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RHI Magnesita N.V. (RHIM)

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Wednesday 01 April, 2020

RHI Magnesita N.V.

Final Results

RNS Number : 3254I
RHI Magnesita N.V.
01 April 2020
 

2019 Full Year Results

Strong strategic progress and resilient performance in difficult market conditions

RHI Magnesita today announces its 2019 full year results for the year ended 31 December 2019 ("2019" or the "Year").

Financial results

2019

2018

 

(€m unless stated otherwise) 

Adjusted1

Adjusted at constant currency

Change

Revenue

2,922

3,126

(6.5)%

Adjusted EBITA

408

448

(8.9)%

Adjusted EBITA margin

14.0%

14.3%

(30 bps)

Adjusted EPS

5.57

5.31

4.9%

Net debt2

650

697

(6.7)%

Net debt to adjusted EBITDA2

1.2x

1.3x

(0.1)x

         

 

 

 

2019

2018

(€m unless stated otherwise) 

Reported

Reported

Revenue

2,922

3,081

EBITA

300

427

Profit before tax

200

246

EPS

2.82

3.52

 

1 Adjusted figures are alternative performance measures "APM" excluding impairments, amortisation of acquisition intangibles and exceptional items to enable an understanding of the underlying performance of the business. Full details are shown in the APM section.

2 Following the introduction of IFRS 16 Leases, 2019 net debt includes the impact of IFRS 16 of €62 million. 2018 adjusted net debt figures are shown including the impact of IRFS 16 (€58 million) to facilitate comparison between reporting periods.

 

Summary

· Resilient performance in difficult markets

Steel Division revenue down 10.4% at constant currency reflecting weak end markets and customer destocking

Industrial Division revenue up 3.6% at constant currency with strong performance through the year

· Significant fall in raw material pricing, back to long-term average levels

· Robust margin performance

14.0% adjusted EBITA margin despite lower contribution from raw materials in H2

· Solid cash flow generation

FY19 Operating free cash flow of €359 million

· Integration of RHI and Magnesita complete in 2019

Operating systems in place and single Group culture fully embedded

€90 million of synergies extracted

Well executed price rise programme

Sustained growth in target markets - revenue growth on a reported basis in China up 10.9%; India up 2.7%

Continued development of solutions model and digital offering

Established Production Optimisation Plan and Sales Strategies to drive next phase of margin improvement - on track to deliver EBITA benefit of €70-€80 million by 2022

· Strong balance sheet, supporting potential for further investment and M&A

Net debt reduced by 0.1x (1.2x net debt to EBITDA)

Strong liquidity position with cash and available facilities of €1.1 billion

· No final dividend for 2019, to preserve financial flexibility

Commenting on the results, Chief Executive Officer, Stefan Borgas said:

"In 2019, RHI Magnesita has further demonstrated strong progress in executing our strategy, resolving previously identified operational issues and implementing the initiatives that will underpin our long-term growth. We have delivered a resilient financial performance in the year, despite difficult market conditions and lower raw material prices, particularly in our Steel Division in the second half.

"Looking forwards, we will benefit from the steps we have taken to strengthen the business, particularly from the Production Optimisation Plan. However, the difficult market environment in the second half of 2019 has continued in the first quarter of 2020. Whilst COVID-19 has not had a material financial impact on the business to date, we have seen a recent slowdown in customer activity, particularly in our Steel Division, and the future demand environment is very uncertain. We have undertaken extensive scenario testing, factoring in a range of potential outcomes, which indicate that the Company has sufficient liquidity to withstand an extended period of uncertainty.

"Longer term we see clear opportunities to further progress our refractory margin, whilst also continuing to benefit financially and strategically from our backward integration. The business benefits from a strong financial position, with low leverage and significant liquidity, and is well positioned to take advantage of growth opportunities when markets improve."

For further enquiries, please contact:

Investors: Guy Marks, Head of Investor Relations, RHI Magnesita, +44 7932 013 357
Media: Matthew Denham, Teneo, + 44 7825 735 596

Conference call

The Company is not hosting a physical presentation for analysts and investors due to restrictions relating to the COVID-19 virus. The presentation will be broadcast via webcast and conference call at 8.30am UK time. The webcast can be accessed using the following link:   https://www.investis-live.com/rhimagnesita/5e6276eefe2c790a00a5472d/ldsf . A replay will be available on the same link shortly after event. 

Conference call participant dial-in numbers are as follows:

UK: 020 3936 2999

All other locations: +44 20 3936 2999

Access code: 337196

The Company's 2019 Annual Report has been published and is available to view on the website at:   https://ir.rhimagnesita.com/ . In compliance with Listing Rule 9.6.1, a copy will also be submitted to the National Storage Mechanism and will shortly be available for inspection at   http://www.morningstar.co.uk/uk/NSM .

This announcement also contains as appendices additional information for the purposes of compliance with DTR 6.3.5 (1) of the UK Disclosure and Transparency Rules. The information below is extracted, in full unedited text, from the Annual Report 2019. Page numbers and cross references in the extracted information refer to page numbers and cross-references in the Annual Report. This announcement should be read in conjunction with and is not a substitute for reading the full Annual Report 2019.

About RHI Magnesita

RHI Magnesita is the leading global supplier of high-grade refractory products, systems and solutions which are indispensable for industrial high-temperature processes exceeding 1,200°C in a wide range of industries, including steel, cement, non-ferrous metals and glass. With a vertically integrated value chain, from raw materials to refractory products and full performance-based solutions, RHI Magnesita serves customers in nearly all countries around the world. The Company has a high level of geographic diversification with more than 13,650 employees in 32 main production sites and more than 70 sales offices around the world. RHI Magnesita intends to leverage its global leadership in terms of revenue, scale, product portfolio and diversified geographic presence to target strategically those countries and regions benefitting from more dynamic economic growth prospects. 

Its shares have a premium listing on the London Stock Exchange (symbol: RHIM) and are a constituent of the FTSE 250 index. For more information please visit:  www.rhimagnesita.com

CEO's Review  

Health and safety is paramount

We believe a safe workplace is a fundamental right of our employees, and it is the Group's responsibility to keep our staff, contractors and customers safe within our operations. While our lost time injury frequency (LTIF) rate reduced further this year, to 0.28, (down from 0.43 in 2018), we can never be complacent. Nothing less than zero accidents is acceptable. We are also focused on protecting our employees in all possible ways we can from the spread of COVID-19.

A resilient financial performance reflecting strength of business model

Despite challenging market conditions, RHI Magnesita delivered a resilient performance. During the year, the global economy grew at its slowest pace since the 2007/2008 global financial crisis, with rising trade barriers and increasing geopolitical tensions the main contributing factors. This had an inevitable impact on industrial and construction activity, and we saw a decline in demand in many of our end-markets.

Global steel production outside China declined by nearly 1.7% in 2019. This decline in demand was exacerbated by customers reducing volumes through the year and destocking their inventories of our products.

As a result, RHI Magnesita's revenues were 6.5% lower in 2019 at €2,922 million. This reduction is primarily attributable to lower refractory volumes from the Steel Division, as a result of inventory destocking at customers' sites amid a weak steel production market environment. Gross profit was €717 million, down from €756 million on a constant currency basis in 2018 mostly due to lower raw material prices, weaker end-markets, exiting the Iranian market and lower fixed cost absorption. Gross margin, however, increased by 30bps to 24.5%, supported by the implementation of the Price Management Programme introduced in April 2019, which further contributed to EBITA, and a €15 million benefit from the turnaround of the previously identified operational issues in 3 of the 4 plants. While lower raw material prices in the year reduced the profit contribution from backward integration, this aspect of our business model continued to be financially beneficial as well as strategically important. 

Integration delivers €20 million of further synergies

Benefiting from the synergies in 2019, and additional efficiency improvements, the Group continued to grow its refractory margin in the year, rising 60bps to 9.0%. This contributed to a broadly stable overall EBITA margin, down 30bps at constant currency to 14.0%. The Group continued its successful integration of the merger throughout 2019, delivering a further €20 million of synergies.

This takes the total to €90 million since the merger in 2017, 29% ahead of our original target of €70 million. The additional synergies anticipated in 2020 were to be primarily derived from procurement savings, however given the broader macroeconomic backdrop, lower activity levels and raw materials prices, we no longer expect to see any further synergies in 2020.

 

Solid cash flow generation

 

Operating free cash flow of €359 million in 2019 (2018: €438 million) was a resilient performance, lower than 2018 primarily due to the weaker and working capital cash consumption. The Group also focused on further extending its debt maturity profile and increasing its liquidity. Our net debt to EBITDA ratio reduced slightly to 1.2x (2018: 1.3x including the impact of IFRS 16 leases). The Group has significant liquidity of €1.1 billion, comprising cash and undrawn committed facilities.

Steel business performance partly offset by Industrial Division

On a divisional basis, our Steel business, which represents approximately 70% of the Group's revenue, saw revenue decline by 10.4% from the prior year at constant currency as a result of the lower customer demand. This was partly offset by our Industrial Division, which has continued to perform well, up by 3.6% on a constant currency basis, driven by a particularly strong year in the Cement segment.

A focused strategy

As outlined in the Capital Markets Day in November 2019, our strategy is built around three key pillars: increasing competitiveness through cost reduction, enhancing our business model and driving market leadership and growth in new markets. Delivering our strategy relies on our greatest asset: our people, who are the true value creators of the company.

Executing cost reduction

The Company has reviewed its capacity and global footprint to ensure production matches regional demand and efficiency is maximised. As a result, management has taken the decision to consolidate some of the Group's plants via its Production Optimisation Plan, which will deliver run rate cost savings of €40 million by 2022.

Expanding the business model

In sales, we are focused on expanding our solutions business, complemented by digital solutions, as we move towards a value-based pricing model. These initiatives, combined with the Price Management Programme, are expected to generate an additional €40-€60 million of EBITA by 2022.

Growth in new markets

New markets remain a key strategic focus for us, as we look to expand in higher growth countries where we currently have modest market shares such as India, China and Turkey. Our sales teams in China have created a 'local for local' approach and built new relationships in this region, creating strong foundations for the business. The team has now started to develop and deliver high-tech solutions designed for Chinese customers specifically. In the first half of 2019, our China team won a major solutions contract worth €20 million with Guangxi ShengLong, which represents the Group's first such contract in the Chinese high-quality steel market. A second major solutions contract was secured in January 2020.

As part of the strategic expansion in India to increase capacity and improve customer services, we bought Intermetal Engineers Pvt., a metallurgical equipment manufacturer in May 2019 for €1.3 million, and separately acquired a refractory brick plant in September 2019 from Manishri Refractories & Ceramics Pvt. Ltd. for €5.5 million.

Acquisitions remain part of long-term growth plans

In addition to the two transactions in India outlined above, the Group acquired Missouri Refractories Co. Inc. (Morco) in January 2020 for $10 million, the first production asset for RHI Magnesita in the Mid-south of the United States.

As previously disclosed, the potential acquisition of Kumas Manyezit Sanayi AS. is currently under review by the competition authorities in Turkey and we hope to have an update on the process later in Q2.

More broadly the Group continues to monitor a select number of other acquisition opportunities as part of its long-term growth plans.

Investment in R&D continues to drive innovation

Innovative technologies including digitalisation continue to be at the heart of our business and enable us to better meet customer demands. Throughout 2019, particular areas of focus have been: recycling of refractory products, CO2 and energy reduction, coating technologies, new production techniques and automation and digitalisation. Investment in R&D totalled €64 million in 2019, representing 2.2% of Group revenue.

It is through our innovation expertise that we will continue to strengthen the products and solutions of our business. We create and customise refractory products that suit the unique needs of our customers, and we offer over 100 value adding services, including our 4.0 digital offering.

Capital allocation policy and shareholder returns

 

The Board's capital allocation policy remains to support the long-term Group strategy, providing flexibility for both organic and inorganic investment opportunities and delivering attractive shareholder returns over the mid-term. These opportunities will be considered against a framework of strategic fit, risk profile, rates of return, synergy potential and balance sheet strength. Dividends and share buybacks, when appropriate, are an integral part of the Company's capital allocation policy and approach to shareholder returns.

Despite the Group's strong financial position, the uncertainty relating to COVID-19 means that alongside the efficiency measures we are taking to preserve cash, the Board has decided not to recommend the payment of a final dividend for 2019. This decision will be reviewed later in the year once the outlook becomes clearer. The Board believes that this is an appropriate and prudent measure to take as it seeks to preserve RHI Magnesita's strong liquidity, cashflow and financial position through these uncertain times.

 

COVID-19 impact

The global impact of the COVID-19 virus is a fast moving and uncertain situation. Our primary focus is the health and safety of our employees around the world. We have continued to operate our production capabilities and supply chain, enabling us to deliver for customers as normal. In China our plants have remained open through the crisis, with employees safe. Across the rest of the world, plants are also open and are operating with strict restrictions such as pre-work temperature checks and no travel between plants. All corporate offices are closed with employees working from home. Whilst we have seen no material financial effects on our business to date, the impact of COVID-19 on demand from our customers is very uncertain. We are engaging customers closely to understand their current production rates, stock levels and short-term requirements.

RHIM notes the FCA's request to UK listed companies to delay the announcement of preliminary financial accounts during the current period of unprecedented events caused by COVID-19. The Board of RHIM has considered the FCA's request, however on balance believes that it is better to announce the Group's 2019 full year results on the 1 April 2020 as originally planned. In arriving at this decision, the Board has considered that the publication will provide clarity on the Company's 2019 financial position and that the Company will be publishing audited and not preliminary results.

Outlook

In 2019, RHI Magnesita has further demonstrated strong progress in executing the Group strategy, resolving previously identified operational issues and implementing the initiatives that will underpin the Group's long-term growth. The Group has delivered a resilient financial performance in the year, despite difficult market conditions and lower raw material prices, particularly in its Steel Division in the second half.

Looking forwards, the Group will benefit from the steps it has taken to strengthen the business, particularly from the Production Optimisation Plan. However, the difficult market environment in the second half of 2019 has continued in the first quarter. Whilst COVID-19 has not had a material financial impact on the business to date, the Group has seen a recent slowdown in customer activity particularly in its Steel Division, and the future demand environment is very uncertain. The Company has undertaken extensive scenario testing, factoring in a range of potential outcomes, which indicate that the Company has sufficient liquidity to withstand an extended period of uncertainty.

Longer term the Group see clear opportunities to further progress the Group refractory margin, whilst also continuing to benefit financially and strategically from its backward integration. The business benefits from a strong financial position, with low leverage and significant liquidity, and is well positioned to take advantage of growth opportunities when markets improve.

Financial review

The Company uses a number of alternative performance measures ("APMs") in addition to those reported in accordance with IFRS, which reflects the way in which Management assesses the underlying performance of the business. The Group's results are presented on an "adjusted" basis, using APMs which are not defined or specified under the requirements of IFRS, but are derived from the IFRS financial statements. The APMs are used to improve the comparability of information between reporting periods and to address investors' requirements for clarity and transparency of the Group's underlying financial performance. The APMs are also used internally in the management of our business performance, budgeting and forecasting. Reconciliation of certain metrics to the reported financials is presented in the section titled APMs.

 

All references to comparative 2018 numbers in this review are at constant currency, unless stated otherwise. Figures presented at constant currency represent 2018 translated to average 2019 exchange rates.

Revenue

2019 revenue amounted to €2,922 million, 6.5% lower than 2018 (2018: €3,126 million). This reduction is primarily attributable to lower refractory volumes from the Steel Division, as a result of inventory destocking at customers' sites amid a weak steel production market environment.  Global steel production ex-China declined 1.7% in 2019 with production weakening as the Year progressed. Additionally, the exit from the Iranian market and the implementation of the Price Management Programme contributed to further volume losses. In the Industrial Division, the Group continues to benefit from the positive momentum seen in 2018, with improved performance in all three segments (Cement & Lime, Non-ferrous metals, and Process Industries). This performance in the Industrial Division was underpinned by the positive dynamics in customer industries despite the weak raw material pricing environment.

The Group's Steel Division revenue amounted to €2,018 million, (2018: €2,253 million) down 10.4% from the previous year. The Industrial Division benefited from positive global GDP growth of 2.9% and was able to drive organic growth, increasing revenue to €904 million in 2019 (2018: €873 million), up 3.6% from the previous year.

From their elevated prices in 2017 and 2018, raw material prices have fallen in 2019 particularly in the fourth quarter. Accumulated overcapacity in supply and inventory coupled with a sluggish market environment, have had a significant impact on raw material prices. These lower levels are expected to continue in the short-term. Despite the current lower prices, the Group's high level of raw material backward integration continues to deliver benefits to RHI Magnesita, in terms of additional margin contribution, customer supply security and enabling unique product solutions for the market.

Gross profit

Gross profit declined 5.2% to €717 million in 2019 (2018: €756 million), as a result of decreasing raw material prices, lower deliveries to Steel customers amid weaker end markets, which has consequently led to lower fixed cost absorption. This was partially offset by the successful implementation of the Price Management Programme and the turnaround of operational issues identified in H2 2018 in certain plants of €15 million. This represented a gross margin of 24.5%, 30 bps higher than in the previous year. On a divisional level, gross profit from steel applications reached €467 million, with 23.1% gross margin in 2019 (2018: 24.2%). Gross profit for the Industrial Division was €250 million, representing a gross margin of 27.7% in the Year (2018: 24.2%).

SG&A

Total selling, general and administrative expenses, before R&D related expenses, stood at €309 million (2018: €316 million), representing 10.6% of revenue in 2019 (2018: 10.3%).  The delivery of the remaining synergies targeted for the Year contributed to the lower spend in 2019.

 

Adjusted EBITA

Adjusted EBITA for the Year was €408 million, 8.9% lower than 2018 (€448 million) and adjusted EBITA margin was 14.0%, 30 bps lower than 2018. This was primarily driven by the deteriorating volume environment in the steel market, raw material price reduction and lower fixed cost absorption, which was partially offset by the successful implementation of the Price Management Programme launched in H1 2019, a €15 million benefit from the turnaround of the operational issues in 2018 alongside delivery of an additional €20 million in synergies in 2019.

Earnings per share: Reconciliation between 2019 reported and adjusted figures

(€m unless stated otherwise)

2019 reported

Items excluded from adjusted performance

 

2019 adjusted

EBITA

300

108

408

Amortisation

(26)

26

-

Net financial expenses

(75)

14

(62)

Share of profit in joint ventures

1

10

11

Profit before tax

200

 

358

Income tax

(51)

(23)

(74)

Profit after tax

149

 

284

Profit attributable to shareholders

139

 

274

Average number of shares outstanding (m)

49.2

 

49.2

Earnings per share (€)

2.82

 

5.57

 

Net finance costs

Net finance costs in 2019 amounted to €75 million (2018: €163 million), which represented a 54% decrease from the previous year. This significant decrease is largely due to the Group's efforts aimed at reducing interest expenses on borrowings, reducing the translation effects on non-euro denominated debt and derivatives, moving to a euro-based debt portfolio to further reduce funding costs, increasing its exposure to floating interest rates and repaying higher interest legacy debt.

As a result of these initiatives, interest expenses on borrowings for 2019 amounted to €28 million (2018: €49 million), mainly attributable to refinancing on legacy high interest-bearing debt. Interest income recorded €9 million, broadly flat with the previous year (2018: €10 million).

Foreign exchange and derivative variances amounted to €17 million in the Year (2018: €81 million), all of which referred to derivative losses related to the Group's previous hedging policy. In August 2019, the Group has restructured its hedging policy and will no longer be exposed to these derivative variances and also minimised the foreign exchange translation effects on the P&L.

Other net financial expenses recorded €39 million (2018: €43 million), which primarily refer to non-cash adjustments related to the provision for the unfavourable contract required to satisfy the EU remedies, pension and non-controlling interest related expenses.

 

Items excluded from the adjusted performance

In order to accurately assess the performance of the business, the group excludes certain non-recurring items from its adjusted figures. These adjustments comprise:

· €108 million recorded in "Other income and expenses" predominantly related to the restructuring costs associated with the closure and downsizing of two plants in Europe, as part of the Production Optimisation Plan with severance costs of €18 million and impairments of €52 million, additional severances of €19 million for corporate reorganisation costs and the impairment of the Norway plant in Porsgrunn of €14 million. Total restructuring and write-down expenses associated with these initiatives amounted to €112 million.

· €14 million related to non-cash other net financial expenses. These include €9 million non-cash present value adjustment of the provision for the unfavourable contract required to satisfy the EU remedies and €4 million of foreign exchange movements on the Group's certain non-Euro denominated debt, as detailed in the "Net Financial Expenses" section. These intercompany loans have been restructured in July 2019 and there will no future foreign exchange movements.

· €10 million write-down of a joint venture loan related to the restructuring of Sinterco (European dolomite mine)

· An adjustment to effective tax rate excluding one-time charges such as the restructuring and impairment expenses to reflect the underlying effective tax rate.

Taxation

The Company's effective tax rate for the Year was 25.5% (2018: 23.9%). The increase year-on-year is mainly due to one-off tax charges related to the closure of production facilities. These costs resulted in non-deductions across tax regions for RHI Magnesita. Excluding these one-time charges, as set out above, the effective tax rate for the Year would have amounted to 20.6%.

RHI Magnesita's tax rate is sensitive to changes in the geographical distribution of worldwide profit and losses and tax regulations in each region. Other key factors affecting the sustainability of the Group's effective tax rate are set out in note 45 to the financial statements, which provides additional information on the Group's tax rate.

Profit after tax and earnings per share

On a reported basis, the Company recorded a net profit of €149 million and earnings per share ("EPS") of €2.82 per share in 2019 (2018: €187 million profit and €3.52 per share respectively).

Adjusted earnings per share for 2019 were €5.57 (2018: €5.31), which is stated after excluding items detailed above and amortisation of intangible assets (€26 million).

Cash flow

Operating free cash flow amounted to €359 million in 2019 (2018: €438 million), down primarily due to the weaker operational performance and working capital cash consumption.

Total free cash flow, which includes the one-off cash disbursements from the Magnesita minority acquisition, share buyback expenses and restructuring costs related to the merger totalled €105 million.

The table below details the underlying operating and free cash flow generation of the business

 

m

Adjusted EBITA

408

Working capital

(23)

Changes in other assets/liabilities

(17)

Capex

(156)

Depreciation

146

Operating free cash flow

359

Cash tax

(68)

Net interest expense

(42)

Restructuring and transaction costs

(6)

Magnesita minority acquisition

(45)

Dividends paid

(76)

Share buyback

(19)

Free cash flow

105

Note: Operating free cash flow is presented to reflect the net cash inflow from operating activities before certain items such as restructuring costs. Full details are shown in the APM section.

Capital expenditure

Capital expenditure for 2019 stood at €156 million (2018: €123 million), which comprised €110 million of maintenance capex and €46 million of project expenditure. As announced at the Capital Markets Day in November 2019, additional project expenditure is expected to continue until 2022 to support the Company's strategy for the Production Optimisation Plan, Sales Strategies, R&D and other small, fast payback projects. In 2020, project expenditure is expected to be around €65 million, of which €55 million will go towards the Production Optimisation Plan and Sales Strategies initiatives and €10 million to support other small, fast payback projects. Maintenance capex is expected to be around €85 million in 2020 and €95 million for subsequent years.

Working capital

Working capital at 31 December 2019 was €523 million (2018: €511 million), up slightly due to the higher cash consumption in accounts payable of €145 million in 2019, as fewer purchases of raw material were made during the Year. This was offset by a material improvement in inventory levels, which have reduced year-over-year, leading to cash generation of €111 million. This was mainly driven by the Group's efforts to reduce stock in our warehouses, improve efficiency of raw material and finished goods inventory by adjusting production to current demand levels. Accounts receivable also improved in 2019 when compared to the previous year with €11 million of positive cash impact due to ongoing improvement of client terms, material reduction of outstanding receivables, and to an extent, lower revenues. Total cash flow consumption from working capital in 2019 amounted to €23 million.

In terms of working capital intensity, measured as a percentage of last three months annualised revenue, the Group recorded 18.3% at year-end, 290bps higher than 2018. This was primarily driven by lower revenue recognised in the last three months of the Year amid weaker market demand. On a half-on-half basis, working capital, both in absolute terms and as a percentage of revenue has improved. Cash flow generation from working capital in H2 2019 amounted to €95 million (H1 2019: €-118 million) and working capital intensity improved 270bps against intensity recorded in H1 2019.

Working capital financing, used to provide low cost liquidity to the Group, was at €290 million at the end of the Year (2018: €316 million). This comprised €223 million of accounts receivable financing (factoring) and €67 million of accounts payable financing (forfeiting). Going forward the Group expects its working capital financing level to stay below €320 million.

Improving working capital performance will continue to be a focus area in 2020. In H2 2019, the Group rolled out its Tactical Network Optimisation modelling tool to optimise raw material and refractory plant loading for best value. In addition, and to support decision making and enhance demand planning with global customers and suppliers, the Group is implementing an Integrated Business Planning system in H1 2020. This will enable the Company to move towards its target of 15-18% working capital intensity in the medium term.

Net debt

Net debt at the end of the Year amounted to €650 million, comprising total debt of €1,055 million, cash and cash equivalents of €467 million and IFRS 16 leases of €62 million. This compared to net debt of €697 million in 2018, which includes the pro forma impact from IRFS 16 leases (2018: €58 million). Net debt to EBITDA stood at 1.2x, 0.1x lower than the previous year (2018: 1.3x). despite the remaining cash outflows related to the payout to Magnesita's minority shareholders (€45 million). This low leverage profile has allowed the Company to improve liquidity and extend the maturity profile of its instruments. Total liquidity is now at €1,067 million, as the Group increased its undrawn facilities from U$400 million to €600 million and more than 60% of the Group's maturities are due on or after 2023.

Amortisation schedule (€m as at 31 December 2019)

Funds immediately available:

Cash + Undrawn RCF1

1,067

Debt maturity:

2020

72

2021

45

2022

127

2023

401

2024

110

20252

600

2026

300

1)  Revolving credit facility increased to €600 million in Jan 2020 with maturity in 2025 and an option of a two-year extension

2)  Undrawn RCF maturity

Synergy delivery

The Group has continued its successful integration during 2019, achieving incremental synergies of €20 million, bringing the annualised total to €90 million. The additional €20 million of synergies achieved in 2019 had an associated restructuring cash cost of €6 million, taking the total cash cost since merger to €84 million. As set out above, there will be no further synergies in 2020.

 

 

Key Initiatives

RHI Magnesita announced its plans for the next round of savings and investment opportunities at a Capital Markets Day in November 2019. Two key initiatives were presented and are expected to bring an additional €70-80 million of EBITA benefit by 2022.

· The Production Optimisation Plan, targeting the Company's global production footprint, increasing plant specialisation, improving raw material integration and implementing state of the art technologies is expected to bring €40 million of EBITA benefit by 2022.

· Sales Strategies will be focused on expanding the Company's presence in growth markets, improving the solutions offering and investing in digitalisation, are expected to generate an added €30-40 million in EBITA benefit.

Total cost to achieve the aforementioned EBITA benefit from these two initiatives will amount to €220 million by 2022, of which €165 million will consist of additional capex and €55 million will relate to restructuring costs. The Company also anticipates approximately €70 million of non-cash impairments to be recorded as a result of the plant closures in Europe, of which €52 million was recorded in 2019.

 

Returns to shareholders

Despite the Group's strong financial position, the uncertainty relating to COVID-19 means that alongside the efficiency measures we are taking to preserve cash, the Board has decided not to recommend the payment of a final dividend for 2019. This decision will be reviewed later in the year once the outlook becomes clearer. The Board believes that this is an appropriate and prudent measure to take as it seeks to preserve RHI Magnesita's strong liquidity, cashflow and financial position through these uncertain times.

Operational review

Steel Division

 

Steel 

2019

2018

Change

Revenue (€m)

2,018

2,253

(10.4%)

Gross margin

23.1%

24.2%

(110bps)

 

In 2019, steel demand was impacted by ongoing geopolitical issues and trade tensions which together contributed to global uncertainty. This was particularly felt in the automotive and manufacturing sectors, which are key drivers of the steel industry. In addition to weaker demand, Steel Division revenues were also impacted by customer de-stocking that has taken place throughout the year.

Steel Division revenues of €2,018 million in 2019 were 10.4% lower than last year on a constant currency basis (2018: €2,253 million in 2018 at constant currency). On a reported basis, Steel Division revenue was down by 8.8% (2018: €2,213 million).

The successful implementation of the Price Management Programme, introduced in April 2019, made an important contribution to profitability in the year, which has helped offset the weaker demand environment. The programme raised refractory prices across the product portfolio enabling the Company to further accelerate investment in technology, environmental solutions and production infrastructure to better serve its customers. Steel volumes were, however, impacted partly as a result of consequential market share loss. 2019 revenues were also reduced RHI Magnesita's exit from the Iranian market in November 2018.

Gross profit for the division was €467 million, down from €545 million in 2018 on constant currency basis. The Division achieved a gross margin of 23.1% in 2019, down by 110 bps from the previous year.

Europe

The Group's Steel Division faced strong headwinds in Europe throughout 2019. Revenue reported for the region was €513 million, down 17.6% from €622 million in 2018 on a constant currency basis. Revenue was negatively impacted by significantly reduced demand levels from steel producers, as demand declined at rates not seen since the global financial crisis. Lower demand was combined with higher iron ore prices, as well as a 70% rise in the price of emission-trading certificates since mid-2018, plus the escalating trade tensions.

Steel production in Germany and Italy, Europe's largest steel producers, declined by 6.5% and 5.2% respectively. Overall, EU28 steel production output declined by 4.9%.  Regional revenues were also affected by intensified price competition and reduced stock levels in customers' plants.

During 2018, customers increased their inventory levels in response to raw material prices increasing, following a raw material shortage (especially in dolomite), and as a result of trade tariff discussions. This led to customer destocking of inventory throughout 2019, contributing to softer sales compared to the previous year.

This trend has continued into Q1 2020, with potential further weakness as growth slows with weakening economic fundamentals.

North America

Revenue was €518 million in 2019 down by 7.5% on a constant currency basis, from €560 million in 2018. The implementation of value-based price management, a customer solution-oriented approach and an adaptable portfolio of products resulted in the Group improving pricing and delivering higher revenue per tonne. However, this only partially offset the impact of materially lower volumes.

Lower sales volumes were the result of ongoing challenges in the Company's end-markets, with increased political uncertainty throughout 2019 and the impact of recently imposed trade tariffs.

Tariffs on Chinese goods entering the United States persisted throughout 2019. However, the Group benefited from the tariffs limiting the participation of low value refractory competition entering the market. Revenue was negatively impacted by the decline in the prices of magnesite which put subsequent pressure on refractory prices. Results were affected negatively by the closure of several steel plants in the second half of 2019, which struggled to retain competitiveness as steel prices declined.

Looking ahead, the Company will implement higher value service contracts with its customers, driving higher revenue per tonne in 2020. Volume recovery continues to be an emphasis, with local production to serve local customers, and the Company expects to benefit from the ability to convert opportunities quickly into regular volumes.

Challenging steel conditions are anticipated in 2020, attributed to weakened economic growth and also uncertainty over trade negotiations. Steel producers will continue to focus on cost mitigation with plant idling expected.

South America

Revenue was €361 million in 2019, down by 0.9% on a constant currency basis compared to €364 million in 2018. Revenue was negatively impacted by lower levels of steel production in the region throughout 2019, with production levels 8.4% lower than the prior year, primarily led by a 9.0% fall in Brazil and by a 10.0% fall in Argentina.

However, profitability for the Group was largely maintained despite the decline in demand for refractories, thanks to an improved product mix and better technical results in performance contracts.

This demonstrates the Group's success in improving its resilience through its strategy of solutions-based contracts and following the successful implementation of the Price Management Programme with some key clients.

In 2019, market conditions remained challenging, particularly in Brazil and Argentina. There have been some signs of an improving economic environment in 2020, particularly in Brazil. However, this is likely to be undermined by the potential impact of the COVID-19. 

CIS-MEA

Revenues were €230 million, down by 19.3% on a constant currency basis compared to €286 million in 2018. This is mostly related to ceasing business in Iran with the last shipments being sent in Q1 of 2019, fulfilling orders that had been made during 2018. The impact of the exiting the Iranian market in 2019 was €35 million of revenue, of which €30 million were from the Steel Division.

Performance was reflective of the overall steel market in these regions, where there was limited growth and significant volatility. Conflict in Ukraine has particularly impacted output across the market, and there is uncertainty around when this may recover.

Following the currency crisis in Turkey, construction slowed in the country as a result of the government's decision to slow capital projects, impacting steel demand.

In 2020, the Company will look to strengthen its overall market position. In the CIS, in particular the Company is intending to grow certain product segments and will continue to add value through the solutions business model.

APAC

Outside of India and China, which are discussed in more detail below, revenue was down by 5.5% on a constant currency basis to €128 million from €135 million in 2018. Regional revenues followed negative trends in steel production in South Korea and Thailand, which according to World Steel Association decreased output by 1.4% and 34.6% respectively. However, this was partially offset by strong performance in Japan and Taiwan, both of which outperformed the market. 

Industrial Division

Industrial

2019

2018

Change

Revenue (€m)

904

873

3.6%

Gross margin %

27.7

24.2

350bps

 

The Industrial Division has continued to perform very strongly with 2019 revenues of €904 million up 3.6% and gross profits of €250 million. The gross margin improved again to 27.7%, up by 350bps compared with 2018.

Cement/Lime

Cement/Lime segment revenue was €344 million in 2019, up by 6.4% from €324 million in 2018 on a constant currency basis, constituting a record year.

This performance, which also included an improved margin, was driven by selective price increases, improved product portfolio choices and market share gains specifically across China, MEA and CIS.

In 2019, global cement demand grew 1% ex-China. While China continues to be the world's largest cement producer, it is removing cement capacity due to overcapacity and environmental considerations leading to a global cement market contraction of c. 3-4%. India is the highest growth market at 4%. Other regions showed a stable, but locally volatile picture, such as in the Middle East and South America.

Europe demand has been slightly weaker in 2019, given customer destocking, following the inventory build-up that took place at customer sites during 2018 as a result of tightening magnesite and dolomite raw material availability during 2018.

Initial forecasts for the global cement and lime markets were for a stable market in 2020 with growth of c.1-2% excluding China. However, the impact of COVID-19 is likely to impact this.

Process industries

Other process industries comprise the glass, EEC and mineral segments. Revenue in this segment amounted to €339 million, 2.0% higher than in 2018 (2018: €330 million on a constant currency basis).

The glass industry has continued to grow in 2019, supported by the recent trend in consumer demand towards recyclable glass packaging and away from single use plastic packaging.

Europe, Africa and Americas all benefited from increased demand, and Eastern Europe and CIS regions performed well, thanks to an increase in projects, whilst activities slowed in the Middle East and Africa and Asia Pacific. China and India have started to begin transitioning to higher performance materials for better glass quality and longer furnace life times.

The float glass sector maintained momentum throughout 2019, predominantly through the repairs business. For the investments business, the key driver of growth was the construction industry; through both regional expansions and from increased demand for eco-friendly buildings which conserve heat through multiple glass sheet windows, and through coating with better heat absorption.

In the EEC sector, volumes were flat, whilst revenue and profitability increased in 2019, as customer take up for services increased. In particular, the sector experienced increased demand from customers in construction services, refractory engineering and supervision services. The strong performance was mostly thanks to several large projects in the first half, followed by significant maintenance demand in the second half.

China, India and North America all benefited from higher demand for project orders. Greenfield projects in Europe and the Middle East slowed due to lower demand.

2019 saw strong demand in the pelletising industry, coke oven business and in energy generation, whereas development of other applications was flat year-on-year, due to fewer investment projects (greenfield and capital projects).

Throughout 2020, the Company expects a more challenging environment due to macroeconomic uncertainties. However, 2019 proved that the streamlined business is working well and will continue to be effective throughout 2020 in growing the glass business and expanding service solutions for our customers.

Non-ferrous metals

The non-ferrous metals segment grew by 1.5%, from €218 million in 2018 on a constant currency basis to €221 million in 2019.

The business performed well in the first half, however the second half experienced lower order intake than expected, in line with the broader global slowdown triggered by trade barriers and macroeconomic concerns.

At the beginning of 2019 the LME listed metals, including copper and zinc, showed price increases, whereas all other listed base metals and precious metals were at comparably low levels. RHI Magnesita's main LME listed metal end-market is copper, and elevated prices in 2019 meant that RHI Magnesita saw an uptick in the repair business. Similar to 2018, the business was predominantly driven by repairs and maintenance work, rather than new greenfield projects. Looking forward, there are several new smelters in an advanced planning stage in Indonesia, where an ore export ban has driven demand for new domestic facilities. Further demand for refractories used in copper and cobalt production (and other battery metals) throughout the year, with the increase in electric vehicles.

The platinum-group metals "PGM" sector, notably palladium and platinum, which are both used in automotive catalytic converters, performed well during the year as the company provided large repairs for long-term customers, mainly in South Africa. Aluminium continues to be a commoditised business in terms of refractory supply to the primary aluminium sector. However, in 2019, the Company completed its largest ever aluminium project in China, for an original equipment manufacturer "OEM".

Looking ahead, with many new global trade barriers in place and the slowdown in the automotive and steel industry, there may be an overall stagnation in refractory demand for the non-ferrous sector. However, this should be compensated for by demand from new capacity in the environmental industries, as well as for e-mobility related applications.

Additional demand from customers for solutions has strengthened the performance of the business throughout 2019, as well as demand for digital offerings. This trend is expected to continue throughout 2020.

New Markets

China

China revenues were up by 9.7% in 2019 on a constant currency basis compared to the previous year. The region recorded revenue of €184 million, up from €168 million in 2018.

As part of its strategy to penetrate new markets, the Company has focused on increasing market share in China. In particular, the Cement/Lime segment delivered a strong performance in China over the course of the year and now has around 10% market share. The new dolomite hub in Chizhou had its first full year in operation and this will enable China to increase its backward integration and cost-efficient production. The Company celebrated the success of winning its first ever solutions contract in China, with GuangXi ShengLong in the first half of 2019. This was followed by a second large solutions contract in China in January 2020.

However, there has been an overall slowdown in Chinese steel demand, as demand is linked to fixed asset investment growth, which has been declining since mid-2019. Furthermore, Chinese steel demand has been affected by the weaker automotive sector. The higher quality and specialist steel segment in China fared more positively however, being less affected by the underlying demand volatility. The Chinese economy has had a material impact from the effect of COVID-19.

Whilst there is likely to be actions from the government to stabilise the economy, the performance overall for 2020 is uncertain.

India

India continues to be one of the key growth markets for the Company and has been delivering steady growth in revenue and margin, as well as gains in market share over the years.

In 2019, revenue in India was flat on a constant currency basis, at €252 million, up from €251 million in 2018.

The demand and consumption of the Indian steel industry has continued to grow, with production increasing by 1.8% compared to 2018. However, from the second quarter of 2019 onwards, the domestic steel industry witnessed sluggish demand on the back of slow GDP growth and a slowdown in the automobile and construction sectors, following the liquidity crisis. The slowdown continued until the end of the year, creating demand and margin pressure for the Company.

Against this backdrop, Steel Division revenue for India was broadly flat in 2019, at €206 million versus €208 million achieved in the prior year on a constant currency basis. Despite the economic backdrop, the Indian operations maintained their effective deployment of internal cost control, inventory management, receivable recovery and synergy measures, which helped the Company navigate these more difficult market conditions.

Throughout the year, the Group continued to drive operational efficiencies and synergies in its Indian operations. The Group was able to achieve substantial integration of its production, supply chain and sales network, which will deliver significant value to our customers and other stakeholders. As part of the strategic expansion in India to increase capacity and improve customer services, the Company bought Intermetal Engineers Pvt., a metallurgical equipment manufacturer in May 2019 for €1.3 million, and separately acquired a refractory brick plant in September 2019 from Manishri Refractories & Ceramics Pvt. Ltd. for €5.5 million.

With Government interventions such as lower interest rates, corporate tax cuts and various reforms including large planned infrastructure spend, steel consumption growth in India is forecast at 5% CAGR for the next 3 years. However, in the short term, this may be undermined further by broader economic slowdown.

Alternative performance measures ("APMs")  
APMs used by the Group are reviewed below to provide a definition from each non IFRS APM to its IFRS equivalent, and to explain the purpose and usefulness of each APM.   

 

In general, APMs are presented externally to meet investors' requirements for further clarity and transparency of the Group's underlying financial performance. The APMs are also used internally in the management of our business performance, budgeting and forecasting. 

 

APMs are non IFRS measures. As a result, APMs allow investors and other readers to review different kinds of revenue, profits and costs and should not be used in isolation. Commentary within the Year-End Results, including the Financial Review, as well as the Consolidated Financial Statements and the accompanying notes, should be referred to in order to fully appreciate all the factors that affect our business. We strongly encourage readers not to rely on any single financial measure, but to carefully review our reporting in its entirety. 

 

Adjusted pro-forma results at a constant currency    
Adjusted and Adjusted results at constant currency The H1 2018 Adjusted results are, where appropriate, adjusted to reflect the purchase price allocation ("PPA") related to the acquisition of Magnesita and other adjustments. This measure provides an estimation of the historical financial performance of the current Group structure. H1 2018 figures presented at constant currency represent H1 2018 reported figures translated at average H1 2019 exchange rates. 

 

EBITA  
EBIT, as presented in Consolidated Statement of Profit and Loss, excluding amortisation and impairments.    

 

EBITDA  
EBIT, as presented in Consolidated Statement of Profit and Loss, excluding depreciation, amortisation and impairments. 

 

Adjusted EBITDA and EBITA 
To provide further transparency and clarity to the ongoing, underlying financial performance of the Group, adjusted EBITDA and EBITA are used. Both measures exclude other income and expenses as presented in Consolidated Statement of Profit and Loss. 

 

Adjusted earnings per share ("Adjusted EPS")  
Adjusted EPS is used to assess the Company's operational performance per ordinary share outstanding. It is calculated using adjusted EBITA (as described above) and removes the impact of certain foreign exchange effects, amortisation, one-off restructuring expenses and impairments, other non-cash financial income and expenses, that are not directly related to operational performance. Effective tax rate for adjusted EPS is calculated by applying the effective tax rate normalised for restructuring expenses and impairments. 

 

Operating cash flow and free cash flow  
Alternative measures for cash flow are presented to reflect net cash inflow from operating activities before certain items. Free cash flow is considered relevant to reflect the cash performance of business operations after meeting the usual obligations of financing and tax. It is therefore measured before all other remaining cash flows, being those related to acquisitions and disposals, other equity-related and debt-related funding movements, and foreign exchange impacts on financing and investing activities.
 

 

Working capital  
Working capital and intensity provides a measure how efficient the Company is in managing operating cash conversion cycles. Working capital is the sum of manageable working capital, composed of inventories, trade receivables and trade payables and other receivables and payables. Working capital intensity is measured as a percentage of last three months annualised revenue. 

 

Net debt  
We present an alternative measure to bring together the various funding sources that are included in the Consolidated Balance Sheet and the accompanying notes. Net debt is a measure defined in the Group's principal financing arrangements and reflects the net indebtedness of the Group and includes all cash, cash equivalents and marketable securities; and any debt or debt-like items.

 

 

 

Consolidated Financial Statements 2019

 

 

 

 

Consolidated Statement of Financial Position

as of 31.12.2019

in € million

Notes

31.12.2019

31.12.2018

ASSETS

 

 

 

 

 

 

 

Non-current assets

 

 

 

Goodwill

(11)

117.5

117.4

Other intangible assets

(12)

319.0

334.4

Property, plant and equipment

(13)

1,106.8

1,094.8

Investments in joint ventures and associates

(14)

19.5

21.8

Other non-current financial assets

(15)

15.4

18.0

Other non-current assets

(16)

39.5

34.3

Deferred tax assets

(17)

181.9

171.1

 

 

1,799.6

1,791.8

Current assets

 

 

 

Inventories

(18)

602.7

717.8

Trade and other current receivables

(19)

432.7

481.2

Income tax receivables

(20)

17.3

18.4

Other current financial assets

(21)

0.1

38.6

Cash and cash equivalents

(22)

467.2

491.2

 

 

1,520.0

1,747.2

 

 

3,319.6

3,539.0

 

 

 

 

 

 

 

 

EQUITY AND LIABILITIES

 

 

 

 

 

 

 

Equity

 

 

 

Share capital

(23)

49.5

48.3

Group reserves

(24)

774.4

752.2

Equity attributable to shareholders of RHI Magnesita N.V.

 

823.9

800.5

Non-controlling interests

(25)

20.8

84.8

 

 

844.7

885.3

Non-current liabilities

 

 

Borrowings

(26)

983.5

844.8

Other non-current financial liabilities

(27)

105.1

49.5

Deferred tax liabilities

(17)

54.0

78.4

Provisions for pensions

(28)

328.1

304.3

Other personnel provisions

(29)

75.8

78.5

Other non-current provisions

(30)

98.5

109.2

Other non-current liabilities

(31)

7.3

10.3

 

 

1,652.3

1,475.0

Current liabilities

 

 

 

Borrowings

(26)

71.5

321.6

Other current financial liabilities

(27)

31.9

15.0

Trade payables and other current liabilities

(32)

614.0

756.9

Income tax liabilities

(33)

35.4

32.2

Current provisions

(34)

69.8

53.0

 

 

822.6

1,178.7

 

 

3,319.6

3,539.0

 

 

Consolidated Statement of Profit or Loss

from 01.01.2019 to 31.12.2019

in € million

Notes

2019

2018

Revenue

(35)

2,922.3

3,081.4

Cost of sales

(36)

(2,205.1)

(2,344.5)

Gross profit

 

717.2

736.9

Selling and marketing expenses

(37)

(126.2)

(128.9)

General and administrative expenses

(38)

(209.2)

(208.4)

Restructuring and write-down expenses

(39)

(112.1)

(22.3)

Other income

(40)

34.9

43.9

Other expenses

(41)

(31.3)

(22.6)

EBIT

 

273.3

398.6

Interest income

(42)

9.1

9.7

Interest expenses on borrowings

 

(28.4)

(48.5)

Net expense on foreign exchange effects and related derivatives

(43)

(17.2)

(81.3)

Other net financial expenses

(44)

(38.7)

(42.6)

Net finance costs

 

(75.2)

(162.7)

Share of profit of joint ventures and associates

(14)

1.5

10.1

Profit before income tax

 

199.6

246.0

Income tax

(45)

(50.8)

(58.9)

Profit after income tax

 

148.8

187.1

attributable to shareholders of RHI Magnesita N.V.

 

139.0

158.1

attributable to non-controlling interests

(25)

9.8

29.0

 

 

 

 

 

 

 

 

in €

 

 

 

Earnings per share - basic

(52)

2.82

3.52

Earnings per share - diluted

 

2.81

3.52

 

 

Consolidated Statement of Comprehensive Income

from 01.01.2019 to 31.12.2019

in € million

Notes

2019

2018

Profit after income tax

 

148.8

187.1

 

 

 

 

Currency translation differences

 

 

 

Unrealised results from currency translation

(7)

(7.6)

(20.3)

Deferred taxes thereon

(45)

3.9

0.9

Current taxes thereon

 

2.4

0.0

Unrealised results from net investment hedge

(56)

(2.9)

0.0

Deferred taxes thereon

(56)

0.5

0.0

Current taxes thereon

(56)

0.2

0.0

Reclassification to profit or loss

(41)

3.7

0.0

Cash flow hedges

 

 

 

Unrealised fair value changes

(55)

(7.4)

(6.8)

Deferred taxes thereon

(45)

1.9

1.8

Reclassification to profit or loss

(55)

(0.7)

0.0

Share of other comprehensive income of joint ventures and associates

(14)

0.0

0.1

Items that will be reclassified subsequently to profit or loss, if necessary

 

(6.0)

(24.3)

 

 

 

 

Remeasurement of defined benefit plans

 

 

 

Remeasurement of defined benefit plans

(28)

(37.1)

(11.5)

Deferred taxes thereon

(45)

9.1

3.0

Share of other comprehensive income of joint ventures and associates

(14)

(0.1)

0.0

Items that will not be reclassified to profit or loss

 

(28.1)

(8.5)

 

 

 

 

Other comprehensive income after income tax

 

(34.1)

(32.8)

 

 

 

 

Total comprehensive income

 

114.7

154.3

attributable to shareholders of RHI Magnesita N.V.

 

103.4

137.9

attributable to non-controlling interests

(25)

11.3

16.4

 

Consolidated Statement of Cash Flows

from 01.01.2019 to 31.12.2019

in € million

Notes

2019

2018

Cash generated from operations

 

470.4

462.2

Income tax paid less refunds

 

(67.8)

(67.9)

Net cash inflow from operating activities

(48)

402.6

394.3

Investments in property, plant and equipment and intangible assets

 

(156.1)

(122.6)

Investments in subsidiaries net of cash acquired

(0.5)

0.0

Investments in securities

 

(0.4)

(121.2)

Cash inflows from sale of subsidiaries net of cash disposed of

 

2.5

0.0

Cash inflows from the sale of property, plant and equipment

 

1.4

2.9

Cash inflows from the sale of securities and shares

 

40.9

118.4

Dividends received from joint ventures and associates

 

13.4

11.0

Investment subsidies received

 

0.2

2.1

Interest received

(50)

8.3

8.2

Investments in/ cash inflows from non-current receivables

 

0.0

0.4

Net cash (outflow) from investing activities

 

(90.3)

(100.8)

Share issue costs

 

0.0

(6.2)

Capital contribution to associates

 

0.0

(1.4)

Acquisition of treasury shares

 

(18.8)

0.0

Acquisition of non-controlling interests

 

(44.6)

(80.1)

Proceeds from sale of non-controlling interests

 

0.0

9.2

Dividend payments to shareholders of the Group

 

(74.2)

(33.6)

Dividend payments to non-controlling interests

 

(1.3)

(1.1)

Proceeds from  borrowings and loans

 

432.0

734.9

Repayments of borrowings and loans

 

(550.4)

(801.9)

Changes in current borrowings

 

(2.8)

26.4

Interest payments

(50)

(49.8)

(71.1)

Repayment of lease obligations

 

(14.3)

0.0

Interest payments from lease obligations

 

(1.2)

0.0

Cash flows from derivatives

 

(14.4)

(20.1)

Net cash (outflow) from financing activities

(49)

(339.8)

(245.0)

Total cash flow

 

(27.5)

48.5

Change in cash and cash equivalents

 

(27.5)

48.5

Cash and cash equivalents at beginning of year

 

491.2

442.4

Foreign exchange impact

 

3.5

0.3

Cash and cash equivalents at year-end

(22)

467.2

491.2

 

Consolidated Statement of Changes in Equity

from 01.01.2019 to 31.12.2019

 

 

 

 

Group reserves

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income

 

 

 

in € million

Share
capital

Treasury shares

Additional
paid-in
capital

Mandatory reserve

Retained earnings

Cash flow hedges

Defined
benefit plans

Currency translation

Equity attributable
to shareholders
of RHI Magnesita N.V.

Non-controlling interests

Total equity

Notes

(23)

 

(24)

(24)

(24)

(24)

(24)

(24)

 

(25)

 

31.12.2018

48.3

-

305.5

288.7

351.0

(5.0)

(114.2)

(73.8)

800.5

84.8

885.3

Profit after income tax

-

 

-

-

139.0

-

-

-

139.0

9.8

148.8

Currency translation differences

-

 

-

-

-

-

-

(1.4)

(1.4)

1.6

0.2

Market valuation of cash flow hedges

-

 

-

-

-

(6.1)

-

-

(6.1)

(0.1)

(6.2)

Remeasurement of defined benefit plans

-

 

-

-

-

-

(28.0)

-

(28.0)

-

(28.0)

Share of other comprehensive income of joint ventures and associates

-

 

-

-

-

-

(0.1)

-

(0.1)

-

(0.1)

Other comprehensive income after income tax

-

-

-

-

-

(6.1)

(28.1)

(1.4)

(35.6)

1.5

(34.1)

Total comprehensive income

-

-

-

-

139.0

(6.1)

(28.1)

(1.4)

103.4

11.3

114.7

Dividends

-

-

-

-

(98.8)

-

-

-

(98.8)

(1.3)

(100.1)

Issue of ordinary shares related to the integrated tender offer of Magnesita

1.2

-

55.8

-

-

-

-

-

57.0

-

57.0

Shares repurchased

-

(18.8)

-

-

-

-

-

-

(18.8)

-

(18.8)

Disposal of benefit plans

-

-

-

-

1.2

-

(1.2)

-

-

-

-

Acquisition in non-controlling interests without change of control

-

-

-

-

(16.9)

0.1

(2.1)

(4.6)

(23.5)

(74.0)

(97.5)

Share-based expenses

-

-

-

-

4.1

-

-

-

4.1

-

4.1

Transactions with shareholders

1.2

(18.8)

55.8

-

(110.4)

0.1

(3.3)

(4.6)

(80.0)

(75.3)

(155.3)

31.12.2019

49.5

(18.8)

361.3

288.7

379.6

(11.0)

(145.6)

(79.8)

823.9

20.8

844.7

 

 

 

 

Group reserves

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income

 

 

 

in € million

Share
capital

Additional
paid-in
capital

Mandatory reserve

Retained earnings

Cash flow hedges

Defined
benefit plans

Currency translation

Equity attributable to shareholders of RHI Magnesita N.V.

Non-controlling interests

Total equity

Notes

(23)

(24)

(24)

(24)

(24)

(24)

(24)

 

(25)

 

31.12.2017

44.8

165.7

288.7

281.9

0.1

(107.7)

(54.7)

618.8

226.9

845.7

Effects of initial application of IFRS 15
(net of tax)

 

 

 

(6.0)

 

 

 

(6.0)

(0.6)

(6.6)

Effects of initial application of IFRS 9
(net of tax)

 

 

 

1.8

 

 

 

1.8

-

1.8

01.01.2018

44.8

165.7

288.7

277.7

0.1

(107.7)

(54.7)

614.6

226.3

840.9

Profit after income tax

-

-

-

158.1

-

-

-

158.1

29.0

187.1

Currency translation differences

-

-

-

-

-

-

(8.5)

(8.5)

(10.9)

(19.4)

Market valuation of cash flow hedges

-

-

-

-

(5.2)

-

-

(5.2)

0.2

(5.0)

Remeasurement of defined benefit plans

-

-

-

-

-

(6.6)

-

(6.6)

(1.9)

(8.5)

Share of other comprehensive income of joint ventures and associates

-

-

-

-

-

-

0.1

0.1

-

0.1

Other comprehensive income after income tax

-

-

-

-

(5.2)

(6.6)

(8.4)

(20.2)

(12.6)

(32.8)

Total comprehensive income

-

-

-

158.1

(5.2)

(6.6)

(8.4)

137.9

16.4

154.3

Dividends

-

-

-

(33.6)

-

-

-

(33.6)

(1.2)

(34.8)

Issue of ordinary shares related to the mandatory tender offer of Magnesita

3.5

139.8

-

-

-

-

-

143.3

-

143.3

Sale of non-controlling interests without loss of control

-

-

-

7.2

-

-

0.2

7.4

1.7

9.1

Acquisition in non-controlling interests without change of control

-

-

-

(59.4)

0.1

0.1

(10.9)

(70.1)

(158.4)

(228.5)

Share-based expenses

-

-

-

1.0

-

-

-

1.0

-

1.0

Transactions with shareholders

3.5

139.8

-

(84.8)

0.1

0.1

(10.7)

48.0

(157.9)

(109.9)

31.12.2018

48.3

305.5

288.7

351.0

(5.0)

(114.2)

(73.8)

800.5

84.8

885.3

 

 

Notes

to the Consolidated Financial Statements 2019

 

PRINCIPLES AND METHODS

1. General

RHI Magnesita N.V. (the "Company"), a public company with limited liability under Dutch law is registered with the Dutch Trade Register of the Chamber of Commerce under the number 68991665 and has its corporate seat in Arnhem, Netherlands. The administrative seat and registered office is located at Kranichberggasse 6, 1120 Vienna, Austria.

The Company and its subsidiaries, associates and joint ventures (the "Group") is a global industrial group whose core activities comprise of the development and production, sale, installation and maintenance of high-grade refractory products and systems used in industrial high-temperature processes exceeding 1,200°C. The Group supplies customers in the steel, cement, lime, glass and non-ferrous metals industries. In addition, the Group's products are used in the environment (waste incineration), energy (refractory construction) and chemicals (petrochemicals) sectors.

The shares of RHI Magnesita N.V. are listed on the Main Market of the London Stock Exchange and are included in the FTSE 250 Index.

RHI Magnesita N.V. was incorporated on 20 June 2017 and became the ultimate parent of the RHI Magnesita Group as of 26 October 2017, after completing the corporate restructuring of RHI AG. Until then, RHI AG was the ultimate parent of the Group. This restructuring represented a common control transaction that had no impact on the Consolidated Financial Statements, except for the reclassification of individual equity components.

The financial year of RHI Magnesita N.V. and the Group corresponds to the calendar year. If the financial years of subsidiaries included in the Consolidated Financial Statements do not end on 31 December due to local legal requirements, a special set of financial statements are prepared for the purpose of consolidation. The reporting date of the Indian subsidiaries is 31 March.

The Consolidated Financial Statements for the period from 1 January to 31 December 2019 were drawn up in accordance with all International Financial Reporting Standards (IFRSs) mandatory at the time of preparation as adopted by the European Union (EU). The presentation in the Consolidated Statement of Financial Position distinguishes between current and non-current assets and liabilities. Assets and liabilities are classified as current if they are due within one year or within a longer normal business cycle or if the company does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Inventories as well as trade receivables and trade payables are generally presented as current items. Deferred tax assets and liabilities as well as assets and provisions for pensions and termination benefits are generally presented as non-current items.

The Consolidated Statement of Profit or Loss is drawn up in accordance with the cost of sales method.

With the exception of specific items such as derivative financial instruments and plan assets for defined benefit obligations, the Consolidated Financial Statements are prepared on a historical cost basis unless otherwise stated.

The financial statements have been prepared on a going concern basis. Information on the outbreak of the coronavirus COVID-19 is disclosed under Note (64). The impact of COVID-19 on the Group is assessed below:

The Group benefits from a strong financial position, with low leverage and significant liquidity. As at 31 December 2019 the group has liquid resources of €467.2 million comprising cash and cash equivalents as well as since January 2020 a committed and unutilised credit facility amounting to €600.0 million. Furthermore, repayments of borrowings to financial institutions in 2020 are scheduled with €15.4 million only. Therefore, it is very likely that liquidity security is given for a period of at least 12 months after the date of approval of RHI Magnesita N.V.'s financial statements. As part of assessing the ability to continue as a going concern, RHI Magnesita also considered the impact of COVID-19 and a related potential global economic downturn on its business. Economic activities in the Steel and Industrial Segments are closely linked to the developments of the global markets. During this assessment management conducted various scenario analyses with sufficient depth and duration, considering different levels of revenue reduction and working capital implications. The sensitivities applied were informed by internal and external data sources, including a review of the Group's most recent production levels and short-term order book, customer feedback and review of regional macroeconomic forecasts. Using this data, management created Scenario A, Scenario B and Scenario C which modelled the effect of incremental reductions to revenue at regional and aggregated levels on the Group's results for a three-year period.  The scenarios also accounted for the working capital implications of reduced sales activity and the mitigating actions available to management.

In each scenario, sufficient liquidity and headroom on the Group's covenants were demonstrated. Based on the most recent available external information we have no information that Scenario C is likely to occur. In the event of such further deterioration of market conditions as a result of the COVID-19 outbreak, and implementation of the mitigating actions identified by the Board, the Group will remain compliant with its financing covenant and will have sufficient liquidity to meet obligations when they fall due for a period of at least 12 months after 31 March 2020. In order to secure production capabilities and the health and safety of our employees, RHI Magnesita established Corona Task Forces on a global and regional basis, plants are operating with very strict restrictions, such as pre-work temperature checks. Moreover, all corporate offices are currently closed with employees working from home. RHI Magnesita is currently evaluating further potential actions to mitigate risk such as the use of short working hours, governmental subsidies and the tax benefits which are offered from the different national governments due to the COVID-19 crisis. As a result, and even though globally everyone is confronted with a high level of uncertainty, it is not expected that the coronavirus COVID-19 will have a material negative impact on the ability of the Group to operate as going concern.

The preparation of the Consolidated Financial Statements in agreement with generally accepted accounting principles under IFRS, as adopted by the EU, requires the use of estimates and assumptions that influence the amount and presentation of assets and liabilities recognised as well as the disclosure of contingent assets and liabilities as of the reporting date and the recognition of income and expenses during the reporting period. Although these estimates reflect the best knowledge of the management based on experience from comparable transactions, the actual values recognised at a later date may differ from these estimates.

All amounts in the Notes and tables are shown in € million, unless indicated otherwise. For computational reasons, rounding differences may occur.

The Annual Report was authorised for issue on 31 March 2020 and is subject to adoption at the Annual General Meeting of shareholders on 18 June 2020.

2. Initial application of new financial reporting standards

In 2019, the Group has applied for the first time a number of new standards and interpretations as well as amendments to IFRSs issued by the International Accounting Standards Board (IASB) that are mandatorily effective for an accounting period that begins on or after
1 January 2019.

Standard

Title

Publication
(EU endorsement)1)

Effects on RHI Magnesita Consolidated Financial Statements

New standards and interpretations

 

 

IFRS 16

Leases

13.01.2016
(31.10.2017)

Detailed description after the tabular overview

IFRIC 23

Uncertainty over Income Tax Treatments

07.06.2017 (23.10.2018)

No material effects

Amendments of standards

 

 

Various

Annual Improvements to IFRS 2015-2017 Cycle

12.12.2017 (14.03.2019)

No material effects

IAS 19

Plan Amendment, Curtailment or Settlement

07.02.2018
(13.03.2019)

No effect

IAS 28

Long-term Interests in Associates and Joint Ventures

12.10.2017 (08.02.2019)

No effect

IFRS 9

Prepayment Features with Negative Compensation

12.10.2017 (22.03.2018)

No effect

IFRS 7, IFRS 9, IAS 39

Interest Rate Benchmark Reform

26.09.2019 (15.01.2020)

No material effects

1) According to EU Endorsement Status Report of 23.01.2020.

 

IFRS 16 "Leases"

The accounting standard IFRS 16 "Leases", issued in January 2016 supersedes the previous IAS 17 "Leases" as well as the related interpretations and is applicable to financial years beginning on or after 1 January 2019.

Whereas accounting according to IFRS 16 remains mainly comparable to the IAS 17 regulations for lessors, accounting according to
IFRS 16 leads to major changes for lessees as it requires lessees to recognise right-of-use assets and liabilities for all leases in the scope of IFRS 16. Applying this single lessee accounting model results in an increase in total assets and liabilities in the Consolidated Statement of Financial Position as well as in a replacement of the straight-line expenses for operating leases with a depreciation charge for right-of-use assets and interest expenses for lease liabilities in the Consolidated Statement of Profit or Loss. Moreover, there is a shift from cash flow from operating activities to cash flow from financing activities in the Consolidated Statement of Cash Flows, except for short-term leases and low value leases.

RHI Magnesita implemented IFRS 16 on 1 January 2019 using the modified retrospective approach for transition. According to this method the lease liability is measured at the present value of the remaining lease payments, discounted at using the incremental borrowing rate at initial application. The recognised amount of the right-of-use asset equals the lease liability. Cumulative adjustments were recognised as at adoption and comparative information was not restated.

When adopting IFRS 16 RHI Magnesita makes use of the following transition exemptions:

· Continuing to apply the definition of a lease in accordance with IAS 17 and IFRIC 4 and not to reassess whether a contract is or contains a lease according to IFRS 16.

· Relying on its assessment of whether leases are onerous immediately before the date of adoption as an alternative to performing impairment review.

 

RHI Magnesita makes use of the following ongoing IFRS 16 practical expedients:

· Lease payments for leases whose contractual term is 12 months or less or whose remaining term at adoption is 12 months or less will continue to be recognised as an expense.

· Lease payments for leases for which the underlying asset is of low value will continue to be recognised as an expense.

· Applying a single discount rate to a portfolio of leases with reasonably similar characteristics.

 

From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

· Fixed payments (including in-substance fixed payments), less any lease incentives receivable

· Variable lease payment that are based on an index or a rate

· Amounts expected to be payable by the lessee under residual value guarantees

· The exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and

· Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.

 

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee's incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. The incremental borrowing rate is based on the German federal bond and the US Government Treasury Yield Curve. Based on these two governmental curves, a spread is determined in relation to the bond rating of RHI Magnesita. This spread is then added with an inflation differential and a country risk premium for each country. The weighted average incremental borrowing rate applied to these lease liabilities was 2.44%.

Right-of-use assets are measured at cost comprising the following:

· The amount of the initial measurement of lease liability

· Any lease payments made at or before the commencement date less any lease incentives received

· Any initial direct costs, and

· Restoration and removal costs.

 

A lease modification is a change in the scope of a lease or the consideration for a lease, that was not part of the original terms and conditions of the lease. If the modification decreases the scope of the lease, the carrying amount of the right-of-use asset and the lease liability has to be reduced accordingly. If the modification increases the scope of the lease (consideration is not at a stand-alone price), the carrying amount of the right-of-use asset and the lease liability has to be increased accordingly.

 

RHI Magnesita's leases are mainly arrangements regarding land and buildings, technical equipment and machinery as well as other equipment, furniture and fixtures. The average lease term is eleven years for land and buildings, five years for technical equipment and four years for other equipment, furniture and fixtures. Impacts resulting from extension and termination options, as well as residual value guarantees are immaterial.

The following table shows the reconciliation of the minimum lease payments reported as at 31 December 2018 to the lease liability
recognised on 1 January 2019:

Commitments arising from rental agreements and leases as at 31.12.2018

 

Commitment for less than one year

16.3

Commitment for longer than one year and up to five years

27.7

Commitment for longer than five years

29.7

Total commitments arising from rental agreements and leases

73.7

Commitments arising from short-term leases and leases of low-value assets

(4.1)

Total commitments for the determination of the lease liability

69.6

Effect of discounting at the incremental borrowing rate

(7.6)

Lease liability as at 01.01.2019

62.0

 

The following table gives an overview of the positions affected by IFRS 16:

in € million

31.12.2019

01.01.2019

Right-of-use assets included in property, plant and equipment

 

 

Right-of-use assets - land and buildings

24.0

40.0

Right-of-use assets - technical equipment and machinery

23.0

17.0

Right-of-use assets - other equipment, furniture and fixtures

4.2

5.0

Total right-of-use assets

51.2

62.0

thereof Segment Steel

28.2

34.0

thereof Segment Industrial

23.0

28.0

 

 

 

Lease liabilities included in other non-current and other current financial liabilities

 

 

Current lease liabilities

13.8

16.0

Non-current lease liabilities

48.1

46.0

Total lease liabilities

61.9

62.0

 

in € million

2019

Depreciation charge of right-of-use assets

 

Depreciation charge of right-of-use assets - land and buildings

5.1

Depreciation charge of right-of-use assets - technical equipment and machinery

7.0

Depreciation charge of right-of-use assets - other equipment furniture and fixtures

2.4

Total depreciation charge of right-of-use assets

14.5

 

 

Interest expense

1.2

Expenses related to short-term and low-value leases as well as variable lease payments

9.2

 

 

The total cash outflow for leases in 2019

24.7

 

 

Impact on Earnings per share in € (basic)

0.00

Impact on Earnings per share in € (diluted)

0.00

 

Payments associated with short-term leases of equipment and vehicles and all leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment, office furniture and other small items.

IFRS 7, IFRS 9, IAS 39 "Interest Rate Benchmark Reform"

RHI Magnesita has elected to early adopt the amendments to IAS 39 and IFRS 7 Interest Rate Benchmark Reform (IBOR) issued in September 2019. In accordance with the transition provisions, the amendments have been adopted retrospectively to hedging relationships that existed at the start of the reporting period and to the amount accumulated in the cash flow hedge reserve at that date.

The amendments provide temporary relief from applying specific hedge accounting requirements to hedging relationships directly affected by the IBOR reform. The reliefs stipulated in the IBOR reform should not cause hedge accounting to terminate in general. However, any hedge ineffectiveness continues to be recorded in the income statement. Furthermore, the amendments set out triggers for when the reliefs will end, which include the uncertainty arising from interest rate benchmark reform no longer being present.

The timing and precise nature of the IBOR reform are currently uncertain. RHI Magnesita's risk exposure that is directly affected by the IBOR reform concerns its USD 200 million floating-rate debt with a remaining term until 2023. RHI Magnesita has hedged this debt with an interest rate swap, and it has designated the swap in a cash flow hedge of the variability in cash flows of the debt, due to changes in USD LIBOR that is the current benchmark interest rate. Further information is provided under note (55).

Currently the structure of the USD LIBOR is unclear after 2021. This represents a possible source of ineffectiveness because this might affect at a different time and have a different impact on the hedged item (the floating-rate debt) and the hedging instrument (the interest rate swap used to hedge the debt). Management considers that the most likely scenario is that the hedged debt will move to the same alternative benchmark rate as the swap. Therefore, no material effect on the Group is expected.

According to recent developments on the market, the EURIBOR is expected to remain active as the benchmark rate in the Euro area and consequently the risk of discontinuation before 2023 is relatively small, thus the interest rate swap of EUR 305.6 million and its corresponding underlying hedged item, a floating-rate debt, both maturing in 2023,  would most likely be unaffected. Even in the unlikely scenario of precocious discontinuation of the EURIBOR, Management considers that the hedged debt would move to the same alternative benchmark rate as the swap.

RHI Magnesita is closely monitoring the developments of the IBOR reform and is in close communication with the banks to minimise any mismatches going forward.

3. New financial reporting standards not yet applied

The IASB issued further standards, amendments to standards and interpretations, whose application is, however, not yet mandatory as at
31 December 2019. They were not applied early on a voluntary basis. They are not expected to have a significant impact on the RHI Magnesita Consolidated Financial Statements.

Standard

Title

Publication
(EU endorsement)1)

Mandatory application for RHI Magnesita

Expected effects on RHI Magnesita Consolidated Financial Statements

New standards

 

 

 

IFRS 14

Regulatory Deferral Accounts

30.01.2014

No EU endorsement

Not relevant

IFRS 17

Insurance Contracts

18.05.2017

01.01.2021

Not relevant

Amendments of standards

 

 

 

IAS 1, IAS 8

Definition of Material

31.10.2018

01.01.2020

No material effects

IFRS 3

Business Combinations

22.10.2018

01.01.2020

No effect

Various

Amendments to References to the Conceptual Framework in IFRS Standards

29.03.2018

01.01.2020

No effect

 

1) According to EU Endorsement Status Report of 23.01.2020.

 

The following financial reporting standard was issued by the IASB, but had not yet been adopted by the EU at the time of the preparation of the RHI Magnesita Consolidated Financial Statements:

Standard

  Title

Publication1)

Mandatory application for
RHI Magnesita

Expected effects on RHI Magnesita Consolidated Financial Statements

New standards and interpretations

 

 

 

 

 

 

 

 

 

 

 

 

 

Amendments of standards

 

 

 

IAS 1

  Classification of Liabilities as Current or Non-current

1/23/2020

1/1/2022

No material effects

1) According to EU Endorsement Status Report of 23.01.2020.

4. Integrated Tender Offer

As a result of the merger between RHI and Magnesita, the Group was required - in accordance with the share purchase agreement (SPA) and Brazilian laws and regulations - to make a mandatory public offer in Brazil which had to be addressed to all remaining Magnesita shareholders and had to be made on the same terms and conditions as those made available to the Sellers under the SPA, including as to purchase price and form of consideration. The Group decided to combine the mandatory offer with a so-called "delisting tender offer" in an Integrated Tender Offer (ITO) and filed with the Brazilian Securities Commission the respective request. The launch of the ITO was communicated to the minority shareholders on 10 November 2018.

Magnesita shareholders received the option of selling each Magnesita share in exchange of:

(i)  R$18.46, adjusted by SELIC (the Brazilian benchmark interest rate) from 26 October 2017 until the date of the settlement of the auction of the Integrated Tender Offer, plus 0.1998 RHI Magnesita shares or

(ii)  A cash-only alternative consideration.

The consideration of the cash-only alternative offer was the highest between:

(i)  R$31.09, adjusted by SELIC from 26 October 2017 until the date of the settlement of the auction of the Integrated Tender Offer, and

(ii)  R$35.56, not adjusted by SELIC.

In the course of the finalisation of the ITO in 2019, the Group acquired the remaining outstanding Magnesita shares during the first four months of 2019 and has issued a total of 1,140,658 new ordinary shares. As at 10 April 2019, RHI Magnesita's issued share capital consisted of 49,477,705 shares with voting rights. The fair value of the consideration as at 31 December 2019 is €97.5 million and includes a cash part in the amount of €40.5 million. These shares were delivered in four different instances to minority shareholders and admitted to trading on the London Stock Exchange's main market in the first four months 2019. The closing price per share on each of the trading days was used for the determination of the fair value of the issued ordinary shares totalling up to €57.0 million. The carrying amount of Magnesita's net assets in the Group's Consolidated Financial Statements as of 10 April 2019 was €499.7 million. Consequently, the carrying amount of non-controlling interests acquired amounts to €74.0 million. This transaction results in a decrease in equity attributable to shareholders of RHI Magnesita N.V totalling to €23.5 million.

5. Other changes in comparative information

Consolidated Statement of Profit or Loss

In 2019 RHI Magnesita initiated its Production Optimisation Plan and entered into the final phase of integration which led to a recognition of €112.1 million of restructuring expenses and asset write-downs. In line with the materiality principle this effect has been disclosed separately on the face of the Statement of Profit or Loss, the comparative figures have been adjusted accordingly.

Consolidated Statement of Cash Flows

Cash flows generated from operating activities have been repositioned within the Notes section and are now shown in Notes to Consolidated Statement of Cash Flows in order to improve peer comparability.

Segment reporting

Our internal management reporting is organised according to the activity of the customer. For the foundry customers this is the Steel segment as the majority of these customers are processing iron. Therefore, the responsibility of the foundry business has been moved from the Segment Industrial to Segment Steel in 2019. The information for the previous year was adjusted accordingly, impacting revenue by €8.7 million, Gross Profit by €4.0 million and segment assets by €3.6 million.  

 

6. Methods of consolidation

Subsidiaries

Subsidiaries are companies over which RHI Magnesita N.V. exercises control. Control exists when the company has the power to decide on the relevant activities, is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

The main operating companies of the RHI Magnesita Group and their core business activities are as follows:

Name and registered office of the company

Country of
core activity

Core business activity

Didier-Werke Aktiengesellschaft, Germany

Germany

Production

Magnesit Anonim Sirketi, Turkey

Turkey

Mining, production, sales

Magnesita Mineraço S.A., Brazil

Brazil

Mining

Magnesita Refractories Company, USA

USA

Mining, production, sales

Magnesita Refractories GmbH, Germany

Germany

Production

Magnesita Refratários S.A., Brazil

International

Production, sales

RHI Magnesita Trading B.V., Netherlands

International

Procurement, sales, supply chain

Orient Refractories Limited, India

India

Production, sales

RHI Canada Inc., Canada

Canada

Production, sales, provision of services

RHI Magnesita GmbH, Austria

International

Sales, R&D, financing

RHI GLAS GmbH, Germany

International

Sales

RHI Refractories (Dalian) Co., Ltd., PR China

PR China

Production

RHI US Ltd., USA

USA

Production, sales, provision of services

RHI-Refmex, S.A. de C.V., Mexico

Latin America

Sales

Veitsch-Radex GmbH & Co OG, Austria

Austria

Mining, production

 

The acquisition method is used to account for all business combinations. The purchase price for shares is offset against the proportional share of net assets based on the fair value of the acquired assets and liabilities at the date of acquisition or when control is obtained. Intangible assets which were previously not recognised in the separate Financial Statements of the company acquired are also measured at fair value. Intangible assets identified when a company is acquired, including for example technology, mining rights and customer relations, are only measured separately at the time of acquisition if they are identifiable and are in the control of the company and a future economic benefit is expected.

For acquisitions where less than 100% of shares in companies are acquired, IFRS 3 allows an accounting policy choice whereby either goodwill proportionate to the share held or goodwill including the share accounted for by non-controlling interests can be recognised. This accounting policy choice can be exercised for each acquisition. For the acquisition of Magnesita, non-controlling interests have been measured at their proportionate share of Magnesita's identifiable net assets.

If a business combination is achieved in stages, the acquirer's previously held equity interest in the acquiree is remeasured to fair value at the acquisition date.   Any gains and losses arising from such remeasurement are recognised in profit or loss.

After completing the purchase price allocation, the determined goodwill is allocated to the relevant cash-generating unit and tested for impairment. In accordance with the provisions of IFRS 3, negative goodwill is immediately recognised to profit or loss in other income after renewed measurement of the identifiable assets, liabilities and contingent liabilities.

Net assets of subsidiaries not attributable to RHI Magnesita N.V. are shown separately under equity as non-controlling interests. The basis for non-controlling interests is the equity after adjustment to the accounting and measurement principles of the RHI Magnesita Group and proportional consolidation entries.

Transaction costs which are directly related to business combinations are expensed as incurred. Contingent consideration included in the purchase price is recorded at fair value at initial consolidation.

When additional shares are acquired in entities already included in the Consolidated Financial Statements as subsidiaries, the difference between the purchase price and the proportional carrying amount in the subsidiary's net assets is offset against shareholders' equity. Gains and losses from the sale of shares are recorded in equity unless they lead to a loss of control.

All intragroup results are fully eliminated.

In accordance with IAS 12, deferred taxes are calculated on temporary differences arising from the consolidation. Subsidiaries are deconsolidated on the day control ends.

Joint ventures and associates

Shares in joint ventures and associates are accounted for using the equity method. A joint venture is a joint arrangement between the RHI Magnesita Group and one or several other partners whereby the parties that have joint control over the arrangement have rights to the net assets of the arrangement.

An associate is an entity over which the RHI Magnesita Group has significant influence. Significant influence is the power to participate in the investee's financial and operating policy decisions without control or joint control. There is the rebuttable presumption that if a company holds directly or indirectly 20% of the shares of the investee or has other abilities (e.g. through seats in the supervisory board) to influence the company's financial and operating policy decisions it has significant influence.

At the date of acquisition, a positive difference between the acquisition costs and the share in the fair values of identified assets and liabilities of the joint ventures and associates is determined and recognised as goodwill. Goodwill is shown as part of investments in joint ventures and associates in the Statement of Financial Position.

The acquisition cost of investments accounted for using the equity method is adjusted each year to reflect the change in the equity of the individual joint venture or associate that is attributable to the RHI Magnesita Group. Unrealised intragroup results from transactions are offset against the carrying amount of the investment on a pro-rata basis during consolidation, if material.

RHI Magnesita examines at every reporting date whether there exist any objective indications of an impairment of the shares in joint ventures and associates. If such indications exist, the required impairment is determined as the difference between the recoverable amount and the carrying amount of the joint ventures and associates and recognised in profit and loss in the item share of profit of joint ventures and associates.

When the group's share of losses in an equity-accounted investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the other entity. If the equity-accounted investment subsequently reports profits, the entity resumes recognising its share of profits only after those profits equal or exceed its share of losses not recognised.

The Financial Statements of the companies accounted for using the equity method are prepared in accordance with uniform accounting and measurement methods throughout the Group.

7. Foreign currency translation

Functional currency and presentation currency

The Consolidated Financial Statements are presented in Euro, which represents the functional and presentation currency of RHI Magnesita N.V.

The items included in the Financial Statements of each Group company are based on the currency of the primary economic environment in which the company operates (functional currency).

Foreign currency transactions and balances

Foreign currency transactions in the individual Financial Statements of Group companies are translated into the functional currency based on the exchange rate in effect on the date of the transaction. Gains and losses arising from the settlement of such transactions and the measurement of monetary assets and liabilities in foreign currencies at the closing rate are recognised in profit or loss under net expense on foreign exchange effects and related derivatives. Unrealised currency translation differences from monetary items which form part of a net investment in a foreign operation are recognised in other comprehensive income in equity. When a non-derivative financial instrument is designated as the hedging instrument in a net investment hedge in a foreign operation, the effective portion of the foreign exchange gains and losses is recognised in the currency translation difference reserve within equity. Non-monetary items in foreign currency are carried at historical rates.

If foreign companies are deconsolidated, the currency translation differences are recognised in the Statement of Profit or Loss as part of the gain or loss from the sale of shares in subsidiaries. In addition, when monetary items cease to form part of a net investment in a foreign operation or when in case of a net investment hedge the foreign operation is disposed, the currency translation differences previously recognised in other comprehensive income are reclassified to profit or loss.

Group companies

The Annual Financial Statements of foreign subsidiaries that have a functional currency differing from the Group presentation currency are translated into Euros as follows:

Assets and liabilities are translated at the closing rate on the reporting date of the Group, while monthly income and expenses and consequently the profit or loss for the year as presented in the Statement of Profit or Loss are translated at the respective closing rates of the previous month. Differences resulting from this translation process and differences resulting from the translation of amounts carried forward from the prior year are recorded under other comprehensive income without recognition to profit or loss. Monthly cash flows are translated at the respective closing rates of the previous month. Goodwill and adjustments to the fair value of assets and liabilities related to the purchase price allocations of a subsidiary outside the European currency area are recognised as assets and liabilities of the respective subsidiary and translated at the closing rate. 

RHI Magnesita has evaluated the effect of applying IAS 29 "Financial Reporting in Hyperinflationary Economies" in Argentina with the conclusion that the effect on the Consolidated Financial Statements is considered immaterial to the Group.

The Euro exchange rates of currencies important for the RHI Magnesita Group are shown in the following table:

 

 

Closing rate

Average rate1)

Currencies

1 € =

31.12.2019

31.12.2018

2019

2018

Argentine Peso

ARS

67.09

43.10

52.94

32.58

Brazilian Real

BRL

4.51

4.44

4.41

4.29

Canadian Dollar

CAD

1.46

1.56

1.49

1.53

Chilean Peso

CLP

842.57

793.69

792.03

753.18

Chinese Renminbi Yuan

CNY

7.81

7.87

7.73

7.81

Indian Rupee

INR

79.90

79.88

78.84

80.45

Mexican Peso

MXN

21.19

22.49

21.74

22.70

Norwegian Krone

NOK

9.88

9.94

9.86

9.62

Pound Sterling

GBP

0.85

0.90

0.88

0.89

Swiss Franc

CHF

1.09

1.13

1.11

1.15

South African Rand

ZAR

15.78

16.46

16.24

15.45

US Dollar

USD

1.12

1.14

1.12

1.18

1) Arithmetic mean of the monthly closing rates.

8. Principles of accounting and measurement

Goodwill

Goodwill is recognised as an asset in accordance with IFRS 3. It is tested for impairment at least once each year, or when events or a change in circumstances indicate that the asset could be impaired.

In accordance with IFRS 3, negative goodwill is recognised through profit or loss immediately after a new assessment of the identified assets, liabilities and contingent liabilities.

Other intangible assets

Mining rights were recognised in the course of the purchase price allocation for Magnesita and are amortised based on the depletion of the related mines. Depletion is calculated based on the volume mined in the period in proportion to the total estimated volume.

Customer relations were recognised in the course of purchase price allocations of acquired subsidiaries and are amortised on a straight-line basis over the expected period of useful life.

Research costs are expensed in the year incurred and included under general and administrative expenses.

Development costs are only capitalised if the allocable costs of the intangible asset can be measured reliably during its development period. Moreover, capitalisation requires that the product or process development can be clearly defined, is feasible in technical, economic and capacity terms and is intended for own use or sale. In addition, future cash inflows which cover not only normal costs but also the related development costs must be expected. Capitalised development costs are amortised on a straight-line basis over the expected useful life, however, with a maximum useful life of ten years, and recognised in cost of sales.

The development costs for internally generated software are expensed as incurred if their primary purpose is to maintain the functionality of existing software. Expenses that can be directly and conclusively allocated to individual programmes and represent a significant extension or improvement over the original condition of the software are capitalised as production costs and added to the original purchase price of the software. These direct costs include the personnel expenses for the development team as well as a proportional share of overheads. Software is predominantly amortised on a straight-line basis over a period of four years.

Purchased intangible assets are measured at acquisition cost, which also includes acquisition-related costs, less accumulated amortisation and impairments. Intangible assets with a finite useful life are amortised on a straight-line basis over the expected period of useful life. The following table shows the most important useful lives:

 

 

Customer relationships

6 to 15 years

Patents

7 to 18 years

Brand rights

20 years

Land use rights

30 to 65 years

Software

4 years

 

Property, plant and equipment

Property, plant and equipment is measured at acquisition or production cost, less accumulated depreciation and accumulated impairments. These assets are depreciated on a straight-line basis over the expected useful life, calculated pro rata from the month the asset is available for use.

IFRS 16 "Leases", supersedes the previous IAS 17 "Leases" as well as the related interpretations and is applicable to financial years beginning on or after 1 January 2019. For the amounts relating to leases recognised in the Statement of Financial Position and in the Statement of Profit or Loss see the overview of the positions affected by IFRS 16 under Note (2).

Production costs of internally generated assets comprise direct costs as well as a proportionate share of capitalisable overheads and borrowing costs. If financing can be specifically allocated to an investment, borrowing costs are capitalised as production costs. If no direct connection can be made, the average rate on borrowed capital of the Group is used as the capitalisation rate due to the central funding of the Group.

Expected demolition and disposal costs at the end of an asset's useful life are capitalised as part of acquisition cost and recorded as a provision. The criteria for this treatment are a legal or constructive obligation towards a third party and the ability to prepare a reliable estimate.

Real estate, land and plant under construction are not depreciated. Depreciation of other material property, plant and equipment is based on the following useful lives in the RHI Magnesita Group:

 

 

Factory and office buildings

15 to 50 years

Land improvement

8 to 30 years

Crusher machines and mixing facilities

8 to 20 years

Presses

10 to 12 years

Tunnel, rotary and shaft kilns

50 years

Other calcining and drying kilns

20 to 30 years

Cars, other plant, furniture and fixtures

3 to 35 years

 

RHI Magnesita's leases include mainly arrangements regarding land and buildings, technical equipment and machinery as well as other equipment, furniture and fixtures. The average lease term is eleven years for land and buildings, five years for technical equipment and four years for other equipment, furniture and fixtures. Impacts resulting from extension and termination options, as well as residual value guarantees are immaterial.

The residual values and economic useful lives are reviewed regularly and adjusted if necessary.

When components of plant or equipment have to be replaced at regular intervals, the relevant replacement costs are capitalised as incurred if the criteria per IAS 16 have been met. The carrying amount of the replaced components is derecognised. Regular maintenance and repair costs are expensed as incurred.

Gains or losses from the disposal of property, plant and equipment, which result as the difference between the net realisable value and the carrying amount, are recognised as income or expense in the Consolidated Statement of Profit or Loss.

Impairment of property, plant and equipment, goodwill and other intangible assets

Property, plant and equipment, including Right-of-use assets, and intangible assets, including goodwill, are tested for impairment if there is any indication that the value of these items may be impaired. Intangible assets with an indefinite useful life and goodwill are tested for impairment at least annually.

An asset is considered to be impaired if its recoverable amount is less than the carrying amount. The recoverable amount of an asset is the higher of its fair value less costs of disposal and its value in use (present value of future cash flows). If the carrying amount is higher than the recoverable amount, an impairment loss equivalent to the resulting difference is recognised in the Statement of Profit or Loss. If the reason for an impairment loss recognised in the past for property, plant and equipment and for other intangible assets ceases to exist, a reversal of impairment on the amortised acquisition and production costs is recognised to profit or loss.

In the case of impairments related to cash-generating units (CGU) which contain goodwill, existing goodwill is initially reduced. If the required impairment exceeds the carrying amount of goodwill, the difference is apportioned proportionately to the remaining non-current tangible and intangible assets of the CGU. Reversals of impairment losses recognised on goodwill are not permitted and are therefore not considered. The effects of impairment tests at the CGU level are shown separately in the Statement of Profit or Loss.

If there is an indication for an impairment of a specific asset, only this specific asset will be tested for impairment. The recoverable amount is determined through fair value. If the fair value is lower than the carrying amount, an impairment loss is recorded in EBIT or, in the case of restructuring, in restructuring costs.

Cash-generating units (CGU)

In the Group individual assets do not generate cash inflows independent of one another; therefore, no recoverable amount can be presented for individual assets. As a result, the assets are combined in CGUs, which largely generate independent cash inflows. These units are combined in strategic business units and reflect the market presence and market appearance and are as such responsible for cash inflows. CGU's are determined based on group of assets that can generate cash inflows independent of other assets.

The organisational structures of the Group reflect these units. In addition to the joint management and control of the business activities in each unit, the sales know-how, the knowledge of RHI Magnesita's long-standing customer relationships or knowledge of the customer's production facilities and processes further support these units. Product knowledge is manifested in the application-oriented knowledge of chemical, physical and thermal properties of RHI Magnesita products. The services offered extend over the life cycle of RHI Magnesita products at the customer's plant, from the appropriate installation and support of optimal operations, to environmentally sound disposal with the customer or the sustainable reuse in the Group's production process. These factors determine cash inflow to a significant extent and consequently form the basis for the CGU structures.

The CGUs of the strategic business unit Steel are Linings and Flow Control. These two units are determined according to the production stages in the process of steel production.

In the Industrial Division, each industry line of business (glass, cement/lime, non-ferrous metals and environment, energy, chemicals) forms a separate CGU. All raw material producing facilities with the exception of Norway are combined in one CGU.

The plant in Porsgrunn, Norway, is not included in the raw materials unit, but treated as a separate CGU because a management team was installed specifically for the coordination and implementation of the optimisation measures due to the dimension and the special situation at the Porsgrunn plant. This organisation goes beyond plant management and includes sub-tasks of the administration processes.

As in the previous year, the impairment test is based on the value in use; the recoverable amount is determined using the discounted cash flow method and incorporates the terminal value. The detailed planning of the first five years is congruent with the strategic business and financial planning. Based on the detailed planning period, it is geared to a steady-state business development, which balances out possible economic or other non-sustainable fluctuations in the detailed planning period and forms the basis for the calculation of the terminal value. As in the previous year, the terminal value is based on a growth rate derived from the difference of the current and the possible degree of utilisation of the assets.

The net cash flows are discounted using a discount rate that is calculated taking into account the weighted average cost of capital of comparable companies (peer group); the corresponding parameters are derived from capital market information. In addition, country-specific risk premiums are considered in the weighted average cost of capital. The discount rate ranges between 5.4% and 8.9% in the year 2019. In the previous year, the discount rates ranged between 10.1% and 13.0%. Main reason for higher discount rates in 2018 was that the equity beta for the peer group increased as the peer group companies outperformed the market index during the period under consideration. In addition, in 2018 one member of the peer group did not pass the statistical test (t-test) and consequently was excluded from the calculation. The adoption of IFRS 16 has no material impact on the discount rate.

Composition of estimated future cash flows

The estimates of future cash flows include forecasts of the cash flows from continued use. If assets are disposed at the end of their useful life, the related cash flows are also included in the forecasts.

A simplified statement of cash flows serves to determine the cash flows on the basis of strategic business and financial planning. The forecasts include cash flows from future maintenance investments. Expansion investments are only taken into account when there has been a significant cash outflow or significant payment obligations have been entered into due to services received and it is sufficiently certain that the investment measure will be completed. All other expansion investments are not considered; this applies in particular to expansion investments that have been decided on but not begun.

Working capital is included in the carrying amount of the CGU; therefore, the recoverable amount only takes into account changes in working capital.

Basis for Planning

Basis for the impairment test was the 2020 Budget and Long-Term Plan 2021 to 2025, which was approved by the Board, and developed with the growth rates used in the forward-looking business plan. To forecast the CGUs' cash flows, management predicts the growth rate using external sources for the development of the customer's industries and expert assumptions. This includes forecasts about the regional growth of the steel production and the output of the non-steel clients. In combination with the development of the specific refractory consumption, which considers technological improvements, the growth rates for the individual CGUs are determined.

 

2019

2018

 

Discount rate before Tax

Perpetual annuity growth rate

Goodwill
 in € million

Discount rate before Tax

Perpetual annuity growth rate

Goodwill
 in € million

Steel Division - Linings

7.9%

0.9%

88.6

11.3%

0.9%

88.4

Steel Division - Flow Control

7.7%

0.9%

27.2

11.3%

0.9%

27.3

 

The remaining goodwill of €1.7 million (31.12.2018: €1.7 million) is spread among the remaining CGU's, all of them having sufficient headroom.

Result of impairment test

Based on the impairment test conducted at 31 December 2019, the recoverability of the assets was demonstrated in all CGUs, except for the CGU Norway.

The property, plant and equipment of CGU Norway has been fully impaired as a result of impairment testing in previous years. This was caused by production costs exceeding the price of comparable raw materials on the market. Given the high raw material prices in 2018 and the lack of Fused Magnesia in the market, management decided to increase the production of Fused Magnesite at the plant. Fused Magnesia is a key raw material used for refractory bricks sold to Linings customers. At the adoption date of IFRS 16, the financial projections supported the recognition of the right-of-use assets according to IFRS 16, but future profitability was insufficient to reverse previously recognised impairments. In the fourth quarter of 2019 the Fused magnesia prices declined and the availability on the market allows RHI Magnesita to buy the material from external sources at lower cost.

Considering the current low prices for Fused Magnesia from China, the cash flow generated by the facility in Norway is negative. The cash flow is calculated based on the external sales of products manufactured in Porsgrunn and the value of internal supply of Fused Magnesia. This value is calculated comparing the manufacturing costs versus potential costs of sourcing comparable material from external sources.

As a result, RHI Magnesita has to write-down the non-current assets of CGU Norway totalling € 13,9 million (thereof real estate, land and buildings € 0.9 million, technical equipment, machinery € 1.4 million, other plant, furniture and fixtures € 0.3 million, plant under construction € 0.8 million, right-of-use asset land and buildings € 10.4 million, right-of-use asset technical equipment and machinery € 0.1 million) as of December 2019 in accordance with IAS 36.

As in the previous year, no reversals of impairments were made in the financial year 2019.

Other financial assets and liabilities

Financial assets are classified as at amortised cost, if the contractual cash flows of the financial asset include solely payments of principal and interest and they are held in order to collect the contractual cash flows. If the contractual cash flows of financial assets include solely payments of principal and interest, but they are held in order to both collect the contractual cash flows and sell the financial asset, then the financial assets are classified as at fair value through other comprehensive income. If the contractual cash flows of financial assets do not solely include payments of principal and interest, then these financial assets are classified as at fair value through profit or loss.

The Group initially recognises securities on the trading date when the entity becomes a party to the contractual provisions of the instruments. All other financial assets and financial liabilities are initially recognised on the date when they are originated. Financial instruments, except for trade receivables, are initially recognised at fair value. Financial assets are derecognised if the entity transfers substantially all the risks and rewards or if the entity neither transfers nor retains substantially all the risks and rewards and has not retained control. Financial liabilities are derecognised when the contractual obligations are settled, withdrawn or have expired.

The item other financial assets in the Consolidated Statement of Financial Position of RHI Magnesita includes shares in non-consolidated subsidiaries and other investments, securities, financial receivables and positive fair values of derivative financial instruments.

The item other financial liabilities includes negative fair values of derivative financial instruments as well as liabilities to fixed-term or puttable non-controlling interests.

Shares in non-consolidated subsidiaries (RHI Magnesita exercises control but the subsidiary is not-fully consolidated due to materiality reasons), investments in other companies as well as securities are classified as at fair value through profit or loss in the RHI Magnesita Group. For materiality reasons if such financial assets are of minor significance cost serves as an approximation of fair value. Directly attributable transaction costs are recognised in profit or loss as incurred. Securities at fair value through profit or loss are measured at fair value and changes therein, including any interest income, are recognised in profit or loss.

Financial receivables are measured at amortised cost applying the effective interest method. Any doubt concerning the collectability of the receivables is reflected in the use of the lower present value of the expected future cash flows according to the impairment model described below. Foreign currency receivables are translated at the closing rate.

Derivative financial instruments, which are not part of an effective hedging relationship in accordance with IFRS 9 or do not meet the hedge accounting requirements, must be classified as at fair value through profit or loss and measured at fair value through profit or loss. In the RHI Magnesita Group, this measurement category includes derivatives related to purchase obligations, forward exchange contracts, embedded derivatives in open orders that are denominated in currencies other than the functional currency as well as derivative financial instruments in the form of interest rate swaps.

Derivative financial instruments relating to purchase obligations are accounted for in accordance with IFRS 9 and concern a long-term power supply contract which provides for the purchase of fixed amounts of electricity at fixed prices. The measurement is made taking into account quoted electricity prices in the futures market. Based on the fixed amounts of electricity, the cash flows for the entire term of the contract are initially determined as the difference between forward rates and contractually fixed prices and discounted at the reporting date using a cost of borrowing rate corresponding to the term. The measurement effects resulting from this electricity derivative are shown as gain or loss from derivatives from supply contracts in the Statement of Profit or Loss.

The measurement of forward exchange contracts and embedded derivatives in open orders denominated in a currency other than the functional currency is made on a case-by-case basis at the respective forward rate on the reporting date. These forward rates are based on spot rates, and also include forward premiums and discounts. Unrealised valuation gains or losses and results from the realisation are recognised to the Statement of Profit or Loss under net expense of foreign exchange effects and related derivatives. The underlying transactions for the derivatives are carried at amortised cost.

For derivative financial instruments, which are incorporated in an effective hedging relationship in accordance with IFRS 9, the provisions regarding hedge accounting are applied. RHI Magnesita has concluded derivative financial instruments in the form of interest rate swaps to hedge the cash flow risk of financial liabilities carrying variable interest. Hedging transactions are shown as part of cash flow hedge accounting. The interest rate swaps as hedging instruments are measured at fair value, which corresponds to the amount which RHI Magnesita would receive or has to pay on the reporting date when the financial instrument is terminated. The fair value is calculated using the interest rates and yield curves relevant on the reporting date. The effective part of the fair value changes is initially recorded in other comprehensive income as an unrealised gain or loss. Only at the time of the realisation of the underlying transaction, the contribution of the hedging instrument is shown in the Statement of Profit or Loss. Ineffective parts of the fair value changes of cash flow hedges are recognised immediately in the Statement of Profit or Loss. If the underlying transaction is no longer expected to take place, the accumulated amount previously recorded in other comprehensive income is reclassified to the Statement of Profit or Loss.

Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge are recognised in Other Comprehensive Income and presented in the currency translation difference reserve within equity while any gains or losses relating to the ineffective portion are recognised in the Statement of Profit or Loss. On disposal of the foreign operation, the cumulative amount of any such gains or losses recorded in Other Comprehensive Income is reclassified to the Statement of Profit or Loss. The Group uses a loan to hedge its exposure to foreign exchange risk on its investments in foreign subsidiaries.

Capital shares of non-controlling interests in subsidiaries with a fixed term are recognised under other financial liabilities in the Consolidated Statement of Financial Position in accordance with IAS 32. The liabilities are measured at amortised cost. The share of profit attributable to non-controlling interests is recognised under other net financial expenses in the Statement of Profit or Loss. Dividend payments to non-controlling interests reduce liabilities.

Furthermore, the RHI Magnesita Group has entered into purchase obligations with non-controlling shareholders of a subsidiary. Based on these agreements, the shareholders receive the right to tender their shares at any time on previously defined conditions. In this case,
IAS 32 provides for carrying a liability in the amount of the probable future exercise price. The difference between the estimated liability and the carrying amount of the non-controlling interest was recognised to equity at the time of initial recognition without affecting profit or loss. Subsequently, the liability to puttable non-controlling interests is measured at amortised cost and changes are recorded in net finance costs.

Impairment of financial assets

Impairment of financial instruments is based on expected credit losses (ECL). Expected credit losses are defined as the difference between all contractual cash flows the entity is entitled to according to the contract and the cash flows that the entity expects to receive. The measurement of expected credit losses is generally a function of the probability of default, loss given default and the exposure at default.

RHI Magnesita recognises a loss allowance for expected credit losses on investments in debt instruments that are measured at amortised cost, trade receivables and contract assets. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument.

The Group recognises lifetime ECL for trade receivables and contract assets by applying the simplified approach. The expected credit losses on these financial assets are generally estimated using a provision matrix based on the Group's historical credit loss experience for customer groups located in different geographic regions. Forward-looking information is incorporated in the determination of the applicable loss rates for trade receivables. For the Group, the general economic development of the countries in which it sells its goods and services is the relevant for the determination if adjustment of the historical loss rates is necessary.

For all other financial instruments, the Group recognises lifetime ECL when there has been a significant increase in credit risk since initial recognition. However, if the credit risk on the financial instrument has not increased significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount equal to 12-month ECL.

Lifetime ECL represents the expected credit losses that will result from all possible default events over the expected life of a financial instrument. In contrast, 12-month ECL represents the portion of lifetime ECL that is expected to result from default events on a financial instrument that are possible within 12 months after the reporting date.

RHI Magnesita makes use of the practical expedient that if a financial instrument has an 'investment grade' rating that it is assumed to be of low credit risk and no significant increase in the credit risk took place and the expected credit loss is calculated using the 12-month ECL. Among other factors the Group considers a significant increase in credit risk to have taken place when contractual payments are more than 30 days past due.

The Group considers the following as constituting an event of default, hence leading to a credit-impaired financial asset:

· significant financial difficulty of the issuer or the borrower;

· a breach of contract;

· the lender(s) of the borrower, for economic or contractual reasons relating to the borrower's financial difficulty, having granted

to the borrower concessions that the lender(s) would not otherwise consider;

· it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation;

· the disappearance of an active market for that financial asset because of financial difficulties.

In addition to these factors, RHI Magnesita applies the presumption in regard to trade receivables, that a default event has occurred when such receivables are 180 days past due unless the Group has reasonable and supportable information for anything different. 180 days past due are used as an objective evidence of default as this is presumed to reflect the Group's customer industry.

For those financial instruments where objective evidence of default is present an individual assessment on expected credit losses takes place.

Generally, financial instruments are written off when there is no reasonable expectation of recovery. Financial assets written off may still be subject to enforcement activities under the Group's recovery procedures, taking into account legal advice where appropriate. Any recoveries made are recognised in profit or loss.

Deferred taxes

Deferred taxes are recognised on temporary differences between the tax base and the IFRS carrying amount of assets and liabilities, tax-loss carryforwards and consolidation entries.

Deferred tax assets are recognised on temporary differences to the extent it is probable that sufficient deferred tax liabilities exist or that sufficient taxable income before the reversal of temporary differences is available for the settlement of deductible temporary differences.

Deferred taxes are recognised on temporary differences relating to shares in subsidiaries and joint ventures, unless the parent company is in a position to control the timing of the reversal of the temporary differences and it is probable that the temporary differences will not reverse. No temporary differences are recognised for financial instruments which were issued by subsidiaries to non-controlling interests and which are classified as a financial liability in accordance with IFRS.

The calculation of deferred taxes is based on the tax rate expected in the individual countries at the time the deferred tax asset is realised or the liability is settled and generally reflects the enacted or substantively enacted tax rate on the reporting date. As in the previous year, deferred taxes of the Austrian group companies are determined at the corporation tax rate of 25.0%. Deferred tax assets and liabilities of the Brazilian group companies are measured mainly at 34.0%. Tax rates from 12.5% to 34% (31.12.2018: 12.5% to 34.9%) were applied to the other companies.

Deferred tax assets and liabilities are offset if there is an enforceable right to offset current tax receivables against current tax liabilities, and if the deferred taxes relate to income taxes due from/to the same tax authorities.

Inventories

Inventories are stated at the lower of cost or net realisable value as of the reporting date. The determination of acquisition cost of purchased inventories is based on the average cost. Finished goods and work in process are valued at fixed and variable production cost. The net realisable value is the estimated selling price in the ordinary course of business minus any estimated cost to complete and to sell the goods. Impairments due to reduced usability are reflected in the calculation of the net realisable value.

Trade and other current receivables

Trade receivables are recognised initially at the amount of consideration that is unconditional, unless they contain significant financing components when they are recognised at fair value and subsequently carried at amortised cost minus any valuation allowances. Valuation allowances are calculated in accordance with the simplified approach of the impairment model for financial instruments (see impairment of financial assets above).

In case of factoring arrangements trade receivables are derecognised if RHI Magnesita transfers substantially all the risks and rewards or does not retain control.

Receivables denominated in foreign currencies are translated using the closing rate.

Emission certificates

Emission certificates acquired for a consideration are carried at cost and recognised to profit and loss in cost of sales when used up, written down to fair value or sold. In the case of a shortfall, a provision is recognised equivalent to the fair value of the lacking emission certificates.

Emission certificates allocated free of charge are not accounted for. Proceeds from the sale of these rights are recognised as revenue.

Cash and cash equivalents

Cash and cash equivalents includes cash on hand, cheques received and cash at banks with an original term of a maximum of three months. Moreover, shares in money market funds, which are only exposed to insignificant value fluctuations due to their high credit rating and investments in extremely short-term money market instruments and can be converted to defined cash amounts within a few days at any time, are also recorded under cash equivalents under IAS 7.

Cash and cash equivalents denominated in foreign currencies are translated at the closing rate.

Disposal groups held for sale

Non-current assets and disposal groups which can be sold in their present state and whose sale is highly probable are classified as held for sale. Assets and liabilities which are intended to be sold together in a single transaction represent a disposal group held for sale and are shown separately from other assets and liabilities in the Statement of Financial Position.

Non-current assets and disposal groups which are classified as held for sale are carried at the lower of fair value less costs to sell and carrying amount. Impairments are initially allocated to existing goodwill and then to the non-current assets on a pro-rata basis, based on the carrying amount of each individual asset of the disposal group. Impairments beyond that are allocated to current assets pursuant to the liquidity principle and recognised through profit or loss in the item other expenses. Non-current assets are not depreciated as long as they are classified as held for sale.

Borrowings and other financial liabilities

Financial liabilities include liabilities to financial institutions and other lenders and are measured at fair value less directly attributable transaction costs at initial recognition. In subsequent measurements these liabilities are measured at amortised cost applying the effective interest method. Financial liabilities in foreign currency are translated at the closing rate.

A financial liability is derecognised when the obligation under the liability is discharged (by payment or legal release), cancelled or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability. The difference in the respective carrying amounts is subsequently recognised in the Statement of Profit or Loss, including any costs or fees.

Provisions

Provisions are recognised when the Group incurs a legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to meet this obligation, and the amount of the obligation can be reliably estimated.

Non-current provisions are measured at their discounted settlement value as of the reporting date if the discounting effect is material.

If maturities cannot be estimated, they are shown under current provisions.

Provisions for pensions

With respect to post-employment benefits, a differentiation is made between defined contribution and defined benefit plans.

Defined contribution plans limit the company's obligation to the agreed amount of contributions to earmarked pension plans. The related expenses are shown in the functional areas and thus in EBIT.

Defined benefit plans require the company to provide the agreed amount of benefits to active and former employees and their dependents, with a differentiation made between pension systems financed through provisions and pension systems financed by external funds.

For pension plans financed through external funds, the pension obligation according to the projected unit credit method is netted out against the fair value of the plan assets. If the plan assets are not sufficient to cover the obligation, the net obligation is recognised under provisions for pensions. However, if the plan assets exceed the obligations, the asset recognised is limited to reductions of future contribution payments to the plan and is shown under other non-current assets.

The present value of defined benefit obligations for current pensions, future pension benefits and similar obligations and the related expenses are calculated separately for each plan annually by independent qualified actuaries in accordance with the provisions of IAS 19. The present value of future benefits is based on the length of service, expected wage/salary developments and pension adjustments.

The expense to be recognised in a period includes current and past service costs, settlement gains and losses, interest expenses from the interest accrued on obligations, interest income from plan assets and administration costs paid from plan assets. The net interest expense is shown separately in net finance costs. All other expenses related to defined benefit plans are allocated to the costs of the relevant functional areas.

Actuarial assumptions required to calculate these obligations, include the discount rate, increases in wages/salaries and pensions, retirement starting age and probability of employee turnover and actual claims. The calculation is based on local demographic parameters.

Interest rates used are the rates on high-quality corporate bonds issued with comparable maturities and currencies are applied to determine the present value of pension obligations. In countries where there is not a sufficiently liquid market for high-quality corporate bonds, the returns on government bonds are used as a basis.

The rates of increase for wages/salaries were based on an average of past years, which is also considered to be realistic for the future.

The fluctuation probabilities were estimated specific to age or seniority.

The retirement age used for the calculation is based on the respective statutory provisions of the country concerned. The calculation is based on the earliest possible retirement age according to the current statutory provisions of the respective country, among other things depending on gender and date of birth.

Remeasurement gains and losses are recorded net of deferred taxes under other comprehensive income in the period incurred.

Other personnel provisions

Other personnel provisions include provisions for termination benefits, service anniversary bonuses, payments to semi-retirees, share-based payments and lump-sum settlements.

Provisions for termination benefits are primarily related to obligations to employees whose employment is subject to Austrian law.

Employees who joined an Austrian company before 31 December 2002 receive a one-off lump-sum termination benefit as defined by Austrian labour legislation if the employer terminates the employment relationship or when the employee retires. The termination payment depends on the relevant salary at the time of the termination as well as the number of years of service and ranges between two and 12 monthly salaries. These obligations are measured in accordance with IAS 19 using the projected unit credit method applying an accumulation period of 25 years. Remeasurement gains and losses are recorded directly to other comprehensive income after considering tax effects and shown in the Statement of Comprehensive Income.

For employees who joined an Austrian company after 31 December 2002, employers are required to make regular contributions equal to 1.53% of the monthly wage/salary to a statutory termination benefit scheme. The company has no further obligations. Claims by employees to termination benefits are filed with the statutory termination benefit scheme, while the regular contributions are treated like defined contribution pension plans and included under personnel expenses of the functional areas.

Service anniversary bonuses are one-time special payments that are dependent on the employee's wage/salary and length of service. The employer is required by collective bargaining agreements or company agreements to make these payments after an employee has reached a certain number of uninterrupted years of service with the same company. Obligations are mainly related to service anniversary bonuses in Austrian and German group companies. Under IAS 19 service anniversary bonuses are treated as other long-term employee benefits. Provisions for service anniversary bonuses are calculated based on the projected unit credit method. Remeasurement gains or losses are recorded in the personnel costs of the functional areas in the period incurred.

Local labour laws and other similar regulations require individual group companies to create provisions for semi-retirement obligations. The obligations are partially covered by qualified plan assets and are reported on a net basis in the Statement of Financial Position.

In 2018, the Remuneration Committee of RHI Magnesita approved a new Remuneration Policy for the members of senior management of the Group. Based on this new long-term incentive programme, share-options are granted. Each reporting date the provisional amount per due date is recognised in equity. 

Obligations for lump-sum settlements are based on company agreements in individual companies.

Other provisions

Provisions for warranties are created for individual contracts at the time of the sale of the goods concerned or after the service has been provided. The amounts of the provisions are based on the expected or actual warranty claims.

Provisions for restructuring are created providing a detailed formal restructuring plan has been developed and announced prior to the reporting date or whose implementation was commenced prior to the reporting date.

The Group recognises provisions for demolition and disposal costs and environmental damages. RHI Magnesita's facilities and its refractory, exploration and mining operations are subject to environmental and governmental laws and regulations in each of the jurisdictions in which it operates. These laws govern, among other things, reclamation or restoration of the environment in mined areas and the clean-up of contaminated properties. Provisions for demolition and disposal costs and environmental damages include the estimated demolition and disposal costs of plants and buildings as well as environmental restoration costs arising from mining activities, based on the present value of estimated cash flows of the expected costs. The estimated future costs of deactivation of assets are reviewed annually and adjusted, if appropriate.

A provision for an onerous or unfavourable contract is recognised when the expected benefits to be derived from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The non-current provisions are measured at the present value of the unavoidable costs of meeting the obligation under the contract which exceed the economic benefits expected to arise from that contract.

Provisions for labour and civil contingencies are recognised for all risks referring to legal proceedings that represent probable loss. Assessment of the likelihood of loss includes analysis of available evidence, including the opinion of internal and external legal advisors of the RHI Magnesita Group.

Trade payables and other current liabilities

These liabilities are initially recognised at fair value, and subsequently measured at amortised cost.Liabilities denominated in foreign currencies are translated at the closing rate.

Government grants

Government grants to promote investments are recognised as deferred income and released through profit or loss over the useful life of the relevant asset distributed on a straight-line basis.

Grants that were granted as compensation for expenses or losses are recognised to profit or loss in the periods in which the subsidised expenses are incurred. In the RHI Magnesita Group, they mainly include grants for research and employee development. Grants for research are recorded as income in general and administrative expenses.

Revenue and expenses

Revenue from the sale of goods and services is recognised at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services. The transaction price is the expected consideration to be received, to the extent that it is highly probable that there will not be a significant reversal of revenue in future periods. If the consideration in a contract includes a variable amount, the Group estimates the amount of consideration to which it will be entitled in exchange for transferring the goods or services to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in the amount of cumulative revenue recognised will not occur when the associated uncertainty with the variable consideration is subsequently resolved. The average credit term is 60 days upon transfer of goods or service. The Group is using the practical expedient in IFRS 15 and does not adjust the promised amount of consideration for the effects of a significant financing component if it expects, at contract inception, that the period between the transfer of the promised good or service to the customer and payment will be one year or less. At contract inception, the Group identifies the goods or services promised in the contract and assesses which of the promised goods or services shall be identified as separate performance obligations. Promised goods or services give rise to separate performance obligations if they are capable of being distinct. Revenue is recognised as control is transferred, either over time or at a point of time. Control is defined as the ability to direct the use of and obtain substantially all of the economic benefits from an asset.

Regarding delivery contracts of refractory products the goods promised are distinct and control of the goods is passed to the customer typically when physical possession has been transferred to the customer. The transport service does not give rise to a separate performance obligation to which a part of revenue would have to be allocated, as this service is performed before control of the products is transferred to the customer.

In consignment arrangements, RHI Magnesita Group ships products to a customer but retains control of the goods until a predetermined event occurs. Revenue is not recognised on delivery of the products to the customer if the delivered products are held on consignment, but generally when the withdrawal of the products from the consignment stock occurs. Most of the products within consignment arrangements have a high stock turn rate.

The Group provides services (e.g. supervision, installation) that are either sold separately or bundled together with the sale of products to a customer. Contracts for bundled sales of products and installation services are comprised of two performance obligations as the promises to transfer products and provide services are capable of being distinct and separately identifiable. Accordingly, the transaction price allocated is based on the relative stand-alone selling prices of the product and services. Revenue from services is recognised over time, using an input method to measure progress towards complete satisfaction of the service, because the customer simultaneously receives and consumes the benefits provided by the Group.

Contracts for bundled sales of refractory products and non-refractory products (e.g. machines) provided to the customer free of charge comprise two performance obligations that are separately identifiable. Consequently, the Group allocates the transaction price based on the relative stand-alone selling prices of these performance obligations and allocates revenue to the non-refractory product which is delivered free of charge.

For contracts in the Steel segment with variable payment arrangements (transaction price depends on the customer's production performance) management has determined that the promise to transfer each of the products and services to the customer is not separately identifiable from all the other promises in the context of such contracts. Therefore, only one single performance obligation exists - the performance of a management refractory service. Further information is provided under Note (10). With regards to these contracts, revenue is recognised over time on the basis using the output-oriented method (e.g. quantity of steel produced in the customer aggregate serviced).

Expected penalty fees from guaranteed durabilities when using refractory products are considered as a variable consideration in the form of a contract or a refund liability. Based on the expected value method, the amount of the variable consideration is estimated. The estimation of the variable consideration is not subject to a constraint as the Group has significant experience with promising durabilities. Once the uncertainty related to guaranteed durabilities ceases to exist, a significant reversal of revenue is highly unlikely. All other warranties guarantee that the transferred products correspond to the contractually agreed specifications and are classified as assurance type warranties. Consequently, no separate distinct performance obligation to the customer exists.

If transfer of goods or services to a customer is performed before the customer pays consideration or before payment is due, a contract asset, excluding any amounts presented as a receivable is recognised. A contract asset is an entity's right to consideration in exchange for goods or services that the entity has transferred to a customer.

If a customer pays consideration before the entity transfers a good or service to the customer, the entity shall present the contract as a contract liability when the payment is made, or the payment is due (whichever is earlier). A contract liability is an entity's obligation to transfer goods or services to a customer for which the entity has received consideration (or an amount of consideration is due) from the customer.

Contract costs are the incremental costs of obtaining a contract and must be recognised as an asset if the company expects to recover those costs. As a practical expedient, RHI Magnesita expenses such costs when incurred, if the amortisation period would be 12 months or less.

In general, the term of customer contracts in accordance with IFRS 15 is no longer than one year. Therefore, the Group decided, as a practical expedient, not to disclose the remaining performance obligations for contracts with original expected duration of less than one year.

Expenses are recognised to the Statement of Profit or Loss when a service is consumed, or the costs are incurred.

Interest income and expenses are recognised in accordance with the effective interest method.

Dividends from investments that are not accounted for using the equity method are recognised to profit and loss at the time the legal claim arises.

Income taxes are recognised according to the local regulations applicable to each company. Current and deferred income taxes are recognised in the Statement of Profit or Loss unless they are related to items which were recorded directly in equity or in other comprehensive income. In such a case, income taxes are also recorded in equity or other comprehensive income.

RHI Magnesita GmbH, Vienna, Austria, acts as the head of a corporate tax group. A tax compensation agreement was concluded in 2017 between the head of the group and eight Austrian group members. According to the group and tax compensation agreement, the members of the group have to pay a positive tax compensation of 20% of the taxable profit to the head of the group if the result is positive, as long as tax loss carry forwards exist with the head of the group; subsequently 25% of the taxable profit have to be paid. In case of a tax loss of the group member, the head of the group has to pay a negative tax compensation to the member of the group, with a rate of 12.5% being applied insofar as the loss can be utilised within the group. In case the losses of a group member were compensated (negative tax allocation payment) and this group member generates taxable income within the next three years (after compensation), the positive tax allocation amounts to 12.5%. In case of a loss in the tax group, an unused tax loss of a group member is retained and offset against future taxable profits of the group member. When the contract is terminated, a compensation payment is agreed for unused tax losses of a group member, which were allocated to the head of the group.

In Germany, Didier-Werke Aktiengesellschaft, Wiesbaden, acts as the head of a tax group for corporate and trade tax purposes. The seven tax group members are obliged to transfer their profit or loss to Didier-Werke Aktiengesellschaft based on a profit or loss transfer agreement. Additionally, Didier-Werke Aktiengesellschaft, Wiesbaden, acts as the head of a tax group for VAT purposes with ten German tax group members. Furthermore, Rearden G Holdings Eins GmbH, Hagen, acts as the head of a two-level structure tax group with four group members for corporate, trade tax and VAT purposes.

9. Segment reporting

The RHI Magnesita Group comprises the operating segments Steel and Industrial. The segmentation of the business activities reflects the internal control and reporting structures and is regularly reported to the Chief Executive Officer.

The Steel segment specialises in supporting customers in the steel-producing and steel-processing industry. The Industrial segment serves customers in the glass, cement/lime, non-ferrous metals and environment, energy, chemicals industries. The main activities of the two segments consist of market development, global sales of high-grade refractory bricks, mixes and special products as well as providing services at the customers' sites.

The globally located manufacturing sites, which extract and process raw materials, are combined in one organisational unit. The allocation of manufacturing cost of the production plants to the Steel and Industrial Divisions is based on the supply flow.

Statements of Profit or Loss up to gross profit are available for each segment. The gross profit serves the management of the RHI Magnesita Group for internal performance management. Selling and marketing expenses, general and administrative expenses, restructuring and write-down expenses, other income and expenses, profit of joint ventures, net finance costs and income taxes are managed on a group basis and are not allocated.

Segment assets include trade receivables and inventories, which are available to the operating segments and are reported to the management for control and measurement, as well as property, plant and equipment, goodwill and other intangible assets, which are allocated to the segments based on the capacity of the assets provided to the segments. All other assets are not allocated. The recognition of segment assets is determined on the basis of the accounting and measurement methods applied to the IFRS Consolidated Financial Statements.

Data on revenue by country are disclosed by the sites of the customers. Data on non-current assets (goodwill, intangible assets and property, plant and equipment) are disclosed on the basis of the respective locations of the companies of the RHI Magnesita Group.

10. Critical accounting judgments and key sources of estimation uncertainty

The RHI Magnesita Group used forward-looking assumptions and estimates, especially with respect to business combinations, non-current assets, valuation adjustments to inventories and receivables, provisions and income taxes to a certain extent in the application of accounting and measurement methods.

The estimates are based on comparable values in the past, plan data and other findings regarding transactions to be accounted. The actual values may ultimately deviate from the assumptions and estimates made. The resulting changes in value of assets, liabilities, revenue and expenses are accounted for in the reporting period in which the change is made and in the affected future reporting periods.

Critical accounting judgments

Revenue recognition

For customer contracts in the Steel segment with variable payment arrangements where the transaction price depends on the customer's production performance, (e.g. quantity of steel produced) management has determined that the commitment to transfer each of the products and services to the customer is not separately identifiable from the other commitments in the context of such contracts. The customer expects complete refractory management for the agreed product areas in the steel plant in order to enable steel production. Thus, only one performance obligation, performance of a management refractory service, exists.

Trade payables subject to supply chain finance arrangements

RHI Magnesita participates in supply chain finance arrangements whereby raw material suppliers may elect to receive a discounted early payment of their invoice from a bank rather than being paid in line with the agreed contractual payment terms. The Group settles the amount owed to the bank. The invoice due date as well as the value of the original liability remains unaltered. RHI Magnesita assesses that these arrangements do not modify the terms of the original trade payable, and therefore financial liabilities subject to supply chain finance arrangements continue to be classified as trade payables.

There are no other critical accounting judgments made in the preparation of the Consolidated Financial Statements.

Key sources of estimation uncertainty

Business combinations (initial consolidation)

Estimates relating to the calculation of fair values of acquired assets, liabilities and contingent liabilities are required within the context of business combinations.

If intangible assets are identified, estimates are necessary for the determination of fair values by means of discounted cash flows, including the duration, amount of future cash flows, and discount rate. When determining the fair value of land, buildings and technical plant, above all the estimate of comparability of the reference objects with the objects subject to valuation is discretionary.

When making estimates in the context of purchase price allocations on major acquisitions, RHI Magnesita consults with independent experts who accompany the execution of the discretionary decisions and record it in appraisal documents.

Impairment of intangible assets with finite useful lives and property, plant and equipment

Intangible assets with a finite useful life and property, plant and equipment must be tested for impairment when events or a change in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amounts of these assets amounted to €1,424.0 million at 31 December 2019 (31.12.2018: €1,427.4 million). In accordance with IAS 36, such impairment losses are determined through comparisons with the discounted future cash flows expected from the related assets of the cash-generating units (CGUs).

As part of the annual planning process, the impairment test is conducted for the CGUs defined in the RHI Magnesita Group, thus considering all changes resulting from updates of strategic planning. Sensitivity analyses are also performed as part of the impairment test. In their calculation one of the main parameters is changed as follows: increase in the discount rate by 10%, reduction in the form of the contribution margin by 10% and reduction of the growth rate in terminal value by 50%. In all CGUs, these simulations do not result in impairments. Likewise, in all CGUs a reduction of the discount rate by 10%, an increase in profitability in the form of the contribution margin by 10% and an increase in the growth rate in terminal value by 50% do not result in reversals of impairments.

Impairment of goodwill and other intangible assets with indefinite useful life

The effect of an adverse change by plus 10% in the estimated interest rates as of 31 December 2019 or by minus 10% in the contribution margin would not result in an impairment of goodwill recognised (carrying amount 31.12.2019: 117.5 million, 31.12.2018: €117.4 million) nor in an impairment charge to intangible assets with indefinite useful lives (carrying amount at 31.12.2019 and 31.12.2018: €1.8 million).

Intangible assets and property, plant and equipment

Management uses its experience to estimate the remaining useful life of an asset. The actual useful life of an asset may be impacted by an unexpected event that may result in an adjustment to the carrying amount of the asset.

Provisions for pensions and termination benefits

The present value of pension and termination benefit obligations depends on several factors, which are based on actuarial assumptions such as interest rates, future salary and pension increases as well as life expectancy. Due to the long-term nature of these obligations, these assumptions are subject to significant uncertainties.

The following sensitivity analysis shows the change in present value of the pension and termination benefit obligations if one key parameter changes, while the other influences are maintained constant. In reality, it is rather unlikely that these influences do not correlate. The present value of the pension obligations for the sensitivities shown was calculated using the same method as for the actual present value of the pension obligations (projected unit credit method).

 

 

 

31.12.2019

31.12.2018

in € million

Change of assumption
in percentage points
or years

Pension plans

Termination benefits

Pension plans

Termination benefits

Present value of the obligations

 

557.9

52.0

506.6

55.5

Interest rate

+0.25

(17.1)

(1.4)

(14.0)

(1.5)

 

(0.25)

17.4

1.4

15.0

1.5

Salary increase

+0.25

1.1

1.4

0.9

1.5

 

(0.25)

(1.2)

(1.3)

(1.7)

(1.4)

Pension increase

+0.25

11.6

-

10.3

-

 

(0.25)

(11.4)

-

(10.1)

-

Life expectancy

+1 year

21.0

-

17.2

-

 

(1) year

(20.7)

-

(17.3)

-

 

These changes would have no immediate effect on the result of the period as remeasurement gains and losses are recorded in other comprehensive income without impact on profit or loss. The assumptions regarding the interest rate are reviewed semi-annually; all other assumptions are reviewed at the end of the year.

Other provisions

The recognition and measurement of other provisions totalling €168.3 million (31.12.2018: €162.2 million) were based on the best possible estimates using the information available at the reporting date. The estimates take into account the underlying legal relationships and are performed by internal experts or, when appropriate, also by external experts. Despite the best possible assumptions and estimates, cash outflows expected at the reporting day may deviate from actual cash outflows. As soon as additional information is available, the estimates made are reviewed and provisions are also adjusted.

The majority of the provisions refers to an unfavourable contract which was recognised in the course of the acquisition of Magnesita and is mainly based on an estimate of forgone profit margins compared to market conditions.

Income taxes

The calculation of income taxes of RHI Magnesita N.V. and its subsidiaries is based on the tax laws applicable in the individual countries. Due to their complexity, the tax items presented in the Consolidated Financial Statements may be subject to different interpretations by local finance authorities. When determining the amount of the capitalisable deferred tax assets, an estimate is required of future taxable income. Should the future taxable profit deviate by 10% from the assumption made on the reporting date within the planning period defined for the accounting and measurement of deferred taxes, the net position of deferred tax assets amounting to €127.9 million (31.12.2018: €92.7 million) would have to be increased by €1.7 million (31.12.2018: €0.6 million) or reduced by €2.0 million (31.12.2018: €0.6 million).

 

NOTES TO THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION

11. Goodwill

Goodwill developed as follows:

in € million

2019

2018

Cost at beginning of the year

119.3

122.1

Currency translation

0.1

(2.8)

Cost at year-end

119.4

119.3

Accumulated impairment at beginning of the year

(1.9)

(1.9)

Accumulated impairment at year-end

(1.9)

(1.9)

Carrying amount at year-end

117.5

117.4

 

12. Other intangible assets

Other intangible assets changed as follows in the financial year 2019:

in € million

Mining rights

Customer relationship

Internally generated intangible assets

Other intangible assets

Total

Cost at 31.12.2018

169.4

108.7

50.5

129.2

457.8

Currency translation

(0.3)

0.6

0.1

0.6

1.0

Additions

0.0

0.0

3.4

6.3

9.7

Retirements and disposals

0.0

0.0

(1.6)

(4.4)

(6.0)

Reclassifications

0.0

0.0

0.0

2.4

2.4

Cost at 31.12.2019

169.1

109.3

52.4

134.1

464.9

Accumulated amortisation 31.12.2018

4.7

17.8

34.1

66.8

123.4

Currency translation

0.0

(0.1)

0.1

0.4

0.4

Amortisation charges

3.3

7.5

4.5

11.1

26.4

Impairment charges

0.0

0.0

0.0

0.6

0.6

Retirements and disposals

0.0

0.0

(1.6)

(3.3)

(4.9)

Accumulated amortisation 31.12.2019

8.0

25.2

37.1

75.6

145.9

Carrying amounts at 31.12.2019

161.1

84.1

15.3

58.5

319.0

 

Other intangible assets changed as follows in the previous year:

in € million

Mining rights

Customer relationship

Internally generated intangible assets

Other intangible assets

Total

Cost at 31.12.2017

179.2

100.0

47.6

143.1

469.9

Currency translation

(9.8)

(2.1)

0.0

(2.6)

(14.5)

Additions

0.0

0.0

2.9

1.2

4.1

Retirements and disposals

0.0

0.0

0.0

(2.5)

(2.5)

Reclassifications

0.0

10.8

0.0

(10.0)

0.8

Cost at 31.12.2018

169.4

108.7

50.5

129.2

457.8

Accumulated amortisation 31.12.2017

0.8

1.1

30.2

64.8

96.9

Currency translation

0.0

0.0

0.0

(0.8)

(0.8)

Amortisation charges

3.9

6.5

3.9

14.3

28.6

Retirements and disposals

0.0

0.0

0.0

(1.3)

(1.3)

Reclassifications

0.0

10.2

0.0

(10.2)

0.0

Accumulated amortisation 31.12.2018

4.7

17.8

34.1

66.8

123.4

Carrying amounts at 31.12.2018

164.7

90.9

16.4

62.4

334.4

 

Internally generated intangible assets comprise capitalised software and product development costs.

The customer relations of Magnesita have a carrying amount of €83.6 million (31.12.2018: €90.0 million) and a remaining useful life of 9 to 13 years.

Other intangible assets include in particular acquired patents, trademark rights, software, and land use rights. The land use rights have a carrying amount of €23.0 million (31.12.2018: €23.4 million) and a remaining useful life of 18 to 58 years.

There are no restrictions on the sale of intangible assets.

13. Property, plant and equipment

Property, plant and equipment developed as follows in the year 2019 and in the previous year:

 

in € million

Real
estate,
land and
buildings

Raw material deposits

Technical
equipment,
machinery

Other plant, furniture and fixtures

Prepayments
made and
plant under
construction

Right-of-use assets

Total

Cost at 31.12.2018

618.4

37.5

1,166.9

311.5

132.4

0.0

2,266.7

Initial recognition IFRS 16

0.0

0.0

0.0

0.0

0.0

62.0

62.0

Currency translation

0.4

(0.2)

1.7

0.9

(0.5)

0.5

2.8

Additions

3.4

(1.0)

11.6

7.4

132.2

17.7

171.3

Reassessment / Modification of leases (IFRS 16)

0.0

0.0

0.0

0.0

0.0

(3.9)

(3.9)

Retirements and disposals

(1.5)

(0.5)

(21.2)

(12.8)

(0.8)

(0.2)

(37.0)

Reclassifications

20.6

0.8

51.4

14.6

(89.8)

0.0

(2.4)

Cost at 31.12.2019

641.3

36.6

1,210.4

321.6

173.5

76.1

2,459.5

Accumulated depreciation 31.12.2018

261.8

22.5

657.2

230.3

0.1

0.0

1,171.9

Currency translation

0.5

(0.2)

1.5

0.9

0.0

0.1

2.8

Depreciation charges

13.4

1.6

99.0

17.7

0.0

14.5

146.2

Impairment charges

8.9

0.0

38.7

1.1

5.9

10.5

65.1

Retirements and disposals

(1.3)

(0.3)

(19.3)

(12.2)

0.0

(0.2)

(33.3)

Accumulated depreciation 31.12.2019

283.3

23.6

777.1

237.8

6.0

24.9

1,352.7

Carrying amounts at 31.12.2019

358.0

13.0

433.3

83.8

167.5

51.2

1,106.8

 

in € million

Real
estate,
land and
buildings

Raw material deposits

Technical
equipment,
machinery

Other plant, furniture and fixtures

Prepayments
made and
plant under
construction

Total

Cost at 31.12.2017

630.1

33.8

1,155.6

298.2

99.4

2,217.1

Currency translation

(14.8)

(0.7)

(22.8)

(3.0)

(3.8)

(45.1)

Additions

2.9

0.3

9.1

11.2

99.4

122.9

Retirements and disposals

(8.3)

0.0

(12.4)

(6.7)

0.0

(27.4)

Reclassifications

8.5

4.1

37.4

11.8

(62.6)

(0.8)

Cost at 31.12.2018

618.4

37.5

1,166.9

311.5

132.4

2,266.7

Accumulated depreciation 31.12.2017

256.8

21.3

575.8

220.7

0.8

1,075.4

Currency translation

(1.1)

(0.1)

(1.5)

(1.1)

0.0

(3.8)

Depreciation charges

12.8

1.3

93.9

16.8

0.0

124.8

Retirements and disposals

(6.9)

0.0

(11.3)

(6.3)

0.0

(24.5)

Reclassifications

0.2

0.0

0.3

0.2

(0.7)

0.0

Accumulated depreciation 31.12.2018

261.8

22.5

657.2

230.3

0.1

1,171.9

Carrying amounts at 31.12.2018

356.6

15.0

509.7

81.2

132.3

1,094.8

 

 

 

The item prepayments made and plant under construction includes plant under construction with a carrying amount of €163.5 million (31.12.2018: €129.9 million), with the sinterplant and the brickplant in Chizhou, China, representing the largest investment project under construction in 2019 as well as the modification of the smelter at the site in Radenthein, Austria, representing the largest investment project under construction in 2018. Information on impairment is provided under Note (8).

There are no restrictions on the sale of property, plant and equipment.

14. Investments in joint ventures and associates

The following investments in joint ventures and associates are accounted for using the equity method in the RHI Magnesita Consolidated Financial Statements:

in € million

31.12.2019

31.12.2018

Investments in joint ventures

19.5

19.6

Investments in associates

0.0

2.2

Carrying amount at year-end

19.5

21.8

 

Joint ventures

The RHI Magnesita Group holds a share of 50% (2018: 50%) in MAGNIFIN Magnesiaprodukte GmbH & Co KG ("MAGNIFIN"), a private company based in St. Jakob, Austria. The company's core business activity is the production and sale of halogen-free flame retardants for plastics. The investment in MAGNIFIN is treated as a financial investment. MAGNIFIN is set up as an independent vehicle. RHI Magnesita has a residual interest in the net assets of the company and accordingly classified its share as a joint venture. There are no listed market prices available.

The following table summarises the income and expenses of MAGNIFIN:

in € million

2019

2018

Revenue

39.4

38.8

Profit before income tax

20.0

17.9

Depreciation

1.5

1.5

Interest expense

0.1

0.2

Other comprehensive (loss)/income

(0.3)

0.0

Total comprehensive income

19.7

17.9

 

Income taxes on the share of profit of MAGNIFIN amounting to €2.5 million (2018: €2.4 million) are recognised by the head of the tax group, RHI Magnesita GmbH, Vienna, Austria, due to the legal form of the joint venture and transferred to Veitscher Vertriebsgesellschaft m.b.H., Vienna, Austria, in accordance with the provisions of the tax compensation agreement.

The net assets of MAGNIFIN are shown in the table below:

in € million

31.12.2019

31.12.2018

Non-current assets

8.3

8.9

Current assets (without cash and cash equivalents)

14.7

11.2

Cash and cash equivalents

13.4

16.5

Non-current liabilities and provisions

(3.9)

(4.0)

Current provisions

(1.2)

(1.3)

Trade payables and other current liabilities

(3.2)

(2.9)

Net assets

28.1

28.4

 

The movement in the carrying amount of the share in MAGNIFIN in the RHI Magnesita's Consolidated Financial Statements is shown
below:

in € million

2019

2018

Proportional share of net assets at beginning of year

14.3

15.7

Share of profit

10.5

9.4

Share of other comprehensive income (remeasurement losses)

(0.1)

0.0

Dividends received

(10.5)

(10.8)

Other changes in value

(0.1)

0.0

Proportional share of net assets at year-end

14.1

14.3

Goodwill

4.9

4.9

Carrying amount of investment at year-end

19.0

19.2

 

In the course of the acquisition of Magnesita in 2017 the Group acquired interests in an immaterial joint venture with a carrying amount of €0.5 million as of 31 December 2019 (31.12.2018: €0.4 million). The Group's share of the profit after income tax, other comprehensive income and total comprehensive income in 2019 amounts to less than €0.1 million (2018: €0.3 million).

Associates

As part of the acquisition of Magnesita in 2017 the Group acquired two immaterial associated companies with a carrying amount of
€0.0 million as of 31 December 2019 (31.12.2018: €2.2 million). The Group's share of the profit after income tax and total comprehensive income for 2019 amounts to €0.7 million. In 2018 the Group's share of the profit after income tax amounted to €0.3 million, total comprehensive income including other comprehensive income of €0.1 million amounted to €0.4 million.

In 2019 the Group has decided to restructure its Sinterdolime sourcing options in Europe and increase its vertical integration.  As a result, it will exit from the equity accounted investment in Sinterco in 2021. In the course of the Magnesita purchase price allocation the fair value of the investment was determined as zero due to its economic performance. It is RHI Magnesita's best estimate that no additional cash contributions will be needed to cover the closing cost based on the current operations and determined exit plan. However, the current shareholders' loan to Sinterco is fully written off, which results in a €9.6 million impairment in 2019, shown in result of joint ventures and associates.

The other immaterial associated company Krosaki Magnesita Refractories is in liquidation as of 31 December 2019.

15. Other non-current financial assets

Other non-current financial assets consist of the following items:

in € million

31.12.2019

31.12.2018

Interests in subsidiaries not consolidated

0.7

0.7

Marketable securities and shares

13.8

15.0

Interest rate swaps

0.0

0.6

Other non-current financial receivables

0.9

1.7

Other non-current financial assets

15.4

18.0

 

Accumulated impairments on investments, securities and shares amounted to €3.5 million (31.12.2018: €4.3 million).

16. Other non-current assets

Other non-current assets include the following items:

in € million

31.12.2019

31.12.2018

Tax receivables

27.4

20.7

Prepaid stripping costs

6.9

6.8

Judicial deposits

4.5

3.7

Plan assets from overfunded pension plans

0.2

2.1

Prepaid expenses

0.5

1.0

Other non-current assets

39.5

34.3

 

Prepaid expenses for stripping costs arising from mining raw materials in a surface mine are included in non-current assets due to the planned use of the mine.

Tax receivables relate to input tax credits, which are expected to be utilised in the medium term.

17. Deferred taxes

Deferred taxes are related to the following significant balance sheet items and loss carryforwards:

 

31.12.2019

2019

31.12.2018

2018

in € million

Deferred tax assets

Deferred tax liabilities

(Expense)/Income

Deferred tax assets

Deferred tax liabilities

(Expense)/Income

Property, plant and equipment, intangible assets

26.5

136.4

30.2

20.1

159.7

25.1

Inventories

27.8

3.5

(6.0)

33.3

5.6

9.8

Trade receivables, other assets

21.0

11.7

8.5

7.7

7.1

24.8

Pensions and other personnel provisions

78.7

0.0

(1.9)

69.6

(0.2)

(2.3)

Other provisions

25.2

5.5

(4.8)

26.1

1.6

0.1

Trade payables, other liabilities

24.2

5.2

3.0

18.0

4.4

(10.6)

Tax loss carried forward

86.8

0.0

(7.1)

96.1

(29.9)

Offsetting

(108.3)

(108.3)

(99.8)

(99.8)

 -

Deferred taxes

181.9

54.0

21.9

171.1

78.4

17.0

 

As of 31 December 2019, subsidiaries which generated tax losses in the past year or the previous year recognised net deferred tax assets on temporary differences and on tax loss carryforwards of €61.5 million (31.12.2018: €47.8 million). Deferred tax assets have been recognised because the companies concerned are expected to generate taxable income in the future.

Tax loss carryforwards totalled €494.5 million in the RHI Magnesita Group as of 31 December 2019 (31.12.2018: €467.7 million). A significant part of the tax loss carryforwards originated in Brazil and Austria where their deduction can be carried forward indefinitely. Furthermore, there are substantial tax loss carryforwards in China expiring within the next five years. The annual compensation of tax loss carryforwards in Austria is limited to 75% and in Brazil to 30% of the respective taxable profits. Deferred taxes on tax losses of €212.7 million (31.12.2018: €155.1 million) were not recognised. Of these losses, €0,1 million will expire in 2020, €0,4 million in 2022, €25,4 million in 2023, €7.8 million in 2024, €1.0 million in 2027 and €1.8 million in 2028 (31.12.2018: €5.8 million in 2021),while the remainder will be carried forward indefinitely.

In addition, no deferred tax assets were recognised for temporary differences totalling €1.4 million (31.12.2018: €5.1 million) as it is not sufficiently probable that they can be used. The deductible temporary differences can be carried forward indefinitely.

Taxable temporary differences of €965.0 million (31.12.2018: €1,085.7 million) and deductible temporary differences of €545.0 million (31.12.2018: €501.1 million) were not recognised on shares in subsidiaries because the corresponding distributions of profit or the sale of the investments are controlled by the Group and are not expected in the foreseeable future.

The maturity structure of deferred taxes is shown in the table below:

 

31.12.2019

31.12.2018

in € million

Current

Non-current

Total

Current

Non-current

Total

Deferred tax assets

140.6

41.3

181.9

78.0

93.1

171.1

Deferred tax liabilities

(9)

(45.0)

(54.0)

2.9

(81.3)

(78.4)

 

18. Inventories

Inventories as presented in the Consolidated Statement of Financial Position consist of the following items:

in € million

31.12.2019

31.12.2018

Raw materials and supplies

134.5

176.8

Work in progress

123.9

140.8

Finished products and goods

334.0

391.9

Prepayments made

10.3

8.3

Inventories

602.7

717.8

Inventories include €2.8 million (31.12.2018: €2.3 million) carried at net realisable value. Net impairment losses amount to €8.0 million (2018: €-2.6 million).

There are no restrictions on the disposal of inventories.

19. Trade and other current receivables

Trade and other current receivables as presented in the Statement of Financial Position are classified as follows:

in € million

31.12.2019

31.12.2018

Trade receivables

317.5

349.9

Contract assets

1.9

1.9

Other taxes receivable

84.9

87.6

Receivables from joint ventures and associates

2.1

11.3

Prepaid expenses

2.3

3.0

Receivables from disposal of investments

0.0

2.6

Receivables from property transactions

2.7

2.2

Emission rights

1.7

1.7

Receivables from employees

3.4

1.7

Receivables from non-consolidated subsidiaries

0.2

0.3

Other current receivables

16.0

19.0

Trade and other current receivables

432.7

481.2

thereof financial assets

324.2

367.2

thereof non-financial assets

108.5

114.0

 

RHI Magnesita entered into factoring agreements and sold trade receivables to financial institutions. The balance sold totalled € 223.0 million as of 31 December 2019 (31.12.2018: € 229.9 million). The trade receivables have been derecognised as substantially all risks and rewards as well as control have been transferred. Payments received from customers in the period between the last sale of receivables and the reporting date are recognised in current borrowings.

Other taxes receivable include VAT credits and receivables from energy tax refunds, research, education and apprentice subsidies.

In 2018 trade receivables with a total nominal value of €34.0 million were assigned as security against financial liabilities. These financial liabilities have been fully repaid in 2019.

20. Income tax receivables

Income tax receivables amounting to €17.3 million (31.12.2018: €18.4 million) are mainly related to tax prepayments and deductible withholding taxes.

21. Other current financial assets

This item of the Consolidated Statement of Financial Position consists of the following components:

in € million

31.12.2019

31.12.2018

Derivatives in open orders

  0.1

1.0

Marketable securities

0.0

36.3

Forward exchange contracts

0.0

1.1

Other current financial receivables

0.0

0.2

Other current financial assets

0.1

38.6

 

Accumulated impairments on other current financial receivables amounted to €0.6 million (31.12.2018: €1.1 million).

22. Cash and cash equivalents

This item of the Consolidated Statement of Financial Position consists of the following components:

in € million

31.12.2019

31.12.2018

Cash at banks

391.2

426.7

Money market funds

74.7

61.9

Cheques

1.2

2.5

Cash on hand

0.1

0.1

Cash and cash equivalents

467.2

491.2

 

Cash and cash equivalents include restricted cash totalling €23.3 million at 31 December 2019 (31.12.2018: €42.5 million). Restricted cash is mainly related to cash and cash equivalents at subsidiaries (mainly in Brazil, India and China) to which the company only has limited access due to foreign exchange and capital transfer controls. €13.0 million (31.12.2018: €23.8 million) are accounted for by subsidiaries with non-controlling interests.

23. Share capital

In exchange for the cancellation of the RHI AG shares as a result of the merger in the year 2017, in which RHI AG merged with and into RHI Magnesita N.V., the shareholders of RHI AG received one newly issued ordinary share of RHI Magnesita N.V. for each RHI AG share. As part of the purchase price for the acquisition of control of Magnesita, RHI Magnesita N.V. issued 5,000,000 new ordinary shares to the sellers of Magnesita shares as at 26 October 2017. Following the merger and the acquisition of control and also at year-end 2017,
RHI Magnesita N.V.'s issued and fully paid-in share capital consisted of 44,819,039 ordinary shares at €1.0 each share.

In the course of the first close of the Integrated Tender Offer (ITO) in 2018 and the acquisition of additional 35.2% of shares in Magnesita, RHI Magnesita N.V. issued 3,518,008 new ordinary shares. Hence, share capital consisted of 48,337,047 ordinary shares at €1.0 each share as of 31 December 2018.

In the course of the finalisation of the ITO in 2019, the Group acquired the remaining outstanding Magnesita shares during the first four months of 2019 and has issued a total of 1,140,658 new ordinary shares. As at 10 April 2019, RHI Magnesita's issued share capital consisted of 49,477,705 shares with voting rights. Additional explanation is provided under Note (4).

The authorised share capital of RHI Magnesita N.V. amounts to €100,000,000 divided into 100,000,000 ordinary shares, of which 49,077,705 ordinary shares are issued and outstanding, taking into consideration the treasury shares amounting to 400,000. All outstanding RHI Magnesita shares grant the same rights. The shareholders are entitled to dividends and have one voting right per share at the Annual General Meeting. There are no RHI Magnesita shares with special control rights.

24. Group reserves

Treasury shares

During August and September 2019 RHI Magnesita N.V. purchased a total of 400,000 of its ordinary shares of one euro nominal value each pursuant to its £20 million share repurchase programme to satisfy awards made under employee performance share plans. Following the purchase of these shares the company holds 400,000 shares in treasury equalling €18.8 million.

Additional paid-in capital

At 31 December 2019 as well as at 31 December 2018, additional paid-in capital comprised premiums on the issue of shares less issue costs by RHI Magnesita N.V.

Mandatory reserve

The articles of association stipulate a mandatory reserve of €288,699,230.59 which was created in connection with the merger. No distributions, allocations or additions may be made and no losses of the company may be allocated to the mandatory reserve.

Retained earnings

Retained earnings includes the result of the financial year and results that were earned by consolidated companies during prior periods, but not distributed.

Accumulated other comprehensive income

Cash flow hedges includes gains and losses from the effective part of cash flow hedges less tax effects. The accumulated gain or loss from the hedge allocated to reserves is only reclassified to the Statement of Profit or Loss if the hedged transaction also influences the result or is terminated.

Defined benefit plans include the gains and losses from the remeasurement of defined benefit pension and termination benefit plans taking into account tax effects. No reclassification of these amounts to the Statement of Profit or Loss will be made in future periods.

Currency translation includes the accumulated currency translation differences from translating the Financial Statements of foreign subsidiaries, unrealised currency translation differences from monetary items which are part of a net investment in a foreign operation,  net of related income taxes, as well as the effective portion of foreign exchange gains or losses when a non-financial instrument is designated as the hedging instrument in net investment hedge in a foreign operation.

25. Non-controlling interests

 

 

 

Non-controlling interests in Magnesita

After completion of the Integrated Tender Offer (ITO) as at 10 April 2019 the Group holds 100% of the Magnesita shares. Detailed information of this transaction and the consequences of the change of the ownership interest in Magnesita that do not result in a change of control are provided under Note (4). Magnesita is a global group dedicated to the production and sale of an extensive line of refractory materials and industrial minerals and distinguishes itself through its vertically integrated operations.

The carrying amount of the non-controlling interests at time of completion of the ITO as at 10 April 2019 is based on the net assets of Magnesita and is determined as follows:

in € million

10.04.2019

31.12.2018

Non-current assets

976.3

969.7

Current assets

1,556.6

561.0

Non-current liabilities

(356.0)

(400.6)

Current liabilities

(1,671.0)

(676.0)

Net assets before intragroup eliminations

505.9

454.1

Intragroup eliminations

(6.2)

(3.9)

Net assets

499.7

450.2

Percentage of non-controlling interests

14.8%

14.8%

Carrying amount of non-controlling interests

74.0

66.7

 

The aggregate Statement of Profit or Loss and Statement of Comprehensive Income are shown below:

in € million

1-3/2019

2018

Revenue

286.5

1,067.5

Operating expenses, net finance costs and income tax

(241.4)

(1,011.4)

Profit after income tax before intragroup eliminations

45.1

56.1

Intragroup eliminations

0.7

(3.4)

Profit after income tax

45.8

52.7

thereof attributable to non-controlling interests of Magnesita

5.8

26.3

 

in € million

1-3/2019

2018

Profit after income tax

45.8

52.7

Other comprehensive income/(loss)

4.7

(24.4)

Total comprehensive income

50.5

28.3

thereof attributable to non-controlling interests of Magnesita

7.3

14.2

 

The following table shows the summarised Statement of Cash Flows:

in € million

1-3/2019

2018

Net cash flow from operating activities

(8.0)

164.9

Net cash flow from investing activities

(13.2)

(10.2)

Net cash flow from financing activities

(15.2)

(258.5)

Total cash flow

(36.4)

(103.8)

 

Non-controlling interests in Orient Refractories Ltd.

Non-controlling interests hold a share of 33.5% (31.12.2018: 33.5%) in the listed company Orient Refractories Ltd. (in the following "ORL"), based in New Delhi, India. ORL is allocated to the Steel segment.

Based on the net assets of the company, the carrying amount of the non-controlling interests is determined as follows:

in € million

31.12.2019

31.12.2018

Non-current assets

30.4

24.3

Current assets

52.1

56.0

Non-current liabilities

(3.7)

(6.3)

Current liabilities

(17.8)

(19.6)

Net assets before intragroup eliminations

61.0

54.4

Intragroup eliminations

(0.2)

(0.4)

Net assets

60.8

54.0

Percentage of non-controlling interests

33.5%

33.5%

Carrying amount of non-controlling interests

20.4

18.1

 

The aggregate Statement of Profit or Loss and Statement of Comprehensive Income are shown below:

in € million

2019

2018

Revenue

90.8

91.0

Operating expenses, net finance costs and income tax

(79.1)

(81.6)

Profit after income tax before intragroup eliminations

11.7

9.4

Intragroup eliminations

0.2

(0.2)

Profit after income tax

11.9

9.2

thereof attributable to non-controlling interests of ORL

4.0

2.7

 

in € million

2019

2018

Profit after income tax

11.9

9.2

Other comprehensive income/(loss)

0.0

(2.3)

Total comprehensive income

11.9

6.9

thereof attributable to non-controlling interests of ORL

4.0

2.2

 

The following table shows the summarised Statement of Cash Flows of ORL:

in € million

2019

2018

Net cash flow from operating activities

11.9

9.5

Net cash flow from investing activities

(9.1)

(1.8)

Net cash flow from financing activities

(3.9)

(3.6)

Total cash flow

(1.1)

4.1

 

Net cash flow from financing activities includes dividend payments to non-controlling interests amounting to €1.3 million (2018:
€1.1 million).

In addition, non-controlling interests hold a share of 33.5% in one immaterial subsidiary acquired in 2019. The carrying amount of the non-controlling interests amounts to €0.4 million as of 31 December 2019.

Accumulated other comprehensive income attributable to non-controlling interests

The development of accumulated other comprehensive income attributable to non-controlling interests is shown in the following table:

in € million

Cash flow hedges

Defined benefit plans

Currency translation

Accumulated other comprehensive income 31.12.2018

0.2

(2.1)

(7.9)

Unrealised results from currency translation

0.0

0.0

1.6

Reclassification to profit or loss

(0.1)

0.0

0.0

Transactions with non-controlling interests without change of control

(0.1)

2.1

4.5

Accumulated other comprehensive income 31.12.2019

0.0

0.0

(1.8)

 

 

 

 

26. Borrowings

Borrowings include all interest-bearing liabilities due to financial institutions and other lenders.

Borrowings have the following contractual remaining terms:

 

Total

Remaining term

in € million

31.12.2019

up to 1 year

2 to 5 years

over 5 years

Syndicated Term Loan

584.0

15.3

568.7

0.0

Bonded loans ("Schuldscheindarlehen")

400.0

0.0

100.0

300.0

Other credit lines and other loans

55.0

50.8

4.2

0.0

Accrued interest

4.1

4.1

0.0

0.0

Total liabilities to financial institutions

1,043.1

70.2

672.9

300.0

Other financial liabilities

15.6

2.3

13.1

0.2

Capitalised transaction costs

(3.7)

(1.0)

(2.7)

0.0

Borrowings

1,055.0

71.5

683.3

300.2

 

 

Total

Remaining term

in € million

31.12.2018

up to 1 year

2 to 5 years

over 5 years

Syndicated Term Loan

479.9

0.0

479.9

0.0

Bonded loans ("Schuldscheindarlehen")

216.0

0.0

152.0

64.0

Export credits and investment financing

171.9

34.4

137.5

0.0

Other credit lines and other loans

278.9

278.9

0.0

0.0

Accrued interest

6.9

6.9

0.0

0.0

Total liabilities to financial institutions

1,153.6

320.2

769.4

64.0

Other financial liabilities

16.6

2.3

13.7

0.6

Capitalised transaction costs

(3.8)

(0.9)

(2.9)

0.0

Borrowings

1,166.4

321.6

780.2

64.6

 

RHI Magnesita further improved its financial structure by signing a new €100.0 million 5-year term loan guaranteed by the Austrian export credit agency (OeKB) in June 2019. The interest rate is floating and is based on EURIBOR plus a margin between 0.4% and 1.3%, according to Group Leverage. RHI Magnesita borrows currently at the lowest margin of 0.4%. The final maturity of the loan is February 2024. Cash inflows from the new term loan in the amount of €100.0 million are shown in the Consolidated Statement of Cash Flows in proceeds from borrowings and loans.

In July and October 2019 RHI Magnesita took out a Schuldscheindarlehen ("SSD") bonded loan in one tranche of €280.0 million and another of €20.0 million respectively. Cash inflows from the new term loan in the amount of €300.0 million are shown in the Consolidated Statement of Cash Flows in proceeds borrowings and loans. With the proceeds from the new and lower interest bearing SSD bonded loans, the Group repaid €116.0 million of the extinguished legacy SSD bonded loans. Cash outflows from the redemption of the bonded loan in the amount of €116.0 million are included in repayments of borrowings and loans.

The utilised sum of USD 210.0 million at December 2018 from the USD 400.0 million RCF was fully repaid during the year of 2019 and at 31 December 2019 the RCF remained fully unutilised.

In the US, a legacy long-term loan of USD 37.5 million was early settled in January 2019. Likewise, in Brazil, remaining legacy loan of
BRL 265.3 million was early settled in August 2019. Both cash outflows from the redemption of these loans are included in repayments of borrowings and loans.

As at 31.12.2018 €34.0 million of the liabilities to financial institutions were secured by receivables, which were fully repaid in 2019.

Net debt excluding lease liabilities/adjusted EBITDA is the main financial covenant of the loan agreements. Calculation of this covenant and net debt/adjusted EBITDA is shown under Note (57). Compliance with the covenants is measured on a semi-annual basis.  Covenant ratio is limited at 3.5. Breach of covenants leads to an anticipated maturity of loans. During 2019 and 2018, the Group met all covenant requirements.

For liabilities of €1,008.1 million (31.12.2018: €1,052.6 million), lenders have a termination option in the case of a change of control. In the event that certain reasons for termination exist, the lenders may declare the loan due with immediate effect and demand immediate repayment of the principal including interest, as well as the payment of other amounts payable that may have been incurred.

Considering interest swaps, 59% (31.12.2018: 55%) of the liabilities to financial institutions carry fixed interest and 41% (31.12.2018: 45%) carry variable interest.

The following table shows fixed interest terms and conditions, taking into account interest rate swaps, without liabilities from deferred interest:

Interest terms fixed until

Effective annual interest rate

Cur-
rency

31.12.2019 Carrying amount in € million

Interest terms fixed until

Effective annual interest rate

Cur-
rency

31.12.2018 Carrying amount in € million

2020

EURIBOR + margin

EUR

389.9

2019

EURIBOR + margin

EUR

132.0

 

LIBOR + margin

USD

15.9

 

LIBOR + margin

USD

221.7

 

Interbank Deposit Certificate (CDI) + margin

CNY

14.0

 

Interbank Deposit Certificate (CDI) + margin

BRL

113.9

 

Various - variable rate

Var.

0.2

 

Variable interest rate + margin

EUR

34.0

 

 

 

 

 

3.77%

EUR

3.0

 

 

 

 

 

Various - variable rate

Var.

16.5

 

 

 

 

2020

1.28%

USD

32.8

 

 

 

 

 

2.30%

EUR

12.4

2022

1.74%

EUR

62.0

2022

1.74%

EUR

62.0

 

4.60%

EUR

3.0

 

4.60%

EUR

3.0

2023

0.28%

EUR

305.5

2023

1.56%

EUR

196.2

 

3.09%

USD

178.5

 

1.12%

EUR

109.4

 

 

 

 

 

3.94%

USD

174.8

2024

3.10%

EUR

35.0

2024

3.10%

EUR

35.0

2026

1.10%

EUR

27.0

 

 

 

 

2024

1.52%

EUR

8.0

 

 

 

 

 

 

 

1,039.0

 

 

 

1,146.7

 

In some cases, the terms to maturity of the contracts are substantially longer than the period during which interest terms are fixed.

27. Other financial liabilities

Other financial liabilities include the negative fair value of derivative financial instruments as well as lease liabilities and fixed-term and puttable non-controlling interests in Group companies. This item of the Consolidated Statement of Financial Position consists of the following items:

 

31.12.2019

31.12.2018

in € million

Current

Non-current

Total

Current

Non-current

Total

Derivatives from supply contracts

5.9

18.0

23.9

0.9

20.0

20.9

Interest rate swaps

0.0

14.8

14.8

0.0

7.3

7.3

Derivatives in open orders

0.6

0.0

0.6

0.0

0.0

0.0

Derivative financial liabilities

6.5

32.8

39.3

0.9

27.3

28.2

Lease liabilities

13.8

48.1

61.9

0.0

0.0

0.0

Fixed-term or puttable non-controlling interests

11.6

24.2

35.8

14.1

22.2

36.3

Other financial liabilities

31.9

105.1

137.0

15.0

49.5

64.5

 

Additional explanation on derivative financial instruments is provided under Note (55).

28. Provisions for pensions

The net liability from pension obligations in the Consolidated Statement of Financial Position is as follows:

in € million

31.12.2019

31.12.2018

Present value of pension obligations

557.9

506.6

Fair value of plan assets

(248.0)

(223.9)

Funded status

309.9

282.7

Asset ceiling

18.0

19.5

Net liability from pension obligations

327.9

302.2

thereof assets from overfunded pension plans

0.2

2.1

thereof pensions

328.1

304.3

 

The present value of pension obligations by beneficiary groups is as follows:

in € million

31.12.2019

31.12.2018

Active beneficiaries

115.3

101.4

Vested terminated beneficiaries

74.6

68.7

Retirees

368.0

336.5

Present value of pension obligations

557.9

506.6

 

The calculation of pension obligations is based on the following actuarial assumptions:

in %

31.12.2019

31.12.2018

Interest rate

2.3%

3.3%

Future salary increase

2.6%

2.7%

Future pension increase

  2.1%

2.2%

 

These are average values which were weighted with the present value of the respective pension obligation.

The calculation of the actuarial interest rate for the European currency area is based on a yield curve for returns of high-quality corporate bonds denominated in EUR with an average rating of AA, which is derived from pooled index values. The calculation of the actuarial interest rate for the USD and GBP currency area is based on a yield curve for returns of high-quality corporate bonds denominated in USD and GBP with an average rating of AA, which is derived from pooled index values. Where there are very long-term maturities, the yield curve follows the performance of bonds without credit default risk. The interest rate is calculated annually at 31 December, taking into account the expected future cash flows which were determined based on the current personal and commitment data.

The calculation in Austria was based on the AVÖ 2018-P demographic calculation principles for salaried employees from the Actuarial Association of Austria. In Germany, the Heubeck 2018 G actuarial tables were used as a basis. In the other countries, country-specific mortality tables were applied.

The main pension regulations are described below:

The Austrian group companies account for €122.0 million (31.12.2018: €125.8 million) of the present value of pension obligations and for €23.2 million (31.12.2018: €26.4 million) of the plan assets. The agreed benefits include pensions, invalidity benefits and benefits for surviving dependents. Commitments in the form of company or individual agreements depend on the length of service and the salary at the time of retirement. For the majority of commitments the amount of the company pension subsidy is limited to 75% of the final remuneration including a pension pursuant to the General Social Insurance Act (ASVG). RHI Magnesita has concluded pension reinsurance policies for part of the commitments. The pension claims of the beneficiaries are limited to the coverage capital required for these commitments. Pensions are predominantly paid in the form of annuities and are partially indexed. For employees joining the company after
1 January 1984, no defined benefits were granted. Rather, a defined contribution pension model is in place. In addition, there are commitments based on the deferred compensation principle, which are fully covered by pension reinsurance policies, and commitments for preretirement benefits for employees in mining operations.

The pension plans of the German group companies account for €160.4 million (31.12.2018: €155.1 million) of the present value of pension obligations and for €0.7 million (31.12.2018: €0.7 million) of plan assets. The benefits included in company agreements comprise pensions, invalidity benefits and benefits for surviving dependents. The amount of the pension depends on the length of service for the majority of the commitments and is calculated as a percentage of the average monthly wage/salary of the last 12 months prior to retirement. In some cases, commitments to fixed benefits per year of service have been made. The pensions are predominantly paid in the form of annuities and are adjusted in accordance with the development of the consumer price index for Germany. The pension plans are closed for new entrants, except one contribution-based plan. There is no defined contribution model on a voluntary basis. Individual commitments have been made, with major part of them being retired beneficiaries.

The pension plan of the US group company Magnesita Refractories Company, York, USA, accounts for €87.5 million (31.12.2018:
€74.2 million) of the present value of pension obligations and for €67.8 million (31.12.2018: €61.8 million) of the plan assets. The pension plan is a non-contributory defined benefit plan covering a portion of the employees of the company. The plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Effective 21 June 1999, the company offered the participants the opportunity to elect to participate in a single enhanced defined contribution plan. Participants who make this election are no longer eligible for future accruals under this plan. All benefits accrued as of the date of transfer will be retained. Employees hired after 21 June 1999 and employees that did not meet the plan's eligibility requirements as of 21 June 1999 are not eligible for this plan. The pensions are predominantly paid in the form of annuities and are adjusted annually based on the US consumer price index. The company's contributions for the year ended 31 December 2019 met, or exceeded, the minimum funding requirements of ERISA.

The pension plan of the UK group company Magnesita Refractories Ltd., Dinnington, United Kingdom, accounts for €63.5 million (31.12.2018: €53.0 million) of the present value of pension obligations and holds €81.5 million (31.12.2018: €69.6 million) of assets, although only €63.5 million (31.12.2018: €53.0 million) of the plan assets are reflected on the balance sheet due to the application of
IFRIC 14 (asset ceiling). The company sponsors a funded defined benefit pension plan for qualifying UK employees. The plan is administered by a separate board of trustees which is legally separate from the company. The trustees are composed of representatives of both the employer and employees, plus an independent professional trustee. The trustees are required by law to act in the interest of all relevant beneficiaries and are responsible for the investment policy with regard to the assets plus the day to day administration of the benefits. Under the plan, employees are entitled to annual pensions on retirement at age 65 of one-sixtieth of final pensionable salary for each year of service. Pensionable salary is defined as basic salary less the Lower Earnings Limit. Benefits are also payable on death and following other events such as withdrawing from active service. No other post-retirement benefits are provided to these employees.

The pension liabilities of the Brazilian group company Magnesita Refratários S.A. account for €72.5 million (31.12.2018: €62.6 million) of the present value of pension obligations and for €39.9 million (31.12.2018: €34.6 million) of the plan assets. The pension plan qualifies as an optional benefit plan. Employees are entitled to contribute to the plan, with the company contributing 1.5 times this value. The agreed benefits include pensions, invalidity benefits and benefits for surviving dependents. Commitments in the form of company or individual agreements depend on the length of service and salary at the time of retirement. For the majority of commitments, the amount of the company pension obligation is limited to 75% of the final remuneration. At retirement the employee may choose to receive up to 25% of his/her amount at once or receive it on a pro-rata base with different options of monthly quotes.

The following table shows the development of net liability from pension obligations:

in € million

2019

2018

Net liability from pension obligations at beginning of year

302.2

306.8

Currency translation

0.3

(1.9)

Pension cost

12.2

11.6

Remeasurement losses

36.9

12.2

Benefits paid

(18.2)

(17.3)

Employers' contributions to external funds

(4.9)

(9.0)

Reclassifications

(0.4)

(0.2)

Net liability from pension obligations at year-end

328.1

302.2

 

The present value of pension obligations developed as follows:

in € million

2019

2018

Present value of pension obligations at beginning of year

506.6

517.1

Currency translation

5.2

(3.0)

Current service cost

3.7

3.9

Past service cost

0.0

(0.5)

Interest cost

16.5

15.2

Remeasurement losses/(gains)

 

 

from changes in demographic assumptions

(1.4)

7.8

from changes in financial assumptions

60.1

(5.8)

due to experience adjustments

0.4

2.7

Benefits paid

(33.1)

(31.1)

Employee contributions to external funds

0.5

0.5

Reclassifications

(0.6)

(0.2)

Present value of pension obligations at year-end

557.9

506.6

 

The movement in plan assets is shown in the table below:

in € million

2019

2018

Fair value of plan assets at beginning of year

223.9

228.6

Currency translation

5.8

(1.2)

Interest income

9.1

7.7

Administrative costs (paid from plan assets)

(0.5)

(0.3)

Income/(expense) on plan assets less interest income

19.5

(6.6)

Benefits paid

(14.9)

(13.8)

Employers' contributions to external funds

4.9

9.0

Employee contributions to external funds

0.5

0.5

Transfer

(0.3)

0.0

Fair value of plan assets at year-end

248.0

223.9

 

The changes in the asset ceiling are shown below:

in € million

2019

2018

Asset ceiling at beginning of year

19.5

18.3

Currency translation

1.0

(0.1)

Interest expense

0.6

0.4

(Gains)/losses from changes in asset ceiling less interest expense

(3.1)

0.9

Asset ceiling at year-end

18.0

19.5

 

At 31 December 2019 the weighted average duration of pension obligations amounts to 12 years (31.12.2018: 12 years).

The following amounts were recorded in the Consolidated Statement of Profit or Loss:

in € million

2019

2018

Current service cost

3.7

3.9

Negative past service cost

0.0

(0.5)

Gains on settlement

(0.1)

0.0

Interest cost

16.7

15.2

Interest income

(9.2)

(7.7)

Interest expense from asset ceiling

0.6

0.4

Administrative costs (paid from plan assets)

0.5

0.3

Pension expense recognised in profit or loss

12.2

11.6

 

The remeasurement results recognised in other comprehensive income are shown in the table below:

in € million

2019

2018

Accumulated remeasurement losses at beginning of year

131.4

119.3

Remeasurement losses on present value of pension obligations

59.2

4.6

(Income)/expense on plan assets less interest income

(19.5)

6.6

(Gains)/losses from changes in asset ceiling less interest expense

(3.1)

0.9

Accumulated remeasurement losses at year-end

168.0

131.4

 

The present value of plan assets is distributed to the following classes of investments:

 

31.12.2019

31.12.2018

in € million

Active market

No active market

Total

Active market

No active market

Total

Insurances

0.0

40.2

40.2

0.0

39.1

39.1

Equity instruments

4.1

31.0

35.1

4.7

18.5

23.2

Debt instruments

17.7

44.2

61.9

14.3

49.2

63.5

Cash and cash equivalents

38.1

4.0

42.1

32.3

4.1

36.4

Other assets

65.8

2.9

68.7

57.9

3.8

61.7

Fair value of plan assets

125.7

122.3

248.0

109.2

114.7

223.9

 

The present value of the insurances to cover the Austrian pension plans corresponds to the coverage capital. Insurance companies predominantly invest in debt instruments and to a low extent in equity instruments and properties.

Plan assets do not include own financial instruments of the Group or assets utilised by the RHI Magnesita Group.

RHI Magnesita works with professional fund managers for the investment of plan assets. They act on the basis of specific investment guidelines adopted by the pension fund committee of the respective pension plans. The committees consist of management staff of the finance department and other qualified executives. They meet regularly in order to approve the target portfolio with the support of independent actuarial experts and to review the risks and the performance of the investments. In addition, they approve the selection or the extension of contracts of external fund managers.

The largest part of the other assets is invested in pension reinsurance, which creates a low counterparty risk towards insurance companies. In addition, the Group is exposed to interest risks and longevity risks resulting from defined benefit commitments.

The Group generally endows the pension funds with the amount necessary to meet the legal minimum allocation requirements of the country in which the fund is based. Moreover, the Group makes additional allocations at its discretion from time to time. In the financial year 2020, RHI Magnesita expects employer contributions to external plan assets to amount to €3.7 million and direct payments to entitled beneficiaries to €21.1 million. In the previous year, employer contributions of €4.8 million and direct pension payments of €17.1 million had been expected for the financial year 2019.

29. Other personnel provisions

Other personnel provisions consist of the following items:

in € million

31.12.2019

31.12.2018

Termination benefits

52.0

55.5

Service anniversary bonuses

21.0

19.4

Legacy share-based payment program

0.0

1.6

Semi-retirements

2.8

1.9

Lump-sum settlements

0.0

0.1

Other personnel provisions

75.8

78.5

 

Provisions for termination benefits

Provisions for termination benefits were based on the following weighted average measurement assumptions:

in %

31.12.2019

31.12.2018

Interest rate

1.3%

2.1%

Future salary increase

3.4%

3.9%

 

The interest rate for the measurement of termination benefit obligations in the Euro area was determined taking into account the company specific duration of the portfolio.

Provisions for termination benefits developed as follows in the financial year and the previous year:

in € million

2019

2018

Provisions for termination benefits at beginning of year

55.5

58.1

Currency translation

0.1

0.0

Current service cost

1.5

1.6

Past service cost

(0.7)

0.0

Interest cost

1.1

0.9

Remeasurement losses/(gains)

 

 

from changes in demographic assumptions

0.0

1.1

from changes in financial assumptions

2.1

(2.3)

due to experience adjustments

(1.8)

0.5

Benefits paid

(5.8)

(4.4)

Provisions for termination benefits at year-end

52.0

55.5

 

Payments for termination benefits are expected to amount to €5.8 million in the year 2020. In the previous year, the payments for termination benefits expected for the year 2019 amounted to €3.5 million.

The following remeasurement gains and losses were recognised in other comprehensive income:

in € million

2019

2018

Accumulated remeasurement losses at beginning of year

27.2

27.9

Remeasurement losses/(gains)

0.3

(0.7)

Accumulated remeasurement losses at year-end

27.5

27.2

 

At 31 December 2019 the weighted average duration of termination benefit obligations amounts to 11 years (31.12.2018: 11 years).

Provisions for service anniversary bonuses

The measurement of provisions for service anniversary bonuses is based on an average weighted interest rate of 0.8% (31.12.2018: 1.7%) and takes into account salary increases of 3.4% (31.12.2018: 3.7%).

Provisions for semi-retirement

The funded status of provisions for obligations to employees with semi-retirement contracts is shown in the table below:

in € million

31.12.2019

31.12.2018

Present value of semi-retirement obligations

6.3

5.1

Fair value of plan assets

(3.5)

(3.2)

Provisions for semi-retirement obligations

2.8

1.9

 

External plan assets are ring-fenced from all creditors and exclusively serve to meet semi-retirement obligations.

30. Other non-current provisions

The development of non-current provisions is shown in the table below:

in € million

Onerous/
unfavourable contracts

Labour and civil contingencies

Demolition/disposal costs,
environmental damages

Other

Total

31.12.2018

83.8

8.3

12.5

4.6

109.2

Currency translation

(0.8)

(0.2)

0.0

0.1

(0.9)

Reversals

0.0

0.0

(2.4)

0.0

(2.4)

Additions

0.4

2.1

0.0

0.0

2.5

Additions interest

8.4

0.0

0.6

0.0

9.0

Reclassifications

(14.3)

0.0

0.0

(4.6)

(18.9)

31.12.2019

77.5

10.2

10.7

0.1

98.5

 

In November 2017, RHI Magnesita sold a plant located in Oberhausen, Germany, in order to satisfy the conditions imposed by the European Commission in connection with their approval of the Acquisition of Control of Magnesita. As RHI Magnesita is obligated to provide raw materials at cost, the Group has recognised a provision for unfavourable contracts as part of the purchase price allocation to reflect the foregone profit margin. The non-current portion of this contract obligation amounts to €71.2 million as of 31.12.2019 (31.12.2018:
€80.0 million)
. Furthermore, provisions for contract obligations amounting to €6.3 million (31.12.2018: €3.2 million) are due to contracts for logistics services and the procurement of raw materials.

The provision for labour and civil contingencies primarily comprises labour litigation provisions against RHI Magnesita totalling
337 cases amounting to €8.0 million (31.12.2018: €7.1 million).

The provision for demolition and disposal costs and environmental damages primarily includes provisions for the estimated costs of mining site restoration of several mines in Brazil amounting to €3.9 million (31.12.2018: €5.9 million) and various sites in the United States amounting to €6.3 million (31.12.2018: €6.1 million).

Provisions related to tax litigation procedures in Peru and Colombia included in the amount of €4.6 million in other provisions as of 31 December 2018 were reclassified to income tax liabilities as of 31 December 2019.

31. Other non-current liabilities

Other non-current liabilities consist of the following items:

in € million

31.12.2019

31.12.2018

Deferred income for subsidies received

5.8

6.2

Liabilities to employees

1.4

2.5

Contingent consideration for acquired subsidiaries

0.0

0.6

Miscellaneous non-current liabilities

0.1

1.0

Other non-current liabilities

7.3

10.3

thereof financial liabilities

0.0

0.6

thereof non-financial liabilities

7.3

9.7

 

32. Trade payables and other current liabilities

Trade payables and other current liabilities included in the Consolidated Statement of Financial Position consist of the following items:

in € million

31.12.2019

31.12.2018

Trade payables

354.1

502.5

Contract liabilities

45.5

64.8

Liabilities to employees

87.5

99.6

Taxes other than income tax

49.7

30.0

Dividend liabilities

25.0

0.5

Payables from property transactions

17.0

9.2

Payables from commissions

8.2

13.0

Customers with credit balances

6.6

7.3

Liabilities to joint ventures and associates

0.7

5.4

Liabilities to non-consolidated subsidiaries

0.7

1.0

Other current liabilities

19.0

23.6

Trade payables and other current liabilities

614.0

756.9

thereof financial liabilities

412.3

539.3

thereof non-financial liabilities

201.7

217.6

 

Trade payables include an amount of €67.4 million (31.12.2018: €85.5 million) for raw material purchases subject to supply chain finance arrangements.

Contract liabilities mainly consist of prepayments received on orders. Prepayments received on orders as of 31 December 2018 were recognised as revenue in the current reporting period.

The item liabilities to employees primarily consists of obligations for wages and salaries, payroll taxes and employee-related duties, performance bonuses, unused vacation and flexitime credits.

Other current liabilities include €1.3 million (31.12.2018: €1.6 million) investment reimbursement obligation to the former subsidiary Dolomite Franchi S.p.A., and other accrued expenses.

33. Income tax liabilities

Income tax liabilities amounting to €35.4 million (31.12.2018: €32.2 million) primarily include income taxes for the current year and previous years which have not yet been definitively audited by domestic and foreign tax authorities. Taking into account a multitude of factors, including the interpretation, comments and case law regarding the respective tax laws as well as past experiences, adequate liabilities have been recognised.

34. Current provisions

The development of current provisions is shown in the table below:

in € million

Restructuring costs

Demolition/ disposal costs,
environmental damages

Warranties

Onerous/
unfavourable contracts

Guarantees provided

Other

Total

31.12.2018

10.1

7.4

2.7

21.1

3.0

8.7

53.0

Currency translation

0.1

0.0

0.0

0.1

0.0

0.0

0.2

Utilised

(6.1)

(1.3)

(1.0)

(20.0)

0.0

(5.3)

(33.7)

Reversals

(0.6)

(1.1)

(1.9)

(5.8)

(3.1)

(0.5)

(13.0)

Additions

28.3

0.4

9.5

9.0

0.1

1.2

48.5

Reclassifications

0.0

0.0

0.0

13.4

0.0

1.4

14.8

31.12.2019

31.8

5.4

9.3

17.8

0.0

5.5

69.8

 

Provisions for restructuring costs amount to €31.8 million as of 31 December 2019 (31.12.2018: €10.1 million) and primarily consist of benefit obligations to employees due to termination of employment resulting from corporate reorganisation of RHI Magnesita. Out of the €31.8 million, €12.1 million relates to the plant closure in Hagen, Germany, and €4.0 million to the partial shut-down of the plant in Trieben, Austria.

 

The item demolition and disposal costs, environmental damages includes an amount of €2.5million (31.12.2018: €2.5 million) which refers to the former site in Aken, Germany. It is assumed that this provision will be used up within the next 12 months.

Provisions for warranties include provisions for claims arising from warranties and other similar obligations from the sale of refractory products.

Provisions for contract obligations include the current portion of the Oberhausen contract obligation amounting to €10.4 million (31.12.2018: €11.5 million). The amortisation of this provision led to an income of €15.5 million in 2019 (31.12.2018: €10.0 million). Furthermore, provisions for other unfavourable contracts amounting to €3.5 million (31.12.2018: €6.7 million) and provisions for unfavourable contracts related to contracts for logistics services and the procurement of raw materials totalling €3.9 million (31.12.2018: €2.9 million) are included.

Provisions for guarantees provided included obligations from sureties and guarantees to banks and insurance companies as of 31 December 2018. As of 31 December 2019, these provisions are disclosed as contingent liabilities, as the outflow of resources is not estimated to be probable.

The item other provisions includes a provision for the share-based remuneration programme of the members of the former Management Board of RHI AG of €1.9 million (31.12.2018: €1.4 million).

In addition, provisions for legal proceedings amounting to €0.7 million (31.12.2018: €3.2 million) are included in the item other provisions. It is currently uncertain when precisely the cash outflow is due.

NOTES TO THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS

Furthermore, several provisions, which are individually immaterial and cannot be allocated to one of the above-mentioned categories, are included in other provisions. A large part of these costs is expected to be paid within 12 months.

35. Revenue

Revenue is essentially generated by product deliveries and by performing management refractory services. The distribution of revenue by product group, division and country is given in the explanations to segment reporting under Note (51).

36. Cost of sales

Cost of sales comprises the production cost of goods sold as well as the purchase price of merchandise sold. In addition to direct material and production costs, it also includes overheads including depreciation charges on production equipment, amortisation charges of intangible assets as well as impairment losses and reversals of impairment losses of inventories. Moreover, cost of sales also includes the costs of services provided by the Group or services received.

37. Selling and marketing expenses

This item includes personnel expenses for the sales staff as well as depreciation charges and other operating expenses related to the market and sales processes.

38. General and administrative expenses

General and administrative expenses primarily consist of personnel expenses for the administrative functions, legal and other consulting costs, expenses for research and non-capitalisable development costs.

Research and development expenses totalled €35.0 million (2018: €32.6 million), of which development costs amounting to €9.0 million (2018: €8.3 million) were capitalised. Income from research grants amounted to €4.4 million (2018: €3.8 million) in 2019. Amortisation and impairment of development costs amounting to €4.4 million (2018: €3.8 million) are recognised under cost of sales.

39. Restructuring and write-down expenses

In 2019 the Group initiated a plant rationalisation programme which led to €46.7 million of restructuring expenses and €65.4 million of asset write-downs of which €54.6 million are allocated to Segment Steel and €10.8 million are allocated to Segment Industrial.

This item includes costs for the plant closure in Hagen, Germany, amounting to €55.3 million (thereof termination of employment of €12.4 million and write-down of €42.9 million), the partial shut-down of the plant in Trieben, Austria, amounting to €13.7 million (thereof termination of employment of €5.1 million and write-down of €8.6 million) and other costs for termination of employment totalling €18.9 million. In 2018, restructuring costs primarily related to costs for termination of employment incurred in connection with the corporate reorganisation of RHI Magnesita amounting to €5.4 million.

 

In addition, restructuring costs include expenses for unused logistics services and procurement of raw materials in the Porsgrunn plant, Norway, amounting to €6.1 million (2018: €3.9 million).

 

Write-down expenses amounting to €13.9 million result from the impairment testing of CGU Norway according to IAS 36, of which €9.3 million are allocated to Segment Steel and €4.6 million are allocated to Segment Industrial. Further information is provided under
Note (8).

40. Other income

The individual components of other income are:

in € million

2019

2018

Amortisation of Oberhausen provision

15.5

10.0

Income from the reversal of provisions

4.6

0.0

Income from the disposal of non-current assets

1.9

2.2

Result from derivatives from supply contracts

0.0

19.6

Income from restructuring

0.0

5.4

Miscellaneous income

12.9

6.7

Other income

34.9

43.9

In 2018, income from restructuring amounting to €5.4 million resulted from the reversal of acquisition-related provisions for redundancy programmes.

41. Other expenses

Other expenses include:

in € million

2019

2018

Expenses for strategic projects

(9.0)

(13.5)

Losses from the disposal of non-current assets

(4.3)

(3.0)

Result from deconsolidation - recycling currency translation differences

(3.7)

0.0

Result from derivatives from supply contracts

(3.0)

0.0

Miscellaneous expenses

(11.3)

(6.1)

Other expenses

(31.3)

(22.6)

 

Expenses for strategic projects amounting to €9.0 million mainly include legal and consulting fees related to optimisation of supply chain, M&A and integration costs. In 2018, expenses for strategic projects amounted to €13.5 million and mainly included legal and consulting fees for the acquisition and integration of Magnesita as well as the related corporate reorganisation of RHI Magnesita.

42. Interest income

This item includes interest on cash at banks and similar income amounting to €8.7 million (2018: €8.8 million), interest income on financial receivables amounting to €0.2 million (2018: €0.2 million) and interest income on securities and shares amounting to €0.2 million (2018: €0.7 million). In 2018 €0.4 million were accounted for by impaired securities.

43. Foreign exchange effects and related derivatives

The net expense on foreign exchange effects and related derivatives consists of the following items:

in € million

2019

2018

Foreign exchange gains

83.3

98.6

Gains from related derivative financial instruments

14.6

4.5

Foreign exchange losses

(83.4)

(160.2)

Losses from related derivative financial instruments

(31.7)

(24.2)

Net expense on foreign exchange effects and related derivatives

(17.2)

(81.3)

 

Compared to the previous year the Group improved its financial structure. The absence of the Magnesita legacy debt combined with reduced volatility of Euro and Brazilian Real against the US Dollar resulted in lower net expense on foreign exchange effects. Realised losses from derivative financial instruments result from the dissolution of derivatives as of July 2019. These derivatives were fully restructured in 2019 and no effect is expected in the future out of this item.

In 2018 the net expense on foreign exchange effects and related derivatives resulted mainly from the devaluation of the Euro, Argentine Peso and Brazilian Real against the US Dollar, affecting both intercompany and third-party loans, accounts payable and accounts receivable.

44. Other net financial expenses

Other net financial expenses consist of the following items:

in € million

2019

2018

Interest income on plan assets

8.6

7.3

Interest expense on provisions for pensions

(16.7)

(15.2)

Interest expense on provisions for termination benefits

(1.2)

(0.9)

Interest expense on other personnel provisions

(0.3)

(0.3)

Net interest expense personnel provisions

(9.6)

(9.1)

Unwinding of discount of provisions and payables

(12.9)

(15.6)

Interest expense on non-controlling interests

(3.9)

(5.3)

Interest expense on lease liabilities

(1.2)

0.0

Gains from the disposal of securities and shares

0.9

0.7

Reversal of impairment losses on securities

0.8

0.0

Impairment losses on securities

0.0

(1.4)

Expenses from the valuation of put options

(0.5)

(1.0)

Other interest and similar expenses

(12.3)

(10.9)

Other net financial expenses

(38.7)

(42.6)

 

45. Income tax

Income tax consists of the following items:

in € million

2019

2018

Current tax expense

(72.7)

(75.9)

Deferred tax (expense)/income relating to

 

 

temporary differences

29.8

46.7

tax loss carryforwards

(7.9)

(29.7)

 

21.9

17.0

Income tax

(50.8)

(58.9)

 

The current tax expense of the year 2019 includes tax expenses for previous periods of €8.4 million (2018: €7.1 million) and income from income tax relating to prior periods of €1.7 million (2018: €0.5 million).

Income tax expenses for prior periods mainly include exit value expenses out of an ongoing transfer of functions between related parties amounting to €1.8 million as well as tax audit expenses in APAC and Italy amounting to € 1.2 million. In 2018 €3.8 million were related to an ongoing tax audit respectively tax loss forfeit in Germany.

In addition to the income taxes recognised in the Statement of Profit or Loss, tax income totalling €18.0 million (2018: €5.7 million), which is attributable to other comprehensive income, was also recognised in other comprehensive income.

The reasons for the difference between the income tax expense, which would result from the application of the Austrian corporate tax rate of 25% on the profit before income tax, and the income tax reported are shown below:

in € million

2019

2018

Profit before income tax

199.6

246.0

Income tax expense calculated at 25% (2018: 25%)

49.9

61.5

Different foreign tax rates

(4.4)

1.8

Expenses not deductible for tax purposes, non-creditable taxes

17.2

10.1

Non-taxable income and tax benefits

(22.5)

(32.3)

Tax losses and temporary differences of the financial year not recognised

9.9

9.5

Utilisation of previously unrecognised loss carryforwards and temporary differences

(2.5)

(0.2)

Recognition of previously unrecognised loss carryforwards and temporary differences

(13.3)

(0.7)

Change in valuation allowance on deferred tax assets

0.6

1.2

Deferred tax expense due to tax rate changes

(0.6)

(1.8)

Deferred income tax relating to prior periods

8.5

2.4

Current income tax relating to prior periods

7.6

6.7

Other

0.5

0.7

Recognised tax expense

50.8

58.9

Effective tax rate (in %)

25.5%

23.9%

 

In 2019 expenses not deductible for tax purposes include voluntary leave payment, Chinese capacity compensation and a write down of a receivable which is not deductible for tax purposes in the total amount of €4.4 million. Non-taxable income includes benefits concerning the SUDENE tax regime amounting to €9.1 million. This tax regime is calculated on profits from activities covered by the incentive tax treatment for priority projects for the development of the SUDENE region in Brazil. Due to improved projections of taxable income deferred tax assets on tax loss carryforwards previously not recognised in the amount of €7.4 million in the Netherlands and €5.9 million in China were capitalised. Deferred tax assets relating to the tax losses of the current financial year of €3.8 million have not been recognised in the Netherlands and €2.3 million have not been recognised in Brazil.

Tax expense due to tax rate changes relates mainly to an Indian company, where the tax rate changed from 34,94% to 27,83%, leading to an additional expense of €1,5 million and to an American company where the tax rate changed from 23,66% to 24,2%, leading to an additional income of €0,7 million.

In 2018, deferred tax expense due to tax rates changes was primarily attributable to the reduction of the corporate income tax rate in Norway from 24% to 23% of 0.9 million and an increase in corporate income tax rate in Turkey from 20% to 22% of €0.4 million. Non-taxable income and tax benefits include the SUDENE tax regime amounting to €20.4 million.

46. Expense categories

The presentation of the Consolidated Statement of Profit or Loss is based on the function of expenses. The following tables show a classification by expense category for 2019 and the previous year:

 

in € million

Cost of sales

Selling and marketing expenses

General and administrative expenses

Other income/ expenses

Restructuring and write-down income/expenses

Total 2019

Changes in inventories, own work capitalised

60.7

0.0

(4.8)

0.0

0.0

55.9

Cost of materials

1,269.6

(0.7)

2.4

0.0

1.7

1,273.0

Personnel costs

412.2

76.9

115.2

0.0

25.3

629.6

Depreciation and amortisation charges

154.1

2.7

15.9

0.0

0.0

172.7

Write-down expenses

0.0

0.0

0.0

0.0

65.4

65.4

Other income

(23.2)

(2.0)

(4.3)

(1.8)

0.0

(31.3)

Other expenses

331.7

49.3

84.8

(1.8)

19.7

483.7

Total

2,205.1

126.2

209.2

(3.6)

112.1

2,649.0

 

Cost of materials includes expenses for raw materials and supplies and purchased goods of €1,049.6 million (2018: €1,321.3 million) as well as expenses for services received, especially energy, amounting to €223.5 million (2018: €232.5 million).

in € million

Cost of sales

Selling and marketing expenses

General and administrative expenses

Other income/ expenses

Restructuring and write-down income/expenses

Total 20181)

Changes in inventories, own work capitalised

(79.2)

0.0

(2.8)

0.0

0.0

(82.0)

Cost of materials

1,550.8

0.6

2.4

0.0

0.0

1,553.8

Personnel costs

409.6

72.8

106.2

0.0

5.6

594.2

Depreciation and amortisation charges

133.5

7.9

12.0

0.0

0.0

153.4

Other income

(27.5)

(0.2)

(4.2)

(9.9)

0.0

(41.8)

Other expenses

357.3

47.8

94.8

(11.4)

16.7

505.2

Total

2,344.5

128.9

208.4

(21.3)

22.3

2,682.8

1) To ensure comparability prior-year figures have been adjusted.

Amortisation charges of intangible assets are largely recognised in cost of sales. Other expenses mainly include freight costs, commissions, travel costs as well as consulting and other outside services.

47. Personnel costs

Personnel costs consist of the following components:

in € million

2019

2018

Wages and salaries

489.6

474.0

Pensions

 

 

Defined benefit plans

4.1

3.7

Defined contribution plans

5.9

5.2

Termination benefits

 

 

Defined benefit plans

0.8

1.6

Defined contribution plans

1.4

1.5

Other expenses

15.9

2.9

Social security costs

79.3

73.7

Fringe benefits

32.7

31.6

Personnel expenses (without interest expenses)

629.7

594.2

 

Personnel costs do not include amounts resulting from the interest accrued on personnel provisions. They amount to €9.6 million (2018: €9.1 million) and are recorded in other net financial expenses.

NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS

The Statement of Cash Flows shows how cash and cash equivalents of the Group change through cash inflows and cash outflows during the reporting year. In accordance with IAS 7, cash flows from operating activities, from investing activities and from financing activities are distinguished. Cash flows from investing and financing activities are determined on the basis of cash payment, while cash flow from operating activities is derived from the Consolidated Financial Statements using the indirect method.

The respective monthly changes in items of the Statement of Financial Position of companies that report in foreign currencies are translated at the closing rate of the previous month and adjusted for effects arising from changes in the group of consolidated companies or in other businesses. Therefore, the Statement of Cash Flows cannot be derived directly from changes in items of the Consolidated Statement of Financial Position. As in the Statement of Financial Position, cash and cash equivalents are translated at the closing rate. The effects of changes in exchange rates on cash and cash equivalents are shown separately.

48. Net cash flow from operating activities

 

in € million

 

2019

2018

Profit after income tax

 

148.8

187.1

Adjustments for

 

 

 

income tax

 

50.8

58.9

depreciation

 

146.2

124.8

amortisation

 

26.4

28.6

write-down of property, plant and equipment and intangible assets

65.5

0.0

income from the reversal of investment subsidies

 

(0.6)

(0.5)

write-ups/ impairment losses on securities

 

8.7

0.3

losses from the disposal of property, plant and equipment

 

2.8

1.4

gains from the disposal of securities and shares

 

(0.9)

(0.7)

losses from the disposal of subsidiaries

 

3.7

0.0

net interest expense and derivatives

 

49.6

92.5

share of profit of joint ventures and associates

 

(11.1)

(10.1)

other non-cash changes

 

26.0

18.1

Changes in working capital

 

 

 

inventories

 

110.9

(56.7)

trade receivables

30.3

21.9

contract assets

 

0.0

(1.9)

trade payables

 

(145.0)

48.8

contract liabilities

 

(19.0)

36.5

Changes in other assets and liabilities

 

 

 

other receivables and assets

 

(4.9)

(29.5)

provisions

 

(8.0)

(59.4)

other liabilities

 

(9.8)

2.1

Cash generated from operations

 

470.4

462.2

 

Other non-cash expenses and income include mainly the net interest expenses for defined benefit pension plans amounting to
€9.6 million (2018: €9.1 million), net remeasurement losses of monetary foreign currency positions and derivative financial instruments of €19.8 million (2018: €14.5 million).

49. Net cash flow from financing activities

The reconciliation of movements of financial liabilities and assets to cash flows arising from financing activities for the current and the prior year is shown in the tables below:

 

 

 

 

  Cash changes  Non-cash changes

 

in € million

31.12.2018

 

Changes in foreign exchange rates

Initial recognition IFRS 16

Interest expense and other changes

Additions and modifications of leases (IFRS 16)

31.12.2019

Liabilities to financial institutions

1,153.6

(161.8)

7.3

0.0

44.0

0.0

1,043.1

Lease liabilities

0.0

(15.5)

0.4

62.0

1.2

13.8

61.9

Liabilities to fixed-term or puttable non-controlling interests

36.3

(5.3)

0.3

0.0

4.5

0.0

35.8

Other financial liabilities and capitalised transaction costs

12.8

(2.1)

0.1

0.0

1.1

0.0

11.9

Trade payables

1.8

(1.8)

0.0

0.0

0.0

0.0

0.0

Changes of financial liabilities and assets arising from financing activities

1,204.5

(186.5)

8.1

62.0

50.8

13.8

1,152.7

             

 

 

 

Cash changes

Non-cash changes

 

in € million

31.12.2017

 

Changes in foreign exchange rates

Interest expense and other changes

Reclassification

31.12.2018

Liabilities to financial institutions

953.0

164.8

(12.0)

60.3

(12.5)

1,153.6

Perpetual bond

215.3

(215.0)

1.3

(1.6)

0.0

0.0

Senior notes

55.6

(54.6)

0.6

(1.6)

0.0

0.0

Liabilities to fixed-term or puttable non-controlling interests

32.0

(1.8)

(0.4)

6.5

0.0

36.3

Other financial liabilities and capitalised transaction costs

1.7

(0.5)

(0.3)

(0.6)

12.5

12.8

Prepaid transaction costs related to financial liabilities

(2.5)

0.0

0.0

2.5

0.0

0.0

Trade payables

0.0

(4.5)

0.0

6.3

0.0

1.8

Changes of financial liabilities and assets arising from financing activities

1,255.1

(111.6)

(10.8)

71.8

0.0

1,204.5

 

The reconciliation of the cash impact of net financing in 2019 and 2018 is shown in the tables below:

 

 

Reconciliation to cash net finance cost

 

in € million

Profit or loss

financing cash movements

other cash and non-cash movements

Cash impact of net financing costs

Interest income

9.1

0.0

0.8

8.3

Interest expenses on borrowings

(28.4)

(5.7)

(4.2)

(29.9)

Net expense on foreign exchange effects and related derivatives

(17.2)

0.0

(2.8)

(14.4)

Other net financial expenses

(38.7)

(5.8)

(24.6)

(19.9)

Net finance costs

(75.2)

 

 

(55.9)

 

 

 

Reconciliation to cash net finance cost

 

in € million

Profit or loss

financing cash movements

other cash and non-cash movements

Cash impact of net financing costs

Interest income

9.7

0.0

1.5

8.2

Interest expenses on borrowings

(48.5)

(12.8)

(6.9)

(54.4)

Net expense on foreign exchange effects and related derivatives

(81.3)

0.0

(61.2)

(20.1)

Other net financial expenses

(42.6)

(5.2)

(31.1)

(16.7)

Net finance costs

(162.7)

 

 

(83.0)

 

Non-cash movements in other net financial expenses are mainly related to net interest expenses on personnel provisions as well as to expenses from the discount on provisions.

 

50. Total interest paid and interest received

Total interest paid amounts to €50.5 million in the reporting period (2018: €72.4 million), of which €0.4 million (2018: €0.3 million) is included in cash flow from operating activities, €0.3 million (2018: €1.0 million) in cash flow from investing activities and €49.8 million (2018: €71.1 million) in cash flow from financing activities.

Total interest received amounts to €8.3 million for the financial year 2019 (2018: €8.5 million), of which €0.0 million (2018: €0.2 million) are included in cash flow from operating activities and €8.3 million (2018: €8.3 million) in cash flow from investing activities.

 

OTHER DISCLOSURES

51. Segment reporting

Segment reporting by operating company division

 

The following tables show the financial information for the operating segments for the year 2019 and the previous year:

in € million

Steel

Industrial

Group 2019

Revenue

2,018.0

904.3

2,922.3

 

 

 

 

Gross profit

466.8

250.4

717.2

 

 

 

 

EBIT

 

 

273.3

Net finance costs

 

 

(75.2)

Share of profit of joint ventures and associates

 

 

1.5

Profit before income tax

 

 

199.6

 

 

 

 

Depreciation and amortisation charges

(109.1)

(63.5)

(172.6)

 

 

 

 

Segment assets 31.12.2019

1,545.9

919.5

2,465.4

Investments in joint ventures and associates 31.12.2019

 

 

19.5

Reconciliation to total assets

 

 

834.7

 

 

 

3,319.6

Investments in property, plant and equipment and intangible assets (according to non-current assets statement)

103.2

77.8

181.0

 

in € million

Steel

Industrial

Group 20181)

Revenue

2,213.0

868.4

3,081.4

 

 

 

 

Gross profit

526.4

210.5

736.9

 

 

 

 

EBIT

 

 

398.6

Net finance costs

 

 

(162.7)

Share of profit of joint ventures and associates

 

 

10.1

Profit before income tax

 

 

246.0

 

 

 

 

Depreciation and amortisation charges

(97.5)

(55.9)

(153.4)

 

 

 

 

Segment assets 31.12.2018

1,669.9

944.4

2,614.3

Investments in joint ventures and associates 31.12.2018

 

 

21.8

Reconciliation to total assets

 

 

902.9

 

 

 

3,539.0

Investments in property, plant and equipment and intangible assets (according to non-current assets statement)

67.7

59.3

127.0

1) Adjusted to reflect the changes in presentation.

No single customer contributed 10% or more to consolidated revenue in 2019. Companies which are known to be part of a group are treated as one customer. In 2018, revenue amounting to €317.5 million was realised with one customer, which was included in the Steel segment.

When allocating revenue to product groups, a distinction is made between shaped products (e.g. hydraulically pressed bricks, fused cast bricks, isostatically pressed products), unshaped products (e.g. repair mixes, construction mixes and castables), refractory management services as well as other revenue. Other mainly includes revenue from the sale of non-group refractory products.

In the reporting year, revenue is classified by product group as follows:

in € million

Steel

Industrial

Group 2019

Shaped products

963.0

613.7

1,576.7

Unshaped products

323.4

187.6

511.0

Management refractory services

628.8

0.0

628.8

Other

102.8

103.0

205.8

Revenue

2,018.0

904.3

2,922.3

 

In 2018, revenue was classified by product group as follows:

in € million

Steel

Industrial

Group 20181)

Shaped products

1,114.9

575.9

1,690.8

Unshaped products

340.9

192.1

533.0

Management refractory services

616.0

0.0

616.0

Other

141.2

100.4

241.6

Revenue

2,213.0

868.4

3,081.4

1) Adjusted to reflect the changes in presentation.

Revenue from shaped and unshaped products is transferred to the customers at a point in time, whereas revenue from management refractory services is transferred over time. Other revenue amounting to €96.9 million (2018: €100.9 million) is transferred over time and an amount of €108.9 million (2018: €140.7 million) is transferred at a point of time.

Segment reporting by country

Revenue in 2019 and in the previous year is classified by customer sites as follows:

in € million

Steel

Industrial

Group

Netherlands

11.4

5.0

16.4

All other countries

 

 

 

USA

359.7

55.4

415.1

Brazil

273.3

58.8

332.1

India

206.3

45.5

251.8

PR China

47.6

136.1

183.7

Germany

96.8

74.1

170.9

Mexico

108.1

47.4

155.5

Italy

88.5

26.3

114.8

Canada

47.9

55.2

103.1

Russia

68.8

9.6

78.4

Other countries, each below €52.7 million

709.6

390.9

1,100.5

Revenue

2,018.0

904.3

2,922.3

 

in € million

Steel

Industrial

Group

Netherlands

13.9

11.9

25.8

All other countries

 

 

 

USA

353.7

54.2

407.9

Brazil

277.1

56.1

333.2

India

202.3

43.0

245.3

Germany

116.6

66.8

183.4

PR China

44.0

121.7

165.7

Mexico

127.8

33.2

161.0

Italy

104.6

27.0

131.6

Canada

46.4

45.8

92.2

Russia

73.7

13.2

86.9

Other countries, each below €62.9 million

852.9

395.5

1,248.4

Revenue

2,213.0

868.4

3,081.4

 

The carrying amounts of goodwill, other intangible assets and property, plant and equipment are classified as follows by the respective sites of the Group companies:

in € million

31.12.2019

31.12.2018

Brazil

514.0

520.7

USA

233.2

233.1

Austria

228.8

220.6

Germany

154.0

198.6

PR China

181.9

160.1

India

64.7

58.0

Mexico

38.9

34.5

France

27.9

31.8

Turkey

29.4

30.6

Other countries, each below €22.1 million (31.12.2018: €18.6 million)

70.5

58.6

Goodwill, intangible assets and property, plant and equipment

1,543.3

1,546.6

 

52. Earnings per share

In accordance with IAS 33, earnings per share are calculated by dividing the profit or loss attributable to the shareholders of RHI Magnesita N.V. by the weighted average number of shares outstanding during the financial year.

 

2019

2018

Profit after income tax attributable to the owners of the parent (in € million)

139.0

158.1

Weighted average number of shares for basic EPS

49,220,010

44,963,615

Effects of dilution from share options

273,969

94,105

Weighted average number of shares for dilutive EPS

49,493,979

45,057,720

Earnings per share basic (in €)

2.82

3.52

Earnings per share diluted (in €)

2.81

3.52

 

The weighted average number of shares for basic and dilutive EPS considers the weighted average effect of the newly issued ordinary shares as well the effect of changes in treasury shares during the reporting period. As of 31 December 2019, there are 273,969 diluting options.

53. Dividend payments and proposed dividend

The Annual General Meeting on 6 June 2019 approved the pay-out of a dividend of €1.50 per share for 2018. Consequently, a dividend totalling €74.2 million was paid out to the shareholders of RHI Magnesita N.V. at the beginning of July 2019.

On 23 July 2019 the Board of Directors of RHI Magnesita N.V. approved the 2019 interim dividend of €0.50 per share amounting to
€ 24.5 million. The 2019 interim dividend was paid on 9 January 2020.

For 2019, the Board of Directors has recommended not to pay a final dividend for 2019, subject to shareholder approval at the Annual General Meeting, on 5 June 2020 to shareholders on the register at 2020. This decision will be reviewed later in the year once the outlook becomes clearer.

Dividend payments to the shareholders of RHI Magnesita N.V. have no income tax consequences for RHI Magnesita N.V.

54. Additional disclosures on financial instruments

The following tables show the carrying amounts and fair values of financial assets and liabilities by measurement category and level and the allocation to the measurement category in accordance with IFRS 13. In addition, carrying amounts are shown aggregated according to measurement category.

 

 

 

 

31.12.2019

31.12.2018

in € million

Measurement category
IFRS 91)

Level

Carrying amount

Fair value

Carrying amount

Fair value

Other non-current financial assets

 

 

 

 

 

 

Interests in subsidiaries not consolidated

FVPL

3

0.7

0.7

0.7

0.7

Marketable securities

FVPL

1

13.3

13.3

14.5

14.5

Shares

FVPL

3

0.5

0.5

0.5

0.5

Interest derivatives designated as cash flow hedges

-

2

0.0

0.0

0.6

0.6

Other non-current financial receivables

AC

-

0.9

-

1.7

-

Trade and other current receivables

AC

-

324.2

-

367.2

-

Other current financial assets

 

 

 

 

 

 

Marketable securities

FVPL

1

0.0

0.0

35.2

35.2

Shares

FVPL

1

0.0

0.0

1.1

1.1

Derivatives

FVPL

2

0.1

0.1

2.1

2.1

Other current financial receivables

AC

-

0.0

-

0.2

-

Cash and cash equivalents

AC

-

467.2

-

491.2

-

Financial assets

 

 

806.9

 

915.0

 

Non-current and current borrowings

 

 

 

 

 

 

Liabilities to financial institutions

AC

2

1,043.1

1,056.6

1,153.6

1,165.6

Other financial liabilities and capitalised transaction costs

AC

2

11.9

-

12.8

-

Non-current and current other financial liabilities

 

 

 

 

 

 

Lease liabilities

AC

2

61.9

-

-

-

Derivatives

FVPL

2

24.5

24.5

20.9

20.9

Interest derivatives designated as cash flow hedges

-

2

14.8

14.8

7.3

7.3

Liabilities to fixed-term or puttable non-controlling interests

AC

2

35.8

-

36.3

-

Other non-current liabilities

 

 

 

 

 

 

Contingent consideration for acquired subsidiaries

FVPL

3

0.0

0.0

0.6

0.6

Trade payables and other current liabilities

AC

-

412.3

-

539.3

-

Financial liabilities

 

 

1,604.3

 

1,770.8

 

Aggregated according to measurement category

 

 

 

 

 

 

Financial assets measured at FVPL

 

 

14.6

 

54.1

 

Financial assets measured at amortised cost

 

 

792.3

 

860.3

 

Financial liabilities measured at amortised cost

 

 

1,565.0

 

1,742.0

 

Financial liabilities measured at FVPL

 

 

24.5

 

21.5

 

          

 

1) FVPL: Financial assets/financial liabilities measured at fair value through profit or loss.

  AC: Financial assets/financial liabilities measured at amortised cost.

In the RHI Magnesita Group marketable securities, derivative financial instruments, shares, and interests in subsidiaries not consolidated are measured at fair value.

Fair value is defined as the amount for which an asset could be exchanged, or a liability settled, between market participants in an arm's length transaction on the day of measurement. When the fair value is determined it is assumed that the transaction in which the asset is sold or the liability is transferred takes place either in the main market for the asset or liability, or in the most favourable market if there is no main market. RHI Magnesita considers the characteristics of the asset or liability to be measured which a market participant would consider in pricing. It is assumed that market participants act in their best economic interest.

RHI Magnesita takes into account the availability of observable market prices in an active market and uses the following hierarchy to determine fair value:

Level 1:

Prices quoted in active markets for identical financial instruments.

Level 2:

Measurement techniques in which all important data used are based on observable market data.

Level 3:

Measurement techniques in which at least one significant parameter is based on non-observable market data.

 

The fair value of securities, shares, and interests in subsidiaries not consolidated is based on price quotations at the reporting date (Level 1), where such quotations exist. In other cases a valuation model (Level 3) would be used for such instruments with the exception that such instruments are immaterial to the group, in which case amortised cost serves as an approximation of fair value.

The fair value of interest derivatives in a hedging relationship (interest rate swaps) is determined by calculating the present value of future cash flows based on current yield curves taking into account the corresponding terms (Level 2).

The fair value of other derivative contracts corresponds to the market value of the forward exchange contracts and the embedded derivatives in open orders denominated in a currency other than the functional currency, as well as the market value of a long-term power supply contract, which was classified as a derivative financial instrument since 2015. These derivatives are measured using quoted forward rates that are currently observable (Level 2).

The fair value of the contingent consideration liability amounting to €0.0 million (31.12.2018: €0.6 million) recognised in 2017 due to the acquisition of Agellis is determined by discounting the estimated earn-out with the transaction's internal rate of return (Level 3).

RHI Magnesita takes into account reclassifications in the measurement hierarchy at the end of the reporting period in which the changes occur. Apart from the initial application of IFRS 9, there were no shifts between the different measurement levels in the two reporting periods.

Liabilities to financial institutions, other financial liabilities and capitalised transaction costs, lease liabilities and liabilities to fixed-term or puttable non-controlling interests are carried at amortised cost in the Consolidated Statement of Financial Position. The fair values of the liabilities to financial institutions are only shown in the notes and calculated at the present value of the discounted future cash flows using yield curves that are currently observable (Level 2).

The financial receivables approximately correspond to the fair value as due to the amount of the existing receivables no material deviation between the fair value and the carrying amount is assumed and the credit default risk is accounted for by forming valuation allowances.

The remaining terms of trade and other current receivables and liabilities as well as cash and cash equivalents are predominantly short. Therefore, the carrying amounts of these items approximate fair value at the reporting date.

At the two reporting dates, no contractual netting agreement of financial assets and liabilities were in place.

Net results by measurement category in accordance with IFRS 9

The effect of financial instruments on the income and expenses recognised in 2019 and 2018 is shown in the following table, classified according to the measurement categories defined in IFRS 9:

in € million

2019

2018

Net (loss)/gain from financial assets and liabilities measured at fair value through profit or loss

(17.7)

1.4

Net loss from financial assets and liabilities measured at fair value through profit or loss designated on initial recognition

0.5

(1.2)

Net gain/(loss) from financial assets and liabilities measured at amortised cost

(39.7)

(123.5)

 

The net gain from financial assets and liabilities measured at fair value through profit or loss includes income from securities and shares, income from the disposal of securities and shares, impairment losses and income from reversals of impairment losses, unrealised results from the measurement of a long-term commodity futures contract, changes in the market value and realised results of forward exchange contracts and embedded derivatives in open orders in a currency other than the functional currency of RHI Magnesita, interest derivatives which do not meet the requirements of hedge accounting in accordance with IFRS 9 and interest income from securities.

The net gain or loss from financial assets and liabilities at fair value through profit or loss designated on initial recognition includes income related to the settlement and measurement of securities and personnel obligations.

The net loss from financial assets and liabilities measured at amortised cost includes interest income and expenses, changes in valuation allowances and losses on derecognition, foreign exchange gains and losses as well as expenses related to the measurement of put options. The net loss is mainly related to financial liabilities measured at amortised cost.

Net finance costs include interest income amounting to €9.1 million (2018: €9.5 million) and interest expenses of €49.9 million (2018: €69.5 million), which result from financial assets and liabilities which are not carried at fair value through profit or loss.

55. Derivative financial instruments

Commodity forward

The RHI Magnesita Group signed a commodity forward contract for electricity for the fusion plant in Porsgrunn, Norway, in November 2011 which has been accounted for as a financial instrument in accordance with IFRS 9 since 31 December 2015 because the "own-use exemption" (exemption for own use in accordance with IFRS 9 no longer applies.

The measurement of the entire term of the contract until the end of the year 2023 at market price level leads to a financial liability of €23.9 million at 31 December 2019 (31.12.2018: €20.9 million). The corresponding present value of the cash flows for the agreed electricity supply totals €59.5 million at 31 December 2019 (31.12.2018: €71.3 million); the present value of the cash flow at market price amounts to €35.6 million (31.12.2018: €50.4 million).

Interest rate swaps

RHI Magnesita has concluded interest rate swaps to hedge the cash flow risk associated to financial liabilities carrying variable interest rates. Variable interest cash flows of financial liabilities were designated as hedged items. The cash flow changes of the hedged items, which result from the changes of the variable interest rates, are balanced out by the cash flow changes of the interest rate swaps. These hedging measures pursue the objective to transform variable-interest financial liabilities into fixed interest financial liabilities, thus hedging the cash flow from the financial liabilities. Ineffectiveness in the hedge relationship may arise due to credit risk, although this risk is assessed to be very low.

In the year 2018, RHI Magnesita concluded an interest rate swap with a nominal volume of €305.6 million maturing in 2023. The interest and compensation payments are due on a quarterly basis. Fixed interest rate amounts to roughly 0.28%, the variable interest rate is based on the EURIBOR. Furthermore, one other interest rate swap has been concluded in 2018, with a nominal volume of USD 200.0 million and a term until 2023. The interest and compensation payments are also due on a quarterly basis. Fixed interest rate amounts to roughly 3.1%, the variable interest rate is based on the USD LIBOR.

A hedging relationship with a nominal volume of USD 50.0 million (31.12.2018: USD 50.0 million) with an original maturity until 2020 was early settled in 2019. An income of €0.7 million recognised in other comprehensive income was reclassified to profit or loss and recognised within other net financial expenses.

In 2018, two interest rate swaps measured at fair value through profit or loss with an original maturity until 2019 and with a nominal value of €12.2 million were subject to early settlement in the reporting period. Total expense in 2018 of this transaction amounted to €0.3 million and was recognised within other net financial expenses.

The fair values of the interest rate swaps totalled €-14.8 million at the reporting date (31.12.2018: €-6.7 million) and are shown in other non-current financial liabilities (31.12.2018: €7.3 million) in the Consolidated Statement of Financial Position. At 31.12.2018 a fair value of € 0.6 million was shown in other non-current financial assets. For the reporting period 2019, €-7.4  million (2018: €6.8 million) have been recognised in other comprehensive income and an i