Magnesita Reports its 3Q17 Results

2017-11-16

Nov. 13, 2017 - MAGNESITA REFRATÁRIOS S.A. announces today its 2017 third quarter results (“3Q17”) and 2017 year-to-date (“9M17”) results. Comparisons are made with 2016 third quarter ("3Q16"), 2017 second quarter ("2Q17") and 2016 year-to-date (“9M16”) results.

“I’d like to start by saying how delighted I am with the closing of the transaction combining Magnesita and RHI. Since October 27th, 2017, we are officially part of RHI Magnesita, a truly global player and the world leader in refractories. This was certainly the most important achievement since I joined the Company five and half years ago. The team and I are very excited about the value creation this combination will bring to all stakeholders, especially our customers and industry partners. We believe this transaction further accelerates our growth, resulting from the high complementary of the businesses, both in terms of geographic footprint and enhanced value-add solutions and technology. Additional value creation will be realized through synergies and the implementation of common proven standards of operational and commercial excellence.

Magnesita continued to deliver positive results in 2017. Consolidated revenue year-to-date was US$841 million, up 16% over 2016, supported by the growth in steel production across our underlying markets, combined with our commercial initiatives to expand in new geographies. Our profitability is in line with the high standards we set out to achieve this year. EBITDA¹ margin reached 15.8% year-to-date, with EBITDA¹ expanding by 15% over last year. Our balance sheet remains strong, with US$ 300 million in liquidity at quarter-end and working capital levels at historic and industry lows. Finally, net leverage decreased to 3.0x, from 3.2x in the previous quarter.

October 27th, 2017 also marks the beginning of the challenge to successfully integrate both companies and to deliver the value creation that is the hallmark of this transaction. The team is eager to execute on RHI Magnesita’s strategy and drive further innovation and deliver best-in-class solutions for our customers. Together, we are the driving force of the refractory industry!”

Chairman

REVENUE AND GROSS MARGIN

Refractory Solutions

Revenue from the refractory segment amounted to US$731.0 million in the 9M17, 14.5% above the previous year, driven by higher deliveries to the steel industry and the currency effect on sales in Brazilian real. Year-over-year, consolidated refractory volume reached 728,300 tonnes, an 8.8% increase versus the previous year, as an 11.6% increase in sales to the steel industry offset a 6.6% decrease on deliveries to the industrial segment.

South America accounted for 39% of revenue from refractory sales in the 9M17, compared to 36% in the previous year. The increase was supported by higher deliveries in the region, especially in Brazil, as well as the effect from the appreciation of the Real against the US Dollar.

Refractory Solutions - Steel
According to the World Steel Association, global steel production increased by 5.6% in the 9M17, with notable expansions across every region.
In South America, steel production surged 8.0%, strongly supported by the 9.1% expansion in Brazil. Despite ongoing lackluster economic activity in the country, steel production outperformed supported by the positive momentum for flats - driven by the auto sector - and exports, led mainly by the ramp-up of CSP.
In North America excl. Mexico, steel production increased 2.9% over the 9M16, supported mainly by robust growth in the US and also a subdued base of the previous year.
In the EU-28, steel production increased 4.1% year-over-year, driven by strengthening domestic demand, especially in the construction sector. Moreover, higher exports and lower imports due to antidumping measures imposed in the end of 2016 supported growth in 2017.
Refractory deliveries to the steel industry increased by 11.6% compared to the 9M16, to 631,000 tonnes, with positive performance both in the Magnesita’s established markets and growth markets. Stainless steel mills and mini-mills in North America and flat steel in Brazil were the main highlights in established markets. In growth markets, the main highlights were strong performance in India and stainless steel segment in Asia-Pacific.

Revenue from sales to the steel industry grew by 16.3% year-over-year, to US$621.5 million, driven by higher deliveries and the currency effect on sales in Brazilian real.

Refractory Solutions - Industrial

Deliveries to industrial applications amounted to 97,300 tonnes in the 9M17, a 6.6% decline from the previous year. This performance was mainly explained by lower sales to the cement industry in MEA-CIS as construction and infrastructure projects in these economies have been delayed after local governments adjusted their budgets in light of the slump in oil prices. Moreover, lower sales to the cement industry in Europe as clients have atypically anticipated purchases in the 4Q16, also impacted overall sales in 2017.
In spite of lower deliveries, revenues from industrial applications in the 9M17 increased by 5.2%, to US$109.5 million, with the exchange rate effect on sales in Brazilian real compensating for the decline in volumes.

Refractory Segment – Gross Margin
Gross margin for the refractory segment stood at 34.1% in the 9M17, 180 bps below the previous year. Margin decline was mainly explained by certain cost increases which were not immediately passed through to clients.

Industrial Minerals
Minerals sales represented 6.5% of Magnesita's consolidated revenue in the 9M17, compared to 5.7% in the previous year. Despite the talc business divesture in December/2016, revenue from minerals sales grew by 30.8% in the 9M17, to US$54.5 million, driven mainly by record sales of DBM, which have tripled year-over-year.
Gross margin stood at 25.5% versus 33.5% in the 9M16. The drop was mainly explained by the impact the stronger real had on minerals produced in Brazil and sold in US Dollars.
As a result of strong DBM sales, its share of minerals revenues increased from 23% to 51%. Conversely, other minerals, which included talc, decreased from 40% to 17%.

Services
Sales from the service segment represented 6.6% of the consolidated revenue in the 9M17, compared to 6.3% in the previous year. Revenue amounted to US$55.8 million, 22.3% increase over the 9M16, driven mostly by a new contract with a large steelmaker in the northeast of Brazil, and to a lower extent, higher demand for spot services. Finally, the currency translation effect also contributed to the revenue increase in 2017 as Brazil accounts for the largest share of this segment.
Gross margin for the service segment increased to 16.0% in the 9M17, from 9.3% in the 9M16. The improvement over 2016 was driven mainly by cost efficiency in recurring contracts, scope increases, with higher value-added services in certain clients, and finally, higher demand for spot services.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
In the 9M17, fixed SG&A expenses amounted to US$128.4 million, compared to US$119.9 million in the 9M16. The 7.1% increase was driven mostly by the currency effect on expenses in Brazilian real. However, as a percentage of sales, fixed SG&A expenses declined by 130 bps, from 16.5% to 15.3% of sales, as sales growth diluted fixed costs.
Freight expenses amounted to US$46.8 million in the 9M17, 8.1% above the US$43.3 million recorded in the previous year. As a percentage of sales, freight expenses declined 40 bps, from 6.0% to 5.6%, driven mostly by the higher proportion of sales in established markets vis-à-vis farther away growth markets.