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

Stefan, please go ahead.

Thank you very much. Good morning, everybody, from Vienna. Happy to engage with you to report what happened in RHI Magnesita and in our markets in this first half year. I'm sitting here with Ian Botha, our CFO. And our Head of Investor Relations and his team, Chris Bucknall is here as well to answer all your questions today and over the course, of course, over the next few days. Let me jump right into the results. And let's take a look at the health and safety situation worldwide. The COVID pandemic is not over. You will see it in the numbers and in our business. The aftermath of all the lockdowns is keeping us very, very busy and requires a lot of attention. But most importantly, the health situation in all of RHI Magnesita's plants all around the world has been managed very, very well. We still have some issues in Brazil and now to a lesser extent also in India, but it is under control. We're working very well together with local governments. Most of our employees have been vaccinated also in those 2 countries so that the reliability of our production is very much secured into the future. Our accident rate is pretty much on the same very low level, and that's quite satisfactory because the level of activity in our plants, of course, is dramatically much higher than it was last year. Let me go to the business numbers next. We have very strong revenue momentum, stronger than originally planned or forecasted. Demand is very strong, but that puts massive, massive strain on the supply chain. To come back from this very low level of activity in the second half of 2020 into an almost normal level of activity in the first half of 2021 in an environment where almost every industrial player in the world has to do the same thing puts massive strain on the supply chain. And that impacted most of our numbers, and it actually is the main area of attention for management over the course of the last month, and it will stay the same. It puts cost pressure on our P&L because these very significantly higher supply chain costs need to be passed on to customers. This is almost entirely negotiated now, and we expect the benefits in the second half of this year. Let me go to the financial highlights. We have an adjusted EBITA of -- that is about 40%, a little bit more than 40% of what we guided to. This is exactly how we saw it coming at the beginning of the year. when we made this guidance to you. So I think we're quite happy that we could deliver on this. The content is a little bit different than we saw at the beginning of the year, but we are well on track. We have also returned over EUR 100 million to our shareholders in the first half of this year through the dividend and through share buybacks that we continue to do. So this is very nice value. As a result mostly of the significant rebuilding of inventory and of our net working capital, our net debt is now a little bit higher than our comfort range, but it will come back down in the second half of the year as the business stabilizes, the working capital stabilizes and as margins expand again and revenue expands again because of the pricing measures that we have already negotiated. So we're not very worried about this. Let me give you a little bit more detail on the freight situation because this is certainly the main theme in the first half of this year. These are extraordinary market conditions. We have never seen this in the history of industrial supply chain in the last decades. Freight rates are at a record high. They are now at almost 14% of our cost of goods. This is almost double the normal level. And of course, you can see it in the margins in the first half of the year. But that's not the only issue. At the same time, the reliability, especially of ocean freight transportation, has dropped dramatically from a reliability factor of around 70% to 80% in normal days, where with 70% to 80% reliability, you know that the ship that you have booked is really taking your material and is sailing, the reliability is now at 30%, dropped even further from the first quarter. We don't expect this situation to substantially improve during the second half of this year. Hopefully, it will normalize itself sometime next year. But we count on this unreliability and the high cost to stay in place for the rest of this year. So all the measures are going into this direction. It has served -- it has impacted our ability to serve our customers. It has, of course, required us to rebuild inventories a little bit bigger than before. And we have had a lot of onetime costs in order to make sure that customers are not negatively impacted. The positive -- the very positive news, also surprising for us, at least at the speed at which it's happened is the demand in our end markets and in the end markets of our customers as well. We have high growth in 2021, and we have very solid volume forecasts as well for 2022. So the L-shaped recovery that would last around 2 years to get back to 2019 was a wrong forecast. This went much faster. It is more. It has happened more like a V. So overall, this is very positive news, we think. Let me give you the business situation in our 2 divisions. In the Steel division, revenue growth is strong, but not strong enough in order to keep the margins. The reasons I already gave you, mainly the big weight from supply chain costs. There's a bit of a raw material cost effect in there as well. Both of those will be passed on to customers through higher prices. They have been agreed through the course of the essentially second quarter, and we will see them coming into the P&L. Actually, we saw some effects in June already, but in the second half of the year, this will be quite significantly. Volumes are nice, very strong. We have regained market share that we lost in 2019. So we have rebuilt our trusted position with all of our key customers all around the world. If we didn't have the supply chain issues, then the situation would be very, very nice. In our Industrial division, the situation is similar, but the dynamics are a little bit different. Also here, we have some volume growth, but the revenue growth is lower because the pricing cycle is longer. Of course, in cement, we have agreed on most of the prices with almost all of our customers in the summer and in the fall of 2020 for the deliveries to be made in the winter cement season, January, February, March and April. And the high logistics cost already weighed there. So the margin impact here is a little bit longer. The order book, however, is very, very strong, and the pricing measures here also have already been agreed in most cases. Finally, before I hand over to Ian, I want to give you an update on our sustainability agenda. Although logistics and supply chain work takes most of the space in management, we are, of course, not forgetting our other activities that will bring the company forward, and one big avenue here is the sustainability improvement. We have made actually really good progress on all fronts. We received a gold rating from EcoVadis, one of the most renovated (sic) [ renowned ] certification agencies. We have also taken the decision and implemented this decision to link most of our debt facilities to the EcoVadis rating. So if we decline our sustainability performance, our debt cost will go up. I think this is a good indication that we are really putting our money where our mouth is. We have experienced very good increase in the percentage of the use of secondary raw materials. This goes now really at a very good trajectory. And I'm very positive that we can report even better numbers at the end of this year. And we have signed a pilot agreement with an Australian technology company by the name of Calix in order to build a pilot plant for one of our raw material operations that will show us that we can decarbonize this section -- this area. With this, I'm happy to hand over to Ian, who will lead you through the financial numbers. Ian?

Thanks, Stefan, and good morning, ladies and gentlemen. As Stefan highlighted, in the first half, the benefits of revenue momentum were offset by margin headwinds due to supply chain costs and higher prices for externally purchased raw materials. We delivered revenue of EUR 1.2 billion, which is up 2.5% year-on-year. In constant currency terms, adjusting for the impact of the weaker U.S. dollar, the Brazilian real and the Indian rupee, revenue was up 9.3%. The higher supply chain and raw material costs contributed to a reduction in gross margins to 22.6% from 23.8% last year. This left us with first half EBITA of EUR 128 million, in line with our guidance. And we remain on track to deliver EUR 310 million for the full year, supported by price increases, 3/4 of which have been contracted with customers for the second half. Despite the lower EBITA performance, our adjusted profit after tax and our EPS have increased by 14% and 16%, respectively. This is mainly due to lower finance charges of EUR 4 million compared to EUR 26 million last year, where we've had a positive benefit from currency movements since the closing balance sheet at the end of 2020. The share buyback has also contributed to a 3.3% increase in EPS. Our effective tax rate is 22.4%. Here, our full year ETR guidance remains at between 20% and 22%. We've declared an interim dividend today of EUR 0.50 per share. This is in line with our dividend policy to pay out an interim dividend equivalent to 1/3 of the prior year final dividend. On a constant currency basis, first half EBITA is broadly flat. Overall, we've seen the higher EBITA that we earned from higher sales volumes together with the benefit of our strategic initiatives, offset by the impact of price and mix and higher costs due to the supply chain issues. If we go into a bit more detail and starting on the left with the price/mix effect of EUR 19 million, as Stefan highlighted, this is largely lower pricing due to the effect of refractory contracts priced in the second half of 2020 at the bottom of the raw material price cycle, now coming through the P&L in this period. This is particularly the case in our Industrial business. We have EUR 7 million increased cost caused by higher prices on externally purchased raw material. These hit our margins in the short term, but it's good to see it supports our earnings into the second half of this year. We have had a EUR 27 million impact from higher supply chain costs, which is largely due to air freight and higher sea freight cost. This is materially up on our guidance of single-digit millions as the sea freight challenges continued for longer than what we had expected and deteriorated in the second quarter. Within the dotted line area, we've set out the benefits from our strategic initiatives with EUR 23 million of cost savings and EUR 7 million from our sales strategies. They are tracking well against our guidance. These benefits are offset by the reintroduction of EUR 40 million of annualized temporary savings that we realized during 2020 in response to the COVID-19 pandemic. This is, again, as we have guided and represents a EUR 20 million effect for the first half period. Turning to raw material prices. The weighted average price of the magnesite-based raw material we produce increased by 20% between the first of January and the 30th of June this year. Prices were up by almost 30% in the first half of this year against the first half of 2020. Higher raw material prices are good for our business as they feed through into higher refractory prices, but there is always a time lag. In a higher price environment, we are able to capture more margin through our low-cost, vertically integrated raw material assets. These assets in the first half account for around 50% of the raw materials by value that we use in our production process. However, in the short term, higher prices on our externally purchased raw materials hurt our margins until these high refractory prices are negotiated and products are then delivered into customers. This is the phase that we've been in, in the first half, and we expect the benefit of higher refractory prices that have been contracted to come through in the second half. Higher raw material prices and increased internal raw material production in the first half of the year increased the margin contribution from our raw material assets to 3.1 percentage points from 2.4% in the full year 2020. At the same time, the refractory margin fell temporarily to 7.6%, impacted by the higher freight and externally bought raw material costs. We expect to return to a higher refractory margin in the second half as these higher costs are passed on to customers. Turning to working capital. And looking at the chart in the center, working capital increased by EUR 88 million to EUR 457 million at the 30th of June, representing an 18.5% intensity. As sales activity is growing and with a strong order book into 2022, we have deliberately sought to rebuild inventory levels to be able to meet higher customer demand in the second half and beyond. We continue to expect to be within our targeted working capital intensity range of 15% to 18% at the year-end. Net debt is temporarily higher at EUR 812 million, including IFRS leases. This is due to the timing of certain cash flows within the year. As we guided, we see a 40-60 split in our EBITA in 2021. So operating cash flow was lower in the first half than we expected it to be in the second half. As mentioned, working capital has increased ahead of increased activity, absorbing EUR 75 million of cash in the first half. We expect this to reduce slightly in the second half given our normal working capital cycle and increased capital expenditure driving higher accounts payable. We have peak funding this year on our organic strategic initiatives. These initiatives have compelling financial returns, largely with 2- to 4-year payback periods. The investment takes the form of project CapEx and restructuring costs. In the first half, we funded EUR 15 million of restructuring costs. The full year guidance for restructuring cash funding remains at EUR 55 million. In addition, we funded EUR 70 million of project CapEx. Our full year CapEx guidance remains at EUR 260 million, including EUR 180 million of project capital. Shareholder returns have been weighted in cash terms to the first half and amounted to EUR 108 million, including EUR 73 million of the ongoing EUR 100 million buyback program. This buyback will be completed in coming days. The temporarily higher net debt, combined with the 40-60 weighting for EBITA this year leads to a gearing ratio of 2.2x EBITA at the half year. We expect gearing to return towards the top end of our target range of 0.5 to 1.5x by year-end. This is because we have a stronger trading performance in the second half, also as we have low shareholder distributions and because we will receive the cash proceeds on the completion of the Magnifin sale of EUR 96 million after tax. Finally, in the context of the buyback program, which we extended in May and the peak levels of CapEx on our organic investments this year, I wanted to confirm how we as a company approach the issue of capital allocation. We allocate capital to attractive investment opportunities, which support our long-term strategy, while seeking to make returns to shareholders alongside those investments. Whilst doing this, we aim to keep our gearing in a range of 0.5 to 1.5x EBITA, which we think is an appropriate range that keeps our balance sheet strong, whilst giving us the flexibility to invest in growth opportunities. We, of course, need to cover our maintenance CapEx commitments of around EUR 80 million per annum and deliver a reliable ordinary dividend for shareholders. We then seek to allocate capital to organic investments and M&A as well as from time to time, considering share buybacks as a way to deliver additional return to shareholders. In terms of organic investments, this year, we have peak CapEx of EUR 180 million. The CapEx commitment in 2022 is lower, and we will see the cash flow benefit from these investments coming through in 2022 and 2023. At the moment, these organic projects represent the highest returns that we can generate with our shareholders' capital, and that is why they are a priority. M&A is a core part of our growth strategy. And typically, as we've discussed in the past, we see very significant synergies when we consider M&A because of the benefits of integrating these businesses into our global network. On buybacks, our decision to pursue a buyback is partially informed by the share price, and therefore, the valuation the market is placing on our business. Buybacks offer a fast and permanent way to achieve EPS accretion and if timed will, can be a useful tool alongside the core dividend to boost shareholder returns. With that, I'd like to hand you back to Stefan, who will share an update on our strategic initiatives.

Good. Ian, thank you very much. Let me tell you what -- how the strategic initiatives are progressing. Despite all the supply chain occupation and the issues that we face with this, we are progressing well with the overall program. We're on track to achieve the 2021 and the 2022 targets on the strategic initiatives. The full numbers you have seen here, this has not changed. The production optimization plan projects are, as Ian has pointed out, very attractive investments. They have very high IRR. That's why they are a priority for us. All the projects returned significantly. All the returns exceed significantly our cost of capital. And most of them have a very short payback period of between 2 and 4 years. Even the Hochfilzen project is in this area if we assume the cost -- significant cost increases that we would otherwise experience. This year is the peak CapEx, and we start to see the cash flow benefits from the projects as they complete now in the fourth quarter of 2021 and, of course, 2022 and 2023. Let me briefly show you how this looks like. In Hochfilzen in the alps, we're installing a new rotary kiln, you see it here already installed. It's replacing a resource that we have in joint venture in Belgium that is much higher costs. It creates a new dolomite hub in Europe. The investment goes into this equipment and all the structure around it and in a large new rail terminal that will take all the trucks from the entire operation in Hochfilzen and move it on the rail, and therefore, support our sustainability agenda as well. In Radenthein, we are building our flagship automated digital plant. We are installing the latest automation technologies. We're developing many of them with -- together with suppliers because they don't exist worldwide today. This will become the blueprint for the modernization at least of our large plants around the world over the course of the next years. Of course, this is joined with an increase of production capacity, which at the end will also, of course, deliver low cost. This is our fastest payback project, just 2 years. Half the amount here goes into capacity expansion and half goes into the automation, very exciting to see. In Brumado, in Brazil, we are investing into a new rotary kiln to replace existing shaft kilns and expand capacity. This further lowers the cost position of this facility, which is already the world leader in the production of magnesite raw materials. This investment will also widen our product range, improve the offering to our customer and significantly extend the life of the mine in Brazil by several decades. In comparison, also in Brazil, we are investing to expand the capacity, make it much more modern, a little bit similar to Radenthein. Here, you can see the installations of the last latest pieces of equipment. Let me give you an update also on the sales strategies because the cost reduction in the production part, in the network optimization is pretty straightforward. This is under control, and this will deliver good profitability improvement. In the sales strategy, we target to deliver EBITA improvement of EUR 40 million to EUR 60 million. The progress in the new markets in China and India is going well. We have grown revenues overproportionately there. Our solution revenues are now almost at 30% from 26% in 2019. Our flow control sales are progressing well. They are recovering faster than the rest of the business. And on the digitalization, the digitalization space is a key enabler in order to put all of these sales strategy in place. Let me drive into this a little bit more in detail to give you some appreciation of what it is that we are doing. You should start to think about RHI Magnesita not as a refractory material supplier any longer, but as a technology leader in the high temperature and in the high heat management space. We are constantly working on new advanced products, and we have an impressive R&D function that translates this into benefits for our customers. Here you can see some examples of the advanced products that we offer, which have all been developed in-house. EMLI, an electromagnetic detection system. These products enable the monitoring of the level of molten metal inside furnaces of our customers and other vessels, of course, also. And they enable automatic control of the tapping process. The mechanical kiln audit tool assesses the mechanical conditions of rotary kilns, very important in the cement industry, for example. This includes stress levels and wear rates and that allows us to select the most suitable product for the customer and to advise the customer on the most suitable time for repairs and for investment that saves millions for the customers. The ladle monitoring product monitors the entire ladle fleet in a steel plant or in a metal plant, is a key piece of equipment in the metal production facility. It helps our customers to optimize the usage of each ladle, which ensures the safety of the operation and optimizes the energy consumption or reduces the energy consumption. The APO, automated process optimization, system is a real artificial intelligence tool. The algorithm accumulates large amounts of data and is able to predict the wear rate and the life of refractory linings. This enables our customers to carry out preventive maintenance and to plan for their relinings, extend safely the shelf life of the lining to its maximum potential and still never endanger any operational conditions, let alone any people. Other innovations that we have under development and which are proving to be very popular with our customers is the RFID-based logistics tools, is nothing so spectacular, but in our industry, it doesn't exist; a new customer relationship management tool that helps our sales force to identify potential for our customers much faster and in a more automated way; a self-service ordering tool; smart contracts that we have started to put in place based on blockchain technology so that we can track performance very transparently with our solution contracts, especially. So lots of things going on here. Hopefully, this gives you a bit of granularity. Let me summarize, ladies and gentlemen. The first year -- half year was characterized by 2 main elements. We are very happy, positively surprised with a very robust demand by our customers. And on the other hand, we are very much struggling with the massive supply chain challenges that this demand increase, in the context of global logistics, the global logistics industry, is presenting for ourselves. The outlook for the second half is much stronger as the price increases are mostly negotiated with our customers. And the inventory buildup has mostly happened. Our free cash flow now will increase significantly. And of course, the progress on our strategic initiatives, including the path to less CO2 emissions, is well underway inside RHI Magnesita. Thank you very much for listening. We look very much forward to your questions today, right now and over the course of the next days and weeks. Thank you. Can we go to the Q&A session, please?

[Operator Instructions] Our first question comes from James Zaremba from Barclays.

I just had a question on volumes and in terms of operational leverage at your plants. If looking at your inventory of the finished products, which increased about EUR 100 million year-on-year, I was just wondering where production levels were in the first half versus pre-COVID levels? And then I guess assuming you don't have a service inventory build in the second half, where we expect production to be in the second half versus what you just delivered?

Yes. So our production plants are fully utilized, almost all of them, especially the plants that make complicated, expensive pieces fully utilized. We have also put in place a network of partners, of production partners around the world that help us to deliver the volumes that we can't make ourselves because actually, the demand is higher than our network even can produce. This is actually very good news because it helps us to balance the production there. Anything else to add, Ian?

I think that this -- so our volumes in the first half increased around 14%, and we're expecting further growth of just over 5% in the second half of this year.

And sorry, in terms of those numbers, Ian, is that as a 14% increase in what you basically delivered to customers? Or is that 14% increase from what you actually produced in your plant, take into account the inventory increase?

James, it's a 14% increase in sales volumes to our customers.

Yes. And so I guess, if we increased the inventory by EUR 100 million in the first half, and we're expecting a 5% increase in sales in the second half for your customers, that means production is sort of flat half to half?

Yes. Production has ramped up to really full capacity utilization in the second half. So the volumes -- the production volumes will be slightly higher in the second half, but not much, maybe 1%, 2%, 3%, just simply because of the ramp-up was still taking place in the January, February, March time frame.

Our next question comes from Mark Davies Jones from Stifel.

Can I dig a little bit more into the increase in prices you're pushing through? Because obviously, that's critical at the moment. Some other management teams have suggested to us that passing on these much higher logistics cost is more difficult than passing on raw material prices because it's a sort of newer phenomenon. And that in some cases, those logistic costs are leading to temporary surcharges rather than more structural price rises. Is that what you're having to do? Is it a time-limited increase in prices related to those logistics costs? Or is it all part of the same sort of price rise structure?

Well, look, we don't have a lot of these discussions right now. I think everybody understands that this is a massive burden on companies and eventually this must be paid by customers. So we don't see significant difficulties to pass this on. As Ian has explained, 75% of what we need to do has already been agreed with customers. Our sales force is very committed. Our customers are very understanding. We have paid quite a bit of urgency logistics costs, speed up logistics costs by ourselves in the first quarter -- especially in the first quarter when the ramp-up was most noticeable. Customers have very much appreciated this. Of course, our delivery performance is not as we like it and our customers like it, but we have kept everybody in business. And I think they see the attempts we have made also financially. We've spent billions in supporting them here. That was on us, we didn't ever ask for this money. And therefore, now the discussion is very, very constructive. So they support us. I think when the logistics freight costs come back down, then we will see how we can relieve our customers or whether we can offer other things that make them happy. But this is, I think, a discussion for next year.

Okay. And the wording is slightly different between the 2 divisions. It sounds as though the Steel side has largely pushed through the price increases, and that's all agreed. The wording on the Industrial side is a bit vaguer about you still seeing the need for price rises rather than having achieved them. So is there a difference between the status on the 2 sides of the business?

Yes, there is a difference, which is simply linked to the different business cycle. Of course, on the Steel side, the movement is much faster. So the reaction time is much faster traditionally. That's just the nature of that business because the materials are consumed quickly, and then the next delivery comes and then you can make a change. In the Industrial side, I think we should differentiate between the cement business and the industrial projects business, which is about half and half. On the cement business, we're very much operating on this annual cycle. So we're negotiating now the second half of the year replenishment orders and then the cycle for the first -- for the winter cement season, December to March. That's under negotiation because it always happens at this time of the year. That's why this is not quite done, but our customers also here send very positive news because for them, this is not a very big burden. And for us, it's a very big help. So I think we're very confident here. On the project business, it's even longer-term discussion because the projects have, in glass, in copper, in zinc, they have a lead time of somewhere between 9 and 18, even sometimes 24 months. So some of the projects we are delivering now have been negotiated 1.5 years or 2 years ago. And of course, there, it's much more difficult to convince customers that there's an actual freight burden now. It's not impossible, it's also happening. Also here, we have understanding, but this is not yet done. In the project business, we have, in some areas, very, very high lead times, 40 weeks lead times, which, of course, is very frustrating for our customers as well as for our sales force. And here, we are finding solutions together with them. A part of them also go, of course, have to be done on the basis of higher prices.

Great. One final one, if I may, for Ian. As you ran through the bridge there on EBITA, obviously, the logistics cost is a much bigger headwind in the first half, EUR 27 million versus high single digits, and yet full year guidance is unchanged. So is the other moving part simply that the price rises you pushed through are higher than you had originally anticipated? Or is it higher volume? Or what gets us back to the EUR 310 million given that higher headwind in the first half?

So we have the benefit of slightly higher volumes coming through. We have the benefit of prices coming through, 3/4 of which we have settled. We expect to have the same level of sea freight costs we've encountered in the second quarter, just over EUR 60 million, continuing into the third and fourth quarter, and then we have this further slight ramp-up in our strategic initiatives.

Mark, look at it maybe a little bit from a different perspective. If you compare what we have done now, we have delivered almost exactly what we have guided at the beginning of the year, 40% of the EUR 310 million. And we will do the 60% of the EUR 310 million in the second half of the year. But the structure is a little bit different. We have much higher burden from the logistics area, EUR 27 million. If we hadn't had this, you can imagine that our result would be quite a bit better than it is actually, because the demand is on a much higher level. So I think the whole velocity of the business is going absolutely into the right direction.

Our next question comes from Andrew Douglas from Jefferies.

I have a few questions. Can you just talk to us about your commentary in the statement this morning about restocking and the fact that you basically see that as being impossible in the second half. Can you explain to us when you expect to see that come through? And does that give you a nice tailwind into '22 and '23? Because -- I guess this leads on to my second question, because if you're guiding to a 5% volume increase in the second half, which looks quite measurable, you've got a hell of a long way to go to get back to 2019 levels in '22 from your base of '21.

Yes. So the volumes have been -- the sales volume have been ramping up quite nicely. We're almost as 2019 volumes now in the middle of the year. The restocking also has happened despite all the logistics cost, is actually the major reason why our cash flow is so depressed because we had to invest significantly in the logistics chain. The reason why we are saying that further restocking is almost impossible in the second half of the year is because the business continues at a very strong level. We've built the inventory now to actually be able to support it to deliver it. If we had, had more inventory earlier this year, we would have been able to ship more volumes as well. This was not a demand problem. It was a supply problem. And therefore, the absolute level of inventory will stay more or less the same level it is now because the sales volume will absorb the higher production and shipping volumes. Anything to add, Ian?

Okay. Can I just be very clear. On the EUR 27 million of costs, what percentage of that is in sea freight additional cost? I'm just trying to figure out what else is in that EUR 27 million and whether it's a number we need to kind of be worried about?

The EUR 27 million comprises sea freight of EUR 14 million and airfreight of EUR 9 million. There's a little bit associated with the rebuild of our inventory levels of EUR 4 million, but it's very largely the sea freight and airfreight.

So the airfreight will completely go away. This is the emergency money we spent to help our customers, mostly in the first months of this year. So that will eventually disappear totally. The EUR 14 million is a run rate level that in the second half could be a little bit higher even because the costs have gone up, especially in the second quarter. So it will shift a little bit. But I think, with a lack of knowledge of what will happen in detail, I think it's a good number to assume to be repeated more or less in the second half of the year, but in a little bit different structure, more towards -- geared towards sea freight.

[Operator Instructions] Our next question comes from Edward Maravanyika from Citigroup.

Just got 2 questions, if I may. The first one, could you just please talk through how far the order book extends for each of your main end markets or just across steel, cement, glass et cetera? And then secondly, understandably this morning, there's been a lot of talk around price rises linked to raw materials and to supply chain issues. But what about prices linked to kind of value-add around your ability to help your customers innovate and also to help your customers solve any ESG issues they may have. Is there capacity to get more structural price increases from that?

Okay. So on the order book end by end, I think we see an overall strong order book in all regions, I'm with the steel business now, in all regions. China, India, Brazil is particularly strong. Volume-wise already above 2019, at least in RHI Magnesita terms. Europe and the U.S., volume-wise, a little bit below 2019 still. But in Europe, especially, we have recovered market share quite nicely. So here, the European team did a very good job to get back to our, let's say, historic levels of market participation. In the Industrial, and this is the outlook into 2022, at least into the first quarter, this is how far we can see now. In the Industrial business, in both segments, cement and in the projects, very strong order book. I talked about the long lead times already in the project business. This gives us concern. We have not seen lead times like this. So we're working very diligently to counteract this, to offer better faster reaction time to our customers. And in the cement business, mostly driven by the global construction industry, also very strong across the board into 2022. The price -- the segmentation of the price increases. The discussions are very much linked at the moment, of course, to the supply chain side. On the raw material side, we're done with this because the increase happened. We foresaw this a little bit more. It wasn't so abrupt. So we could negotiate it in April, May time frame. This is pretty much done, but the logistics part is happening now. These are the ongoing discussions, and this is very much the focus. You can see the increase in the solutions business. That is very much linked to these value-added tools. And I think this is the longer-term opportunity for us, more with a focus on 2022, 2023 as these tools become more mature and get rolled out.

Our next question comes from Dominic Convey from Numis.

Just a couple of questions, if I may. Firstly, with all the chat around the supply chain headwinds in the first half, I don't spot anything specifically in the statement, but can you perhaps talk a little bit about any labor shortages that you might be seeing and perhaps pockets of wage inflation? Secondly, in terms of the recycled materials that you're using, does the recovery of these raw materials add additional costs? Or should we think of it more that these are premium products ultimately that the customer is going to be prepared to pay higher prices for, given the ESG agenda. And then I guess, finally, just one third one. I'm sorry to get hung up on this second half profit bridge. I think you've given some very clear guidance about second half volumes and also the impact of the supply chain cost inflation numbers. But if we think specifically about the pricing element, what is the sort of across-the-board price increase that you've managed to pass through? And how might that look second half versus first half? And how much of that EUR 55 million, say, that we need to get to for the second half to that cover?

Okay. I think Ian is best placed to answer the third question. Let me tackle the first 2 first. Labor shortage is indeed a problem. It's there, especially in Europe and in the U.S., in those 2 markets. In the rest of the world, is not very much an issue. The inflationary part, wages are not that big of a challenge for us. It's the availability of, especially, trained and expert labor. We have open positions everywhere. This is a challenge. And therefore, the robotization and automation of our plants is so -- is going to be such a big tool to counteract this over time. From that perspective, we're even -- I would have loved to be 12 months ahead with this project. But this is definitely something we struggle with. We talk with authorities a lot about this. How can we bring labor, maybe from other regions. It's a difficult discussion, as you can imagine. We're building a training center by ourselves in the east of Austria, a global training center in order to take young people and bring them into our industry. We have lots of activities in order to also bring women into these engineering professions because we need to tackle it in a structural way. So it's something definitely we struggle with in Europe and in the U.S. The recycled products, it's a very interesting discussion. Right now, this is the focus for us very clearly, is the CO2 footprint of RHI Magnesita. This is our major driver to move this forward. Our customers are not yet very much appreciating these products. Having said this, as we market them, we can see in many markets that we're starting to get the same prices for these products than before. In our industry, products with recycled raw materials were always treated as dirty and lower quality. This is not the case anymore because technically, we can prove that they're absolutely equivalent. And now we are starting to get at least recognition by our customers, not yet premiums. But I'm very convinced that this will come, especially as we -- for those customers with whom we collaborate to take their waste back because we have the ability -- or we are striving for the -- for a solution where we take 100% of their waste and use it in different applications, which they cannot do by themselves because, of course, they have less breadth in order to use it. So we're introducing this and this is still a relatively new topic of discussion when it comes to this level of detail, but with a lot of positive feedback from customers now. Profit bridge price increase level?

Dominic, so in the first half, sitting in the price mix bucket, we've got around EUR 15 million of price benefit coming through at the very end of the first half. In the second half, on an expectation of sustainably higher sea freight costs and expectations we don't have a repeat of the air freight and that raw material prices stay flat, our expectation is that the large majority of the improvement in first half versus second half comes through from pricing. And as we've guided, 3/4 of that we have settled contractually with our customers.

What that does, of course, it gives very nice velocity for 2022.

Our next question is from Harry Philips from Peel Hunt.

Just a couple of questions, please. There is an echo on the line as well, which isn't great. Just maybe, coming back to, I'm afraid, sort of raw materials and what have you, the -- and in a way, you just answered the question partially in Dom's previously, is the 150 basis points negative impact in the first half on refractory margins. Does that -- what -- I mean should we assume in a normal year, 9%, 9.5% is a sensible level for refractory margin certainly in the near term? Secondly, in terms of your own raw materials, 310 basis points gain, if you like, or boost, given where raw material prices seemingly are heading, what should we think about for the second half there? And then lastly, obviously, you've announced a big increase in externally sourced raw materials in terms of purchasing. Does that plateau out into the second half in the context that your inventory levels are now sort of satisfactory to satisfy customer demand.

Okay. So I think you should think about refractory margins at 9%, 9.5%. And that should be the normal level, but that's the old normal. As the especially production network improvements come through, that mostly we will benefit the refractory margin. So that will start to increase next year and in 2023 from there, driven by that. But 9%, 9.5% is a good starting point. The 3 point -- the 3 percent points on the raw material benefit that we have now step-by-step will go up because the overall pricing level goes up, right? And that benefits our backward integration as well, to a large extent. On the external raw materials, the volume will not go down in the second half. Because our total sales volumes are still the same, and our production capability will improve a little bit. We've had some -- we will have some increased production in Brumado. But otherwise, we are already at a very high level of production and, of course, Hochfilzen, which is the only investment in the raw material replaces something that we already have. So the externally purchased raw material volumes will not very much go down in the second half of the year. We have agreed this with our suppliers. But the price increases -- they are, of course, much more expensive than our own raw materials. And so the price increases that we had to do for those is very much negotiated already. So the margin will be higher for those products containing these materials.

Harry, we continue to anticipate over the medium-term strong mid-teen margins from our business as we execute the strategic initiatives. And then as we reported at the quarterly results, we are building up our inventory levels of certain raw materials in order to mitigate the risk associated with the Beijing Winter Olympics. So that's, we've mentioned in the RNS, around EUR 50 million. So that too is currently playing out.

We currently have no further questions. I will now hand back to the host for any final comments.

Wonderful. Thank you very much for dialing in this morning and for the lively discussion. We're looking forward to continuing this on a one-to-one basis with you. Thank you, and goodbye from Vienna.

This concludes today's call. Thank you for joining.