Hello, welcome to the Mersen 2023 half-year results call. All participants are currently on listen only. Q&A will be organized at the end of the presentation. For your information, this session will be recorded. It will be led by Mr. Luc Themelin, Chief Executive Officer, and Thomas Baumgartner, Chief Financial Officer. I will now hand over to Véronique Boca. The floor is yours. Good morning, everyone, thank you for joining this conference call. The press release, as well as today's presentation and the half-year report, are all available on our website. As you were just told, at the end of the presentation, Luc and Thomas will be available to answer your questions, either directly on the conference call or by using the chat. You can put all your questions through the chat as we go. Without further ado, I'm going to hand over to Luc Themelin.
Thank you, Véronique, and good morning, everyone. It has been a remarkable half year for Mersen. Also a semester rich in events. We have again beaten our half year sales record at EUR 608 million. We signed major contracts with Wolfspeed for the SiC semiconductor market, and with ACC for the supply of busbars for electric vehicle batteries. These contracts, and many others, are really the foundation of our 2027 roadmap, which we presented in March, with the aim to achieve sales of EUR 1.7 billion by 2027. As you know, to give us full strategic and financial flexibility, we launched a successful, completed capital increase of EUR 100 million. Let's come back to the first half results.
As you can see, all markets grew, especially the semiconductors and silicon semiconductors, which were the main growth drivers. There are some interesting highlights with the growth in the process industries, which remained solid. The aviation sector, which continues to recover. railway, above 2019 levels. Last but not least, in chemical, with good bookings there again to ensure good sales for the current year. Let's now look at our growth markets, because beyond the half-year performance, it is important to understand how we see future growth. Starting with EV, we achieved EUR 10 million in the first half, and we're continuing to win major deals for both fuses and busbars. The growth of this market is confirming, and we are very well positioned.
The first busbar production line is currently being qualified in our Sant-Bonnet plant for ACC, and production lines are being set up as well in Mexico and China. As regards the manufacturing of classic semiconductors, like silicon-based ones for computer memories, microprocessors, sensors as well, there, Mersen is enjoying steady growth despite the temporary slowdown in global demand, mainly in memory. Major investments are underway in the US, in Germany as well, and in Korea. Thanks to our presence at key process stages, Mersen should not feel any particular downturn in this business. For silicon carbide semiconductors, our growth in the first half was incredible. We reached EUR 43 million in a single half year, compared with EUR 52 million for the full year 2022.
Obviously, this is partly due to deliveries to Wolfspeed, but the market as a whole is also very dynamic. Let me remind you that semiconductors are essential to the development of electric vehicles. As you know, we have a very unique position in this market, thanks to long-standing relations with Wolfspeed, which enabled us to develop the best graphite and insulating soft felts with, you know, the right physical properties, as demonstrated by a major contract signed recently. Last but not least, in renewable energies, growth is more limited. As we announced earlier, Mersen wants to focus on top-of-the-line solar markets. Our aim is not to necessarily to keep pace with the growth in the market as a whole, but to allocate capacity in China for our most high-end customers. Over now to Thomas to take us through the key financial information.
Thank you, Luc, and good morning, everyone. Let's start with some information on sales first. As you can see, our organic growth was 18%, +18% for the first half year. This growth come from both divisions, 19 for electric, for example. Now, if you look at growth by nature, you can see that volume and mix were the biggest contributors. Prices contributed approximately for 5%. Let's now come back to the main indicators of the half year. EBITDA up 16% for over EUR 100 million, which is 16.5% of sales. Depreciation and amortization remains stable at 32% for the half year. It should be noted that the investment program was very, very dense during the first six months. Commissioning has not yet been completed.
It will be carried out in batches over the, the, the next semesters, and we should see a significant increase in depreciation. As a result, our operating margin before non-recurring items rose sharply by 25% to EUR 69 million, and margin increased by 80 margin points. Before going into the details of our operating margin, I would like to highlight the ROCE for the half year at 13.3%. We're in a very favorable situation on June 30th. CapEx, very high, but well below the level for the next six months, and we are fully benefiting from the utilization of our production capacities.
Our ROCE will not remain at this level for the full year 2023, as the CapEx will be much higher, between EUR 150 million-EUR 200 million, for only EUR 60 million for the first half. All investments are not yet fully operational. Going into the increase of our operating margin, 80 basis points, as I said, it can be explained mainly through volume growth and pricing power. Volume represents 2.6 points in margin. As Luc said, it comes from various markets. Second, we have seen significant inflation in energy prices, raw material prices, as well as wages, which is something we planned, we knew, and this was offset through productivity and above all, price increases. We are benefiting from onboard price effects, you know, which were passed in 2022.
We continued in the first half to c- to increase prices, especially in the electrical segment, and we should be able to further benefit from this in our margins for the second half. The margin also includes additional costs, which I would describe as exceptional or, or temporary costs. First of all, linked to the ramp-up of our Columbia plant. There are development costs on the project with Soitec, and costs coming from the creation of the dedicated electric vehicle treat team. All these costs have a temporary impact on our P&L as they relate to sales, which are still relatively low, but which are set to increase over the next years. Let's now take a look by division, starting with Advanced Materials.
As you can see, Advanced Materials was able to maintain very high levels of recurring operating margin with a strong volume effect as well, while observing the additional costs of ramping up the Columbia and Soitec projects I just mentioned before. Price increases and productivity plans were partly offset, the effects of inflation. Just coming back now to the margin of Electrical Power, which also rose sharply thanks to a favorable volume mix effect and thanks to the positive impact of price increases. Margin of 10.7%, which does include the additional costs of setting up the electric vehicle teams. Net income also significantly up with growth over 25%. Financial expenses were higher than last year due to the exceptional increase of interest rates, nearly 4%, which is very significant, very considerable.
On the very variable portion of our debt, it represents about 30% of our gross debt. It also includes a tax rate of 23%, which is very consistent with previous fiscal years. Operating cash flow also improved significantly compared with H1 2022, which was largely impacted by high working capital requirements. This year, working capital stood at 22.9%, as you can see, 22.9% of sales, which is down 2%, down 25%, sorry, versus June 30th. The group benefited from contract advances in the semiconductor market. Conversely, the rise in inventories was due to strong business growth in the building up of safety stocks to ensure a good start to our long-term SIC semiconductor and the electric vehicle contracts.
Last but not least, we made higher tax disbursements than last year, in line again with our earnings growth, of course, and due to the non-recurrence of favorable 2022 effects on our tax payments in China and in North America. Overall, cash flow from operating activities rose sharply to EUR 39.2 million for the first half year, compared to EUR 5.3 million at June 30th, 2022. As we announced, CapEx rose sharply, EUR 62 million versus EUR 33 million in June 2022. You can see that 55% of the amount of the first half is coming from our 2027 roadmap. The balance includes other growth projects, maintenance, safety, as well as environmental projects. As I have already mentioned, some of these investments have not yet been launched, so their amortization has not yet started.
Furthermore, CapEx should be higher in the second half of the year, as we have indicated in our guidance. The end of June, group's net financial debt was down EUR 52 million to EUR 189 million. We benefited from the capital increase, net of expenses that is, for EUR 96 million, and we've reinvested this in significantly higher investments as part of the company's growth plan. Our financial structure remains very solid, with a leverage ratio below one, at 0.98, to be precise. Last but not least, before handing back to Luc, a quick word on our liquidity, liquidity profile. As you can see, the average maturity of financing is 4.5 years. The major installment or, or, or maturity for, or reimbursement, I should say, is in 2026, with the refinancing of the Schuldschein.
In addition to that, we have EUR 320 million of undrawn confirmed lines and EUR 50 million of available cash. In other words, once again, we have a very solid financial structure, which will allow us to pay for our future investments. Back to Luc for conclusions.
Thank you, Thomas. As you've seen, all indicators we've just presented are looking good, with increased confidence, and we were able to increase our annual guidance. Organic growth between 10% and 12% versus 5%-10% previously. Operating net margin between 11% and 11.2% of sales, versus 10.5%-11% previously.
CapEx is still forecasted to be anywhere between EUR 150 million and EUR 200 million, the good results obviously confirm the 2027 plan, which we announced back in March. Our roadmap is still active, the objective being EUR 1.7 billion in sales, with operating margin before non-recurring items between 11.5% and 12.5%. EBITDA margins between 18.5% and 19.5%, and an ROCE between 12.5% and 13.5%. Much for the main comments on today's publication. Thomas and I are now available to answer any of your questions. Ladies and gentlemen, if you'd like to ask questions, please dial star one on your phone, I will let you know when you can ask your question. The first question is from Thomas Renaud, Gilbert Dupont. Over to you.
Hello, good morning. Can you hear me okay?
Yes, we can hear you loud and clear.
Okay, I have several questions. How do you expect inflation to evolve for the rest of the year? You announced 4% at the beginning of the year. Is that still the case today, or are you seeing a drop in prices which could cause you to revise this number? That was my first question. My second question on production capacity. EUR 1.2 billion in production capacity for the full year, what are your expected capacity increases, and what would be your capacity expectations for 2023? I have two additional questions on utilities and energy markets. We've recently heard about the challenges of the wind industry. Could you tell us how much you're exposed in this segment? Last but not least, a question on solar.
Could you tell us about your growth perspectives of solar in China? Many thanks.
I can pick up the first question. The inflation is still... we're going to be quite consistent. We expected 6% in wages, and the overall number was 4%, which we would offset by price increases. Some raw material prices and energy costs have declined, but we do not expect major changes. Moving on to your question on production capacity, I imagine your question pertains to materials. On rigid felts, especially? We anticipated that this year, demand was going to go up, and things are going quite according to plan for silicon carbide. Our capacity plan is proportionate to demand. In other words, our capacity will be slightly higher towards the end of H2.
The objective behind this is really to prepare for next year. There will not be a major increase or peak between now and the end of the year. We're just preparing and gearing up for next year. The EUR 1.7 billion plan is for 2025, 2026, 2027. In wind, we, you know, provide the blades, and it is very contingent on the number of mills that are installed. We're also delivering for new equipment, but 90% of the sales are coming from existing mills, windmills. Depending on wear and tear, we provide equipment for generators. This includes a lot of carbon fiber and glass fiber for blades. The high-end market is doing very well. It is actually slightly up at the end of H1. For solar, you're absolutely right.
We're working very closely with China. We have several projects in China. There, there's really two, three projects we've been working on very actively. We have the U.S. as well and India. We have more projects in France, for example, two major projects in India and a couple big ones as well in the U.S. with expected sales, not before 2025. They will they're, they're full, full contracts. It's not contracts where we have a little portion. It's major contracts with panels, with, you know, these are very interesting projects for us. We're, we're monitoring those very, very closely. They're not on the roadmap, if they do develop, it'll be a small bonus for us.
How, how much additional sales would you expect to get?
It's difficult to say. Maybe we could develop this in a few months from now. I, I don't think we're quite there yet. What we do know is that projects, projects right now are not sufficiently advanced to give you any clear numbers.
Okay, that's very good. Thank you so much.
Next question from Julien Onillon from Stifel.
Good morning. I have 2 questions. The first one is on EV and silicon carbide. You mentioned EUR 10 million for EV last year, EUR 20 million. Are you seeing, are you expecting, something different? Are you expecting growth in the, in H2? I, I, I think you, you I, I was expecting more growth. For silicon carbide, as you said, very significant growth, EUR 43 million versus EUR 52 million for the full year 2022.
What do you expect to be the final result for the full year, 2023? Do you expect this growth to continue, with knowing that your capacity at one point will reach its limits? That's my first question. My second question pertains to other markets, other segments, including chemicals, chemistry. You said performance had been relatively good for H1, with good perspectives for H2. Are you seeing any of your chemical customers challenged because of the current context? Have they, have any of them revised their guidance? Do you think some orders could go down? Much for chemical or the chemical industry for process, the numbers were good. What are your perspectives, and how do you see the market going forward, H2, namely?
Are there still favorable price effects to be expected, or do you think that the price increases were passed on, and do you think there could be price drops? Sorry, lots of questions. Thank you so much.
We're going to take the questions one by one. Sales for EV, I can answer the question. We've known for a while now. We, we don't know what will be the full year result. EUR 22 million, I think very close to last year. The qualifications or especially for fuses, will coming in 2024, and mainly 2025. The results really come a year after that. Don't expect EUR 30 million or EUR 35 million by the end of this year. I think it'll be for next year. For silicon carbide, as you said, very significant growth.
I don't think, maybe we'll do a little more than H1 and H2. We have a few large players in this industry. They have been adjusting their demand. I think we're probably going to do a little over what we did in H1. The bookings are looking good for 2023. For 2024, we don't really know. What we're seeing is that there are a lot of projects in the pipeline, in the chlorine industry, for example, in the chemical sector. We're not expecting a contraction of the chemical industry markets. Global sales is, is, is, is about 10% of the total market volume. A lot of this is includes services and maintenance. What we're seeing is that orders are not necessarily increasing.
We had a lot of orders last year, not quite the same this year, and we are not expecting strong industry growth for H2. I think we've reached somewhat of a plateau. This is why we said the guidance between 10% and 12%, even if we had 18% in H1. We don't have a, a unfavorable price effect to expect. We're actually continuing to increase prices. So I, I still expect a favorable effect. If you're only looking at the variations versus last year, last year, we had already increased prices, so the favorable price effect this year is not what it was. We think that it could be 4% for the full year, but not 5%. I, I don't know if I was clear.
Yes, you were. It was very clear. What you're saying is that there is a basis effect or a baseline effect. The price effect will not be as significant in H2. The volume effect has reached a plateau, so is my understanding. I guess the question is: Are you going to continue and increase your prices right now versus a month ago, for example?
We increased our prices at the end of H1. Yes. Okay. There is the baseline effect, but you've continued to increase prices as well? Not for all, in all process industries, but in several. Okay. Very clear. Thank you.
Thank you.
Next question from Stéphane Benhamou at Exane BNP Paribas.
Good morning. Can you hear me?
Yes, we can hear you.
I have 4 questions, please. The first one on foreign exchange. Q2 had a significant impact of Forex. What have you secured in terms of hedging? Could you tell us what your expectations are in terms of Forex impact? 2nd question on guidance: If we take mid of the range, we're seeing a small EBIT margin erosion. Is this coming from the volume effect, or are there any other elements that could explain this erosion? My 3rd question is on cash: How do you see working capital requirements in H2 with the acceleration of capital expenditure? Do you think the free cash flow burn will be much more significant in H2? Question 4 is more of a midterm question.
As you said, if we exclude Colombia, the EBITDA margin is, is already 12%. Would you say the objective of 11.5%, 12%, 12.5% EBIT margin is a, is a bit conservative?
Okay. On Forex, there is no hedging. This is simply a translation of everything we, you know, of all the restatements in our car, in our accounts. If you take the current foreign exchange, you apply it to H2, it would be between EUR 25 million and EUR 30 million. Negative, that is. This would add to the EUR 10 million. The dollar was at 1.02, the beginning of 2022. We're at 1.10 right now. I think we should expect a negative Forex impact on operating income in terms of value.
The impact is very limited on profitability. We produce where we sell, which is really one of the key strengths of Mersen. Second question on the erosion of EBIT. It depends on H2 sales. There is a 4-digit point gap for H2, depending on the economic environment. It could be slightly less favorable. What's important is the volume effect. If we're at 10% organic growth, then v-volumes could be lower. The mix, we did, we did a very good work on prices, and then there is the amortizations. We have better margins on our plan. More amortization. The volume effects, which may not be as profitable. As far as burning cash, we, with the capital increase, if, if we exclude the capital increase, we're at minus EUR 50 million in terms of cash burn.
I think that we're, we're going to make more investments, but working capital is going to be largely positive for the full year. It will be positive. H1 is always the most difficult in terms of working capital, because this is when you pay bonuses and so on. December is also lower, always lower than June. This is where we stand, ex- excluding dividends. There will be dividends as well. All in all, there might, there may be slightly more cash burned, but this, again, excluding the capital increase. I can't remember if there was a last question. Yeah, right. On the last question, you're right. We do include costs for the Soitec, Colombia, but at, at the same time, we're going to have amortizations once again. We've had this question on midterm prices.
In 2027, you know, we, we have quite a bit of time. We, we gave you, you know, fairly broad range. Today, we can only confirm the numbers we've given so far.
Okay, very good. Very clear. Thank you so much.
Next question from Jean-Francois from ODDO BHF.
Good morning. I think you answered many questions already. I have a few more. Could you tell us a little bit about Advanced Materials margins stability in spite of growth? You said amortizations were going to go up. How do you explain them to be stable when the improvement is coming mainly from Electric] Second question: You talked about your contracts. I heard you were, you were still negotiating with other companies. Could you give us a quick update on potential future contracts in the silicon carbide industry? Question three.
Could you tell us about production capacity you expect to have in, for isostatic graphite? I think you're at 12,000 tons right now. What do you expect to be a full capacity after investments are completed? Next question, could you give us an update on Soitec? How, how are things going? Are you looking at additional CapEx? Last question, on M&As, I know you're always on the lookout. Do you have any short-term plans for mergers and acquisitions as part of your 2027 plan?
I'll start with the first question. Advanced Materials is not increasing its margin, but its value, quite significantly. Why is it not going up? Because there were energy effects. The energy prices went up, and we have not fully received all the aids and subsidies we're eligible for.
Soitec in Columbia have generated costs, but the margins have not increased, but they've not decreased. As far as other contracts are concerned, we have many contracts. SiCrystal, you know, big players, number two, three, four. We're covering pretty much everyone. For three-year contracts, the longest one reaches 2027, China as well. Pretty much everyone is embarked in the 2027 program. The objective is 12,000 tons, which is. In terms of M&A, its weight is relative in the plan. It, it's there, but it's relative, and we are making progress with, you know, some projects potentially in the US, as we indicated earlier this year. I have no additional information at this point on this. Soitec, we can give you an update on a bit later this year. We're working on sampling with them.
Right now, we're looking on delivery plans. Right now, I think we're very much in line with the 2027 objective, and we do not expect CapEx to be higher than what we had announced. They're in, in talking with STMicro for the commercial parts.
Okay, thank you. We have no more questions. We have no more questions. Last call. If there are any questions at this point, please do let us know. Press star 1. It seems we have no further questions. I'm going to give the floor to Véronique for webcast questions. Thank you. We have several questions. I think most of them have already been addressed, but I'm just going to acknowledge the questions. The first one is coming from Bruno on organic guidance. Were you not excessively cautious?
Well, for H2, H2 2022 was significantly higher than H1 this year.
The next question was on Soitec. I think we just covered that question. Second question from Paul Maligo.
Congratulations for the great results. Could you tell us about the electric distribution momentum in the U.S.? We were surprised about the good performance instead of, you know, a slowdown. What are your midterm expectives? What are the perspectives for 2023 in the context of the overall economic downturn?
Then there was a question on Soitec, which I think was, which is, was addressed. The question is then on electric distribution. We covered it briefly earlier. We have orders that a little under what we had before, but a lot of bookings nonetheless, a lot of products to deliver. We had a few challenges in our plants.
A few have yet to be addressed on some components. There is still some tension on some components. We have major, major deliveries to be completed before the end of this year, but it's normal for some customers that they have actually ordered less than expected. A very active pipeline nonetheless. I, I still think there is a very strong market momentum.
Next question from Rafael, from Kepler Cheuvreux.
Do you see any dynamics changes in your different businesses? Do you expect any changes in market dynamics for H2? Where do you expect to be the biggest challenges, especially for Q3?
Well, we have less visibility for Q4, for sure, when it comes to process industries. Hence, the guidance. Except for that, I think we answered those questions. Right, we don't expect any major changes. Second question on Forex.
I think Thomas's answer was that in H2, we're at minus EUR 25, between EUR 25 and EUR 30 million impact in H2, based on the current Forex. There was a question on M&A. I think we've just answered this question. I don't believe we have any additional questions in the chat at this point. In that case, back to you to close today's conference call.
Thank you. Happy holidays to everyone. I hope the weather will be good in the north and in the south. I think we will be announcing Q3 results October 25th. Thank you so much. Thank you for attending, and have a wonderful day. Bye-bye. Ladies and gentlemen, this call is now closed. Thank you so much for attending.