RHI Magnesita N.V.

("RHI Magnesita" or the "Company" or the "Group")

Strong pricing, strategic sales initiatives and M&A contribution offset lower demand to deliver increase in EBITA and deleveraging

RHI Magnesita, the leading global supplier of high-grade refractory products, systems and solutions, today announces its unaudited results for the six months ended 30 June 2023 ("H1 2023" or the "Period").

Financial results

¹   H1 2022 adjusted for constant currency for H1 2023 average FX rates.

² Adjustments of €16 million to reported EBITA include €11 million relating to non-recurring restructuring costs and €5 million was spent on M&A integration costs in the Period.

³   Includes trailing 12 months EBITDA contribution from businesses acquired during the period, including prior to the date of acquisition.

Operational and strategic highlights

·   Steel revenues 5% higher, reflecting an 8% volume reduction in line with subdued market demand globally, more than offset in the Period by strong pricing

·   Industrial division performance benefited from strong pricing recovery and later cycle nature of project business, to deliver gross margin of 29.0% (H1 2022: 25.9%), highlighting benefits of sector diversification

·   Low plant capacity utilisation of 76% (H1 2022: 83%) delivers planned inventory reduction excluding M&A. Associated fixed cost under-absorption results in flat gross margins for Steel, despite lower input costs

·   Inventory now at or approaching target demand coverage ratios, through focus on stock management without impacting customer performance. Record high PIFOT ("produced in full and on time") and record low customer complaints

·  Recycling rate increased to 13.0% (H1 2022: 9.3%). Over the period January 2018 to June 2023, approximately 1.1 million tonnes of CO₂ emissions has now been avoided through the use of secondary raw materials

·    Five acquisitions completed during H1 2023 in India, China and Europe for a total cash consideration of €208 million, including working capital investments of €23 million. Significant synergies and earnings accretion expected as new businesses are integrated into the Group

Financial highlights

·   Revenue increased 9% to €1,734 million (H1 2022: €1,594 million), as higher pricing and M&A contribution offset the negative impact of lower sales volumes

·    Adjusted EBITA of €200 million (H1 2022: €188 million) and margin of 11.6% (H1 2022: 11.8%) as currency tailwind, higher pricing, M&A contribution and strategic sales initiatives offset lower volumes:

- Price increases contributed €167 million to Adjusted EBITA versus H1 2022

- Adjusted EBITDA from M&A in H1 2023 of €19 million (EBITA: €14 million) against previous full year guidance of €25-€30 million, with contribution weighted towards H2 2023 due to timing of completion. Guidance for 2023 increased to approximately €40 million

- Strategic initiatives cumulative annual EBITA contribution since 2019 now at €131 million, achieving the FY 2023 guided range of €125-€145 million

·   Adjusted EPS of €2.53 per share in line with H1 2022 (H1 2022: €2.58 per share) as higher EBITA was offset by higher debt interest charges, as guided, and currency movements

·   Significant step up in free cash flow to €167 million (H1 2022: €146 million outflow) driven by working capital release in base business and strong operating cash flow conversion of 114%

·   Net Debt reduced to €1,124 million (31 December 2022: €1,163 million) and pro forma Net Debt to Adjusted EBITDA reduced to 2.1x (31 December 2022 Net Debt to Adjusted EBITDA: 2.3x), strong cash flow and €100 million equity raise in India funded cash invested into M&A of €208 million during the Period, including €23 million of working capital investments

·    Interim dividend of €0.55 per share declared

Outlook

·    Outlook for key end markets remains uncertain, with order books suggesting continued weakness into the second half

·    Pricing currently resilient but competitive pressure expected in the remainder of the year

·    Benefit of lower input costs expected to be offset by reduced fixed-cost absorption due to low production volumes

·   Following strong first half profitability, full year Adjusted EBITA margin is now expected to be between 10.5% and 11.5%, delivering full year Adjusted EBITA including M&A of at least €360 million

·    Net debt to EBITDA expected to remain above 2.0x at the FY 2023 as the Group further executes on its M&A pipeline, in line with its guidance range

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

"In the first half of the year we continued to experience challenging conditions in the steel market as a result of low demand volumes in all geographies with the exception of India. However, I am pleased to report that the resilience of our business model and strategy has been demonstrated by strong pricing, sector diversification, the delivery of material benefits from our strategic sales initiatives and a growing contribution from acquisitions. We have generated free cash flow of €167 million compared to an outflow of €146 million in H1 2022 and we are now on course to deliver full year EBITA of at least €360 million with a margin of between 10.5% and 11.5%. This is higher than we expected at the beginning of this year, but with the benefits from lower input costs eroded by fixed cost under-absorption due to low production volumes. Five acquisitions completed in 2023 year to date have been funded through operating cash flows and an equity raise in India, enabling us to reduce gearing to 2.1x pro forma EBITDA, in line with our targeted range. We are continuing to progress the transformation of our business and the delivery of our strategy, despite the challenging overall demand conditions."

A presentation for investors and analysts will be held today starting at 8:15am UK time (9:15am CET). The presentation will be webcast live and details can be found on: https://ir.rhimagnesita.com/. Alternatively the webcast can be accessed here.

For further enquiries, please contact:

Chris Bucknall, Head of Investor Relations

Tel +43 699 1870 6490

E‐mail: chris.bucknall@rhimagnesita.com

Media:

Hudson Sandler

Mark Garraway, Emily Dillon, Nick Moore

Tel +44 020 7796 4133

E-mail: rhimagnesita@hudsonsandler.com

About RHI Magnesita

RHI Magnesita is the leading global supplier of high-grade refractory products, systems and solutions which are critical for 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 around the world, with around 15,000 employees in 47 production sites, 7 recycling facilities and more than 70 sales offices. RHI Magnesita intends to build on its leadership in revenue, scale, product portfolio and diversified geographic presence to expand further in high growth markets.

The Group maintains a premium listing on the Official list of the London Stock Exchange (symbol: RHIM) and is a constituent of the FTSE 250 index, with a secondary listing on the Vienna Stock Exchange (Wiener Börse). For more information please visit: www.rhimagnesita.com

HEALTH & SAFETY

A core value of the Group is to maintain a safe working environment for its employees and contractors. During H1 2023 the lost time injury frequency ("LTIF"), excluding recently acquired businesses, increased slightly to 0.25 per 200,000 hours worked (H1 2022: 0.22), whilst the total recordable injury frequency ("TRIF") reduced to 0.58 per 200,000 hours worked (H1 2022: 0.63). RHI Magnesita aims to reduce all accidents to zero over the long term.

During the Period, the main focus areas for improvement were protocols for workplace inductions and safety training for new hires. Further initiatives related to safety-awareness on specific topics such as prevention of finger and hand injuries were rolled out in response to an increase in incidents of this nature in Q1.

FINANCIAL OVERVIEW

Reported revenue increased by 9% to €1,734 million (H1 2022: €1,594 million) as the contribution from M&A, price increases and benefits from strategic sales initiatives in India and in Cement and Lime offset 9% lower volumes across Steel and Industrial, excluding recycling and minerals sales. Revenue increased on a constant currency basis by 9% (H1 2022: €1,593 million). Total revenue contribution in the Period from M&A was €119 million.

Cost inflation began to ease during the Period but absolute costs were higher compared to H1 2022 largely due to M&A, with cost of goods sold increasing by 8% on a reported basis to €1,320 million (H1 2022: €1,221 million).

Adjusted EBITA increased by 7% on a reported basis to €200 million (H1 2022: €188 million) and reduced by 1% on a constant currency basis (H1 2022: €202 million). Adjusted EBITA margin decreased by 20bps to 11.6% (H1 2022: 11.8%). Higher pricing levels maintained from H2 2022, combined with a reducing rate of cost inflation, resulted in a record refractory margin contribution of 9.8ppts (H1 2022: 8.4ppts). The vertical integration margin was lower, as guided, at 1.8ppts (H1 2022: 3.4ppts) as higher energy costs increased the internal cost of raw material production, compared to global market prices which are linked to the marginal production costs of China based producers. Total Adjusted EBITDA contribution from M&A in the first half was €19 million (EBITA: €14 million) against original full year EBITDA guidance of €25-€30 million. Guidance is now increased to approximately €40 million of Adjusted EBITDA from M&A, including the expected contribution from DGSB and Seven Refractories in the second half of 2023.

Net debt decreased to €1,124 million at the end of the Period (31 December 2022: €1,163 million) and reported leverage was 2.2x net debt to Adjusted EBITDA, down from 2.3x at 31 December 2022 due to higher operating cash flow. Including a 12-month historic EBITDA contribution from businesses acquired during the period, pro forma leverage was 2.1x Net debt to Adjusted EBITDA.

M&A cash consideration, net debt consolidated on acquisition and working capital requirements of acquired businesses increased net debt by €256 million in H1 2023. Cash outflow on acquisitions was offset by strong operating cash flow in the base business and the proceeds of a Qualified Institutional Placement ("QIP") by RHI Magnesita India Ltd, raising approximately €100 million in April 2023. The QIP is to be followed by an equity investment of €22 million by the Group in RHI Magnesita India Ltd via a Preferential Issue which is expected to complete in Q3 2023.

Net Working capital, before consolidation of new M&A, decreased by €84 million to €834 million (31 December 2022: €892 million) as inventories and accounts receivables were successfully reduced, offset by decreased accounts payable due to lower raw material prices and purchases. Excluding M&A, the base business recorded a working capital intensity of 25.6%. Including M&A, working capital stood at €940 million and working capital intensity was 26.0%.

Available liquidity was €1,360 million at the period end (31 December 2022: €1,121 million) including undrawn committed facilities of €600 million and cash and cash equivalents of €760 million. Adjusted operating cash flow was €228 million (H1 2022: €(84) million), resulting from higher profitability and reduced working capital requirements.

OUTLOOK

The outlook for the Group's key end markets and consequently customer volumes remains uncertain, with order books suggesting continued weakness into the second half. Pricing pressure from competitors is expected over the remainder of the year.

Supported by strong profitability in the first half of the year, the Board expects to deliver a full year Adjusted EBITA margin of between 10.5% and 11.5% and Adjusted EBITA including M&A of at least €360 million. Leverage, measured as a ratio of net debt to Adjusted EBITDA, is expected to remain above 2.0x as the Group further executes on its M&A pipeline.

CAPITAL ALLOCATION 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 midterm. These opportunities will be considered against a framework of strategic fit, risk profile, rates of return, synergy potential and balance sheet strength.

The Group incurred €38 million of project capital expenditure in the first half (H1 2022: €36 million), which included investments in the Production Optimisation Plan and on recently acquired assets. Maintenance capital expenditure in the period was €25 million (H1 2022: €22 million). Total capital expenditure was therefore €63 million (H1 2022: €58 million), against unchanged full year 2023 guidance of €200 million, including M&A.

Consistent with the Company's dividend policy to pay an interim dividend equal to one third of the previous final dividend, the Board has declared an interim dividend of €0.55 per share representing €25.9 million in aggregate. The interim dividend will be paid on 22 September 2023 to shareholders on the register on 25 August 2023.

Shareholders should note that Rhône Capital reserves the right to reduce the consideration payable under its Partial Offer, including to shareholders who have already accepted the Partial Offer, by an amount equal to any such dividend payments.

M&A

During the Period, the Group completed two highly strategic acquisitions in India, including the €86 million acquisition of the refractory business of Hi-Tech in Jamshedpur and the Indian refractory business of DBRL, which has substantially improved the Group's regional positioning within the flow control and industrial segments.

Following completion the Group began the integration of these two acquisitions with its existing Indian footprint, including the relocation of some flow control and lance production to locations with a closer proximity to customer sites. The acquisitions in India have increased the Group's local market share, representing strategic progress against the Group's aim to grow in geographies where it was previously under-represented. The expanded plant network and additional low-cost production sites will increase RHI Magnesita's competitiveness in the region for both local sales and potential new export opportunities, especially across West Asia and Africa.

The Group agreed to acquire DGSB, a German subsidiary of the Dalmia Bharat Group, in March 2023. DGSB is a leading supplier of monolithic lances and other precast products to European steel customers for use in the desulphurisation and homogenisation of molten steel, and represents a complementary addition to the Group's existing product range.  

The acquisition of a 65% stake in Jinan New Emei was completed in April 2023 for a cash consideration of €23 million plus assumed net debt and other liabilities of €17 million, with the payment of €3 million of cash consideration deferred to 2024. Jinan New Emei is based at a new facility in Shandong China and has a well-established business in refractory slide gates, nozzles and mixes. The integration of the plant commenced in May 2023.

On 21 April 2023, the Group announced the acquisition of Seven Refractories for a cash consideration of €84 million and the transaction was completed on 17 July 2023. Seven Refractories is a specialist supplier of alumina based refractory mixes with broad applications across all of the Group's customer segments including iron and steel, cement, aluminium and non-ferrous metals.

The Group has continued to integrate acquisitions that were completed in prior periods including SÖRMAŞ (Türkiye), MIRECO (Europe Recycling) and Chongqing (China) and these newly acquired businesses are together delivering material benefits to the Group.

The total contribution to Adjusted EBITDA from M&A in H1 2023 was €19 million (EBITA: €14 million). Guidance for M&A contribution in the full year 2023 is increased from the previous range of €25-€30 million Adjusted EBTIDA to approximately €40 million, including the recent acquisitions of Seven Refractories and DGSB.

SUSTAINABILITY

The Group secured an increase in its Ecovadis sustainability rating to 72 in June 2023 (June 2022: 69), maintaining its 'Gold' rating. Out of a total of €2.4 billion of available debt facilities, the margin payable on €1.9 billion of debt facilities and Schuldschein bonds are now linked to the Group's Ecovadis sustainability rating. Any further increase in the rating would result in a reduction in the margin payable to lenders.

Continued progress has been delivered in recycling, with the usage rate of secondary raw materials increasing to 13.0% in the first half of 2023 (H1 2022: 9.3%). Each tonne of recycled material used saves approximately two tonnes of CO₂ emissions that would otherwise be released as a result of the mining and processing of fresh raw material. Since the Group started to increase its recycling rate significantly in 2018 through technical innovations, investments in new product formulations, customer engagement, the use of internal incentives and formation of MIRECO, a total of 1.1 million tonnes of CO₂ emissions have been averted, compared to the emissions that would have been released if the increase in recycling had not been implemented.

The Group continues to invest in developing new technologies to deliver a reduction in its absolute CO₂ emissions and emissions intensity and will seek to maintain its leadership position in the refractory industry in the field of sustainability.

STRATEGIC INITIATIVES

The Group launched a number of strategic initiatives in 2019 to improve its competitive position by investing in the rationalisation and modernisation of its production footprint. The Group has invested into its production plants and raw material assets, creating a technically advanced and cost-competitive plant footprint with a more localised supply chain. With the Manufacturing Execution System in the final stages of implementation at Dalian and Radenthein, the Production Optimisation Plan is now substantially complete and supporting the Group's resilient performance through the current period of market weakness. The Brumado mine expansion and kiln installation project in Brazil is now expected to ramp-up in H1 2024.

The Group also launched a series of sales initiatives to grow its flow control business, seeking to increase sales from heat management solutions to 40% by 2025 and to grow into new markets including India, China, Türkiye and the non-basic product segment, both organically and via acquisitions. The target for cumulative annual EBITA contribution from sales initiatives was €40- €60 million by the end of 2023 and the total contribution achieved to date now stands at €61 million.

Growth in new markets strengthened in the Period, primarily as a result of M&A, with India revenues increasing by 43% to €241 million or 13.9% of Group revenue (H1 2022: €168 million, 10.6%). Flow Control revenue increased by 5% to €261 million (H1 2022: €249 million) in line with market volumes, despite softer overall sales volumes in steel. Tundish mixes and isostatic sales in America experienced strong pricing dynamics.  

The strategic initiatives have delivered cumulative annualised EBITA savings of €131 million in the period from 2019 to 30 June 2023, which is now within the targeted range of €125- €145 million of annual EBITA savings by the end of 2023.

RAW MATERIALS

Raw material prices softened in H1 2023, with the price of high-grade dead burned magnesia ("DBM") from China decreasing by 13% from the beginning of the year, and by 15% on average compared to H1 2022. The cost of production of refractory raw materials for suppliers in China remained low due to availability of low-cost energy, whilst the cost of production of raw material remained higher for RHI Magnesita, in particular for DBM production in Türkiye. As guided, the EBITA contribution from vertical integration remained at approximately the same level as H2 2022 at 1.8ppts (H1 2022: 3.4ppts).

OPERATIONAL REVIEW

Steel overview

Supplying the steel market with refractory products and services accounts for c.70% of RHI Magnesita revenues and market demand is closely aligned to global steel production volumes. Refractory products line all steel making applications, protecting equipment from extremely high temperatures of up to around 1,800°C, chemical reactions, and abrasion of molten steel. RHI Magnesita offers a comprehensive product and service offering for all steel applications, including primary iron (blast furnace 'BF' or direct reduction of iron 'DRI') and steel making (basic oxygen furnace 'BOF' or electric arc furnace 'EAF') as well as ingot and continuous casting. Refractories used in the steel-making processes are classified as an operating expense by steel producers, accounting for c.3% of the cost of steel production.

Revenue increased by 5% to €1,203 million during the Period (H1 2022: €1,150 million) and by 4% on a constant currency basis (H1 2022: €1,152 million), with higher pricing offsetting a volume decline of 8% (excluding steel recycling). World Steel Association data recorded volume decline in steel production globally of c.1% over the Period and, excluding China, a decline of c.4%. The Steel division recorded a gross margin of 21.6%, a decrease of 80bps compared to H1 2022 of 22.4%.

Industrial overview

RHI Magnesita supplies refractory products to its customer portfolio across cement, glass, non-ferrous metals, energy, environmental, chemicals and foundry industries. It classifies this segment as 'Industrial' and customers across these industries make up c.30% of Group revenues.

Recorded revenue in the Period was €531 million, an increase of 20% on a reported basis (H1 2022: €444 million) and by 21% on a constant currency basis (H1 2022: €440 million).

North America

Revenue in North America increased by 13% to €484 million (H1 2022: €426 million), largely driven by pricing, which is expected come under greater competitive pressure in H2 2023. On a constant currency basis, revenue increased by 10% over the period. Volumes were slightly lower in the Period, down by 2% reflective of a more subdued steel market in the region.

Steel revenue stood at €348 million, an increase of 6% (H1 2022: €327 million) due to higher pricing established in H2 2022. Shipped steel refractory volumes decreased by 3% in H1 2023 compared to H1 2022, an outperformance compared to steel production in the region, where according to World Steel Association (WSA) data, production decreased by c.4%. Volume performance was ahead of the market, despite one of the Group's largest customers in Mexico ceasing production in late 2022. Pricing remained strong with price levels around 6% higher than H1 2022. The region benefited from contracts to supply 13 greenfield developments and 6 brownfield developments, all of which were new or expanding EAF plants.

Industrial revenue increased by 37% to €136 million (H1 2022: €99 million), reflecting price increases implemented in H2 2022 of around 38% against volume increases of 3%. Lower demand in the Cement and Lime segment driven by softening of the construction business was offset by stronger volumes in the Non-Ferrous Metal and Glass businesses. Demand is expected to be stronger in the non-ferrous metals and glass industries over coming years, given capacity expansion across these industries of 1.2 million tonnes.

The region made good progress in flow control sales over the Period and expanded its market share in isostatic products and through the Group's Interstop flow control product range. There was a high growth in demand for refractory application machinery and technology during the Period, particularly for EAF steel plants.

The region is actively improving its recycling rate, and in the Period increased its recycling consumption significantly through maturing its partnership with recycling processers and the implementation of a regional recycling team. Recycling rates are comparatively lower in the US compared to other regions in which the Group operates, representing a significant opportunity to expand recycling activities further.

Europe, CIS and Türkiye

Revenue in Europe, CIS and Türkiye increased by 7% on a reported basis to €442 million (H1 2022: €415 million) and by 8% on a constant currency basis (H1 2022: €411 million).

Steel revenues increased by 2% to €287 million (H1 2022: €281 million). World Steel Association data indicates that steel production in Europe and Türkiye (excluding Russia) decreased by 12% in H1 2023 compared to H1 2022, as high inflation and tight monetary policy impacted end markets and reduced steel production. RHI Magnesita's shipped refractory volumes were lower by 15% (excluding recycling), broadly in line with the market. Pricing remained resilient in the Period, however, cost pressures across the industry are easing in particular in respect of imports from Asia, leading to pricing pressure in some markets.

Industrial revenues increased by 16% to €155 million (H1 2022: €134 million), reflecting significant price increases of around 40% implemented in H2 2022, notably in Cement and Lime. Volumes in industrials declined by 12% overall, mostly driven by lower activity in Non-Ferrous Metals.

The Group has integrated the acquisition of SÖRMAS, Türkiye, which completed in H2 2022. SÖRMAS produces refractories for the cement, steel and glass industries and complements the Group's production footprint by servicing local customers with finished refractories previously shipped from plants in Continental Europe.  Vertical integration efficiencies are gained due to the procurement of certain raw materials from the Group's magnesite mine in Türkiye, Eskisehir.

MIRECO, the Group's newly formed recycling business following the acquisition of a 51% stake in Horn & Co Minerals Recovery GmbH & Co KG in 2022, is integrated and ramping up production. Demand for secondary raw material from MIRECO has been strong in the Period.

The Group completed the acquisition of DGSB in April 2023. The acquisition expands RHI Magnesita's customer offering in Europe, where monolithic lances are a complementary addition to its existing product range, with applications in the desulphurization and homogenization of molten steel. Material synergies are expected to be generated through cross-selling within the Group's existing heat management solutions offering.

The acquisition of Seven Refractories, a specialist supplier of non-basic monolithic refractory mixes, was completed on 17 July 2023. Non-basic monolithics are expected to become increasingly important with the development of new low CO₂ emitting manufacturing technologies within the Group's customer industries. Significant cross selling synergies are anticipated due to the complementary nature of Seven's products and service offering with the Group's existing refractory product range and there is an opportunity to roll out the business model globally, beyond Seven's existing markets in Europe, USA and India.

India, West Asia and Africa

Revenue in the India, West Asia and Africa region increased by 25% in the period to €365 million (H1 2022: €292 million) or by 28% on a constant currency basis (H1 2022: €285 million). Including the contribution from M&A, volumes were broadly flat, decreasing by 2% in the Period, with an increase in steel volumes of 2% offsetting lower industrial volumes.

Steel revenue for the region increased by 21% to €282 million (H1 2022: €234 million). Steel shipped refractory volumes of 2% increased at a slightly higher rate than the market, which according to WSA steel production in the region increased by c.6%. Steel refractory prices increased by c.22% in the Period as the Group maintained pricing against slightly softening input costs including raw materials, sea freight and European energy costs (which are relevant for imported products). Steel production in India continues to benefit from government infrastructure stimulus programmes such as the Production Linked Investment scheme and is expected to continue to grow at 5-6% on average annually, offsetting slightly weaker demand in West Asia and Africa largely due to macroeconomic uncertainty in Egypt.

Industrial revenue recorded for the region was €82 million, an increase of 40% (H1 2022: €59 million). Industrial pricing was considerably higher than the prior period, increasing by over 84% despite a competitive pricing environment, especially in Non-Ferrous Metals. Pricing was especially strong in the Industrial Applications and Cement businesses, which offset weaker demand in Glass and Industrial Applications. Industrial volumes declined by 21%.

In January 2023, the Group completed the acquisition of the Indian refractory business of DBRL and Hi-Tech. These acquisitions were partly financed by the issuance of equity in the Group's listed Indian subsidiary, RHI Magnesita India Ltd, in a QIP which raised €100 million. The integration of DBRL and Hi-Tech is progressing well, with strong synergy opportunities identified in SG&A and procurement of raw materials, as well as cross-selling. During the Period, slide gate production was relocated from Rajgangpur to the Jamshedpur plant which was previously owned by Hi-Tech. Production of lances for South and East India has now been shifted to Rajgangpur and Bhilai from Bhiwadi, improving localised production to the customer. Given the new plant production capacity and the expanded plant network in India, RHI Magnesita will now be able to supply products more competitively locally, as well pursue new export opportunities across West Asia and Africa.

As part of the Group's Production Optimisation Plan, the Group invested into expanding production at certain plants and Cuttack is now operating at double its original capacity, at c.30,000 tonnes per year and around 90% utilisation.

The region is growing its market share in the flow control market based on successful trials for three new tundish technologies brought to India in the past year. Tundish refractories are used in the lining and operation of the tundish, which is a vessel used to regulate the flow of molten steel during the continuous casting process. The Group delivered an Automated Process Optimisation contract to measure the refractory lining wear rates with one customer for a BOF application in the Period.

South America

Revenue in South America increased by 3% to €263 million (H1 2022: €255 million) or by 2% on a constant currency basis (H1 2022: €258 million). This was due to the maintenance of price increases implemented in H2 2022, despite weakening demand with volumes lower by 8%.

Increased revenue was largely driven by significant price increases in the Industrial segment, increasing by c.30%. Pricing was especially strong in Cement and Lime and Non-Ferrous Metals. This led to an increase in revenue in the Industrial segment of 19% to €81 million (H1 2022: €68 million).

Steel revenue declined by 3% to €182 million (H1 2022: €187 million). Volumes were down by 7% which was broadly in line with the market, with WSA reporting crude steel production c.7% lower.

Flow control demand was softer in the Period, in particular due to the reduction in steel production in Brazil where the Group has a higher market share. The Group has continued to pursue new business opportunities in flow control at two sites of one of its largest customers to continue to increase flow control market share over the near term.

Softness in crude steel production is expected to continue through H2 2023. High interest rates and inflation in Brazil have resulted in reduced economic activity and lower export demand, particularly in the construction and automotive end markets, which affects mostly the Steel and Cement refractory demand. Industrial segment volumes were down by 9%, primarily in Cement and Lime and Industrial Applications.

The region achieved a recycling rate of over 10% in H1 2023, driven by a combination of sourcing, research and development, processing, consumption, and sales effects.

As part of the Production Optimisation Plan, the Group will increase the life of the Brumado mine to c.120 years and further improve the cost competitiveness of this already low-cost mine. The expansion project has experienced delays due to supply-chain related issues, cost inflation and COVID-19 related contractor availability. Civil and electromechanical works are ongoing, with project completion and ramp-up now scheduled for H1 2024.

China and East Asia

China and East Asia revenue decreased by 12% to €180 million (H1 2022: €205 million), and on a constant currency basis decreased by 10% (H1 2022: €200 million). The revenue decline was primarily due to lower shipped volumes, which reduced by 22% due to a production stoppage at a key customer in Vietnam.

Steel revenue was €103 million and lower by 14% (H1 2022: €121 million). Steel volumes in the region declined by 24%, driven by weak demand from East Asia where steel volumes declined by 40%. Comparatively, steel production for China and East Asia countries were unchanged in the Period according to WSA.

Steel production was weak in South East Asia, especially in Vietnam due to lower global exports, reflective of weakening construction end markets. Overall crude steel production in the East Asia region, according to WSA, declined by c.6%. The Group's weaker shipments in East Asia were mostly due to one of its key customers in Vietnam stopping production, leading to an underperformance compared to local steel production volumes. The customer reduced its steel output by c.50% compared to H1 2022. The plant is expected to restart production in Q3 2023, however steel market softness is expected to persist in the region throughout H2 2023. There has also been refractory destocking over the Period in Japan, South Korea and Oceania, leading to lower refractory demand compared to steel production. 

Shipped steel refractory volumes in China remained stable in the Period. This compares to crude steel production in China increasing by c.1% in the Period. Pricing became more competitive in the Period and the Group reduced its prices for finished products by around 9%.

Industrial revenue in the region reduced by 9% to €77 million (H1 2022: €85 million) driven by weaker volumes of c.18%, although pricing remained strong. Volumes were particularly weak in the Glass and Cement sectors in China. Cement demand reduced due to weak real estate investment and lower construction demand. Volumes reduced in line with the market and the Group retained its market share. Glass demand reduced due to fewer new solar projects undertaken in the Period.

The Group acquired a 51% stake in a new joint venture in Chongqing in December 2021, and is currently developing a state-of-the-art production hub at this location for refractories for the Cement market with scope to expand into more industries. The plant is nearing completion with all equipment installed and the tunnel kiln firing taking place in June. Production trials will commence in Q3 2023 and the plant will then ramp up production for sales in Q4 2023.

The acquisition of a 65% stake in Jinan New Emei was completed in April 2023 for a cash consideration of €23 million plus assumed net debt and other liabilities of €17 million, with the payment of €3 million of cash consideration deferred to 2024

In January 2023, the Group announced the acquisition of a 65% stake in Jinan New Emei for a consideration of €40 million. In April 2023 the acquisition of Jinan New Emei was completed and cash consideration of  €23 million was paid, after deduction of net debt and other liabilities of €17 million, with the payment of €3 million of cash consideration deferred to 2024. Jinan New Emei is a well-established business producing refractory slide gates, nozzles and mixes from a recently constructed and modern production facility in Shandong, China. Integration commenced in May 2023 and synergies are expected to be realised through cross-selling to existing steel customers, as well as operations and SG&A savings.

FINANCE REVIEW

Reporting approach

The Company uses a number of alternative performance measures ("APMs"), in addition to the performance measures reported in accordance with IFRS, which reflect the way in which the Board and the Executive Management Team 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 used internally in the management of our business performance, budgeting and forecasting. A reconciliation of key metrics to the reported financials is presented in the section titled APMs.

All references to comparative H1 2022 figures in this review are on a reported basis, unless stated otherwise. Figures presented at constant currency represent H1 2022 translated to average H1 2023 exchange rates of 1 Euro to 1.08 USD, 1 Euro to 7.47 CNY, 1 Euro to 5.53 BRL, 1 Euro to 88.82 INR, 1 Euro to 20.8 TRY.

Group performance

Revenue for the Period amounted to €1,734 million (H1 2022: €1,594 million), up by 9%. On a constant currency basis, revenue increased by 9% over the Period (H1 2022: €1,593 million). The increase in revenue was driven by a stronger industrials business, where reported revenue (including Minerals) increased by 19% to €531 million (H1 2022: €444 million). Steel sector reported revenue increased by 5% to €1,203 million (H1 2022: €1,150 million). Revenue on an underlying basis, excluding revenue contribution from M&A of €119 million, increased by 1% to €1,615 million (H1 2022: €1,593) million.

The Group cost of goods sold over the Period amounted to €1,320 million (H1 2022: €1,221 million), an increase of 8% compared to the same period last year. On a constant currency basis, cost of goods sold was 9% higher (H1 2022: €1,207 million). Labour costs increased by 19%, raw material costs increased by 16% given cost of production internally, energy costs decreased by 3% and freight costs decreased by 15% on a constant currency basis.

The Group delivered gross margin of 23.9%, an increase of 50bps compared to the same period last year (H1 2022: 23.4%). Gross margin over the period for the Steel business decreased by 90bps to 21.6% (H1 2022: 22.5%). The Industrial business gross margin was significantly stronger at 29.0% inclusive of minerals, increasing by 310bps (H1 2022: 25.9%).

Selling, General and Administrative ("SG&A") expenses, excluding R&D expenses, amounted to €213 million in H1 2023 (H1 2022: €181 million), 18% higher than the comparative period. SG&A as a percentage of revenue increased to 12.3% (H1 2022: 11.4%). Higher SG&A in the period was mainly due to increased personnel and personnel-related expenses and M&A.  

Other income and expenses amounted to €16 million in H1 2023 (H1 2022: €11 million), comprising €11 million of one-off restructuring costs, mostly relating to a restructuring programme to increase decentralization from the head office into the regions. A further €6 million was spent on M&A integration costs in the Period.     

Adjusted EBITDA margin was 15.3%, 10bps lower compared to the 15.4% reported in H1 2022. Adjusted EBITDA increased by 8% to €265 million (H1 2022: €245 million). Acquisitions contributed €19 million of EBITDA over the Period, and excluding this contribution underlying EBITDA was flat at €246 million. Adjusted EBITDA margin combined from the newly acquired businesses was 16.0% and the base business remained unchanged in its recorded adjusted EBITDA margin of 15.2%.

Adjusted EBITA increased by 6% on a reported basis, to €200 million (H1 2022: €188 million), mainly due to price increases implemented in H2 2022, currency tailwind and a contribution from M&A. Adjusted EBITA from acquisitions during the Period amounted to €14 million. Underlying EBITA on a like-for-like basis and including the impact of currency was broadly flat at €186 million.

The Group recorded an Adjusted EBITA margin of 11.6%, decreasing by 20bps compared to 11.8% for the same period last year on a reported basis. The Refractory margin contributed 9.8ppts of Group EBITA margin (H1 2022: 8.3ppts) whilst the vertical integration assets contributed 1.8ppts (H1 2022: 3.4ppts). Adjusted EBITA margin from acquisitions was 12.6% and were therefore overall margin accretive.

Reported net financial expenses in H1 2023 amounted to €51 million (H1 2022: €22 million), with net interest expenses of €18 million (H1 2022: €10 million). Net interest expenses in H1 2023 benefited from €9 million (H1 2022: €3 million) of interest income on cash balances resulting from interest rate rises on deposits. Interest expenses on borrowings, amounting to €27 million (H1 2022: €13 million), have increased as expected due to costs associated with bridge loans in India used to fund M&A (€4 million), higher base rates on variable interest facilities as well as overall higher debt balances. Other net financial expenses amounted to €18 million (H1 2022: €16 million).

The largest impact on net financial expenses has been foreign exchange and derivative movements leading to a €15 million loss (H1 2022: €4 million gain), mainly due to the weakness of the Argentinian Peso, Turkish Lira, Mexican Peso and US Dollar. The Balance Sheet Translation loss was €23 million, of which €10 million is realised. This is partially offset by derivative gains of €8 million, being gains on foreign exchange contracts used by the Group to manage the volatility arising from Balance Sheet Translation and embedded derivatives in sales contracts.

Adjusted net financial expenses amounted to €41 million, following a €10 million adjustment mainly due to (i) €5 million cost of bridge loans in India used to fund M&A; and (ii) a further €3 million non-cash present value adjustment of the provision for the unfavourable contract required to satisfy EU remedies at the time of the RHI Magnesita merger. Guidance for finance costs for the full year remains around €65 million, consisting of €40 million of net interest cost and €25 million of other net finance expenses.

Reported profit before tax was €111 million (H1 2022: €142 million). Total tax for H1 2023 in the income statement amounted to €28 million (H1 2022: €38 million), representing a 25% reported effective tax rate (H1 2022: 27%).

On a reported basis, the Group recorded a profit after tax of €83 million (H1 2022: €104 million) and earnings per share of €1.71 (H1 2022: €2.06).

Adjusted profit before tax was €159 million (H1 2022: €169 million), and the respective adjusted effective tax rate is 24% (H1 2022: 24%). On an adjusted basis, profit after tax was €121 million (H1 2022: €129 million) and adjusted earnings per share for H1 2023 were €2.53 per share (H1 2022: €2.58 per share), which is stated after excluding other income and expenses and restructuring charges (€16 million) and other financial income and expenses (€10 million). The full year adjusted effective tax rate is expected to be between 23-25% in 2023.

^1.  EBITA reconciled to revenue above.

^2.  Total issued and outstanding share capital as at 30 June 2022 was 47,112,047. The Company held 2,365,658 ordinary shares in treasury. The weighted average number of shares used for calculating basic earnings per share in H1 2023 is 47,037,581.

^3.  Numbers may not cast due to rounding.

^4.  Excluded items of €16 million to reported EBITA include €11 million relating to non-recurring restructuring costs and €5 million M&A integration costs in the Period. For further details see APM reconciliation for Adjusted EBITA below.

Cash flow and working capital

Adjusted operating cash flow, which is presented to reflect net cash inflow from operating activities before tax and net finance expenses, was €228 million for H1 2023 (H1 2022: €(84) million), reflecting strong cash generation from increased profitability, working capital release and low capital expenditure. Cash flow conversion, calculated as Adjusted operating cash flow as a percentage of Adjusted EBITA, increased to 114% in the Period (H1 2022: (45)%).

Working capital excluding M&A¹ reduced to €834 million pre-M&A (30 June 2022: €996 million; 31 December 2022: €892 million) driven by a reduction in inventories and accounts receivable, offset by a decrease in accounts payable due to lower raw material costs and purchases. Including working capital investments related to new M&A, working capital increased to €940 million.

The Group has improved customer service levels and delivered stronger pricing following its decision to carry higher inventory levels throughout 2022 and is now seeking to maintain working capital intensity levels at around 25% during 2023. Working capital intensity was slightly above this level at the end of the Period, at 26.0%, due to higher working capital intensity in recently acquired businesses.

Inclusive of all M&A, working capital intensity, measured as a percentage of the last three months' annualised revenue, decreased to 26.0% (H1 2022: 29.3%). Accounts receivable intensity was 10.7% (H1 2022: 11.8%) and accounts payable intensity was 13.9% (H1 2022: 16.0%). Inventory intensity stood at 29.1% (H1 2022: 33.5%).

¹ Excludes working capital associated with MIRECO, SÖRMAS, DGSB, DBRL, Hi-Tech, Chongqing and Jinan New Emei. Comparative figures for prior year periods have not been adjusted.

The Group decreased its inventory levels excluding M&A to €974 million (30 June 2022: €1,138 million; 31 December 2022: €1,030 million). Inventory volumes for the base business (excluding M&A) decreased to 591kt from 606kt at year-end 2022 and were significantly lower than the 716kt recorded at the end of H1 2022, as production intentionally lagged shipments to reduce inventory coverage to targeted ratios. Including the effect of M&A during the Period, inventory decreased versus the prior year to €1,053 million (30 June 2022: €1,143 million).

Accounts receivable excluding M&A decreased to €278 million at 30 June 2023 (30 June 2022: €402 million; 31 December 2022: €364 million), despite higher finished goods prices, as the Group implemented various initiatives to reduce overdue payments. Including M&A, Accounts receivable increased to €389 million. Accounts receivable is calculated as trade receivables excluding factoring plus contract assets less contract liabilities and downpayments received, and a full reconciliation can be found in the APMs section.

Accounts payable excluding M&A was €418 million (30 June 2022: €544 million; 31 December 2022: €501 million) due to lower volumes and pricing of raw materials purchased, reflect the subdued demand environment. Including M&A, accounts payable increased to €502 million.

Working capital financing, used to provide low-cost liquidity and support the Group's commercial offering to customers, stood at €310 million on 30 June 2023 (30 June 2022: €320 million; 31 December 2022: €314 million), comprising €265 million of accounts receivable financing (factoring) and €45 million of accounts payable financing (forfaiting). Working capital financing levels vary according to business activity, and the Board has set a ceiling of €320 million.

The increase in working capital of €22 million since 31 December 2022 was mainly driven by the first-time consolidation of newly acquired businesses of €67 million, which was offset by a €49m reduction in working capital in the base business prior to M&A and €4m of other items including unfavourable foreign exchange movements.

The Group incurred €63 million of capital expenditure (H1 2022: €58 million), of which €25 million was maintenance related, €36 million was expansionary capex and a further €2 million from M&A related capex. Full year guidance for project capital expenditure is unchanged at €200 million. This comprises €85 million of maintenance capex, €95 million of expansionary capex and a further €20 million of maintenance and integration capex towards new acquisitions.

Net cash interest payments on net debt and further refinancing costs amounted to €23 million in the Period (H1 2022: €12 million).

Cash expenditure on acquisitions (excluding working capital investments) in the Period amounted to €185 million, which was partly funded by the proceeds of a QIP by RHI Magnesita India Ltd, raising approximately €100 million in April 2023. The QIP is to be followed by an equity investment of €22 million by the Group in RHI Magnesita India Ltd via a Preferential Issue which is expected to complete in Q3 2023. Total change in net debt from M&A in the Period was €256 million, inclusive of (i) €185 million of cash consideration paid; (ii) €23 million of working capital investments into newly acquired businesses in addition to opening balances on acquisition, and (iii) €48 million of net debt consolidated on acquisition.

¹ Further detail on the adjustments can be found in Alternative Performance Measures section.

Financial position

Net debt at 30 June 2023 was €1,124 million, comprising total debt of €1,814 million, leases of €70 million and cash and cash equivalents and marketable securities of €760 million.

As at 30 June 2023, total leases amounted to €70 million (H1 2022: €54 million), which under IFRS 16 is included in the Company's net debt position.

The Group's pro forma leverage position has decreased to 2.1x net debt to EBITDA (31 December 2022: 2.3x) and has decreased by 0.6x since H1 2022 (30 June 2022: 2.7x). The Group was able to reduce gearing despite a cash outflow of €173 million on inorganic investments during the Period, given its strong operating cash flows and the successful QIP raising €100 million in India.

Including 12 months of historic EBITDA contributions from businesses acquired during the Period, the Group's leverage position further decreased to 2.1x.

Available liquidity for the Group at 30 June 2023 was €1,360 million, including undrawn committed facilities of €600 million and cash, cash equivalents and marketable securities of €760 million.

The Group has debt maturities of €88 million scheduled in the second half of 2023, of which €58 million is short-term debt that can be rolled into 2024, and €136 million of maturities in 2024.

In April 2023, the Group issued a €170 million ESG-linked Schuldschein bond with average maturity of five years and refinanced an existing bilateral Term Loan, increasing the total loan amount from €115 million to €150 million and extending the maturity date to 2026. The refinanced Term Loan is now also ESG-linked.

Out of the total gross debt of €1,814 million, 97% is denominated in Euro. The floating to fixed ratio of the gross debt is 34% floating to 66% fixed and the weighted average cost of debt as at 30 June 2023 was 2.92%, including swaps.

Return on invested capital

Return on invested capital (ROIC) is used to assess the Group's efficiency in executing its capital allocation strategy, which is aimed at enabling organic growth, disciplined M&A and shareholder returns.

Group ROIC in H1 2023 was 10.4% (H1 2022: 10.3%), from a total of €2,973 million of invested capital (H1 2022: €2,692 million) and €154 million recorded net operating profit after tax (NOPAT) (H1 2022: €139 million). ROIC for raw materials assets was 9.4% (H1 2022: 16.9%), from a total of €454 million of invested capital (H1 2022: €467 million) and €21 million NOPAT (H1 2022: €40 million). ROIC for refractory assets was 10.6% (H1 2022: 9.0%), from a total of €2,519 million of invested capital (H1 2022: €2,225 million) and €133 million NOPAT (H1 2022: €100 million).

PRINCIPAL RISKS AND UNCERTAINTIES

The Group has an established risk management process based on a formally approved framework and regular risk surveys among functional and operational managers aimed at systematically identifying, assessing and mitigating risks and uncertainties in the Group. 

Material and major risks with potentially high impacts on the Group, its results or its ability to achieve its strategic objectives are reviewed regularly by the Board.

The risks considered by the Board to be the principal risks were presented in the 2022 Annual Report, which is available on the Group's website at www.rhimagnesita.com. 

The Board has reconsidered the principal risks and uncertainties of the Group, assessed the broader macro and external risk environment and have determined that those risks reported in the 2022 Annual Report remain relevant for the remaining half of the 2023 financial year. Emerging risks were considered and evaluated but were not significant enough to impact the principal risks.

The risk likelihood and/or potential impact of three out of the ten principal risks have changed during H1 2023, as highlighted in the summary table below. 

The regulatory and compliance risks increased due to an overall more complex regulatory environment primarily as a result of the Russia-Ukraine conflict and the post-COVID-19 challenges after a high number of employees have been working remotely for an extended period. 

Overall, RHIM's risk landscape has improved as a result of an upgraded organisational capacity to execute strategy. 

The risks may occur independently from each other or in combination. If they occur in combination, their impact may be reinforced. The Group might be facing other risks than the ones mentioned here, some of them being currently unknown or not considered to be material. The updated comprehensive analysis of the principal risks and emerging risks faced by RHI Magnesita will be included in the 2023 Annual Report.

RELATED PARTY TRANSACTIONS

RHI Magnesita enters into arrangements with a number of its subsidiaries and affiliated companies in the course of its business. These arrangements relate to service transactions and financing agreements and RHI Magnesita treats these arrangements as related party transactions. Furthermore, RHI Magnesita includes transactions with key management personnel as related party transactions. As of the balance sheet date, 30 June 2023, there have been no significant changes in the related party transactions from those described in RHI Magnesita's 2022 Annual Report. More information can be found in note 20 of the Condensed Consolidated Interim Financial Statements.

GOING CONCERN

In considering the appropriateness of adopting the going concern basis in preparing the Condensed Consolidated Interim Financial Statements, the Directors have assessed the potential cash generation of the Group and considered a reverse stress scenario that models a breach of the Group covenant under a very severe but plausible potential economic downturn. This assessment considers the period up to the subsequent financial year end, 31 December 2024, for any indicators that the going concern preparation is not appropriate.

The reverse stress test determines how much volumes could reduce before breaching the Group's debt covenants and adjusting for price deflation. Further examples of mitigating actions within management control would be taken under this scenario, including fixed cost, working capital and SG&A reductions or deferring capital expenditure but these were not incorporated in the downside modelling.

The Directors have also considered the Group's current liquidity and available facilities. As of 30 June 2023, the Group balance sheet reflects cash and cash equivalents of €760 million. In addition, the Group has access to a €600 million Revolving Credit Facility (RCF), which is currently undrawn and not relied upon for the purpose of the going concern assessment. The Group is in compliance with the debt covenant.

On the basis of the assessment performed, the Directors consider it is appropriate to continue to adopt the going concern basis in preparing the Condensed Consolidated Interim Financial Statements for the period ended 30 June 2023.

ALTERNATIVE PERFORMANCE MEASURES (APMs)

Definitions of APMs used by the Group are set out below, including the purpose and usefulness of each APM and a reconciliation to the nearest IFRS equivalent measure, or a reference to a reconciliation appearing elsewhere in this document. In general, APMs are presented externally to meet investor and analyst requirements for clarity and transparency of the Group's underlying financial performance. APMs are also used internally in the management of the Group's business performance, budgeting and forecasting. APMs are non-IFRS measures which enable investors and other readers to review alternative measurements of financial performance, but they should not be used in isolation from the main financial statements. Commentary within the Annual Report, 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 and context affecting the Group's financial performance. Readers are strongly encouraged not to rely on any single financial measure and to carefully review the Group's reporting in its entirety.

Performance APMs

Adjusted EBITDA

Adjusted EBITDA is a key non-IFRS measure that the Executive Management Team ('EMT') and Directors use internally to assess the underlying financial performance of the Group and is viewed as relevant to capital intensive industries. The ratio of Net Debt to Adjusted EBITDA is used as a measure of financial gearing.

Adjusted EBITDA is defined as EBIT, as presented in the Condensed Consolidated Statement of Profit or Loss, before amortisation, depreciation, and Excluded Items (see definition below).

Adjusted EBITA

Adjusted EBITA is a key non-IFRS measure that the EMT and Directors use internally to assess the underlying performance of the Group.

It is determined consistently with Adjusted EBITDA, but includes depreciation expense of property, plant and equipment to reflect the wear and tear cost and future replacement of productive assets on the Group. 

Adjusted EPS

Adjusted EPS is a key non-IFRS measure and one of the Group's KPIs (as reflected on pages 26-27 of the 2022 Annual Report). It is used to assess the Group's underlying operational performance, post tax and non-controlling interests on a per share basis.

This measure is based on Adjusted EBITA after finance income and expenses, taxes, share of profit or loss from associates and joint ventures and non-controlling interest. Share of profit or loss from associates and joint ventures is adjusted to exclude impairments and gains or losses recognised on disposals.

It excludes finance income and expenses, including foreign exchange, that are not directly related to operational performance. This includes the non-cash present value adjustments for the unfavourable contract that was required to satisfy EU remedies put in place at the time of the RHI and Magnesita merger in 2017.

Taxes are adjusted to remove the impacts of items already excluded as well as certain tax impacts that do not affect the underlying performance of the business.

Excluded items

Items that are excluded (Excluded Items) in arriving at the Group's Adjusted measures of Adjusted EBITA, EBITDA and EPS include:

Other income, other expenses and restructuring expenses as reflected on the Statement of Consolidated Profit and Loss as well as gains and losses within Interest income, interest expenses and other net financial expenses that are non-recurring in nature and not reflective of the underlying operational performance of the business. Excluded items include restructuring related provisions, costs in relation to corporate transactions and other non-recurring costs. The tax impacts of the above Excluded Items are also adjusted for.

Cash flow performance measures

Operating Cash flow and Free cash flow

Adjusted operating cash flow is a key non-IFRS measure used by the EMT and the Directors to reflect the operational cash generation capacity of the Group before the cash impacts of Excluded Items (see definition above).

It is defined as Adjusted EBITDA adjusted for working capital items, changes in other assets and liabilities and capital expenditure and other non-cash items, such as share based payments. This APM is reconciled to Net Cash flow from operating activities as follows:

¹   As reflected in the Condensed Consolidated Statement of Cash Flows

Free cash flow is determined from the IFRS measures of Net cash flow from operating activities, net cash used in investing activities and net cash (used in)/provided by financing activities and excludes the cash impacts of purchases and disposals of business and subsidiaries, dividends paid to equity shareholders of the Group, share capital transactions with shareholders, proceeds and repayment of borrowings and current borrowings and repayment of leases.

Free cash flow is reconciled to Cash changes in net debt in the table in the Cash flow and working capital section. Cash changes in net debt is reconciled to Change in cash and cash equivalents in the Net Debt APM reconciliation.

Balance sheet

Liquidity

Liquidity comprises cash and cash equivalents, short term marketable securities and undrawn committed credit facilities. 

¹ As reflected in the Condensed Consolidated Statement of Financial Position

Net Debt

Net Debt is the excess of current and non-current borrowings, associated debt derivatives for which hedge accounting is applied and lease liabilities over cash and cash equivalents and short-term marketable securities. The Board uses this measure for the purposes of capital management. A reconciliation of Net Debt is included in note 11 to the Condensed Consolidated Interim Financial Statements.

¹ As reflected in the Condensed Consolidated Statement of Cash Flows

Working capital

Working capital consists of inventories plus trade receivables and other receivables minus trade payables and other payables. Working capital intensity provides a measure of how efficient the Company is in managing operating cash conversion cycles. It is measured as Working capital divided by trailing three-month revenues (annualised) and is expressed as a percentage.

¹ As reflected in the Condensed Consolidated Statement of Financial Position

Return on invested capital (ROIC)

ROIC reflects the annualised return on invested capital of the Group. It is calculated as NOPAT (net operating profit after tax) divided by total invested capital at the balance sheet date.

¹ As reflected in the Condensed Consolidated Statement of Profit and Loss

² As reflected in the Condensed Consolidated Statement of Cash Flows

¹   As reflected in the Condensed Consolidated Statement of Financial Position