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

Ladies and gentlemen, good evening, and welcome to the Q3 Mersen's results presented by Luc Themelin, who is the CEO; and Thomas Baumgartner, who is the CFO. Ladies and gentlemen, this call is recorded. [Operator Instructions] The floor is now over to Mr. Luc Themelin. Thank you.

Thank you, and good evening, everyone. Welcome to Mersen's Q3 2024 Sales Conference Call. First of all, I would like to point out that we have set a new record for the first 9 months of the year in terms of sales, EUR 933 million versus EUR 910 million last year. However, the last quarter, especially the month of September, were sharply impacted by a downturn in solar and a significant slowdown in the silicon semiconductor market. For these reasons, we're revising downwards our targets for 2024. I will come back to this point in greater detail towards the end of the presentation. Over now to Thomas who is going to come back to the details for Q3.

Thank you, Luc, and hello, everyone. First of all, a quick reminder. We have a total sales of EUR 933 million for the first 9 months, which is organic growth of 3.7%, of which 2.5% were due to price increases, which once again demonstrates Mersen's pricing power. So the current impact of ForEx was unfavorable, mainly the conversion into euros of the Chinese RMB, U.S. dollar and the Japanese yen amounting to almost EUR 10 million. The impact of changes in group scope or structure was neutral. First of all, we have the disposal of small unprofitable businesses, one in the chemical industry in Germany, which was conducted in August 2023 and a more recent one in railway brushes in China, which was disposed in April 2024. Second, we had the acquisition of GMI in North America, which we've now consolidated for 1 quarter. As a reminder, this company is consolidating our footprint and position in the graphite activities in the U.S. And it generates full year sales of around USD 40 million. Now looking over the 9-month period for all divisions and geographies. As you can see, they all contributed to this growth. Advanced Material [ 5% ], as you can see, in Europe, organic growth was 3.4% despite the downturn in Germany, especially in Q3, we'll come back to that. And growth has been primarily driven by France, Italy and Spain. In Asia, growth was 2.8%. China continued to grow moderately, albeit we'll talk about the solar in China in Q3, and India has overperformed in the region. Last but not least, North America, organic growth at 4.5%. Most of this is coming from the chemicals and process industries markets. Moving on to Q3. Total sales of EUR 309 million, which is a more moderate increase, 1.2%. This is organic growth. So we have the process industries, which have posted sustained growth in both divisions. This growth is particularly strong in the U.S. with the exception of electrical distribution, which is set for -- which was very strong in 2023, I beg your pardon. The electronics market is in slight decline with a contrasted picture with SiC semiconductors on one hand, and a slowdown in the silicon semiconductor market and fewer power electronics projects on the other hand. The energy market, this is important. The energy market is down sharply. This is due primarily to solar energy in China. As Luc suggested earlier, the wind power market is stable. Growth in the transportation market is particularly strong in all 3 subsegments, Aeronautics to start with, rail and electric vehicles, EVs. And the Chemical segment has also benefited from major deliveries and synthesis and heat exchangers in Europe and North America. So total growth there as well during this quarter. Let us now come back to some of our growth markets, and let's look at our expectations for Q4. I'm going to start with the Renewable Energy segment, representing EUR 100 million over the first 9 months, EUR 110 million, I beg your pardon, 60% of which is coming from solar. So we saw a fairly significant slowdown in Q3, which we do not expect to subside in Q4 because the stock, the inventory of Chinese manufacturers is simply very high. So this doesn't really jeopardize our business in solar industry, we think this is a temporary situation in the value chain, which should be solved. And on the other hand, wind power has been stable as expected and should remain so until the end of the year. Moving on to the second market, which is the silicon semiconductor business, representing approximately EUR 40 million in the 9 months. Since the beginning of the year, sales were down very much in line with market trends and in anticipation of AI-related growth to come. So we were expecting a rebound in H2, especially as we saw interesting signs of improvement. But we're not actually seeing this improvement happening now. And we didn't see it in Q3. We don't expect it in Q4 because we still have these inventories. So the rebound is not to be expected before 2025. Silicon carbide semiconductors accounted for EUR 75 million in 9 months, growth slowed in Q3 and we now expect stability in Q4, again, in line with expectations for the EV market, electric vehicle market. And this is obviously lower than we had initially forecasted. So the electric vehicle market is still growing strongly. We had EUR 22 million in sales over a 9-month period. And we expect stability in Q4. A vast majority of our sales are on heavy vehicles, and we're already positioning ourselves on platforms on that specific market for next year. Other markets are holding up quite well overall, and we anticipate a decent end of year in spite of rather tense macroeconomic context in Germany. Luc, over to you to close this presentation.

Yes. Thank you, Thomas. First of all, I would like to say that this month, we completed the acquisition of a small company in the U.S., in the cooling sector, KTK Thermal Management. This is a small-scale acquisition, very much in line with measures we decided to take at the beginning of the year to improve profitability of this specific product line, coolers that is. So this acquisition should allow us to consolidate our North American expertise in coolers on this new site and therefore, achieve significant cost savings. We're also in the process of concluding another acquisition in the U.S. representing approximately USD 15 million in sales in the materials sector. So these 2 acquisitions in total will represent the cash outflow of approximately USD 20 million. At this point, the group has no other acquisition projects in the pipeline. At the beginning of this year -- sorry, at the beginning of this year, we launched a series of optimization measures, which we've decided to accelerate. We already announced the sale of a railway brush business in China. This was a business where our main customers were state-owned companies, which implies they're difficult to grow and develop. We're also in the process of closing 2 product lines in Asia, 1 in India involving the manufacturing of anticorrosion equipment, and another 1 in China for a small line of power transmission products. For both, we are not competitive with strong local competitors in Europe. We're going to close a workshop in the Netherlands, which didn't have critical size, and we're going to transfer equipment to, and sales to other European countries. Last but not least, we are going to consolidate our North American cooling expertise on the KTK Thermal Technologies site, which I mentioned earlier. So all these measures will lead to gains of approximately EUR 15 million, EUR 3 million have already been -- will be achieved in 2024. So in total, for 2024, we're talking about EUR 20 million, EUR 12 million in cash costs and EUR 8 million in noncash costs, mainly depreciation of these EUR 20 million, EUR 3 million have already been booked in the first half. These factors lead us to revise our objectives for the years -- for the year as follows: we're expecting growth between 1% and 2% compared to 5% previously, operating margin between 10% and 10.5% versus around 11% of sales previously. So this revision can be explained by the lower than anticipated volume effect while the level of depreciation remains unchanged. CapEx of around EUR 220 million compared to EUR 200 million to EUR 240 million previously. The 227 (sic) [ 2027 ] targets are confirmed, however. So this concludes my comments, Thomas and I are now at your disposal to answer all your questions.

[Operator Instructions] The first question is coming from Julien Onillon from Stifel.

I would like to come back to this sharp decline in Asia Pacific. We had a nice increase in the first 6 months. Q3 minus 8.3%. So we understand that this is coming from solar. Could you give us a bit more detailed information on this business precisely, solar, you mentioned EUR 40 million. I'm looking at the numbers here. I jotted down. I think you said 60% -- EUR 60 million or EUR 70 million, sorry, in the last -- the first -- the 9 first months, could you break that down? Could you break those EUR 60 million to EUR 65 million between Q1 and Q2 to fully understand the impact of Q3? And then what are your expectations for Q4 moving forward, again, in the solar business. Second, question 2, coming back to silicon and silicon traditional semiconductors. Obviously, performance is quite disappointing. It is not what you were expecting. Some orders obviously were not booked. There again, could you be a bit more detailed in your expectations, the expectations you had for Q3 and the actual performance in Q3. And therefore, the gap between expectations and the actual numbers. Coming back to silicon carbide. You said you gained some customers. You told us that for Q1, you had new customers in Asia, in China, namely, I remember very well. You're giving us some of the names of customers. China is now declining. What does that mean? Does it mean that those Chinese customers are not delivering? And then maybe a more fundamental question. You have this major contract with Wolfspeed. I know that this is -- that they're very, very active with Tesla. What is the outlook for this -- what are the perspectives for this contract? And what are your expectations between now and 2025 moving forward?

Well, thanks. I'll pick up on the question on solar. H1, we had -- we generated EUR 45 million, Q3, EUR 18 million. And we expect less in Q4. September mainly was disappointing, right. And I can give you some contextual information. We're quite used through these ups and downs in China with Chinese companies. They're all trying -- seeking to gain market share. We don't work with everyone. We have privileged customers, but they're subject to fluctuations, just like we are. We generate substantial sales in silicon sales or -- the Chinese have about 1,000 gigawatts installed. I think last year alone, they installed 450 gigawatts in solar panels. So this means that when they overproduce, they can overproduce a lot more than the installed capacity. I don't know exactly when this happened, possibly 2023, the end of 2023 and 2024, but some products not being sold, caused them to produce less. We actually faced this a few years ago already. So inventory has to be turned into solar panels and then shipped around the globe. So as we're waiting for this to happen, well, we're pretty much coming to stand still. It's China. It's not happening elsewhere. And as far as silicon is concerned. The silicon market is doing well. We had some issues in -- there were some issues in 2023, but we didn't really feel these issues. So chip companies use a lot of components, and they're doing well. Take [ SkyLink ] or Samsung, they have recently announced good results. But when market was low, we didn't have a lower performance but spare parts inventories built up. And I think that right now, they're selling these inventories and orders have been quite low. It's really not that easy to anticipate because we don't really know what is truly happening in the supply chain. Once again, this has happened before. We've had silicon ups and downs. It comes in cycles. And typically, things change within 6 months. Right, in Q1 -- sorry, H1, we saw sales slightly declining. And the end of the year is a bit more of a surprise. But we've been talking to some of our customers, and we think things will change. What's reassuring is sales in semiconductors, [ EUR 52 billion ] in September. So we had a low point of [ EUR 42 billion ]. It's really unfortunate that this should happen at the same time. But otherwise, as far as semiconductors in China are concerned, this one customer we're delivering in China. They're very buoyant. They're very dynamic. They are still -- they still have a lot of demand. So it's not because of this Chinese company, it's really only due to solar. What we showed you earlier, you were referring to customers. We didn't really announce new customers. The illustration of what we were trying to convey is that we had many customers. As far as Wolfspeed is concerned, I think, yes, the -- as you said, they deliver Tesla. We are not really aware of what they do and where the transistors are shipped. It's a growing business. It's -- manufacturing seems to be struggling a little bit as they're picking up. Again, we don't really know. We produce wafers essentially. They have -- did not order what they -- the maximum -- they suggested they might do. We don't know at this point. We have no perspectives for next year.

Okay. Thank you. You had a contract, a guaranteed contract, and you made some major investments for this contract. So with guaranteed, minimum guaranteed return of investment. So what are your expectations for next year? We don't have any details regarding the phasing of this contract between 2024 and then 2025. Does the contract include an increase of sales, Mersen sales to Wolfspeed in '25 versus '24. And if that's not the case, what happens? Would there be any penalties.

So the contract indeed includes an increase. We said between 50% and 100% for all customers, we didn't specifically comment on Wolfspeed, but we do need to have some flexibility in all our discussions with customers, including Wolfspeed. And this is true for 2024 and 2025. So far, they pretty much booked what they said they would book. But we're now waiting for their 2025 forecast. We have an investment plan with 1 target, which is 2027. Remember, we were expecting significantly more higher numbers in 2026 and then 2027. Right now and even in 2024, we're considering that this is a transition period.

Can I ask you one last question with Soitec. You recently accelerated your investments because of growing demand from Soitec potentially to produce a bit more than initially planned. Could you give us an update there? And could you tell us what the order book looks like with Soitec. How -- what is Soitec telling you?

Well, I think right now, we're simply delivering what we said we would do a few months ago. We said the objective is to have a plant to produce significant volumes. It's not the case now, but it's the case for 2024, 2025. So this is what we're doing with Soitec. We're working on process qualifications right now. They also need to get their technology qualified with their customers. I don't have additional information. But I know that there has been some -- there have been some press articles. Really, the big deal for them is FT. So as you know, there are 6 inches and 8 inches. And a lot of people are now looking at 8 inches. So we are really focusing on 8 inches as well. We did a lot of work on 6 inches initially. So the lead times for industrial ovens are very, very long. So we're limited as far as how much we can produce right now. We're looking at the end of 2025.

Next question from Jean-Francois Granjon from ODDO BHF.

I have a first question on 2025. What are your expectations in terms of big trends solar, for example. Do you expect the business to pick up again in 2025? I guess you have to be very cautious in terms of organic growth. And then you said you confirmed your 2027 objectives. What makes you confident you will achieve, you will reach your 2027 goals.

Well, I can -- we're not really here at this point to comment on 2025. We talked about semiconductors and solar, we think that it's mainly due to inventory, and we think the situation is temporary. For 2027, we don't really have anything to say at this point so we can't tell -- we're simply confirming our initial objectives. As you know, our business is very much driven by markets. We think solar is going to resume. It's happened before. And every single time there was a rebound. And we -- there is no reason for this not to happen again. So we've always cautiously allocated graphite to solar. I think we have to wait a few more months for manufacturers and for EV -- for the EV industry to come back to a more normal situation, 2023 saw its ups and downs. I think things have to -- we have to wait for the dust to settle and then we're waiting for forecasts for next year from companies like ACC, for example.

Next question from Thomas Renaud from Kepler Cheuvreux.

I have several questions, please. The first question on organic growth in Q3, do you think there is a negative volume impact for Q3? Second question on optimization measures. What does that really represent in terms of sales? And have you built that into your 2027 roadmap? Question 3, on ACC -- recent ACC comments, they're looking at upgrading their technology. Does that mean that the contract you signed at the beginning of 2023 is now at risk. Question 4, on market share. Market share you achieved in 2022 and 2023, especially following graphite reallocation of some of your competitors. Don't you think you might actually lose some of the market share you gained. Solar is slowing down. Do you think those -- some of your competitors could come back and actually pick up some of your market share? And one final question on CMB. Could you give us -- tell us about your expectations for this market moving forward?

Okay. That's a lot of questions. I think we jotted down everything on price and volume. The organic growth is 1.2%, price is up approximately 2%, 2-plus percent. So there's 2 ways of looking at this. The negative way, there are negative volumes, but the positive way is that prices were kept. As far as optimization, we also had some acquisitions in the pipeline. So I'm really talking about sales here. So we don't, it's going to have an impact on sales. Your question pertained to the 2027 plan. Yes, you told us about a total acquisition envelope of EUR 100 million, but you did not really ever mention these optimization measures and factory closures, right? They were not integrated. ACC and the ACC technology, they're going from lithium to LFP. It doesn't really make a big difference in terms of cells. It will take some time to actually develop this. We're talking about a platform for 2027 or 2028, the contract we have with them right now is simply going to stay where it is. They're working on a new platform with new geometries with potential -- potentially LFP, we don't know, but we're obviously quite active already and they are a partner with which we have a long-term relationship. And how about your expectations for 2024? Well, we had a few thousands of units. They're launching their line. There have been a lot of articles in the press on ACC, I'm sure you're fully aware of this. So they're really now delivering for the first cars so far. They are -- the initial results, mileage and so on, the results were quite good, quite impressive. So we'll have to see what the shipping plans look like for next year. And your last question. I want to make sure we don't leave any questions out. Yes, we gained market share for some other -- from other companies working in the graphite industry. It took us a bit of time to do this, and I don't think, I don't expect them these guys to just come back in the business. I think we have a strong, long prospective position. And your last question, I think, was on our long-term perspectives. I think all new markets are going way beyond 2027. So I guess we really need to have that long-term vision. How about nuclear. I think you mentioned nuclear. Well, maybe we shouldn't talk about the content of CMB. We will talk about the long-term and -- midterm and long-term perspectives.

[Operator Instructions] The next question is coming from Jeremy Sallee from BNP Paribas.

I think you answered most of my questions. I have one left. I've read some articles today about the potential -- the Wolfspeed plant in Germany being abandoned. What was the weight of that plant specifically in your contract? And how will it impact you?

Well, I don't think it's a rumor anymore. I think they officially announced they were going to discontinue. It will -- it wasn't published in the press, but I don't think they've formally communicated or disclosed anything. So this is a factory that makes transistors in Germany for the automotive industry instead of shipping out of the U.S. So we're generating some money there, but we're interested primarily in wafers and bulk in the U.S. with Wolfspeed. That's a business in which they tripled -- doubled or tripled their capabilities. So they're reorganizing their business. And they've been spending a fair amount of money, hence, the closure possibly. It will not have a direct impact on Mersen.

There is the Hennigsdorf facility with SiC chips. Is that the one you're referring to?

Well, wafers -- yes, they make wafers, I think they were also making transistors. We sell materials for the upstream part of the process of Wolfspeed. They were interested in developing their business in the downstream part a few years ago. It's not worked out very well. But we are really focused -- still focused on the upstream part. And Wolfspeed is the #1 global player, really a reference on the upstream, not on the downstream, really in the upstream parts.

Here comes a question from Julien Onillon from Stifel.

I would like to come back to the electric distribution market in the U.S. You said it was quite resilient. What does your backlog look like? And how much -- what are the perspectives? What's the outlook on the process industry and chemistry there again. How do you feel about these segments moving forward. They were good in Q3, what are your expectations? How much visibility do you have for Q4 and possibly the beginning of next year.