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

Good morning, and welcome to the RHI Magnesita FY '21 Results Call. My name is Adam, and I will be your operator today. [Operator Instructions] I will now hand you over to Stefan Borgas to begin. Please go ahead when you are ready.

Thank you very much. Good morning, ladies and gentlemen from Vienna. These are interesting times. 2021 was quite a remarkable year. After the corona crisis, we thought that we were going to come into stable waters, but that wasn't the case. We're going to explain to you why. Now 2022 is starting, and we were thinking that the post-corona supply chain problems are finally under control, and we were coming into stable waters. And yet again, we're getting surprised by global volatility. This is probably the topic we need all to get used to. Volatility is here to stay. We don't know what will hit us. But certainly, for the time being, we have to be very reactive. So let me, without any further delay, give you the summary of 2021. 2021 was a year of very strong customer demand. Our market shares could recover on top of the buoyant and very strong growth of demand. We delivered -- the revenue increase was very strong. We delivered the price increase programs that we had to deliver because of a massive increase, especially in supply chain costs. Mainly, this was seen in Q4. We had unprecedented supply chain challenges as a basis of this. We decided to do 2 things, of course, pass the cost on to our customers. This worked quite well, and we recovered our profitability fully by the end of the year in the fourth quarter. But we also decided to significantly increase our inventories during the course of the year, step-by-step across the entire chain. Despite all these disruptions, we also progressed our strategic transformation. The optimization projects, the investment projects all over the world that you might appreciate also were very much in challenged from all of the supply chain problems from our suppliers into these CapEx projects. But we could also sign 2 M&A transactions, 1 in Turkey and 1 in China that shows that our M&A agenda is also nicely underway. Let me point out on the next slide that also, on the health and safety side, we continue to be very stable. This is a core value for us. We will not give up health and safety of our employees. Later on, when we talk about Ukraine and Russia, we will point this out again. This is at the top priority of what we do. Plants are operating at full capacity. Employees are stressed. We have to give them a huge thanks for all of the engagement that they showed during 2021. And despite this, excellent rates remained at a very low level. Let me give you the financial highlights. Our revenue grew very strongly by 16% in the year. Our profitability recovered, although relatively late in the year, but recovered very nicely. We could deliver the year within the guidance that we gave in the middle of the year. Most importantly is that our margins in the fourth quarter of the year are back to the target margins of around 12% EBITA that we want to see in our business as a minimum. Gearing went up, of course. This is, let me say, not a big area of concern because the entire increase of the gearing is strictly linked to the buildup of inventories that we have. So this is a capital that we have employed in the company that we can convert into cash relatively quickly. In these times of uncertainty with Ukraine, it might actually turn out to be a little bit of an advantage to have good inventory levels everywhere. Let me go into the different parts of the business. The Steel division volume growth was stronger than the market everywhere. Overall, our margins are a little bit down because of the cost headwinds, especially from freight and from raw material costs. But this is very much due to the skew of the higher cost, of course, having to be absorbed by us before the material makes it through the supply chain, and we can then invoice to our customers. As I said before, in the fourth quarter, this was pretty much through the system. If we look at the Steel division by region, we can see that in those markets in which we are -- we still see growth potential, India, China, we could gain very nicely. Also in Brazil, where we had some recovery to do, we could deliver this recovery. The U.S. volumes, if you look at North America on this slide, look that we were behind the market, but we are not behind the market there. This simply has to do with the fact that in the COVID crisis, the blast furnaces were moved down more, and they recovered faster now compared to the electric arc furnaces. And in the blast furnaces, we have traditionally a lower market share. So that doesn't concern us at all because, overall, the market share was kept same in Europe. In our Industrial division, the margins are flat in overall -- on an overall basis, again, very much because of the skew in the cement business that saw a very strong recovery. But the profitability really only improved in the fourth quarter. Anyway, the cement business is relatively seasonal in the fourth and in the first quarter of each year because of the repair cycle of this industry. In the industrial, in the non-cement business, in the project business, we don't yet -- we did not yet see a strong top line recovery. That's due to the fact that, here, the project, of course, take a little bit longer. Our order book in this business is very, very strong. Last topic before I hand over to Ian is on sustainability. As you are hopefully aware, one of our biggest short-term drivers to improve our CO2 footprint but also to improve the sustainability, the environmental sustainability of the company is the increase of raw materials that comes from secondary sources, on the breakouts of our customers. Here, we have made very, very good progress, and we give you on this slide here the quarterly development in order to show what the velocity is in this particular area. We are -- we have linked our debt, our financing to ESG criteria, so we are very serious about this. We are -- no one in the industry is on the avenue on which we are in terms of recycling and in terms of CO2 capture. We brought you an example how does this look like because this is much more complicated than it looks at first glance. Traditionally, if you take materials that come from the breakouts of our customers, you get breaks. You get finished -- new finished products that look like the picture on the left here with many cracks. And this is, of course, a problem for our customer because their hot metals penetrate into these cracks. We have developed a technology with which we can now use these secondary raw materials. And the end products that we make from those look exactly like products that come from virgin material from the mines, as you can see here on the right side. There are, in general, other elements of R&D that make very good progress. We brought another example here. And this is our Magnano product, which we launched in the Americas, and these are nano graphite coating materials that we can implement in our products. And the result of this is that the energy loss for our customers goes down quite dramatically. This will help our customers to save energy costs, reduce CO2 this way. And of course, for us, eventually, it will count on our Scope 3 emissions. With this, I'm at the end of the overview, and I'm very happy to hand over to Ian.

Thanks very much, Stefan, and good morning, ladies and gentlemen. I'll now provide a more detailed update on our financial performance during the year. Starting with the profit and loss statement, we delivered adjusted EBITA of EUR 280 million, which was at the bottom end of our guidance range of EUR 280 million to EUR 310 million, which we issued at the time of our third quarter trading update. Performance within the guidance range was dependent on the successful implementation of price increases and there being no further increases in our cost of production. We were able to achieve our price increase target, delivering EUR 127 million of benefit in the 2021 financial year against a target of EUR 130 million. However, there were further cost increases in the fourth quarter, which eroded this benefit, notably in freight, in purchased raw materials and in energy. And I'll go into more details on costs later on. Our adjusted profit after tax increased by 35% to EUR 222 million as the 2020 financial year was impacted by adverse foreign exchange movements that did not reoccur in 2021. The Board has recommended a final dividend of EUR 1 per share bringing the full year dividend to EUR 1.50 per share, including the interim dividend paid to shareholders in the second half of last year. This maintains our core dividend at the same level as 2020, with an earnings cover ratio of 3x in line with our stated policy. Changing the slide. Revenue increased strongly in '21, up 16% in constant currency terms to EUR 2.55 billion. Volumes are back above 2019 levels. And in addition, we delivered some market share gains on top of keeping pace with the general volume recovery in steel and other industries. This has been achieved during a year of significant disruption to global supply chains but also during the peak year of our internal investment program. Many of our sites have been undergoing significant upgrades whilst needing to run at very high levels of capacity utilization to meet the strong rebound in customer demand. The price increase program, which delivered EUR 127 million of benefit, was heavily weighted towards the second half and the fourth quarter in particular. This is due to the time delay in realizing the benefit of higher prices after they have been negotiated and agreed with customers. The strong sales volume growth translated into a EUR 79 million benefit at an EBITA level. We further improved our profitability with the strategic measures, adding EUR 36 million from cost savings and EUR 13 million from the sales initiatives in 2021 on top of the benefits delivered in 2020. You can see the EUR 127 million benefit on the price increase program flowing directly through to EBITA. This was, however, more than offset by the cost headwinds we've been facing, totaling EUR 152 million. Freight increased materially, up EUR 68 million, and we incurred EUR 69 million of additional raw material costs on externally purchased raw material. Whilst we are a vertically integrated refractory producer, we do still need to purchase around 30% of our magnesite-based raw material, our electro-fused material and all other non-magnesite materials like alumina-based products. On the positive side, operating at higher volumes saw a EUR 31 million benefit from higher fixed cost absorption. Finally, as expected, the temporary cost savings we introduced during the pandemic in 2020, like the site closures and the short-time working, these came to an end and came back into our cost base in 2021 with a EUR 43 million impact against our guidance of EUR 40 million. The impact of the cost increases largely falls on our refractory margin, which weakened to 7.8%, whilst the contribution of our raw material assets increased to 3.2%, in line with higher market prices for the raw materials we consume internally. As Stefan highlighted, we see the weak refractory margin as a temporary development. We restored refractory margins in the fourth quarter of 2021 with the benefit of our price increase program, and we are focused on preserving this in 2022. Raw material prices in the first 2 months of this year have held higher levels on average compared to 2021, and we are capturing this benefit. Looking at our costs in a little bit more detail. Freight is one of the largest categories of cost increases and increased from 8% of our cost of goods sold to 12%. You will all be aware of the very difficult conditions in the freight market this past year, with spot rates on average over 200% higher year-on-year, a difficulty getting containers, and only 35% of those containers actually arriving at their destination on schedule. This down from around 80% in previous periods. The energy price increase is another well publicized feature of current markets. Our energy costs increased by 1/4 to EUR 187 million in 2021, much of that in the fourth quarter, partly offset by the benefits of our hedging program. Today, our key exposures are to natural gas and power prices in Europe and to oil prices globally. Key raw material prices are set out on this slide, and you can see 2 significant step increases in the fourth quarter of 2020 and the fourth quarter of 2021, that together contributed to the EUR 69 million increase in raw material costs year-on-year. On this slide, we have set out a quarterly view to demonstrate the success of our price increase program in restoring margins to a more acceptable level of 12.5% in the fourth quarter. The dip that you can see in the third quarter is due to the impact of the unscheduled kiln outage at Radenthein, Radenthein being a key plant for the production of high-margin refractories for the industrial sector, and this had an EBITA impact of EUR 8 million very largely in the third quarter. In total, we went through 4 rounds of price increases with customers in 2021. And this increased frequency of price discussions is likely to remain a feature of our industry going forward, at least for so long as the current cost volatility continues. Moving to working capital. And maintaining continuity of supply for our customers came at the cost of a significant increase in our inventories, which increased EUR 0.5 billion and finished the year at EUR 977 million. This was partly offset by the increase in accounts payable. And together, these contributed to an increase in working capital to EUR 677 million, up just over EUR 300 million year-on-year. In the chart on the right, you can see that much of the increase in inventory is driven by higher costs of EUR 170 million and increased activity of EUR 125 million. Some of the increase is also a result of longer transit times with goods on the water or held up in port congestion for a longer period. Some was also a deliberate action on our part, as we've shared at the third quarter trading update, to ensure that we had raw material available to see us through the Winter Olympics in the first quarter of 2022 and to maintain sufficient stocks throughout our supply chain to ensure continuity of our own production, and importantly, deliveries to our customers, we increased the inventory. We do expect to be able to unwind this excess inventory, but this can only be done when global supply chain reliability improves, and there's no sign yet of that happening. We are operating on the assumption that disruption is going to continue in 2022, with the intention of releasing inventory as soon as market conditions allow. Turning to our net debt. Higher working capital is the main reason for the EUR 430 million increase in our net debt to end the year at just over EUR 1 billion. We continue to benefit from significant headroom in terms of available liquidity, which was EUR 1.2 billion on the 31st of December. We refinanced over EUR 1 billion of debt facilities in 2021, and this is reflected in the long-dated maturity profile that you can see on this slide. All of this refinancing was ESG-linked, consistent with our sustainability strategy. Gearing at 2.6x is clearly higher than our target range of 0.5 to 1.5x, and we expect this ratio to reduce in 2022 towards our target range as we pass the peak of CapEx on our internal investment projects and as our EBITDA increases and with our strategic initiatives and organic growth. The obvious route to strengthen the balance sheet will be to reduce the level of inventory. But as I said on the previous slide, this can only happen when the global supply chain returns to much improved levels of reliability. And with that, I'm happy to hand you back to Stefan.

Thanks, Ian, very much. Let me wrap up the presentation part of the call with a view on our strategic initiatives. As we approach 2022, we are -- we can see that we are behind the target in 2022 of our strategic initiatives. This is almost entirely due to the -- to a time lag triggered by the COVID 1.5 years. Of course, the problem that we couldn't access customers, therefore, our sales initiatives are behind for over a year, probably in some cases, almost 2 years. And of course, many things were then delayed because of the supply chain topics. Good news is that we can raise our target to EUR 110 million we can gain -- that we can gain from the cost savings from 2023 onwards after the projects are completed, and our sales initiatives are still more or less at the same level than before. Let me give you a few pictures so that you can see that your money is really delivering something. Here is the new plant in Hochfilzen in the Tyrolian Alps, which produces now probably the best quality of dolomite raw materials in Europe also at the largest scale. This plant is fully in operation and is working quite nicely. On the next picture, you can see the new tunnel kiln in Urmitz in our German site that was commissioned in the fourth quarter of this year. You can see this is a super modern, high-tech piece of equipment that will allow us to significantly increase capacity here, consolidate with some neighboring sites and, therefore, deliver the benefits. If we look at the sales strategies, you can see on flow control, we have recovered very nicely to the 2019 levels. The solution contracts are -- have made good progress. We rebased the calculation a little bit here. So therefore, we've given you the last 3 years, and you can see the progress we've made here. And most importantly, in India and in China, where we did have lower market -- or we still have lower market shares than in other parts of the world, we made very good progress. And these 2 geographies now make up around 18% of our global business already. As an example for this, we have signed -- we have bought shares in a company in China. And together with our partners, we're going to build a new plant. This is already fully in construction, in Chongqing in China. This gives us access to a different geography and to a different product class. And in Turkey, on the next slide, you can see that the agreement to buy a company called SÖRMAS has been agreed and signed. We are now waiting for the Turkish antitrust authorities to give us the clearance. This is a downstream investment for us. As you know, in Turkey, we are already producing raw materials. We would very much like to keep these raw materials in the country, expand the production of SÖRMAS there in order to supply the strongly growing Turkish market with local production. That's the target here. We can hopefully take this over as soon as we get the approval from the antitrust authorities some times over the course of the next months. Let me summarize, ladies and gentlemen. RHI Magnesita takes its leadership in the global refractory industry very seriously. We continue our strategic transformation despite all of the volatility and all of the headwinds that we experienced year-after-year now, and it looks like this will not end for the time being. Our production optimization plan is close to completion. We will continue with our journey to strengthen the company through M&A, especially in the markets that are attractive for us, India and China. We are also the sustainability leader in the refractory industry. We are well positioned for a global decarbonization in the long run, but we are also reducing CO2 already in the short run. Nobody in the industry is anywhere closely as engaged as we are in this area. And last but not least, we are the innovation and technology leader in the market. We're not forgetting innovation in the classical refractory technologies. But we're also adding new knowledge and new innovation in the area of recycling, where a lot can still be done in order to upgrade the quality of the raw materials that come from the breakout of our customers. And finally, the heat management capabilities of RHI Magnesita are unmatched. Nobody can deliver these full complete solutions for our customers, and this is what we're continuing to build out. Our customers recognize this. That's why the percentage of solution business in our portfolio is increasing year-after-year. Thank you very much for listening. And now Ian and myself are, of course, very happy to answer your questions.

[Operator Instructions] Our first question is from Mark Davies Jones from Stifel.

Lots going on, obviously, so can we start first with pricing and costs? The exit run rate in Q4 looks much healthier. Looking forward to 2022, obviously, we get that full run rate of price increases, but we also get a full run rate of higher cost levels. So if things on both sides stay roughly where they are, is there any reason why that 12.5% can't be sustained or built on in 2022? Or are there other lagged effects coming through now?

Mark, the big challenge now in 2022 is energy cost. This has, of course, dramatically increased starting in the fourth quarter already. So we have some of these costs in the inventories that we have, but it's continuing, of course, accelerated now by what's going on in the Ukraine. I saw Brent was at $100 per barrel this morning. So that will continue. And this is the same order of magnitude than shipping cost was last year. So we cannot sit back. I think I'm quite confident that we can maintain the margin level that we have at this moment. All of the order book shows this, but we can't sit back. In a little bit lower level but still also on the cost side, our labor costs go up significantly. We have about 3x the salary increases this year that we experienced in past years. So that has some effect on us as well. It's not as big as shipping and energy, but it's there to be managed. So by no way can we sit back and relax.

Indeed. And perhaps I can ask Ian, if we're going to have an extended period of higher-than-expected debt. Can you just remind us where covenants sit and how comfortable your relationship banks are with running those debt levels? I can see the commercial need to keep inventory and keep the whole system moving, but is that something you've got backing for?

Mark, thank you. So our debt covenants across all of our gross debt is 3.5x. That 3.5x is calculated excluding the IFRS 15 debt. And therefore, on an equivalent basis, our actual figure is 2.5x. And yes, we have a stable, long-term supportive banking syndicate of 11 banks weighted towards Austro-Germanic banks that have been with RHI for many, many years, and we continue to count on their support.

Excellent. And if I can just do one third one. Any potential second order threats from the Russia-Ukraine situation? I mean, have you looked at how much of your production base in Europe is in regions that are entirely dependent on Russian gas supply?

So there are 3 aspects to this crisis. The first one, which is the most important one, I think, and the most -- one that we should take the most serious is the people. We have employees in Ukraine and employees in Russia, and we are very focused on trying to help them, especially the ones living in Ukraine, them and their families. This is like safety and health, the most important thing that we need to take care of now in the next days. So we're focused on this. The second aspect is the business that we have in Ukraine and Russia. It's a total business of around EUR 90 million. I think we need to assume in a worst-case scenario that this business might seize during 2022 and maybe in longer term as well. It depends on sanctions on many things. It's difficult to judge this, but there's big production interruptions in Ukraine now. And if sanctions continue to escalate, then probably we cannot deliver very much into Russia. So that's the second aspect. It's a pity, but I think that's about the extent in which we would see this. It's about 3.5% of our turnover. And the third part is probably the issue with the biggest financial impact in the short and medium term. This is the gas supply from Russia, especially our Austrian raw materials plants are very much exposed. Hochfilzen in Tyrolia that you just saw has the ability to use coal. So we could switch relatively quickly to coal. In Austria, 60% of the coal also comes from Russia. But here, we could find alternative sources, I think, relatively quickly. But the other raw material plant in Breitenau is entirely dependent on gas. Most of this comes from Russia, so here, this is rather a serious situation. We're already in emergency planning, and we have to see how this develops. I think this is a risk, but it's almost impossible to forecast this at this moment in time. The finished goods plant in Europe could probably switch to liquid gas and other alternatives a little bit easier because also the consumption is not so high. It will remain a challenge also. This is a European issue or an issue for the European plants. There could be some upside if Russian imports of finished products of steel, copper, things like that are -- cannot happen anymore. This will strengthen the European producers and the Turkish producers and other producers. So I think from a market perspective, we're not that negative. But gas supply is a challenge, very difficult to quantify it today. We were more relaxed on Friday when we wrote this RNS and Q&A, and then acceleration of sanctions happened over the weekend. So I think we have to take it day by day at this point.

Nothing further in the queue at present. [Operator Instructions] We have a question from Harry Philips of Peel Hunt.

I hope everyone is keeping their tin hats on. Just a couple of questions, please. The first is around China and India, which is already up to 18% of sales. Just how say -- sorry, there's a horrible echo on the line. In 5 years' time, say, where would you hope they ought to go? And how much would -- further investment would you need to put into the regions to facilitate that? And then the second is around solutions. So you've given us the chart, which is very helpful. But is the 40% target still readily achievable in [indiscernible]?

[indiscernible] of China and India for 2025 or so because it doesn't make sense. In China, much depends on consolidation, on industry consolidation. It is quite encouraging what is happening there. So I think we can continue on this path. And in India, this is very much a matter of the growth of the Indian market. The Indian market is really the only big, large-scale market in the world that is growing. We have a good position. But here, this is a matter of investing into capacities through intelligent combination of plant expansions but also some targeted acquisition. So this percentage, I believe, will easily surpass the 20% of the share of wallet. But how far it would go, I'd rather not make any predictions now. The solutions percentage of 40% is ambitious. We obviously need some exponential growth in order to do this. But it is also supported by a lot of new digital products that will complement our traditional offering, and they are only coming to the market now in the next 1 or 2 years. And then the growth, of course, comes thereafter. So the 40% is still in reach. We don't want to give this up, but I acknowledge it's ambitious. Maybe it will take a couple of years longer. It depends on how well our customers will accept these new total solutions. By the way, also the recycling of the breakout materials makes a big part of the solutions' potential.

And that sort of leads really on to my next question, which is the whole sort of green steel sustainability, how recycling fits into that. You have the SSAB announcement a couple of weeks ago, 3 weeks ago, where electric arc is being brought on stream. And you look at the new capacity coming on stream in North America and huge -- well, almost total dominance around electric arc. And just how you sort of deploy your strategy around those dynamics?

Yes. So the electric arc furnace, of course, is the sweet spot for us. This is a magnesite-dominated refractory environment. We have a huge technology leadership in this area. Our market share in the electric arc is much higher than in the blast furnace, as you could see in the 2021 U.S. numbers, as I've explained before. So this is quite good for us. This should give us above-average growth opportunities here. There are 2 other elements to the decarbonization of our customers. One is the refractory materials that help them to save energy, like the Magnano that I talked about in my presentation, like better measurement of energy efficiency of refractories and other things around heat loss there at the customer. And of course, the recycling because this is a clear reduction of Scope 3 CO2 cost for our customers. If we look at the electric arc furnace environment before and after decarbonization, once -- today, the CO2 emissions attributable to refractories are about 3%, 3.5% from the perspective of a steel company. So it's not that big and, therefore, not so much in the prime focus. Once a steel plant is converted to a green electric arc furnace environment with hydrogen reduction rather than oxygen plants, then the percentage of CO2 attributed to the refractories will go up to 15% to 20%. And at that point in time, it's very important that the refractories are low-carbon products as well because we will be very high on the radar. And that's what we are working towards, so that we have these solutions in place before the situation arises.

And in terms of the customer sort of response to that or whatever. Just how -- are they driving it very hard themselves and sort of aligning with yourselves to produce solutions? Or are you -- is it still one way you're bringing solutions to the customers? Or how is that dynamic working at the moment in time?

It depends on the individual customers. We have very advanced customers who are pushing the envelope on every aspect than they can. And here, of course, we have big open arms on coming with our own solutions, mostly towards what helps them directly in their own Scope 1. So that works. But there's a customer segment still also out there that is not very much focused on this, and they want low-cost refractories, period, and not yet pay any premium for green products. This exists as well, but this is shifting. Even in markets like India, where decarbonization wasn't that big on the agenda, until very recently, this is starting to change. So there also, we see the leading companies pushing for these kind of solutions. Surprisingly, in the U.S., of course, because of the push towards EAF, the interest is very, very high. In Europe, it's mixed. In South America, it's not yet so strong with the exception of Gerdau, who is super advanced and very focused and very visionary in this area. And in the rest of Asia, I think it's quite mixed also. In China, also, there are quite some customers who are super engaged in all of the circular economy area and also in these innovative products that help them to save energy in there with CO2.

And one very last question just around pricing into the current year. I mean, clearly, the realization in Q4 was tremendous. But with, as you say, cost going higher and what have you, I mean, price increases already going through and you sort of feel reasonably happy that the -- your action and sort of environment around that is quite stable in terms of how you manage it.

Yes. So from everything that we can see now for the first quarter, when I say everything we can see, all the cost increases that we can see and that we can list in the first quarter, things look quite solid. I have to say that our sales force has done a tremendous job here to change -- also change the way we look at price management. This always, in our industry, used to be a project planning and implementing a price increase. This is not a project anymore now. This is part of ongoing operational everyday business because the volatility has so dramatically increased. And our customers have accepted this. Our customers are attributing a much, much bigger emphasis on supply security than on pricing only, at least most of them, I have to say. This is the reason why we decided to invest into inventory because this is the quid pro quo. So first quarter looks quite good. Second quarter, I would say, we can be reasonably confident as well. And -- but this comment I make without knowing what will happen, especially on the energy cost, especially in Europe. Ian, anything to add?

I think that the key sensitivity that we have is around energy costs. And as we've spoken before, our hedging program extends well into 2022. So we're -- around 2/3 of our energy cost is hedged. The key exposure that we really have is European gas, European electricity as well as oil on a global basis. And that really starts to impact us from the end of the second quarter into the second half of this year. So price increases are going to be important for us to maintain the margins we established in the fourth quarter.

Do we have another question?

We do from Dom Convey of Numis.

Just want to follow up on Harry's, if I may, specifically with regard to the pricing dynamic. And if we think about the EBITA bridge for 2022, apologies if I may have missed it, but have you given an equivalent figure to that EUR 130 million price increase target that you had for last year? What would the equivalent number be this year in order to maintain those margins at the 12.5% Q4 exit rate?

Ian, do you want take this?

Yes. Dom, thanks for the question. So we've intentionally not given that guidance at this point because of the uncertainty around the cost pressures around energy and non-magnesite-based raw materials. But if you go back to an EBIT bridge and the building blocks for 2022, our margin of 12.5% in the fourth quarter last year did benefit from a strong cement season. So if you extend the period and perhaps look at the second half, which is EUR 150 million of EBITA, you double that up, you take into account the strategic initiatives, which are targeting to deliver around EUR 35 million of incremental EBITA, and the fact that there may be some modest 2%, 3% volume growth during the course of the year, you get the key building blocks for our 2022 EBITA.

[Operator Instructions] Next question from Mark Fielding of RBC.

You actually touched on the question I was going to ask in that answer, so I was curious, as you've talked about the Q4 sort of 12.5% benchmark. Just -- and it's as hard, you've flagged seasonality, but what is the normal quarterly seasonality? I say it's hard because I'm not sure we've had a normal year in the last 3 or 4 years in that. So cement is obviously stronger generally later in the year and in Q1. How do we think about margin seasonality through the year in this business in general?

Yes. There's not so much margin seasonality, at least from a demand perspective but more revenue seasonality, and that comes almost entirely from the cement business. The cement customers, they buy our materials in -- usually in the -- at the end of the fourth quarter and then in the first quarter in order to repair their kilns. This is in the Northern Hemisphere where most of the customers are. Why? Because in the winter, many kilns are shut down. And then before they start again with the start of the construction season, they use the refractories in order to prepare the kilns for a restart. This is the reason for this seasonality. It looks like this year, the cement kilns have run a little longer in 2021 and the shutdown is a little bit later, so it might -- we might have the peak month in April rather than in March. That's how it looks like. But this is the season. And then the third and the second quarter usually are a little bit weaker because we have very little cement sales during this time. And then in the fourth quarter, it picks back up. This is the seasonality. Does that answer your question? But the margins are more or less the same from one quarter to another.

Next question is from Neeraj Parkash from White Oak Capital.

Yes. So first, I just wanted to understand the strategic thinking behind choosing India as a manufacturing hub versus other countries like China, Mexico or directly the Middle East, which is where you're going to be currently exporting your products from India.

Yes. So the main manufacturing purpose of India is India for India. Why? Because the growth of the Indian market, of course, is very strong. This is a 5%, 6% growth environment for refractories. The Indian refractory production or the Indian refractory sales have a lot relied on imports over the course of the last 20 years, not just for RHI Magnesita but for the industry as a whole. And part of the Modi government-induced Make in India initiative asks us to domesticize a lot of this imported production. Specifically, this means we're moving production from China to India, while at the same time, the Indian demand grows quite significantly. And that's why there's a manufacturing -- significant manufacturing increase in India going on in the refractory industry. That's the background. India then -- and why has this been the case? This has been the case because many raw materials are just simply not available in India. They're just not in the geology. It's nobody's fault. It's just the fate of nature. So that's why there has been this strong import of finished goods. But with the maturing of the industry now, we can import raw materials to a larger extent than in the past and make the finished goods there. With respect to the Middle East, we have been serving the Middle East mostly from India and Europe also because of the proximity. In the future, and this is one of the reasons for our strong investment and interest in Turkey, we want to shift some of this production to Turkey simply for proximity reasons. You might know that one of the major drivers for our big investment projects is that we want to have a more regionalized supply chain. That's part of this. So India for India, Turkey for Turkey and Middle East, Europe for Europe, China for China and so on. Does that make sense?

Sure. Great. Just as a follow-up on that. What would the incremental unit economics look like for the EUR 42 million CapEx that has been laid out for the Indian entity? I mean, what kind of revenues can we expect or margin profile? And do we see India as a percent of the overall revenue and becoming a significant chunk? It's about like 10%, I think you mentioned in the presentation. Do we see that increasing exponentially over time?

For sure, this will increase. Yes, for sure. Ian, do we -- can we answer the incremental revenue? I don't think we have this.

We haven't shared that information at this point. Certainly, we are expecting to see further margin growth in the business supported by that CapEx investment to drive domestic production.

The India margins are not yet at the same level than in some other regions. So there is a bit of a challenge there. It's part of growth and part of pricing pass-through dynamics, so some of this is short term. But for sure, the production and the share of revenue on group will continue to increase.

Sure. Yes. The context of this was just trying to understand how this would be accretive to overall corporate margins at a global level. Because we do understand that the Indian entity itself has about 16%, 17% plus sort of EBITDA margins because of the labor cost arbitrage and the efficiencies. So just trying to understand, as you create it as an export base and India for India as well, on an overall RHI global level, what type of margin accretion can one expect, in a ballpark level, 3 to 5 years from today?

Yes. Okay. We haven't shared this yet. It's a complicated calculation.

Sure. Just if I can squeeze one last one. Any view on the market cap and the valuation of the global entity? We understand it's a USD 1.8 billion sort of market cap. But if you look at the Indian entity, which is a pretty small part of the overall pie right now, that itself is being valued at $1 billion plus. Any sort of thoughts on this?

We're very happy about the strong recognition of Indian investors of our business there. So I think that's the first thought. I think it's a bit due to the difference of valuations in the different markets. Otherwise, Ian, any thoughts?

Yes. I think that we continue to believe that the RHI Magnesita group share price is trading on an undemanding multiple. And clearly, as we deliver on our strategic initiatives, as we retain the margins that we've established at the back end of last year, hopefully, those will be supportive for our share price. But our focus as a management team is delivery.

[Operator Instructions] As we have no further questions, I'll hand back to the management team for any closing remarks.

Thank you very much, ladies and gentlemen, for dialing in this morning. Thanks for your interest. Let's stand together to see what happens now here in Europe or more specifically in Ukraine. We will do our best to mitigate these events. And of course, we will keep you informed with every step we take and with every element that influences us. Thank you for dialing in, and have a good day.

Thank you all. Goodbye.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.