Mersen SA

PAR:MRN

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the Mersen Group's conference on the sales figure for the first quarter 2020. We have Luc Themelin and Thomas Baumgartner.

[Thomas Baumgartner, CFO and Group VP of Finance & Administration]

Hello, everyone. This is Thomas Baumgartner. Welcome to our phone conference to announce our sales figures for the first quarter of 2020 for the group. Now of course, the current context is very exceptional, but first of all, we would like to start by saying that we hope you and your loved ones are in good health. So during the conference, we will also give you an update on the group's situation, and Luc Themelin, our CEO, is also with me to answer your questions. So we'll start with the sales for the first quarter.We already described these elements on April 8, and so sales came in at EUR 225 million for the quarter which is a drop of nearly 9% on a like-for-like basis and 6.4% on a reported basis. There was a positive impact of nearly 2% from the change in scope of consolidation thanks to acquisitions, in particular, AGM Italy consolidated in December 2019 and GAB Neumann in March 2020. We also had a positive currency effect of 0.7% thanks in large part to the appreciation of the dollar.So before going into detail, let me make a few comments. First of all, even before the health crisis, we anticipated a high base of comparison in the beginning of the year, especially for chemicals and semiconductor markets, which recorded very high sales in the first quarter of 2019. Secondly, the health crisis has impacted the group at different times: China in the first quarter; Europe in mid-March; and then the United States in mid-March, early April. Thirdly, the situation is evolving quickly in each country but also from one site to another for various reasons, including issues with the supply chain due to problems with some of our suppliers.All right. Now let's look at the different segments. So in Advanced Materials, sales were EUR 129 million for the first quarter, which is down 11% in organic terms. This is mostly tied to the COVID crisis but also a high comparison effect in the chemicals and electronics market. However, there is a dynamic market in renewable energy, particularly for solar energy.As for Electrical Power segment, sales were EUR 96 million for the quarter, down 6% in organic terms, also impacted by the health crisis, particularly a downturn in the transport and process industries in the Asia-Pacific zone and in Europe.Now let's look at the breakdown by geographic zones. First of all, there's an organic decline in Europe of 11%, primarily explained by the high base of comparison in chemicals and semiconductor markets and the drop in business due to the health crisis starting in March. As for Asia, this is a quite contrasted picture. China showed growth for the quarter thanks to brisk sales in the solar market and a rapid rebound of our sites. In other countries, activity was slack, particularly in India, where the site had to close for part of March.Now in North America, where it's nearly 10% down, this is compared with a very strong first quarter of 2019, which had been 11% higher than the previous year. So as expected, process industries are down as was the semiconductor market, though electrical distribution held up well in the first quarter.So now let's have a quick review of the operational situation of the company, which is changing very quickly as I've said. To date, about 85% of our sites are operational. Some are functioning normally, others at a lower capacity. At several factories, we have some staff who've taken holiday leave, others on temporary layoff. And we're closely monitoring the situation country by country and site by site depending on local regulations.So as we said, we have taken various measures to limit the impact, recontrolling operating costs and investments, and we are keeping a very close eye on working capital requirements. And for now, we have not noted any particular drift in payment terms. We've also obtained greater flexibility in the leverage test of our bank covenant through the end of June for our syndicated loans and U.S. private placements. So this is -- these are precautionary measures in the current context. We want this flexibility through June in the event that we face a more seriously deteriorated situation. So the leverage ratio of net debt to EBITDA at June 30 is calculated according to the EBITDA, the first half of the year, multiplied by 2 of course. But of course, the EBIT of the first 6 months will be impacted by the health crisis.So I'll remind you that the group has a very strong financial structure. At the end of April, we have EUR 132 million in undrawn credit lines. We have EUR 100 million in cash, including EUR 30 million covering our maturities on the NEUCP. So these resources give us confidence in the face of this crisis.At this stage, we're unable to quantify for the full year 2020 the consequences of the economic crisis or the effectiveness of our countermeasures. It is also too soon to say to what extent the group might benefit from government stimulus plans. What we can say, based on some first signs for April, we expect to see a strong impact of the health crisis on our business for the second quarter.So those are the main comments we wanted to give you today. Luc Themelin and I are here now to take your questions.

[Operator]

[Operator Instructions] We have our first question, Jean-Francois Granjon of ODDO BHF.

[Jean-Francois Granjon]

My first question, could you give us an idea of the drop in sales to come? Secondly, you said 85% of sites are still operational. Can you say a bit more about that zone by zone? And thirdly, can you give us an idea of the fall in sales for the month of April?

[Luc Themelin, Chief Executive Officer]

So this is Luc Themelin. All right. On the question of our utilization rates of our plants. Well, you know we have plants of many different sizes. So in graphite works, this is operating as normal. Other smaller sites are also mostly working. But of course, we do need to be sure that our suppliers are able to keep up. So that utilization rate is, in fact, quite satisfactory.If -- when we began getting the announcements about the confinement across all of the countries, well, we're pretty happy at the way we managed to manage that. Now we don't have full information for April, first of all, while those figures aren't all in. And also we are starting to look a bit further down the road to May, June. For March, it's true that, well, the confinement in many places wasn't effective until the end of March.

[Jean-Francois Granjon]

Well, could you tell us the type of recovery you expect to see -- what you expect to see as an end result for April? And will the recovery come in?

[Unknown Executive]

We don't have much of a scenario of a recovery for April. We hope this is perhaps the low point. We know that there is some deconfinement coming in May. Some countries say there might be a rebound in the virus, in fact, a resurgence of the virus later on following those deconfinements. So the picture's not very clear. It's difficult for us to be any clearer than the information that we're being given by the authorities either.

[Operator]

We have a question now from Stephen Benhamou.

[Stephen Benhamou, Financial Analyst]

I have 3 questions. Well, you answered partly first -- my first one. What trend do you observe for April in Asia? That was pretty robust business there in that first quarter. Do you -- has that been confirmed in April? Secondly, could you give us an estimate of your operational breakeven in terms of sales? What's sales unit for breakeven? And third, you mentioned lower investments. Could you give us a bracket how much you expect to lower your CapEx?

[Luc Themelin, Chief Executive Officer]

Well, Asia's operating well. They did a very good job in February recovering. So I'm speaking mostly of China of course. And so we're back at a near-normal level. Now it is a big exporting country, of course, and -- to the U.S., to Europe. And so we're keeping a close eye on that, but currently, business is good there. Now in India, well, it's a smaller market, and we do have a factory that is underutilized right now for local reasons. But in a few weeks, we expect to see them back up and working. Korea's functioning normally as is Japan.

[Thomas Baumgartner, CFO and Group VP of Finance & Administration]

This is Thomas Baumgartner answering. Okay. So we -- trying to simulate the breakeven is complex. Let me give you an example. If you stop a site, well, you probably have to continue paying everyone. It can depend on the country and government regulations, and so there are highly variable conditions from one country to another because of those regulations. And then there's the question of government aid as well, and while it's really in the second quarter that we'll have a better idea of what aid we might be able to have access to. So that's why -- well, it's hard for me to give you a breakeven figure.

[Luc Themelin, Chief Executive Officer]

Luc Themelin. Okay. So you asked about CapEx. Well, we're looking at about 25% less than what we were planning for the year, what we were seeing, so overall, we expect, yes, to lower that by about 25% but we'll see in June what we want to do. There's already been investments made in the year for acquisitions and other CapEx.

[Operator]

We have a question from Exane.

[Unknown Analyst]

I have 3 questions. Could you -- what subsectors of process industries are struggling the most? Then what is your outlook for aeronautics this year, sales to that market? And then solar and semiconductors and the silicon carbide, will those companies -- do you think those companies will continue the same level of orders?

[Luc Themelin, Chief Executive Officer]

Luc Themelin answering. Starting with your last question. So silicon carbide market, we are still delivering normally there. There's a good demand in the Europe, U.S. and China, and we don't expect to see a slowdown there. There's a lot of business there. As for solar, we had a very good start to the year. We -- if you follow that sector, you've seen the 45-gigawatt installed base that people are revising some of the numbers there that evolves quickly. There are -- and so we expect to see more furnaces being built and all of that should keep us busy. But we could expect to see a slowdown later but not right now. We are still delivering regular customers.In aeronautics, we can certainly expect to see that drop. We're waiting to see what our customers will be telling us. They haven't said much yet. We've seen Airbus and Safran issue some press releases, but we're waiting to hear from them directly. But we do expect the year to drop. But our exposure is not so high in that sector, but it will certainly have an impact.As for the process industry, that's a bit complicated to answer your question about the subsectors. We don't see the impact clearly yet. Even in April, some customers are asking us or passing more orders because they want to constitute some inventory.Oil and gas in the U.S. is -- has slowed down, but we're not overly exposed there. And then the automotive industry with our concasting business, here again, we're seeing weaker business, and well, some of those effects are not related to COVID. But we can -- with pretty much 2 months with no automobile sales, at 1 point or another, we'll probably feel the impact of that.

[Operator]

[Operator Instructions] We have a question again from ODDO BHF.

[Unknown Analyst]

Going back to the leverage. You've got good room for maneuver there. And so do you expect to exceed the 3.5 at the end of June? Or is this purely a precautionary measure? You're just anticipating what might happen. My second question, are we on the same configuration, do you think? [The interpreter apologizes. She can't hear the speaker very well.]

[Unknown Executive]

So well, on the -- as it concerns to leverage, as I said, we do not expect to exceed the 3.5, but out of prudence, we've done this anyway just in case. And there are very extreme situation. I mean that's our role to make sure, and in the event of a very strict stress test, we need to be prepared.Now as concerns our costs, if you look back to the model in 2008, 2009, well, that cost structure, that cost model is no longer really valid. The company has changed. We have more flexibility thanks to better geographic zone distribution. And also, depending on the site, well, we have more or less flexibility. It really depends on the regulations. In India, if you stop the site, you pay all of your staff 100%, and you must keep everyone. There's 0 flexibility in India. In other places, even in France, we have flexibility measures that didn't exist in 2008, 2009. So there's no single model here. It's really country by country and sometimes site by site. And because the situation evolves from 1 week to another, it's hard for us to make projections. However, we prepare for all cases, trying to be as flexible as possible, and we have managed to reduce costs wherever possible. So that's how we're managing things, but we certainly can't say that there's a group-wide model for that.

[Operator]

We have another question.

[Unknown Analyst]

I have a question about salary, the wage bill. How many people are on partial layoff in Europe in particular? I don't -- or what is going on in the U.S.? Or can you give us a percentage or number of people?

[Unknown Executive]

Okay. So we have EUR 285 million wage bill. In terms of partial layoffs, this changes from week to week. In fact, in France, I can tell you, for April, May, 12% of our workforce -- now there are some lines that are stopped, okay? So -- and France, it's true, is hard hit by absenteeism as well. We had 30% of people out. In the U.S., in fact, there were no similar -- there was no similar type of reaction.

[Operator]

We have another question.

[Unknown Analyst]

Coming back to the economy or savings, rather, could you tell us about your cost savings?

[Unknown Executive]

Well, it's difficult to answer that. I can give you a global overall idea when we have the results, but right now we have the figures for the sales overall. For the results, that's something that I can't give you today.

[Unknown Analyst]

Well, could you also tell me, is demand very much impacted? Are you seeing, for example, like a 50% drop in new orders? Do you have that kind of a number?

[Unknown Executive]

Well, that is -- well, demand isn't so bad in fact. At the end of March, in any case, demand was not bad. But it's true that if you compare with the same period of previous year, it is lower because that was a very high first quarter 2019. But looking at our sales for our first quarter, well, it's true that there are -- some of that drop is due to the fact that we couldn't deliver from some plants for example and so -- but in other areas, they're very hard hit. It's variable.

[Operator]

I have another question.

[Unknown Analyst]

Do you have clients in the aeronautics industry who you consider at risk such as Airbus or others?

[Luc Themelin, Chief Executive Officer]

[Answer from Luc Themelin.] Well, we work with Safran, Thales, the big -- all of the big names. Airbus as an end customer, we don't deliver much to them directly. We supply their suppliers, and -- but we're going to have to see how they schedule their orders. So we are hugely diversified in terms of our customer base and geographically and sectors of activity, so this is a strength.

[Operator]

[Operator Instructions] We have another question from Stephen Benhamou.

[Stephen Benhamou, Financial Analyst]

Coming back to trends in Asia -- or you said the business is holding up, but in the U.S., you mentioned a minus 10% in organic sales, I believe. What about for the second quarter? How is the market holding up there seeing as they're hit hard in COVID?

[Thomas Baumgartner, CFO and Group VP of Finance & Administration]

[Answer from Thomas Baumgartner.] Well, I think you have an idea of your -- of what the answer is going to be on that score. We can't really say much more at this stage.

[Stephen Benhamou, Financial Analyst]

Well, if you went into a bit more detail about Asia, so I was wondering if you could give a bit more detail about the United States. But yes, I've understood that in different states across the country, the confinement measures are different.

[Thomas Baumgartner, CFO and Group VP of Finance & Administration]

[Answer from Baumgartner.] Well, it's true that the COVID crisis really only kicked in at the end of March. So we know this is -- we know the impact on our sales is coming. In Europe, it's true that we were hit earlier but not in January, February, in fact, not yet.

[Operator]

[Operator Instructions]

[Unknown Executive]

Well, apparently there no further questions. All right then. Thank you, everyone, for joining us. Please stay healthy, and we'll be communicating again at -- on July 31 but no doubt sooner than that. But in any case, our regular conference call, July 31 before trading. Thank you, everyone, and have a good evening.

[Operator]

So ladies and gentlemen, thank you very much for joining us. The conference is now over.[Statements in English on this transcript were spoken by an interpreter present on the live call.]