RHI Magnesita NV
LSE:RHIM
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RHI Magnesita NV
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Good morning, everybody, from Vienna. This is a day with a lot of sunlight in Vienna and a lot of hope as societies are opening up in many countries again and vaccines are making people free. I want to give you 3 main messages, which sum up the first quarter of RHI Magnesita's business in 2021. First on the business, the business unfolded very much as we have outlined and described in our year-end results call. We're on track towards pretty much all of the objectives that we have set ourselves and then we have discussed with you. The end markets are recovering step by step. The customer demand is not yet at the 2019 level, but it's moving towards this. So we have no big worries from the demand side at all. If we talk to our customers, this should not be a concern for the remainder of this year. It's strong, and there's not a massive amount of supply chain building yet, inventory building in the supply chain. This is really driven by end market demand. Our order book as a result is pretty solid. This is not a concern for us either. Our plants are all operating at a very high level of utilization. They're operating very well. We don't have any major problems, no significant hiccups. We are struggling with 2 issues, or we are focused on 2 issues. The first one is the passing on of quite higher raw material prices, especially on the magna side raw materials compared to the middle of 2020. And these costs are now in our system, and the prices will only make it through the P&L over the course of the second half of this year. Therefore, we have a skewed result. That's not a surprise. We already told you about this before. And the second topic we struggle with, and maybe this is the biggest activity inside the company, is on rebuilding the supply chain. We were extremely disciplined on inventories last year. Maybe a notch too disciplined, so that now rebuilding the supply chain, it takes a lot of effort and also quite a little bit of onetime cost. It's not massively concerning, but it's still there and it keeps people busy a lot. So this is the business environment. Everything is stable more or less around the world, going into a good direction of development. We did 2 other things in the first quarter. We negotiated with our long-time joint venture partner, Huber Corporation, this is a privately held, very reputable, very high-quality chemicals company in the U.S., for them to buy out a 50% stake in a joint venture that we've had with them for many, many years. This is an operation that's located in one of our mines. Some of the waste streams of the mine goes into this plant. We support on the operations, and they had handled the business for many years. It is a noncore activity. It's very stable. It has now come back after the corona years as well, like all other businesses. And we have agreed that they will buy out the 50% stake for EUR 100 million. This is a good valuation from our perspectives. And it, of course, takes a noncore business out. It frees up the management attention that we've had on this. And it gives us additional cash. So this transaction has been signed in the last days, actually yesterday. And the second thing that is important for the first quarter as we completed the first tranche of our share buyback program of EUR 50 million that we had announced in the fourth quarter of last year. This is now completed, and we have decided pretty much to continue this program by adding another slice of up to EUR 50 million. We have to see how things go. We think this was very successful, and it fits well in the overall capital allocation of the company.Turning to the 3 messages, we will continue the share buyback. We have divested another core asset, so that we can concentrate on building the refractory franchise. And our Q1 operations are going according to expectations with a few bumps here and there, but actually nothing to worry about with good confidence for the rest of the year. With this, I'm happy to -- and Ian, of course, we're happy to listen to your questions.
[Operator Instructions] Our first question is from Mark David Jones of Stifel.
A couple of questions, please. In terms of those supply chain issues, are there any particular areas that are severe bottlenecks? Where have you seen the most pressure? And has that actually delayed any sales activity? Or is it more a question of spiking costs in Q1?
Yes, so the issue has been the most pronounced where our supply chain is the longest. That means in the Americas, because there we have about a 3.5 months lead time in order to bring raw materials in. This was the biggest issue. So to replenish the raw material inventories after the demand had increased so fast so suddenly in December, this is really what we were struggling with. We incurred some onetime transportation costs on airfreight. And of course, it's very horrible to airfreight the types of materials that we deal with. This is nothing you ever want to do, but we had to in order to not shut down any one of our customers. The issues were a little bit less pronounced in Europe, but still felt there also because of the same problem. They were accentuated by the global -- actually significantly accentuated by the global shipping ocean freight problems. Ship reliability usually is around 80%. That means when you book a ship, in 80% of the cases it leaves on time and arrives on time. Now the shipping reliability is around 34%. And so you can see how massively problematic it is, especially if your supply chain is relatively empty, in order to bring this back. And of course, it is not just in our channel. Is it a problem. It's a global issue. So this is the root cause. Yes, it has led to some sales that we had to delay, mostly in system sales where we have to sell -- where we're selling 8, 10, 15, 20 different products that come from several different plants, and they all have to come together in order to make the shipment for the customers. Some of those, we have delayed. There's probably something like us between EUR 10 million and EUR 20 million that are delayed. We would not lose this. This will come, but this is a consequence. So it's not dramatic, as I mentioned before, but these are the issues. And we have these onetime costs. These onetime costs, you can split into some of them we will eat ourselves like an airfreight if we're out of raw materials. This is our lack of perfect planning or the cost of our liquidity optimization from last year, however you want to put this, but this is on us. And then there's, of course, other costs like the much higher freight cost. Not just the reliability is low, but freight cost is 6x or 7x higher than it used to be. Those we can pass on to customers, and we will get this back as part of this price increase as they move through the P&L, especially in the second half.
Mark, we anticipate the cost of the supply chain challenges as being high single-digit millions impact on our EBITA. And when we confirmed our full year guidance at EBITA of EUR 310 million, we've taken that into account. [Technical Difficulty]
We have lost connection with that line. The next question is from James Zaremba of Barclays.
I just had one question about your plans on recycling and the targets there. I know the level of recycling varies a lot by market. And I think at the Capital Markets Day in 2019, the level of recycling in India was right around 27%. And in the context of I guess the 10% 2025 target for the group, can you talk about I guess the key factors that prevent a more India-like recycling level over the very long term or broadly? I think be those things like cost or market acceptance or something else.
Yes, so a couple of words to this. Our target of 10% overall use of raw materials coming from waste by 2025, this is still fully in place. And I say this very confidently because we've made really good progress now in the first quarter. One of the reason why we made good progress, one of them, is because we have finally convinced all of our people in the company that this is a really good thing to do. The plant managers are now convinced. The procurement guys are convinced. The sales guys are convinced. Our formulation experts, our scientists are convinced. And the one action that convinced the last doubters last year was an introduction of an internal carbon tax, a very small carbon tax that we introduced internally on all the virgin raw materials. All the virgin raw materials are now taxed with a very small euro amount, and that money is used as a subsidy for raw materials that come from waste. And that has dramatically improved the cost situation, of course, of these materials. So that helped, and we made really good progress. The bottleneck quite frankly now is in sourcing. We still have to convince many of our customers that really the entire waste of refractories that they produce can be reused. We don't have yet solutions for 100% of that, but we have a lot of technology work going on. And we are quite confident that in 2 or 3 years, we will be able to. But we need to, of course, organize the supply chain back to the furnace of our customers. And this is the one thing that will -- the next big, let's say, hurdle that we're working on. We've received huge amount of really good feedback from our customers, but the devil's in the detail. It's really complex, and it takes actually quite a bit of CapEx investment in terms of machines and crushers and sorters and logistic chain organization, local plants and things like that. You need a certain scale to do this reasonably. Otherwise, this becomes a PR show. And that's not, of course, what we want to do. But so it's moving forward. I'm quite satisfactory. And the 10% right now is a good safe number to use.
Our next question is from Dominic Convey of Numis.
I appreciate this is a Q1 update, but there's a lot to think about in terms of the year-on-year comps and the phasing this year. You've given a very clear steer that you expect that profitability to be second half weighted. But just as to help us perhaps calibrate our models, can you give us a little bit more color about what you're seeing in terms of pricing and volume trends through the first quarter and into second quarter to date? Obviously, we're now lapping much easier comps, one would imagine. But also just think in terms of regional trends, obviously as we're sat here in the U.K., it feels as though we're through the worst now on COVID with a successful vaccine rollout; but obviously in places like India, Brazil, a very different picture. Could you just perhaps give us a little bit of a view as to what you're seeing in those markets?
Yes. Maybe Ian can talk about the phasing throughout the year of the different components. But let me just talk about what's going on regionally in terms of volumes, and let's go from west to east. Brazil is very strong. Because of the superb competitiveness of Brazilian steel makers. And then of course, we are linked to this. So Brazilian volumes are above 2020. Almost at 2019 levels -- or at 2019 levels actually already now. U.S. steel market has recovered quite well, but that was price driven. Volumes in steel production in U.S. are actually not yet at 2020 levels. They're below 2020. And also, cement is not yet at the 2020 levels. So this is an all price induced. Eventually, during the course of the year or towards the end of the year, maybe the beginning of next year, I don't really know exactly, I would expect U.S. steelmakers to give up their very, very disciplined pricing policy. Because of course, more and more imports are flowing into the country, and eventually they will switch to catching up on some of these volumes. So volume-wise, U.S. is relatively weak. And of course, this is a strong market for us. Europe volume-wise is good, but still also below 2020 -- or at 2020 levels but below 2019. Not expected to go very far, there could be an issue with the auto industry in Europe. Not because of steel or demand problems, but because of the computer chips. But I haven't heard any concerns from our customers on this, so maybe this is overstated. China is very strong, already above 2021 -- above 2020 and above 2019. So this is a strong market. Unfortunately, we're still too small there, but our business is developing quite nicely. I'm very happy. Same in Southeast Asia, this is going quite well. I have skipped over India because India was one of the star recovery markets in the fourth quarter of this year, the beginning of this year. But India's COVID situation, of course, is terrible. It's just really heartbreaking what happens there with the people on the ground and how much the people in India are suffering now under this pandemic. I would expect that this is going to have some impact on demand in the second and third quarter. Once this is done and also the Indian population has been vaccinated to a large extent, I would expect these volumes to come back very, very fast. But there could be a downside here, a little bit too early to tell. Ian, you want to guide a little bit on the different profit components?
Yes certainly. Good morning, Dominic. So we've confirmed that we are comfortable with where analyst consensus is EBITA at EUR 310 million. We continue to believe the earnings is going to be weighted to the second half of the year roughly 40-60. The reasons for that is threefold. Firstly, because of the benefit of higher raw material pricing, largely flowing to higher refractory pricing in the second half. In Q1 we are looking at a backward integration benefit slightly up on the fourth quarter of last year, which is 2.6. We're currently at around 2.7. Secondly, we see the benefit of the volume growth that we can see in our order book. And then thirdly, the net benefit of our strategic initiatives coming through. That weighting is also true from a cash flow perspective. And as you know, this year we have our peak CapEx of 260 million, but we are also building up our working capital levels as activity returns. And whilst that cash outflow has been moderated by our use of trade finance, we will see a bigger absorption likely through the first half, and then finishing the year likely within our range of 15% to 18%.
In terms of production volumes, Dominic, we are already at a pretty good level above last year now. As the pricing will make it through, the profitability benefit will come quite substantially.
[Operator Instructions] We have 3 questions from Andrew Douglas of Jefferies on the webcast. The first question, "With regard to restocking and your comments there, is that a general comment? Or are you not seeing any restocking in the territory -- in any territory?" Second question, "Please, can you give us an update on India and what you're seeing there?" Third question, "With regard to your cement and line comments, all looks okay. Any specific regions that were strong?"
Yes, India, I already mentioned -- everything went well. And now I think there's a quite a big question -- there is quite a question mark in my mind on what will happen with construction and steel industry, because the country is re-battling this pandemic. So as I mentioned, I think the second and third quarter could be weaker in terms of demand. But the economy also has proven extremely flexible. So once this is under control, this will come back really for us. So it's nothing that worries us. And I think in the overall context of RHI Magnesita, we should be able to absorb this. When I mentioned restocking, of course, our worry is how much of the materials that we sell is going into inventory and how much is really consumed across the entire chain. So we have a lot of discussions with our customers on this. Our direct customers are not building inventory because they're shipping, cement, steel and copper as fast as they can get at the moment in almost all of the regions and pretty much all of the regions. And therefore I said there's not a lot of inventory building. Their customers also are doing the same. So it hasn't started yet. The inventory levels that have been low everywhere in the corona pandemic, hasn't started yet to be built up again. It's one of the reasons why this shipping caused -- the shipping disruptions are so problematic because we would need really a reliable shipping industry at this point in time, which we don't have, in order to manage these very tight supply chains everywhere. At one point in time, this restocking will start. Of course, it will start from the end producers. And then it will make it all the way through refractories. I think it will start to happen fourth quarter this year, first quarter next year. That's my guess, but it's nothing else than an estimated guess. Cement industry quite strong in Europe, Asia, China, India, Brazil. U.S., a little bit less.
Excellent, thank you. We have no further questions on the line, so I will hand back to our hosts.
Wonderful. If there are no more questions, then it's good, we can end the conference. If you have any more questions, please feel free to reach out to us. Annabel and Chris are there for you all the time, especially today, but Ian and I are also available for the whole rest of the week for you. Thank you very much for dialing in, for listening to us and for your continuous support. Goodbye from Vienna.