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

Thank you very much. Good morning from Vienna to all of you. Thank you for dialing in, and welcome to this somewhat unusual, unscheduled additional update. Just to put everybody at ease, we have nothing dramatic to report, but because the uncertainty for everybody is so high, we took the approach that speaking more is better than -- rather than speaking less. So we thought before the summer break and the holiday break in Europe, we give you an update on how our business is doing. And then we meet again for the half year updates as scheduled at the beginning of August. This pandemic, COVID-19, has presented unprecedented challenges to us, to our business as well as to the rest of the world. I'm very, very proud about the team and all of the employees at RHI Magnesita in the way that our company has responded to those challenges. Our company is in safe waters and is dealing with the situation with open eyes and with really fantastic collaboration, also unprecedented. The primary focus has been and continues to be on the health and on the safety of our employees. We have seen, in the last weeks, an increase in infection cases, especially in South America. And this is not exploding, but this is increasing in a controlled way. We have had no severe illnesses, let alone deaths, from the pandemic, and we are managing these additional cases in a very controlled way with all the infection that could come from this. And we have not caused or seen any concerns in our operations or in our customer operations where we are present. This remains the first responsibility. And we have seen no involuntarily production operation from COVID-19. We continue to support our customers wherever they need us and whenever they need us with all of the material and the services they require. All of our plants remain -- or keep the capability to stay open. We have put a lot of safety and operating -- new operating protocols in place, but this has been accepted really well and also our supply chains all around the globe remain resilient with fantastic collaboration of our supply chain partners everywhere. Volumes, however, have clearly dropped in the second quarter of this year, very much in line with the volume drop at our customers. So we're very sure that we haven't lost any market position. The volume drop is well within the parameters of our scenario planning. We're somehow between scenario 1 and 2, it depends on which parameter we look at. Our liquidity position remains very strong at levels of above EUR 1.1 billion of available liquidity at any given point in time. So the company is absolutely stable, and there's no reason to believe that this will change. We have started to look at a scenario of longer-term subdued demand because of a very slow recovery and are planning measures or thinking about measures that are now in the middle of being developed that would then link to an L-shaped recovery maybe going even over a period of 2 years. We will give you numbers on this at our half year update, but I'll talk about the specificity of these measures and the direction of where we go a little bit later in this update. The slowdown in our customers' activities has clearly been noted in May and June. It will continue in July and August, maybe at just a little bit better levels than June but not substantially higher as much as what we can see now. Especially for July, we don't see very significant uptake of volume. This has caused our revenues in the second quarter almost 20% lower than in the first quarter, both in the Steel and Industrial Divisions, very much in line, as I said, with our scenarios. If you look a little bit more in detail, we've had good, resilient continued business in our global cement business. Also, the Steel business in Middle East and most of Asian countries has remained relatively resilient. But especially in Europe, South America and India, the steel demand has been very weak in the second quarter and remains very weak also into the next weeks, July and August. In the Industrial projects business -- our Industrial business is split between projects and cement. And in the Industrial projects business, we have now seen delays that are more than delays of a few weeks, in line with customers postponing their CapEx into next year. Some of these projects have now also moved into next year. So the performance in that part of the business we expect will be weaker in 2020 than it was in 2019. Our Steel business in North America was actually quite strong in the first 4 months of the year but now in May and June has gone down quite dramatically. This is due to the specific structure of U.S. steel production, which is predominantly driven by electric arc furnaces that can be very quickly stopped and restarted. And also here, July and August does not look like a significant recovery. The visibility into the future remains very low, unfortunately. We can look about 2 months ahead, but even the second month is much more unclear than it would be in normal times. And the visibility beyond 2 months is really not reasonable to rely on. There's another aspect that is worthwhile mentioning on the environment, this is the raw material prices. Raw material prices from China have continued to fall during the first 4 months of the year because there was a significant increasing capacity last year in China and much of this capacity came on stream at the point in time when demand was going into the other way because corona impacted demand already in January of this year so as a result, raw material prices have fallen quite significantly. There's a stabilization now since May on raw material prices, and the Chinese government has undertaken curtailment of explosives, so that there's at least a serious attempt to stabilize the raw material level. But again, here, we need to see what the reality will bring in the next 6 months. In RHI Magnesita, the first business focus after safe and healthy has been on cash preservation. We have handled this really well. I'm so proud about our team. We have had to temporarily close 3 plants in Europe and 1 plant in Mexico. This will continue now into the next months. We have introduced short-time working schemes in line with those countries' regulations where it is possible, mostly in Europe. We have deferred EUR 45 million of CapEx into 2020. This is CapEx that is linked to expansion of capacity or maintenance in those plants that are not utilized or utilized much less. The CapEx that we have planned for restructuring our network and improving our cost position, it remains fully in place, or we're even trying to accelerate it here or there where this is possible. We have put regular fixed cost measures in place that you would expect, hiring freezes, for example, on noncritical roles, also restricting discretionary expenditures and elements like this. And if we take this all together, we have delivered cost savings around EUR 25 million in the second quarter of 2020. We are now confident enough that we can sustain such a lower demand level for quite some time as long as it lasts. So that we have started to look at what is the implication of this environment for our strategy, where can we accelerate maybe value-creating elements that we have identified and bring it into the market faster. This project is fully ongoing now, so we don't want to give you numbers, but I'm very happy to give you a direction on what it is that we are doing. We -- our strategy, as you know, as we have presented it to you at our Capital Markets Day in November last year, has 3 components. The first one is to improve our competitiveness, reduce costs in our network and in our processes. The second one is to enhance our business models at our customers. And the third one is to grow market share in those markets in which we are very weak. This remains in place. We believe that this pandemic has somehow changed the environment in 3 dimensions. We believe that in the next years there will be an increase in regionalization of supply chains, matching supply with demand on a regional trade block level. This will become stronger rather than weaker in the future, which means our organization should decentralize and take their decisions more in these regions. This is one trend. The second trend is that the volatility will increase because the visibility is so low, and that means we need to have a bigger variabilization of our fixed costs so that we can adapt better to a more volatile environment. That's the second trend. And the third trend is that, sure, we have learned that digitalization is possible much more than we thought in many more areas than we thought, and there are opportunities in this area. In particular, we have already implemented a reduction of -- in our levels of management by 20%. This is effective August 1, 2020. Everybody has been informed, and we will reduce our management structure by 20% with the related cost savings but also with the related change in management setup. We -- the production optimization plan that we have indicated will be -- will deliver EUR 40 million of improved EBITA in 2022, remains fully in place, and we're actually quite far along in the analysis to tell you that we're confident that this number is very safe. Possibly, we're going to be able to increase the improvement here. Again, the numbers, we will give you in August. We continue to manage our working capital, our financial position. Our working capital is in good order. Inventories are coming down together with the lower level of the business. We have no principal worries on accounts receivable. We might have one or the other customer who will push their payments from the end of June to the beginning of July because for them it's half year and for us it's half year, so we might see this. But this is not a worry. Our overdues are under control, not increasing significantly. Our receivables are also not increasing significantly and coming down with the business. So our liquidity of more than EUR 1.1 billion is in good shape. And also with the reduced profitability, our covenant is nowhere at risk. And to summarize, I'm again very proud of how our teams have responded to the challenges, how actively everybody is thinking and contributing to what RHI Magnesita should do. The business is financially very resilient. Our customers are very happy with us and rely on us maybe more than before. On the other hand, our volumes are weak in the second quarter, likely to remain weak into the third quarter as well. We have continued -- we have looked at additional measures, more structural measures to deliver our strategy faster and maybe more aggressively. That project is in full-blown rollout. The management structures will be adapted already on August 1, and we will inform you about the quantification of this program with our half year results. With this, I'm finished with my introductory words and very happy to go into a Q&A session and answer all the questions that you might have.

[Operator Instructions]

Thank you very much.

We have a question from Mark Davies Jones from Stifel.

A couple of questions, if I can. The industrial side of the business, I think, back in April, you were hoping that, that would hold up rather better. Clearly, it [ hasn't held up ], and I guess it's no surprise given the shock to many of the customers. But you say the cement sector has held up well, I thought that was the biggest chunk of that. So are there other areas that are particularly weak? Or is it just a rephasing? And do you think those projects come back? Are they just delayed? Or do you think they're canceled?

Yes. The cement business is about half of our Industrial business or a little bit more. And the rest is mostly glass and nonferrous applications. In these businesses, we are delivering into the CapEx cycle of our customers in a glass furnace once every 10 years or so. And a lot of these CapEx projects are postponed. So all the orders remain in place. All the -- this is very complex engineering design. So we will not lose any of this. But it will -- more of this will slip into 2021 than we thought 3 or 4 -- or our customers thought 3 or 4 months ago. So what happened is they took a furnace repair, they moved it from May to September and now they moved it from September to March. This is what happened. So we're not worried about this. Just if you look at the 2020 revenue, then you will probably not see some of this. So it's a part of half of the Industrial business.

Very clear. And then if we return to Steel. And obviously, I understand what you're saying about the lack of visibility, but in terms of your picture, what we should be looking at in terms of what drives some of that recovery. We are seeing the big end [ markets like ] automotive and construction beginning to come back into life [ there ]. Those steel plants have been shut, are you seeing any indication of when they might reopen? And what sort of lag do you think there might be between the end markets picking up and the steel supplying those end markets returning to work?

Yes. I mean this is, of course, the question we ask ourselves. And unfortunately, we don't have much visibility. July looks like it could be slightly better than June, slightly higher sales than June, but in order of magnitude, not significant, and August also not. And honestly, our customers right now tell us they have visibility for about 2 weeks. So the whole chain is very uncertain. Now with our customers and with their end markets, the discussion around second wave is much more pronounced than what it was 6 weeks ago, especially in North America, where the threat now is higher, and therefore, really, the visibility is low. But China, East Asia is relatively okay. But -- and Europe is relatively stable but unfortunately on a pessimistic outlook. That hasn't changed very much. But in North America, really, the outlook has -- is rather -- or they say the mood is not as good as it was 6 weeks ago. But the visibility is not there, so we cannot make any forecast for August.

Our next question is from James Zaremba from Barclays.

Yes, just one quick question about the kind of focus on trying to increase more flexibility in the cost base. So I guess, usually, more flexibility comes at the sacrifice of maybe higher cost. And so I suppose, in terms of how you're thinking about is that something we should expect. Is there kind of an impact to margin from, I suppose, having more flexibility? Or if not, I suppose, how are you hoping to offset that normal trade-off?

Yes. So the -- in principle, you are right. If you go back to business school, then you are right, but this is now the age of digitalization. So maybe this is not quite the case anymore. And here's what we are thinking about. We have a plant network that is designed for a certain peak utilization, and we use the peak output of this plant network maybe once every few years. And what we want to do is we want to staff or we want to organize the fixed costs, have a level of fixed costs that is not designed to handle the peak utilization but to handle a utilization which is significantly lower than that, maybe 10%, 15% lower than the peak utilization would be. And then, of course, if this is the case, in case the utilization goes up, we would have to have outsourcing partners that provide us the resources in order to deliver the peak. For the peak utilization, you are right, most likely, we will sacrifice some margin. But for the average utilization and for the lower utilization, our margins will significantly improve. And of course, the whole thing only makes sense if the average cycle cost is lower rather than higher. Otherwise, why do it, right? So this is what we are calculating right now. The devil is in the detail here. There's thousands of measures to be looked at because we have so many plants and so many fixed cost blocks, but that's the idea behind it. And I'm actually quite encouraged by the first results that we have here from the team.

Great. [ So definitely ], I suppose, what you're saying is your kind of take on the shape of that cycle has maybe changed, so therefore, your perception on the optimal level of variable to fix has changed. Is that [ fair ]?

Yes, exactly. I mean you know that we were very bearish and pessimistic 2 months ago or 2.5 months ago when we said we look at a longer recovery curve than actually most economists were looking at. Our outlook in the meantime is kind of a "middle of the road" outlook because more people have joined this camp, and maybe we've had the chance, maybe we've had a bit of a head start in adapting to such a long L-shaped recovery. And therefore, adapting the fixed cost base makes sense now. But part of this is adapting down, but the other part is flexibilization. So that's, next time we get a pandemic or something like this -- I heard talk about a new swine flu in China being identified. If this comes in 2 years, then we should be ready for -- to be able to handle this. Maybe this is the new normal. I don't hope so, for sure, but we have to think in these scenarios.

Our next question is from Harry Philips.