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

Hello, and welcome to today's RHI Magnesita Q1 2023 Trading Update. My name is Bailey and I'll be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Stefan Borgas, CEO. Please go ahead.

Thank you very much. Good morning, everyone. Thanks for joining us. I'm joined on this call by our CFO, Ian Botha; and our IR team, Chris and Annabel. We're happy to report what happened in the first quarter of this year and then answer all of your questions, of course. Before we go into the details, let me try to give you the summary, 4 takeaways. First, we have been able to extend the strong pricing and margins that we had established in the fourth quarter of last year into the first quarter of this year. Therefore, we are on track to achieve at least our guidance for 2023. This is the positive news. Second message, volumes have been lower, markedly lower. We expected this because of the slowdown in many, many of our customer industries in most geographies. We're starting to see some recovery in our order books, but it's really happening very, very slowly, slower also than we had originally expected. Third message, the outlook, therefore, for the rest of the year remains uncertain. We're in a cyclical bottom of the -- especially in the construction industry. The recovery will be bumpy. It will not be the same everywhere. It will be not quite as forecasted. There's upside but also quite many downsides. We are also seeing pricing pressure on the horizon as costs are coming down in certain categories, and we have some competitors who still operate on a cost-plus model. Fourth message, we continue to make good progress on our acquisition strategy. We have completed acquisitions and announced some others. I'll get into this -- into the detail just in a moment. Let's start now looking a little bit deeper into these topics. The volumes are 8% lower, mainly due to soft demand in steel and in cement, driven by very low construction activity everywhere around the world, maybe with the exception of India. Even in China, the recovery in the construction industry is very muted and, therefore, it doesn't support us very well. This was foreseen, but the turnup doesn't happen very much yet at the moment. In our industrial projects business with a later business cycle, everything remains quite resilient. So that's the volume side. Let's talk about the pricing side. The pricing side still has been quite strong in the first quarter. This is the opposite effect from what we saw about a year ago when costs moved up everywhere, and we had to pass on higher cost to customers but with a certain time delay. And now this is going the other way, but this is a short-term benefit. It doesn't sustain, of course, in the long term, unless competitors change their behavior. We're in this part of the cycle where the volumes are weaker, there's a cost deflation happening everywhere, especially in shipping and in energy cost and some raw material categories as well, and that will induce pricing pressure in a few weeks or months from now. As a result, we had good margins in the first quarter, ahead of our guidance of 10%. We do expect this to come under pressure. So we have to watch for the remainder of the year where this is going. We have a business that is diversified all over the world, as you know. So we have to look in the individual pockets of what happens in end markets and with customer markets. We are benefiting from the cost-saving initiatives that we've started a couple of years ago. These are step by step coming into the P&L. So some of the margins we hopefully can defend over time, but we now start -- we will start to see this year also some significant and meaningful benefits from acquisitions, so far to the business this year. Let's talk about M&A. Acquisitions have been a central part of our strategy execution over the past 2 years. We are seeing good momentum, as you have noted from the deals that we have announced step-by-step over the course of this year. Just to summarize what we have done on the acquisition side in the first quarter. We closed the 2 acquisitions in India, Dalmia-OCL and Hi-Tech in January of this year. The integration is fully underway. The teams have been completely merged already, and now we're more focusing on the operational aspects here. This leaves us with a 30% market share, roughly 30% market share in the fastest-growing refractory market in the world, India. We are quite excited about the prospects here in this market. I think this will become a very good platform. We have now 9 manufacturing locations spread over India, so that we can serve the different customer segments relatively well with the regional setup. We also now have a very well-balanced product portfolio across the steel and the industrial markets. And of course, also the flow control markets mostly and still also in a few other segments. We have room in this production network now to increase production as the market continues to grow. So we can serve the growth of our customers. This will reduce imports into India from other markets, notably from China, but also from Europe, and it will create an opportunity in due time to exports, especially into the West Asia and Africa regions. Further on, on the acquisition side, we signed and closed the acquisition of Jinan New Emei in China with a very efficient and professional process with the local authorities, who approved this deal very quickly. This was a good experience. This is an addition in our Flow Control business with a super modern facility located in the Shandong province. And we also signed and closed another smaller acquisition in Germany, a company called Dalmia GSB. This is a specialty producer of lances for the steel industry. It's a functional product in which we were not active until now in Europe in -- the region, Europe. So this is an addition to the portfolio. We're very happy about this team that acquisition has also closed already. Total cash that we invested in acquisitions in the first quarter was EUR 155 million, including the India payments and also including the acquisition in MCI Carbon in Australia, which is a technology company that could help us solve a large portion of our CO2 emissions. In April, after the quarter, we reached an agreement with a company called Seven Refractories for a cash consideration of EUR 93 million. Seven is a nonbasic refractory business, operating mostly in Europe and somewhat also in U.S. and in India. We have been very small in this market segment. So also, this is a portfolio addition. This transaction requires European approvals. So we need time for this to close, and this will happen sometime later this year, probably more towards the end of the year rather than the beginning of the year. Our M&A pipeline, the rest of the M&A pipeline remains robust. We are continuing to advance discussions with other potential sellers to see whether we can continue to complement our portfolio. We continue to see opportunities to make these value added very accretive deals in really all geographies and to build our business this way. With this, let me hand over to Ian, who can give you a little bit more details on the numbers. Ian?

Thanks, Stefan. We've made good progress in funding alongside the headway that we're making in M&A. Our financial liquidity remains strong at around EUR 1.2 billion with a long-dated debt maturity profile at very competitive rates of interest. This was supported in the first quarter by EUR 320 million of new debt finance through a Schuldschein bond issuance together with a renewed and increased bilateral facility with UniCredit, and both of these are ESG linked. In the first week of April, we secured EUR 101 million of new equity funding through a placement of shares in our listed Indian subsidiary. There was strong interest from institutional investors in India and internationally, and this has confirmed the market value of RHI Magnesita India. The group generated strong operating cash flow in the first quarter, very much as it did through the second half of last year, and this helps to reduce our gearing from 2.4x at the beginning of the year to 2.2x, including the India equity raise and the EUR 155 million of M&A that we completed in the first quarter. If you also include a trailing 12-month EBITDA contribution from M&A completed in the first quarter, so Dalmia and Hi-Tech, our pro forma gearing was 2.1x. Moving to working capital. Absolute levels of working capital were broadly unchanged in the first quarter pre the M&A that we completed. We continue to maintain higher levels of working capital than we've done historically. We are doing this very deliberately as our customers value the security of supply, and this has delivered important market share gains and price support in 2022. With that, I'll hand you back to Stefan.

Perfect. Thanks, Ian. Let me finish with an outlook for the rest of the year. As I said earlier, the outlook for 2023 remains quite uncertain. The assumptions we take every month get reworked. On the positive signs, we see some volume recovery, although they're coming later and -- with lower book than we had maybe hoped for at the beginning of the year. But there are some volume recoveries. We see this especially in the steel order book, as I said, a little bit more -- a little bit later than originally estimated. This is offset, however, by pricing pressure. We have these discussions everywhere. We expect to experience this as costs are falling and too many competitors still operate on a strict cost-plus business model. Having made a good start to the year, and having -- and based on the assumptions that the volumes continue to recover and that the pricing pressure remains reasonable. So that maybe we can hold on to some of these cost reductions. We are confident to achieve our current guidance for 2023 and to be able to integrate the M&A so that in the next year, you will see really a good improvement of the company. We're happy to take your questions now.

[Operator Instructions] Our first question today comes from the line of Mark Davis Jones from Stifel.

Can we talk a little bit more about M&A? There's been a lot going on. Your position in India is now very strong. Are there geographic areas which are much in focus? Or are these more focused on sort of product add-ins like some of the deals you've just highlighted?

Well, both, really. I think in India, we're pretty much done now. We don't plan of any further acquisitions here. I think in China, there are still some round-up opportunities similar to the new EMA transaction. Turkey also, I think we're pretty much done. We now have to look at other geographies where we are weak. We are -- we have some weakness in North America in some market segments. And we have some weakness also in East Asia in certain of the fast-growing markets. So we look at this. And then, of course, this product portfolio round up also is another focus. Actually, also on the recycling side, we have some opportunities.

Okay. And the -- can you talk a little bit more about your thinking around the Indian subsidiary. The placing there is obviously an interesting and successful step forward. But how do you balance benefiting from the valuation arbitrage there with maintaining sort of control over that asset? How do you see that going forward?

We, for sure, don't plan to reduce our shareholding any further in India. Ian, do you want to talk a little bit about the valuation aspect?

Yes. Mark, RHI in India is a core long-term part of our portfolio, but we have no intention to reduce our shareholders further. Clearly, this was an attractive opportunity for us to essentially fund that portion of the Hi-Tech and Dalmia acquisition plus associated working capital investments in India using the higher value equity. But we do not intend to dilute further from the 56% that we have now.

The next question today comes from the line of Patrick Steiner from Kepler.

Congrats on the good Q1 results. Just 1 question. I mean, you've seen very strong Q1 margin wise and you didn't really change your full year guidance. As expectation in the next 3 quarters changed negatively somehow over the last couple of months? Or do we just have even more cash in the current guidance?

No. Actually, we have seen some disappointment on our expectations. We have clearly expected at the beginning of the year that the volume recovery would start in March, later in April, that didn't happen yet. So -- and it also didn't come with the same -- at the same level than we had thought. And we are very -- based on our past experience, we're also very careful on having big expectations on the pricing side because as volumes don't come smaller competitors get under pressure and we expect still a lack of discipline here. So we're careful on the pricing side. And on the volume side, we actually have seen some disappointments.

The next question today comes from the line of Jonathan Hurn from Barclays.

Just a couple of questions for me, please. Just coming back to the sort of volume improvement or the tick-up that you've seen in the order book. Can you just sort of talk us through a little bit more on that, please? Maybe just in terms of the regions where you've seen the improvement. And you just obviously just commented about April. Can you just sort of talk about how April has trended relative to March as well, please? That was the first one. Yes. So on the -- let me go through the different regions, volume-wise, and then maybe can make a bit of an April assessment. Europe, volume increased coming from a very, very low level. So there is some improvement here in the steel business. The cement was a bit weaker than usually is. The cement is now pretty much finished middle of May. And steel recovery, however, has been slower than we had sought. There wasn't a big inventory effect. Therefore, inventory built up in last year in -- at least not refractory inventory and not very much steel inventory either. So we didn't -- therefore, we expected this to come a little bit faster and a little bit bigger, but it didn't. North America maybe is the biggest disappointment, you've also seen the -- compared to what we were expecting. You've maybe also seen the GDP forecast there. This is lower than what everybody expected. And we see it also still not a significant take-up of steel demand and refractory demand because of low construction activity. South America is pretty much as bad as we thought. So no positive surprise here. India is as strong as we thought. So no negative surprise here either. And China maybe is a little bit weaker also than we had thought because the recovery there is not happening on the construction industry side, but more in segments that don't require very much steel or cement or glass. So this is a little bit the overall picture if that helps. Ian, you want to try to compare April to March?

So it's very much a continuation of the trends that we've been seeing. So we've seen a continuation in the reduction in key costs, a continuation in the resilience of our sales prices, but our volumes have been weaker in April. Slightly weaker than what we had in March. And we've just moved through what's probably been the weakest steel pool in Europe and North America for our customer group since pre-COVID.

Yes, 15 years, actually.

Okay. That's very clear. And just a second question is just coming back to pricing. I think when we heard from you last, you said in terms of the bridge year in '23 on '22. There's probably a 50 basis points headwind to that coming through from price. Is that still the expectation that it kind of comes through at that level?

Yes. I think that we've been clear that our results this year are really going to be impacted very heavily by 3 things. One is what happens with raw material prices, raw material prices have remained soft. And we expect that to continue during the course of the year, our back integration margin to remain weak. And secondly, around sales volumes, you've heard the guidance there. And from a pricing perspective, we are expecting softness as the year progresses. We continue with the earlier guidance.

Maybe I can just squeeze 1 last one. And just in terms of, obviously, the M&A, obviously, the pipelines have been very active. I mean just in terms of looking forward, how long do you think this sort of I suppose, heightened level of M&A will continue. Do you think you can probably complete it within the next sort of couple of years? Or do you think it's something that the RHI does maybe over sort of 3 to 5 years? Just any views there, please?

Yes. I think for the -- over the next couple of years, it's probably a good assumption.