RHI Magnesita N.V. (RHIM) Earnings Call Transcript & Summary

Hello, and welcome to RHI Magnesita's Full Year Results 2024 Webcast with Stefan Borgas, CEO; and Ian Botha, CFO. The webcast will consist of a presentation followed by Q&A. [Operator Instructions] I would now like to hand over to Stefan to start the presentation. Stefan, please go ahead.

Thank you very much, and welcome, everybody joining us here in Vienna. Ian and I will lead you through the 2024 results. And then, of course, we are very happy to answer all of your questions right afterwards and in the coming days. But before we start, I would like to share a safety moment with you. We begin all presentations and meeting at RHI Magnesita with a short discussion or reflection on safety. I would like to share a reflection all around learning about health and safety. As you know, we recently acquired Resco Products in North America. The Resco approach -- the Resco management approach on safety has very excellently focused on behavioral awareness of all the employees. For example, last year, they had completely stopped work at all of their 9 production facilities because, before, there was an accident in one of them. This created huge and very, very good awareness among all of the employees on safety. On the other hand, now that we're going through their plants a lot, they miss to put in place some of the physical protection, like guard rails or hand protection screens or lockout sensors, more similar to what is done in other RHI Magnesita plants. So now, of course, as we listen and learn to each other, the best approach will be to combine both of those approaches to safety. We learn from each other, we listen to each other, and then, we put in place even better process to improve safety for everybody. Before we now move into the main section of the presentation, I would like to highlight the 3 key takeaways from this 2024 result review. First message. For the third year in a row, we have been facing a declining demand from our customers. And thanks to our operational performance -- our improved operational performance, we have still delivered a solid financial results, but weaker pricing reduced revenues. This was offset by contribution from acquisitions. Despite these falling prices, we increased adjusted EBITA margins from 11% -- to 11.7% from 11.4%, achieving our guidance. Cash conversion remained high, above 100%, and gearing is very well controlled within our guided range. Second message. We have taken a major step forward in North America, actually in the United States, with a EUR 391 million acquisition of Resco Products. This is our largest acquisition since the merger of RHI and Magnesita in 2017. We are focused on the benefits now, mainly on those benefits this merger will bring to our customers in the U.S. market, and then, of course, to our shareholders subsequently. Third message, RHI Magnesita continues to be a sustainability leader in our industry. We are closing in on our decarbonization targets for 2025. I'm very confident that we will meet those, and we have set ambitious new targets for 2030. As opposed to the last 5 years, we are now starting to actually deploy cutting-edge technology to solve complex engineering challenges in order to deliver meaningful reduction in CO2 emissions. Let's move into 2024 health and safety. We are fully focused on health and safety as a core value actually at RHI Magnesita. The Board and the executive management team have made it very clear that nothing takes priority over safety. And at the moment, nothing is more important than completing our overhaul of our safety standards to review and relive our safety culture and safety leadership. We don't want any accidents anymore, let alone any fatalities. Every employee in RHI Magnesita has the right to stop industrial activity if there is a risk to safety. The global RHIM team is responding very, very well to this initiative and to this relaunch. I believe that we will succeed together and make a real step change in the next quarters and years. An example of our unity on this topic has been the launch of the RHIM HELP fund, which has been funded by staff contributions, from employees, management and the Board of Directors and then a one-to-one matching contribution from the company. Together, we have raised over EUR 800,000 for this new fund, which has already made payments to some families who have been affected by serious injuries due to workplace accidents. HELP offers support not just for RHIM employees, but also to those affected in our communities. Let's move into the financial highlights of 2024. We have, again, faced very difficult market conditions during that year, as we continue to operate through an extended, still ongoing downturn in global industrial output. Against this backdrop, we have delivered resilient financial results with revenue, EBITA, cash flow, cash conversion and gearing all in line with 2023. The results were supported by M&A. At EUR 407 million EBITA, we achieved our guidance range for the adjusted EBITA that was between EUR 400 million and EUR 410 million. Our Board of Directors recommends a final dividend of EUR 1.20 per share, maintaining the full year payout at EUR 1.80 per share. This is in line with last year. By focusing on cost and operational efficiency, we managed to increase our adjusted EBITA margin by 30 basis points to 11.7% despite increasing pricing pressure. Earnings per share grew by 7%, also due to favorable currency movements. Increasing margins in an environment of falling prices and softer volumes at the same time is not an easy task. And this shows the benefit of the investments we are making to improve the efficiency of our business and to grow through acquisitions. So let's talk about M&A contributions because they offset the revenue effect of lower pricing. If we take a closer look at the revenue line, we actually saw a 1% decline in sales volumes in our base business before acquisitions and a 6% lower pricing. Part of the pressure on pricing was due to lower industry input costs, leading some of our cost-plus competitors to reduce their prices. Increasingly, competitors are now also fighting for volumes. However, lower price per tonne is also a result of changing product mix due to our acquisitions, as these have shifted the product mix to certain lower-priced product segments. So nothing to worry about here. This was expected. The contribution from M&A increased revenue by 6% to EUR 3.5 billion, which is then broadly flat versus 2023. In this weak demand environment, we delivered a slightly improved adjusted EBITA margin of 11.7%. However, this is a story of 2 parts. On the one hand, a record refractory margin of 10.9%, reflecting our disciplined cost and price management and still improving operational execution. On the other hand, a record low backward integration margin contribution of only 0.8%. This is a function of very low magnesite prices, which remain at a cyclical low and also very low capacity utilization at our raw material plants due to the weak volume demand from end customers. Whilst raw material prices are low, the backward integration is still positive with a contribution of EUR 28 million to EBITA because we remain able to produce at a cost that is below the external market prices. This compression has removed EUR 56 million of EBITA when compared to the EUR 84 million only 2 years ago. This has largely offset the incremental EBITA contribution from acquisitions over the period that was at EUR 77 million. Our strategy is to continue to sustainably grow margins, as we expand our business and capture network, logistics, procurement and other synergies from acquisitions. Let's go into the different business segments now. Steel revenues reduced slightly, but this was mainly due to price and product mix. We increased sales volumes by 1% excluding M&A, which is quite a solid performance compared to global steel output, which reduced by 1% according to World Steel Association figures. We also successfully increased gross margin to a 4-year high of 23.2%, thanks to operational delivery in our supply chain and in our plants. Regionally, we saw weakness in China and North America, whilst India, West Asia and Africa, Europe and South America recorded increased steel output, although each region for a little bit different reasons. So let's look at the regions. World steel production reduced by 1% in 2024, as I mentioned, the third consecutive year of contraction in global steel output. This, ladies and gentlemen, is unprecedented in the last 20 years. Only the global financial crisis saw a greater decline, and that was for 2 consecutive years, but then there was a fast and full recovery. All of our regions recorded lower steel revenues compared to 2023 with the exception of China and East Asia, where a full year of contributions from 2023 acquisitions and a strong volume performance from the base business resulted in a 12% increase in sales volumes. In India, West Asia and Africa, a 4% increase in steel production suggests a strong backdrop. But much of the domestic production was displaced by imports, impacting demand, growth locally and also triggering reduced pricing. The contributions from M&A was evident in Europe, CIS and Turkiye, where shipped volumes, including M&A increased by 7% against the backdrop of 0 growth in steel production. Increasingly weak pricing and mix effects reduced revenues by 1% in North America -- by 1% in Europe, CIS and Turkiye. North America was again our largest market by steel revenue. During 2024, we were operating in a tough environment with a 4% decline in steel production. We believe that steel mills may have been reluctant to increase production, especially in the fourth quarter, with the expectation of tariff protection potentially leading to a higher steel pricing opportunity in 2025. South America, last but not least, was relatively stable in all respects except in pricing as imports from China and soft customer demand impacted pricing to be lower. Let's look at the Industrial business. The Industrial business delivered flat revenues versus 2023, although there were some large movements behind this. M&A contributed strongly to the performance in Europe and India, and shipped volumes increased by 11% overall in the Industrial business. The strong growth in volume was fully offset by weaker pricing and also by mix effects. By product segment, we saw a weak or, let me say, a very weak Cement & Lime season, but this was offset by industrial projects, which grew revenues by 7%, supported by a good number of capital projects in non-ferrous metals and glass, which we know will not be repeated in 2025. The main reason for the slight decline in gross margins to 26.6% was the change in mix due to acquisitions. The Industrial segment remains overall a higher margin business than steel, but with a higher year-on-year volatility. The most significant strategic development in 2024 was undoubtedly the acquisition of Resco Products in the U.S. We have been working on this transaction for several years, and we have been very keen to grow our local presence in the U.S. based on strong feedback from our customers to do this. Resco more than doubles the size of our Industrial business in the U.S. and allow us to enter into new market segments, in particular in the oil and petrochemical industries as well as aluminum and cement also. A significant proportion of the Resco steel business is actually focused on iron making, where RHI Magnesita was traditionally not very strong in the U.S. And this is, therefore, very complementary to our existing business overall in the United States. Resco has a good network of 8 refractory production sites and 2 raw material sites. It is this planned footprint, which will enable us now to transfer production that is currently in Europe and South America to onshore U.S. locations. To deep dive a little bit into this local production strategy. Whilst many industrial players today seem to be waking up to the frictional costs resulting from tariffs and duties, those of you who have been following us for a number of years will know that we have been very attentive to this issue and the connected challenges of freight and working capital management and long supply chains and uncertainty there. This is why our strategy is fundamentally based on a local-for-local production strategy as far as possible in our 5 manufacturing hubs, which are located in the largest refractory markets around the world. We seek to produce as much as possible close to where our customers need it, but still leverage the power of our global network. As we have built up this network until now, the longer supply chain and the largest proportion of imports has been in North America, which receives material quantities of finished goods exports from Europe and South America, and in the Resco portfolio, also from China. The acquisition and the merger of our businesses gives us the opportunity now to address this and increase local-for-local production in the U.S. to at least 75%. A typical acquisition for RHIM will always benefit from procurement, SG&A and technology transfer improvements. With Resco, there is also a major opportunity in logistics benefits, network efficiencies and working capital savings, which is why we are very pleased to have completed this transaction and launched the integration process fully to realize those gains as quickly as possible, of course. There is also an opportunity to bring our industry-leading recycling practices with associated sustainability benefits to Resco's customer base and to using the plant network that we now have. Our M&A program since December 2021 now spans 11 acquisitions with a total deal value of EUR 1.2 billion. I would summarize the benefits to our group overall as an integration of knowledge. Each acquisition brings us valuable insights into new market opportunities and exposure to different business model. We gain from the addition of talented individuals to our team, from whom we can learn so much. They can often bring their expertise to a much wider customer base by leveraging the RHIM network and our global platform. In sustainability, we are closing in on our 2025 targets and expect to meet our key environmental targets fully. We set them in 2029, and we said we would reduce CO2 emission's intensity by 15% and increase our recycling rate to 15%. When we originally set these targets, it was not clear in detail how we would be able to deliver them and whether the timing would be too aggressive. It is through a combination of remarkable innovation and determination of all the people in our company that we have been able to get to this point. We have now set ourselves new benchmarks for 2030, which are equally stretching and will demand much from the team to deliver. It will become incrementally much more difficult and more expensive to make additional gains. Recycling has now grown to such an extent that we are now setting up a new business unit to pursue external sales of green raw materials to other refractory producers and other industrial companies. A few words on regulation in this space. With this annual report, we published our first sustainability statement according to the new CSRD or ESRS standards this year. Having completed in full with -- having complied in full with the new requirements, we are of the view that the outcome is not particularly beneficial to stakeholders. These reporting standards plays a very high compliance burden on firms, which diverts resources away from actually trying to solve real-life sustainability challenges. The assurance process alone costs EUR 500,000 to RHI Magnesita. And this is before the cost of significant internal resources required to complete this process. We are encouraged to see that regulators have realized that these and other new regulations have imposed a high burden and are hopefully revising directives that have been proposed. We are hopeful for improvements here. Irrespective of regulation, sustainability is a cornerstone of our strategy, and RHI Magnesita is leading its industry in developing new technologies to deliver sustainable growth. I'm very happy to share with you an example of our technology leadership and innovation in this field. This is the Raptor, a cutting-edge modular sorting technology, which is fully scalable and can be rolled out globally at speed. Raptor is an automated sorting line, which uses scanning technology and robotics to deliver a step change in our ability to process and sort large quantities of reclaimed refractory materials to a very high level of purity. You are looking at the first installation in our Mitterdorf recycling facility in Austria. In previous presentations, I have shown videos of how the sorting technology has performed in testing. This is the delivery of a commercial scale facility for real-world use. We have also been working on other robotic solutions for various refractory applications, and I'm pleased to report strong growth in sales in 2024. Recycling and robotics are just 2 examples of the additional value that we are able to bring to our customers. As the group has shown, and as we have grown in size, we have become closer and closer to our customers, in particular, where we have been offering solution contracts. Our offering has now evolved to the point where we have redefined and relaunched it under the 4PRO banner. We now group all of our offerings under the 4 categories of people, performance, partnership and planet, and you can see the wide variety of areas, which this service and solutions menu encompasses. We have evolved into a global business, which can deliver far more than simple refractory materials. The more we grow through acquisitions and develop our in-house capabilities, the broader our offering becomes. And we can differentiate ourselves further from the competition, and more importantly, help our customers in their operations. No other refractory player has this breadth of offering and geographic penetration. With that, now let me hand over to Ian for a more detailed look at the financials.

Thanks very much, Stefan, and good morning, ladies and gentlemen. In a difficult market environment, we have delivered a strong operational and financial performance. In 2024, revenue declined by 2% and gross profit by 1% with weak pricing, largely offset by the contribution from M&A. Despite the revenue decline, we saw an increase in the adjusted EBITA margin to 11.7% from 11.4% in 2023. This helped us deliver adjusted EBITA of EUR 407 million, in line with guidance and consistent with the 2023 performance. Net financial expenses benefited from a foreign exchange gain of EUR 11 million compared to a loss of EUR 30 million in 2023 due to the strength of the U.S. dollar against the euro, the Brazilian real and the Mexican peso. This was the primary driver behind our 7% growth in adjusted EPS to EUR 5.32 per share. The Board has recommended a final dividend of EUR 1.20 per share, bringing the total dividend for 2024 to EUR 1.80, which is the same as the payout for 2023. The dividend is covered approximately 3x by adjusted EPS in line with our policy. Turning to revenue. In 2024, we faced a EUR 43 million currency headwind on the revenue line compared to the previous year. The 1% reduction in sales volumes in the base business led to a EUR 46 million decline in revenue. In addition, the 6% lower pricing and the weaker sales mix impacted revenue by EUR 221 million. This was partially offset by the contribution from our 2023 M&A, which added EUR 224 million. In 2024, we delivered adjusted EBITA of EUR 407 million, which was largely flat year-on-year. M&A contributed an additional EUR 40 million of EBITA. At the EBITA level, the currency effect was reversed, and we benefited from a tailwind of EUR 30 million, this given the weakness in the Argentinian peso and the Brazilian real. However, these positive effects were fully offset by 2 key factors. Firstly, the falling contribution from the group's raw material assets, reduced EBITA by EUR 33 million year-on-year dropping to a record low contribution of EUR 28 million. This was primarily due to lower prices for refractory raw materials and a very low loading of our raw material plant. Secondly, we saw a decline in earnings from our refractory business, driven by lower prices and lower sales volumes, which more than offset the benefit of lower input costs, better fixed cost absorption and our operational improvement. As a result, as shown on the right, the contribution from our base business fell year-on-year by around EUR 40 million to contribute to EUR 341 million, and at the same time, our M&A contribution grew by EUR 40 million to EUR 66 million. There were 3 key categories of adjustments to our EBITA in 2024, and I'd like to provide you with more detail on each of these. The first is digital transformation spend. We are replacing our core operating systems, including our SAP ERP, while redesigning our end-to-end business processes to cut costs and to enhance our customer experience. As you are already aware, the digital transformation spend is accounted for as Software-as-a-Service and expensed as incurred as is required by IFRS accounting standards. The total cost for 2024 is EUR 52 million. This is above our guidance of EUR 35 million, and this increase is due to certain items that were capitalized in 2023, but have now been charged through the P&L in '24. The second adjustment relates to the noncash impairment of certain fixed assets in Brazil. This results from our strategy to transfer production to the U.S. post the Resco acquisition. This was anticipated in our business case for the Resco deal and was announced at the time the Resco transaction completed. And then finally, as part of a new phase of network optimization, we've provided EUR 25 million in closure costs for the Mainzlar plant in Germany. This plant was originally slated for closure as part of the RHI Magnesita merger, but the closure was delayed due to capacity needs at the time. With the optimization efforts now in place, we're moving forward with the closure, and this delivers a EUR 10 million EBITA benefit in 2025. These adjustments account for the bulk of the EUR 125 million in total adjustments, and they align with our existing policy for handling such expenses. Turning to costs. In '24, our cost of goods sold remained stable year-on-year. Lower input costs in our base business offset the impact of M&A-related expenses. However, the cost mix did shift. Labor rose as a proportion of our cost of goods sold while raw material costs declined. This year, in '25, we are seeing some input cost inflation driven by rising labor and raw material costs. To offset this, we are targeting price increases in our refractory products. This has not been realized in the first quarter and weighs somewhat on our first quarter '25 results. Now the 6 M&A transactions that we completed in 2023 delivered an EBITDA contribution of EUR 77 million, This is in line with our guidance of approximately EUR 80 million despite difficult demand conditions. This boosted our EPS by 23% or just below EUR 1 per share. In '24, M&A spend totaled EUR 77 million, including EUR 44 million in Resco prepayments, EUR 5 million for the acquisition of Italian recycling business, Trezzi, and other deferred payments or minority acquisitions. Group free cash flow comfortably funded these payments together with a dividend of EUR 87 million with net debt reducing by EUR 53 million in the year. The remaining payments for the acquisition of Resco of EUR 391 million have now been made in January of '25. Our working capital intensity improved to 23.4%. We ended 2024 with EUR 115 million lower working capital driven by a EUR 39 million reduction in inventories, stable accounts receivable and a EUR 74 million increase in accounts payable, as we extended payment terms with our suppliers. We are pleased with our inventory coverage, which was reduced to target levels in previous periods and is tightly controlled. In 2024, we invested EUR 145 million in CapEx, and we are setting '25 guidance at the same level. This includes EUR 15 million for the Resco integration and maintenance CapEx. Our focus is to keep CapEx as close to or below depreciation as we prioritize capital allocation towards M&A to drive long-term growth. In addition, as mentioned, we are investing approximately EUR 35 million per year into our digital transformation. This is being charged through the P&L under other expenses as required by IFRS. Turning to our network optimization. Following the significant M&A activity in 2023 and the completion of the Resco transaction, we are now taking the next step to optimize our network to fully capture the benefits of our expanded footprint. This also seeks to address surplus capacity in lower growth markets and reducing exports from locations where they are no longer needed. As a result, we will be closing some sites in Europe, in South America and in North America while expanding capacity modestly in the United States to support customer demand. To execute this, we plan to spend EUR 100 million between 2025 and 2027 comprising EUR 40 million of CapEx and EUR 60 million in restructuring costs. Importantly, we expect a fast payback with an EBITA benefit of EUR 10 million this year in 2025, EUR 20 million next year and a EUR 30 million annual benefit thereafter recurring. The EUR 10 million EBITA benefit in 2025 is included in our market guidance for adjusted EBITA to be modestly above 2024. Also, the '25 CapEx guidance of EUR 145 million includes network optimization spend of EUR 15 million. Our business continued to generate strong and consistent cash flow, reinforcing financial stability and supporting strategic growth. We delivered EUR 419 million in adjusted operating cash flow in 2024, bringing our total for the last 3 years to EUR 1 billion. The period of exceptional working capital absorption in 2021 and the first half of '22 is now firmly behind us, and we've returned to the strong cash conversion that is normal for our business. Free cash flow has also remained very healthy with EUR 258 million in '23 and EUR 225 million in 2024, reflecting the resilience of our operations. Net debt reduced to EUR 1.25 billion, down from EUR 1.3 billion at the start of the year. We continue our track record of stable and predictable management of our balance sheet. Gearing was held at 2.3x for the third consecutive year, remaining within our guided range of 2 to 2.5x, this despite weakness in end markets and investments in M&A. Also to note, net debt increased by EUR 44 million in '24 due to prepayments on the Resco acquisition, though no pro forma Resco earnings are included in the '24 gearing number. We maintained high levels of liquidity, almost EUR 1.4 billion at the year-end, ensuring we were well prepared for the EUR 350 million in payments for the acquisition of Resco in the first quarter of this year. To support this, we secured a new EUR 200 million bilateral facility linked to completion of the transaction. Our debt maturity profile is long-dated with 3/4 of our interest rates fixed and a weighted average cost of debt below 3%. We continue to benefit from a broad range of financing sources and long-term relationships with supportive lenders. I will now hand you back to Stefan for some closing remarks.

Thank you very much, Ian. Let's look at the future. I would like to summarize the market guidance that we have announced today and provide the context in a really, really difficult market environment that we continue to face. The first quarter of 2025 has started very weak, and there's no recovery in demand visible anywhere around the world and in none of our industries. The structural issue of excess China production and exports of many different materials continues to affect domestic producers in other regions on an ongoing basis. RHIM has a higher share of the refractory business in these other regions so it weighs over proportionately on us. In the Industrial business, we had a relatively good 2024, but 2024 finished the Industrial sector's CapEx cycle, and we know that this good project business in Industrials will not be repeated in 2025. In addition to this, the cement business in the first quarter has been particularly weak due to the ongoing weakness in the world's construction market and less nonferrous and glass projects are in the order book for 2025. We, therefore, guide to adjusted EBITA that will be only modestly above the levels that we achieved in 2024, including the contributions from Resco. We expect that this will be weighted 45% in the first half and 55% in the second half. Let me finish where we started, with the themes of safety, resilience and progress: safety, because this is our #1 priority, and it will always be; resilience, because we have once again in '24 delivered results that I hope you will agree are impressive given the very difficult market conditions that we are facing since 2 years; and progress, because despite the challenging environment, we are continuing to build a global business through acquisitions that is now well established as a consolidator in the refractory industry. We are a true leader in terms of the value that we can bring to our customers. Ian and I are now happy to take all of your questions. Thank you for listening.

[Operator Instructions] We will now take our first question from the conference call.

Our first question comes from Andrew Simms of Berenberg.

I'm Andrew Simms from Berenberg here. I've got a couple of questions. Firstly, I was trying to see on Slide 9 where you go through the growth performance by region. Can you maybe give a little bit of color on China given the steel production was down, and certainly your comments around exports and things like that? It's interesting to see your base volume go up 5%. I'd be interested in to see what you've been doing there, how that's going about and maybe what the pricing situation is there. The second question is then on -- just on gross margin in refractory. Is that all efficiency improvement? And improvement you've seen there, was that some net pricing that you've been able to hold on to through this year? And then I was just thinking about the start to 2025 now as well. You mentioned perhaps some pausing of steel production due to tariff concerns. Have you seen any of that start to reverse yet? Or is there anything -- any signs of life that, that part of that pause might change?

Okay. Let me start with China. We have a very, very small market share in China in the domestic business. Hence, if we gain 1 or 2 large contracts, it makes a big impact on our growth, but it's relatively immaterial to the whole market. Also, we have made good progress in Southeast Asia in some of the markets that were relatively weak in 2023, where we have regained volumes because customers started to produce again. And thirdly, we have a full year integration of our acquisitions in China. And if you take this all together, then you come with a volume impact. So it's not market driven, but it's driven on the relative percentage of our relatively small business to the very big market. Refractory margin improvement, yes, this is almost entirely driven by operational excellence. I mean, it's a continuous good progress. We started to work on our machine room, on our global robustness, on our global supply chain performance substantially after the COVID year because we saw in this big recovery that we had a lot of work here, and we still have quite some opportunity here. But the refractory margin improvement comes almost entirely from this and not from pricing that we could hold on to because, unfortunately, in the fourth quarter of 2024, prices went down overproportionately despite the fact that raw material costs in alumina started to go up. And then last question that you had, Andrew, 2025, start of the year. We haven't seen yet a big pick up in steel production in the U.S. I think it's more affecting now pricing there, steel pricing. So customers are quite confident about their own profitability, but volumes haven't yet improved significantly. There are lots of discussions on import duties, but they're not actually effectively yet implemented, so no relief on the volume side yet in the U.S. on the -- from the steel side.

I'll now hand back to the management team for any questions via the Zoom.

Thank you, Alex. The next question comes from Harry Philips at Peel Hunt.

A couple of questions, please. Just thinking about pricing and mix. And I think the mix, you've explained very clearly, Stefan, around the project side and what have you within industrials and what's going on there. But in terms of raw materials, I guess you get sort of 2-way hit. If magnesia prices sort of remain flat, as they seem to be at the moment, that you don't get any pickup in the vertical margin -- vertical integration margin. And then if you get to fused alumina, as it shows in that chart, really kicking on in the final quarter, you just don't get any recovery on that. And if you can't lift prices, you just have to take that hit straight in your P&L. Is that a correct reading of that?

Yes, that's absolutely correct. On the magnesia side, the fused magnesia prices have started to increase. Unfortunately, we are not backward integrated there. We're only backward integrated into the sintered magnesia. And here, the price increases are small. They are there, but they are still very small, so they're not yet material. Maybe that could be an opportunity in the second half of 2025, but I think it remains to be seen what happens here. China is the price maker here. On the alumina side, however, the risk is fully there. Prices went up. So ourselves and all of our competitors bought these higher-cost alumina products, and they are now in the cost of goods of the materials that will be sold in the next 6 months. Unfortunately, alumina prices, or fortunately, depending on from which perspective you look at it, alumina prices have started to go down again. So I think there's a real danger that many competitors decide to absorb this peak, and then, we will have quite a noticeable margin compression, especially during the first half of the year, if this trend continues. This is quite dynamic, so I think we need to discuss it quarter-by-quarter, and we're happy to tell you, of course, what happens here. But this is a true risk for margins now in the first quarter. And we see it, as Ian has mentioned, already in the January and February shipments.

No, that makes a lot of sense. And then just thinking about Resco and sort of synergies out of Resco beyond the sort of plant optimization, if you like, of the broader network. Should -- with your rule of thumb on synergies from acquisitions, which is, what, 30% to 50% of EBITDA in outer years. Can we apply that to Resco as well above and beyond the sort of optimization plan you've outlined already?

Yes, that's a good number. That's what we're targeting here as well. Now the network synergies will only come in '26 or maybe even '27, right, because we need to do some adaptations of the plant, that takes time, the engineering needs to happen. So that -- the customers need to test the products. So that takes a little bit of time. The nonnetwork synergies like raw materials synergies, consolidation of general and administrative costs and so on, that will come this year. But, of course, there are a lot of one-time costs that balance this out. So from a cash flow perspective, that won't help very much yet this year. Maybe there's a bit of an opportunity here on the EBITA side to solidify it. But we've been careful on budgeting this in now. We've just closed, and the integration has started 3 weeks ago, so...

And then just one very final one. In terms of that local-for-local sort of modeling in North America and this sort of 75% with Resco in there, could -- is that the right level for it going forward? Or can that go higher still than the 75%?

Yes. So the 75% number is a number that we know we can deliver with what we want to do. I think there's a little bit more opportunity here to go to 80%, maybe even 85%, which should be the optimal level. We don't ever want a local-for-local percentage to be at 100%. Why? Because it doesn't -- it takes the flexibility away that customers are requiring for diversifying their supply chains, right? What we offer to customers is you don't only get the sources of the products in your country, this is the main supply base, but you also get backup supply from different parts of the world. This is the one reason why we should never be at 100%. And the other reason is, of course, super specialty high-tech products, we only want to make in 1 or maximum 2 places in the world and not everywhere. Otherwise, the fixed costs are too expensive.

The next question comes from Mark Davies Jones at Stifel.

A couple of things, please. Firstly, on the raw material side. Obviously, you're getting squeezed quite hard on the margin there. Is there anything that you can do from your own cost of production point of view within that business? Obviously, restructuring has principally, I think, been focused on the refractory business. But anything you can do to your own cost position there that would help in the meantime? And any early thoughts on pricing this year, whether the price declines you would expect given this environment could be steeper than those you experienced in 2024?

Yes. On the raw materials side, of course, when we talk about magnesite raw materials, there's always something we can do. We're, for example, looking at lower-cost fuels in Brazil, where we can switch from one fuel category to another taking advantage of this. The new plant in Brumado in Brazil also allows us to modify our product portfolio and then get an overall reduction in cost per tonne, assuming that we can fully utilize this plant, of course. So there is opportunity here, for sure. I would estimate this to become effective in 2026 rather than in 2025 because, of course, these changes take time until they implement it and then make it through the supply chain, right? Raw materials are early in the chain, so it always takes a little bit longer for this to be noticed in the P&L eventually. On the pricing side, Mark, there is clear risk. We don't see -- let me start a different way, the last time we had structural price increases in the industry was in 2021 when raw material costs really went up dramatically and the industry was forced to do this. Now with 3 years of industrial decline, you have 2 things that happened. People lost a little bit that competence and that focus on making sure that the cost and prices follow each other. But the other thing you see is also because of the low -- ongoing low volume environment that some competitors are getting frustrated with volumes not going up year by year. They won't go up in 2025 either because the demand simply isn't yet recovering, unless something changes during the course of this year that -- which we all hope, of course. But that combination, I think, embeds more pricing risk than pricing opportunity for short-term volume gains. In RHI Magnesita, we will be very -- more disciplined on pricing in 2025 than we were in 2024, even more, even at the risk to lose market share. We will put a focus on this because we have to defend our margins; otherwise, we get into a bad spiral.

Okay. And just one final one. Given the fact that Resco is the biggest deal that you've done, would it be fair to assume that the focus this year is principally on integration? You've done a lot of transactions now over the last few years. Or are you continuing to look for new consolidation targets at the same time?

Both. Look, acquisitions are the only way for us to grow structurally. So acquisitions will remain a clear pillar of our strategy. But on the other hand, of course, now we need to absorb and digest this relatively sizable acquisition. So the amount we will spend and also the number of transactions that we can actually physically execute might be a little bit lower this year and next year in terms of spend volume, but also in terms of number of integrations that we can actually master. The Resco integration has to really work well. So we have a lot of focus on it that we don't -- we really want to make sure that we deliver very well on this.

Next question comes from Jonathan Hurn at Barclays.

Just a few questions for me, please. Firstly was just on -- in terms of the return on invested capital of the business. If we look at the level in 2024, it's 9.8%. It was 10.7% in '23. It is coming back due to M&A. Obviously, you've done another big deal or completed on Resco at the start of January. So the question really is just on the outlook for the return on invested capital of the business. Is it going to be structurally lower going forward? I think if we go back to 2019, it was around about 15%. Can we get back to those kinds of returns for RHI, please? That was the first question.

Ian, do you want to take that one?

Yes. Thanks, Stefan. Jonathan, so we are super focused on our return in invested capital. Clearly, the 9.8%, which has been coming down over the last couple of years, is too low for us. It's come down really for 2 reasons. One is this collapse of the backward integration margin. And you can see the very weak vertical integration margin or ROIC that we get below our cost of capital at 3.5%. And then the second piece is the M&A. We are focused on both improving the numerator, so growing revenue, growing earnings, improving our cost position and on improving the denominator, so network optimization, reducing our working capital, being super disciplined around the CapEx that we spend and making sure that, that is in line with our depreciation. Because of the size of our invested capital, just over EUR 3 billion, obviously moving ROIC is not just something to happen in 1 year, but over a couple of years. Certainly, our expectation is that it will tick up nicely this year and it will continue in 2026.

Jonathan, the main reason for this network optimization activities, the EUR 100 million that we will spend and the EUR 30 million annual benefit, the main reason is ROIC improvement. If backward integration margins come back to over 1 percentage point and we are -- and the network optimization is implemented, then ROIC will become double digit again.

Okay. Very clear. The second one is just if you can speak a little bit more about the outlook for India. Obviously, the growth coming through there is below expectation. It's -- I think it's fair to say. Obviously, it's getting hit by imports from China. But can you just talk about how you see that market developing from here? Is it going to continue to be a sort of 3% to 4% growth market? Or could it actually go back to that sort of mid- to high-single digits, which I think a lot of people are hoping for? Just some color there would be helpful, please, in terms of the medium term as well as the short term.

Yes. Look, in our business, there's 2 things that drive this growth in India. One is of course the imports from China. And here, your guess is probably better than ours because you see much more and broader industries than we do. But as long as this is not addressed, then I think the growth in domestic production will be lower than the growth in domestic demand. The demand growth in India is solid, so we don't need to be concerned about this at this point in time. The second piece here that affects our growth is the start-up of new production facilities in India, where we have an overproportionate share because for these new facilities, customers want a more broader, encompassing solution. This is true for steel, but this is also true for industrial -- new industrial plants. And all of the -- because of the little bit lower production level, these new projects have been delayed a little bit. But as they come on stream, we will have the step changes. And we will have one now in the first half of this year from a big new steel plant that is now just starting up, originally scheduled to start up in September last year, now delayed, but this is now coming. And there is a few other industrial plants as well. We have some, I think, additional opportunity there by translating the Resco portfolio to India because the oil and gas industry and petrochemical industry in India is a good, strongly growing sector as well. And now we have a product portfolio for this and a reputable brand also. So I think we can get back to 5%, 6% volume growth in India relatively in the short term. But whether we can get to 8% or maybe in a year even to 10% depends very much on this import dynamic.

Okay. Very clear. And last one, I was just interested about that ERP implementation across the whole group. I mean, it's a big undertaking. How is it going? I mean, has there been any issues? Just -- essentially -- I mean, it's a very complex task, I mean. Yes, just what's happening there. And how easy do you think it's going to be?

Yes. So there are many moving parts on this because, obviously, it's not just -- you don't just buy a software and put it into place. We redesign our total business processes. One portion of this was the other business services, the administrative services. In-house, we call it our administrative factory, which has potential for improvement and efficiency gains. We partnered with Capgemini on that. Ian is leading this part of the transformation. That is going very well. The software design, we're in the process -- at the end of the process design phase now. You can bet that we have hundreds of energetic, controversial discussions with a little bit of a delay. But we've achieved a super high level of standardization here, standardizing our business process to the future ERP design. So that has worked very well as well. And now we're in the phase of actually programming this and showing the first pieces of the new software to our key users. There, we're a little bit delayed. Of course, we have a large -- very large partnership here with Tata Consulting Services, and we're getting used to each other in this. So there, it's a little bit bumpy. So we've had a few months' delay, but nothing to be worried about. So, so far, I think, the program is broadly on track. There's no issue here. We're on budget. The timing is a little bit delayed, but it's not going to affect us very much. The key milestone is going to be at the end of this year when we implement the first big region, which will be North America, and then, we'll be live on the new systems. And then the rollout to the other regions, hopefully, will be easier. But this year is a decisive year for this.

We are now turning to written questions. The first question comes from Stephan Klepp at HSBC, who has 2 questions for you. The first question is, how do you see pricing developing at the moment and through 2025? And the second question is, how much market tailwind and rebound in demand do you need in markets in H2 2025 to achieve your guidance?

Pricing, I think we said most of the things already. This is maybe the biggest short-term concern we have at the moment. Therefore, we have -- the operational teams all around the world have a very big focus on this. So I think there's more risk than opportunity on pricing for 2025, quite frankly. Market tailwind, we don't need a lot of tailwind, but we need these new projects to come on stream in -- this is mostly in the U.S. in steel, but also -- and also in India. Those, they need to happen. And we need to be sure or we need -- what needs to happen in the Industrial business is that those projects that we have actually get delivered and not delayed into 2026 again. So I think those are the 2 things we need. I think other than that, we're okay. Next question, please.

The next questions come from Mark Fielding at Royal Bank of Canada. He's asking, please, can you clarify around 2 accounting changes on revenue recognition and inventory provisioning? Were these changes expected at the time of the Q3 update when the 2024 outlook was updated or further back at the half year results? Further, the revenue recognition benefit would seem like a base level change for future years. Is that correct? And on the inventory provisioning, is this more of a one-off benefit or also a base impact?

Mark, thank you. Thank you very much for the question. These are great examples of how we are getting closer to our business, how we are more tightly managing the performance of our business. The revenue recognition item, Stefan touched on the journey that we're on at the moment with redesigning our ERP. What we found out was as we were redesigning the new SAP 4HANA instance that actually for one particular shipment type, CFR, using an intermediary, particularly into India, that we were recognizing the revenue a little bit too late. We're recognizing it when it reaches the customer port rather than when it is loaded onto the vessel. And clearly, we have fixed that. The net incremental benefit this year at an EBITA level is EUR 2.5 million. The second piece is bigger, and this is a once-off, and this is inventory. Those that have followed RHIM for several years would have seen that we've been through periods of reasonable volatility in our inventory. We've had periods where we've had too little inventory and we've had too airfreight material in and we've been through periods of too much inventory, finished goods coverage at 2.9 months, whereas today, we're sitting at 1.7 months. And what we have seen is as we are more tightly managing our inventory, it's more stable, it's more predictable, not just does it improve our PIFOT, our Produced In Full, On time -- not just does it improve our customer experience, but actually it allows us to revisit the very high levels of stock obsolescence that we've carried. Because our reality is that we've been recovering over 2/3 of the obsolescence value that we've provided. So that's an ongoing better level of stock obsolescence that we expect. But yes, it does provide a level of support in 2024 of around EUR 10 million.

If I can make another comment here. We talk about the margin improvement because of operational excellence. On the inventory side, this is a really fantastic example of this. Because of the sharper management, the much lower level of obsolescence, the better control across the entire supply chain, simply, we waste less. And, therefore, we write off less and have a better margin because we do it right the first time. And of course, our auditors look at this and say, "Okay, your provisions are too high. Please bring them down." So yes, it's a one-time effect. But, of course, we are trying to do everything we can to have another one-time effect next year in 2025.

If you look at our obsolescence as a percentage of our inventory, it still remains reasonably high. And this is clearly an opportunity for us over time as we tighten up our inventory management to further reduce that.

The next question comes from Vanessa Jeffriess at Jefferies. Regarding 24% working capital intensity target in FY '25, understand the market share gained from your inventory strategy, but given current raw material prices and availability dynamics, can we expect to eventually move back to the pre-FY '22 15% to 18% target range?

Vanessa, thanks for the question. So I think that we certainly are seeking to reduce our working capital intensity further over time. And a particular focus on reducing our inventory intensity as we drive more local for local, like with Resco, as we invest in some of this new digital technology around transport management and supply chain planning, but, also, as we seek to reduce further our accounts receivable overdue. So bringing it down 1%, 2% in future periods is certainly on our radar screen. It will not go back though to the 15% to 18%, that may have been the case in the past, really for 3 key reasons. One is that we have not increased our trade finance as a proportion of our working capital as the levels of working capital have grown. If we were to do that, that alone would add a reduction of almost 3 percentage points. Secondly, as the portfolio grows in geographies like India, what we do find is that there are longer supply chains that now exist. It simply takes us -- we have more material on the water into India. And thirdly, it's a consequence of the relative strength of the U.S. dollar.

Thank you. This concludes the Q&A. And I would now like to hand back to Stefan for any closing remarks.

Thank you very much for all of your questions, and thank you very much for dialing in to listen today. Let me just summarize our key messages. In our industry, together with many other industries in the basic materials, we are facing a very serious difficult demand situation, now the third year in a row. Considering this, our '24 results are quite resilient. Second, in RHI Magnesita, we have delivered another good contribution from our strategy execution with the Resco acquisition in the U.S. That gives us a true step forward here in terms of revenue, profits, synergy potential, but also local production increase in this important market. And third, we are, and we remain, the sustainability leader in our industry. The activities here are now moving from a big operational focus to a technology implementation focus for the next 5 years, but we will continue to be here. If we look at 2025, we have to be careful. Our outlook for 2025 is considering this market environment, which could very well get worse before it gets better, because we have no pricing pressure coming on top of the already weak and ongoing volume demand. We are sure that in 2025, we will deliver moderately better results than in 2024, but that includes the integration of Resco. Thank you very much for listening to us today, and we're very happy to engage with you over the course of the next days and weeks. Goodbye from Vienna.

Thank you.