RHI Magnesita lifts earnings expectations after solid quarter

(Sharecast News) - Refractory specialist RHI Magnesita hiked its full-year earnings expectations on Tuesday after its adjusted EBITA remained stable in the third quarter thanks to resilient pricing, strategic initiatives, and mergers and acquisitions. The FTSE 250 company said those factors counterbalanced lower sales volumes and under-absorption of fixed costs.

Over the year, RHI Magnesita said it had improved its operating key performance indicators (KPIs), resulting in enhanced customer service levels and more efficient cost management.

In the quarter, the company's production volumes followed typical seasonal patterns, with plants operating at an average of 70% capacity, aligning with previous guidance indicating a potential 5% decrease in full-year sales volumes compared to 2022.

Notably, steel volume weakness was most pronounced in Europe, China, and South America, reflecting localised market conditions.

Pricing trends showed strength in the cement and lime, and nonferrous metals segments within the industrials business due to the cyclical nature of the industries.

However, refractory raw material prices decreased in the third quarter, indicating potential pricing pressure on finished goods in the fourth quarter.

The firm's EBITA margin for the quarter saw a slight reduction to 11.2%, compared to 11.6% in the first half of 2023, with the refractory margin remaining robust and a modest contribution from vertical integration at 1.8%, consistent with guidance.

Financially, the company continued to generate strong organic operating cash flows from its base business before mergers and acquisitions, with year-to-date cash conversion increasing to over 120%, primarily due to the release of working capital.

M&A activities contributed to an increase in net debt of about €430m year-to-date, which included working capital, assumed net debt, and the P-D Refractories acquisition completed in October.

Acquisitions in India were partially funded through the issue of 27 million shares in RHI Magnesita India and a qualified institutional placement raising €100m in April.

The company's gearing, as a ratio of net debt-to-EBITDA, was expected to increase by the end of the year but remain within the target range of 2.0x to 2.5x.

On the M&A front, RHI Magnesita completed its acquisition of P-D Refractories, a European producer of high-quality alumina-based refractories for industrial applications, on 3 October.

The transaction was not expected to significantly affect the company's gearing on a pro forma EBITDA basis.

It said it had successfully executed nine acquisitions in the last 24 months as part of its strategy to consolidate businesses in its target geographies and product segments.

Looking ahead, RHI Magnesita said its order book visibility remained typical, with limited indications of demand volume recovery in 2024.

Global construction activity remained weak, with auto market demand remaining below pre-pandemic levels.

However, the company increased its adjusted EBITA guidance for the entire year from €360m to at least €380m due to its strong third-quarter performance, outperformance in M&A synergies, and anticipated higher volumes in cement and lime in the fourth quarter.

The benefits from M&A and operational efficiencies were expected to support earnings into 2024, counteracting weak demand.

Net financial expenses, excluding foreign exchange-related items, were tracking in line with the guidance of about €65m for 2023.

Considering the higher EBITA forecast offset by higher financial expenses and foreign exchange adjustments, the firm expected earnings per share to be moderately ahead of analyst consensus for the full year.

"I am pleased by the strong execution demonstrated by RHI Magnesita during difficult conditions for our key end markets," said chief executive officer Stefan Borgas.

"We are currently benefiting from the strategic investments we have made in reducing our cost base and rationalising our production network, together with improved planning and careful management of our assets through this period of weaker demand.

"Pricing discipline has helped to maintain EBITA margins at over 11%, offsetting the impact of lower production on our fixed cost base."

Borgas noted that the firm was also able to progress its merger and acquisition strategy, with six acquisitions completed in the first nine months of 2023 and nine in the last 24 months.

"As a result of success in the early stages of M&A integration and our consistent operational and financial delivery in the year to date, we are able to increase our EBITA guidance for 2023 to at least €380m."

Reporting by Josh White for Sharecast.com.