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

[Presentation]

Hello, and welcome to the RHI Magnesita Half Year Results 2024 Webcast with Stefan Borgas, CEO, and Ian Botha, CFO. The webcast will consist of a presentation followed by Q&A. [Operator Instructions] I would now like to hand over to Stefan to start the presentation. Stefan, please go ahead.

Here is my moment of safety. A handyman was preparing to cut a metal bar at my friend's house when I recently went to visit him on the weekend. The handyman didn't have the plastic cover on his cutting machine. Walking by, I asked him why? And he answered, it's too cumbersome to assemble and I never used this cover shield. When I came back out of my friend's house, the handyman was sitting on the floor holding his bleeding eye, the metal splinter had flown into his eye. The plastic cover would have prevented this. Why did I not insist when I walked by his workplace on the way in? Luckily, he recovered after a few hours without any long-term harm. This moment reminded me, safety in our life is precious. And we all have a responsibility every day to ensure our health and our livelihood and the health and the livelihood of the people around us. Hello, and welcome to the RHI Magnesita First Half Results of 2024, which we are hosting today from Vienna and Austria. The 3 key messages for these results are the following: as we guided in February, this is a tough environment for global demand. And it has been, again, even more subdued than we had hoped for in the first half. RHIM's steel sales volumes are down 1% and industrial sales volumes have been 10% lower than the previous period, both before M&A. There is still no short-term catalysts that we can see to expect materially stronger market-driven demand in the second half. But for RHI Magnesita, we do expect an increase in volumes in the second half anyway due to seasonality out of our industrial portfolio, the timing of industrial project deliveries and some specific effects in our India steel sales. With this, we are still very much on track for our full year guidance. Second message. Despite the ongoing and challenging environment, we have delivered a resilient set of results. The cash flow performance is significantly over 100%. It is particularly strong, and we have released EUR 86 million of working capital over the first 6 months. Third message. Finally, we are continuing to transform our business through strategic acquisitions, sustainability leadership and by developing new products, solutions and technologies for our customers, which we are consistently bringing to the market. We can do this, even though market conditions have been difficult, thanks to the reliability of our cash flows and the innovation and expertise and the great energy of our people. Let's look at some of the numbers. Overall, we have kept revenues stable compared to the first half of 2023. But behind this, there are 3 moving parts. Volumes and pricing also, to a certain extent, have both reduced and this has been offset by the contribution from acquisitions. Steel sales volumes were 1% lower in the first half like-for-like, which was a little worse even than we had forecasted. Much of it of this reduction happened in the second quarter. Industrial volumes were weaker and reduced by 10%. Much of this is due to a lower volume cement season in Q1, which is expected to be better in the next winter season starting in the fourth quarter of this year. Because of the delay -- and another big piece of these lower industrial sales is the delay in deliveries of quite a few key, relatively large, industrial investment projects from the first half to the second half, decided by customers, of course. You can see that pricing has trended lower for both divisions compared to the levels in the first half of 2023. This is in line with our guidance. We said at the beginning of the year that price could be up to 5% lower and it has been 4% lower on average across the businesses. We maintain our guidance for EBITA of at least EUR 410 million in 2024 based on expected higher delivery volumes in the second half of this year as well as some cost efficiency measures and better fixed cost absorption in the second half. Let me talk about health and safety. I've started the call with this. Before we go into the details of the results of all the financials, we have to address workplace health and safety. This is a core value for us at RHI Magnesita. I'm very saddened to report that there was a tragic fatality of the employee of a visiting supplier in one of our plants in our China sites during the first half of this year. At RHI Magnesita, we are already in the middle of a major review of health and safety across the whole company, supported by DSS+ which is one of the global leaders in safety consulting that really helps us all around the world. We are committed to making the changes necessary that help us to deliver to a safety performance that we used to have and which every stakeholder expects us to have. We are in the middle of a total change of our safety culture. Every meeting in our company starts with safety. And therefore, I started with my safety moment this morning with you. It also has been a personal focus of mine. And I can say that the DSS+ team has been excellent at guiding us through this culture change so far. We have learned a lot already, but we also have learned that we have much further to go. Let's go to the numbers of the first half. As I mentioned in the summary, we can present a resilient set of financial results in the context of the ongoing very weak demand environment that we are currently navigating through, still navigating through. EBITA has declined slightly due to the lower volumes. This is in line with the guidance that we gave at the beginning of the year. Cash conversion, however, is a highlight at 123% of EBITA and EUR 233 million. This is the highest operating cash flow that we have generated in any 6 months period since we listed RHI Magnesita on the London Stock Exchange in 2017. M&A contributions of EUR 34 million against full year guidance of EUR 80 million are in line because the second half weighting of synergy benefits is expected to be progressing, of course, and as each integration gets more traction. This is despite a weaker base business and a weaker demand, of course, also in the acquired businesses. We have maintained gearing in the guided range and we have reduced working capital intensity and grown earnings per share. Let's go into the businesses. We delivered strong margin performance in steel as we generally prioritize pricing over volumes in this period even at the detriment of short-term market share losses here and there. The key end markets for steel are construction and transportation, and these are both experiencing ongoing subdued demand, sluggish. As a result, our sales in steel reduced by 1%. While we had experienced -- while we had expected for volumes to increase slightly, so here, we are running behind our expectations. One of the main global factors at the moment is that Chinese steel industry is exporting a lot of surplus steel production, and this means that domestic producers, outside of China, where we, as RHI Magnesita have a higher market share and produce -- we are producing less in all these geographies because of these Chinese imports. This is particularly the case in India and in Southeast Asia, but also in South America. And anywhere else that does not or did not have significant tariff protection in place. Slowly, this will change. We are announcing a little earlier this year, so the June figures for World Steel Association have just come out last night, so we couldn't consolidate the numbers. We will update this slide on our website as soon as it is the one that you are used to getting from us. For now, you can see the impact of acquisitions in Europe and in China with strong volumes coming through on top of the base business. We have been able to achieve strong pricing in South America. The volume performance in India, however, was weaker in the first half. This is due to some -- this is down due to some specific factors, many of which should ease in the second half and will not be there anymore. First, there's a competition from Chinese imports that I just talked about. But in June, we also saw lower steel production and therefore, lower refractory orders around the election time frame. There was a pausing there in steel production. In one specific case in India, we made the decision to delay shipments during payment discussions with a relatively large key accounts. It was the right thing to do to forge closer links to these customers, even giving up some volume in the short term. This has affected India volumes in this short period. And certainly, there was actual production downturn in the steel industry in India in the second quarter compared to the second quarter of 2023. So quarter-on-quarter comparison here, before the elections. This is expected to increase and recover again in the second half of this year. The outlook for India in the second half is strong, also in our order books, and this is one of the reasons we can be confident in our full year volume expectation and guidance. Since World Steel data is not available, I wanted to share some more detail on how we see the steel market developing in each of the 6 regions shown here on this slide. The overall story is that excluding the 2020 low, during the pandemic, North America, South America and Europe are all tracking at multiyear lows for steel output. This is expected to stay that way, at least, for the remainder of this year. We're at the low end of this demand volatility if we take a longer-term view. India, of course, continues to be the bright spot with strong growth forecasted in the second half on the first half and many years into the future also. But also look closely at China. In contrast to the other regions shown, we have been tracking close to multiyear highs for steel production in the first half. Even though global and domestic China demand for steel is weak, this is what is behind the increase in exports from China -- steel exports from China to other regions. We expect this trend to ease a little in the remainder of this year as it has last year as excess production is pulled back step by step in a measured way in China. In the Industrial business, as usual, there are lots of moving parts. Industrial revenue of EUR 543 million is 2% higher than in the first half of 2023. But it's a 6% decline from the second half of 2023. These numbers include the strong contributions from acquisitions in Europe and India, which is mainly coming from the former PD business, and Dalmia and 7 refractory transactions. Excluding acquisitions, volumes were 10% lower. This really shows the market behavior. And it is clearly below what we had expected for the first half, almost entirely linked to some key industrial investment projects from customers moved from the first half into the second half, the deliveries for those investment projects. Pricing overall in the industrial sector is also lower in 2024 versus the first half of 2023. We guided this to you, but it has held up pretty well compared to the second half of 2023. So the pricing release happened between the first and the second half last year. Given that the cement season in '23, '24 winter was quite a bit weaker than usual, we expect a return to better demand in the fourth quarter, starting the fourth quarter of 2024 with the next winter cement season, that will also contribute to the weighing of H2 versus H1 in our earnings. Let's talk about strategy a couple of minutes. We are continuing to execute our strategy to consolidate the global refractory industry, adding businesses to our portfolio where we have product or geographic gaps or where we see an opportunity to bring efficiency benefits or even to serve -- or just to serve our customers better. The most material transactions we have in process at the moment, is Resco, which we intend to acquire for an enterprise value of up to USD 430 million and this is currently being reviewed by the merger control authorities in the United States. We also made a further acquisition in the recycling business during the first half of this year, with the purchase of Refrattari Trezzi in Italy. Recycling has been a successful initiative for us and we continue to see opportunities to reduce our CO2 emissions by growing this part of our raw material business. In the medium term, we do have aspirations to continue our acquisition program with focus on East Asia, the Middle East and with a focus on alumina-based refractories and also recycling and maybe some other specialties also. One of the major goals for our acquisition program is to establish local-for-local production footprint to cut down on freight dependency and other frictional costs such as custom duties, which will be growing over the next years. Also, the reduction of working capital in the chain and the increase of speed to react to our customers' ever faster changing requirements and the adaptation to the changing global trade environments are important objective with this local-for-local strategy. Currently, smaller markets in Africa, the Middle East and Australasia are served from our 5 main regional hubs. But with those regions growing, the goal is to source as much of the finished goods, locally, as possible in the longer term. I've highlighted North America here because reducing imports is a key theme for the Resco acquisitions, bringing production onshore into the United States, so that we no longer need to ship it from overseas and be dependent on other geographies for this big market. This will bring significant logistical benefits. It clearly meets the loud and vocal demands of our North American customers who have been asking us to locate production into the U.S. for quite some time. The Resco transaction has entered Phase 2 of the review -- of the antitrust review and is now expected to complete in late second quarter of this year or maybe even in early 2025 in the hands of the regulators. We are maintaining our momentum in sustainability. It is an integral result of our strategy to be the sustainability leader in the refractory industry. There are already financial benefits to be gained from what we are doing today. And we believe that in the longer term, customers will prefer and will even pay a premium for sustainable products, refractory products. But also for sustainable production processes as they go, as our customers go into their own transition to reduce carbon emissions because the weight of carbon emissions of refractories will consistently increase. Our recycling rates in the first half of this year increased again to 13.2%. When you look at the consistent increase, it might appear that this is an easy mechanic transition, but I can confirm to you it's getting more and more challenging over time. Also, because of the dilution from acquisitions, the businesses that we acquire initially are using small amounts of recycled raw materials or even none at all. So every time, we add a business to the network, the recycling rate goes down just because of mathematics. And we have to work hard again to get it back up. Hitting the renewed higher target of 15% for 2025 has become a little bit more challenging in this context of acquisitions. But we are very much aiming to deliver it and confident to do so. Given that the size of RHI Magnesita is now larger, bear in mind that the absolute tonnage of recycled raw materials used is increasing even more significantly than the recycling rate. The chart on the bottom here of the slide on the left, I hope, illustrates how much of a change this is delivering. We are a relatively large emitter for the size of business that we are, our network today was emitting 6.2 million tons of CO2 in 2018. And the figure is now 4.6 million tons per year. It's a reduction of 1.6 million tons of CO2 emissions every year. It's actual annual release to our planet that is not happening anymore. In the context of European industrial and capital goods peers, this is, by far, the biggest absolute reduction in emissions, at least according to Bloomberg data. We maintained strong ratings from the key ESG agencies and I'm pleased to report that since we have increased our EcoVadis score to 76 from 72 this year, we will now qualify for a reduction in interest payable on our sustainability-linked debt, which amounts to EUR 0.5 million per year going forward, also a nice effect. Recycling can only take us so far. And we are working on many different technologies and the approach is to deliver the next step change in our CO2 emission reduction. We have 9 pilot projects in various stages of development, in various parts of the world, and one of the most promising is the MCI carbon technology. This solution is the most interesting to us because it is not just an additional cost burden to remove the CO2 wherever we have to pay for emissions. But this process creates salable green products by remineralizing the CO2 into new industrial minerals, which have their own application end market. Although a very significant CapEx project, such a remineralization plant should have a business case of its own and will not simply be an additional cost without any return other than avoiding CO2 allowance costs imposed in Europe. We are in the process of assessing this really in detail. At RHI Magnesita, we have been carrying out a drilling campaign in Austria to check for availability of suitable raw materials for this plant -- for this mineralization plant so that we can run this process. Materials from these different sources have been shipped to Australia where they are now going to be tested in the brand new MCI pilot plant that is under construction in Newcastle. This trial production will take place in 2025. Meanwhile, we're also testing the market for potential customers of the end products of such a production facility and response that we have received has been quite positive so far. We invested a further EUR 2.5 million in MCI in the first half of 2024, and we retain exclusive rights for the use of this technology in the refractory industry. Sustainability is not just about reducing the impact of our own operations and the ones of our suppliers. But there's also a major opportunity for us to support and participate in the development of new technologies by our customers who are seeking to reduce their CO2 emissions. The contract with SMS Group, who are the OEM designer for Thyssenkrupp's Duisburg green steel project is a result of the in-depth technical development at RHI Magnesita. This route to making steel in the future involves the use of an additional type of furnace. This represents new refractory demand in addition to the iron-making and BOF processes that we will continue to serve, of course. When competing for these contracts, customers recognize that they need a refractory supplier who has the R&D capability, the technical knowledge to help them to design, build and reliably supply a completely new technology. There are very few companies out there who are capable of building this, of doing this. And that's why, this is such a good opportunity for RHI Magnesita. Thank you for your attention thus far. I will now pass you over to Ian who will lead you through all the details of the numbers.

Excellent. Thanks very much, Stefan. Good morning, ladies and gentlemen. Turning first to the profit and loss summary, we have delivered a resilient performance in a challenging market environment. Revenue and gross profit are broadly flat as the negative impacts of lower sales volumes and pricing has been offset by the contribution from M&A. We guided for approximately 11% EBITA margin in 2024, and that is what we have delivered in the first half. This is a reduction compared to the margin first half last year of 11.6% and that is very much down to the lower backward integration margin. Adjusted EBITA reduced 5% year-on-year to EUR 190 million. And then if you look below the EBITA line, we've got favorable movements in foreign exchange-related finance charges and higher interest income. And that means that our adjusted finance charges this year are EUR 17 million compared to EUR 41 million in the first half of last year. This drives a 2% increase in our EPS despite the reduction in EBITA and we're reporting EPS of EUR 2.59 per share. We've declared an interim dividend of EUR 0.60 per share. This is in line with the established dividend policy to pay an interim dividend equivalent to 1/3 of the previous year's full dividend, which was EUR 1.80 per share. Our first half revenue of EUR 1.728 billion, broadly flat on the EUR 1.734 billion reported in the first half of last year but improved by 1% on a constant currency basis as we experienced an FX headwind of EUR 18 million on revenues. There are 3 simple moving parts, which drove the revenue out of tone. The first, softer sales volumes in the base business down 3%. Secondly, softer pricing in our base business, which is down 4%, both steel and industrial down 4% or 5%. And this was then offset by the contribution from the M&A we completed last year. This is in line with the broad guidance for the year that we've given in February, although the volume decline in the first half has been a little more pronounced than we expected, particularly in the second quarter. Turning to the EBITA bridge. At EBITA level, we have a small currency tailwind and this, due to the cost benefit of a weakness in certain of the emerging market currencies, which reduces our euro costs in those geographies. Our sales volumes down 3%, reducing our EBITA by EUR 13 million, lower finished goods pricing and the mix impacts impacted our EBITA by EUR 148 million and a meaningful portion of that was offset by EUR 118 million reduction in our input costs for, in particular, raw materials for energy and for freight. Although sales volumes declined, our production volumes and our plant utilization increased very slightly, and that led to a modest further fixed cost absorption benefit of EUR 5 million. We guided that production would increase in 2024 to match our sales volumes this, after we followed a period of destocking in 2023. The 2023 M&A contributed EUR 19 million higher EBITA in the first half of this year relative to the first half last year. We've seen a continuation of the trend of the last 2 years of declining contribution from raw materials and increasing refractory margins. We achieved a record refractory margin of 10.2% in the first half. And this is a result of the M&A synergies and the production optimization that we've been carrying out since 2019. The raw material contribution is still positive, generating EUR 14 million of EBITA or 0.8 percentage points of margin contribution, but it is down materially on the EUR 30 million contribution that we saw in each of the first and the second half of 2023, which themselves were already at cyclical lows. That said, even at current low raw material prices, we can produce our own raw materials for a lower cost than the cost of purchasing that material from third parties and out in the market. We continue to believe that the raw material margin can return back to a range of 2.5 to 3.5 percentage points in a higher raw material price environment when demand for refractories recovers from the current low levels. Moving to costs. Excluding M&A, so on the like-for-like comparison, there was a 9% reduction in our absolute cost of goods sold compared to the 3% reduction in our sales volumes in our base business. The biggest input cost reductions, as I mentioned, were in raw materials, down EUR 80 million in freight, down EUR 30 million; and in energy, down EUR 29 million, reflecting both the small reduction in our volumes and more importantly, lower global prices for each of these key inputs. These reductions in input costs are the cause of refractory price reductions across the industry as many of our competitors price on a cost-plus basis. What we are seeing is that freight costs have started to increase during the second quarter due to the conflict in the Red Sea, the low water levels in the Panama Canal and equipment failures in the major ports in Singapore and Malaysia. And this means that we will have to increase our pricing in the second half to cover this. The second important area to watch is alumina prices, which have increased significantly through the first half. Alumina-based raw materials are the largest group of raw materials that we buy of the magnesite and dolomite. And this is a raw material that we are not vertically integrated into. This will lead to cost increases for alumina-based refractories in the second half and price increases will need to be put through to offset this cost escalation. Our 2023 M&A contributed EUR 34 million to EBITDA in the first half and the EBITA equivalent of that was EUR 27 million. The EUR 34 million compares to our guidance for the full year of EUR 80 million, and we are on track to achieve this considering the second half weighting for our synergy benefits. M&A delivered cash flow before working capital release of EUR 18 million and released an additional EUR 13 million of working capital in the first 6 months of this year. Our cash outflows on M&A-related items were EUR 47 million. That's mainly the EUR 33 million on the prepayments on the Resco acquisition as well as the deferred payment on the acquisition of new EMA in China, buying out a minority in one of the 7 refractory subsidiaries and then the newly announced acquisition of Trezzi recycling in Italy. Turning to working capital. We successfully reduced working capital in our base business to EUR 748 million, and EUR 86 million reduction since the half year last year and EUR 73 million reduction since the beginning of this year. This really as our costs have come down and our activity levels have reduced. Accounts receivable has reduced very much in line for lower activity accounts payable. Here, we have seen an increase in the payment terms that have been successfully agreed with our suppliers. Our inventory coverage remains within the target range based on our forecast demand. During the first half of the year, the inventory value remained stable as volume increases in the base business were offset by lower costs and a reduction in inventory in newly acquired businesses. At the half year, our working capital intensity in the base business is 24.3% and for the entire business, including the M&A at 25.3%. We continue to see the opportunity to reduce the working capital in the businesses that we've acquired. And accordingly, we continue to guide for working capital intensity for the full year at 24%. If you look in the chart in the bottom left-hand corner, the majority of the increase in inventory, that we are pointing to, relates to raw materials, which are to support our second half deliveries. Moving to capital expenditure. Our guidance for capital expenditure remains at EUR 170 million for 2024 with EUR 68 million spent in the first half. There is an accounting issue to note on the treatment of spending that we have guided as CapEx on our digital upgrade. This is the replacement of our ERP, our move to SAP 4HANA. IFRS requires spending on cloud-based software-as-a-service in certain circumstances to be classified as an expense and charged through the P&L in the year in which the cost is incurred, even as we see the benefits of this investment over many, many years in the future. This is the same accounting approach that has been adopted by other IFRS reporting companies going through similar investment programs. When we report for the full year, that means that EUR 35 million of this CapEx will be classified as OIE rather than capitalized. It's not going to impact our adjusted EBITA, adjusted EBITDA or adjusted EPS, which already excludes such items. You will have seen that we're reporting EUR 15 million of these expenses in the first half, and that's been classified as OIE. One of our key strengths of RHI Magnesita is our strong cash generation. And this has continued very nicely in the first half of the year with, as Stefan highlighted, record adjusted operating cash flow of EUR 233 million. Cash flow was supported by an EUR 86 million release of working capital. Net debt reduced by EUR 30 million compared to the year-end down to EUR 1.274 billion. Finally, whilst the strong cash performance led to an absolute reduction in our level of debt, our gearing has increased slightly versus the year-end to 2.4%, that due to the lower 12-month trailing pro forma EBITDA. We continue to operate with significant liquidity of EUR 1.4 billion in cash and undrawn committed facilities and maintain a long-dated maturity profile. We've reduced our borrowing costs when compared to the year-end, when we reached an average of 334 basis points, it's now at 307 basis points, consequent on the repayment of a higher cost facility and as the base rates have reduced slightly. And we're still running with around 71% of our interest being fixed. So in summary, we have delivered a resilient financial performance in the first half with continued strong cash generation, record refractory margins and encouraging support from our M&A in what has remained a difficult market environment. With that, I'll hand you back to Stefan to touch on the closing remarks.

Thank you, Ian. So what's ahead? Let's look at the outlook. We do have a second half waiting to achieve our EBITA guidance. This is mainly a volume topic, but we are confident in this. We are not basing this volume increase on any material recovery in customer demand in the second half. This, we assume, will continue to be as weak as it is now or as it has been in the last 2 years. We don't see any signs to expect anything different in our order book yet. The recovery comes from industrial projects to be delivered, which customers have moved from the first half into the second half. It comes from the normal seasonal effects of the cement season in Q4 and in a certain recovery due to special effects in our steel business in India. We do forecast overall a reducing impact of Chinese steel export into the developed markets, which help us to gain a little bit of volumes but everywhere. With higher production in the second half, with efficiency measures to continue to take effect and with more synergies from acquisitions, there's also an opportunity to increase EBITA margins a little, despite ongoing very, very low backward integration margin. Ian has explained the change in CapEx guidance due to the expensing of the digital investments already. So to summarize, the first half of 2024 is another reminder of how resilient our business can be in an incredibly weak environment -- industrial environment. In the meantime, we continue to putting in place the building blocks for longer-term growth on revenue and on margins. Our margins have been maintained in line with guidance. And as we have demonstrated, we have an over 20-year track record in keeping these margins really resilient. When pricing and costs come down, there's a natural release of working capital, which we are managing carefully in line with the target coverage ratios. That is why you see strong cash conversion of 123% of EBITA, the highest since the merger and the listing in 2017. Meanwhile, the M&A investments that we have made over the last 2 to 3 years and the ongoing integration projects for each of those are starting to make a meaningful contribution. Acquisitions are subject to the same demand conditions as the base business, of course. So the full effect is not yet even evident, but we are progressively integrating each of these companies and the benefits will come over the course of the next 2 years. Ian and I are now very happy to take your questions. Vanessa, please lead us through the Q&A session.

[Operator Instructions] So I will now like to turn to Mark Davis Jones from Stifel.

Two, if I may. Firstly, on those comments around China and potentially the export flood from China reducing a bit in the second half. What gives you that confidence? Is that already something you're seeing? Do you think that's government intervention? And does it also work for the raw material end of the business? Because clearly, there's been a mismatch of supply demand there, presumably also out of China. That was issue number one. And then the second was on the Resco deal. Is that slightly longer review timetable just a question of timing? Or do you think there's any significant risk or concern around that? And is there anything from Resco in the guidance for this year?

Okay. So on the China exports, what is happening all over the world is that many geographies are putting in place or have very recently put in place import tariffs. And then, of course -- and that will slowly, slowly make the domestic steel production more competitive against the imports from China. And this is proliferating a little bit everywhere around the world. And we can see this taking effect step by step. So there is actually real evidence here for this trend. There's also, if you go back into the chart that shows this a seasonal behavior of the Chinese steel industry, the exports usually always go down in the second half of the year slightly. So if you could accumulate this, this supports this trend. But of course, there's a certain assumption that this will happen again here. On the raw materials, the situation is very different. There is an increased focus on quality improvements and also environmental protection improvements in China. You can see it in the alumina space, is one of the main drivers of the price increase of the alumina-based raw materials where China is also very, very strong. On the magnesite base side, there is still a lot of material available and not yet a massive increase. Although in the last weeks, we have seen a slight increase in some of the magnesite-based raw materials. So there could be an effect here, but we haven't factored this in for 2024 because of the delays that we will have through by bringing these raw materials through the supply chain. On the Resco approval, we are fully within our base case assumption. We expected this Class 2 -- or the second request investigation. There was a remote case where this wouldn't have to happen, but this is our base case. So we're -- with the closing of the deal at the end of this year or the beginning of next year, we are full in the base case. There's no downside here. There's no deal risk. Also, it depends on 2 products that are under investigation, no more than this. So we are very, very confident that this deal will happen is just a matter of time.

And Mark, it's not in any of our guidance for 2024.

Exactly. Nothing in the guidance. There hasn't been anything in the guidance, and I think we were right of this. That shows you this was the base case assumption.

The next question comes from Jonathan Hurn at Barclays.

Just a couple of questions for me. Firstly, just coming back to that refractory margin of 10.2%. Obviously, it is a peak I mean, can you just give us a little bit more color about how we think about that going forward just in terms of can it progress? Obviously, I think earlier you said it can. And just in terms of the rate of progression of that margin maybe over the next couple of years. That was the first one. And then the second one was just on the sort of the broader refractory marketplace. So wonder if you could just sort of give us a little bit more color on what's happening there, just in terms of sort of competitive behavior. Obviously, you referenced focusing on price over volume. Just really, what are your competitors doing out there right now?

Okay. Let me give this -- give you the broad direction and then Ian can give you a bit more light on the margins. But in generally, the refractory margin, of course, is a result of the efficiency with which we manage the entire chain from buying and optimizing raw materials in the recipes from operating our plants and from managing the supply chain all the way to our customers. The more we get predictability and stability into the supply chain, the better we can plan and, therefore, the less variability we have in each variability cost money. The better we can run our plants, the less waste we have, the less scrap we have, the less rework we have, and that helps on the margins. And the better we can optimize our recipes, the better we can use those raw materials that at a given moment in time are financially advantageous. And if you add this all together, there's a continuous potential still for improvement. The same is true on the SG&A side, mostly driven by the acquisitions because the SG&A block that the base business has is big enough to cover many of the acquisitions. And if we bring together 2 teams, we can optimize the size of these teams and the impact we have. It has nothing to do with people selection, but with the total cost of SG&A. So we can -- we have more potential in the midterm to optimize this refractory margin. Ian can maybe add to this. The question with the competitors is more -- requires a little bit more of a differentiation region by region. In China, competition is -- I'll go from East to West. In China, competition in the refractory industries, a little bit similar than in the steel industry. It's still very, very fragmented, of course, relatively undisciplined in the Chinese markets. There's still a big infatuation with volumes, although the local production goes down because the demand, especially in the steel industry, but also in the cement industry goes down. So competitors are still very much infatuated with volume, although it makes little sense. And there's a big push to export. That presses on margins in especially Southeast Asia, in geographies that are a little bit closer. Countries like Russia have been more or less taken over by Chinese supplies, the import has been taken over by Chinese suppliers. So that has taken up some of the volumes, but this is a trend that happens in the competitors there. In India, it's the run for the growth. Everybody wants to be part of this story. So there is a continuous risk of oversupply as from my observation, a little bit too many people are building plants. So there's a short-term oversupply, until then demand will catch up with this over the next 2, 3, 4 years. And, therefore, in some cases, we take value decisions versus volume decisions. But of course, this is a very fine tuning. We will not give up -- structurally give up market share, but it's a case-by-case decision. In Europe, the competition has become more disciplined. Customers also have -- are sourcing more strategically than in the past, much less tactically. based on price, but supply arguments, raw material strategies play a much bigger role, also technologies, decarbonization play a much bigger role than in the past. So European competition is more focused on these topics than just on price. So it's more predictable. North America is disciplined as it always has been. So not much change here at all. Mexico, however, has been flooded by Chinese imports. It's one of those places where these refractory competitors are shipping material to, in large quantities and see then what they do. So it's a difficult place. Similar to some markets in South America, East especially the smaller countries. And in Brazil, also the situation is more disciplined and customers are incredibly value-oriented like they always have been. Long answer to a short question, but I don't know how to answer it otherwise. Ian, anything to add on the margins?

Yes. Jonathan, we continue to believe that 14% is a good EBITA margin for us in time. We have meaningful operational leverage coming through when demand normalizes, which means that our production normalizes because we still carry a significant fixed cost under absorption. Both of those benefit our refractory margin? And then also, as raw material prices normalize, which, together with higher volumes, then drives up our backward integration margin.

Our next question this morning comes from Harry Philips at Peel Hunt.