Mersen SA

PAR:MRN

Earnings Call Transcript 2019-Q3

[Operator]

Welcome to the Mersen Conference -- the Third Quarter 2019 Conference Call, with Luc Themelin and Thomas Baumgartner. Please go ahead, gentleman.

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

Hello. And I would like to welcome you to this conf call organized on the occasion of the publication of the third quarter 2019 revenue publication. I'd like to make a few comments on the publication and then we'll be able to answer your questions, Luc Themelin and myself. If we were to remember one, single point of this publication, this would be the good performance of the third quarter, in line with our expectations, amidst a turbulent macroeconomic environment, with an unfavorable chemicals phasing off of projects. And now with -- the Group generated revenues of EUR 234 million in the third quarter, with a growth of 5%, I'm talking about a reported growth. And 2.5% on a like-for-like basis. We are benefiting from a stronger dollar than last year.Now let's have a look at the geographical zones. Europe generates a growth of 5.5%, with good activities in Nordic countries. Spain and Italy and France, the situation is leveling off after a very strong year 2018. Germany is contracting, most especially on the Power Electronics (sic) [ Electrical Power ] business, we had had significant contracts last year. In Asia, the market is contracting by 2% related to chemicals invoicing going down quite significantly in China, and due to the phasing I was referring to. Excluding chemicals, the organic growth in this area would be exceeding 5%, with strong growth in renewable energies and electronics. Growth in North America amounted to over 5%. Business is quite sustained in electronics, thanks to the momentum in SiC semiconductors, on the basis of silicon carbide. Our sales in wind energy are also growing, as far as electrical distribution is contracting. In the rest of world, the organic decline is based -- or is related to an unfavorable basis of comparison, most especially, in the chemicals market. Let's now have a look at the various segments. Let's have look at the Advanced Materials segment, which is going up by 5% organic growth, with revenues amounting to EUR 134 million, with great momentum in SiC semiconductors market, which I was referring to a few minutes ago. And the aeronautics market is also going up. And renewable energies are going up. Sales addressed to the chemicals market are stable, stronger in Europe and lower in Asia. And I'd like to remind you that growth of this market was quite significant in the first half of the year, with delivery phasing, very different from that in 2018. Lastly, the process industries are still buoyant, most especially in North America. The Electrical Power segment is now clocking revenues of over EUR 100 million, going down by 1% organic growth and going up by 1.5%, I'm talking about a reported growth here. And the energies -- renewable energies are quite stable versus last year. Electrical distribution in North America experienced a sluggish activity, going down versus last year, all the more since the third 2018 was quite high. Sales in Europe and/or other product lines enabled us to roughly offset this decline. In the transportation market, lastly, the sales of electrical vehicles are in line with that of last year. The group is now pressing ahead with its discussions with major car makers. On the other hand, the segment is actually experiencing lesser invoicing in railroads business. Revenues in the first 9 months of the group amounts to EUR 718 million, going up by 10%, reported growth here, with a positive ForEx of over EUR 14 million over 9 months. And the scope effect, which was observed in the first half of the year, of EUR 16 million. It is related to FTCap, Idealec and LTI companies as well as the setup of the Mersen, Galaxy joint venture solar energy. Now among the trends announced by the group in the beginning of the year on our markets, those were confirmed, actually. And then first 9 of the -- 9 months of the year are in line with our expectations. We are now reaffirming our forecast for full year 2019. In other words, organic growth of revenues ranging from 4% to 5%, and operating margin ranging from 10.5% to 10.7%, before the implementation of IFRS 16. Before we open up the session to questions and answer, I'd like to remind you of our strengths through 4 points: first of all, many products are customized and are based on know-how, for which the barriers to entries are high; number two, a very strong position on tomorrow's markets into sustainable development such as renewable energies, electronics or electrical vehicles; number three, a worldwide footprint, this allows us to be close to our clients, and it's also quite important to produce locally; number four point, a great operational performance culture; and last point, and we never reiterate this enough, a great engagement from the part of our employees, with close to 90% of those employees obviously saying that they're proud or very proud of working for Mersen. This is the conclusion to my comments. Luc Themelin and myself are now ready to answer your questions.

[Operator]

[Operator Instructions] We now have the first question from Martin Boeris from Exane BNP Paribas.

[Martin Boeris, Analyst of French Mid Caps]

Yes. I'd like to have 4 comments here. Well, first of all, were you able to benefit from those positive positions in the third quarter at the group level? The second question is regarding the process industry. I believe that the momentum is still up in the third quarter. How do you foresee the end of the year? And the third question, is the solar market. After the normalization of H1, there was a potential rebound in H2, with a speeding up on the -- in the fourth quarter. And finally, were there any developments in electrical vehicles activities?

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

Okay. I'll answer the first 2 question, and Luc will answer the last question. And -- so for the prices, yes, we have positive price impact of 1.5% in the quarter. So this is in the right direction, nothing to say about this. And so far as the second question, the process industries, now yes, it is working quite well. As you may have able -- been able to observe, growth was very strong in North America in H1 and less strong in the third quarter. And this is partially ascribed to process industries and in so far as industries at large. We mentioned this already, electrical distribution is contracting. So basically, the environment -- the economic environment is not really as positive as in H1.There was a question on solar energy as well. So a decline in solar in H2 last year and fourth quarter, the beginning of the year was very weak, very slow. And there are recovery signs in Q2. And Q3 was pretty good. And there is no reason why it should not go on because announcements -- important announcements are made in so far as investments in new production capacities in China. And you must have read it also, this technology is really prevailing over the others, so this is quite important. So we do have bookings with a major customer in China.

[Luc Themelin, Chief Executive Officer]

And you had asked a question on the development of EV products. Yes, hybrid technologies, we're really working with a carmaker and 2 other carmakers. We're really working on the product we had proposed last year, quite a number of things are happening on fuses and make them -- try to make them perhaps -- or make them reliable on automobiles in China. And a lot of work has been done on batteries and cell connections in batteries, electrical vehicles, industrial vehicles and energy storage as well is quite important for grids. So we are quite busy in so far as research and innovation.

[Operator]

We got no other questions for the time being. [Operator Instructions] We got no questions for the time being. [Operator Instructions] We have a question from Stephen Benhamou.

[Stephen Benhamou, Financial Analyst]

Yes. I just had a question regarding the forecast beyond the year -- beyond this year. And as you said very clearly, the macroeconomic situation is slowing down and your profile is less and less related to this global momentum. How do you foresee -- I mean what is your first feeling for next year? And do you foresee a challenging year? Or will you be able to actually overcome the situation in the beginning of the year while the basis of comparison will be quite high.

[Unknown Executive]

No. Overcome the situation. No. I don't really know what you mean by this -- well, I mean let me tell you that first, of course, before you asked the question. Well, we did ask this question ourselves on a regular basis. Quite a number of things need to be factored in. We had -- the beginning of the year was not really great in China. The year was not very good in Germany. Now this had already been going down in Q4. Solar was not really great at the beginning of the year. And -- so for semiconductors -- traditional semiconductors, while this is not really great, and we're still displaying good figures. Now things might also start going down in the industry. The process industry is something we need to watch on. I mean there are no particular signs for future decline. I mean, we're not really on for 10% growth, I mean, this is something we understand. But there is no more to say here. Next year is not going to the more horrendous than that. I think it's just going to be a continuum, perhaps a rebound and everything that's happening, so far as the tariffs, and now this problem is being settled. We got quite a number of relays and solar energy could also help us out in offsetting declines. And semiconductors, I mean, we're still growing in this sector, China could actually resume. And next year should be actually up to snuff, and [ Korea ] is truly up to snuff in semiconductors; actually should start off mid of next year. Now having said that, now we got several business activities here of these sectors. I mean we're really able to strike off the right balance at the group level. Now we need to really keep a close look at Q4, well, perhaps a further inflow at the beginning of next year, depending on Q4 and the bookings we'll have registered, this is important actually. Now Q3 environment is not really that good or as good. Let's see what is going on or what would go on in Q4 and see whether things are going to be leveling off or go down or go up and we'll be more able to give you an answer later.

[Stephen Benhamou, Financial Analyst]

As far as the potential rebound, if those tariffs are going to be eliminated. Now you said that you were producing on a local basis. Are you -- or were you able to reduce this customs and tariff obstacle? Or is it still an important challenge? And are you able to quantify this? And how?

[Unknown Executive]

Now today, it is not quite important or very important, directly important. We said that it had an impact on our margins, and we are working on this, actually. 2 to 3 margin points, which we're actually transferring to process. So we offset this problem. Okay. 0.3, 0.4 margin points maximum. Why? Because we're producing on a local basis. We're producing locally, as you said, quite significantly. But this has an indirect effect on macroeconomic situation. And each time our stock exchange rate -- I mean each time events have taken place in so far as customs and tariffs, our rates go down, plummet or vice versa. So this is actually the point. I mean the less customs and tariffs, this will have a positive -- or indirect positive impact, that's a given.Now the Chinese activity. Now this is the first time that we have activities -- Mersen activities in China that are that stable. I believe there was some slowdown due to this.

[Operator]

We got no other questions for the time being. [Operator Instructions] We got another questions from [indiscernible] from BNP Paribas.

[Unknown Analyst]

Yes. A very last question with regards to the guidance. The guidance entails a potential more important growth in the fourth quarter, more important than the third quarter, and perhaps the effect of a potential rebound in the solar sector. Or perhaps are there any other markets, perhaps we should factor in?

[Unknown Executive]

Well, listen, we -- today obviously, we issued a guidance. We did not thought or deemed useful to review the guidance, so 5% over the year, the guidance, which -- I mean this is in the recent guidance of the fourth quarter. There was a deviation, which was quite significant. But we just did not want to be more accurate at this level.

[Operator]

We got no other questions for the time being. [Operator Instructions]There are no other questions. I'll give you back the floor for the conclusive remarks.

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

Thank you, everybody. Now the conclusion is, let's meet again on the 30th of January, 2020 at 6 p.m. to give you some information on the revenues for the year 2019 and results will then be -- we'll then see you on the 11th of March . So that's it. We hope that you are going to be quite numerous on the 30th of January. Thank you very much, and have a nice evening.

[Operator]

Ladies and gentlemen, thank you for being able to participate. You may now disconnect.[Statements in English on this transcript were spoken by an interpreter present on the live call.]