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

Ladies and gentlemen, welcome to Mersen 2026 Half Year Results. The webcast will be structured in 2 parts. First, a presentation by the Mersen management team, represented by Salvador Lamas, Group CEO; and Thomas Baumgartner, Group CFO. Afterwards, there will be a Q&A session. [Operator Instructions] I will now hand over to Salvador Lamas. Sir, please go ahead.

Thank you, Nathalie. Good morning, everyone, and thank you for joining us. Before turning to our first half results, let me say how pleased I am to speak to you for the first time as CEO of Mersen. Although I officially took over the role in May, I've been part of the group since 2021 and have been closely involved in defining and implementing our current strategy. Over the past few months, I had also the opportunity to spend a great deal of time with our teams, our customers across different markets and of course, you, our investors. Those discussions have reinforced my conviction that Mersen has unique strengths: highly differentiated technologies, long-standing customer relationships, a truly global industrial footprint, and strong positions in markets that are benefiting from powerful long-term trends. At the same time, they have confirmed something equally important, the fact that our strategy is the right one. Therefore, my priority today is to continue and accelerate its execution with discipline, agility, remaining close to our customers and ensuring that we succeed in translating these strengths into profitable growth, cash generation and value creation. I do see opportunities to further improve our execution, additional simplification and better capital allocation. These opportunities are already today translated into internal group initiatives, aiming to further improve our quality, our processes, productivity, lead times, which are becoming more and more important these days, and efficiency in our manufacturing sites. The first half results we are presenting today are, I believe, a very good illustration of that. The market environment is very dynamic in some end markets, while remaining contrasted across geographies. We delivered very solid organic growth, maintaining healthy profitability. And therefore, today, we are raising our guidance for the full year. So now, turning to our results. Mersen delivered a dynamic first half performance. Sales reached EUR 611 million for the first half, leading to a solid organic growth of plus 3.9% EBITDA amounted to EUR 97.4 million, which corresponds to 15.9% of sales. And operating income before nonrecurring items amounted to EUR 56.5 million, representing 9.2% of sales. This represents a solid first half, and with that, we are raising our guidance. Thomas will come back into more detail later on. The 3.9% organic increase in sales compared to the first half of 2025 was driven first by strong growth in North America. We continue to see in the region, a very dynamic electrical distribution business as data centers customers are expanding at a very rapid pace. This is not the only growing market, as aeronautics and wind power are also on a strong momentum. Demand for silicon semiconductors also remained very strong in North America, which, by the way, is even more visible in Asia. Going to Asia Pacific, also reporting significant growth organically, reaching plus 7.6%, even though China remained in negative territory due to weak solar and chemical end markets. As I mentioned in my introduction, the group is extremely well positioned in a wide range of countries. And in this region, even with the decrease in China, we delivered growth in India and in South Korea, driven by rail, semicon, data centers and energy storage markets. Europe is lagging a little bit behind, reporting a slight decrease. This is mainly due to weak chemical market sales, which is in line with the difficult situation of this market. Without this market, the region would have reported positive organic growth. This decline in chemicals hides finally the good performance in aeronautics and rail in this region. During the first half of the year, the group performed well, and I would like to briefly share and comment on some of these key successes we have. We met -- we were able to meet this strong demand for fuses to protect data centers installations in different regions. As mentioned before, data centers is a key growth segment for us, and I will come back with more details in a moment. We also reported significant growth in silicon semiconductors. Mersen is very well positioned in the manufacturing process, especially in the ion implantation phase. Regarding EV, the group has been selected to supply fuses for Ford and Leapmotor. We released our communication on that topic a few days ago. Finally, and this is more for the long term, we are pursuing our partnership with Terra Innovatum for the SMRs that could generate future growth potential. These achievements illustrate very clearly our position in key markets with long-term growth trends, particularly electrification, data centers, energy transition and sustainable moving. Let me explain you now why we see data centers as such an attractive opportunity for Mersen. Behind the AI story, there is, first and foremost, an electricity story. Every new data center requires power generation, grid infrastructure, power conversion and electrical protection. We are present across virtually the entire electrical value chain, supporting these critical infrastructures. It starts upstream with power generation, where we provide solution for renewable energy projects. Electricity then needs to be conducted, transported and stored before it reaches the data centers. At every step of this electrical chain, Mersen provides technologies that help to manage, conduct and to protect the flow of electricity. Our technologies are also present inside the data centers itself, supporting both the electrical infrastructure and the computing equipment. Across this value chain, our Electrical Power business provides critical electrical protection and power management solutions. At the same time, growing demand for data centers also drives a high demand for semiconductors. This benefits our Advanced Materials segment, where our graphite solutions are used in critical semiconductor manufacturing processes. This growth positioning is one of our unique strengths. We are not exposed to a single product or a single application. As investments in data centers continue to accelerate, we benefit from growth across multiple parts of the ecosystem. Looking further ahead, SMRs will complete this ecosystem and will become an additional growth opportunity for the group, and I will come back to that in a moment. For the full year 2026, we expect to exceed EUR 40 million revenue from data centers, roughly twice the level of 2025. In the first half of 2026, we already confirmed this trend by reaching above EUR 20 million. Data centers are also one of the key drivers behind the strong momentum we are seeing in silicon semiconductors, alongside artificial intelligence, electrification and the increasing computing requirements across many industries. This is a market where Mersen enjoys a strong competitive position built over many, many years. Our products are used in several critical stages of semiconductor manufacturing, particularly ion implantation, where our graphite solutions are recognized by leading customers. Our competitive advantages are clear, a global industrial footprint close to our customers, long-standing relationships with the leading semiconductor manufacturers and recognized expertise in high-performance graphite grades. These strengths allow us to benefit from the current acceleration of the silicon semiconductor market. In the first half of 2026, revenue from silicon semiconductors exceeded EUR 30 million, representing a strong double-digit growth compared to last year. And for the full year, we currently expect revenue of more than EUR 60 million. Let me now turn to EV, electrical vehicles. Our strategy in this market is very selective. Rather than trying to participate across the entire EV value chain, we focus on critical electrical protection and interconnection functions, where qualification barriers are high and where our technologies create the most value. We already communicated a few years ago on our nomination with ACC to supply busbars for interconnection and monitoring of battery cells. Recently, we have announced that Mersen has been selected to supply fuses for electrical and hybrid vehicles, manufactured by Ford and Leapmotor, in addition to the nomination received from CATL at the end of 2025. These recent wins demonstrate the growth, the competitiveness of our technologies and the relevance of our global industrial footprint. Finally, let me briefly touch on the small modular reactors, or SMRs. We see this as a promising long-term opportunity rather than a short-term growth driver. The expected growth is primarily driven by the political commitment in the United States and the growing demand for power from hyperscalers. We are well positioned in this market, and we are the only integrated isostatic graphite producer in the United States. We have, therefore, in our portfolio, graphite grades available for SMR key applications such as moderator or reflector blocks. We are also pursuing our collaboration with Terra Innovatum, where Mersen supplies nuclear-grade graphite for the First-of-a-Kind process currently under development. Their ambition is to move toward industrial deployment before the end of the decade. While commercial volumes remain some years away, this illustrates how Mersen is positioning itself on the next generation of energy infrastructure. I will now hand over to Thomas for more details on H1 results.

Thank you. Thank you, Salvador. The first half was indeed very strong with a very robust performance of the Electrical Power segment. This was driven by, I would say, different drivers, strong growth in power electronics, where we supply different passive components for OEMs. EV was also solid, thanks to the ramp-up of busbar deliveries for ACC. And finally, and maybe more importantly, electrical distribution continues to grow significantly, largely due to the increase in demand for data centers. The Advanced Materials segment also benefited from growth in several markets, silicon semiconductors, as mentioned by Salvador, aeronautics, rail. On the other hand, the activity in chemicals suffered from the difficult situation of this market. Salvador mentioned it. And as far as solar is concerned, we've not seen yet any sign of recovery. And finally, SiC semiconductor sales remained, as expected, at a low level. Volumes have increased but were offset by the nonrecurrence of one-off positive effect linked to the silicon carbide long-term contract renegotiation. Those renegotiations occurred in H1 2025. All in all, we released group sales at EUR 611 million, including a negative exchange rate conversion impact, I would say, of EUR 22 million, mainly in Q1. And what you can see as well is that we have an improvement in organic growth in Q2 compared to Q1. If we come to profitability, the group maintained a good level of operating income and EBITDA. At constant exchange rate, operating income improved by 2% and EBITDA by almost 4%. As expected, the D&A increased as a result of our large CapEx program, and we expect a further increase in H2 as we have planned to commission large equipment. Operating margin reached 9.2% and EBITDA margin, 15.9%. I will now comment in more detail on our operating margin and the move of operating margin between 2025 and 2026, and we have 2 positive effects and 2 negative. Starting with the positive, you can see that our volume was positive and contributed by 90 basis points to the change of margin. Second very positive thing is that the price increases and productivity measures have offset inflation, inflation on raw materials, silver and copper mainly, but as well, inflation on energies and wages. On the other hand, depreciation and amortization have increased, as expected. I mentioned it. And more important, we had to face the positive impact of the renegotiation of long-term contract with our silicon carbide customer in H1 2025. The latter represents about 100 basis points of margin. If we look now in more details by segment, the profitability of Advanced Materials segment has been impacted by the nonrecurrence of renegotiation of the SiC contract I just mentioned. Besides that, price increases and productivity have offset inflation. The Electrical Power segment is growing very strongly, gaining 280 basis points on EBITDA, almost the same in operating margin, thanks to the volume effect. And what's more, we have been very successful in increasing prices, and we expect an even more important impact on H2. If we look at the net income, you can see that it's growing by 5%, and even 10% at comparable rates with very low nonrecurring expenses of EUR 1 million. The net financial expenses are in the same range as last year with a slightly higher cost of debt at 4.9%. And income tax reached EUR 10.6 million. That is an effective tax rate of 25%, which is similar to last year. Coming now to cash flow. I will start with the focus on change in working capital. So the change in working capital was -- over the semester was about EUR 45 million during the first half. It includes different things. First, an impact of EUR 36 million linked to the increased activity, especially in June. We posted high sales in June. So it had raised significantly and temporarily receivables, that will be paid in H2. Second effect, our inventories were revalued to the -- due to the important increase in silver and copper price. Third effect, we also reimbursed part of the SiC customer advances, as expected. And last, as it is every year, we paid net variable compensation in the first half. So, all these effects on working capital were partially offset by additional factoring and by some other effects for a net positive impact of EUR 11 million. So keep in mind that it's an important increase in working capital. But as always, with Mersen, we decrease working capital in H2. So if you look now at the operating cash flow after CapEx, you can see that it's quite similar this year compared to last year with 2 very opposite effects. The first one is the working capital increase I just mentioned, and the second one is a lower CapEx than last year. We spent not a lot of CapEx this half year. And you remember that at the end of the year, we will have lower CapEx than in 2025. So I would like to take the opportunity to comment on the performance in our inventories. Last year, we benefited from a huge decrease in inventory, and this explained at that time, a low consumption of working capital. And this year, we keep a very good performance in inventory. To give some numbers, our inventory level at comparable sales is lower by 9% compared to the same period last year. So if we look now at the net debt, it reached EUR 400 million. The company financial structure remains very solid with a leverage ratio of 2.3. Our liquidity profile is very strong. As you can see, the average maturity of our financing is 5.4 years. We redeemed a private placement Schuldschein in the first half of the year, mainly using our cash in hand. So in other words, we have strong liquidity to cover medium-term repayments. As mentioned by Salvador, all these very positive factors enabled the group to raise its guidance for the full year. We now expect organic growth between 4% and 6%. This is the upper range of our initial guidance for the full year. EBITDA margin before nonrecurring items between 16% and 16.5%, also the upper end of our initial range for the full year. Operating margin before nonrecurring items between 9% and 9.5%. This is above our initial guidance, which was between 8% and 9%. And eventually, our industrial CapEx between EUR 80 million and EUR 90 million, below our initial guidance, which was between EUR 90 million and EUR 100 million. I now [ leave ] Salvador conclude.

Thank you, Thomas. Looking ahead, I remain confident in our [ perspectives ]. I'm convinced that Mersen enters the next phase of its development from a position of strength. That strength is built on competitive advantages that are very difficult to replicate, differentiated technologies, demanding qualification processes, long-standing customer relationships and a unique global industrial footprint. We are very well positioned in markets, supported by powerful long-term trends such as low-carbon power generation, electrification, the transition towards direct current, the rapid development of data centers and artificial intelligence, clean mobility, and the broader industrial transition. Of course, the markets will not evolve in a straight line. Each one follows its own cycle, as we experienced in the previous years. But the long-term direction remains unchanged, and we believe Mersen is well positioned to benefit from these structural trends. Over the past few years, we have invested significantly to prepare for these opportunities, particularly in the AM segment, in the Materials segment. Today, our industrial platform is largely in place and our focus increasingly shift from building capacity to generating returns on those investments and [ results ]. We also benefit from a truly global industrial footprint, allowing us to remain close to our customers, while limiting our exposure to geopolitical and trade restrictions. Finally, our financial position gives us the flexibility to pursue disciplined value-creating acquisition as opportunities arise. Altogether, I believe Mersen has the right markets, the right capabilities and the right teams to continue delivering profitable growth and creating value over the long term. As a result, I can confirm our 2029 medium-term road map: sales around EUR 1.7 billion; EBITDA margin of 19%, plus or minus 50 basis points; operating margin of 12%, plus/minus 50 basis points; and ROCE at 13%, plus or minus 50 basis points. I remind you that these objectives have been defined in February 2023 with different exchange rates. With that, thank you, and let's move to you questions.

[Operator Instructions] The next question is from Giovanni Selvetti from Berenberg.

Can you hear me?

Yes.

Congratulations for the results. I have a few questions. One is like about a few numbers just to kind of understand if I got them right. You said that revenues from data centers were around EUR 40 million in H1, whilst from -- for the semiconductor business was around EUR 60 million. Is that correct?

No, it's the full year amount.

Yes, EUR 60 million for the full year and EUR 30 million in H1. Is that correct?

Yes. I think for data center, it's EUR 40 million for the full year.

Okay. And maybe you also mentioned that there's -- the increase in the organic growth for the Electrical Power division is also linked to the ramp-up of deliveries of ACC -- for ACC. If you can please quantify that in Q2 and in H1? And my last question is really on the profitability of the electrical power distribution because you clearly mentioned that with volumes, margins are improving. And I was wondering how close you are to full capacity in that division. So how much room you have more to improve margins going forward?

Maybe I will start with the last question. In fact, in terms of capacity for -- in electrical distribution. In fact, it's not very capital intensive. So you can follow quite easily the capacity increase in capacity without weighting on your margins. And what we can say is that as always, electrical distribution for us is more profitable than -- in the U.S. especially than in other regions. So when we do business in the U.S., it's -- we have a positive mix. So it's profitable for Electrical Power business.

But can you just give us a rough quantification of the difference in the profitability, like 2 points more, 3 points more?

No, I'm sorry, we don't do that.

Okay. And yes, and then on ACC?

Yes. We don't disclose exactly the number of ACC deliveries. What I can tell you is, H1 deliveries -- the ramp-up continues in ACC. We have delivered more or less close to 3x the volume compared to last year in terms of parts, in terms of volume. It still is behind the schedule of ACC, as probably know. Ramp-up has been a little bit more difficult than scheduled, but we are following this growth, and it keeps growing in H2.

The next question comes from Thomas Renaud from Kepler Cheuvreux.

Can you hear me?

Yes.

I have several questions, please. The first one on pricing. What was the price effect in Q2? And are you, let's say, satisfied with the price increase implemented so far? I have a second question on guidance. As you expect a stronger growth in H2 compared to H1, is the low end of the guidance simply cautious? Or are there specific factors that could bring the growth closer to that level? And I have 2 more questions on data center and working cap. On data center, U.S. peers are reporting orders and sales growth well above 100%, alongside, let's say, 2x to 3x increase in content for new architectures. Are you seeing similar trends? And on working cap, you mentioned the advance payment in H1. Could you please quantify the amounts remain to be repaid over the coming years and how it could impact the working cap profile over the next two years?

So the price increase in the second quarter was around 3%. So it's increased compared to the Q1. And it will further increase -- there will be further increase in H2. With regard to the strong growth in H2, you said that the guidance -- that the low end of the guidance is maybe conservative. I would say that, you know what, the environment -- geopolitical, macroeconomic environment is not obvious, changing. So we will see at the end of the year, for us, it's a good level of the guidance what we gave today.

Regarding data centers, I can take that one. Yes, I confirm the numbers are these. We see this trend of [ times 2 ], potentially more on this trend on volume.

And on working capital, you said that, yes, we still have some advanced payments to be repaid, something between -- I won't give very, very -- I would give rough figures, between EUR 20 million and EUR 30 million to be repaid, but in several years, I mean.

The next question comes from Julien Onillon from Marex.

Yes. Can you hear me?

Yes.

Yes. So, a few questions -- 4 questions to start with. The first, could you tell us what your sales are in EV in the first half to EVs? And I got in mind, for the full year, around -- last year, about EUR 30 million. What you could expect for this year in terms of EV sales, considering all the growth you have? A similar question about silicon carbide. You didn't speak so much. I had in mind about EUR 55 million last year. Is it something where you see, however, a bit of growth? You mentioned it's still weak. But could you see some small improvement anyway this year? And 2 specific markets I just want to talk. First, you had contract with the DLA for the defense in the U.S. Potentially, it's going to effectively some missile in the U.S. for using some graphite. Knowing that the U.S. is consuming right now a lot of missile in Iran, are you -- have some numbers to give us on what sort of sales you are doing right now, what could happen for this year? And the fourth question, coming to the Soitec contract, I remember, you have done an impairment on that. But you mentioned that you were working on a solution to a new market. Could you tell us where you're going right now on this specific market -- specific project here? And have you effectively in mind something that you could [ fill ] the investments you have done?

I will -- thank you for your question. I will answer to the specific numbers you asked. EV is around EUR 15 million in H1, and we give no guidance on the end of the year. And SiC business, silicon carbide business, semiconductor was around [indiscernible] for the H1.

Yes. Regarding DLA, DLA, you know it's a defense contract with the Logistics Agency in North America. We are supplying this contract. We communicated the envelope of this contract, which is close to $10 million. We are delivering to that contract, okay? So we don't know at this stage, additional contracts to come. They might be their discussions. But at this stage, it's early to say. And regarding Soitec, yes, we are today focusing on working the diversification program on our processes that we have developed to supply this energy. This is not short-term action. This is medium, long-term impact.

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

Can you hear me?

Yes.

Four questions from my side. The first one, I would just come back on the -- I don't quite understand the amount of the sales for the SiC business during the first half. So just could you remind us the sales for this business for the first half? The second question is regarding the depreciation. We see, I would say, relative stabilization in H1 compared to last year. Do you expect the similar level for the full year? And the question is, so in fact, your guidance, you expect -- you improved the guidance for EBITDA, but you expect -- you increased more the expectation for the EBIT margin versus the EBITDA margin. So can we explain that by probably less depreciation compared to what you expect previously? The third question is, you have reached a historical level EBIT margin, 14.9% for the Electrical Power. Is it sustainable for the coming years, I would say, on average, 15% or more than that? And the last question, I will come back on the working capital. So if I understand, you expect higher or better level for the working capital during the second half. And could you give us some more color regarding what you expect for the free cash flow for the full year after the EUR 6 million mentioned last year?

Okay. Maybe I will start with some figures. Sales in SiC, it's around EUR 25 million in the first half. So regarding depreciation impact, yes, it's because exchange rate -- at the same exchange rate impact, depreciation increased by EUR 2 million, compared to the first half last year. And it's less than what was expected because we commissioned, for technical reasons, the CapEx a little bit later this year compared to what we thought at the beginning of the year. So that's why, at the end of it, there will be more depreciation in the second half but still lower that was expected when we made the guidance at the beginning of the year.

I will take the third one regarding the sustainability, we can say, of the Electrical Power performance in terms of EBIT margin. The answer is yes. We -- at this stage, we don't expect any reduction on this performance. The opposite, when we compare this performance to peers, we can say like this, we still can see slight margin improvement in the next months, okay, I should say. So yes, I think it's sustainable, to answer the question.

Regarding working capital, I will not give number, Jean-Francois. Why? Because it will depend on the growth in Q1 2027 for working capital. That's why I will not comment today on the cash that will be -- but I can tell you that even with whatever the scenario, the second half would be far better before CapEx, so far better.

So Thomas, we can confirm that normally, you should have a higher free cash flow compared to last year, compared to the EUR 6 million in the last year?

This is a fair assumption.