RHI Magnesita NV
LSE:RHIM
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RHI Magnesita NV
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Ladies and gentlemen, welcome to the RHI Magnesita Q3 trading update. My name is Megan, and I'll be coordinating your call today. [Operator Instructions] I will now hand over to your host, Stefan Borgas, CEO. Stefan, please go ahead.
Thank you very much. Good morning, everybody. I'm happy to give you the update of our business in the third quarter. Obviously, this is a trading update so we don't have many slides to show. But I just want you to understand what's from our perspective are the main takeaways from the third quarter. Our business continues on the same trajectory that it did in the first half of the year in terms of the continuation of the integration with the delivery of the synergies, in terms of delivery of our day-to-day business, sales levels, profitability levels, all continue on the same trajectory as the first half, that's the first takeaway. Second take away, the outlook of the business into -- until the end of the year and into the first quarter of next year also remains very, very stable. Raw material prices in China have gone slightly up, again, looking out until Chinese New Year, which is until where we can see, which means all of the raw material scenarios remain very, very stable into something like the middle of the next year because the [ supply chain ] has a certain length. This is the second message. The third message is the deleveraging of our business because of the ongoing consistently solid cash flow continues. This has been the first priority of our company after the merger since last year. This continues as -- actually better than we had planned originally. And then maybe as a fourth piece of news, the tender offer in Brazil to take over the last half of Magnesita, second half of Magnesita is now very close to being formally launched so we expect this to be completed by the end of the year, so this is out of the system. Let me give you a little bit more granularity on these things. Sales levels have been very, very stable month by month by month, throughout the year. This continued also in the third quarter and this will continue into the fourth quarter as well. Profitability levels have been very stable as well. Any kind of raw material changes we could adapt through pricing measures so that there's no impact here other than the numbers that you've seen in the first half. All the trading difficulties that the world is seeing because of new duties is impacting us only in such a way that we have to adapt our supply chain consistently. That requires a change of trading flows, of material flows around the world and that has led to slightly higher inventories. But they are coming back down as well as the system adapts to itself as we shift from one continent to another in order to optimize duties and the volumes to this. Our margin is continuing to slightly trend upwards as the synergies are coming through. But this is 0.1, 0.2 margin points per month so this is growing steadily but don't expect any dramatic jumps here. More on the industry level. Steel production remains very robust globally. There might be a slight, slight adaptation to steel volumes next year. You know that our business is strictly linked to the volumes of our customer's industry, not to their pricing because, without us, they cannot produce anything. So we are volume linked, and we of course, also make up a very small percentage of our customer's cost. So steel volumes are quite robust, also looking into next year. Obviously, there is -- this differs a little bit region by region in the world but as we're truly global, this doesn't affect us very much if there are local changes. On the industrial side, especially our Nonferrous business has done very, very well in the third quarter. This is a very profitable business so this was good. On the other side, in the Cement/Lime business, especially in cement, we have been more careful because pricing measures have not been as easy to implement here so we stepped back on purpose, took down some market share in order to let customers put the lowest profitable products into this industry as we focused on other areas. But also here, these are not mega changes, these are small adaptations so that we can a little bit re-optimize our business. The -- in the raw material situation in China, I think is very interesting. The volume scenario there has come back to a certain extent as mining has started again in China. But there are very tight government controls on mining levels and also on price levels for raw materials. So the opposite has happened from what many observers in the industry has expected. Prices slipped throughout the summer but then came up quite significantly for the fourth quarter and the first quarter of next year, mainly due to the selling price controls that the Chinese local governments have put in place in order to benefit from high margins. The European suppliers have not followed to the same extent. It looks like they are rather satisfied with the price levels that they have now, and they're not following the Chinese levels. This is just a fact, which I don't have to comment any further. From the company's perspective, we have continued to make good progress in India and China. In India, we've seen solid double-digit growth in our business, and in China as well. We have put an emphasis on these 2 markets because we're relatively small in those markets and want to continue to grow here. Our Chizhou dolomite facility rejuvenation is making good progress. We plan to make first products in Chizhou in the first quarter of next year like we had planned before. With this, I think I'm at the end of my short introductory words. Again, my key message is the business continues on the same trajectory than in the first half of the year, including the integration synergy deliveries. The raw material scenario is very, very stable looking into next year even. The deleveraging of our business continues as planned or even a little bit better than we had planned. And the tender offer in Brazil also should be finished until the end of this year. With this, we're very happy to have your questions.
[Operator Instructions] Our first question comes from Mark Davies Jones of Stifel.
Can I come back to those comments you made about China? Two questions, I think came out of that. Firstly, these tighter controls, those don't have any influence or any delaying impacts on your own ambitions to restart activity there? You say you're on track but if the regulations are now tighter, is there an implication for what you can do?
No, these are 2 completely different things. We're talking -- when we talk about our new mine starting this is a dolomite mine. This is a totally different region of China, in Anhui province. We're talking about the Liaoning province magnesite regulations and controls.
Okay, I just wanted to clarify that. And then in terms of their ability to continue to control pricing, is that a new measure that they are getting much more active in managing that process from a government point of view? And is that sustainable as supply comes back on-stream, do you think?
Well, there are 2 districts in the Liaoning province that control, I don't know, 2/3 of the Chinese magnesite. And they both have a little bit different approach. One of them has created a sales company that controls all the sales of all the private mining activities, that everybody has to sell through this entity and they set prices there. They have now said that this company will be in place until at least 2022. That's the date they gave, and so far it seems that they are very disciplined on this. The other district is more controlling the volumes of the mining site, but that also seems to work quite in a disciplined way at this moment in time. Difficult to forecast the future, especially in China, but measures are clearly effective at the moment.
Excellent, and one final question, if I may, on profitability. So the underlying is continuing to trend up. Obviously, we've got the -- face the trend of these PPA adjustments. But through the balance of the year, would you expect these sort of gentle monthly increases in EBITDA margins to continue?
We would actually, yes, because there are still some price increases making it through completely into the contracts of customers who had been protected before or partially protected before, this helps. And of course, the synergy helps on the cost side also. So if we take these together, these are very soft, gentle improvements.
Our next question comes from Stephan Trubrich with Kepler Cheuvreux.
I would like to follow-up on the situation in China, and potentially the repercussions for global supply growth in magnesite. What is your market intelligence telling you? I mean if you expect now this supply situation to remain constrained for longer, could there be further greenfield or brownfield expansions in magnesite across the globe, so maybe some color here? Tied to that, also your strategic project, you mentioned in today's release about the potential transaction with Kumas Manyezit. Could you maybe provide some color what this company could add to your business in terms of offering and geographic reach? Also if I'm not mistaken, in public media, there was an announcement that you might plan or intend at some point, a Greenfield project in Russia, so maybe how near is that? And this would be much appreciated.
So it seems like the controls in China are done in a very balanced way. The shortage of the market that we experienced earlier in 2018, is out, there's enough material around. So the focus is on more on the product side than on the volume side. Although, the Chinese government has clear intentions to only bring back 75% to 80% of former capacity. So that will -- according to their estimate, that will keep the balance. We have not seen major new greenfields yet. We are very, let's say, not nervous but we're very, very observant about this because obviously, this could be a game changer. But it hasn't happened yet. Many players just like ourselves are trying to get a little bit more independence from raw material supply from third-party suppliers in China. Refratechnik, for example, has announced a closer collaboration with a Chinese mining company in order to secure these volumes from themselves. So it is happening. But I see this more as a reconfiguration of the supply chain rather than as a dramatic push of volumes out of China. Our activities in Turkey, you know that we are already present in Turkey with our own mining operations since more than 40 years. We have 800 people in Turkey. So we're very, very comfortable and familiar to act in this country. And Kumas came on the market, I think many, many players looked at this, so did we. There was some news event about 3 months ago that suggested that we are participating in this, so we confirmed that we are. But this is by far not the only asset that we're looking at as they come for sale. We typically get involved in all of them to -- in order to make sure that we don't miss any opportunities. The attractiveness for Turkey from that asset for us would be twofold, one is a little bit bigger strengthening of the backward integration. But this is an asset, which focuses on different quality levels. They have very small volumes in the high-quality part of the market in which we typically are active. They're much more focused on lower quality dead burnt magnesia products, which we're not that active so this would be more like a portfolio expansion. But more importantly, they have an interesting business position inside Turkey. Turkey is one of the top 10 steel producing countries in the world. And we are not that strong in the local market because most of the products we have paid for until now. So we're actually a little bit more interested from that perspective than from the raw material perspective. But it's a process that is dragging on. It's going very slow. We're not counting on any, even decision points for the next few months. So this is more the reaction to a leak. And we repeated it this quarter because of the Brazil tender offer. We just want to make sure that nobody later on comes and tells us we're trying to hide some activity. So it's less of an importance. Russia is another one of those markets in which we don't have a very strong market position. Another one of the top 10 world steel markets. We have a position there, mostly with imports from Europe, more on the higher-end side. But we believe that to build a market position in Russia, we have to have local activities and we simply had some investigations there. And then a very engaged, energetic politician made this news out of this that we're just about to invest EUR 300 million. We're far, far away from this. We're in market research mode in Russia. But just like India and China and Turkey and Japan, and Korea, these are the big markets in which we are not yet strong. So we need to investigate and -- to find eventually what it is that we want to do there. That's what's behind this.
Okay. Maybe two more from me. I mean tied to that, you write that your net debt-to-EBITDA is going to reach below 1.5x at year-end. Going forward, in what leverage level do you feel comfortable to operate? Particularly, if you are already, let's say, in strategic expansion projects. Do you want to get to below 1x before, some color maybe on that first? And then on your non-steel revenues where you mentioned that obviously, in cement here, let's say, the high-quality products are not that much required. And you basically leave the market to other players. Given the fact that, obviously, cement/lime accounted in 2017 for the, let's say, the majority or the lion's share of non-steel revenues, is this now, let's say, an approach you take that you see now basically focus more on nonferrous metals and then shifting away from cement/lime or is this just a temporary measure?
Let me hand over that question to Eduardo, who's sitting next to me. But let me answer the margin question first. What we're doing -- the cement business continues to be a very important business for us. We are not retracting from this. What we described here in the RNS is a small adaptation on shares. We gave up 2%, 3% market share in cement and lime because price increases there were the slowest in all the industries. So we said, as we need to allocate -- we want to allocate materials to those markets that appreciate the value of our products, we retracted from there. But it's an important market. Of course, we are one of the 3 key players in this market. We're not going to give it up. And it will remain more or less in the same relative size in the company's portfolio than it has been before.
Hi Stefan, how are you? I think it's something that we will do -- delever or do a strategic transaction, I think both of them will happen at the same time. If you think about the capital commitment to expansions, these are likely to be multi-year projects. They're not going to happen at the same time. As Stefan mentioned, just a few minutes ago, the Russian perspective is very exploratory now. So I think that we can continue to delever even below 1x to give us the capital structure flexibility to pursue these transactions. In addition to that, as you know, the majority of the transactions that could be available to us are very likely to be much smaller than the transaction that led to RHI Magnesita. Very unlikely that anything we do would increase our leverage by more than 1 turn, given where we are now and where we're likely to be at 6, 9, 12 months when a closing -- the earliest closing could happen on anything.
There is another question from Harry Philips of Peel Hunt.
Just a very brief one. You made the comment about Europe being slightly slower. Are you just slower in line with markets? Or is there any market share issues in there as well?
No, it's slightly slower in line with markets. Actually on the market share side, Europe is rather strong in the third quarter for us.
Our next question comes from Ed Maravanyika of Citi.
My question was actually on that comment, so I was just wondering if you could perhaps just give a little bit more detail on the kind of relative weakness you've seen in Europe? And then in contrast to that, the relative strength you're seeing in North America? And then just on the Chinese cement market, whether you would consider changing your pricing quality strategy in order to better compete with your more commoditized competitors?
Okay. Europe is slightly slowing down just like you can see it in all the economist's reports, there is no crash or anything like this. And because we have a relative strength in Europe, where the slowdown that comes to our industry is more on the importers, we believe that is on the domestic producers. So we actually see slight improvement in market share, and therefore, our business in Europe is quite satisfactory, also from a profitability perspective. The U.S. is -- our biggest challenge in the U.S. is the supply because the reconfiguration of the supply chain simply takes 6 months, and their duties are now in place. So the U.S. steel industry is very optimistic. It continues to be very bullish going into next year. And we are taking volumes from other regions to put into the U.S. This is continuing. Also profitability in the U.S. is very strong obviously, because everybody has the same stress there. Competitors -- local competitors in the U.S. have to import raw materials most of which come from China and there are anti-dumping duties on those raw materials also. So the raw materials we bring into the U.S. and the finished products we bring into the U.S. don't have to come from China. They did in the past but we can reconfigure the supply chain and have them come from either Europe or Brazil, which has no, or lower, anti-dumping duties. So we have a margin improvement that way because we don't have to pay the duties but we can still benefit from the pricing effects that competitors have to put through to stay whole themselves. That's why the U.S. is so attractive for us at the moment. And the policy in China, we have actually seen an extremely satisfying business development in China this year and it comes from -- mostly from the ability, which is building now, we can adapt much better to the Chinese market. We're not compromising our quality requirements, actually quite on the contrary, but we're adapting many of our products to the Chinese demands and to the Chinese requirements because as you know, the Chinese steel industry is structured differently -- or has been structured differently than the rest of the world. Much more focused on volume output and lower quality output. We are -- we haven't been catering to this very much but we are now as our local -- our lead teams and our local sales teams have grown considerably over the course of this year, we've built this up quite significantly. And now rather than selling products that we sell in the global market, we adapt our formulations mostly -- and the raw materials that we use to these local requirements. And that has helped quite significantly. The profitability of our business in China is quite comparable to the profitability of the rest of the world, despite of what you would think.
Our next question comes from David Larkam of Numis Securities.
A couple for me please. First on the supply chain issues you've been talking about. Can you give us some sort of degree of magnitude. It sounds like those come first, and then obviously, you get the benefits from North America and the additional pricing, secondly. And then just on Brazil, obviously change of administration. Any thoughts on impact there?
Yes. So on the supply chain, what happened is we used to sell products made in European plants to the Middle East, and made in China, to the U.S. Now we have products made in Brazil for the U.S. and made products in Europe for -- the Middle Eastern market has made -- products made in China stay in China or in Asia. That sounds so simple but these are tens of thousands -- or hundreds of thousands of tonnes of materials that suddenly go on different boats in different directions, and that's why it takes long. We have seen quite a significant increase in inventories because of this. Because now we have more material on the boats or -- on boats. And while this reconfigures, you partially have double inventory. That we've seen in the third quarter, not very good for cash flow, obviously. But now this is starting to come back down and normalize itself. So at the end of the year, we should see net working capital levels at very similar levels as before. I think this is the extent of the supply chain changes. And as these tariffs change again, we'll have to continue to adopt this. We're in the fortunate situation that we have the -- all these tools in-house. Competitors practically do the same thing. But they have to look for different suppliers so that is much more difficult or more costly, it depends on the [indiscernible]. Brazil is early days but the sentiment in Brazil, I've talked to some of our board members there, is extremely positive when it comes to the business environment, and the business outlook for Brazil going forward. What that means for us is that Brazil doesn't have any further downside compared to today, this is how I would put it. Brazilian steel production, cement production, construction industry, industrial output has been rather on the lower level over the course of the last 2 years. And I think our sentiment now is there is no more downside potential here. But there is significant, significant upside potential. If that happens, we're simply going to utilize our Brazil platform and our strong market position in Brazil in order to benefit from that development. So I think we're carefully optimistic about what happens. Also the discussed combination of the new super Ministry of Finance and the economy, I think looks very, very positive. The reforms that have been talked about in order to dampen debt levels, or the government's deficit, all this should really help the business environment. But of course, we haven't seen anything yet so let's see if that materializes.
And if I may add just to remind you that more than 50% of steel production in Brazil is exported nowadays, right? And this is likely to be more positive to our cement business, which in general, is much more local than to the Steel business for example.
There is no further questions on the line. Stefan, I will hand back to you for any further remarks.
Great, thank you very much for listening this morning. Let me just repeat our key takeaways. Business and integration continues on the same trajectory as in the first half of the year, including the delivery of the synergies. Second, the raw material situation is very stable looking into the fourth quarter and in the first quarter of next year and should not impact very much our business in a negative way. The deleveraging of our business has continued and will continue step-by-step, and fourth, the tender offer in Brazil should be completed until the end of the year. Thank you for listening this morning and I look forward to talking to you during the course of next days. Goodbye from London.