RHI Magnesita NV
LSE:RHIM
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RHI Magnesita NV
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Good morning, all, and welcome to the RHI Magnesita Q3 Trading Update. My name is Adam, and I'll be operating this event. [Operator Instructions] I will now hand you over to CEO, Stefan Borgas, to begin. So Stefan, please go ahead.
Thank you very much. Good morning from Vienna, ladies and gentlemen. I'm happy to give you the trading update of RHI Magnesita of the third quarter. And there's -- you can really find everything in the RNS that we published this morning. I just want to make 3 -- give you 3 key messages out of it that I think are important to highlight. First, message around the business. We are now in a calmer business environment than we were for most of the year throughout this corona pandemic. Our business has stabilized, although at a low level, and we have a little bit more visibility now than we had through the summer. Business is not yet at normal levels, but it's better than in the bottom of the lockdown -- last lockdown with a little bit more visibility. This is the first message. The second message is the short-term cost containment measures that we undertook in the peak of this crisis have been replaced now with structural cost-saving measures. And we have increased our total deliverable cost reduction to -- that we commit to, to EUR 100 million per year by 2022. It was around EUR 15 million lower. So expect EUR 100 million lower cost for the company, mostly from the production and the SG&A area by 2022. And the third message, because of the calmer business environment and the ongoing strong liquidity even throughout the entire crisis, we are very comfortable to bring back the dividend of the company at the same levels than you were used to. Therefore, we are committed to pay out an interim dividend of EUR 0.50 per share on -- in the beginning of December. With this, I pause and open the line for all of your questions and any other things that you're interested in. Adam, can you please lead the questions?
[Operator Instructions] Our first question today comes from Mark Davies Jones of Stifel.
A couple of things, if I may. Could you just talk a little bit about the Industrial Division? Because going into this, the expectation was it hold up better. Obviously, that hasn't really come through, and it seems to be slower to show any signs of improvement at the moment. Do you have any visibility about when that might turn? I know it's a lumpier business. But what's your outlook there?
Yes. So we were actually holding on better in the Industrial Division going into this crisis for the first months. Our cement business was very, very good in the first half of this year. There are now 2 things that happened. In the cement side, there's a bit of a stock uptake that has happened in the first half of the year. And therefore, we expect the cement business to come out of the crisis a little bit later. It's mostly related to this. So probably not towards the end of this year, but more into next year. We're not really worried about this because the construction industry as a whole, worldwide, is holding up okay, but this is -- this inventory effect will happen. On the project business, the situation is a little bit different because here, we are linked into the CapEx cycle of the customers. And customers are still very careful in committing to major CapEx and major repair. They have even hold -- they even held up some of the already committed projects. We don't lose this business at all, but it has been postponed into next year. And it's a little bit really too early to say how, in this project area, this will continue, whether we have another 6 months to wait or 9 months or only 4 months or something like this. So that's the uncertainty under which we are.
Great. And on an unrelated matter, the step-up in the medium-term restructuring plan, the 10 plants you're closing, that's clearly a very ambitious, very wide-ranging initiative. Is this a situation of using the crisis to make more fundamental reductions to your footprint than perhaps might otherwise have been possible politically in some of those regions? Is that how we should think about it?
No, not really. I mean we've never been afraid to tackle the necessary restructuring, or we've not been afraid in the last few years to tackle the necessary restructuring that this network, this production network needs. But this crisis has really given us the opportunity to reevaluate what our customers need, you know that -- and where they need the material. You know that we've spent quite a bit of time in May, June of this year to reflect what will be different after the crisis than before. And one of the key areas that will be different is the fact that we will move more into regional trade blocks and less -- and we'll have less globalization, especially of the supply chains. And as a result of this, we have translated this into our network. And as a result of this, we still have too much capacity in Europe, and we're not specialized enough in the Americas. We have a few -- and we have plants that are too small in order to be able to react to this. And that's the root cause of this restructuring. And as a result of this, many of the small -- these 10 plants maybe sounds more fantastic than it is in reality because many of them are relatively small plants that we've been keeping for -- and that have been stayed alive because they've been relying on a lot of global export. And that's going away. We're going to make products region-by-region more than before, and that's the root cause of this.
[Operator Instructions] We have a question from Harry Philips of Peel Hunt.
Stefan, just wondering about your thoughts on steel at the moment, given Steel Dynamics used a very strong [ print ] earlier this week. We got Nucor later on today. Global steel production ex China was down just 9% in August. Are you sort of worried about inventory levels anywhere in the system, particularly finished steel?
No, we're not so much worried about inventory levels. I think this has been managed quite well by the industry. They are not dramatically up, also not refractory inventories in the steel companies, but we have a patchy steel market if we really look at this on a global basis. I concur completely with your judgment, North America looks quite strong. We see this also. China looks very strong. We see this, but we're very small in China. So the impact on us is, unfortunately, yes, very small. We see South America actually reasonably resilient. This is good for us, especially for our market share recovery actions. We've got good feedback from customers here. But Europe is recovering very slowly. There might be more restructuring coming in Europe, if you read what the steel industry is doing here. And India has, of course, suffered terribly. India has had a fantastic steel production in September, 97% of capacity utilization in India in September in steel. The question is how sustainable is this? Will this -- will it stay there? And then if this all stays like this, we might be quite conservative with our forecast now. But we'd prefer to do so rather than to be too bullish. Also, I think the big disclaimer on all of the outlook and the forecast is, we assume there will not be a second lockdown. If there's a second lockdown, we've got to talk again.
Our next question comes from James Zaremba of Barclays.
Stefan, yes, a few questions then. One, just on the footprint rationalization, what impact does this have on your total capacity? If I look at the kind of impairments taken of around EUR 110 million for the last couple of years, I'm estimating sort of 10% reduction, and that sounds reasonable. And then as a follow-up to that, in terms of the EUR 55 million of savings from doing that, how much of this is pure fixed cost savings, you've broken down those plants, versus maybe more variable savings, which could expand from being able to move the volumes from plants with lower unit costs? And then just a follow-up, on the sales initiatives, you mentioned at the half year, these have been delayed somewhat by COVID. Maybe if you could just chat briefly about what changes need to happen in the market for you to be able to go after these again?
Okay. Let me ask Ian in a moment to talk about the structure of the EUR 100 million cost reduction. But on the footprint, actually, we don't have a significant reduction of our footprint. It is a shift more than this. We have a clear reduction in Europe, actually more than 10%, but we have an appropriate increase in capacity in other parts of the world because we had been exporting there. And the big driver here is the adjustment for the regional markets. The European market isn't growing. Actually, it's probably shrinking. Therefore, our network needs to adapt there. When -- yes, we have taken out old assets. We have and we will, in the total amount of around EUR 100 million, but we will replace this more or less with much more modern assets suited to this regional footprint design.So at the end of the day, our -- there is no significant reduction in total capacity of -- that we have, but there's a shift into Asia and into the Americas. This is the gist of it.And before we get to the structure of the fixed cost reduction, on the sales outlook, what would make us more confident? I think, like everyone else, we have better visibility now than in May, June, but we don't at all yet have the same visibility that we had before the crisis. So this will take more time. And what would make us more comfortable? Well, I think this threat of lockdowns and of impact of this pandemic has to go away first, just like with every other industrial company. And then I think we get more confidence again also.
James, it's Ian speaking. So on the structure of our cost savings, so as you mentioned, EUR 55 million of the aggregate EUR 100 million from the strategic cost savings initiatives comes from our production optimization plan. Of that EUR 55 million, approximately EUR 45 million is fixed cost savings and the rest being variable cost savings.
[Operator Instructions] We have had a question via the webcast. "Great to see that you reinstated the interim dividend. Does this mean we can expect the full year 2020 dividend to be announced on March 2021?"
Well, if you could expect that, that firmly would have -- we would have announced it now. Look, we have the whole -- the full intention to do so. That's why we reinstated the interim dividend at the exact levels than before. We still want to take a few more months to see how the business develops, like show that there's no second lockdown and make sure that this very slow recovery continues. And then we will have another discussion with our Board early in 2021 and hopefully come to this decision. But don't take this as a guarantee yet.
Our next question comes from Mark Fielding of RBC.
Just actually a quick clarification question in terms of this temporary versus structural savings. I think that you've indicated that EUR 10 million of the temporary savings will continue into next year related to -- well, the short-term savings will continue to next year related to depreciation. Can you just clarify, is that EUR 10 million distinct from the product optimization? Or is that some benefits you've got already? Just what is that EUR 10 million number? And how do we think about it in the long term?
Thanks, Mark. So the EUR 50 million short-term fixed cost saving, we are absolutely on track to deliver that. EUR 40 million will not continue into 2021. The EUR 10 million that will continue is the impact of lower depreciation, consequent on the low levels of utilization of our plant, particularly the 3 plants in Europe and the 1 plant in Mexico that have not been operating. If you look at the EUR 50 million itself, EUR 30 million of that comes from plant-based measures, including the temporary closure of the plant in Europe and Mexico, and EUR 20 million comes from SG&A, areas like lower travel, hiring freezes, reduced overtime.
So we're thinking about the...
Did that answer your question?
Yes. So we're thinking about, therefore, sort of moving parts into next year. That, in theory, if the demand got better, that EUR 10 million depreciation at some point would come back. But in reality, you're then optimizing some of your plants. And obviously, the SG&A bit, as you say, is going away, but you separately got your SG&A.
Correct. So what you should model is a EUR 50 million benefit this year and a EUR 10 million benefit next year on a sustainable basis from depreciation, with that EUR 40 million reduction being offset by the benefit of the ramp-up of the strategic cost savings initiatives, which is a EUR 45 million increase year-on-year.
We have another question via the webcast. "Given you are through the worst and have reinstated the dividend, will you start to look at M&A and share buybacks again?"
Yes. Thank you for the question. We have never stopped looking at M&A. So this continues as before. As we have opportunities, we will pursue them and execute them. Share buybacks, we have taken a very long and hard look over the course of the last weeks together with our Board, because quite a few of our shareholders have asked us to do so. We have had quite a positive sentiment towards share buybacks as well. The reintroduction of the dividend now is the first step towards this also. And just the same is true to what I said about committing to the full dividend. As we see the business improve the way we think it will, we will also very strongly consider share buybacks.
[Operator Instructions] We have a question from Sam Bland from JPMorgan.
Just one question, please. I'm just looking at world steel production, let's say, ex China. Obviously, we had a pretty steep recovery since the trough in around April. Adjusting for different geographic exposures, has the revenue in the Steel Division roughly tracked that recovery of the steel production? Or has there been a little bit of a difference for some other reason, that means the revenue progression hasn't quite tracked that steel production progress?
So the revenue has tracked with more or less the steel production. I mean, there's always a month-to-month inventory adjustment. But if we look at it over the course of the last 9 months, we are very close to the steel production numbers. So we haven't lost any market share this year.
No further questions at present. [Operator Instructions]
Okay. If there are no more questions, let me just repeat the 3 messages, I think, to take away. And before I do that, I think it goes -- it's completely self-understood that above all of the things we discussed today here is the safety of -- and health of the employees that work at RHI Magnesita and all of the safety and health of the employees of our business partners and, of course, our customer supply security. That's governed everything we do above anything else.Below this only priority that we have really, only the #1 priority that we have, really 3 things to take away. Our business is not yet back to normal, but it is recovering slowly step-by-step. The visibility has improved somewhat during the course of the third quarter. Second, we have increased the total structural cost savings potential to EUR 100 million per year, a lower cost base by -- to be delivered in the year 2022. And there's a third message, because of this calmer trading environment, business environment and the ongoing strong liquidity of the company, we have reintroduced the dividend and also, in this area, are back to normal.Thank you very much for all of you to listen to us today, and we're looking forward to interacting with you over the day and the course of the next week. Thank you, and goodbye from Vienna.
Ladies and gentlemen, this concludes today's call. Thank you very much for joining. You may now disconnect your lines.