RHI Magnesita NV (LSE:RHIM, Financial), a leading global supplier of high-grade refractory products, systems and solutions, has reported its unaudited half-year results for the period ending June 30. Despite encountering demand challenges, the company's effective pricing strategy, strategic sales initiatives and contributions from mergers and acquisitions have led to an increase in earnings before interest, taxes and amortization and significant progress in debt reduction.
I previously wrote about the stock in April, and the company is making good progress on its strategy.
Operational and strategic highlights
In the steel division, revenue recorded a 5% increase, even with an 8% volume reduction due to subdued global market demand. The strength of the pricing strategy more than offset the decline in sales volume during the period.
The industrial division's performance benefited from a favorable pricing recovery and the later-cycle nature of project-based business, achieving an impressive gross margin of 29%, showcasing the advantages of sector diversification.
Despite a low plant capacity utilization of 76% (compared to 83% in the first half of 2022), the company successfully executed a planned inventory reduction, excluding M&A, resulting in flat gross margins for steel despite lower input costs.
Through efficient stock management, inventory levels now approach or meet target demand coverage ratios without compromising customer performance. Remarkably, RHI Magnesita achieved record high "produced in full and on time" and recorded an all-time low in customer complaints.
A focus on sustainability led to a recycling rate increase to 13%, which resulted in the avoidance of approximately 1.1 million tonnes of carbon dioxide emissions between January 2018 and June 2023 through the use of secondary raw materials.
During the first half, RHI Magnesita successfully completed five acquisitions in India, China and Europe, amounting to a total cash consideration of $231.88 million, including working capital investments. The integration of these new businesses is expected to yield significant synergies and earnings accretion.
Financial highlights
The company reported a robust 9% increase in revenue, reaching $1.93 billion compared to $1.77 billion in the prior-year period, primarily driven by higher pricing and M&A contributions, which offset the negative impact of lower sales volumes.
Adjusted Ebita reached $222 million, compared to $209 million a year ago, with a margin of 11.6%. The positive effects of currency tailwind, higher pricing, M&A contributions and strategic sales initiatives counteracted the impact of lower volumes.
Price increases contributed $185 million to adjusted Ebita compared to the first half of 2022. Additionally, adjusted Ebitda from M&A amounted to $21 million, surpassing the previous full-year guidance. The guidance for 2023 has now been increased to approximately $44 million.
The cumulative annual Ebita contribution from strategic initiatives since 2019 now stands at $145 million, achieving the guided range of $139 million to $162 million for fiscal 2023.
Adjusted earnings remained steady at $2.81 per share, in line with the year-ago period ($2.86 per share). The increase in Ebita was balanced by higher debt interest charges and currency movements.
A significant improvement in free cash flow was observed, reaching $185 million, compared to a $163 million outflow in the first half of 2022. This was driven by working capital release in the base business and strong operating cash flow conversion of 114%.
Net debt was reduced to $1.25 billion, compared to $1.29 billion as of Dec. 31, while the pro forma net debt-to-adjusted Ebitda ratio declined to 2.10 (compared to 2.30). Strong cash flow and a $111 million equity raise in India supported cash investments of $232 million during the period, including $25.5 million of working capital investments.
The company also declared an interim dividend of 61 cents per share, reaffirming its commitment to providing value to shareholders.
Outlook
Despite the positive financial results, RHI Magnesita recognizes the uncertainty in key end markets, with order books indicating continued weakness into the second half of the year. While the pricing environment remains resilient, competitive pressure is expected to persist. The company anticipates the benefit of lower input costs, but may face challenges due to reduced fixed-cost absorption caused by low production volumes.
Nevertheless, RHI Magnesita remains optimistic about its future performance. Following a strong first half, the company now expects the full-year adjusted Ebita margin to be between 10.5% and 11.5%, aiming to deliver a full-year adjusted Ebita, including M&A, of at least $400 million.
However, the company anticipates the net debt-to-Ebitda ratio to remain above 2.0 at the end of 2023 as it continues to execute on its M&A pipeline, in line with its guidance range.
The stock is rated as modestly undervalued by the GF Value Line and it has a strong Piotroski F-Score of 8 out of 9, boosting its classification as a value stock.
In conclusion, RHI Magnesita's half-year results demonstrate its resilience in navigating challenging market conditions. The company's focus on strategic sales initiatives, strong pricing and successful acquisitions have contributed to increased earnings and progress in debt reduction.
Despite the uncertain economic climate, RHI Magnesita remains committed to delivering value to shareholders and achieving its financial targets, while continuing to pursue its transformation and growth strategy. It well worth adding to your watchlist for European stocks.
