RHI Magnesita NV
LSE:RHIM
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
2 734
3 785
|
| Price Target |
|
We'll email you a reminder when the closing price reaches GBX.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
RHI Magnesita NV
You don't have any saved screeners yet
Good morning, and welcome to the RHI Magnesita Q3 Trading Update.My name is Seb, and I'll be the operator for your call today. [Operator Instructions]I will now hand the floor over to Stefan Borgas, CEO, to begin. Please go ahead.
Thank you very much. And good morning from Vienna. Welcome to the RHI Magnesita Q3 update 2021.2021 continues to be quite a challenging year and quite a gratifying year, depending on how you look at the situation. For sure, it's remarkable because it's different than anything we've ever seen before.Let me give you the highlights of the quarter. First message: The profitability environment remained challenging in the third quarter, impacted mostly by the higher costs in many different categories which still take time to pass through, in terms of higher prices, to the value chain partners, to our customers but all of this in an environment of strong demand. So very little changed to the second quarter.Second message. We have made very good progress on price increases, on passing-through these higher costs. We have EUR 100 million already agreed to be effective in the P&L in 2021. This is slightly higher than we had guided even in the half year, but there is an additional EUR 30 million under advanced negotiation that we're targeting to deliver also in 2021 to the bottom line. Third message: The overall fundamentals for our business remained strong, and we are very confident about the mid-term future of RHI Magnesita. Our production optimization plan is progressing very well. Margins improved now with the benefits of this production plan, especially in 2022, and we have some encouraging progress on M&A.Those are the key messages. Let me get a little bit more into the details, ladies and gentlemen.As I mentioned, the third quarter really has no fundamental issue with demand. Again our order books remain solid. We have small demand blips here and there with individual customers and individual plants, but fundamentally our order book is strong into 2022. Our challenges remain all these new cost elements that come and hit us, some of them unexpected actually; and then our ability to pass them on continuously and quickly. Pricing has moved. Price increases have moved, has moved from a project status, "Let's do a price increase," into part of our business. On an ongoing basis, we have now learned how to identify all of these little cost increases that add up to a significant amount of time and pass them on, on an ongoing basis. Supply chain and logistics, as the main part of these cost increases, remain much more expensive as part of this strong demand; also still some emergency shipments that, of course, cost additional money here. Good progress on the price increase: EUR 100 million is agreed with our customers. EUR 30 million are in advanced negotiations, in the fourth quarter, to meet our guidance. If we can deliver it completely, we can still get to that guidance. That's the best case scenario from our perspective at this moment in time.A new item has materialized in the last just few weeks, and this is the effect of the power outages in China. Over the past 2 weeks, we have seen much, much higher prices from Chinese raw material producers, especially in the magnesite area but not only there, also in the alumina raw materials, much, much higher prices. Why? Because most of the raw material producers in China are very heavily affected by these power outages. So their ability to produce has reduced dramatically and their stocks are diminishing very, very quickly; and as a result of this, prices have shot up quite significantly. We are not quite sure -- how much of this price increase related to these raw materials is a -- has a speculative nature. And how much of this is of more medium-term nature because that depends very much on when these power outages are going to be ending. There's no information on this in most of these -- from most of these suppliers, so the situation is a little bit in limbo. Higher prices, however, for raw materials have a short-term negative impact because, again, we have this small time lag to pass it through, but in general this is a very positive environment for us because of our large amount of vertically backward integration. So if parts of these price increases remain more structural, then there could be quite substantial upside for next year.Our current inventory situation is very high. You will see it in our net debt numbers at the end of this year, which will be higher than originally guided. We have deliberately built inventory, especially in raw materials, over the course of this year, originally to prevent some predicted reduction of production due to the winter Olympics in China. And this higher level of raw materials now helps us to manage through this speculative phase a little bit. And I'm actually quite happy that we went to the upper end of our inventory targets already until now.Let me talk a little bit about the mid-term development of RHI Magnesita, the status of our strategic initiative, especially our production optimization plan. As we head into 2022, these production optimization projects will move from being a cash burner, because we have to pay for all these investments, in -- towards a generator of positive cash flow because we ramp up all of these different capacities. And then we benefit from the volumes but mostly from the lower costs of these plants after this very significant program, as it comes to market. Let me just go one by one so that you get an appreciation of how significant this is for our company.First, in our Austrian -- one of our Austrian raw material plants, we've inaugurated a new railway terminal in August. And we have started to mine the new, very new, dolomite reserves in this area in the fourth quarter now. We have started the mining process in order to fill our European dolomite platform up. On the receiving end of this, the plant in Valenciennes in France has expanded its tunnel kiln capacity all for the European dolomite demand. The demand is running very well. This goes mostly to the stainless steel industry. We have expanded capacity by about 30% in this plant; and the new plant is finished, running very well. In Radenthein, our highly specialized plant for very sophisticated products for process industries and also for steel, the new capacity has been commissioned in the third quarter. We had a little of a blip there with an old -- one of the older installations. That got well under control, but it will cost us some money. But the new capacity is commissioned. And the robots that are improving the productivity here are starting to move around the plant by themselves. It's very impressive to see.In Urmitz in Germany, where we expand the capacity in order to absorb the capacity in the site of Kruft which will be shut down next year, this is a site where we make functional products and mixes, the expansion also is going very well. And all the negotiations with the workers have been done, and we are very confident that here everything is on time. In Contagem in Brazil, the new capacity will be available fully in the second half of 2022, but also here this is a site with hundreds of people. It's a very large site which is totally in reconstruction. And finally here, the -- after some cost increases that we've had because of the very strong inflationary cost pressures in Brazil, the execution is doing very well. And in Brumado, our raw material hub, we are on track for the commissioning of the new magnesite raw material plant at the end of the first half of 2022. I wish this could have been half year faster because then we could replace some of these Chinese volumes that are not being produced at the moment, but okay. Still it comes at a very, very good time. And it will reduce our already very low cost position in dead-burned magnesia to an even lower level and give us significantly more volumes.The last point I want to touch on before I hand over to Ian to talk a little bit more specifically about some of the numbers, yes, is the -- to inform you about an acquisition that we were able to sign in Turkey. This is a class 2 transaction for us, so it's of medium size, but still important and remarkable for our company.In Turkey we were operating just a raw material plant for the last decades. And now we were able to sign a deal with the family that was the owner of a company called SÖRMAS, which is the second largest refractory producer in Turkey. We will buy 85% of the shares of this company from the controlling shareholders for EUR 39 million. The company currently delivers an EBITDA of EUR 6.5 million. This was the 2020 number. 2021 number is not yet finished, of course, but hopefully, will be in the same order of magnitude, maybe a notch better.This acquisition has 3 purposes. It serves as a production hub in order to follow the growth of the Turkish industry but also as a hub for the wider region in the Middle East where there is a lot of -- some growth happening at least. It will enable us to deliver now full-line service solutions to our customers in Turkey because we will invest into an R&D center and in a technical center in order to bring all the innovation of RHI Magnesita directly to the Turkish customers. And of course, it will give synergies of around 50% of the current EBITDA that we have [ been buying ]. It is a mixture between different cost elements, mostly savings and transportation back and forth into Turkey and, of course, local production rather than imports that we have been using there.I will now hand over to Ian, who will take you through the details on the financial outlook.Ian?
Thank you, Stefan. And good morning, ladies and gentlemen.As Stefan has described, we've continued to face a challenging environment through the third quarter with costs increasing. We have seen further increases in freight costs, the higher prices for externally purchased raw materials, higher energy prices and more airfreight to balance out the unreliable global supply chain. In addition, the unplanned closure of one tunnel kiln at Radenthein for 8 weeks will reduce our EBITA by EUR 8 million.On energy prices. European natural gas is an important input for us. You will have seen that spot prices are significantly higher at the moment. We have locked in pricing for all of the natural gas we require for the coming winter period across Europe. We have partially hedged the position under our long-term hedging strategy already, and we recovered the remaining requirement in September. As a result, our weighted average price for natural gas over the period is significantly lower than the current spot prices. The price increases, we have already agreed, and the remaining EUR 30 million in advanced stage of negotiations to offset these cost pressures.Moving to working capital. As you heard from Stefan, we have taken the decision to deliberately increase our inventories this year to protect against the knock-on problems that can arise from supply chain disruption and in advance of the China Winter Olympics. Working capital intensity at the year-end may therefore be above our targeted range of 15% to 18%, but we believe this is the right strategy to follow in the current environment. This decision might also have additional upside in 2022 if new supply shortages from China triggered by the electricity shortage last longer than a few weeks.Turning to the balance sheet. We have a strong liquidity position. Driven by our inventory build, our net debt-to-EBITDA is now expected to be higher than our targeted range of 0.5 to 1.5. And at the year-end, we expect a number around 2x. This is after the receipt of EUR 96 million of post-tax proceeds from the sale of our interest in MAGNIFIN, which we expect to receive in December 2021. Gearing will reduce in 2022 as we establish a higher run rate of profitability following the price increases in 2021 and as project CapEx reduces once we [ pass the peak CapEx phased ] in 2021.Turning to our EBITA guidance for 2021. The variables we outlined earlier result in some uncertainty regarding our full year guidance for EBITA. We can see a range of outcomes between EUR 280 million and EUR 310 million, depending on how successful we are in realizing further price increases in the fourth quarter and if we see further increases in costs. Our judgment today is that we will most likely end around the middle of that range.The fundamentals of our business remain strong. And as you heard from Stefan, the production optimization plan is progressing well, which will be supportive for margin improvement in 2022.And with that, I'm happy to hand you back to Stefan.
Thanks, Ian.Let me just summarize. 2021, so far, has been a difficult year in many ways. It's just as difficult as 2020 but with totally different challenges. I might also call it the strange year. The biggest difficulties remain the continued volatility of the international environment for us; and for our business partners, especially for our customers.Throughout 2021, we've seen strong demand for our products. That remains encouraging. We have the whole year prioritized the delivery to our customers, which is exactly what we need to do in order to be a reliable, long-term partner and the leader of the refractory industry. That has cost us money, but we've done it, anyway, and we would do it again. This has meant that we have to absorb some costs upfront, but our customers recognize this, as we can see now. And they are therefore receptive to the price increases that we are putting through now week by week.The fundamentals for RHI Magnesita remains very positive. We continue to make excellent progress on our production optimization, which benefits with the ramp-up, especially in 2022. We have continued to deliver our long-term investments in technology solution, especially in recycling; and now in M&A, which is evident today with the transaction in Turkey. Our acquisition pipeline into the future also remains healthy. This leaves us well positioned as we head into 2022.And Ian and I and Chris and Annabel are very happy to take your questions. Thank you for listening.
[Operator Instructions] Our first question from the phone lines comes from Mark Davies Jones of Stifel.
Two, if I may. Firstly, could I ask Ian on something of a bridge on the full year guidance? Wherever you are in that range, if Q3 profitability was similar to the first half, is still going to be a big step up required in Q4. Obviously some of that is the timing of the price rises coming through, but can you, could you run us through a bridge there? You also mentioned more seasonal cement sales and perhaps other moving parts, so can you just give us some help on understanding why we have a big step-up?
Mark, thank you. So as you said, if you look at our first half earnings, which were EUR 128 million. We've guided -- third quarter was relatively similar, so at around EUR 65 million a quarter, that takes us to around EUR 119 million. If we can get to the midpoint of our range, we need to deliver a EUR 105 million increase in the -- EUR 105 million in the fourth quarter. Traditionally our fourth quarter is around 20% stronger than our third quarter, that's [ an important piece ], supported this year also by volumes which are around 5% stronger in the fourth quarter versus the third quarter. And then the second key part is clearly the benefit of the price increase coming through.
Okay. And of the variables in terms of the final outcome, you've mentioned obviously the success in getting the EUR 30 million of additional price increases through, but the other piece was on cost. Can you just have a quick word on what's -- the key concerns and sensitivities are there? It sounds from some as though some of the logistics pressures may have peaked in terms of costs, if not availability, but are you seeing now labor beginning to be inflationary pressure as well? Or is that more under control?
Okay. So on the cost side, still the major piece is freight. The freight increases have reduced, but the freight cost overall is still very high. Also I think it's important to point out that freight is not just the long ocean lanes but also truck land freights. And that has incredibly increased, especially in the third quarter, in North America, in Brazil and all over Europe, linked, of course, to the shortages of capacities and drivers there. Then there is a bit of a shift in this logistics industry. Rather than increasing freight costs directly, they have moved to an increase in other types of surcharges. So demurrage now is much more expensive than before. Holding cost is much more expensive than before and much more [ imminent ], so there is an add-on to this. The third big block is energy cost. This is a very big driver now in the third quarter and in the fourth quarter with gas prices, coal prices, electricity prices going up everywhere. We have done some good forward-looking hedges, like Ian has explained, but that doesn't cover everything. So there is still quite a bit that we have to absorb, respectively pass-through.And then the last -- then the fourth piece is labor. I think this is more of an issue for 2022 because, if we look at labor negotiations now, they probably will be double from what we would have normally expected in a year, when we look at what is going on in the different regions in terms of labor contract negotiations. So I think that's still to come, not yet in the books now or in the fourth quarter. Other than new employees, which are more expensive to hire now than they used to be because we have to -- we can only hire them at higher salaries. And then the last piece is raw materials because of the shortage in China; very big, significant effect also for us because we don't make all the raw materials ourselves. So for those, this is -- for the ones that we make ourselves, it's more of a tailwind, but for the ones that we buy, we have to make sure that, very speedily, we pass these through. So the environment remains very volatile, and that's not going to end with a year.
No, clearly. Okay.
The next question comes from Patrick Steiner at Kepler.
It's Patrick Steiner speaking from Kepler Cheuvreux. I would be very curious about the impact of your price increases on 2022.
Okay. You -- Chris, do you want to take this?
Yes, sure. So I mean the price increases that we're putting through now are obviously to offset cost increases, but they do establish a very -- a much better run rate as we head into 2022. The question is whether that sticks because obviously, if you're just putting prices up for freight and then freight comes down again, then that potentially gets reversed, but what we're seeing in the raw material market in China could lead us to be, I think, more confident about that actually if the new pricing environment [indiscernible] is stronger.
So right now price increases are mostly restoring our margins. If we can get back to the margin level that we desire, 12% EBITA or higher, then we will be very happy for 2021. The raw -- and then these margins will, hopefully, remain stable as we're able to pass-through these -- all these different cost increases as they happen. Or we take them back as they go back in relation to freight, for example. With respect to raw materials, it is a very different story because this is more of a longer-term perspective. And here there could be different levels. So that has more of a medium-term impact, with the potential to expand margins eventually during 2022, yes.
Our next question is from Andrew Douglas of Jefferies.
Just 2 quick ones from me, please. Can you give me an update on how well hedged you are for 2022 on energy prices? It looks like you've done a good job in '21, but I didn't really get a sense for how hedged you are for '22. And if you could give us some form of guidance based on spot rates, what that impact could be in terms of the gross number from energy costs next year. And secondly, as a slightly bigger picture question: Given the kind of the purge the Chinese government is kind of undertaking now on kind of highly pollutive, low-quality producer of raw materials, do you see this as an opportunity for market share gains either in China or globally, particularly given you're the kind of low-cost producer in the market? I'm just wondering. Any thoughts on that, please?
Let me pass on the hedge question to Ian in a moment, but let me answer the raw material question first. It's -- and I think we've learned through 2018 situation that we have to be very careful to make longer-term predictions on the Chinese raw material industry for the time being, so I want to refrain a little bit from more of a longer-term strategic outlook until we see more fundamentally what's going on here. But everything right now on the magnesite side smells like 2017, 2018 yet again with shortages coming very abruptly; huge amount of speculation; some level of panic on the demand side; and very, very fast-increasing spot pricing on fused magnesia and dead-burned magnesia. So that looks like '17, '18. And if this is any kind of a model, then this is a 18-month period. During these 18 months, I think we will be able to decide what it is that we want to do. The expansion in Brumado in Brazil comes at the right time. Originally we wanted to shut down an old plant there at that site. We have put a little bit of maintenance now into this old plant, and we will keep it running at least for another 2 years. So the capacity that comes in June is actually really add-on for us that gives a chance for market share increase. And we have the capability at this site to add another about 100,000, 120,000 tonnes of additional capacity if we need to or if we desire to for relatively moderate amount of money, but that takes another year. So we will only do that if we can see this situation in China lasting longer than, let's say, a year, 1.5 years. Ian, on the energy...
Patrick (sic) [ Andrew ], thank you. So we are fully covered for our gas and our electricity requirements through to the middle of 2022. And on average, for 2022, we are 75% hedged.
With the exception of China, where you cannot hedge.
Yes. And one just quick follow-up on that in terms of the CapEx guidance for this year. I know it's elevated. What is the CapEx guidance for next year? Can you just remind me of that, please?
So our guidance for this year was EUR 260 million. Our guidance for 2022 was [ 1 65 ]. As Stefan highlighted, we have seen pressures in Brazil with steel, cement contractors, which have pushed up the costs of both the Brumado and the Contagem projects. And therefore, we would expect the guidance for next year to increase. We are not updating it yet.
Our next question is from Harry Philips at Peel Hunt.
A couple of questions, please. Just first of all, in terms of the raw material margin, that was running up -- well, adding 310 basis points at the half year. Just where might that be now given all the volatility in the price movement you've been highlighting? And then secondly, in terms of the substantial new capacity going into North America, you've got Steel Dynamics coming onstream next year. You've got U.S. Steel and Nucor coming down the track in late '23, '24. Is that sort of a real potential sweet spot for you in terms of potential new business wins? I would imagine, given where those new lines are being orientated, clearly the sort of whole-solution value-add proposition for yourselves is likely to be much improved.
Okay. So on the raw material margins, we don't see a significant increase, not yet, because the 2021 pricing has been essentially flat until now. And with the price increase that happened now on the raw materials, we will only have it in finished products in 2 or 3 months. So it will largely come as a benefit next year, not this year, the magnesite-based raw material improvement. On North America capacity expansion, this is a very interesting topic. And we've been working on this quite diligently with our customers because there is not really a dramatic net capacity increase happening in the steel market, but there is a shift from blast furnaces to electric arc furnaces. And that's really the sweet spot for us because in the electric arc furnaces a lot of these very high-quality products that we make are needed much more than in the blast furnaces where there is more standard aluminum-based materials where we are not that strong. And this is where the benefit comes from. And of course, operating these electric arc furnaces is more -- technically more advanced. It is technically more -- a little bit more difficult and so we can help with these kinds of full solution packages. So yes, we look at this with a certain level of optimism.
Harry, just to add to Stefan's point on the raw material margin. As you mentioned, it was 3.1% at the half year. That included 2.7% for the first quarter, which we've mentioned; and 3.4% for the second quarter. The third quarter again was 3.4%, and therefore our year-to-date number is 3.3%.
[Operator Instructions] Our next question is from Jonathan Hurn at Barclays.
Just one question from me, please. Just obviously you talk about utilization rates being high, and obviously you also talk about building inventory. I know some of that's down to raw material, but if we kind of look at sort of production rates, are you overproducing with the level of demand right now? Was that the case in Q3? And if it was, is that sort of overproduction going to continue into Q4?
So we're not overproducing refractory products. We're producing at full capacity, but our capacity is a little bit impacted, of course, because of the production network investments. So not all the capacities are at the level where they will be end of next year, and therefore we're not overproducing. We're catching up still, in a way. Our lead times are, especially in our more complex project businesses, still very long, still over 6-month lead times. So we are -- it's a little bit uncomfortable for us, to be that long. In the Steel business, they have come down, but they are still higher than average also. So rebuilding this inventory that got so depleted in the first quarter especially -- first and second quarter was one of our targets. What we are doing on the inventory side, we're -- yes -- or we are increasing our stocks in raw materials quite deliberately, as Ian has explained.
We have a follow-up from Patrick Steiner at Kepler.
It's Patrick again. Just a -- quick follow-up questions. Do you see some of your competitors, especially smaller ones, struggling especially? And do you think there could be some future potential for some nice acquisitions with that regard?
For me, these are 2 questions really. I think no competitor that we are aware of is in dire -- in a dire situation, but very few competitors also are in a bombastic margin expansion. Everybody is struggling with this pass-through effect. Therefore, pricing discussion is -- I wouldn't say easy. It's never easy, but it's very constructive because everybody has this pressure. The refractory industry, I think we will see, at the end of this year has weaker margins than we all had hoped at the beginning of the year. And that's due to this entire inflationary cost environment that we talked about. That's true for smaller competitors as well. On the M&A side, yes, we have very calmly and diligently built relationships with many interesting companies over the course of the last 18 months, step by step and without much noise. One of the results was this very, very constructive and friendly discussion with this very honorable family in Turkey that decided now to step out of this business, mostly for family reasons, yes. And I think those are the opportunities that we're pursuing, that we want to materialize in order to generate the kind of synergies that we're able to generate every time we do such a deal.
[Operator Instructions] So we have no further questions on the call, so I'll hand the call back to Stefan and Ian.
Thank you very much, ladies and gentlemen, for dialing in this morning, for speaking with us and for listening to us. And we look forward to meeting you over the course of the next days and weeks.Goodbye from Vienna.
Goodbye.