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

Hello, everyone, and welcome to the RHI Magnesita 2020 Full Year Results Call. My name is Seb, and I will be the events specialist on your call today. [Operator Instructions] I will now hand the call over to Chris Bucknall, Head of Investor Relations.

Thank you. Hello, Chris Bucknall, Head of Investor Relations at RHI Magnesita. Thank you for joining us today for our full year results analyst presentation. I'm joined by Stefan Borgas and Ian Botha, who will both be presenting the results to you today. And I'm very pleased to hand over to Stefan to get us started.

Thank you very much, Chris, and welcome to RHI Magnesita. Really great to have you onboard. Good morning, ladies and gentlemen, from Vienna. Three key messages we want you to remember for today. First key message is, despite the COVID -- clear COVID-related impact in our results, RHI Magnesita has shown remarkable resilience to any kind of crisis, if this year can be taken as a severe one. Second message is, despite the crisis or maybe also a little bit charged by the crisis, we are -- we have been able to accelerate the delivery of our strategy and have made really good progress here. And the third message is we are well positioned for the recovery and for many things that we can take advantage of in the markets. On the -- you'll see the operational highlights here on Slide 4. I will spare you from reading this because we will go into the details one by one. So let me turn to Slide 5 of the presentation. Health and, of course, safety, but especially health was in the focus of 2020. We were quite scared in the beginning of the year what this pandemic would do to our employees, to our customers, to our business partners. And I'm very proud to say that we've had very little actually health impact for our employees around the world, of course, with the exception of many of them having had to suffer on the illness, but all of them recovered really well. In parallel, this increased focus on health also helped our safety performance, which improved yet again in 2020, to a point where I think now we would start to switch this reporting to a more granular reporting other than just lost time injuries, but we will do that next. So on the health and safety side, the focus has really paid off. If we turn to Slide 6, you see the financial summary of the year. Our revenue is down 23% or 20% if you look at it at constant currencies. Our volumes reduced also, but they reduced slightly less than the volumes reduced -- the production levels reduced in our customer industry. The difference between the volume reduction and the revenue disruption is almost entirely attributable to raw material pass-through effect. I'll get into this a little bit later. I think the most remarkable number on this Slide #5 is our margin that continues to be very, very resilient with a level of 11.5% on the EBITA level. We're proud of this, and I think this is a really solid performance. It shows the resilience of RHI Magnesita even to this kind of a crisis. Our cash flow was very strong due to the release of working capital. A lot of this is also attributable to the diligent management of our teams, especially in our supply chain on -- and our sales staff. But some of it is, of course, a normal effect of a business with reduced revenues where working capital gets released if it's managed properly. The other number to note here is our liquidity. Our available liquidity, half in cash and half in debt facilities, of EUR 1.2 billion has been stable through the entire crisis month by month by month. This liquidity has not suffered, which is another element of -- another demonstration of the resilience that we have. And our net debt is in good shape as well. If we go to Slide 7, we look a little bit more at the volume picture. If we strip out the effect of raw material prices and the currencies, these are the numbers that you can see here on this slide. The effect of COVID-19, of course, is in these numbers, especially in the first and the second quarter. It started to improve in the third quarter. And in the fourth quarter, revenues came up very, very strongly again, especially in the second part, in the latter part of the fourth quarter. I want to dampen the enthusiasm just a small little bit, we are not yet at 2019 levels. This is a really great turnaround compared to the middle of the year, but not yet at the 2019 levels. If we dig a little bit deeper on Slide 8. In this volume scenario, you can see that all industries have been impacted. All supply chains have been impacted in 2020. In steel, we had a higher exposure to Europe and South America, but a lower exposure to China. Therefore, our volumes are skewed that way. In the industrial project business, which usually is a late cyclical behavior, the capital rationing by our customers in the crisis happened very, very fast. So many, many projects were postponed already in the second quarter, more in the third quarter, but also in the industrial projects, quite a few of those couple of projects started to come back towards the end of the year. The cement business recovered very, very quickly towards the end of the year, especially in Asia. If we go into the 2 different divisions now on Slide 9, I think the most notable number here, again, is the margin resilience that shows the ability of our team to adapt fixed costs really fast in order to maintain margin. This is the self-help that we have in the company. And this flexibility, that in a downturn is needed, is a big lesson that our team learned during the course of the year. Our steel refractory sales volumes were down 12% overall, which is just a little bit less than the overall production reduction of the steel industry. So in terms of market shares, we've fared well, at least on average over the whole year. Then, of course, an additional effect from raw material pricing, which you see in the revenue numbers. That's the pass-through, and there's some currency effects as well. But from a volume perspective, we are pretty comparable to what our customers did here. And now towards the end of the year, we show very solid recovery of the volumes compared to where they were in the middle of the year. In the industrial business, on Slide 10, you can also see that the margins are very resilient, still at a really very good level. The cement business recovered very nicely in the fourth quarter, and we see it going into the first quarter as well because of the cement season. This is when most of the repairs happen. But the volumes come back, that's quite reassuring. The delays that we saw in all these capital projects in our industrial business in 2020, they happened very fast. And quite frankly, this speed surprised us. We didn't expect this when it happened. And then when it happened, then we had to react really, really fast. But also in the project business -- in the industrial projects business, there was a certain recovery already in the fourth quarter, and it continues into the first quarter as well. As a result of this really fast recovery, our supply chains now are quite stretched. And the big focus of our teams all over the world, especially in those regions in which the supply chain is very long because raw materials need to travel a long time and the transportation distances are generally big, like in the Americas, the effort that the team has to put in, in order not to disrupt customer deliveries is quite big. So this is a bit what we're fighting with operationally at the moment. But let me say it's a good fight to have. When we look a little bit further out, on Slide 11, we have put together the strategic initiatives that we have engaged in that you all know about if you -- if you are looking at RHI Magnesita for a while. And the good news here on this slide is that, after we have managed all of these crisis measures, especially in the second quarter of 2020, our team sat back and said, which one of these crisis measures are actually measures that could be translated into more structural improvement? And we put together a pretty large team in the third quarter of 2020 that tried to translate some of the learnings from the crisis into more longer-term benefits. And the result of this is what you see on this slide here, an accelerated, but also slightly increased potential for the strategic initiatives that we have already announced, both on the cost side as well as on the sales strategy side. We can get into the details with you over the course of the next weeks. But of course, this requires some funding as well. Funding allocation has to be put to this acceleration. Ian will get into this just in a moment when he talks about this. But the result is that, in 2022, we should have around EUR 100 million benefit from cost measures and about EUR 40 million to EUR 60 million benefit from the sales strategy measures. So good acceleration, thanks to the structural improvement. And then Slide 12 is the slide maybe that I'm most proud of because as part of this attempt to see what are the structural improvements that the company can put into place, how can we get out of the crisis stronger, we've also had a team that very much in detail looked at carbon emissions of the company. And as you know, inside RHI Magnesita, we emit a little bit more than 2.5 million tons of CO2 per year. If we add the scope 2 and 3, it's more than double this. So it is a responsibility that we have. And we have, together with our Board, decided to take EUR 50 million of our own money in addition to all the CO2 carbon improvement, environmental improvement projects that we already have in the company, anyway, and invest those over the course of the next 4 years into developing technologies, mostly in carbon capture and carbon utilization so that RHI Magnesita in 4 years, 3, 4 years has a technology portfolio ready for implementation in order to become carbon neutral, totally carbon neutral. The implementation of such investments will depend, of course, on the socioeconomic environment, the cost of carbon at that time and so on and so forth. But we want to have the technologies available that today are not there. Today, we can -- we know that we can reduce carbon emissions by 15% for the next 4 years until 2025. This we will do anyway. We have to invest some money, spend some money on R&D also. But our ambition has to be to get to 0. And the technologies in order to do this are going to be developed with this program. This is fully now under implementation. We have a team of around 15 people in the company that is full time focused on this topic that will do this. We will engage in many partnerships. We will also invest in some pilot plants already to be built towards the end of this year, beginning of next year that will support the 15% reduction, maybe improve this a little bit in the short-term so that we can test these technologies, but this is a very important step towards decarbonization of the refractory industry that we want to bring here those technologies. Certainly, we will make available once we have them developed. With this, I'm very happy to pass on to Ian, who will lead you through the numbers. Ian?

Thank you, Stefan, and good morning, ladies and gentlemen. As Stefan has highlighted, in 2020, the group delivered a resilient performance in tough market conditions. Revenue was down 23%. It was impacted by lower volumes as a result of the effect of COVID-19 on our end-market demand as well as lower raw material prices and currency movement. EBITA was down 36% to EUR 260 million with the impact of lower revenue, partially offset by cost reduction initiatives. The business delivered a double-digit EBITA margin of 11.5%. We have declared a final dividend of EUR 1 per share. This increases the full year dividend to EUR 1.50 per share, which is equal to pre-pandemic levels. This reflects the strength of our cash flow generation and our balance sheet as well as our improving confidence in the market outlook. Moving to gross profits and starting with the chart on the left. You can see that the business has maintained a stable gross margin over the past 3 years, this despite the pandemic in 2020. In the chart in the center, 2020 gross profit was EUR 550 million, 23% lower than 2019, in line with the drop in revenue. The gross profit performance varied across our business unit. Steel China continued to grow its market share. Steel Americas was fairly resilient, with a relatively stronger North America offsetting weakness in Brazil due to the collapse in the Brazilian real. The Steel Europe and India businesses were weaker, impacted by a combination of the pandemic and low raw material prices. Finally, if you look at the chart on the right, you can see that the impact of COVID was from the second quarter and that we have seen gradual but consistent recovery through the second half. Turning to the EBITA bridge. 2020 EBITA was materially impacted by the reduction in magnesia-based raw material prices and by COVID, both reducing our EBITA by EUR 80 million. The COVID impact was after EUR 50 million of short-term cost reduction measures. These included the temporary closure of plant, reductions in travel, payroll and other fixed cost savings. These short-term measures taken in the first half were then converted into long-term sustainable measures in the second half. This resulted in our strategic cost savings program increasing from EUR 55 million to EUR 100 million. As you've heard from Stefan, the annual run rate benefit of the group's strategic cost and sales initiatives increased year-on-year by EUR 20 million to EUR 35 million. We are pleased with the resilience of our refractory margin, which increased to 9.1% and contributed EUR 205 million of EBITA. This reflects the benefit of our cost savings initiatives and our focus on generating an acceptable margin across all our sales. Backward integration is a key strategic advantage for RHI Magnesita and ensures a low-cost, high-quality supply of raw materials to meet our customer requirement. In 2020, it contributed 2.4 percentage points of margin and EBITA of EUR 55 million. Importantly, our strategic initiatives will drive further growth in both the refractory and backward integration margin. Magnesia-based raw material prices continued to fall since to August 2020 before recovering in the fourth quarter to around historic averages. We are now back to raw material price levels at the end of 2019. Our raw material plants are in the lowest cost quartile of the industry cost curve and are well positioned to generate attractive returns through the cycle. Even in 2020, these assets generated a return on invested capital after tax of 13.5%. The group continued to be disciplined about its working capital management, with working capital down materially in 2020. In the chart in the center, you can see that working capital reduced by EUR 150 million to EUR 369 million, reflecting lower trading activity, currency movements and the ongoing benefits of the group's working capital initiative. These included in 2020 the implementation of an integrated business planning process and improved debtor collection, which halved the percentage overdues to the lowest level in the group's history. Working capital intensity finished the year at 15.9%, which is within the group's target range of 15% to 18%. As business activity improves, we expect the absolute level of working capital to increase in the first half of 2021, with some of that released in the second half. The cash absorption will be moderated through our use of trade finance. Turning to CapEx. We invested EUR 157 million in CapEx in 2020, comprising EUR 71 million of maintenance capital and EUR 86 million of project capital. EUR 28 million of the total CapEx was spent on our raw material assets. We have peak capital this year of EUR 260 million as we invest to deliver the cost reduction and sales initiatives. This is up on our earlier guidance as we have accelerated project capital spend and approved a EUR 30 million investment into the Brumado raw material plant. This reduces Brumado's already low cost of production and will position it as the lowest cost producer in the world. Our CapEx projects are proceeding on budget and largely on time, despite COVID-19. The group expects CapEx to return to a longer-term range of EUR 120 million to EUR 130 million in 2024, of which 15% is spent on our raw material plants. The business continued to generate strong operating cash flow in 2020 of EUR 290 million, with an improved cash conversion of 112%. This was supported by cash release from working capital net of currency movement of almost EUR 100 million. We returned EUR 52 million to shareholders, comprising dividend payment and the start of our EUR 50 million share buyback program. As part of our strategic cost reduction program, we spent EUR 52 million on restructuring costs, which is largely severance paid on our European plant closures and SG&A reduction. And on the right, you can see that since 2017, the business has generated strong and sustainable cash flow of over EUR 1.3 billion. The group's financial position remains strong, with net debt reducing in 2020 by EUR 68 million to EUR 582 million, including IFRS 16 leases. Net debt-to-EBITDA increased to 1.5x, given the fall in EBITDA, but remains within our target leverage of 0.5x to 1.5x. Our liquidity position is strong and increased to EUR 1.2 billion during the year, with limited debtor repayments before 2023. The strength of our business make it capable of sustainably generating significant free cash flow. In 2020, we generated EUR 267 million of free cash flow available for capital deployment. We have deployed this cash flow in a proactive and disciplined way to drive long-term value creation. EUR 138 million went into our cost reduction and sales growth strategies. This takes the form of project capital and restructuring costs. These will increase our earnings, our margin and our return on invested capital over the next 2 years. EUR 52 million went into shareholder returns. EUR 10 million was spent on acquisitions. Finally, EUR 68 million went into net debt reduction. In summary, I'm pleased that we have successfully navigated what has been a challenging period, delivering a resilient financial performance whilst continuing to invest in our strategic development and maintaining returns to shareholder. The business is well positioned to benefit from the recovery in end market. Thank you. And I'll now hand you back to Stefan.

Thanks, Ian. Let us finish up with 2 perspectives, one longer term and one short term. Ladies and gentlemen, RHI Magnesita is the leader in heat management solutions, and we want to expand on this leadership and take advantage of the mega trends that underpin our businesses. We have realized that the COVID-19 pandemic has reinforced many of these trends and maybe added some to it as well. Therefore, we have reflected during the course of 2020 on how we can improve our strategy delivery based on this. So all the mega trends support the activities that we're doing. We have a strong platform with a global footprint, with fantastic customer relationships, with proven technology leadership, with a balance sheet that allows us to do more than even what we have specifically named. And delivering value to shareholder will come through different ways. We have proven in the crisis now that we have a long-term resilient business that we manage. We have sector-leading margins that are unrivaled and that come from the setup of our specific business model. We have strong cash flow generation that allow us to engage into actions that, even in the short term, we can improve the company. We have a prudent, solid, stable balance sheet, and therefore, are able to generate attractive shareholder returns over the long term. The outlook for the year now looks as following. We see sequential improvement that is happening in our end markets. These improvements are not bringing us back to 2019 pre-pandemic levels immediately as we have shown you with the help of the numbers in the fourth quarter and also with the outlook in the first quarter. But step-by-step, we are very confident that the overall refractory volumes in the world are going to come back to 2019 levels eventually. But it is a step-wise recovery. Raw material prices have increased, and we will need some time because of the length of the supply chains for these raw material prices to be passed through. And this relatively rapid increase of demand in the fourth quarter going into the first quarter also puts stress on the supply chains, which is accentuated with the difficulties of freight companies, especially in freight. And as a result of this, our 2021 earnings will be weighted 40-60 towards the second half. That doesn't worry us, but it's just something to note. Our strategy will deliver EUR 140 million to EUR 160 million of additional EBITA in 2022 compared to the former levels. We have engaged in a substantial increase in CO2 technology investments in order to become the technology leader also in this area. Our entire management team is active in driving the business forward and grasping new opportunities and in delivering what we have already set out to engage in. We are well positioned for the recovery that the world will go through in the industrial market. Thank you very much for listening to us this morning, and we're now very much looking forward to your question. Operator?

[Operator Instructions] Our first question comes from Mark Davis Jones at Stifel.

Congratulations on a very solid performance in tricky circumstances. Can I just ask, in the event of a decent recovery coming through this year, you've seen some recovery in raw material prices. We've seen some commodities and raw materials rising price pretty dramatically over recent months. Do you think your specific raw materials are different? What does the supply demand characteristics look like there? Do you think there's a possibility that after the very modest recovery so far off the lows, how we could see those raw material prices move quite a bit higher again during the course of '21? And a slightly related question on recovering volumes. You say the supply chain is already somewhat strained. Is there anything on that front in terms of keeping your customers and deliveries flowing that might impact your ability to deliver the restructuring builds you got this year, i.e. to keep things running a bit longer just to overcome those sort of supply issues and bumps?

Yes. Thank you for those questions. So on the raw material prices, of course, this is very much crystal ball reading because in our business, the big impact comes from China. You -- we -- in the magnesite raw materials, we saw a significant increase when we compare to the middle of 2020, but it's actually not that dramatic if we compare it to the beginning of 2020 or the end of 2019. Therefore, there is not such a huge impact if we compare it to the long-term development. Yet, how far will this go? It's very difficult to say. It's very clear that, in China, the government has engaged in an clear, active additional enforcement of environmental measures. It is clearly a step-up that is happening there. Second, there's also a consolidation happening in magnesite raw material suppliers that is driven by the government's willingness or desire to get disciplined in this market. But there are some other factors that have to do with the overall consolidation of industries in China. And the third aspect, which could have an effect, especially at the end of the year, is a possible production curtailing because of the Beijing Olympics that will happen at the beginning of 2022, which happened before. So that -- those are the uncertainties. We don't believe that raw material prices will significantly soften now. But how much they will go up is very difficult to forecast, and I don't want to get into this. On the supply chain, there is for sure an additional significant freight cost that we have to absorb or pass on to customers or both. And there's a problem of freight capacity, especially ocean freight, container freights. It's starting to ease a little bit, but it's still really, really difficult to manage. So we have some customers that we supply with airfreight, which, of course, is a terrible thing to do in this business where materials are so heavy. So airfreight usually destroy profitability of a particular shipment, but we do it anyway in order to keep customers afloat. That's a strain we have on the cost side. On the volume side, we have already taken back the early closure of some of our smaller plants that we wanted to close. In the middle of 2020, we saw an opportunity to close some of the plants earlier. We already took this back in order to be able to supply sufficiently. And I think from a volume perspective, from a ramp-up perspective, we're just going to get by. So that's okay. We also are engaging with partners maybe a little bit more than in previous times, and that works quite well. So I think we're going to be okay, except for a little bit additional cost.

Okay. Can I ask quickly about the EUR 50 million of incremental R&D on the CO2 program? Can you just give a little bit more color about what specific kind of measures you're looking at there? Is this stuff you're going to have to develop yourselves? Or is this more about partnering with the Part C suppliers on some of the technology or maybe some of the focus of those spending plan?

Yes. Okay. So let's split this in 3 pieces. One is solutions for our customers, including the use of secondary raw materials. This is -- these are a lot of the projects we have already been engaged in. We increased this a little bit, but that is over and above the EUR 50 million. So this is R&D money that we already had allocated before. If you want to add this, then our entire sustainability program is clearly above EUR 65 million. So that's one piece. The second piece is capturing CO2 in our raw material plants and in our refractory plants. So that's a block of activities that we will mostly do by ourselves. We have some technologies that we license for this, but mostly these are projects we do by ourselves. Our own engineers are already designing this, and we will have at least 1, maybe 2 pilot plants under construction towards the end of this year. This is in the process of engineering. And those -- there, we're testing 2 or 3 different solutions for this. That's why it's in the R&D space, of course. Yes. And that will -- especially the pilot plant construction, will be a good part of those EUR 50 million. And the third block is CO2 utilization. This is the -- once we have captured the CO2, what do we do with this? This is the same problem than -- that anybody else has, of course. And therefore, as RHI Magnesita, if we were going to do this alone, we would fail because we are far too small for this. So here, we are looking for partnerships. We have already engaged in some. And another considerable portion of money goes into these partnerships in order to develop utilization technologies around our plants, not in general, but around our plants because the CO2, of course, is at those specific locations. Those are the 3 things we're going to do.

Our next question is from James Zaremba at Barclays.

Yes. I had 3 questions, please. One was just around flow control. So in your sales strategy, I wonder if you could kind of break out where what kind of portion of revenues you have today from that area. The second one was around China, which obviously did really well this year and has done well the last few years, but where in steel saw quite a small part of the business? I was wondering kind of what range of revenue we might expect that to provide in kind of 5 years' time. And then lastly, in your annual report, you mentioned about electric arc furnaces kind of growing net share over the next 5 years. In terms of what this means for revenue, can you kind of explain per ton of steel what revenue you get for electric arc furnace versus the blast furnace? And then also, I suppose, what's that share change for that regard that has been over the last 5 to 10 years as well?

Well, the -- I'll pass on the flow control sales question to Ian just in a minute. The electric arc furnace growth per revenue over the last 10 years, sorry, I just don't have this at the tip of fingers, but we'll be happy to get back on these numbers for you. In general, for -- looking at the RHI Magnesita portfolio, the electric arc furnace is about 10% to 15% higher in refractory consumption in revenue for us compared to the same steel volume in a blast furnace, because the electric arc furnace has much higher percentage of magnesite containing materials. So this -- therefore, this is a very relevant change for us. What does this mean growth for revenue in detail? I think this is something we don't want to publish really. But it is quite positive for us. Yes. The China -- where can our China business be in 5 years? Well, we are in -- our China business is relatively small. It's still short -- a little bit short of EUR 200 million per year now, but the growth rates are very solid double-digit between 20% and 30% per year. So -- that we think we can deliver. That's the organic part, and then you can calculate where this will go in 5 years. This is the organic part. But the Chinese steel industry is very clearly starting to consolidate based on what the government does. And as a result of this, the refractory industry could very well be dragged along for consolidation also. And here, it's -- our faith in China will also depend on the fact whether we're going to be able to merge with 1 or 2 of the players in China in order to accelerate the growth with acquisitions. We cannot put an acquisition in China in our business plan because it's highly uncertain, but it's certainly something that would accelerate our growth. Ian, the flow control?

Yes. Thank you. James, so our flow control strategy is an important part of the EUR 40 million to EUR 60 million of incremental EBITA from our sales initiatives. We have the flow control installed capacity. We've got the product range. It's a question of driving greater market penetration. The business currently has revenue of around EUR 350 million, and we want to grow that over the next several years.

Does that make you the current #2 market share player then? Is that right to think?

Yes.

Yes. And then sorry, just to follow-up on your consolidation comment, Stefan. I guess -- you've talked about China obviously frequently. And I think the last time you mentioned about M&A in China maybe a year or maybe in 2 years ago. You sort of said -- you said it was a bit too early to consider M&A because maybe there's obviously experience in that market, as you know, let's say, in Europe, for example. And are you now in a position today where you still -- you understand that market well enough to do dividends? Or is that something where you still are a couple of years out or so?

No. I think our team has demonstrated this year for the third time in a row that they are able to build the business, that they are penetrating more and more, they're signing more and more contracts. So I think we're in a position now. If an M&A opportunity comes along, we could engage. Clearly, we are now where we wanted to be 3 years ago.

We have a question on the webcast. This comes from Andrew Douglas at Jefferies. This reads, not easy to predict the future, but what is your best guess for how long it will take to get back to FY '18 levels?

Okay. So '18 levels are kind of an abnormal year in the refractory industry because everything was boosted by raw material levels. But let's take '19 as a year. Look, we've said that this is not a V-shape recovery. We've said this in the fall, and I still would say -- would state the same. This is not a V-shape recovery. This is an L-shape recovery, although an optimistic error. One written by an optimist where the bottom line is in straight, in line with the bottom of the paper, but going up a little bit. So this is how I would characterize it. And what that means is, personally, we -- I think we will be at 2019 levels again towards the end 2022. So the run rate 2019, fully in all businesses, will be at the end of 2022. And until then, we will climb back up to this. So step by step, one by one. Maybe we can be 1 or 2 quarters faster. But from today's perspective, that's what I would say.

We have a follow-up also from Andrew. This follow-up reads, the EUR 50 million investment in sustainability leadership, what returns do you expect to achieve from this investment? Or is this just investments in the business to drive and improve ESG agenda?

So there is no direct payback for this. This is R&D technology investment, which will make some changes because we will build pilot plants, but it will not massively reduce CO2 emissions beyond the 15% that we are already implementing. And therefore, there's no direct payment, but it will provide us the technologies with which we then can return -- can have a return on investment on the investments that will follow. The world needs solutions for decarbonization, not just the willingness.

We have a question from the conference call from Mark Davies joins again.

Sorry. One more from me. Can we talk a little bit more about the CapEx investment in '21? It's a very big number, EUR 260 million. So a couple of questions off that. Does that mean you're comfortable going a little bit above your 1.5x net debt-to-EBITDA range for this kind of big strategic benefits in the longer term? And does that also imply that M&A is slightly off the agenda short-term, given the fact that you will have that very large cash outflow to deal with? And of that EUR 180 million of incremental spend on the projects, what's the sort of average payback time on that EUR 180 million?

Mark, thanks for the questions. So yes, we would expect in 2021 that our aggregate leverage would move slightly above our target range of 0.5x to 1.5x, really because of the CapEx and the fact that we will not have a repeat of the EUR 100 million release of cash flow from working capital. M&A remains a fundamental part of our investment case. We continue to look at value accretive M&A. On the return of our CapEx, the thresholds that we look for are all incremental organic capital has to generate a return on invested capital of at least 20%, and IRR of over 15% and payback period of less than 3 years. That said, the capital is going into our production optimization plan, which, in aggregate, over the 3 years is EUR 290 million. It's EUR 190 million of CapEx and EUR 100 million of restructuring. That's generating a 2-year payback period for us.

Our next question comes from [ David Larkin at Edison ].

Sorry, another one on your decarbonization strategy. The second line in the slide, you talked about moving away from fossil fuels, which is obviously preferable to carbon capture. So can you talk about that? And then also in steel making, obviously, quite a push towards hydrogen. Can you talk what you're doing for that and what that might mean for your product?

Can you just repeat the second part, please?

Yes. Just on hydrogen, obviously, quite a big push for using hydrogen in steel making. I wonder if you're working on that. And does that change to put out -- is that to use more refractory, less refractory?

Yes. Okay. Thank you. So of course, moving away from fossil fuels is one of the keys to decarbonize because in these high temperature environments in which we operate, we cannot just electrify everything. We need to continue to have other types of fuels. Hydrogen, for example, or methane produced from CO2 routes or so on. That's what we mean with this, and we have to invest in this. That's why it's part of the program, of course. We have to find the specific solutions that we need. Now obviously also not -- as part of the utilization effort also, so a lot of partnerships here. There's still hydrogen reduction route. Yes, we are very actively involved in this with quite a few customers. There are different ways on which this could work. The most promising technology that's in the customer space right now is a move from replacing the blast furnace, which is mostly oxygen-operated towards a mix -- replacing this one aggregate blast furnace with 2 aggregates, a direct reduction furnace and an electric arc furnace after that. And of course, 2 furnaces need more refractories than one furnace. So this is interesting for us. Therefore, we are also involved in this. But it also requires us an entire new setup of refractories going through this and a management of the heat and the solution and the energy across this. And we're engaged with many customers -- with quite a few customers in specific project here.

So potentially by the sound of it also is if you're involved in these projects, heat management, this could sort of be more of a service type thing, I know you've been pushing towards?

That is exactly the direction in which we are going. If you look at the long-term development of the refractory industry, it went to a product-focused innovation phase in the -- at the end of the last century into a equipment-related innovation environment in the first 20 years of this century. And we believe that the next 20 years will be very much data-driven improvement of the entire industrial setup, and we're investing into this. And that, of course, entails much more step services because we need -- data doesn't fall from the sky, right? It needs to be generated. So we need to invest in sensors, in other data generating tools in addition to our refractories. Therefore, one of our major targets is to increase the percentage of solution business, the way we call it. These are the total heat management solution contract that we do with customers where we share benefits with customers, where we do not sell refractory volumes in dollars per ton of refractories anymore, but where we invoice dollars per ton of steel produced in heat management service to the customer. We already have more than 1/4 of our business into this, and we want to bring this to 40%. We're making good progress, 2, 3, 4 percentage point improvement here every year with more new contracts signed all the time, but also new services added to all of these.

Our next question comes from Mark Fielding at RBC.

Three questions for me. Predominantly, sort of follow-ups on the other ones you've had. Firstly, in terms of that target to expand in the flow control area, just whether today, how the flow control profitability sits today versus profitability in the wider refractory business and whether that changes through operational scale, et cetera, as you grow that business. Maybe deal with that, and I'll come back to the other couple of questions.

Yes. Currently, the profitability is relatively comparable to the rest of the business. But of course, through the operational leverage, the profitability has the opportunity to increase quite significantly. That's why this is such an interesting engagement for us.

Perfect. And then just in terms of the raw material side of things. So in the context of your guidance, your outlook comments today, in terms of being in line with consensus EBIT as it stands, does that assume that, that backward integration raw material benefit does -- is going to be somewhat bigger this year than the 240 basis points last year? I mean is there a sort of number that is built into your planning at present? Or is it just too volatile to put a precise number on right now?

The market assumes that raw material prices stay at the levels that they were at the end of 2020. So if you look at our margin evolution during the course of 2020, we had 2.3 percentage points of margin in Q1, Q2 and Q3 and 2.6% in the fourth quarter. So we continue to believe that on our current raw material cost structure, the 2 to 3 percentage points of margin is sustainable.

And before you get too excited, Mark, before you get too excited, Mark, these raw material price increases leads to refractory price increases about 6 months later. Yes, it's faster in China, but the benefit is smaller, but it's longer in the Americas where the benefit is bigger. So on average, for our business, it's about 6 months that it takes in order to pass it through.

And actually, can I ask a follow-up on that, which is, prior to everything sort of going down, not even COVID, but the sort of declines we saw before that, obviously, you were pushing a more positive pricing strategy in the first half of 2019. I mean is there a point at which demand, et cetera, gets better that you think differently about how you push pricing again in the business or how -- to a degree that that's spot a long way off or not feasible right now?

We look at this quite actively all the time, but certain competitors have taken advantage of us the last time we did this. So we are a little bit more careful now. So we don't want to give up market share to competitors because they take advantage of short-term pricing opportunities. That's the simple answer. But there is some potential here.

Okay. And then -- sorry, my final question, gone a little bit. The -- in terms of the CapEx side of things, obviously, you've provided in that chart the information in terms of severance cost impacts that are not included in there. Are there any other P&L costs we should be thinking about in relation to the sort of structural cost actions that we need to put into our models?

There are not. So from an earnings bridge perspective, in 2021, you'll have an incremental EUR 15 million of strategic benefit and we will then have a cash outflow of EUR 55 million on severance, but nothing beyond that.

We have one last question, which comes from the webcast. It's from Anthony Plom at Berenberg, and read, a couple of questions. It's on the raw material, how significant are the supply side changes in China, maybe in comparison to 2017 or '18?

They are, I think, more structural, whereas in 2017, '18, they were driven by the environmental costs, which not everybody could afford. Therefore, there was some consolidation. Now this is also driven by the desire of the government and of the producers consolidate. So they are more structural. Therefore, they will be a little bit slower, because, obviously, it takes lots of negotiations to get this done.

Unfortunately, we are now out of time today, I will hand back to the management team to conclude.

Thank you very much. Chris Bucknall here. Thank you for your time today and your question. And very happy to follow-up with any of you off-line if you have anything else you'd like to know. So thank you for your time today.

Goodbye from Vienna.

Thank you.

Goodbye.