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

Ladies and gentlemen, welcome to the Q1 results of Mersen. Today, we have Mr. Luc Themelin and Thomas Baumgartner as well as Véronique Boca. This conference is recorded [Operator Instructions] Over now to Mrs. Véronique Boca to kick off this conference. Mrs. Boca,the floor is yours.

Hello, everyone. Welcome to Mersen's Q1 sales conference call. I'm going to hand over to Luc Themelin, our CEO. I want to mention to you that he is currently in China, which means the sound may not be perfect. We apologize in advance. Luc, over to you.

Thank you, Veronique. And hello, everyone. I hope you can hear me loud and clear. We have published sales of EUR 305 million for Q1, which is in line with our expectations. This represents a drop of 2.5% on a reported basis and an organic decline of 6.4%. And I would like to remind you that the organic growth target is between minus 5% and 0% for the year. And we said the first half would be less dynamic than the second. What else can I say? Acquisitions, net of disposals contributed to approximately EUR 10 million to sales. As anticipated, solar markets in China and SiC semiconductor markets are strongly impacting the company's business. Thomas will come back to this in a moment. Excluding these two markets, the company's sales grew by almost 2%, thanks in particular to strong performance in wind, rail and aerospace. The other highlights of the quarter are, of course, discussions and tariffs, which we're monitoring very, very closely. However, Mersen benefits from strong assets. As you know, we have a strong international footprint close to our customers. We produce mainly in the countries where we sell our products. This limits transfers between continents as well as shipping costs and the competitiveness impact of currency fluctuations. The second strength is our expertise in leadership, which has been reinforced by recent acquisitions. The acquisitions we made in 2024 in the U.S. have strengthened our position as a world leading producer of isostatic graphite in the U.S., where we now generate 30% of our sales. We are the only manufacturer of artificial graphite. Over now to Thomas, who is going to review the details and with greater detail.

Thank you, Luc, and hello, everyone. So let's go back for a moment to our end markets. Electronic. Electronic market accounts for 19.5% of the total which is down due to the sharp drop in SiC semiconductor sales as expected and as Luc just said, so in Q1, the market has been declined, and we continued our negotiations with our customers in long-term contracts, which significantly slowed down business and deliveries. We reached a low point this quarter with sales just over EUR 10 million. The good news is that negotiations are now nearing completion. Our sales will be higher in this market from the second quarter and onwards. The semi -- traditional SI semiconductor market has been stable with a good order book last but not least. The third market is power electronics with growing projects. For example, we've delivered components for power grid interconnection management systems in Great Britain and China. The second important market for us is the energy market, which is also down. This is primarily due to a sharp slowdown in solar cell production in China, which we have mentioned several times in the past. I would like to remind you that the installation market rose sharply in 2023, leading solar cell manufacturers to overproduce in 2024, beyond market needs, and this has led to temporary overstocking. Subsequently, our solar sales amounted to less than EUR 15 million this quarter, which is a strong decline. Conversely, the wind power market is growing strongly. We're talking about double-digit growth here. For the transportation markets, growth has been dynamic in all three segments, aerospace, rail and EVs, electric vehicles. Growth in aerospace continues. In Rail, we are working on a significant number of projects, including the electrification of the Indian rail networks. In EVs, we're starting to record ACC sales, so deliveries will ramp up during the course of the year. The Chemicals segment has also posted growth this year. However, we do expect overall deliveries to be declining for this year after a very good year 2024. The process industries were both -- were down in both divisions, in line with the company's average. They had also risen sharply in last year in Q1. Let's now take a look at the company's different geographies. As you can see, sales in Europe were down moderately, minus 1.4%. This evolution reflects growth in energy storage and power electronic markets for the grid and conversely, a slowdown in the SiC semiconductor market. Sales were stable, both in France and in Germany. In Asia, company sales were down 19.3% versus last year, mainly due to the sharp drop in sales to solar cell manufacturers in China. So this is the main reason. There are also -- there is a secondary reason, which is that there are fewer projects in Chemicals than in 2024. By contrast, however, sales in India are up by over 10%, thanks in particular to the rail segment. In North America, sales declined organically by 4.9%, mainly due to the downturn in the SiC semiconductor market. And excluding this market, the region would have been -- seen a positive growth. This region is benefiting from the contributions of acquisitions made in 2024. I'd like to come back for a moment to our geographical footprint, which I mentioned earlier. It has become an essential factor in the current context as we've shown this slide during the annual results, and as you can see once again here, we are -- we have footprints across all geographies. And most of our products are made in the geographies where products are delivered. So having a strong local presence is essential. It provides greater customer proximity, a shorter supply chain, lower shipping costs and protection against tariffs. As you can see on this slide, I'm going to start with the U.S. 75% of sales in the U.S. are produced in the U.S. The rest is mainly fuses that are manufactured in Maquiladora in Mexico. And most of those products fall within the USMCA agreement, which means that they are largely tax exempt. We are raising prices for the few products that are subject to tariffs, to customs duties. In Europe and China, the proportion of local manufacturing is very high. It reaches 92% in Continental Europe, 95% in China. I would also like to say that our suppliers are also largely local, over 80%. For the time being, so far we have not had any price increases from suppliers, except for a few isolated insignificant cases. So this does not provide us 100% protection from tariffs. Especially if they will be confirmed, there will be no doubt, macroeconomic repercussions. But our geographical footprint today has become a major asset. So before closing, I would like to give you our vision of some of the key market trends moving forward. In the Energy segment, we expect a further slowdown in solar, given, once again, the inventory effects, which I have mentioned just a moment ago. However, we do expect the wind power market to continue and gain additional momentum. In Electronics, we think things should improve. We have a strong solid backlog in the SI semiconductor markets. And we've -- the completion of negotiations with our SiC semiconductor customers should allow us to resume deliveries as early as Q2. We've also -- we also have a number of projects in power conversion for electricity transmission. We call them HVDC lines. The transportation market will continue its positive trend. We have a number of railway projects in India, but also in the U.S. Aerospace should pursue its growth. As for electric vehicle, EV, we are gradually ramping up deliveries of bus bars for ACC. Last but not least, as I mentioned earlier, the Chemicals market is expected to slightly decline in the year, while the process industries will follow the global economic trends. So we are, of course, remaining very attentive to the developments in the current context, but we would also like to confirm our objectives for this year, that is, reported sales that will be stable at the -- growing at the exchange rates indicated on this slide, organic growth between 0 and minus 5%. EBITDA margin between 16% and 16.5%, recurring operating margin between 9% and 9.5%. Investments of anywhere between EUR 160 million and EUR 170 million. So this takes me to the end of the presentation. Luc and I are now happy to answer any of your questions. Thank you. Are there any questions? Okay. Could our operator please announce the questions, if any?

We're going to take the questions on the webcast first, we have a question on CapEx in the U.S. Are they going to be impacted by tariffs?

To our knowledge, no. Once again, for the U.S., most of our sourcing is based in the U.S., which means that at this stage, it's totally insignificant.

Question two, what has been the price volume contribution in Q1? And could you develop what you said about negotiations with SiC customers? You said organic growth is going to improve in Q2. Could you also develop that? Do you think the Q2 could be below expectations?

So the price effect is 1%. As far as SiC negotiations are concerned, we have NDAs, obviously. We are revisiting our contracts with customers. I can't really disclose anything additional at this point. Maybe when we publish our next results, the half year results, as far as improvements during H2 -- sorry, Q2, I mentioned the Electronics segment, which is expected to improve, we had growth at the beginning of this year. In process industries, Q1 has been very good and in electrical distribution as well in 2024 and on electric distribution, Q1 '25 was not very high. But orders, the backlog is looking good, and this is something we expect to improve in Q2. Last question?

On [indiscernible] S1.

Well, we said volumes would be higher in H2 versus H1. We are a business which is primarily driven by volume. That's really our objective for the full year. And I think our H2 mark will probably be higher than the H1 one. That's all I can say at this point.

Okay. Very good. We have a question on solar. Should we expect a further drop of solar between S1 -- sorry, Q1 and Q2?

Well, I cannot answer that question precisely. What I can say is that Q2 will be low. I don't know if it will be a sequential drop. I don't think we can really go into any of those details. But we know it will not be a strong quarter.

What is the -- what are the expected impacts of foreign exchange in the current context of 114 in the dollar versus the euro?

Very difficult to say. I won't give any amounts but you can do the math. You can look at the share of our sales in the U.S., that's 37%. That gives you a bit of a flavor. The other important currency for us is the renminbi. It represents approximately 10%. So that makes it pretty easy for you to make conversions.

Yes, what is the sales currency -- sorry. What is the level of sales currency from India? And beside railway you mentioned, what other opportunity you are seeing from India; solar, wind, grid.

Power sales for 2024 in India, were EUR 35 million. I'm sorry, I hope you can hear me okay because I'm answering all the questions, not Luc. Because we have a connection problem with Luc. So that's why I've been answering all the questions. This is Mr. Baumgartner. So wind is being -- is big in India, the grid as well. We have more long-term perspectives for solar. We do have a number of solar projects in India. But I think really, all our businesses. There is business in all segments for us in India.

Did you expect the solar market segment to pick up at midyear, which does not seem to be the case then on market trends you just flagged, should we expect this to go on in H2? The second question is you mentioned that electrical distribution was down in Q1 and benefited from a strong order backlog. Can you please quantify roughly how much down and your guidance, and I think we already answered this question, your guidance is based on exchange rate of euro-dollar of 1.05, which is far off from where we are now, what is the sensitivity of the dollar. Maybe you can answer again to the last question.

Okay. Picking up on the questions that were asked in English, I'm going to answer in French, but we have translation into English. So I think I already mentioned the impact on sales. The 37% of our sales are in dollars, U.S. Then we have some conversion effects. We would like to have a slightly stronger dollar, obviously, for better margins. But all in all, it's fairly marginal. The question -- next question was on electrical distribution in Q1. We had a negative to mid-single digit that gives you the gist. And to the first question. On solar, what we're seeing today is exactly what we planned. Q1, Q2, we announced would be slow. Today, it is very difficult to announce a change. Things could pick up very fast. We don't know -- I'm convinced it will pick up. I don't know exactly when. What I can tell you right now is that we're not seeing this change coming anytime soon, but it could very well change in the second part of the year. 10% of the solar installations are in the U.S. That was the case in 2024. If we continue to have tariffs, there could be bit of a slowdown of this recovery. That's what I can say.

Question from Julien Onillon. SiC sales were EUR 10 million last year -- sorry, I apologize. EUR 10 million in Q1, EUR 19 million for the full year, '24. What are your expectations for the full year, '25? Second question on solar. Solar is at EUR 15 million in Q1. Do you expect EUR 70 million or EUR 75 million for the full year?

We have not given any guidance at this point. So I can't really answer those questions, I apologize. On SiC, as I see things, the negotiations have not come to completion yet. We know the year will be less lower than last year. Same thing for solar. But again, it greatly depends on the recovery, and we can't really address the question of when at this point.

There's another question on wind from Thomas Renaud. In my mind, most of your wind business was in replacements. How about new projects?

Well, I think 2/3 of the business is replacement, but we do have new projects as well. So, we're seeing a lot of retrofitting projects in the wind segments. Question on share buybacks in 2025. We do very little share buyback. We only do free shares. And that's really it. Because our financial structure, we don't really want additional leverage.

We have a question on CapEx. What's the breakdown of renewal versus growth CapEx?

Well, maintenance renewal is about EUR 40 million per year. And other than that, the standard CapEx is 6.4% of sales. And then we have this growth plan, which is probably going to take us above that number.

We have another question from Julien Onillon, who is again asking the same question on SiC. Do you think we could -- you could have -- you could reach 20 million in Q2 after completion of negotiations? My understanding, Thomas, is that you did not want to answer that question specifically at this point. Here comes a question on EVs, reading in English. Question on Tesla.

Not really. Tesla is one of our customers, but they're not a big customer.

We have no additional questions at this point on the webcast. In that case, we're now going to take questions on the phone. [Operator Instructions] We have a first question from Julien Onillon from Stifel.

Yes. Thank you so much. I apologize. I've been insisting. I heard what you said about the outlook for SiC. I'd like to ask a question on renegotiations that took place in Q1. How have those negotiations led to a decline in business. Your customers? Is it because customers put pressure on you? So I was trying to understand, we're expecting a drop but we were not expecting such a sharp drop. And my second question is on electrical distribution. You said Q1 was a bit slow, slightly down. When the numbers -- so once again, in electrical distribution, there is a decline about -- a little under minus 5%, but you were quite confident things would pick up in at Q2 and you were confident your -- the order intake would increase. So it's -- I understand it's probably a bit difficult to foresee. But what would where would this rebound come from? From investments in the U.S. near shoring or insuring or is it a bit too early to say? Or do you think this rebound could also be connected from -- connected to some fears about tariffs where customers could be tempted to restock again to increase their inventory in preparation of potential increasing tariffs moving forward?

Well, I can pick up the question on electrical distribution. We have had some periods during which we had a lot of orders. We had some delivery problems due to supply chain difficulties. This was COVID, during COVID and after COVID, but we delivered a lot of products. And at one point, orders declined, and this translated into fewer deliveries in Q1. We think it is normal to expect a rebound technically.

It's -- are there concerns or fears about potential tariffs? And are we therefore seeing customers anticipating?

Not really. This is not what we're hearing when we talk with distributors. And as far as the U.S. is concerned, no, we're not there yet. As far as SiC is concerned, as you may know, when you negotiate, our position I mean, demand was going down, and we have long-term contract -- binding contracts. So this difficult situation somewhat froze deliveries. And when you renegotiate, well generally things are back -- go back on track. We don't think 2025 will be a big year for silicon carbide. But we think the next -- the rest of the year will be better than Q1.

Right. So customers did put pressure on you in Q1?

Right. Well, take-or-pay is full year. I think that we were in a wait-and-see -- they were in a wait-and-see attitude. I wouldn't say pressure. I think they were sort of waiting to see what was going to happen.

Okay. So they're expecting a drop?

Well, as you will remember, 2024 was a good year, even if the end of the year saw a bit of a slowdown because we had take-or-pay and customers respect stuck to the take or pay even if they didn't really need it. So in Q1, I think the need was not what it was before.

Thank you. I believe we have no additional questions. This is our last call. [Operator Instructions] We have no more questions. The floor is back to our speakers.

I don't know if there are any questions on the webcast at this point? Apparently not. Ladies and gentlemen, thank you so much for attending this conference. Again, we apologize for the sound quality. Luc is still unable to speak on the line right now because he's in China, but we're looking very much forward to hearing and seeing you on July 31 for the next results. Have a pleasant evening. Bye-bye now. [Statements in English on this transcript were spoken by an interpreter present on the live call.]