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Edited Transcript of RHIM.L earnings conference call or presentation 12-Aug-19 7:30am GMT

Half Year 2019 RHI Magnesita NV Earnings Call

London Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of RHI Magnesita NV earnings conference call or presentation Monday, August 12, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ian Botha

RHI Magnesita N.V. - CFO, Finance Director & Executive Director

* Stefan Borgas

RHI Magnesita N.V. - CEO & Executive Director

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Conference Call Participants

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* Andrew Douglas

Jefferies LLC, Research Division - Equity Analyst

* David Alexander Larkam

Numis Securities Limited, Research Division - Analyst

* Edward Maravanyika

Citigroup Inc, Research Division - VP

* James Edward Zaremba

Barclays Bank PLC, Research Division - Research Analyst

* Mark Davies Jones

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

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Presentation

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Stefan Borgas, RHI Magnesita N.V. - CEO & Executive Director [1]

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All right. Good morning, ladies and gentlemen here in the room, in London and in the telephone conference. Welcome to the RHI Magnesita 2019 First Half of the Year Numbers Presentation and Results Presentation. Happy to have you all here.

This was quite a different semester than we saw developing in the second half of last year. When we look at this semester from last year's perspective, we would not have thought it was going to be that tough and I think this, of course, reflects what everybody else is seeing as well. With this, let me jump into the numbers and into the facts and details that are behind the numbers.

If we go to Slide #5 of the presentation, it shows you our highlights. We have a small revenue growth of about a little bit more than 2%. That was mainly driven by the continuation of all of the activities that we did in the company since last year. It was translated in a margin of about 15 -- a little bit more than 15%, 15.2%, driven by synergy -- continued synergy delivery, cost discipline but also price discipline. So we're happy about this margin development. This happens in an environment where some of our raw materials are a little bit going down in price. So our backward integration, of course, gives us a piece of this margin expansion. Other raw materials have continued to increase, so there's a mixed bag picture here. The effect of raw materials have, as we have said many times before, largely been overestimated in this business because this is a specialty business and I think we're seeing it in the numbers in this semester.

So happy about the margin development, not quite as happy about the working capital delivery. The intensity here of 21% is higher than we would have liked to see it. I think it's due to 2 effects: the first one is the fact that we have maybe been a little bit oversupplied, especially in our raw material chain because of the experiences of last year where we had a lot of delivery problems, so we have more buffers than we probably should have in these market conditions; and we reacted a little bit too slow to the softer volume demand all over the world from our customers, and that leads to this effect. We have in the meantime put all the measures in place that are necessary to adjust this, and you will see this come down through the course of the second half. Actually, we have seen this come down in May, June already so the trajectory is okay.

Our -- we have announced a dividend according to -- the interim dividend according to the dividend policy that we have set. Our EPS is in line, so we're okay with this.

Let's go into the operational highlights on the next slide. I think in these markets, we can be quite satisfied with the performance that we have delivered. Last year was, you might want to say, a 13-month year because many customers have filled their inventory chains because of tight supply situations in many parts of our industry. This month is an 11-month year because that tightness of supply on the refractory side is no longer there, so customers can be a little bit sharper in planning refractories. But also, maybe more importantly, customers themselves have much more uncertainty, so they want to take their inventories out of the chain. That means 2019 will be a lower-volume year overall.

We have had very strong performance in our Industrial Division. This is a Project business mostly. This has done very, very well. You will see the numbers in a moment when Ian presents them to you. But we've seen rather weak performance in the steel markets especially in Europe. You've all written about it and read about it, so I don't need to explain the background of the weakness of steel production in Europe. It's automotive-driven, but also industrial production-driven. And we have had somewhat of a weakness in North America as well. This is less structural. This is more of a timing issue because some of the steel supply has moved to the southern part of the U.S. where our market share is slightly lower than in the integrated steel mill. So that will adjust itself over the course of the next 6 to 9 months. I'm not so worried about this. And of course, part of the volume reduction also is driven by customer destocking.

The growth markets that we are going after, especially India and China, are doing well. We're very proud that in China we have been able to sign our first real solutions contract with a customer there, and the team is extremely proud about this and very energized and very encouraged by this and so is everybody who's supporting them. Also India, revenue growth with 16% is very satisfying.

Our gross margin performance will continue to benefit from the operational improvements that we are making and also from the recovery -- also from the synergies that we will continue to deliver.

Working capital, I already talked about.

Safety is a priority for us. We continue to make good progress here. The organization is really taking this on well. We still, however, have a lot of work here. We need to expand this program now to our contractors, maybe a little bit more also to our customer sites where, of course, with the rollout of the solution business, this will become more and more important.

With this, Ian, please lead us through the numbers.

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Ian Botha, RHI Magnesita N.V. - CFO, Finance Director & Executive Director [2]

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Thanks, Stefan, and good morning, everyone. As Stefan has highlighted, against the backdrop of more challenging market conditions, the group has produced a robust financial performance in the first half.

On Slide 9, we present an overview of the profit and loss statement, and I'd like to highlight the key drivers behind the first half performance. Revenues were up 2% to EUR 1.54 billion and up 1% in constant currency terms due to strong growth in the Industrial Division, which offsets the weaker performance in the Steel Division.

EBITA was up 12% to EUR 234 million, resulting in EBITA margin of 15.2%, up 140 basis points year-on-year or 30 basis points in constant currency terms. This was due to the realization of further synergies and improved price and mix offsetting the impact of lower volumes and lower production volumes, which led to lower fixed cost absorption.

Profit after tax was up 86% to EUR 121 million, reflecting the progress made in refinancing high-cost debt, the lower average net debt and reduced foreign exchange effects from the range of mitigating actions that we have taken.

Moving to the next slide. Revenue was up 1% in constant currency terms to EUR 1.54 billion with higher prices and mix contributing EUR 126 million, which was largely offset by a reduction in sales volumes of EUR 109 million.

First half EBITA of EUR 234 million benefited from foreign exchange movements of EUR 19 million, most notably from a 7% stronger U.S. dollar, which contributed EUR 17 million. On a constant currency basis, EBITA was up 3%, with the delivery of synergies contributing EUR 10 million and higher margins from improved prices and mix adding EUR 35 million. These were offset by lower steel sales volumes as well as higher SG&A costs. This is largely attributable to expenditure on strategic initiatives such as the creation of our Rotterdam supply chain hub.

Turning the slide. Working capital is flat on a comparative period, but we have disappointingly seen an increase from the beginning of the year by EUR 131 million to EUR 642 million, and as a percentage of our working -- of our revenue, increased to 21%. Approximately half of this increase was driven by EUR 63 million reduction in accounts payable to EUR 440 million. This results from lower purchasing levels in the second quarter when production was slowed to align with softer steel demand and in order to reduce our inventory levels. The balance of the increase was largely caused by EUR 53 million increase in accounts receivable to EUR 349 million as a consequence of more cautious markets in the first half of the year and lower prepayments due to the cessation of sales into Iran. We expect to partly recover the increase in working capital by the end of this year.

Turning to cash flow. We reported an operating free cash flow of EUR 129 million, materially impacted by the increase in working capital. Net cash flow before the Magnesita tender offer was EUR 68 million with EUR 45 million invested to complete the buyout of the Magnesita minority shareholders.

We started 2019 with net debt of EUR 639 million, which reduced to EUR 611 million in the first half from net cash generation. The company adopted IFRS 16 on lease accounting from the 1st of January and this has added EUR 58 million to our net debt, taking our net debt to EUR 669 million at the 30th of June and leaving us with a robust net debt-to-EBITDA of 1.1. This provides the group with a strong platform from which to execute its capital allocation priorities in support of organic growth, strategic consolidation in target markets and a progressive increase in returns to our shareholders.

In 2018, the company refinanced EUR 800 million of high-cost legacy debt. This has continued in 2019 as we have further strengthened and simplified our debt funding through additional low-cost refinancing. This included entering into EUR 100 million 5-year loan in June with OeKB, the Austrian export credit agency, and in July entering into a EUR 280 million Schuldschein with tenders of 7 to 10 years. This will be partially used to repay EUR 102 million of legacy high-cost debt.

On Slide 15, we've provided our guidance for 2019. As Stefan has mentioned, we are on track to deliver further EUR 10 million of synergies in the second half, bringing the full year incremental synergies to EUR 20 million and the total synergy savings at the end of this year to EUR 90 million.

The operational turnaround at 4 plants that underperformed in 2018 is on track with EUR 20 million expected to be recouped in the second half of this year and the total amount of EUR 40 million in 2020.

We continue to guide to maintenance CapEx of EUR 110 million to ensure business continuity and safe production.

Our project capital is focused on low-CapEx, fast-payback, value-adding projects. And in 2019, this largely comprised expenditure on the Chizhou dolomite project in China, which project is proceeding on budget and on schedule. We are, however, reducing our 2019 project capital guidance to EUR 40 million. This is partly due to the deferral of CapEx given current market dynamics.

Depreciation of EUR 140 million is expected in 2019. This is EUR 15 million up on our previous guidance and follows the adoption of IFRS 16 on lease accounting. It is worth just noting that both depreciation and amortization are impacted by foreign exchange movements.

And lastly, the effective tax rate is projected at 24%, unchanged from the guidance at the beginning of the year.

Thank you, and I'll now hand you back to Stefan to talk you through the operational and strategic review.

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Stefan Borgas, RHI Magnesita N.V. - CEO & Executive Director [3]

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Thanks very much, Ian. On the strategy on Slide 17, just to remind you that we are targeting an organic growth year-over-year of between 1% and 3% and an additional growth from M&A of again 1% to 3%. And it comes from these 6 buckets that you see on this slide. I will not spend much time on it. I'd just highlight a few areas. The efficiencies that we want to bring to the steel industry are going to be one major driver of our solutions approach as -- where we want to grow from materials -- refractory material supplier into a full solution supplier with more than just product sales.

The -- from the market perspective, India and China and maybe Turkey are on the primary focus for us and then the other markets in the future. And the drivers here are digitalization and also process innovation inside our own plants. Those are the main levers here in this strategy.

When we look now back at the H1 performance on Slide 18, we put together a little bit more in detail what were the drivers of the business. Pricing, all very stable. We're happy about this, but we have a volume issue in the steel industry. It's an adjustment volume reduction when we talk about North America, South America and also the Middle East where there's simply an inventory reduction of refractory materials in the chain. So I'm not really worried about this in the mid and in the long run. In Europe, this is more structural. So we have to see how the European steel industry, and more in general, heavy industries will develop over the next years. But from our perspective, this could end in more of a restructuring of the European industrial landscape including what we will do ourselves.

Now if we go into the 2 parts of our business. The Industrial business did very well. Cement growth was 17%. The project business growth was 9%. Very good margin delivery on this. There's no reason why this should slow down in the second half of the year. We have good visibility on this because the project portfolio is quite full. So we're good on this.

Steel, the picture is a little bit more complicated. Usually, we show you this steel volume growth data because this is the major factor that drives our business. Of course, the growth of the volumes of the steel producers drives the volumes of refractories. But just to look at the volume picture is too simple because there are some other factors that drive the chain, and that's what we've tried to do with this complex-looking assortment of bubbles on the left side.

On the bottom 2 -- the bottom 2 lines show all the things that are going on in the heads of our customers: economic slowdown, is there a crisis, what's happening with trade, how are the market conditions, how is this going from one region to another. That's what's going on in their heads and then they determine their own steel production plan from this and make all these announcements that you could read of in -- read about in the last months. But they also adjust their inventory chain. You see this here on the far left, the overall inventory reduction.

And that -- both of those things -- both of those items, the production schedule but also the inventory planning thinking impacts the refractory industry and then ourselves. So that's why we have to talk -- keep looking at more things than just the steel production numbers. And if we translate this then in our own performance, we've had a slight reduction in steel sales of about 3% and a stabilization of margin here, but not a growth.

On the operational side, inside RHI Magnesita, you know that we've had 4 plants that we've had issues with. I am happy to report that the problems are solved in 2 of them. Our Irish plant was under heavy restructuring in the first quarter of this year, that's why we see quite a burden of this restructuring cost in the numbers of the first half. But since the middle of March, this plant is running like an electric train, fantastic, cranking out products, sales are going well. I think this is a great performance of the plant in Drogheda. Similar performance in the Austrian plant in Veitsch. We still have slightly to higher scrap rates there, but this is getting better month by month. Output is fantastic, stabilized, delivered performance is back. So those 2 plants are done with.

The 2 German plants we have problems within Hagen -- had problems within Hagen and Kruft are not doing any worse. They are also stabilized, but we haven't seen much improvement here. So this will take longer because this takes heavy restructuring in both of these plants. Therefore, the benefits that we would get here will only be in our P&L next year.

Other than that, we are translating this sales situation that I talked about a few slides ago into a production network optimization now. There are really 2 big factors -- or 3 big factors that is driving our thinking. The first one is the fact that the regional supply is going to become more important and there will be less really global trade. So this is especially important for our supply in India and China. Those plant network -- those plants must -- those markets must become more reliant on their own supply. So when we think about restructuring India and China production network, that means becoming more autonomous there.

The second effect is in the Americas -- or our second part of thinking is in the Americas. In the Americas, we have to become more competitive with our plants and we're going to do this by dedicating the plants on individual product groups more than they're dedicated now.

And the third part is Europe. Europe has traditionally exported a much higher percentage of the production than other regions because of the history of the company. This, for sure, will not be able to be continued into the future. So we have to reduce the export share, that means we have too much capacity in Europe. Also the European market itself will not grow dramatically. Maybe it will shrink. So in Europe, it's more of a classic restructuring, possibly with some reduction of capacity. We're developing this in detail, and we will explain this in numbers and concrete actions in our Capital Markets Day in November.

A word to the backward integration because we believe this is a key strategic advantage that we have, and I think the first half numbers show this. The EBITDA margin continues to be very much supported also by the backward integration that we have because we can produce raw materials at much better conditions and also at much better return on invested capital than if we had to buy all the materials outside.

There's a lot of talk about raw materials, so we put a raw material price slide in here. We indexed this on the 2016 numbers, which were relatively low, and you see there's some talk about falling raw material prices. This is actually true only for some of the dead-burned magnesia products, and falling means really adjusting back to some level of normality after the peak of last year. So there's nothing like a raw material crash happening -- raw material price crash happening. If you look at all the other raw materials, which make up almost half of our product portfolio, 45% of our product portfolio, they are very stable or even going up. So there's no raw material concern to be had here from anybody.

With this, let me summarize. We believe RHI Magnesita remains a clear and compelling investment case. We have a good strategy and a strong competitive position that we can continue to improve with the self-help measures.

We have significant growth opportunities in new markets and also with selected and focused M&A. Also, on M&A, we will be reasonable and not do deals for the sake of doing deals. This is also the reason why some of the ones we've talked about in the past are not happening so fast because we will not do crazy things.

We will -- we have continued margin opportunity from cost savings, and our synergies and our cash conversion is something that Ian keeps us very focused on. And I'm very, very grateful for this.

The first half of 2019 was difficult, more difficult than we had thought going into it, especially because of the steel environment, the steel production environment, and the reduction of inventories in the chain, but supported by a strong business in the industrial markets.

We are seeing encouraging market response to our price increase attempts. This is being done in a disciplined way without over aggression, very measured and very much in good cooperation with our customers and also some positive response from competitors in some parts of the world. Continued good growth in India and China. And our margin performance overall also is satisfactory.

When we look at the second half of the year, I think we should continue to be rather careful. Personally, I don't think we have seen the end of the inventory adjustment in the steel industry, especially not in the industrial countries. I am more -- I think we have to be prepared for a further cooling down of the global economy, which will also have a somewhat cooling down of the steel and the other material production. The Industrials momentum will stay strong in the second half of this year, and if there's weakness there, this will only come next year.

We have self-help measures that we have talked about. Our Asia business is developing well. Our synergies are coming through. The price increases are going to support some of this continued volume pressure that we will also have in the second half of the year. And therefore, we have kept our guidance the way it is because we think we have enough self-help to counterbalance the additional volume pressure that we will probably see in the second half of this year.

With this, we're at the end of the presentation and are, of course, very happy to take your questions. I suggest we take the first round of questions from the room here and then go to the telephone conference.

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Questions and Answers

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [1]

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It's Andy from Jefferies. A few questions, please. Can you give us a book-to-bill on your Project business in Industrial, clearly it's going very well. Just kind of interested in kind of what you're kind of booking as well as what you're shipping because clearly Project business is more important to understand kind of what you're taking in.

With respect to growth in sales in the first half, can you give us price and volume by the 2 divisions just so we have a rough idea of how to model that going forward.

India, you've done very well versus the market, which has been quite challenging. We hear from other people it's quite an ill-disciplined market at the moment. Can you just talk about gross margins in India? Just making sure you're not kind of giving it away for slightly less than you probably should do.

And also on the pension guidance, Ian, you've given us GBP 30 million excluding pension. Can you give it to us including pension?

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Stefan Borgas, RHI Magnesita N.V. - CEO & Executive Director [2]

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Yes. So for the price, volume and the pension data, maybe, Ian, you can take those two. The Project business outlook is solid. We have a visibility of around 9 months, so we're quite okay for the second half of this year because all of these projects are booked long time ago. No significant weakness looking into the first half of next year either. I think the one exception here is the cement business because that tends to be more shorter term-focused. I think we have to see how the end of the year cement orders are going to look like until we can give you a further outlook here.

India, we have had no margin concerns there. This was quite disciplined. The India margins actually have recovered really well, especially in the second quarter. We've also collected some very overdue receivables there, which actually is a particular issue from time to time in India. So we're quite happy with the discipline of the team there. So really nothing bad to report.

I think third quarter, India is going to be a little bit weaker because of the summer and because the order book that we see, but fourth quarter should again be okay. But margins in India, quite okay and receivable collection also quite okay because those 2 things go together there.

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Ian Botha, RHI Magnesita N.V. - CFO, Finance Director & Executive Director [3]

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Andy, on the revenue bridge, the price/mix split is Steel is up EUR 81 million, Industrial is up EUR 45 million.

From a volume perspective, Steel is down EUR 115 million and Industrial is up EUR 6 million.

From a pension perspective, we would expect a full year impact of just short of EUR 10 million. The impact in the first half has largely been a consequence of lower interest rates on our pension schemes in Europe, the U.S. and Brazil and we expect that, that will continue into second half of the year.

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [4]

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Mark Davies Jones at Stifel. A few things. Firstly, the commentary on pricing is interesting. Obviously, with falling volumes and falling raw material prices, it's fairly extraordinary if you're still managing to push through price rises yourself. So can you talk through how you're managing to do that and how those conversations are going with the customer base?

Then is there anything from history to can give you an indication of how long the steel industry takes to adjust its inventory? Is there any kind of average period we should be looking at for an adjustment?

And then very finally, you sort of mentioned this in passing, I think, in your commentary, but the Turkish business you were looking at, slightly odd commentary there that you're no longer exclusive, but you're still looking. So is there any more color you can give to what the considerations are there?

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Stefan Borgas, RHI Magnesita N.V. - CEO & Executive Director [5]

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Okay. Let me -- the Turkey business is just simply a discussion where we were not able to conclude a deal based on the parameters that we wanted to do. So the seller decided to look elsewhere and we said please do that. So we stay quite disciplined. We're in good speaking terms with them. We have a good exchange. They might or might not come back to us.

I think that the assumption that I perceived in your question that raw material prices are going down, I want to challenge this assumption if this is the assumption you have. Raw material prices are not going down like you could see on that chart. What is going down is the low-quality dead-burned magnesia supply from China. But all the -- even the mid-quality dead-burned magnesia is very stable. The high-quality dead-burned magnesia from China is almost the same level than it was at the beginning of this year. And the high-quality dead-burned magnesia supply from outside of China is actually going up in prices because there's a significant production problem with the main DBM producer in Europe who has announced that they have capacity problems, they have just put a 20% price increase.

And so raw material prices are not going down. And when we explained this to customers in detail, this question goes away. The pricing discussion we have with our customers is only with the old-fashioned mindset linked to raw materials, but 90% of the price discussions we have with our customers is going around how do we deliver a total production cost reduction for making steel or making cement or making copper to them. And very quickly, the discussion goes around we need more than just a cheap pallet of refractory bricks. We need a lot more than this. We need measurement tools. We need analytic capabilities. We need robots to take people off the shop floor. We need dramatically less energy consumption in our steel plants. Can you not deliver a package that gives us this? And we -- then we go through the details of how we can develop this over the time and then what it costs.

And we need to pre- -- we, as a company, need to preinvest in all of these technologies and systems and tools. And therefore, we need to have a price increase in order to be able to do this, and that's the reason why customers accept this. We're not increasing prices by 30% or so. We're talking 2%, 4%, 5%, 8%, depends a little bit. And we do have customers who don't want this because they say we can do this ourselves and they don't accept this, and we walk away from those customers. One -- the major reason for the volume reduction, especially in Europe, are those customers who find suppliers who give them refractory products at 10% margin, 10% gross margin. And as a company with our business model, we are not prepared to do that and we walk away from this business.

Second question, you -- I think there's a last question here.

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [6]

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Yes. The timing of the inventory adjustments through the steel industry, if there's any lessons from history on how long it takes.

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Stefan Borgas, RHI Magnesita N.V. - CEO & Executive Director [7]

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I think we'll need one more quarter and then the volume impact of that piece should be done.

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James Edward Zaremba, Barclays Bank PLC, Research Division - Research Analyst [8]

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Jim Zaremba at Barclays. Can I just follow up on your comment, Stefan, around kind of price and mix. In terms of those conversations, how much is it you're persuading customers that they need better products from you so you're getting this mix benefit versus, I suppose, what maybe you're saying about you're getting pricing to invest to deliver more in a year's time, if that makes sense. As in, are you persuading your customers that they need a higher-quality product to you and that will deliver them savings today, so therefore, they're paying you more and you're getting mix benefit? Or are they paying you more for the same product?

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Stefan Borgas, RHI Magnesita N.V. - CEO & Executive Director [9]

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I mean obviously, it's a combination of this. If a customer tells us we want more of your technical service competence at our site, but please give us the cheapest brick, then either we charge them for our technical service competence and this is not just the cost of the person, but this is the total cost that the company has in order to bring a knowledgeable person, then it's just a matter of how do we bill. And at the end, we always agree -- almost always agree to put this into the product price. But this is not a business where the actual physical quality properties make a dramatic difference. They do make a difference, but it's more of the selection of which exact quality do you use for which exact parts of the furnace of the customer. You don't need the best-performing brick in the part of the furnace that has very low wear. You can take a cheaper product there and that's, of course, what we do. But that's part of the optimization brainwork that an expert needs to -- a refractory expert needs to do when they are in the plant. Those are the kinds of discussions we have.

So this is, I would say, half is on actual, immediate improvements and we always offer the customer to share in this. We tell them we are ready to take this over. We bill you in euros per tonne of steel produced, and we share the benefit when we are able to reduce euros of tonne per steel produced or we do a traditional sale of product, but then we put the performance into the product price. So that's I would say half and the other half is about future investments. Actually, most customers at the end want both because, especially when we talk to the plant managers, they don't care about the price of the brick because it's such a small piece of their costs. They want something that works and where they can reduce maintenance costs because that is so much dramatic for them.

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James Edward Zaremba, Barclays Bank PLC, Research Division - Research Analyst [10]

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Maybe a follow-up for Ian. In terms of working capital in the first half, was there any change versus the full year and factoring and kind of what's the absolute level we have at the half year?

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Ian Botha, RHI Magnesita N.V. - CFO, Finance Director & Executive Director [11]

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So James, we certainly do make use of working capital financing both factoring and for fitting. It's an important source of low-cost liquidity for our business. And also, when you look at our U.S. dollar term loan and the revolving credit facility, both of those have interest rate matrixes in terms of which the interest rate that we pay is driven by the net debt-to-EBITDA ratio. So lower net debt-to-EBITDA ratio drives a structural reduction in our interest and that saves us about EUR 6 million an annum. In the first half of the year, the aggregate working capital financing increased by EUR 50 million to EUR 360 million and that's probably at the level of our revenue at the moment that we're comfortable with. It's unlikely to go too much bigger in the near to medium term.

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David Alexander Larkam, Numis Securities Limited, Research Division - Analyst [12]

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David Larkam, Numis. Just going on to the Steel side, it looks like the shaped went down and services went up quite a bit. Just talk about that, does that mean your sort of strategy is working there? And then -- in terms of the mix of what you were doing.

And secondly, add into that China, which first contract there. Is that meaningful for numbers or just meaningful for how the strategy is developing?

And then one for Ian, just going back to the financing, EUR 500-plus million of cash on the balance sheet, going to be probably EUR 600 million hopefully at the year-end, what do you really need in this business?

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Stefan Borgas, RHI Magnesita N.V. - CEO & Executive Director [13]

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Again, the first part of your question, the -- on the Steel business?

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David Alexander Larkam, Numis Securities Limited, Research Division - Analyst [14]

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Like the shaped products went down and the services went up in the first half. This is nothing particularly...

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Stefan Borgas, RHI Magnesita N.V. - CEO & Executive Director [15]

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Shaped sales went down because overall volumes went down, and of course, shaped products are a big part of the volume, so it's just part of the same trend. And of course, services went up because the Industrial business is more service-intensive because it's a project business, right, so services are a bigger piece of that volume.

No. Steel -- and then in China, of course, is the sign that the strategy works, but this is a significant contract. This is a contract that will deliver more than EUR 20 million per year. And for a business that is -- so that's a 10% growth of the total China business. And if you consider that the total China business, of course, has a significant Industrial part, then in terms of the Steel business, this is a 15%-or-something like this growth of the Steel China business. So it is very meaningful for that business. And for the company, okay, EUR 20 million is not going to save RHI Magnesita, but it's a contributor. One or 2 more of those and we're starting to have a real business in China.

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David Alexander Larkam, Numis Securities Limited, Research Division - Analyst [16]

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By the year-end?

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Stefan Borgas, RHI Magnesita N.V. - CEO & Executive Director [17]

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Next question.

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Ian Botha, RHI Magnesita N.V. - CFO, Finance Director & Executive Director [18]

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On the cash, we're carrying just over EUR 0.5 billion in cash at the half year and that is impacted by the fact that we received EUR 100 million on the OeKB on the 27th of June. We will carry relatively high levels of net cash in the business because of the strategy to look at value-adding, inorganic growth. And to have that liquidity available is strategically very helpful.

The focus for the business in the second half is actually around our cash pooling, where what we're seeking to do is to move cash from deep down in our business up to the center to being able to service the revolving credit facility. On an annualized basis, we can see interest rate savings of around EUR 3 million. But as a general thematic, I think that over the second half of the year, you're going to see the aggregate level of liquidity in our business increase because even at the half year, if you add the Schuldschein, we're sitting at EUR 900 million.

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Stefan Borgas, RHI Magnesita N.V. - CEO & Executive Director [19]

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Any questions in the telephone conference?

No questions. Okay. Let's stay in the room then.

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Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [20]

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Just one quick follow-up on the joint venture number went from quite a healthy positive to a negative in the first half, I think, EUR 5.5 million to minus EUR 3.8 million. Anything going on there that we should be aware of just for modeling purposes?

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Ian Botha, RHI Magnesita N.V. - CFO, Finance Director & Executive Director [21]

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So we had the write-down of the Sinterco loan, so this was a decision to change our purchasing strategy and we've written off EUR 9.6 million in the first half of the year, and that will not be repeated in the second half of the year.

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Mark Davies Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [22]

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At the risk of preempting what you want to talk about in November, obviously, you were talking about some structural issues in Europe, which I guess is not a surprise to any of us. But given the location of your European plants, that's potentially something very expensive to restructure, one imagines. So are there plants you can repurpose or change the configuration and make savings that way? Or will you have to look at actual closures? And how many plants do you have in Europe at the moment?

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Stefan Borgas, RHI Magnesita N.V. - CEO & Executive Director [23]

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We're looking at the reconfiguration, especially of the plants in Austria and Germany because that's where we have the bulk of the plants. We also have 2 plants in France that initially we were rather pessimistic on, but I have to say that the new French focus on industrialization has actually already made it through the bureaucracy. We get really good support in France from the authorities on permits, on moving forward, on improving the structure. Also, on the worker relations side in France, we have really good collaborative unions there, tough and they bring their topics, but they're fast. So we are actually quite surprised by the potential that we have on the French side. There's a very good opportunity of reconfigurating one of the French plants. We're waiting for the permitting results. We will also in-source some raw material -- the raw materials that we make outside of the group into one of the Austrian plants. Also this is positive for them, but then we have 3 smaller plants in, 2 in Germany and 1 in Austria, that we need to do something about, they're not long-term sustainable. And that entire package we are looking at right now, and please allow us not to speak -- say more about this because we want to have the discussion with our works council first and then we will publish on what we will do there, but we're quite advanced there.

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Edward Maravanyika, Citigroup Inc, Research Division - VP [24]

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It's Ed Maravanyika from Citi. Just to follow up on that, where would you say capacity utilization is for your plants in the Steel division in Europe? And I think also at the last conference call, you talked around working on improving margins in Brazil, which you said had been -- well, had tailwinds because of the political change, but had issues around the margin. Just an update on progress around that, please.

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Stefan Borgas, RHI Magnesita N.V. - CEO & Executive Director [25]

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So plant utilization, in general, we don't have -- have a difference between steel plants or industrial plants because we make product categories in the plants and they go into all applications, of course. But overall plant utilization is closer to 70% rather than 80% in the first half of this year. And of course, in Europe, it's lower than in India or Brazil.

The margin recovery in Brazil is going quite well. This is one of the reasons why we're not seeing such a dramatic increase in volumes. Obviously, it's difficult with the market share we have there, but the Brazil margin recovery will be one of the drivers in the second half of this year, but most of the discussions and negotiations are finished there. So I think the Brazil business is back to closer where the global average is at the end of this year.

Any other questions?

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Unidentified Company Representative, [26]

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No further questions.

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Stefan Borgas, RHI Magnesita N.V. - CEO & Executive Director [27]

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No further questions in the telephone conference as well. Well, thank you very much for supporting us, for writing about us critically and positively, both. We appreciate the constructive exchange and are looking forward to seeing you all in November in our Capital Markets Day here. Goodbye, and see you soon.