# RHI Magnesita Demand remains strong

- Link: https://www.directorstalkinterviews.com/rhi-magnesita-demand-remains-strong/4121028625
- Published: 2021-10-19T07:13:51+01:00
- Author: Giles

**RHI Magnesita N.V.** (LON:RHIM) today issued its trading statement in respect 
of the three-month period to 30 September 2021.

**Trading update**

Demand has continued to be strong for both the Steel and Industrial businesses, 
with the Group’s raw material assets and refractory plants operating at high capacity
utilization and order book visibility extending into the first quarter of 2022.

Whilst the Group saw improved earnings momentum in September, benefiting from higher
prices, profitability in Q3 was in line with H1 2021 due to the impact of further
increases in costs.

In addition, sales volumes for high margin refractories mainly for use in non-ferrous
metals projects were impacted by lower output from the Group’s Radenthein plant 
in Austria, where the temporary closure of one tunnel kiln for unscheduled maintenance
during the quarter will adversely impact H2 2021 EBITA by around €8 million. The
plant is now fully operational.

Prices for magnesite-based raw materials in Q3 were in line with the first half 
of 2021.

**Responding to supply chain challenges**

The supply chain position remains challenging in all territories with the Group 
seeing further increases in the cost of sea freight and demurrage, together with
rising energy and consumables costs. Supply chain delays caused by low freight reliability
impacted production schedules and deliveries and there was continued use of air 
freight when necessary to ensure customer supply.

**Price increases**

In response to higher costs, the Group has implemented significant customer price
increases, with a forecast revenue benefit from agreed increases of €100 million
so far in 2021. Further price increases are being negotiated, with a potential additional
revenue benefit of up to €30 million in 2021.

Whilst these increases are being achieved without loss of market share and will 
support the Group’s profitability in Q4, higher pricing is mostly applied to new
orders and there is a time delay before margins can be restored to prior levels.

**Inventory and logistics management**

Inventory levels were increased in Q3 in response to the reduced reliability of 
the global logistics industry and potential for disruption to the supply of raw 
materials. Additional people and systems resources have been dedicated to managing
logistics and other areas of increasing cost pressure. Improvements in delivery 
reliability and reductions in production backlog have already been achieved.

**Production optimisation plan**

Investments to upgrade the production network are progressing and are on track to
significantly improve the Group’s cost position and delivery capabilities as new
facilities ramp up in 2022.

A new container rail terminal was commissioned at the European dolomite hub in Hochfilzen(
Austria) in August and an upgraded tunnel kiln for production of fired dolomite 
products commenced operation at Valenciennes (France) in September. Mining of dolomite
raw material at Hochfilzen is expected to begin in Q4 2021 and the new rotary kiln
at the site will ramp up output in 2022.

New capacity for the non-ferrous metal and glass markets was commissioned in Radenthein
in Q3 allowing the closure of another site in Europe and further capacity for these
markets will be available in Contagem (Brazil) from the second half of 2022. Capacity
expansion at Urmitz (Germany) to supply functional products to the global market,
and high performing mixes to European customers, is on-track to ramp up in the first
half of 2022. The new magnesite raw material plant in Brumado (Brazil) is scheduled
for commissioning by the end of H1 2022.

The planned closure of the Mainzlar plant (Germany), which serves customers in high-
margin markets similar to those supplied by Radenthein, has been postponed until
the end of 2022 to assist in the fulfilment of customer deliveries during the current
period of high demand and during the ramp up of new capacity at Radenthein and Contagem(
Brazil).

**China raw material supplies**

In Q4, power shortages in China could increase the cost of externally purchased 
magnesite based raw materials and impact their availability. Production at RHI Magnesita
sites and customer demand in China may also be affected. The Group is examining 
alternative supply routes to mitigate this risk.

**2021 guidance**

Third quarter profitability was weaker than forecast but momentum improved in September
as the benefits of price increases took effect. Achieving full year guidance for
EBITA of €310 million requires a strong performance in the fourth quarter, which
is supported by the normal seasonal uplift in cement but is also subject to the 
agreement of further price increases which are currently being negotiated with customers.
Full year EBITA could therefore be between €280 and €310 million, depending on the
successful realization within the fourth quarter of the latest round of price increases
and any further increases in costs.

**Financial position**

The Group’s liquidity position remains strong. Net Debt : EBITDA is expected to 
remain at a temporarily higher level of around 2.0x at the 2021 year end due to 
lower profitability in Q3 and increased inventory levels to mitigate supply chain
disruption. This includes €96 million of proceeds from the disposal of the Group’s
interest in the Magnifin joint venture, which is expected to complete on 1 December
2021, in line with previous guidance. Gearing is expected to reduce in 2022 due 
to the combined effect of higher revenues and profits following price increases 
implemented in 2021, lower costs as benefits from the Production Optimisation Plan
ramp up and lower capex as the projects are completed.

**Acquisition of SÖRMAŞ**

In line with its stated strategy to grow in geographies where it is currently under-
represented, RHI Magnesita has agreed to acquire an 85.22% stake in SÖRMAŞ Söğüt
Refrakter Malzemeleri Anonim Şirketi  (“SÖRMAŞ”), a producer of refractories for
the cement, steel, glass and other industries in Turkey, for a consideration of 
€38.8 million in cash. The acquisition will significantly expand the Group´s locally
manufactured product portfolio and serve as a production hub and platform for business
growth in Turkey and the wider region. With an enlarged product portfolio, further
potential exists from the opportunity to deliver full-line service solutions to 
customers in Turkey.

SÖRMAŞ recorded underlying EBITDA of €6.4 million in the year to 31 December 2020
and had Gross Assets of €27.7 million and net cash of €3.7 million at 31 December
2020. The vendors of the 85.22% stake are entities controlled by Dr. Orhan Karabuda
and Prof. Dr. Zihni Cüneyt Karabuda and connected persons, and employees of SÖRMAŞ.
The acquisition is subject to competition authority clearance and is expected to
complete in H1 2022.

**Outlook**

> **Stefan Borgas, RHI Magnesita Chief Executive Officer, said:** “Demand remains
> strong and we have made good progress on our network optimization and capital 
> projects in the year to date. During the current period of supply chain disruption,
> we are focused on delivering for our customers, who recognize that pricing needs
> to be increased to account for the higher costs affecting refractory producers
> worldwide. We have taken action to mitigate these additional costs and our medium-
> term prospects are well supported by our structural cost reduction programme and
> investments in technology, solutions, recycling and growth in new markets. Progress
> against our strategic plan is demonstrated today by the acquisition of SÖRMAŞ 
> in Turkey which will provide a new platform for growth in the region.”

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