Ladies and gentlemen, good evening, and welcome to the Q3 Mersen's results, presented by Luc Themelin, who's the CEO, and Thomas Baumgartner, who is the CFO. Ladies and gentlemen, this call is recorded. You will be in a listening mode only. However, at the end of the presentation, you will be able to ask questions by pressing star one on your device to record your question. The floor is now over to Mr. Luc Themelin. Thank you.
Thank you and good evening, everyone. Welcome to Mersen's Q3 2024 sales conference call. First of all, I would like to point out that we have set a new record for the first nine months of the year in terms of sales, EUR 933 million versus EUR 910 million last year. However, the last quarter, especially the month of September, were sharply impacted by a downturn in solar and a significant slowdown in the silicon semiconductor market.
For these reasons, we're revising downwards our targets for 2024. I will come back to this, this point in greater detail towards the end of the presentation. Over now to Thomas, who's going to come back to the details for Q3. Thank you, Luc, and hello, everyone. First of all, a quick reminder. We have total sales of EUR 933 million for the first nine months, which is organic growth of 3.7%, of which 2.5% were due to price increases, which once again demonstrates Mersen's pricing power.
So the current impact of Forex was unfavorable, mainly the conversion into euros of the Chinese RMB, US dollar, and the Japanese yen, amounting to almost EUR 10 million . The impact of changes in group scope or structure was neutral. First of all, we have the disposal of small, unprofitable businesses, one in the chemical industry in Germany, which was conducted in August 2023, and a more recent one in railway brushes in China, which was disposed in April 2024. Second, we had the acquisition of GMI in North America, which we've now consolidated for one quarter. As a reminder, this company is consolidating our footprint and position in the graphite activities in the U.S., and it generates a full year of sales of around $40 million.
Now, looking over the nine-month period for all divisions and geographies, as you can see, they all contributed to this growth. Advanced materials, five... As you can see, in Europe, organic growth was 3.4%, despite the downturn in Germany, especially in Q3. We'll come back to that. And growth has been primarily driven by France, Italy, and Spain. In Asia, growth was 2.8%. China continued to grow moderately, albeit we'll talk about the solar in China in Q3, and India has overperformed in the region. Last but not least, North America, organic growth at 4.5%. Most of this is coming from the chemicals and process industries markets.
Moving on to Q3, total sales EUR 309 million, which is a more moderate increase, 1.2%. This is organic growth, so we have the process industries, which have posted sustained growth in both divisions. This growth is particularly strong in the U.S., with the exception of electrical distribution, which is set for, which was very strong in 2023. I beg your pardon. The electronics market is in slight decline, with a contrasted picture with SiC semiconductors on the one hand and a slowdown in the silicon semiconductor market and fewer power electronics projects on the other hand. The energy market is, this is important. The energy market is down sharply. This is due primarily to solar energy in China, as Luc suggested earlier. The wind power market is stable.
Growth in the transportation market is particularly strong in all three subsegments: aeronautics to start with, rail and, electric vehicles, EVs. And the chemical segment has also benefited from, major deliveries and synthesis units and heat exchangers in Europe and, North America. So total growth there as well during this quarter. Let us now come back to, some of our growth, markets, and let's look at our expectations for Q4. I'm going to start with the renewable energy segment, representing EUR 100 million over the first nine months. EUR 110 million , I beg your pardon. Sixty percent of which is coming from solar.
We saw a fairly significant slowdown in Q3, which we do not expect to subside in Q4, because the inventory of Chinese manufacturers is simply very high. This doesn't really jeopardize our business in solar industry. We think this is a temporary situation in the value chain, which should be solved. On the other hand, wind power has been stable as expected and should remain so until the end of the year. Moving on to the second market, which is the silicon semiconductor business, representing approximately EUR 40 million in the nine months. Since the beginning of the year, sales were down, very much in line with market trends and in anticipation of AI-related growth to come.
So we were expecting a rebound in H2, especially as we saw interesting signs of improvement. But we're not actually seeing this improvement happening now, and we didn't see it in Q3. We don't expect it in Q4 because we still have these inventories. So the rebound is not to be expected before 2025. SiC semiconductors accounted for EUR 75 million in nine months. Growth slowed in Q3, and we now expect stability in Q4. Again, in line with expectations for the EV market, electric vehicle market. This is obviously lower than we had initially forecasted. So the electric vehicle market is still growing strongly. We had EUR 22 million in sales over a nine-month period, and we expect stability in Q4.
A vast majority of our sales are on heavy vehicles, and we're already positioning ourselves on platforms on that specific market for next year. Other markets are holding up quite well overall, and we anticipate a decent end of year, in spite of a rather tense macroeconomic context in Germany. Luc, over to you to close this presentation. Yes. Thank you, Thomas. First of all, I would like to say that this month we completed the acquisition of a small company in the U.S., in the cooling sector, KTK Thermal Technologies. This is a small-scale acquisition, very much in line with measures we decided to take at the beginning of the year to improve profitability of this specific product line, coolers, that is.
So this acquisition should allow us to consolidate our North American expertise in coolers on this new site, and therefore achieve significant cost savings. We're also in the process of concluding another acquisition in the U.S., representing approximately $15 million in sales, in the materials sector. So these two acquisitions in total will represent, a cash outflow of approximately $20 million. At this point, the group has no other acquisition projects in the pipeline. At the beginning of this year, we launched a series of optimization measures, which we've decided to accelerate. We already announced the sale of a railway brush business in China. This was a business where our main customers were state-owned companies, which implies they're difficult to grow and develop.
We're also in the process of closing two product lines in Asia, one in India, involving the manufacturing of anti-corrosion equipment, and another one in China, for a small line of power transmission products. For both, we are not competitive with the strong local competitors. In Europe, we're going to close a workshop in the Netherlands, which didn't have critical size, and we're going to transfer equipment to, and sales to other European countries. Last but not least, we are going to consolidate our North American cooling expertise on the KTK Thermal Technologies site, which I mentioned earlier. So all these measures will lead to gains of approximately EUR 50 million , EUR 3 million have already been, will be achieved in 2024.
So in total, for 2024, we're talking about EUR 20 million, EUR 12 million in cash costs and EUR 8 million in non-cash costs, mainly depreciations. Of these EUR 20 million, EUR 3 million have already been booked in the first half. These factors lead us to revise our objectives for the year as follows: We're expecting growth between 1% and 2% compared to 5% previously. Operating margin between 10% and 10.5% versus around 11% of sales previously. So this revision can be explained by the lower than anticipated volume effect, while the level of depreciation remains unchanged. CapEx of around EUR 220 million compared to EUR 200 million- EUR 240 million previously. The 2027 targets are confirmed, however. So this concludes my comments.
Thomas and I are now at your disposal to answer all your questions. Thank you, gentlemen. If you have any questions or if you would like to make any comments, please press star one on your device, and please make sure you're unmuted when putting your question to the company. We have no questions for the time being. Once again, if you would like to ask questions, please press star one on your device. The first question is coming from Julien Onillon from Stifel. Over to you.
Hello. I would like to come back to this sharp decline in Asia-Pacific. We had a nice increase in the first six months, Q3, - 8.3%. So we understand that this is coming from solar. Could you give us a bit more detailed information on this business, precisely? Solar, you mentioned EUR 40 million. I'm looking at the numbers here. I jotted down. I think you said 60%. EUR 60 million or EUR 70 million, sorry. In the first nine months.
Could you break that down? Could you break those EUR 60 million-EUR 65 million between Q1 and Q2 to fully understand the impact of Q3, and then what are your expectations for Q4 moving forward, again, in the solar business? Second question, coming back to silicon and silicon traditional semiconductors. Obviously, performance is quite disappointing. It is not what you were expecting. Some orders obviously were not booked. There again, could you be a bit more detailed in your expectations, the expectations you had for Q3 and the actual performance in Q3, and therefore, the gap between expectations and the actual numbers?
Coming back to the silicon carbide, you said you gained some customers. You told us that for Q1, you had new customers in Asia, in China, namely. I remember very well you giving us some of the names of customers. China is now declining. What does that mean? Does it mean that those Chinese customers are not delivering? And then maybe a more fundamental question. You have this major contract with Wolfspeed. I know that they're very, very active with Tesla. What is the outlook for this, what are the perspectives for this contract? What are your expectations between now and 2025 moving forward?
Thanks. I'll pick up on the question on solar. H1, we generated EUR 45 million, Q3, EUR 18 million, and we expect less in Q4. September mainly was disappointing, right, and I can give you some contextual information. We're quite used to these ups and downs in China with Chinese companies. They're all trying, seeking to gain market share. We don't work with everyone. We have privileged customers, but they're subject to fluctuations, just like we are. We generate substantial sales in silicon or the Chinese have about 1,000 GW installed. I think last year alone, they installed 450 GW in solar panels. So this means that when they overproduce, they can overproduce a lot more than the installed capacity. I don't know exactly when this happened, possibly 2023, the end of 2023 and 2024, but some products not being sold caused them to produce less.
We actually faced this a few years ago already. So inventory has to be turned into solar panels and then shipped around the globe. So as we're waiting for this to happen, well, we're pretty much coming to a standstill. It's China. It's not happening elsewhere. And as far as silicon is concerned, the silicon market is doing well. We had some issues in, and there were some issues in 2023, but we didn't really feel these issues. So chip companies use a lot of components, and they're doing well. Take SK Hynix or Samsung; they have recently announced good results. But when the market was low, we didn't have a lower performance. But spare parts inventories built up, and I think that right now they're selling these inventories, and orders have been quite low.
It's really not that easy to anticipate because we don't really know what is truly happening in the supply chain. Once again, this has happened before. We've had silicon ups and downs. You know, it comes in cycles, and typically things change within six months. Right. In Q1, sorry, H1, we saw sales slightly declining, and the end of the year is a bit more of a surprise. But we've been talking to some of our customers and we think things will change. What's reassuring is sales in semiconductors, 52 billion in September. So we had a low point of 42. It's really unfortunate that this should happen at the same time, but otherwise.
As far as semiconductors in China are concerned, this one customer we're delivering in China, they're very buoyant, they're very dynamic. They still have a lot of demand. So it's not because of this Chinese company, it's really only due to solar. What we showed you earlier, you were referring to customers. We didn't really announce new customers. The illustration or what we were trying to convey is that we had many customers. As far as Wolfspeed is concerned, I think, yes, they, as you said, deliver Tesla. We are not really aware of what they do and where the transistors are shipped. It's a growing business. Their manufacturing seems to be struggling a little bit as they're picking up. Again, we don't really know. We produce wafers, essentially. They did not order what they, the maximum they suggested they might do. We don't know at this point. We have no perspectives for next year.
Okay, thank you. You had a contract, a guaranteed contract, and you made some major investments for this contract. So with minimum guaranteed ROI. So, what are your expectations for next year? We don't have any details regarding the phasing of this contract between 2024 and then 2025. Does the contract include an increase of sales, Mersen sales to Wolfspeed, in 2025 versus 2024? And, if that's not the case, what happens? Would there be any penalties?
So the contract indeed includes an increase. We said between 50% and 100% for all customers. We didn't specifically comment on Wolfspeed, but we do need to have some flexibility in, you know, in all our discussions with customers, including Wolfspeed. This is true for 2024 and 2025. So far, they pretty much booked what they said they would book. But we're now waiting for their 2025 forecast. We have an investment plan with one target, which is 2027. Remember, we were expecting significantly more, higher numbers in 2026 and then 2027. Right now, and even in 2024, we're considering that this is a transition period.
Can I ask you one last question with Soitec? You recently accelerated your investments because of growing demand from Soitec, potentially to produce a bit more than initially planned. Could you give us an update there? And could you tell us what the order book looks like with Soitec? What is Soitec telling you?
Well, I think right now we're simply delivering what we said we would do a few months ago. We said the objective is to have a plant to produce significant volumes. It's not the case now, but it's the case for 2024, 2025. So this is what we're doing with Soitec. We're working on process qualifications right now. They also need to get their technology qualified with their customers. I don't have additional information, but I know that there have been some press articles. Really, the big deal for them is FT.
So as you know, there are six inches and eight inches, and a lot of people are now looking at eight inches, so we are really focusing on eight inches as well. We did a lot of work on six inches initially. So the lead times for industrial ovens are very, very long. So we're limited as far as how much we can produce right now. We're looking at the end of 2025 .
Okay, thank you.
Next question from Jean-François Granjon from ODDO BHF.
Hello, good evening. I have a first question on 2025. What are your expectations in terms of big trends, solar, for example? Do you expect the business to pick up again in 2025? I guess you have to be very cautious in terms of organic growth. And then you said you confirmed your 2027 objectives. What makes you confident you will achieve, you will reach your 2027 goals?
We're not really here at this point to comment on 2025. We talked about semiconductors and solar. We think that it's mainly due to inventory, and we think the situation is temporary. For 2027, we don't really have anything to say at this point, so we can't tell. We're simply confirming our initial objectives. As you know, our business is very much driven by markets. We think solar is going to resume. It's happened before, and every single time there was a rebound, and we there is no reason for this, you know, for this not to happen again. So we've always cautiously allocated graphite to solar.
I think we have to wait a few more months for manufacturers and for the EV industry to, you know, to come back to a more normal situation. You know, 2023 saw its ups and downs. I think things have to. You know, we have to wait for the dust to settle, and then we're waiting for forecasts for next year from companies like ACC, for example.
Thank you. Next question from Thomas Renaud from Kepler Cheuvreux. Over to you.
Hello, good evening. Can you hear me okay?
Yes, we can hear you loud and clear.
I have several questions, please. The first question on organic growth in Q3, d o you think there is a negative volume impact for Q3? Second question on optimization measures. What does that really represent in terms of sales? And have you built that into your 2027 roadmap? Question three, on ACC, recent ACC comments, they're looking at upgrading their technology. Does that mean that the contract you signed at the beginning of 2023 is now at risk? Question four on market share.
Market share you achieved in 2022 and 2023 , especially following graphite reallocation of some of your competitors. Don't you think you might actually lose some of the market share you gained? Solar is slowing down. Do you think those some of your competitors could come back and actually pick up some of your market share? And one final question on SiC: Could you give us, tell us about your expectations for this market moving forward?
Okay, that's a lot of questions. I think we jotted down everything on price and volume. The organic growth is 1.2, prices up approximately 2%. So there's two ways of looking at this. The negative way, there are negative volumes, but the positive way is that prices were kept. As far as optimization, we also had some acquisitions in the pipeline. So I'm really talking about sales here. So we don't, it's going to have an impact on sales. Your question pertained to the 2027 plan? Yes. You told us about a total acquisition envelope of EUR 100 million, but you did not really ever mention these optimization measures and factory closures. Right. But- They were not integrated. ACC and the ACC technology, they're going from lithium to LFP.
It doesn't really make a big difference in terms of cells. It will take some time to actually develop this. We're talking about a platform for 2027 or 2028. The contract we have with them right now is simply going to stay where it is. They're working on a new platform with new geometries, with potentially LFP. We don't know, but we're obviously quite active already, and they are a partner with which we have a long-term relationship. How about your expectations for 2024? We had a few thousand units. They're launching their line. You know, there have been a lot of articles in the press on ACC. I'm sure you're fully aware of this. So they're really now delivering for the first cars.
So far, the initial results, mileage, and so on, the results were quite good, quite impressive. So we'll have to see what the shipping plans look like for next year. And your last question, I want to make sure we don't leave any questions out. Yes, we gained market share from other companies working in the graphite industry. It took us a bit of time to do this, and I don't expect them, these guys, to just come back in the business. I think we have a strong, long perspective position. And your last question, I think, was on our long-term perspectives. I think all new markets are going way beyond 2027 . So I guess we really need to have that long-term vision.
How about nuclear? I think you mentioned nuclear.
Well, maybe we shouldn't talk about the content of CMB. We will talk about the long term and midterm and long-term perspectives.
Okay, thank you. Thank you for your answers.
Are there any additional questions? If yes, please press star one on your device. The next question is coming from Jérémy Sallée from BNP Paribas. Over to you, Mr. Sally.
Good evening. I think you answered most of my questions. I have one left. I read some articles today about potentially the Wolfspeed plant in Germany being abandoned. What was the weight of that plant specifically in your contract, and how will it
impact you? Well, I don't think it's a rumor anymore. I think they officially announced they were going to discontinue. Well, it wasn't published in the press, but I don't think they've formally communicated or disclosed anything. So this is a factory that makes transistors in Germany for the automotive industry instead of shipping out of the US. So we're generating some money there, but we're interested primarily in wafers and bulk in the U.S. with Wolfspeed. That's a business in which they tripled or doubled or tripled their capabilities. So they're reorganizing their business, and they've been spending a fair amount of money, hence the closure, possibly. It will not have a direct impact on Mersen.
There is the Ensdorf facility with SiC chips. Is that the one you're referring to?
Well, wafers, yeah, they make wafers. I think they were also making transistors. We sell materials for the upstream part of the process of Wolfspeed. They were interested in developing their business in the downstream part a few years ago. It's not worked out very well, but we are really focused, still focused on the upstream part, and Wolfspeed is the number one global player, really a reference on the upstream, not on the downstream. Really in the upstream part.
Okay, thank you.
Here comes a question from Julien Onillon from Stifel.
Thank you. I would like to come back to the electric distribution market in the U.S. You said it was quite resilient. What does your backlog look like? And how much, what are the perspectives? What's the outlook on the process industry and chemistry? There again, how do you feel about these segments moving forward? They were good in Q3. What are your expectations? How much visibility do you have for Q4 and possibly the beginning of next year?
Well, on process industries, they're doing well in the U.S. We're still seeing good perspectives. I can come back to electric distribution. We are really active in the electric distribution, and things are going very well in the U.S. This is less the case in Germany, and this will not be a surprise to you. I think it has to do with the macroeconomic trends in those countries. So in the U.S., we said we were not expecting very good performance towards the end of the year. We knew we were somewhat lagging, especially on the supply chain. I think we really fixed those problems, and the impact of doing this is that we have less visibility.
Sometimes you have orders and sales within the same month, but the overall backlog shrunk. As far as Q3 is concerned, Q3 was not great. It was a little below what was expected, but the dynamic market remains dynamic. We have good product rotation, good growth, a lot of projects in the pipeline. I have no concerns about this geography in particular.
Okay. Since you're talking about the overall business, how about prices? Are you seeing raw material prices coming down, which could mean that your profitability could increase? Energy costs as well have declined. So do you think that with retail prices stabilizing, how do you think, how do you see things going forward, and how do you see margins? Do you think margins could improve with the raw material prices declining?
No real effects right now. There's been a lot of inflation. We've passed on this and with higher prices, especially in 2023. We're seeing lower energy prices, but that's pretty much it. And so this doesn't really explain the margins. I think this is really our business model. We're managing to pass on inflation in our prices with higher prices, but we want to remain credible with our customers. We want long-term credibility. We don't want to take advantage of temporary hiccups in the market to actually boost prices all of a sudden. That wouldn't make any sense.
Okay, thank you.
Okay, over. We're going to see if there are any questions in English. If yes, please ask your questions in English now.
Thank you. We do have a question coming from Giovanni Selvetti, of Berenberg Bank. Please go ahead. Your line is open.
Yeah, can you hear me?
Yes.
Yes, sir.
Okay. Thank you very much. I have a few. The first is that you can please say the contribution from GMI in the third quarter. The second question is about electrical distribution. You reported an organic growth of 0.6% in Q3. If you can give me a rough idea of how much was up US and how it was down Europe, just to have an idea of how the two geographies are moving. The third one is that on silicon carbide, you were quite confident during the presentation on the first half results, saying that you wouldn't expect, let's say, a slowdown as your main competitor was seeing. So what has changed over the summer? Is that, let's just say, the weakness was generalized, or was there a particular customer suffering more than the others? Thank you. I have another one, maybe,
Shall we? Yeah.
The last one is about you mentioned also that we'll have to recognize EUR 20 million in non-recurring expenses in 2024. Does this mean EUR 17 million more than the first half? Thank you.
We start with GMI acquisition, about EUR 8 million of sales on the third quarter. Non-recurring cost EUR 20 ? Non-recurring cost, we said, EUR 20. So you have to add EUR 17, compared to the first half. In the first half, it was EUR 5. Electrical distribution, you ask, a difficult question because, yes, we are in distribution U.S.A. and Europe. I don't have really the number, but Europe is not doing so good. It's even always a little bit less than U.S.A. But there is a slowdown specifically in Germany. And Germany, the weight of the German market in Europe is big. And U.S.A. is quite stable because as Thomas said, we are still shipping some late order, and I would say it's roughly stable. Europe, a little bit weak.
It's stable c ompared to the previous month.
Yes.
It's declining compared to high level of last year.
And the silicon carbide, there is a slight slowdown in Q3, but not so big. Less demanding than S1. You know, we have orders month after month, and in fact, deliveries, we are still, in fact, we are not at the maximum on the contract, clearly, and so compared to what we thought at the very beginning of the year, because at the very beginning of the year, there were very, very, very a ggressive and we said that even that it would be difficult for us to answer to the needs. In fact, the needs are a little bit lower than what was expected, even if it's still positive in the Q3, and we'll do a good year.
We have no more questions, gentlemen. The floor is back to you for written questions.
Yes, we have written questions coming from the webcast. First question from Arnold Briant. Are you supplying Tesla, BYD? And I'm sorry, I could not hear the last part of the question. And right, the last part of the question was in Boeing. We do not work with them directly. We go through suppliers like Safran, Liebherr. We have not seen anything in particular, really at this point in time on Boeing. Our aeronautic business is up. Our main footprint is Europe, really. And yes, we supply to Tesla. We have for a long time. BYD, the answer is simple. It's no, and they do pretty much everything in-house, batteries, but also fuses. They develop a lot of products.
They're all even interested in making their own transistors. So we don't do business with them. And SpaceX, same thing. It's a difficult question. They do a lot of 3D printing for parts on their rockets. They use a lot of laser equipment, in which we have optic systems coming from German OEMs. The third question from this same person: Is cash flow in line with your forecast? Well, that question we normally do not answer at this time of the year, but given what we said and the guidance we gave, the answer is yes, it is in line. H2, in terms of cash flow before investments, is always higher than the cash flow of H1.
Mr. Rudnitz, is the worst result in the semiconductor and solar market specific to the company, individual customer, or the entire market? Second question, does the management board see any risk for the project for Wolfspeed and ACC? When can we expect significant revenues from this project?
We answer in English?
Yes.
I think in, on the semiconductor business, Mersen is suffering a little bit like our competitor, who are delivering spare part in graphite, but the market at the end is booming. There's a question of inventory on for the OEM machine ion implanters and epitaxy, but the market at the end is good. The solar market is not good. The market f or PV installation is good, but on the silicon cell production side, there is a slowdown, and everybody is seeing this as a slowdown.
And every customer as well. It's not linked with one customer in particular.
The management, okay. But Wolfspeed, we talk a little bit about them. There is always a risk that the customer is not matching the quantity and the forecast, but I don't see other risk. If it is a risk, it is life, I would say. But Wolfspeed is strong. Number one, we will see what happens on the market, but I don't have any concern about Wolfspeed and ACC. Our revenue, we still have big revenue with Wolfspeed, and ACC, we are just starting. That is, the revenue should come 2025, and we are waiting the forecast, the projection.
The brand is running quite well, as we are confident to get quite a big quantity of busbar for 2025 .
A question from Mr. Klutt. "Hello. Last year, there was a dilution. What is the impact of the investments, this, right now?" Well, I think you're referring to the increase, to the capital increase. Yes, indeed, we, we did have this capital increase to have greater flexibility, and we are making investments. We're continuing those investments. It's part of our business plan, our roadmap. It's difficult to comment on, Q4 and make any conclusions. We did not invest for 2024. We invested with a long-term view. The cash we're spending today is for equipment that will become available and operational next year. I don't know if there was an underlying question. There is another question from Bruno Hetz: What is your flexibility for CapEx for 2025? How much flexibility?
I think we have an ambitious plan to stick to the market, and the market has been buoyant. We're not looking at postponing investments for 2026. I think we had about EUR 300 million investments. We said the flexibility would be maximum EUR 50 million. It doesn't mean EUR 50 million, it's really the maximum, but I cannot give you a precise answer. I think we have to wait, customer demand first, see what customer, how customer demand goes before we can answer that question. Switching to a different area, would there be an impact on Mersen if there were a war between China and Taiwan? I suppose we wouldn't be impacted. The first to be impacted and, you know, there is the TSMC plant, the big one is there.
There are other plants and other geographies, but if this plant were destroyed, which I don't think would happen, but there would be very few high-tech semiconductors on the surface of the globe left. So it's not possible. Okay, we have no additional questions. The only questions I have are questions you've already answered.
In that case, if there are no further questions, thank you so much for your time.