RHI Magnesita buys Turkey's SORMAS as input costs rise
RHI Magnesita said demand was still strong for both its steel and industrial businesses in the September quarter on Tuesday, with its raw material assets and refractory plants operating at high capacity utilisation, and order book visibility extending into the first quarter of 2022.
The FTSE 250 company said net debt-to-EBITDA was set to remain at a “temporarily higher level” of around 2x at year-end, however, due to lower profitability in the third quarter and increased inventory levels to mitigate supply chain disruption.
At the same time, it said it had agreed to acquire an 85.22% stake in Turkish refractory producer SORMAS for consideration of €38.8m (£32.82m) in cash.
Looking at its trading, Magnesita said that while it saw improved earnings momentum in September, benefiting from higher prices, profitability in the third quarter was in line with the first half 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 would adversely impact second half EBITA by around €8m.
The board said the plant was now fully operational, adding that prices for magnesite-based raw materials in the third quarter were in line with the first half.
RHI Magnesita said its supply chain position remained “challenging” in all territories, as it saw 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.
In response to higher costs, the group had implemented significant customer price increases, with a forecast revenue benefit from agreed increases of €100mso far in 2021.
Further price increases were being negotiated, with a potential additional revenue benefit of up to €30m in 2021.
“Whilst these increases are being achieved without loss of market share and will support the group's profitability in the fourth quarter, higher pricing is mostly applied to new orders and there is a time delay before margins can be restored to prior levels,” the board said in its statement.
Inventory levels were increased in the third quarter, 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 had been dedicated to managing logistics and other areas of increasing cost pressure.
The company said improvements in delivery reliability and reductions in production backlog had already been achieved.
Investments to upgrade the firm’s production network were progressing, and were 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 was expected to begin in the fourth quarter, and the new rotary kiln at the site would ramp up output in 2022.
New capacity for the non-ferrous metal and glass markets was commissioned in Radenthein in the third quarter, allowing the closure of another site in Europe, and further capacity for those markets would be available at 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, was on-track to ramp up in the first half of 2022.
The new magnesite raw material plant in Brumado, Brazil, was scheduled for commissioning by the end of the first half of 2022.
“The planned closure of the Mainzlar plant in 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,” the board explained.
Looking at the fourth quarter, RHI Magnesita said power shortages in China could increase the cost of externally-purchased magnesite based raw materials and impact their availability.
Production at its sites and customer demand in China could also be affected, with the group examining alternative supply routes to mitigate that risk.
On its full-year guidance, the company said third quarter profitability was weaker than forecast, although momentum improved in September as the benefits of price increases took effect.
Achieving full-year guidance of €310m EBITA would require a “strong performance” in the fourth quarter, which the board said was supported by the normal seasonal uplift in cement, but was also subject to the agreement of further price increases which were being negotiated with customers.
“Full year EBITA could therefore be between €280m and €310m, depending on the successful realisation within the fourth quarter of the latest round of price increases and any further increases in costs.”
The group said its liquidity position remained strong, with net debt-to-EBITDA expected to remain at a “temporarily higher level” of around 2.0x at year-end due to lower profitability in the third quarter, and increased inventory levels to mitigate supply chain disruption.
That included €96m of proceeds from the disposal of the group's interest in the Magnifin joint venture, which was expected to complete on 1 December, in line with previous guidance.
Gearing was 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 ramped up, and lower capital expenditure 1as the projects were completed.
Finally, in line with its stated strategy to grow in geographies where it was currently underrepresented, RHI Magnesita said it had agreed to acquire an 85.22% stake in SORMAS, which would “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.
SORMAS recorded underlying EBITDA of €6.4m in 2020, and had gross assets of €27.7m and net cash of €3.7m on 31 December.
“Demand remains strong and we have made good progress on our network optimisation and capital projects in the year-to-date,” said chief executive officer Stefan Borgas.
“During the current period of supply chain disruption, we are focused on delivering for our customers, who recognise that pricing needs to be increased to account for the higher costs affecting refractory producers worldwide.”
Borgas said the company had taken action to mitigate those additional costs, with its medium-term prospects “well-supported” by its 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 SORMAS in Turkey which will provide a new platform for growth in the region.”
At 0959 BST, shares in RHI Magnesita were up 5.01% at 3,102p.