Mersen SA

PAR:MRN

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to the Mersen conference call announcing the third quarter sales of the group sales with Luc Themelin and Thomas Baumgartner.Good evening, everyone. Welcome to the Mersen conference call announcing the group's sales for the third quarter of 2020. You will also be given a presentation of the group's current situation and guidance for the year by CEO, Luc Themelin; and CFO, Thomas Baumgartner.So I will first hand over to Luc Themelin.

[Luc Themelin, Chief Executive Officer]

Good evening, everyone. I would like to start with a few general comments, and then I'll hand over to Thomas. So the third quarter of the year reflects the economic crisis stemming from the measures taken in many countries in the second quarter to curb the health crisis, so the worst appears to be passed. Now the situation is very different from one region to another. Asia shows positive signs and North America is still impacted, much improved in the third quarter, while the situation remains difficult in Europe. The situation is also very different from one market to another in chemicals, and aeronautics markets are suffering, but the sustainable development markets are doing well, and we're continuing to move forward in Graftech development and SIC and for electronics and electric vehicle customers.This contrasted situation for the group requires targeted measures. We will continue our strategic investments in the high-growth markets and at our Colombia factory. On the other hand, we will have to adapt our base in Europe and in the aeronautics and chemicals markets and I'll come back to that later. And now I'll hand over to Thomas, who will comment our sales figures.

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

Thank you, Luc. Good evening, everyone. The group sales in the third quarter reached EUR 208 million, which is a 4% improvement on an organic basis compared to the second quarter, although the third is generally lower. So this is a cyclical effect. This also represents a 10% decline on a like-for-like basis compared to last year. Now we benefited from a 2% positive scope effect, thanks to recent acquisitions, including AGM Italy, which was consolidated in December 2019 and GAB Neumann since March of this year.On the other hand, we suffered a negative currency effect of 3.6%, which represents EUR 8 million. This was due to the rise of the euro against other currencies, especially the U.S. dollar, and to a lesser extent against the RMB. Let me give you a few comments per segment.Let's start with advanced materials. Sales for the third quarter were EUR 112 million, which is an organic decline of over 16%. This segment was hit by the slump in aeronautics, chemicals and process industry markets. However, the sustainable development markets grew, thanks to a vibrant renewable energies market in solar and wind power and in electronics.As for sales in electrical power, this segment reached EUR 96 million for the quarter, which is a small organic decline of 1%. Electrical distribution was very dynamic in North America. However, sales trends in Europe are less positive and projects in power electronics are generally down from last year.Now let's look at the different geographic zones. Europe saw a strong contraction, as Luc mentioned, down by 19.6%. All of our markets are impacted, in particular, chemicals and aeronautics. And this decline is made all the worse by the wait of the aeronautics industry in Europe compared to other regions. The situation in Asia is somewhat mixed. China returned to good growth in the quarter, thanks to business in the solar industry. India also showing good levels of activity as business picked up again. Other Asian countries, however, still are suffering from the global economic slowdown. In North America, sales trends were quite contrasted. There was a strong slowdown in chemicals and process industries, but sales remain satisfactory in wind power and rail transport.As mentioned earlier, sales are very strong in electrical distribution and in some specific markets such as data centers. So for the first 9 months of the year, sales reached EUR 638 million. This is an organic decline of about 11% on a reported basis. Trends in our main sustainable developed markets, solar, wind, electronics and green transport, showed a limited fall of 2%, whereas other markets fell by 19%.And now I'll hand back over to Luc Themelin.

[Luc Themelin, Chief Executive Officer]

So as you noticed, we are facing a structural decline in some of our markets and a situation decline in others. So this is why we implemented a part-time work schemes allowed by the government to help protect jobs in the wake of the pandemic, and we will continue to use these measures where necessary.Now in the aeronautics and chemical markets, we expect to see a strong fall for the entire year with no real expectation of improvement for several years. In the first 9 months of the year, we saw a 30% drop in aeronautics, and it was even 45% for the third quarter. In chemicals and process industries, which are very closely connected, there's been a drop of 20%. This means that we have to adapt our workforce at 2 French sites in particular, Gennevilliers and Pagny-sur-Moselle, in order to keep them competitive. 25 jobs will be eliminated at each of these sites, preferably by voluntary departures and retirements that will not be replaced and through programs to assist staff to relocate or change careers.When we presented our results for 2019, we mentioned that we were reviewing the operational efficiency of the Electrical power segment. This will involve, for example, transferring fuse manufacturing in China to a more modern plant, and we will be regrouping the capacitor design and manufacturing at the Husum site in Germany.So in total, these adaptation measures may lead to a net reduction of 300 jobs across many of the group's sites around the world. We will begin implementing measures by the end of the year, and this should be completed by the first half of 2021 in full compliance with procedures for consulting staff representative bodies.And now Thomas will give you the figures concerning these measures. So Thomas.

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

So the cash outlay connected to these global adaptation measures will reach approximately EUR 20 million, mostly related to restructuring costs. The plans should result to improve our operating income by about EUR 16 million on a full year basis in 2022. The group will also book impairments of tangible and intangible assets linked primarily to the slowed business in chemicals and the underutilization facilities on structurally weak markets.Overall, Mersen will recognize about EUR 55 million in nonrecurring expenses, primarily in 2020, EUR 5 million of which was already booked in the first half of the year. So these expenses will not give rise to any tax savings at the group level. And we can now conclude.Moving on to the outlook. I would like to emphasize the situation for the group varies according to the market. As I said, some markets are very promising, and we have moved forward with our strategic projects, which can show confidence in the medium term. First production test runs have been successful at the Colombia site, which will become a flagship for the group in the coming years.Industrial and R&D project allows to preposition ourselves as a leader on SIC markets. And we're also making progress with our electric vehicle maker clients, which should lead to certifications and orders. So for 2020, given the current health crisis, the group expects to see an organic decline in sales of between 12% and 14% for the year, and operating margin before nonrecurring items should be between 7% and 8% of sales.And now we will take your questions.

[Operator]

[Operator Instructions] So we don't have any questions yet. And we have our first question.

[Unknown Analyst]

I have a question about the guidance for the year. Have you taken into account the second wave of COVID and extent, do you think that your guidance is prudent or conservative?

[Luc Themelin, Chief Executive Officer]

Well, we don't have any real details about this visibility about this second wave. We're keeping a close eye on this. So there's no real way to integrate that yet into our guidance.

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

Now in many countries, well, the situation can be different. In France, so yes, we are in a second wave, but this remains unpredictable in other regions.

[Operator]

We have another question.

[Unknown Analyst]

I have a question about the impairments. What event led to this? And could you also give us more detail about what you're doing in electric vehicles and what the outlook is there for certifications?

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

Well, first of all, concerns are, our plants, most of them remained operational. So we did everything we could to keep them up and running. Now nonetheless, well, we will then see if we are able to uphold this. Now as concerned to impairments, we've been through a -- we're going to a temporary situation and our strategy is for the longer term. The situation is becoming more clearer to us and that -- and what we can see, in fact, is that in aeronautics and chemicals, well, then we now see that this is more permanent, whereas earlier in the year, this is not so clear.

[Luc Themelin, Chief Executive Officer]

As concerns, electric vehicles have a lot of different projects, we are some -- we are often selected to pursue developments. And so we work on these projects, and we go through test phases, and these have been going very well with the idea being that they should lead to a qualification. So -- but there are many projects running at the same time, working with the major manufacturers of electric vehicles. And so 2021 is likely to be another year of testing on qualifications, but it's shaping up very well.

[Operator]

[Operator Instructions]

[Unknown Executive]

All right then. It appears that there are no further questions. So thank you, everyone, for your attention and we will announce our 2020 sales on January 28. So have a good evening and thank you again.

[Operator]

Thank you, ladies and gentlemen. That ends the conference and you can now hang up.[Statements in English on this transcript were spoken by an interpreter present on the live call.]