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

Good morning, everyone, and welcome to the RHI Magnesita Q1 Trading Update. My name is Seb, and I will be the operator for your call today. [Operator Instructions] I will now hand the floor over to Stefan Borgas, CEO, to begin. Please go ahead.

Thank you very much. Good morning from this wonderful summerly morning in Vienna. Let me give you the key messages of the first quarter business update of RHI Magnesita. First message, the demand for our products across all regions in the world remains very solid. Second key message, we have been able to maintain the margins that we have restored in the fourth quarter of last year, around at the same levels, although a lot of things have moved since then. Third message, our inventory and our working capital remains high. This is deliberate, and this is a clear business advantage right now. And the fourth message, on the strategy execution, we have made very good progress, and I want to especially point out our progress on the recycling business in Europe. Let me go a little bit more into the detail. On the demand side, demand remains very solid, very strong in the Industrial business and still good and solid in the outlook in the steel business. We have full order books. Customers are accepting price increases as long as they're linked to cost pass-through. The order book for our steel business is around 6 months. Especially for the next 3 or 4 months, this looks very good. But in the Industrial business, our order book is larger than 12 months, a lot of very strong demand here. Our business is linked, just as a reminder, to the production volumes of our customers and not to their pricing. Second, explanation around margins. We have been able to maintain the margins in the first quarter at approximately the same levels than in the fourth quarter of last year. The momentum that we've had is carrying into this year. There's nothing that led us to believe that this will change now in the second quarter either. But we have experienced a lot of additional cost increases, of course, on energy, on labor cost, on raw material and now again also towards the end of the first quarter, on freight costs, especially linked to the supply chain constraints that come out of the port closures in China. The frequency of price discussions with our customers is much, much higher now than it was at this time last year. We're using surcharges in a lot of these areas in order to pass through these cost increases much faster than at the same time last year. Clearly, we have learned our commercial professionals have learned from -- to live with this new life of volatility. Third, comment around working capital. We have had increased inventory levels towards the end of last year, quite deliberately, because of some concerns coming from China and longer supply chains. And we have decided to keep these inventory levels at those levels. That, of course, leads to an elevated net debt because these inventories are valued at higher costs. This is not a big concern, because this will make it through the P&L and then into the balance sheet as these higher costs get recovered with the cash that we get from customers. But in the short term, this leads to higher net debt. It doesn't make us very nervous at all, because it's all backed up with good, solid inventory levels. And of course, at this point in time, our customers highly, highly value this. It's one of the reasons why our demand remains very strong, because we're the safe bench for our customers for all of their supply. We've actually reduced the volumes in the -- on the raw material side, because here, we had elevated levels because of concerns of supply. That is now out of the system. So the raw material inventory levels have come down a little bit. Let me mention on the strategy execution just one -- or let me highlight one area. Before I do this, on the other big points, our CapEx projects, we made good progress. Our investments, around EUR 50 million each in Radenthein, in Hochfilzen and Urmitz, are coming to completion now during the course of the first half. And the benefits are already been seen slightly in the P&L, and we will see it even more in the second half of this year. So this is doing very well. Also on Flow Control, we're making very good progress here. We have a massive, massive increase of trials with customers now that we can access them again. But I think the highlight of the first quarter was the acquisition of 51% of the market leader for recycled refractory raw materials in Europe, a company by the name of Horn, very reputated, very, very well-known industry -- in the industry. There's a very experienced management team in charge of this company. So we're very proud to have been able to secure them as our long-term partners. This is a very big step for us forward in Europe, Because essentially out of 3 reasons. Of course, it will help us now to achieve our 10% recycling target earlier than 2025. And then in 2025, our ratio will be higher than that. We will guide in due time how much higher. But very clearly, we will be able to outperform this important target linked to our decarbonization. But in reality, there's 2 other things that are really remarkable about this. This will allow us to create the -- a superb offering for the entire European refractory industry of green raw materials. This is not just helping RHI Magnesita, but this is helping the entire refractory industry, because we will offer these products at quite competitive conditions to the entire European refractory industry. And that will hopefully help the entire industry to do a step towards decarbonization. But this is also a tech game. And that's why this combination between these experienced recycling managers and this outstanding technology platform at RHI Magnesita will provide a huge value, new value that hasn't been there before, because with the application of the technologies that we have been able to develop, recycling now doesn't -- is going to move away from a little bit dirty waste business and towards the high-tech business. Of course, this transition will take a couple of years, but it will not take 5 or 10 years. So very exciting move, and we're quite proud about this. Last but not least, and then I'm very happy to listen to your questions together with Ian and Chris, who are sitting here next to me, the outlook for the rest of the year. We fully expect to get hit by a lot more cost increases from everywhere. This is clear. This is already announced in many areas. We would see it in the raw materials, but we will see it in the other cost areas, labor, energy as well. Actually, we experience it every day. We are set up to pass it through to customers, so that margins can be more or less maintained. The order book looks very, very good for the second quarter. And for the second half, also, we are quite confident that our business will not turn and look very different than now. With this, very happy to turn back to the operator and listen to your questions.

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

Stefan, Ian, 2 quick things, just a clarification. There's a note in the release about some additional CapEx to build some contingency into the European business if Russian gas becomes difficult to get hold of. Can you just give us some indication of what that means in practice, because I thought that your pullback was coal and the coal is also sourced from Russia. So what can you do to reduce that dependency?

Yes. So the issue is gas from Russia, in Germany and Austria for us, especially in our raw material plants. They are mostly fired on gas from Russia in these 2 countries. So we need to prepare for a situation where we will have less gas available in the grid, because Russian gas might be constrained or even stopped altogether. And in order to do this, we're going to change some of these plants to other fuels, coal, oil or petroleum gas. And in order to be able to do this, we need to change the installation. We need to change the burners, and we need to install tanks and delivery infrastructure and things like that. And that's the EUR 6 million CapEx that we have approved and that the team is putting into place. It will take a year to actually make it operational, of course. But hopefully for next year, we should be prepared. Not for a complete elimination of gas, but for a reduction, a significant reduction.

Okay. And then on the success on passing through cost, you do seem to have accelerated that. You've said in the past that there's quite a long lag between price action and realization given the cycles that you're in, in terms of orders and so forth. The surcharges let you get past that to some extent? Or is it just catching up from price rises you made last year?

No. It's indeed compressing the time line between cost increases and pass-throughs. I mean this is a new environment in which we are since more or less 1 year now and the, let's say, old business behavior in which we could absorb cost increase in one or the other category for a quarter until there's a contract renewal, these times are passed. The cost increases are just so broad and happening everywhere that we can't absorb it anymore, as we have seen in the second and third quarter of last year where our margins were so depressed so fast. So we've changed the business model. We've changed the setup. We've agreed volume contracts with our customers. And we have kind of a base price with our customers, but we're talking about these different cost elements step by step. It's not indexed, but it's going into this kind of direction. And therefore, the pass-through now is faster.

The next question comes from Dominic Convey from Numis.

I think a couple of questions, if I may. Firstly, in terms of the broader outlook for some of your end markets. Obviously, global steel demand has been cut recently for 2022. And then within that, there's obviously some sort of fairly significant events driving steel production location. I just wondering whether you could perhaps give us -- to -- talk to us about whether you've seen any signs yet of Europe picking up the slack in Russian steel exports and perhaps give us your assessment of inventory levels throughout the supply chain. Obviously, sort of you've been very detailed about your own elevated inventory levels at the moment.

Yes. So if we go east to west, in China, for sure, there will be a reduction of steel production. Our business in China is relatively small, and we're mostly focused on the modern EAF plants. They can be shut down faster, but they can be brought up faster also. And because they smelter scrap more than imported iron ore, with coal, they will be a little bit less affected. So in China, clearly, steel production is down, but not our segment and our business is not very big there. In East Asia, the situation is relatively stable. In India, there's still actually quite solid growth. In the Middle East, also, there's -- the situation is stable at least, if not positive, because the Middle East is picking up some of the -- or is expected to pick up some of the Russian exports. Turkey, the same. Europe, I think we have some concerns more -- not so much because of demand now, but more because of energy costs. So we've seen some reduction here. And I think because of the recession in Europe that some people talk about, there could be a downside here. In the U.S., it's the other way around, because of the big energy sales surplus of the U.S. economy. And because of very good demand in the manufacturing side in the U.S., there's an upside. And of course, we're very strong in the U.S. It's similar to South America. So when we take this as a total, there's some movements from one place to another, but not a catastrophe on the horizon.

That's very clear. I think just maybe, whether it's a little bit early, but talk about how you see the rest of the year developing, specifically the seasonality in the business. I mean historically, you've been perhaps a modestly first half weighted business. Last year was very much an anomaly. But given the dynamics you've talked about in terms of outlook for second half and obviously catch up on further cost inflation, how do you see this year panning out?

Yes. I mean typically, we always have a little bit stronger first quarter and fourth quarter, because of the cement industry, the cement season in the Northern Hemisphere. The rest of the business is actually relatively stable. The Industrial Projects business, of course, is lumpy, but there's no seasonality in this sense. So I think if you expect just a little bit weaker second quarter and third quarter, and then the fourth quarter, again, more or less at the current levels, then I think you should get it right.

[Operator Instructions] Our next question is from Harry Philips at Peel Hunt.

Just a couple of questions, please. Just if you could maybe provide an update on -- I know you don't traditionally sort of put this in detail, but just an update on the production optimization program and the sales strategies, just how those cost savings are manifesting themselves at the current time? And then secondly, sort of keeping with the sort of green steel theme. Obviously, we've got the Nordic project sort of looking very interesting. You've got 10 million tonnes of new capacity predominantly EAF, if not all EAF, coming on North America. Just how you sort of align into that and the opportunities and the greater refractory content you have in EAF and how those dynamics are panning out? And then I suppose also, the competitive environment in that more higher tech green steel backdrop, please?

Okay. Let me take the green steel question, and then Ian will talk about the update on the programs. Yes, on the green steel side, of course, we're -- this is very much in our focus. We try to be the partner of choice here, because of our portfolio, but also because of the investments that we have. I think in the Nordics, this is not a particular booster for us. We're traditionally very strong in this region, especially when it comes to EAF. So I think we're all in these new projects. But in the U.S., clearly, there's a step-up that is happening there, as these EAF investments are coming through now with a lot of new EAF plants being built in the U.S. We will, for sure, increase our capacity of products that cater to these markets. We will very shortly decide on a capacity increase of some of our products to be produced locally in the U.S. So we will switch from traditional import towards an import of raw materials and then local production in the U.S. in order to be faster in servicing customer there. So that's in the making. There could also be some smaller, quite very targeted M&As here. And because, of course, these clean steel programs cater towards -- this is not just green steel, but also clean steel, so there's an increased level of flow control solutions at the end of the process. Also there, we have stepped up quite significantly our staff and our capabilities in the U.S.

On your strategic initiatives question, so we continue to guide to EUR 36 million of incremental EBITA this year. EUR 12 million of that coming through from our sales initiatives, EUR 24 million of that coming through from our cost initiatives and expect to deliver that run rate of EUR 120 million this year. If you look at the sales initiatives, we've maintained the momentum. In particular, I think that we're encouraged by the growth that we're seeing in India, in particular, the good margin growth that is apparent. And as we touched on in the or and if, we're encouraged by what we are seeing in the Flow Control business where now with 60 of the trials that we've taken in the first quarter, we've had a success rate of almost 90%. And now the focus is on ensuring that, that converts into revenue as we go forward. On the cost initiatives, again, good progress. Hochfilzen has been completed. And at the end of last year, we closed the Sinterco joint venture in Belgium, which allows us to reduce costs. Urmitz is ramping up. And Radenthein is progressing well on target to be completed in the second half of this year. [indiscernible] we got a 40-60 split, so 40% of that EUR 36 million will come through the first half of the year, and then as we ramp-up, the second 60% will come through the second half.

Fantastic. And then just maybe one final question following on from Tom's comments a moment ago around how you see customer inventory levels at the moment and maybe sort of stockholder levels. Comments from Tyson and [indiscernible] in the last couple of days look pretty robust given the backdrop. So just how do you see your customer inventories, not so much of your product, but just broader finished steel in the system, particularly across Europe?

Honestly, I think we -- I don't have this off the top of my head, at least not in a competent way, so I can't give you a kind of a guesstimate. I don't want to do this. So let us get back to you on this.

Our next question is a follow-up from Dominic from Numis.

Just to wanted to look a little bit more about the debt position, working capital specifically. There was a chunk of working capital finance at the end of last year, if you could just give us an update on the position there. And secondly, it would be useful just to understand the average debt levels to help us sort of calibrate our interest models. And I guess in the general environment of rising interest rates, what your exposure to that is as well, please?

Certainly. Thanks, Dom, for the question. So we finished 2021 with EUR 320 million of trade finance. That's our factoring and forfeiting. We would expect to maintain that level at the half year and at the year-end. We will also not go above that level during 2022 despite the growth in revenue. On our leverage, so we finished last year at EUR 1 billion of net debt or 2.6x leverage. At the half year, we would expect it to be somewhat above that in the absolute net debt given a higher level of working capital, and then to delever below the EUR 1 billion in the second half of the year and to move our average leverage to -- or finishing leverage to around 2x. The average cost of our borrowing, so we have just completed a, or could be, refinancing in Austria. This remains very competitively priced. So OeKB to give you an example, came in at 166 basis points plus EURIBOR. EURIBOR at the moment is negative 45, so it's 121 basis points. And our average interest cost is likely to be about 160 basis points this year.

And just specifically in terms of the average net debt, I was thinking more from month-to-month rather than the period end where there might be a little bit of timing difference. Is there a material movement in net debt through the period?

No. What you will see is a reasonably straight line growth in the first half of the year and then a reasonably straight line reduction during the second half of the year. It is not particularly lumpy.

[Operator Instructions] At this time, there are no further questions on the call. So I will hand back to the team to conclude.

Wonderful. Thank you very much to the operator for great management of the call, and thank you very much for all of you to listen and your interest and your support in RHI Magnesita. And we're looking forward to talking to you during the next weeks and all together again for the half year update. Goodbye from Vienna.