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

[Audio Gap] [Operator Instructions]. Over now to Mr. Luc Themelin for the conference. Thank you.

Good evening, everyone. Welcome to the 2024 Annual Sales Conference. First of all, let me say that we set a new record for annual sales, EUR 1.244 billion versus EUR 1.211 billion last year. Q4 was impacted by a sharp drop in solar cell manufacturing in China, and more marginally by slower pace of growth in the semiconductor market but Q4 ended up being better than what we anticipated at the end of October. So we are adjusting our operating margin target for 2024. We now expect an operating margin close to 10.5%, whereas we had previously forecasted between 10% and 10.5%. We'll come back to the 2024 guidance at the end of the presentation over now to Thomas, who is going to give us review of the figures.

Thank you, Luc, and hello, everyone. Sales for 2024 are EUR 1.244 billion. Organic growth was 2.6%, of which more than 2% were to price increases. Once again, this demonstrates Mersen's pricing power. Foreign exchange had a negative impact of almost EUR 9 million, mainly due to the Chinese RMB, the Korean Won and the Japanese Yen. The impact of changes in the company's scope of consolidation were positive overall, EUR 11 million. We had some disposals of unprofitable businesses, EUR 8 million. We sold 1 chemical business in Germany in August 2023 and 1 in the rail industry in China in April 2024. And then we had some acquisitions, a little under EUR 20 million. [ So there ] is GMI in North America, July 1 and KTK from October and Bar-Lo since November 1. So looking at the full year, the 2 divisions contributed to 2.6% to the growth, starting with Advanced Materials. Growth was particularly dynamic in the transportation market, aeronautics and railway, that is sales and SiC semiconductors are up around 10% for the full year, and sales growth in the chemicals and process industries was above the company's average. Finally, as expected, and as Luc just said, sales in the solar and silicon semiconductor markets were down due to high inventories in the value chain. For the Electrical Power division, sales to the electric vehicle market remain buoyant as did as were sales to other transport markets like railways or aeronautics. Sales to the electrical distribution sector in the U.S. remain high, albeit slow, slightly down compared to last year. Power electronics remains stable. Let's now look at the geographic numbers and performance by geographic area. Starting with Europe. Europe rose moderately 1.8%, driven mainly by rail, aeronautics and EVs as well as SiC semiconductor markets. This growth was offset by decline in renewables and electrical distribution across Europe. Business remained buoyant in France as well as in Italy, while German was down due to the economic downturn. In Asia, group sales were down 1.2% compared to the previous year, mainly due to the sharp slowdown in solar cell production in China, towards the end of the year but by contrast, India and South Korea recorded strong growth driven respectively by rail and energy storage. North America. Now sales were up in both divisions at 6.2% overall with aeronautics and chemical markets, very buoyant and as expected, the electrical distribution sales were down compared to the very strong levels seen in 2023 with other process industries that remain buoyant. Sales of SiC semiconductors grew slightly, but it failed to offset the downturn in semiconductors and Si semiconductor that is. Let's now take a look at market trends starting with the process industries. They are growing in both divisions and above the company's average. The electronics market is growing overall with growth, first of all, in the SiC semiconductors, reaching almost EUR 100 million this year. And on the other hand, there is a slowdown in the silicon semiconductor market to EUR 58 million from over EUR 60 million last year. Power Electronics projects are at the same level as the last year. Turning now to the energy markets and energy market is down. This is due to the sharp slowdown in solar cell production, as I said earlier, in China, the installation market rose sharply in 2023, leading solar cell manufacturers to overproduce in '24 and beyond market needs. And this has led to a temporary overstock. So as a result, our solar sales amounted to EUR 80 million compared with nearly EUR 100 million last year. So the wind power is growing by over 5%, so the transportation market growth was particularly strong, both in aerospace and rail. The most significant growth is coming from the EV market, which reached EUR 30 million in 2024. Chemicals is also growing as we suggested earlier by more than 5% for the full year '24. I would now like to focus on Q4, more specifically, which ended up being better than expected. Sales totaled $311 million, down slightly, 0.6% versus Q4 '23, price effects were weaker than for the rest of the year, but still above plus 1%. So what are the insights? Well, first of all, the currency effect has been pretty much neutral. But there has been a strong contribution of acquisitions, which has enabled the company to generate published growth of plus 3.2%. As far as markets are concerned, as expected, we've seen a sharp slowdown of the solar sector, roughly minus 30%, which is impacting our sales in China. Transportation and wind energy markets have been very buoyant in this quarter. And the SiC semiconductor sales declined slightly in the quarter while the -- and that's a positive -- that's good news. The Si semiconductors sales turned positive towards the end of the year. Last but not least, deliveries in chemicals were lower than last year due to seasonal effects compared that are different from. I'm going to close by going through the different trends by area, by geography. They're quite contrasted in Asia. China is down minus 12%, mainly due to solar. But our sales in Korea and India are really buoyant. Business in European countries has contracted overall with a decline of 3%. Last but not least, North America has displayed a very dynamic growth, plus 12% with very good contributions coming from aerospace, wind energy and semiconductor. So much for the comments. Back to you, Luc, to close the presentation.

Yes. Thank you, Thomas. So in closing, the company, as you were able to hear has remained solid this year. With good sales achieved in '24, which is an all-time record for the company. As we mentioned at the beginning of the presentation, we're adjusting our operating margin to close at 10.5% of sales. Nonrecurring items remain similar to what we said in December at close to EUR 25 million and CapEx also unchanged around EUR 200 million. In addition, the net debt should be better than expected. It should be under EUR 400 million compared to the initial forecast, which was between EUR 400 million and EUR 430 million. So in this context, the company is going to be able to rely on its well-balanced international footprint, we are very confident about merchants medium- and long-term prospects. This concludes the presentation. Thomas and I are now willing to answer your questions.

[Operator Instructions] The first question is coming from Mr. Julien Onillon from Stifel. Over to you.

Yes. I have many questions. I'll start with 2. You mentioned -- you talked about semiconductors. You said the semiconductors are the good news. In Q3, business on because of destocking. And in Q4, obviously -- right, Q4 business picked up. So what are your expectations for Q1 '25? Do you expect this Q4 rebound to continue, especially in the U.S., where you said business was buoyant, do you think this will continue in Q1 and possibly Q2 '25? The second question, you mentioned solar, which declined in '24. In China, there have been some very important meetings to discuss quotas and this caused the prices of solar cells to increase. What is your -- what are your prospects? What is -- what are your anticipations? There's been a lot of destocking, it will not last forever. What are your expectations moving forward? When do you think things will pick up again? Q1, Q2, the end of Q1? Could you give us some guidance there? And my third question, you mentioned wind. Wind, which is performing very well in the U.S. Trump has just announced some measures against wind power. Do you think this is a market which could drop decline, which could completely turn around or not?

So we're not going to make any comments on quarters. We said '24 would not be a very good year because of overstocking, but we do hope '25 will be a better year for sure. That's really what we can say at this point. Maybe we can give you more information in March when we give you the guidance.

Right. But the beginning of the year has just started. Q4 was -- brought some good news in semiconductors. Do you expect this to continue at the beginning of the year?

It's hard to say. We don't really have any information to answer this question. We work OEMs, I think, we have to wait at least 1 quarter before we have a good sense of where we are headed. Once again, we're not pessimistic for this particular market segment. Sales and silicon components are widely used and will continue to be widely used and increase. As far as solar is concerned, there was an important meeting last -- yesterday, the price -- the prices of solar panels are going to increase again. And the fact, Chinese companies are no longer battling over this, this is positive. It's also good that they're no longer overproducing. We don't really have official numbers, but we think there are going to be a lot of installations, the numbers of '24 showed that there was a real momentum with installations. [ We ] talk about 380 gigawatts. That's in China alone. That's the equivalent of what was installed in the previous year but worldwide. So this -- and this requires a lot of the graphite that we sell. The meeting happened yesterday, really. So it's a bit early to say. But what I described is a rather positive sign. Let's be patient wait and see. As far as wind power is concerned, obviously, the bulk of our sales, a lot of [ December ] is coming from replacements. So unless Mr. Trump decides to stop all the wind mills, including the ones that are already operational, his decision could have an impact on future wind mills and future facilities. I mean, 2, 3 years down the road. But for the year to come, we don't expect any major impacts on Mersen going forward.

The next question is from Jean-Francois Granjon from ODDO BHF.

I have 3 questions. I'd like to come back to Q4 minus 5% for Advanced Material plus 5% for Electrical Power. What explains these both positive and negative performances? Second question, as far as SiC sales are concerned -- SiC semiconductor, you said global growth 10% -- plus 10% for the full year. Could you tell us more specifically what the performance was for Q4? And my last question has to do with the debt. You said the debt is now below EUR 400 million. Why is that? And does that exclude rents?

I can pick up on the last question. It's a net debt, excluding rents. And we will go into further details on the debt in March. We had a stock reduction plan, which we managed very efficiently, and that's why. I can pick up question SiC. And I missed part of the question because I had a problem with my microphone. Could you ask -- what I can say is that the year went quite well existing customers kept their promises. They pretty much delivered what we expected them to deliver. We would have hoped -- we did hope for a slightly higher growth, but all in all, we're quite satisfied. We're now looking at '25, and we are already trying to see what their expectations are for '25 and '26 as well. But for sure, 2024 was a very good year. SiC semiconductors. And in Q4, we had a small growth, I believe, the person said.

[indiscernible].

Yes, you said minus 5% in Advanced Materials and plus 5%, right. Advanced Materials was impacted by solar. And the chemicals segment as well. So this is why the Advanced Materials' performance was down 5%. Otherwise, the electrical distribution business did well. We actually -- our anticipation was below the actual performance, which is good news.

[Operator Instructions] The next question comes from Thomas Renaud from Kepler Cheuvreux.

Hello, can you hear me?

Yes, we can hear you loud and clear.

Very good. I have 2 questions for you. The first one is on the Q4 performance. Are there some one-offs that explain the performance of Q4 which is ended up being different from what your expectations were in October? And then I have a question about North America. Would you say there is such a thing as a Trump-effect already? Or do you think that the beginning of the year is going to be a bit like Q3 and Q4?

I think Q3 was quite good compared to the rest of the year. Well, I think it's a bit early to say whether there is a Trump effect. His predecessor put a lot of money in semiconductors and supporting the economy with various projects. So I think it's -- there is no Trump effect right now. You asked us a question about exceptional items in Q4. No. I think all in all, were a little better than expected. We delivered a very large contract, which was quite positive. And yes, that's it pretty much.

And do you think that the basis effect is more favorable in Q4 as opposed to the 3 other quarters?

Well, December was a bit below, it was a bit slower. Towards the end of the year, to be honest, is always very difficult to forecast. We're not talking about billions. We're talking about a few millions. The gap was a few millions.

Here comes another question from Julien Onillon from Stifel.

Yes. I have a few more questions. You said at -- in the chemicals segment, there are some differences. Are you expecting some major contracts to come, at the beginning of the year? And the second question is technical. With M&A, as far as M&A, I thought the acquisitions were in Advanced Materials. You mentioned EUR 1.5 million. If I did the math correctly, what company is working with Electrical Power -- in Electrical Power? And my last question, electrical distribution is better than expected in Q4? The backlog went down during 2024, what is it like now? Has it improved? Are there some price or volume effects in the electrical distribution segments?

Yes. I think we can say that there has been a lot of destocking with a lot of distributors, not necessarily at the same time in Canada. There is still a fair amount of stock. But in the U.S., I think it's -- the stocks are pretty much gone. We're seeing a lot of ordering, a bit like in the good old days a couple of years ago, but there is some destocking still happening. So some weeks are a bit slower than others. So things are improving for sure. And there is no Trump effect. I think the U.S. industry is doing really well. And we think we're going to see more bookings once things are stabilized when it comes to inventory.

Right. Things are improving, but as Luc said, things have been somewhat erratic compared to a couple of years ago, perspectives are quite limited. We don't have the same amount of visibility we used to have a couple of years ago. I think we're pretty much back to pre-COVID levels, there are some -- still some minor price adjustments that are happening other than that, there is nothing we can see.

Okay. As far as the scope -- company's scope is concerned and M&As, we announced an acquisition electrical power and coolers, the company is called KTK, and the objective was to scale up. We already had some business in this segment in North America. In the chemicals, I think we delivered contracts. In 2023 -- sorry, 2024 -- again, 2024, good year compared to '23. We started with a lot of growth at the beginning of 2023. And last year, it was the opposite. We had a very good last order, but we really don't know what will happen this year in the year to come. I think it really depends on how and when deliveries are made.

We have another question from Jean-Francois Granjon from ODDO BHF.

Once again, I'd like to come back to the prices. You mentioned the price effect. What are the perspectives for '25 price-wise, do you expect prices to stabilize, there will be slightly lower volumes and prices -- may be more difficult to increase prices? Or do you expect further price increases? Would you say there is more pressure?

It depends. In Asia, it is quite difficult to maintain high prices -- I'm sorry, prices are actually somewhat eroding. Things are better in the U.S. And in between, there is Europe. Again, we can give you more detailed information once we give you -- when we give you the guidance for 2025. We still have the same business model based on pricing power. There is less inflation and therefore there is less price effect.

So do you think it will really continue?

I -- we don't think so.

Next question from Geoffrey d'Halluin from BNP Paribas.

I apologize, I missed the beginning of the call. I just wanted to clarify one point. And coming back to Q4, which was better. Was December better than what you anticipated? Could you just clarify that because I missed the beginning. And my second question on debt. I would like you to confirm what you said, you said that you're really actually under the number you initially gave, EUR 400 million. So this is the result of the work and the efforts you've made on stock to improve your leverage. So it has had a positive in terms of working capital requirement. Could you please confirm that? And the last question, which maybe it's -- this is a bit early to ask. But still I'm going to ask you in terms of cash generation, what are your expectations for 2025 based on the end of 2024. Do you have any notions of where you might be.

Well, at this point, it's still too early to say anything about cash generation in 2025, definitely too early. In terms of EBITDA, we're at the upper range in terms of working capital -- working capital requirement. We moved very swiftly to reduce stock. And as far as debt is concerned, yes, the debt is now lower than what we anticipated at the beginning of December '24. And then we have some positive effects. First of all, we like to be very cautious. Remember, we even had a profit warning, we said between 1 and 2. We thought -- we were hoping to be not at the lower end. In silicon semiconductors, things were quite -- we were quite surprised. Businesses were -- went up when we were expecting it to decline and electrical distribution also did better than expected and so did wind, wind power.

We have no more questions from the conference call, French or English. Laurent (sic) [ Thomas ], can we now answer the questions that came in, in writing on the webcast? Sorry, it's actually Thomas, who has picking the questions.

So with the new Trump administration. How do you see the situation -- the economic situation in North America for 2025? You had 3 acquisitions you did well. Are you still as confident about the growth for the U.S.? Well, I think we started the acquisitions a number of years ago. And yes, I think you're right. We did well. And I think there is a very good momentum. I think we did well. These acquisitions are very good acquisitions. If growth is higher, than what it is today, well and good. Q4 was, as we said before, was very good in the U.S. So if it stays where it is, it will be absolutely wonderful. We were confident and we are still confident. Okay. Second question. Q4 was good news? Does it change your perspectives for '25? Well, we have to be reasonable. We're happy about Q4 but the year is only starting. Okay. Question 3. Why do you still give dividends when you're investing? Well, we have our dividends policy, between 30% and 40% of net income. We said -- this is the question we had during the Capital Market Day. We were asked about dividends. And we said it's a good question. We have not -- the Board of Directors has not discussed this yet. We will, and we will get back to you in March on this. The last question, the margin guidance margin has tightened, why? Is it the top line? Yes. The answer is yes, it is the top line. And cost reduction measures have also reduced to sort of better handle the drop in solar, which we had not really anticipated at the beginning of the year. Okay. Are there any final questions? I believe we have no more questions from our listeners. Okay. If there are no questions, please allow us to thank you. Thank you for listening in. We will see you again on March 13 for our full year results. Thank you very much, and have a pleasant evening. Bye-bye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]