RHI Magnesita NV
LSE:RHIM
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RHI Magnesita NV
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Ladies and gentlemen, welcome to the RHI Magnesita Q1 2020 Trading Update. My name is Maxine, and I'll be coordinating the call today. [Operator Instructions] I will now hand you over to your host, Stefan Borgas, to begin. Stefan Borgas, to begin. Stefan, please go ahead when you're ready.
Thank you very much. Good morning, ladies and gentlemen, from Vienna. Our offices have reopened in Austria on Monday, yesterday. So we're in the second day in the office, still not with full staff, but with alternating staffing in the office to be careful that we don't create a second wave here from the RHI Magnesita office. But we're also confident that we have this really well under control. We are very happy that, at least from a personal perspective, there's a little bit of an element of normalcy coming back into our lives. On the business side, I think this will take much longer for normalcy to come back. But let me give -- try to give you some light on this from our perspective with our Q1 update. First message we want to send to you is our trading in the first quarter of Q1 was still relatively normal with very little impact from COVID-19. The numbers look similar to the second quarter of 2019, very much as we had expected. The weakish market environment that we had, especially in South America and in Europe, continued into 2020. Our margins are a little bit ahead of the fourth quarter of last year, and this whole environment was due mostly to lower activity in the Steel Division or let's say, weak activity in the Steel Division out of Europe and South America, whereas North America was actually quite stable and quite solid in the first quarter. In the Industrial Division, our performance continued to be very good, especially in cement. The first quarter is always the high season in the cement industry because this is the repair time for all of the -- or for many of the cement kilns in the Northern Hemisphere. So it's traditionally like this. And there was no difference in 2020 compared to previous years. Now if we look into the second quarter of 2020 in which we are now operating, the challenges are significantly different and dramatically higher. There's a significant slowdown now in customer activity. Our order book has been falling week-by-week and is still -- and there's still no sign of recovery. As a result of this, raw material prices in China have fallen also further compared to the already relatively low level towards the end of 2019 and in the first quarter of 2020. So raw material prices go down more because there's more or less the same volume in the market, but the demand from all the refractory producers around the world has reduced, and that had an effect in this commodity parts -- in this commodity market had the effect on raw material prices. And the supply is still okay from China and not interrupted. The customer demand reduction is mostly being felt in our Steel business. Customers have reduced production in many parts of the world as a consequence of the lockdown. I would say that in our industry, we're a few weeks behind the actual lockdown activities until the demand comes to RHI Magnesita. And we're now starting to feel this in April, but it will be markedly seen in May and in June. And what comes after is still very difficult. In the Industrial Division, we have seen more resilient order book, but we have seen quite a lot of postponements of projects. This looks like it's mainly a function of scheduling because of logistics and availability of workers that do all of this maintenance and of -- that do all of these furnace refurbishments. But I would not exclude -- there could be some postponements of these kinds of new installations or new furnace installations happening also, but we have to see how this develops during the course of the quarter. The primary focus for RHI Magnesita has been on 2 elements: of course, health and safety of our employees. We have weathered very, very well with only single-digit number of infections among our 14,000 people around the world without having any spreads of this. So that worked actually very, very well despite the fact that all of our plants were operating. And the other part of our primary focus really is to support our customers and keep them operating no matter how difficult it was at -- or it still is in many points in time because the transportation chains are not working as usual. So that's the primary focus on our business, and nothing should happen in here on this side. Our plants all remained open during the crisis in Europe, in China, in North America. We had some issues in India because the shutdown in India happened very abruptly and very much without any preparation. However, the Indian plants have all come back into operation and are in the process of restoring relatively normal levels. The focus now for the next month is shifting, as we have customers' operations and our own health and safety well under control, is now shifting towards protecting our profitability because on the liquidity side, we feel quite confident. So cost management now is coming into the center of what, as a management team, we're looking at. And therefore, in the next weeks, we need to temporarily close some of our plants. We have decided on 3 plants, 2 in -- 3 plants in Europe and 1 plant in North America and Mexico to be shut down for some time. We don't yet know how long, but for some time. We also have introduced short-time working arrangements in many of our plants in order to buffer the effect for our employees, and of course, to adapt to the -- all of the local regulations that are available. We have deferred at least EUR 45 million of capital expenditures this year in order to not weigh on our liquidity too much. We have decided not yet to pay out the final -- or we have not yet decided on the final dividend for 2019. We will relook at this regularly, certainly during the second half of this year. And we have started to engage in a whole series of fixed cost reduction actions, such as reduction of management salaries in order to set a good example from the top, but also increased vacation by employees, hiring freezes, restrictions on many discretionary expenses and other things like that, that you would expect. Our longer-term production optimization program that will create good value for RHI Magnesita as a company with -- in the order of magnitude of EUR 40 million improvement in 2022, this program, we have not stopped. We have also not stopped the CapEx activities for this program because this is, anyway, bringing value in all of the scenarios that we have looked at. The operational turnarounds that we have done because some of our plants weren't operating so well will also add a further EUR 15 million of profitability in 2020, of course, as [ cash collected ] on a normalized demand. Our financial and liquidity position, which, of course, originally is the focus in any crisis -- the financial focus on any crisis remains very strong. Of course, our working capital remains a one big area of focus. This is an area where we feel we have good control, especially on the management of inventories but also on the collection of receivables. We haven't seen anything that should concern us yet. Working capital reduction always lags behind a little bit the reduction of demand because, of course, the inventory that we intended to sell were produced weeks before. So it always lags behind a little bit. But the direction is clear and is also -- we can see it in our numbers. The -- it -- the working capital increased modestly in the first quarter compared to the fourth quarter of last year, but that's more due to the very strong cement business. So that's a seasonal normality of our business. We see this every year. It may -- the intensity may increase further in the second quarter, the levels, hopefully not. Our liquidity position remains very strong. We have increased our liquidity through additional facilities and through all the working capital management activities that we did, the EUR 1.2 billion in the first quarter of 2020. Our debt maturity profile is of long-term nature, so we have no pressure here in the next forthcoming years. And we remain very significantly beneath any covenant levels. The outlook, I'm sure, is something that all of you are interested in. Actually, so are we. The real midterm outlook beyond June is very, very difficult to predict. The uncertainty is very high. Our customers don't know and we don't know. And if we look at more broader economic indicators also, they are -- the forecast here are very, very broad. So we really, despite the fact that we would like to share this with you, cannot make any midterm, let alone long-term predictions, on how the economic future will look like. We are taking the right actions in the business on making sure that our profitability is secured as much as possible in this crisis. We have strong liquidity we can withstand extended period of this kind of uncertainty. And in the longer term, let's say, 2 years or so, we are focused on delivering the values that we have outlined, and we have no reason to believe that this is not possible. We are also now, in the interim, trying to set ourselves up to take advantage of a recovering market whenever it will happen. With this, I'm at the end of the summary. Our first quarter was similar to the second half of 2019. We have a primary focus on health and safety and our customers' operations. That has worked really well. Our cost management activities are now increasing in activity and in scope. Our liquidity position is very strong and doesn't give us any concerns to worry about. But our outlook remains -- the outlook remains very nebulous, and we need to remain extremely flexible in order to adapt to whatever will hit us. And we're prepared to do this. With that, I'm at the end of this first quarter trading update introduction. And I'm very happy, together with Ian and Guy, to answer your questions.
[Operator Instructions] We have a question from Mark Davies Jones from Stifel.
A question about the Steel business and what you're hearing from your customers. Obviously, we're seeing some automotive plants beginning to restart in Europe. We're seeing construction beginning to restart in Europe. Those steel parts that are closed currently, do you have any indication of what the steel companies are thinking in terms of lag before they reopen their own facilities? Any guidance you're getting around that?
So steel -- in Europe, the steel plants that were mostly impacted are the steel plants in the Southern part of Europe, Italy, Spain, also France. I think it's still a little bit too early for them to make forecast. They're as uncertain as we are because it's not really clear how the economies will recover. So unfortunately, difficult to respond. In the rest of Europe. The industry was -- didn't go down that much. In North America, the reduction was equally fast, maybe a little bit even more accentuated, but we expect that the acceleration, the restart also will be a little bit faster. But we don't see this yet until the middle of June because that's when -- until when we have orders now.
Okay. And the [ waiver ] support schemes, the state support for your employees, could you give us a quick view of how long those last? I know that in the U.K., it lasts on the 1st of June at the moment. But is that a similar picture in the other markets that you play out in terms of state support for your workforce?
It depends on the country. I can't tell you country by country exactly how long this lasts. But I'm not aware that we have a problem here to continue to get this for our employees into June and even a little bit beyond. I think it lasts a little bit longer here on the continent, but we'll get the details to you.
And in terms of managing down the working capital, as you say, there's a lag there. So you're flagging Q2, we should probably see working capital up again as a portion of sales. Would you expect that to start coming down by Q3? Or is it going to be sort of towards the year-end before we see those things coming back into alignment?
Yes. Mark, so certainly we would expect the level of working capital to reduce in line with activity during the course of the second half. As Stefan highlighted, in the first quarter, what we have seen is, in absolute terms, our level of working capital pre financial -- pre this working capital finance, the factoring and forfeiting actually stay completely flat, but the level of forfeiting, and to a lesser extent, factoring has reduced, absorbing a little bit of cash in the first quarter. We would expect that to continue into the second quarter and to see working capital reduce in line with activity in the second half.
So the build-up that we have seen last year, this year, should be much less pronounced.
We have a question from Andrew Douglas from Jefferies.
Two of my questions have just been answered or asked. I guess the other one is you've flagged that there's going to be 4 plants which will be shut down, I think you said, for some time. Can you give us an indication as to how much capacity that involves and kind of potential impact on the top line just for kind of modeling purposes?
Yes. I mean these are 4 plants out of 35. Probably in terms of our end-use capacity, this is something like 10% or 15% of our end-use capacity. But that's not all because we have a lot of partial shutdowns in many of our other plants. So we expect sales reductions in second half -- in May and in June especially. We saw some already in April, about 20%, 25%. We don't have April numbers yet, but something like this. And in May, this will be more pronounced. And in June, this will be more pronounced. And our production cuts should be at the same order of magnitude because otherwise, we produce into inventory, right?
And Andrew, from a financial perspective, we run with just short of EUR 750 million of fixed cost. So if you look at our cost base, 70% is variable, 30% is fixed. The measures that Stefan touched on earlier, that will reduce our fixed cost in the second quarter by around EUR 25 million, including the plants in Europe and Mexico. And we would expect then, depending on the level of customer demand in the second half, to have further fixed cost measures. But the impact for the second quarter is EUR 25 million.
Okay. Perfect. And are you able to just go into a little bit more detail on the pricing environment? I mean we talked about raw material prices having an impact on prices. Can we just talk about kind of how much of your product portfolio that's impacting? And maybe just give us a bit of order of magnitude, please?
Yes. So first of all, this is a raw material price reduction in a particular category of raw materials, which are the high-quality dead-burned magnesia, not an overall reduction in all raw materials. So this only is relevant for a specific piece of the product portfolio. Second, there's hardly any trading volume because nobody is buying. That's why this happened. So we would not -- so all the competitors are sitting on raw materials that they bought early in the first quarter or most of them -- actually outside of Asia at least in last year. So this will not have an impact on pricing until the second half of this year. And how this will happen, then we have to see. This will only affect those product groups and only in Europe and maybe India and China a pass-through effect. But in India and China, of course, also, the time lag between when these raw materials are bought and when they're used is very short. In China, it's 2, 3 weeks. In India, it's maybe 4 to 6 weeks.
In terms of the backward integration benefit, the benefit in the first quarter was 2.5 percentage points of margin, and as we've previously guided, in 2019, the EBITA contribution that came through was EUR 145 million and 2.5 percentage points of margin. That's EUR 60 million for 2020 on the same level of activity. The 2.5 percentage points during the course of April has softened very modestly.
[Operator Instructions] We have a question from Harry Philips from Peel Hunt.
Just I'm intrigued by your comments, Stefan, around sort of opportunities. When -- is that in terms of buying assets? Is it in terms of taking, I guess, not now market share but coming out taking market share? Or was it a combination of both as competitors possibly fall away given the current market backdrop?
Yes. I think it's more in 2 -- it's mostly in 2 areas. First is possibly buying assets, making acquisitions because we are quite sure that some competitors have suffered -- are suffering more than us now because they have been more operating on the margins anyway. So I think this is clearly one opportunity. The second one is more on introducing new technologies much faster than before because customers are very conservative or have been very conservative in making any changes in the supply chain and in the processes. And now they, just like us, have -- just like all of the world has experienced how much digitalization can be used, remote inventory, control tools, for example, better process control. And we've -- we have -- we had been preparing quite a few of those tools, and they're being -- we hope that they're being considered now much more aggressively and introduced much faster than we could have hoped otherwise. I think those are the 2 major opportunities. I think in terms of market share, there's limited opportunities in our large markets anyway, in Europe and in North America and in South America and the Middle East. And maybe there's a bit of an opportunity in India and China because of our relative strength there compared to other competitors.
We currently have no questions registered at the moment. Stefan, if you'd like to continue.
So thank you very much, all of you, for dialing in this morning. We hope we could give you a bit of a glimpse of how the situation looks like. We will continue to give you updates as much as they matter, even within the quarter, if that happens. But latest, we will hear you in -- at the end of the second quarter with our half year results. Thank you very much. And we look forward to continuing to talk to all of you. Please feel free to reach out to us. Guy and his team are always available. Thank you, and goodbye from Vienna.
Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect your lines.