022. Looking at end markets, over the years, starting with the process industries, which obviously accounts for the largest share of sales, 33% of total sales. There again, growth was sustained at over 10% with contributions of the 2 segments, the Electrical Power segment, as I said electrical distribution in Europe -- in the United States first and also in Europe has been -- remained very buoyant, mainly driven by price increases for advanced materials, growth was driven by the glass industry, the steel industry price increases as well as market share gains in Europe. Second market in electronics -- is electronics, sorry, with 24% of total sales. So this market is driven by the impressive acceleration of SiC semiconductors, EUR 90 million in 2023 versus EUR 52 million in 2022. So this is really not a surprise. This market has been driven by a number of long-term contracts we have with industry players, especially the Wolfspeed contract. In conventional, silicon semiconductor's growth is also quite present in spite of a declining market. Mersen's growth is due to its positioning in key very technical areas of the business of the -- and the manufacturing process. To continue, energies, mainly renewable energies, starting with solar, growth in 2023 is close to EUR 100 million, EUR 97 million to be precise, leading as expected to limited organic growth over the year. EUR 100 million last year, but there is a negative currency effect. So -- but we do have positive organic growth. At the end of 2022, we decided to allocate less graphite production capacity in China to solar energy in order to free up that capacity for the semiconductor market. We're actually going to continue this strategy in 2024. The wind power market is also showing limited growth as we also expected. The transports market represents 13% of the total sales. Growth has been very dynamic in the Aerospace segment, both in Europe and in the U.S. Rail has also grown very much in line with the company's growth, and we are actually now above pre-COVID levels. Lastly, for electric vehicles, EV, the company has started to supply Marquardt with fuses and also the first ACC deliveries with busbars. Furthermore, business for charging stations is also picking up in the U.S. and Europe with fuses as well as cooling plates. And last but not least, the chemical -- chemistry, 9%. The growth here has been a bit more limited, but the order book is higher than last year at the same time on a like-for-like basis. So I would remind you that organic growth in growth market, semiconductors, SiC, renewable energy was in total 20% compared to 5% in more traditional markets. In the growth markets, the strongest contribution is, as you would expect, coming -- come from SiC semiconductors with nearly 90% growth, EUR 90 million in 2023. Growth for electric vehicles is 16%. It represents EUR 24 million in sales. And once again, we expect stronger growth in the markets moving forward 2025, 2026. Last but not least, growth was slightly less strong for semiconductors and renewable energies, respectively, at 9% and 5% for the reasons I explained before. So this overall good performance allows us to increase our operating margin guidance for the year, as Luc said earlier, it should be around 11.3% of sales. As far as investments are concerned, guidance remains unchanged between EUR 175 million and EUR 200 million, as we indicated before. This is it for this presentation. Luc and I will now be happy to answer all your questions.

[Operator Instructions] We have one question from [indiscernible].

Could you tell us about the acceleration in Q4 Advanced Materials and the slowdown in other segments. Could you explain what's behind these changes in Q4? This is my first question. Second question. In Q4, there was a slowdown in Electrical Power, does that mean that the only -- what's behind the growth is only volume and price increases? And my third question is on electrical distribution. Could you give us the outlook for this business as we start 2024?

Well, I think the first question; in Q4, the chemical is doing very well. So there is no real change in the actual trends in the 2 markets you mentioned. Between Q3 and Q4, there has been -- there have been no major changes. On the question on electrical distribution. I think the one in Europe works quite well. We have more visibility in the U.S. We have a significant backlog, as we mentioned before, we had to -- some mid-year deliveries, important deliveries. And we have a few months ahead of us with continued high deliveries. We're delivering the orders that were made a few months ago. The overall trend is still looking quite satisfactory at the beginning of this year.

How much visibility do you have? Would you say 4 to 6 months?

Well, we have a significant backlog. Demand in the U.S. right now is not declining. Business is quite sustained there. So we'll have to see -- things could very well pick up again in February and March. The 2 past years have seen a somewhat unusual cycle with COVID but we think we have a very solid momentum in the U.S., but also in Europe, we've had some very good deals all the way up through the end of 2023.

And how about the prices for electrical power in Q4?

I think you're right. It's -- the main effect is a price effect. It's been a bit higher, as a matter of fact, than anticipated. Price and volume. We're talking about electrical power, EP.

Next question from Jean-Francois Granjon.

I have a question on electrical distribution. You said that you're delivering the orders you took over the past weeks. What are the current trends of order intakes? Are you seeing a slowdown in order intakes? And subsequently, how do you see the next 3 to 4 months? That's my first question. My second question. You've had obviously an excellent year 2023. Organic growth was 18% in H1, 9% in H2. The guidance is 11.3% margin. So we're going to see -- so the margin will be the same in H1 and in H2, with organic growth, which was less sustained in H2 and yet margins are excellent. How do you explain this? How do you explain this very good margin semester after semester with organic growth being lower? Do you think it's a question of productivity? How do you explain margin has been so good during the second half of the year in spite of organic growth being lower, not bad, but lower, lower than H1.

Well, we have two very similar semesters in terms of sales. Organic growth, again, has been quite similar in terms of volume and in terms of price. And this is really what explains this. We will communicate this in greater detail when we communicate the results. So how about -- and as far as the bookings are concerned, your question on bookings, the electrical distribution bookings are a bit lower. But we've had a lot of orders, which we're now delivering. So we're sort of catching up, making up. Products are being delivered. They order a bit less. We're still getting very decent orders. I think in February-March, we should be -- if business goes well, we should be in good shape. We're not seeing any signs of decline. We saw a lot of growth in 2023. In 2024, we don't expect particular growth in electric distribution.

The last question on pricing. 5% growth is the price effect for the full year. What is the price momentum right now? Is it still the same? Are you still being able to increase prices or not?

Well, we're still going to get the benefits of the 2023 price increases. We may continue to increase prices, but more selectively. Obviously, increasing prices has become more difficult also because of less inflation. Inflation -- the main inflation is coming from wages. It is significant, even if it has -- it's less than the previous year. Inflation is lower, energy prices are dropping, for example, raw materials, some raw materials are declining as well. They were very -- they increased very sharply last year. I'm going to say what we've said before. Our objective is to compensate for inflation. We did this in 2022. We did it. We did it in -- we said it in 2023, we delivered. We're saying the same thing, the objective. This is our objective, again, very consistently with the previous years within reach.

[Operator Instructions] The next question is coming from [indiscernible].

I would like to come back to the 2023 price increases. Obviously, you're going to have cost increases in 2024, wages, materials. You've been able to have some price increases. What -- how much is going to be -- how much of the price -- the 2023 price increases will still impact Q1 2024?

We will give you additional information once we work on our guidance probably in March. What I can say is that the impact is less now than it was last year.

Right, quite logically. So would it be in the vicinity of about 2%?

Once again, we will tell you in March.

Okay. I have a quick technical question on the scope. You mentioned the small disposal. I was a bit surprised by the amount. It was EUR 6 million impact on Q4. I had in mind it was a EUR 10 million sales business for the full year. Have you booked retro actively? To me, it sounded -- seemed quite high.

EUR 6 million for Q4, that sounds a bit high. I'm not sure how to answer your question. To me, that sounds a bit high. Make sure you call Véronique Boca. We'll get back to you with the precise answer.

Okay. I have another question. I'd like to come back to the main growth factors and growing segments. You mentioned electric vehicles, EVs. No new major contracts with battery manufacturers. Obviously, you still have the deal with ACC, which is now generating some sales. But to reach your 2027 targets, you're going to have to sign much larger contracts like the ACC contract. How much progress have you made? We hear about a slowdown in the EV business, things seem to be a bit more complex than expected. Could you give us an update on that? And my next question is on silicon carbide, EUR 90 million sales, a very sharp increase with a potential capacity limit. You're really trying to mobilize massive efforts to answer the demand. In 2024, how do you see things moving forward? How much do you think you could earn maximum with much larger capacity contracts? What's the maximum sales you would expect to generate on that segment?

Difficult to know what will be the final demand for silicon carbide. What I can say is that 2023 was very much in line with our expectations. We announced a number of contracts and those contracts happened. Our customers kept their promises. We are now working on 2024 with our customers. Again, I cannot really answer your question at this point. I think customers will adjust their needs as we move forward. We have several customers. We finished the year positively with a Chinese customer who came -- which was somewhat unexpected. We're going to do our best to amortize ups and downs, but I can't really give you any figures at this point.

But you have capacity constraints, right, on these products?

Yes. We always said that '23 would be difficult to deliver more. The fact is customers did not really ask for more. In 2024, there are going to be some additional allocations, but not that many. The real peak will be coming in 2025. This is where our capacity, mainly in H2, will need to -- will be important. We're really following demand as we move to be -- to meet customers' needs and expectations. We do expect growth in silicon carbide in 2024, of course. Sales should accelerate quarter after quarter as we increase our capacity. We will give you additional information in March once we can give the guidance. We have contracts, good qualifications, and again, we're very much in line with the 2027 plan. We should have the credentials -- we would like to have a second contract like for batteries, we have ACC. With ACC, we're in very good shape, better than expected, doing very well. We're talking to a number of other companies, 1 or 2 companies for potential deals in 2025, '26, '27 and new platforms potentially as well. We're not going to disclose any names right now, but things are looking quite good and we should be in line with the 2027 plan.

Okay. This was our last question coming from listeners. I'm going to give the floor to Véronique Boca for any questions in writing.

Hello. We have one question from [ Bruno Hertz ]. What is going to be the impact of current sales on your ramp-up on the electric vehicles?

Well, it's difficult to say at this stage. We're not targeting 80% market share. I think our success greatly depends on the manufacturers we work with. I can't really answer the question, looking at the current EV performance. We have different product -- customers who have qualified our products. We'll see how successful they are, how successful their platforms are in the next 2 to 3 years, if things go well.

Okay. Here's another question from [ Philip Dubois ]. What explains the increase of 2023 investments, which I mean, in the fall? Is it because of price increases due to inflation or is it because you have real new development opportunities?

Well, I think we somewhat adjusted our estimates. At the beginning of the year, we more or less had this in mind between 75 -- 175 and 200, but it's a large amount. And we figured if we're behind, we may be under that number. So we deliberately put a very wide bracket because we never invested that much in the past. Obviously, we have to execute. And we know we may not be able to spend all the money. But we did, we did, which is good news. So things remain unchanged. Maybe we didn't communicate clearly. It's not an increase in capital expenditure. I think today, we're talking about greater precision, accuracy, sometimes there can be a gap between January and December. So that's the explanation.