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RNS
RHI Magnesita N.V.   -  RHIM   

Final Results

Released 07:00 27-Mar-2019

RNS Number : 0974U
RHI Magnesita N.V.
27 March 2019
 

RHI Magnesita N.V.

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

 

2018 Full Year Results

 

Strong organic growth, continued synergy delivery and rapid deleveraging

 

RHI Magnesita today announces its 2018 full year results for the year ended 31 December 2018 ("2018" or "the Year").

(€m unless stated otherwise)

 

2018

Adjusted2

2017

Adjusted2

pro-forma3 constant currency

Variance

 

Revenue

3,081.4

2,549.6

+21%

Adjusted EBITA

428.1

235.9

+81%

Adjusted EBITA margin

13.9%

9.3%

+460bps

Adjusted EPS

€5.31

n/a

n/a

Net debt

638.9

750.8

-15%

Net debt to adjusted EBITDA

1.2x

1.9x

-0.7x

 

 

 

2018

Reported

2017

Reported4

Revenue

3,081.4

1,950.1

EBITA

427.2

78.9

Profit before tax

246.0

(5.9)

EPS

€3.52

(€0.43)

 

 

 

 

1 A full table of reported and pro-forma results is provided on page 18

2 Adjusted measures are alternative performance measures excluding impairments, amortisation of acquisition intangibles and exceptional items to enable an understanding of the underlying performance of the business. Full details of the APMs can be found on page 17

3 Whilst the merger became effective on 27 October 2017, the pro-forma results were prepared as if the Group had existed since 1 January 2017. Full details on page 18

4 As reported in 2018 Annual Report following purchasing price allocation ("PPA") and other reclassifications

 

·     Strong revenue growth of 21% to €3,081 million reflecting increased volumes and commercial and raw material pricing gains:

Steel Division revenues up 15%;

Industrial Division revenues up 33%; and

Significant growth in China and India, with revenues up 36% and 21% respectively.

·     Adjusted EBITA up 81% to €428 million, representing an adjusted EBITA margin of 13.9%, 460bps higher than in 2017:

Continued successful integration with synergies of €70 million, exceeding the previously increased target;

Benefits of volume and price increases retained through integrated model; and

Improved efficiency and network optimisation, partially offset by short term operational issues at certain plants and some supply chain challenges during H2.

 

·     Free cash flow of €220.5 million, underpinned by an improvement in working capital intensity5 of 680bps to 15.4% and supporting robust organic growth, alongside significant expansion potential.

·     Leverage reduced significantly, from 1.9x to 1.2x net debt to adjusted EBITDA.

·     Financial performance and strong balance sheet underpin capital allocation policy:

Progressive dividend policy with proposed 2018 dividend of €1.50 per share, representing a 100% increase on 2017 and dividend cover of 3.5x6;

Incremental efficiency and growth capex programme starting in 2019; and

Flexibility to pursue acquisition opportunities in growth markets.

 

5 Working capital as a percentage of last three months annualised revenue

6 Calculated using adjusted earnings per share

 

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

"This was our first full financial year as a new company and I am delighted by the significant amount that we have achieved. Underpinned by the strength of the markets in which we operate, we have reported very strong financial results, successfully delivered on our integration plans and benefitted from the synergies of the combination.

More broadly, we continue to navigate well the challenges of the integration process and have set the business on the right path to support its ongoing strategic development.

Whilst some uncertainties exist in the macroeconomic outlook for 2019, robust customer markets in the medium term (albeit with some uncertainty in the short term) and positive trends in raw material pricing support our expectation to deliver modest organic revenue growth, with improved operating margins from 2018 levels, driven by continued synergy generation and further optimisation initiatives, in addition to further growth potential from acquisitions."

This announcement contains inside information for the purposes of Article 7 of Regulation 596/2014.

 

For further enquiries, please contact:

RHI Magnesita N.V.:     

Guy Marks, Head of Investor Relations

+44 7741 73068

 

Conference call

The Company will host a presentation for analysts and investors at the offices of Peel Hunt LLP, Moor House, 120 London Wall, EC2Y 5ET at 8:30am (GMT) on Wednesday 27 March 2019 to discuss the results. The presentation will also be available via webcast and conference call. The webcast can be accessed using the following link: https://www.investis-live.com/rhimagnesita/5c6c1ea4f562761200e15694/rhgs. 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: 471643

 

The Company's 2018 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 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 2018. 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 2018.

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 14,000 employees in 35 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 review

In 2018, RHI Magnesita has continued to consolidate its position as the driving force of the refractory industry and we have made good progress in setting the business on the right path to achieving its full potential.

The Group achieved very strong results in its first full year, following the combination of RHI and Magnesita in 2017, with revenue growth of 21%, and an increase in adjusted EBITA of 81%. The growth in revenues, which exceeded that of the underlying steel and industrial markets, demonstrates the continuing demand for the Group's breadth of technology, services and products. Positive customer demand was noted in the Steel Division in 2018, with strong revenues of €2,204 million and a gross margin of 23.7%. The Industrial Division reported revenue of €877 million, with a gross margin of 24.5%, benefitting from an overall healthy level of industrial demand.

In addition to capturing a significant proportion of this growth by virtue of the vertically integrated model, the Group has benefitted from its successful integration process, with the realisation of synergies and network optimisation supporting a significant step up in operating margins. Disappointingly, the Group experienced some operational and supply chain challenges in its European business during H2 which partially offset some of the margin gains. The root cause of these issues has been identified and improvement plans are in place. Management is confident that they will be substantially resolved in the current year.

Overall, the Group's integrated model continues to derive benefit from a structurally changed pricing environment. However, it is our ability to protect margin improvements, regardless of the pricing environment, that really matters. This can already be demonstrated in our results and will be further underpinned by the Company's solid growth strategy.

The Group has continued its successful integration during 2018, achieving synergies of €70 million, with a further €20 million expected in the current year, and remains on track to deliver €110 million during financial year 2020. The combination of top-line growth, synergy implementation and our vertically integrated model has led to an adjusted EBITA margin of 13.9%, representing a 460 basis points improvement on 2017.

The Company's financial position continues to strengthen, with growth in operational cash flow generation, materially improved working capital intensity and a reduction in annualised interest expense, as a result of the refinancing carried out in 2018. This has enabled the Group to significantly reduce net debt to 1.2x adjusted EBITDA.

In 2018, we refined our key strategic priorities and have identified the following four pillars which will support the Company's long-term growth and sustainability:

·     People: hire, retain and motivate talent and nurture a meritocratic, performance-driven, customer-focused and friendly culture;

·     Business model: the leading service and solution provider in the refractory industry with an extensive portfolio based on innovative technologies and digitalisation;

·     Markets: worldwide presence with strong local organisations and solid market positions in all major markets; and

·     Competitiveness: low-cost producer of technically advanced refractory materials with a safe production network.

As we adapt our business model to a changing world, we are aiming for a much higher share of sales through our solutions offering, leveraging the Company's innovative technologies and digitalisation, thereby creating additional value for our customers and further enhancing our competitiveness. We place great importance on developing and delivering higher quality products and services, which will in turn enable our customers to improve the quality of their operations and products.

As the number one refractory player in four out of the top ten steel markets, in addition to maintaining our leadership positions in the Americas, Europe and the Middle East, we intend to grow our share in key, under-penetrated geographies. We have seen significant success during the Year with our dedicated, local strategies for the Chinese and Indian markets, resulting in high levels of growth and market share gains. We will look to accelerate these in 2019, as well as applying focus to additional important steel markets where the Group has a limited presence.

One of the fundamental drivers of our business model and strategy bases itself on our internal expertise in innovative technologies and digitalisation. The Group continues to drive innovation, with significant opportunities in the fields of automation, robotics and recycling, and aims to devote 2.2% of total revenues per year to R&D and Technical Marketing. Investment in R&D and Technical Marketing in 2018 was c. €63 million7, representing 2% of revenues, marginally lower than the target as a result of foreign exchange movements and the merger combination process.

7 R&D portion is stated before subsidies and including opex and capex

Safety

The Company's intense focus on safety has already shown significant results, with a 60% improvement in the Lost Time Injury Frequency ("LTIF") rate in 2018 to reach 0.4. Nothing less than zero accidents is acceptable and therefore our focus on this important area will persist.

Board and Management team appointments

The Board has been further strengthened by the proposed appointment of two Non-Executive Directors - Fiona Paulus and Janet Ashdown. In April, our new CFO, Ian Botha, will be joining the Executive Management Team ("EMT") and Board. The composition of the EMT was complemented during the Year by the appointment of Jacqueline Knox as General Counsel & Company Secretary and post-Year end, Gustavo Franco as Chief Sales Officer.

Organic growth investment

Following the progress made in the integration process, as well as the much strengthened balance sheet and continued strong cash generation, we intend to initiate a number of targeted capital investment programmes to support the Group's medium term objectives. In addition to approximately €110 million of annual maintenance capital investment, we intend to deploy approximately €65 million of additional capital investment in 2019 to support growth, increase raw material capacity and improve efficiency. Of this, approximately half relates to the Group's dolomite expansion project in Chizhou, China and the remainder on smaller projects in York (US) and India.

Returns to shareholders

Underpinned by the strong performance of the business and given its strong annual cash generation, the Board has considered its long term dividend policy in the context of its capital allocation strategy.

For 2018, the Board has recommended a final dividend of €1.50 per share for the full financial year, equating to an increase of 100% over the previous year. This represents a dividend cover of 3.5x adjusted earnings per share.

Going forward, the Board's dividend policy will be to progressively increase ordinary dividends and to target a dividend cover of below 3.0x adjusted earnings over the medium term. Dividends will be paid on a semi-annual basis with one third of the prior year's full year dividend being paid at the interim.

Share buyback

The Board has taken the decision to commence the repurchase of shares on the open market to cover the requirement of the Long Term Incentive Plan ("LTIP") Scheme, with an intention to purchase up to 400,000 RHI Magnesita shares. When purchased, these shares will be held in Treasury until they are required to satisfy awards made under the LTIP.

Secondary listing on the Vienna Stock Exchange

The Board has considered the uncertain regulatory environment that resulted from the United Kingdom's decision to withdraw from the European Union. Due to these uncertainties the Board has decided that it is prudent for RHI Magnesita to apply for a secondary listing on a regulated market in the European Union. While the Group is a global business and has a strong presence in many jurisdictions, it has its head office in Vienna and was historically listed on the Vienna Stock Exchange. The Board has therefore decided that the most logical secondary listing location for RHI Magnesita is Vienna.

RHI Magnesita will continue to have a Premium Listing and be admitted to trading on the London Stock Exchange, which will remain its primary listing venue.

Outlook

2018 has been a year of tremendous progress and transformation, creating the leading company in the global refractories industry, successfully delivering on our integration plans and benefitting from the synergies of the combination. More broadly, we continue to navigate well the challenges of the integration process and have set the business on the right path to achieving its full growth potential.

We are expecting a more stable raw material market in 2019. Whilst pricing may ease from the current high levels, a new higher base looks likely to be maintained through the year on account of the structurally changed environment, especially in China.

Whilst some uncertainties exist in the macroeconomic outlook for 2019, robust customer markets in the medium term (albeit with some uncertainty in the short term) and positive trends in raw material pricing support our confidence in further growth, underpinned by our strategy. We expect to deliver modest organic revenue growth, with improved operating margins from 2018 levels, driven by continued synergy generation and further optimisation initiatives. In addition to this we expect further growth potential from acquisitions. We remain focused on driving margin improvement opportunities and strong cash flow generation, which will provide the foundation to support our capital allocation and progressive dividend policy.

I would like to thank our employees, shareholders, and customers for your continued support in what has been a critical year in the Company's development.

Financial review

An overview of Alternative Performance Measures ("APMs") is on page 17 along with a reconciliation of both the adjusted pro-forma results and reported results. All references to comparative 2017 numbers in the text below are to adjusted pro-forma figures at constant currency unless stated otherwise.

Adjusted pro-forma results

 

 

2017

2018

 

 

 

Constant currency pro-forma

 

Variance

Revenue

2,549.6

3,081.4

21%

COGS

(1,989.1)

(2,344.5)

18%

Gross Profit

560.5

736.9

31%

SG&A

(350.4)

(337.3)

(4%)

Other income & expenses

14.2

(0.9)

(106%)

EBIT

224.2

398.6

78%

Amortisation

(25.9)

(28.6)

11%

EBITA

250.1

427.2

71%

Adjusted EBITA

235.9

428.1

81%

Depreciation

(115.1)

(124.8)

8%

EBITDA

365.3

552.1

51%

Adjusted EBITDA

351.1

553.0

58%

 

Revenue

Revenue for 2018 amounted to €3,081 million, 21% higher than 2017. The significant growth in revenue is underpinned by strong growth in both the Group's Steel and Industrial Division results, as well as the favourable market conditions, with positive dynamics in customer industries as well as the raw material pricing environment.

Against this backdrop, with global steel production growing 4.6% in 2018, the Group's Steel Division revenue increased by 15% to €2,204 million (2017: €1,913 million). Given the Company's global position, with presence in all major refractory markets, the Industrial Division benefitted from the positive global GDP growth of 3.7% and was able to drive organic growth, increasing revenue by 33% in 2018 to €877 million (2017: €658 million.) Continued government controls in China have led to a significant reduction in raw material production output, thereby increasing market prices. Following the significant price increases in H2 2017, raw materials remained stable throughout 2018 and are expected to continue broadly at these new levels in 2019. The Group is able to derive benefit from this structurally altered environment given its level of backward integration, both in terms of cost control and customer supply security.

Gross profit

The Company reported gross profit of €737 million in 2018 (2017: €561 million), as a result of strong selling prices, a high degree of vertical integration and synergies, partially offset by operational issues at certain plants and some supply chain challenges in H2 2018 (which will be an important focus in 2019), representing a gross profit margin of 23.9%, 190 bps higher than in the previous year. On a divisional level, gross profit to steel applications reached €522 million, with 23.7% gross margin (2017: 23.1%8). Gross profit for the Industrial Division was €215 million, representing a gross margin of 24.5% (2017: 22.5%8).

8 Based on reported 2017 figures

 

SG&A

Total selling general and administrative expenses stood at €337 million (2017: €350 million), representing 11.0% of revenue in 2018 (2017: 13.7%). The implementation of the announced synergies in SG&A for 2018 and the higher fixed cost dilution in light of higher revenues for the Year also contributed to the overall performance. In 2019 we are targeting incremental synergies of €20 million, bringing the annualised total to €90 million, and remain firmly on track to deliver our €110 million 2020 synergy target. Importantly, whilst progress has been made throughout the Year in our efforts to optimise the Company's supply chain, governance, controls and compliance systems and to further develop the use of automation and digitalisation, further investments are required in order to build the foundations that will support the Group's ongoing strategic development.

Adjusted EBITA

Adjusted EBITA for the Year was €428 million, 81% above adjusted 2017 EBITA (€236 million). Adjusted EBITA margin for the Year was 13.9%, 460 bps higher than 2017, driven by significant revenue growth, greater operating efficiencies in both CoGS and SG&A, including the synergy benefits of €70 million brought about by the continued successful integration of the business and the benefits of our own raw material supply, both from a cost control and customer supply security perspective.

Net financial expenses

Net financial expenses in 2018 amounted to €163 million (2017: €82 million). This was mainly due to foreign exchange and derivative variances, the majority of which were non-cash, amounting to €81 million. These variances stem predominantly from:

·     The mark-to-market of intercompany loans with our Argentine subsidiaries (€25 million), as the Peso devalued c.50% against the USD during the Year;

·     As a result of the Group's hedging policy, which aims to match the currency exposure of our net debt to that of the EBITDA, the Group has incurred €19.6 million in derivative losses in 2018;

·     The mark-to-market of the foreign currency debt owed by Magnesita Refratários (€37 million), a Brazilian Real reporting entity, which have now been effectively all refinanced; and

·     c. €6 million FX gain on cash in foreign currencies held by Magnesita Brazilian entities.

Total net interest expenses for 2018 amounted to €39 million and €43 million was recognised in other net financial expenses, which were predominantly non-cash in light of the refinancing completed in August and other non-cash adjustments related to the provision for the unfavourable contract required to satisfy the EU remedies. The refinancing of the legacy debt, concluded on August 2018, has generated a reduction of approximately €24 million in the Company's annualised net interest expense.

Taxation

Tax efficiencies have been achieved as a result of the Group's integration and by the overall Group's performance, in particular of our mining operations in Brazil, thereby lowering the Company's effective tax rate for the year to 23.9%. RHI Magnesita's tax rate is sensitive to changes in the geographical dispersion of our worldwide profit or losses and tax regulations in each jurisdiction. Other key factors affecting the sustainability of the Group's effective tax rate are set out in note 44 to the financial statements in the 2018 Annual Report, which provides additional information on the Group's tax rate.

Purchasing price allocation ("PPA")

As announced on the Q3 trading update, the Group completed the PPA in relation to the merger between RHI and Magnesita. The process reviewed the fair value of fixed and intangible assets as a result of the merger, causing depreciation and amortisation to increase by €37 million and €11 million respectively in 2018.

Profit after tax and earnings per share

On a reported basis, the Company recorded a net profit of €187 million and earnings per share ("EPS") of €3.52 in 2018 (2017: €10.8 million net loss and €0.43 loss per share respectively).

Adjusted earnings per share for 2018 were €5.31, which is stated after excluding the following items, which principally relate to acquisition of Magnesita SA and related refinancing and foreign exchange effects:

·     Other income and expenses (€0.9 million);

·     Amortisation (€28.6 million); and

·     Net finance costs (€76.6 million): Impact of foreign exchange movements on certain of the Group's non-Euro denominated debt balance of €81 million, as detailed in the "Net Financial Expenses" section above, excluding the €19.6 million in derivative losses; One-off non-cash expenses related to the refinancing of the legacy debt (€10.6 million); Other non-recurring financial income and expenses (€4.4 million).

A reconciliation of the adjusted to reported results is set out in the table below.

 

2018 Reported

Items excluded from underlying performance

2018 Adjusted

EBITA

427.2

0.9

428.1

Amortisation

(28.6)

28.6

 

Net finance costs

(162.7)

76.6

(86.1)

Share of profit in joint ventures

10.1

 

10.1

Profit before tax

246.0

 

352.2

Income tax (23.9%)

(58.9)

(25.4)

(84.3)

Profit after tax

187.1

 

267.9

Profit attributable to shareholders

158.1

 

238.9

Earnings per share

€3.52

 

€5.31

 

Cash Flow

Cash flow from operations amounted to €462 million in 2018 (2017: €255 million), with the 81% increase being driven by the strong operating performance of the Group as well as efficiencies in working capital (with a 670bps year-on-year improvement in working capital intensity) as well as an overall higher profit for the Year.

Cash flow from financing activities amounted to an outflow of €245 million in 2018 as the Group focused on improving the debt amortisation profile and reducing recurring interest expense payments. As part of the previously announced debt restructuring programme to refinance the legacy debt, prepayments of the perpetual bond and certain short-term facilities were made during the Year, generating significant interest expense savings. As a result, the Company was able to negotiate more flexible covenants and increase the maturity profile of its debt amortisation schedule, such that more than 70% of the Group's debt maturities are due on or after 2022.

Operating and free cash flow

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

Cash Flow

2018

 

 €m

Adjusted EBITA

428.1

Working capital

48.7

Changes in other assets/liabilities

(40.9)

Capex

(122.6)

Depreciation

124.8

Operating free cash flow9

438.2

Income tax

(67.9)

Net interest expense

(62.8)

Restructuring and transaction costs

(52.2)

Dividend payout

(34.7)

Free cash flow

220.5

 

9 Operating free cash flow is presented to reflect net cash inflow from operating activities before certain items such as restructuring costs. See APMs for further detail.

Capital expenditure ("capex")

Cash flow from investing activities registered an outflow of €101 million and capital expenditure for 2018 stood at €123 million (2017 reported: €72 million). The ratio of capital expenditure to depreciation was 0.98x (2017: 1.09x) in line with RHI Magnesita's capital allocation policy and investment profile. Maintenance capex is guided at around €110 million in 2019 and beyond. As set out above, the Group will continue to invest in accordance with its strategic priorities, aligned with its newly defined capital allocation policy.

Working capital

Working capital intensity in 2018 saw significant improvements when compared to 2017 pro-forma figures, both in absolute terms and as a percentage of revenue. Cash flow generation from working capital in 2018 amounted to €49 million, driven primarily by improvements on accounts payable and accounts receivable as a consequence of improving our terms with both clients and suppliers. The overall positive impact on the balance sheet was partially offset by the higher inventory consumption in 2018, driven by increased sales volumes and higher raw material costs. Working capital as an absolute value stood at €511 million at the end of 2018. As a percentage of revenue, it was at 15.4% at Year-end (calculated using last three months annualised revenues), 680bps lower than the previous year (2017: 22.2%).

Net debt

Net debt at Year-end amounted to €639 million comprising total debt of €1,166 million, cash and cash equivalents of €491 million and marketable securities of €36 million. This compared to net debt of €751 million in 2017. In line with the Company's commitment to deleverage, net debt/EBITDA stood at 1.2x, 0.7x lower than 2017 as a result of the improved cash generation in 2018. This improvement was despite the outflows related to our restructuring costs and the payout to Magnesita's minority shareholders. See "Capital allocation policy" below for further detail on the Group's target leverage range.

Integrated Tender Offer

As previously announced, RHI Magnesita launched an Integrated Tender Offer ("ITO") to the minority shareholders of Magnesita in November 2018. At the end of the first close of the ITO on 10 December 2018, RHI Magnesita owned 85.2% of Magnesita and had issued a total of 3,518,008 new RHI Magnesita shares, along with €85.2 million of cash consideration. As at the final close of the ITO on 10 March 2019, RHI Magnesita owned 97.5% of Magnesita and had issued a total of 4,657,408 new RHI Magnesita shares, along with a total €115.4 million of cash consideration.

Successful delivery of synergies

The integration of RHI and Magnesita has led to significant cost saving synergies via procurement and supply chain management as well as operating cost efficiencies, all of which have exceeded initial expectations. In August 2018, the Company announced an increased synergy target of €110 million reduction in operating costs per annum (from €70 million) to be realised by 2020 and synergy benefits of at least €60 million in 2018. In 2018, synergies of €70 million were achieved.

Future growth

Through the cycle, the Group expects organic growth to exceed the broader refractories industry. In the short-term this expectation is supported by further market share gains, continued investment in R&D and opportunities in growth markets, particularly China and India. In the medium to long term, this expectation will also be supported by new business models and solutions. We anticipate that this nominal organic growth should average 1-3% per year through the cycle.

Alongside the organic growth opportunities, we expect to derive additional growth from acquisitions. Over time, we expect acquisitions to deliver average growth at levels similar to expected average organic growth.

Capital allocation policy

Since the merger, RHI Magnesita has made good progress in terms of integration and in the execution of its corporate strategy as well as delivering on the targeted synergies. This has led to leverage continuing to reduce significantly, reaching 1.2x net debt to adjusted EBITDA at Year-end.

The Board's capital allocation objective remains to support the long term Group strategy, providing flexibility for both organic and inorganic investment opportunities and delivering attractive shareholder returns over time. These opportunities will be considered against a framework of strategic fit, risk profile, rates of return, synergy potential and balance sheet strength.

Going forward, the Group intends to target leverage of between 0.5x and 1.5x net debt to EBITDA. Should a highly attractive acquisition opportunity present itself, the Group will consider exceeding 1.5x leverage for larger acquisitions but with the intention to de-lever quickly and back to the target leverage range within 24 months. If Group leverage is consistently below 0.5x the Group will consider additional options to return capital to shareholders, including share buybacks and special dividends, taking into account the opportunities available to the Group.

Returns to shareholders

For 2018, the Board has recommended a final dividend of €1.50 per share for the full financial year, representing an increase of 100% over the previous year. This represents a dividend cover of 3.5x against adjusted earnings per share.

Subject to approval at the AGM on 6 June 2019, the dividend will be payable to shareholders on 3 July 2019 to shareholder on the register at the close of business of 14 June. The ex-dividend date is 13 June 2019.

Operational review

Steel Division

 

Steel 

2018

2017

Variance

Revenue

€2,204.3m

€1,913.1m10

+15%

Gross margin

23.7%

23.1%11

+60bps

 

10 Adjusted pro-forma

11 Calculated based on 2017 reported figures

 

72% of total Group revenue was attributable to the Steel Division in 2018 (2017: 74%), amounting to €2,204 million, which represents an increase of 15% on the previous year. Gross profit for the Steel Division was €522 million, representing a gross margin of 23.7% (2017: 23.1%). Whilst overall there was a gross margin improvement in 2018, a deterioration was noted in H2 as a result of some operational issues at certain plants and supply chain challenges. These will be a focus for the Company in 2019. The root cause of the issues has been identified and improvement plans are in place. Management is confident of substantially resolving issues during the current year.

According to the World Steel Association, global crude steel production increased by 4.6% to 1,809 Mt in 2018 (+2.5% excluding China), with increases noted in all regions except the EU, providing a positive customer demand backdrop for the Group's Steel Division.

Europe

The Group realised a good level of organic growth, with revenue of €632 million, in spite of the subdued level of steel production in Europe and notwithstanding the plant production challenges encountered during the Year, which can be characterised by raw material shortages and long lead times (especially in dolomite). This increase was driven by product portfolio optimisation with a favourable pricing impact, and also influenced by our ability to pass on cost increases. The Company successfully mitigated long lead times and production/shipping delays (as a result of unplanned ex China orders) by close interdepartmental and customer cooperation. Furthermore, coordinated inventory measures were taken to reduce excessive stock and thereby free up capital employed without impacting customer satisfaction with our supply reliability.

Steel production in the EU decreased by 0.3% to 168 Mt. Steel consumption levelled in H2 2018, according to the European Steel Association ("Eurofer"), showing a 2.2% increase at closing when compared to 2017. High overall levels of steel consumption and stock building across the steel distribution chain drove stable demand during the Year amidst tensions over US tariffs on European steel and serious discussions on safeguards and tariff barriers in response to steel imports in the region, especially from China and other Asian producers.

As with North America, we see potential positive benefits in Europe from the reopening of the Chizhou plant and expect 2019 to present a steadier year in this region.

North America

Strong revenue of €535 million was recorded in 2018, with particularly strong performance in North America due to crude steel production rising in the US and Mexico, but also due to the Group's focus on key strategic initiatives, an enhanced portfolio of products, and market price adjustments, which outpaced the cost development.

Given the limited raw material sourcing options in North America, resulting in a high reliance on imported goods and raw materials, this region inevitably saw challenges in 2018. Customer sentiment was impacted by supply concerns on account of raw material developments in China, which significantly increased prices. There were specific challenges in 2018 to fulfil demand for dolomite-based shaped products, which was impacted by production capacities and increased steel pour.

The Group was able to derive benefit from its strong market position in North America, driven by its very competitive product and service offering across the full refractory portfolio, and also from its high level of backward integration for imported products from Europe and South America.

North America demonstrated strong growth in 2018, particularly when considering the maturity of the market, with steel production increasing by 4.1% to 120.5 Mt. The US saw a particularly high year on year increase of +6.2% to 86.7 Mt, with key drivers being the Government's infrastructure plan, the tariffs escalation with China and raw material prices.

Looking forward to 2019, we are encouraged by customer green- and brown-field projects as well as the positive impact of increased steel pour from those operations which were restarted during the Year. We also anticipate being in a position to derive some of the latent benefit from increases in Chinese raw material pricing that was not yet fully felt during 2018. The reopening of the Chizhou plant in China is expected to free up dolomite capacity in North American plants from the end of 2019 onwards, enabling additional deliveries to customers in the region.

Middle East & Africa ("MEA"), CIS & Asia Pacific

The Group succeeded in outperforming the market in India, China and Asia Pacific in 2018, which itself saw strong steel growth in all regions. Revenue reported for MEA and CIS in 2018 was €286 million, with €386 million in Asia Pacific, positively impacted by price increases, with the strongest improvements being seen in MEA. The Group contended with the issue of a limited level of backward integration in a majority of these regions during the Year; however, with a steadier raw material supply flow expected in 2019, a further improvement in performance is anticipated.

Steel production in Asia grew by 5.6% to 1,271 Mt. China increased by 6.6%, with its share of global production rising from 50.3% to 51.3%. India's production increased by 4.9%, overtaking Japan as the world's second largest steel producing country. The Middle East saw a significant increase in steel production of 11.7% to 38.5 Mt. Turkey decreased slightly to 37 Mt. Egypt, Morocco and Algeria increased steel production by 9.3% to 9.8 Mt12.

12 According to CRU statistics

Steel production in the CIS remained largely flat; +0.3% to 101 Mt. Ukraine production decreased by 1.1% to 21 Mt, continuing to be impacted by political instability and resultant lower business activity. The impact of lower steel prices and higher iron ore production costs at the start of 2019 is already being noted. There is an increased risk to steel producers in these regions on the basis of a growing preference for steel imports from Russia, Ukraine and China as opposed to utilising local steel production. It is specifically likely that regional electric arc furnace ("EAF") plants may suffer.

South America

The Group's market position in South America is strong, with a focus on the solutions model, benefiting from longstanding customer relationships and driving value for these customers. Revenue, which amounted to €366 million in 2018, was negatively impacted by country-wide industrial action of truck drivers in Brazil in May as well as the political situation in Venezuela, which has largely halted steel production in the country. However, profitability was increased in 2018 as a result of improved product mix, better technical results in performance contracts as well as merger-related synergies. The Company encountered some challenges with its stand-alone installation model in 2018 which negatively impacted on margins but we expect to generate positive gains in 2019, with a strong focus on a turnaround of this area.

2018 saw average growth in steel production, given the maturity of the market, with an increase of 1.3% in Latin America to reach 44 Mt. Brazil showed a steady pace in its economic recovery with steel production reaching 34.7 Mt in 2018 (+1.1% y-o-y).

Apparent steel consumption is forecast to rise by 6.2% to 22 Mt13 on the basis of expectations of the new Brazilian Government measures. Whilst our internal expectations take into account a certain level of conservatism, this still has the potential to driver further steel production increases in 2019.

13 Brazil Steel Institute

We will continue to reinforce the commercial strategy of our solution-oriented business in South America, with a focus on supporting the recovery of the steel industry.

Industrial Division

 

Industrial

2018

2017

Variance

Revenue

€877.1m

€658m14

33%

Gross margin

24.5%

22.5%15

+200bps

 

14 Adjusted pro-forma

15 Calculated on a statutory basis

 

With global GDP growth in 2018 of 3.7% (of which c. 3% is relevant to the business), the Group was able to derive benefit from a healthy overall industrial demand environment. Revenues in the Industrial Division accounted for 28% of total Group revenue (2017: 26%), with revenues of €877 million (2017: €658 million). Gross profit for the Industrial Division was €215 million, representing a gross margin of 24.5% (2017: 22.5%).

Cement / Lime

Cement/Lime in 2018 amounted to €321 million, driven by price increases and portfolio optimisation. This segment constituted 37% of Industrial Division revenue in 2018 and 10% of overall Group revenue.

The Company saw a successful turnaround of its Cement/Lime business during the Year, with positive effects from the renegotiation of contract terms being noted. Magnesite and dolomite raw material availability remained tight in 2018, with Chinese dead burned magnesia ("DBM") maintaining high price levels. In H1, cement continued to be impacted by long-term contracts and a very high order level from 2017. Long lead times, mainly in Europe, also led to delayed margin improvements. However, the Company took positive actions to mitigate these issues, shortening the impact of price increases by reducing contracts and price validity, and concentrating on the most profitable business areas. From H2 onwards, price increases were then evident in improving margins.

2018 was a year of steady refractory market growth and relative stability for cement and lime from a global market perspective, with some significant variances on a regional basis. China, the world's largest cement producer, continued its focus on environmental improvements and consequently on reducing mainly outdated cement capacities. Other countries, such as Brazil and those in the near Middle East can be characterised by their challenging economic environments, whereas Eastern Europe, Central Asia and North America all benefited from significant increases in demand.

The market demand for lime has been very stable. However, as a result of fewer projects in vertical shaft kilns - one of our key market areas - we saw lower volume and revenue compared to 2017. Nevertheless, we note an encouraging projects pipeline and positive current trend in early 2019. An additional focus on rotary kilns is also expected to lead to market growth, mainly in North America.

After the turnaround seen in this business in 2018, further upside is anticipated in 2019 driven by our ability to fully capture the positive effects of our backward integration.

Non-ferrous metals

Revenue contribution from the non-ferrous metals business represented 7% of the Group's overall revenue in 2018 and 25% of the Industrial Division, with strong revenues of €217 million in 2018, outpacing the market, which itself retained positive dynamics. The business unit performed well during the Year and saw the benefit of a number of projects with long-standing customers.

After a strong year in 2017, the upwards price trend of LME-listed base metals continued at the start of 2018. Following the implementation of tariffs and the commencement of international trade disputes, prices then decreased slightly with the change in the macro-economic environment, and the majority closed 2018 down on the previous year.

The business was predominantly driven by major repairs and standard business with existing customers. We saw strong orders from certain customers - with an example being greater orders than expected from Kazakhstan's ferro alloy industry, which positively impacted our results. The positive momentum seen in 2018 is expected to continue in 2019 and, looking forward we see significant opportunities for the non-ferrous metals business as a result of the evolution of e-mobility technology.

Other process industries

Other process industries mainly comprises glass, environment, energy and chemicals ("EEC") and mineral industries. In 2018, this segment accounted for 39% of the Industrial Division revenues and 11% of the Company's overall revenue, with revenues of €339 million. The global demand of refractories for the glass industry was high in 2018, enabling us to fully utilise the production capacities at all of our plants. Customer investments were strong and, based on our backwardly integrated portfolio for basic refractories, we were able to support this trend. Strong performance was recorded in this section of the business, mainly driven by pricing. The Company recorded growth which outpaced that of the market.

In the first complete business year since selling the non-profitable fused cast product line, we were able to compensate for the loss of fused cast revenue by focusing on the bonded product portfolio. Supported by new strategic measures and alongside a robust pricing strategy the glass business unit contributed strongly to the overall business plan, and provided significant improvements to margins.

In the EEC sector, revenue, shipments and profitability increased in 2018, albeit demand for most applications was relatively flat year on year, driven by volatile oil markets. 2018 saw strong demand in the pelletising industry, mainly in the Middle East, as well as an increase in business with our special waste customers worldwide. European and CIS demand was strong throughout 2018. As a result of the challenging oil and gas environment in Canada in 2018, in which a large proportion of investment projects were halted, this market saw subdued demand during the Year.

Opportunities in 2019 include the further broadening of the product portfolio, especially with regards to non-basic products for glass furnaces. The EEC market saw some positive impetus at the end of 2018, which is expected to continue in 2019.

Growth Markets: India

The Group has a strong local presence in India, with a leading market share, solid revenue streams and continuous growth. We operate through two production facilities and two sales offices and have long-standing relationships with blue chip customers.

2018 has seen the Indian steel market becoming the second largest in the world, further reinforcing the necessity for our continued emphasis on this geography. The Indian Steel Ministry has set a 300 Mt per annum steel capacity target by the end of 2030 which underpins the future of this industry.

Revenue for 2018 amounted to €252 million16. In spite of the lack of greenfield steel manufacturing projects during the Year, the Group's Indian business continued to grow ahead of steel market. In order to address increased customer demand, the Company has aligned its Indian business units to meet requirements. The Group has also increased capacity at its operations in certain areas to address demand. India's steel production and demand is expected to increase by 5% and 7% respectively in 2019, backed by growth in investment in infrastructure and construction projects, complemented by strong automotive demand. At present, the Indian steel industry is running at 78% utilisation rate (current capacity 130 Mt per annum). The demand outlook for next 3-5 years is likely to mirror the current GDP growth rate of 7% (which should enable India to overtake the UK in becoming the world's fifth largest economy). Ahead of the 2019 general election it is expected that Government of India may take measures to boost overall sentiment in the upcoming fiscal budget.

16 Includes €6.2 million revenue from Sri Lanka, Bangladesh, Nepal and Bhutan

Growth Markets: China

In order to develop and advance our position in the key growth market of China, we implemented a new business plan and built up a stronger, locally-focused management team as part of a 'China for China' strategy developed in 2018. We have been able to grow our market presence here as a result of the newly developed team, our tailor made products for China, increased capacities, enhanced inventory management abilities and an overall strong local focus on this geography. Demonstrating our focus in 2018, revenue in China amounted to €166 million17 in 2018.

17 Includes €0.1 million revenue from Hong Kong and Macau

Cognisant of the unique nature of the Chinese market, our new R&D team has developed specific, strategic and environmentally friendly products in cooperation with key customers. The team also collaborates with local universities and organisations. In addition to this, we have carried out significant efforts to increase our brand awareness in China and have implemented the Group's first Virtual Reality ("VR") project here.

Successful projects carried out in 2018 included:

·   The ramp up of the Group's brick plant in Chizhou, which is being conducted in a two phased process. Phase one is on track, with trial production currently underway and our first sales coming onto the market in early 2019;

·   Silo project: This project offers greater flexibility in the production of carbon bonded magnesia bricks for the domestic market (previously production from the carbon bonded magnesia brick site was predominantly exported). The Group now has three sites in Dalian.

·   ISO extension at Dalian sites: The Company is developing technology in the sphere of ISO bricks to enable it to achieve higher growth than the market. We are investing in additional capacity at the ISO site to enable shipping to the domestic market.

Given our local expertise in China, we are able to adapt and strengthen our business to overcome market challenges and adapt to trends. As an example of this, we have reorganised and widened the breadth of the Chinese steel department. Against the backdrop of a challenging automotive industry, we still see good opportunities in the steel sector. In addition to the increasing demand for SUV and MPVs (which consume more steel in their production), we are also seeing strong demand for new energy vehicles ("NEV"), with the overall sales of NEV increasing 68% year on year for the January to November period.

We also see significant opportunities with the shift to EAF steel plants and the consequent refractory demand. Automation is a key focus in the Chinese market and we are therefore concentrating on creating solutions which will enable our customers to increase the quality of their products, whilst lowering energy and production costs.

With the increasingly strict environmental policy in China, recycling will play a key role in our strategy for 2019 and, benefiting from our local expertise and market access, we are targeting our R&D work on creating 'China for China' products with increased use of SRM.

Innovation

The Company's technology leadership is built on the ambition, dedication and creativity of our employees. Innovation management gives structure to this creativity and ensures that ideas are converted to marketable products, services and new business models.

R&D underpins the Group's strategy to be the top service and solution provider in the refractory industry with an extensive portfolio based on innovative technologies and digitalisation.

Alternative performance measures ("APM"s)

APMs used by the Group are reviewed below to provide a definition and reconciliation 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 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 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

Whilst the merger became effective on 27 October 2017, the adjusted pro-forma results were prepared as if the combined Group had existed since 1 January 2017. The Pro-forma 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.

Given the changes in capital structure arising from the acquisition of Magnesita, the historical interest, tax and dividend charges are not deemed to be meaningful. As a result, adjusted pro-forma results have only been provided down to EBITA.

Figures presented at constant currency represent 2017 amounts retranslated to average 2018 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 ("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 foreign exchange effects, amortisation, restructuring expenses, one-off non-cash expenses related to the refinancing of the legacy debt, and other non-cash financial income and expenses that are not directly related to operational performance.

Operating free 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 revenues.

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. 

Reconciliation of pro-forma and reported results

Reconciliation of 2017 adjusted pro-forma results

This table shows the impact of purchasing price allocation ("PPA") and other adjustments on the adjusted pro-forma results, as they were presented in the 2017 Annual Report (i.e. taking into account a supposed full 12 months contribution from both companies), as well as retranslating to average 2018 exchange rates (2017 constant currency pro-forma).

 

2017

 

 

2017

2017

2018

 

 

Adjusted pro-forma18

PPA adjustment

P&L reclassifications19

Adjusted pro-forma20

 

Constant currency pro-forma

 

Variance

 Revenue

2,677.2

 

4.0

2,681.2

2,549.6

3,081.4

21%

 COGS

(1,999.3)

(49.5)

(31.4)

(2,080.3)

(1,989.1)

(2,344.5)

18%

 Gross Profit

677.9

(49.5)

(27.4)

600.9

560.5

736.9

31%

 SG&A

(399.8)

2.7

27.4

(369.6)

(350.4)

(337.3)

(4%)

 Other income & expenses

0.0

14.2

(0.1)

14.1

14.2

(0.9)

(106%)

 EBIT

278.1

(32.6)

0.0

245.5

224.2

398.6

78%

 Amortisation

(26.0)

(3.1)

0.8

(28.3)

(25.9)

(28.6)

11%

 EBITA

304.1

(29.6)

(0.8)

273.7

250.1

427.2

71%

 Adjusted EBITA

304.1

(43.8)

(0.7)

259.6

235.9

428.1

81%

 Depreciation

(84.7)

(41.1)

 

(125.8)

(115.1)

(124.8)

8%

 EBITDA

388.8

11.5

 

400.3

365.3

552.1

51%

 Adjusted EBITDA

388.8

(2.7)

0.1

386.2

351.1

553.0

58%

                 

18 As reported in the 2017 Annual Report

19 P&L reclassifications includes the reclassifications of bad debt, commissions, FX gains and losses and interest expenses between the P&L line items

20 Including the PPA adjustment and other reclassifications

Reconciliation of 2017 reported results

This table shows the impact of PPA and other adjustments on the reported 2017 results.

 

 

2017

PPA

P&L

2017

 

reported

adjustment

reclassifications21

reported after adjustments

Revenue

1,946.1

 

4.0

1,950.1

COGS

(1,485.6)

(30.5)

(27.3)

(1,543.4)

Gross Profit

460.5

(30.5)

(23.3)

406.7

SG&A

(292.5)

0.5

47.7

(244.3)

Other Expenses

(124.9)

1.6

26.4

(96.9)

EBIT

43.1

(28.4)

50.8

65.5

Amortisation

(13.6)

 

0.2

(13.4)

EBITA

56.7

(28.4)

50.6

78.9

Depreciation

(59.9)

(6.3)

 

(66.2)

EBITDA

116.6

(22.1)

50.6

145.1

 

21 P&L reclassifications includes the reclassifications of bad debt, commissions, FX gains and losses and interest expenses between the P&L line items

Principal risks

The risks identified in the following are those the Board considers to be principal to the business and which may have a significant impact on the results of the Group and on its ability to achieve its strategic objectives. They may occur independently from each other or in combination. In case they occur in combination, their impact may be reinforced. For full disclosure of risks, including our risk management framework, development of the risk identification and assessment process, risk appetite and mitigation as well as the link to strategy, see pages 42 to 47 of the 2018 Annual Report.

The below is not an exhaustive list of risks faced by the Company but encompasses those considered to be most material. Given 2018 was the first full financial year following the merger, it has been considered more appropriate to report on risk change throughout the Year in 2019. However, the principal risks were reviewed during the Year and amended to reflect the current situation, with risks related to the merger having been removed and the addition of significant changes in the competitive environment or speed of disruptive innovation, inability to execute a key strategic initiative or necessary adjustments to core operations and cyber and Information Security risk.

1.   Macroeconomic environment and condition of customer industries

Changes in the global economic environment and adverse political developments may have an impact on the Group's revenue and profitability.

The demand for refractory products is directly influenced by steel production, the investment climate, metal and energy prices and the production methods used by customers.

Due to the Group's cost structure, fluctuations in sales volumes have an impact on the utilisation of the production capacities, and consequently on the Group's profitability.

2.   Regulatory and compliance risks

We strive to establish a culture of compliance throughout the organisation. Nevertheless, like many other corporations which operate internationally, we are confronted with increasing regulatory complexity and are exposed to regulatory and compliance risks which may result in financial losses or operational restrictions.

In addition to this, sudden regulatory changes could impact the profitability of our operations and our need for investment.  

3.   Fluctuations in exchange rates and energy prices, increasing volatility of raw material prices

Due to the Group's global sales and production activities, revenue and profitability may be impacted by currency fluctuations. The Group relies on external supply of energy and raw materials for its production activities. Fluctuations in demand and/or supply from global markets (especially from China) have a significant impact on the prices and hence on the production costs of refractory products.

4.   Significant changes in the competitive environment or speed of disruptive innovation (new)

Customer demand for environmental features, digitalisation and services may evolve more quickly than expected. Increasing focus on digitalisation and services may lower the entry barriers for existing and new competitors.

Depending on the capacity of the Group to develop adequate products and services, this may present either an opportunity or a threat by increasing pressure on demand and margins.

5.   Inability to execute a key strategic initiative or necessary adjustments to core operations (new)

The Group's strategy includes numerous strategic initiatives including sales expansion, new product and service models, network optimisation and M&A projects. The failure to execute one of several of those initiatives because of external or internal circumstances may lead to lower than planned financial performance including loss of revenue and margin.

6.   Business interruption and supply chain disruption

As a producing company, the Group is exposed to business interruption risk resulting either from natural catastrophes, fire, machinery breakdown, supply chain disruptions or cyber-attacks. The Group partly relies on a small number of production sites or a small number of external suppliers for certain materials. The inability to produce or supply those materials may have a significant impact on the Group's capacity to produce and deliver its products.

7.   Environment, Health & Safety risks

Controlled emissions and usage of potentially hazardous materials are inherent to the production of refractory products. Regulatory changes in this area may result in higher production costs and additional investment needs. Also the risk of uncontrolled emissions at our production sites exists and may result in high financial losses and liabilities. Especially at our production sites, employees and contractors may be exposed to Health & Safety hazards which cannot be completely eliminated. Also our products may potentially cause accidents at the customers' sites.

8.   Cyber and information Security risk (new)

Our growth strategy (including mergers and acquisitions, entries into new geographies, the design of new products and digitalisation) results in a growing risk exposure. In addition, the Group is confronted with a fast-evolving cyber and information security threat landscape. The possible impact of cyber and information security risks could range from operational disruptions, loss of intellectual property, legal compliance issues/frauds, or significant reputation losses.

Statement of Directors' responsibilities

The full statement of Directors' responsibilities can be found on page 75 of the 2018 Annual Report. The Directors have prepared the Annual Report in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and the relevant provisions of the Dutch Civil Code. The Directors must not approve the Annual Report unless they are satisfied that it gives a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period.

With reference to section 5.25c paragraph 2c of the Dutch Act on Supervision, each of the Directors, whose names and functions are listed in the Governance section of the Annual Report, confirm that, to the best of their knowledge:

·     the Company's financial statements and the consolidated financial statements, which have been prepared in accordance with IFRS as adopted by the European Union and the relevant provisions of the Dutch Civil Code, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group;

·     the Annual Report gives a true and fair view on the situation on the balance sheet date, the development and performance of the business and the position of the Company and the Group companies of which the financial information is included in the Annual Report and includes a description of the principal risks and uncertainties that the Company faces; and

·     having taken all matters considered by the Board and brought to the attention of the Board during the financial year into account, the Directors consider that the Annual Report, taken as a whole is fair, balanced and understandable. The Directors believe that the disclosures set out in the Annual Report provide the information necessary for shareholders to assess the Company's position, performance, business model and strategy.

 

After conducting a review of management analysis, the Directors have reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors consider it appropriate to adopt the going-concern basis in preparing the Annual Report.

Directors are also required to provide a broader assessment of viability over a longer period which can be found on page 43 of the 2018 Annual Report (the "Viability Statement").

Forward looking statements

The consolidated financial statements presented here are consistent with the criteria of international accounting standards - IFRS issued by the International Accounting Standards Board - IASB, based on audited financial information. Nonfinancial information contained herein, as well as other operational information, were not audited by independent auditors and may include forward-looking statements and reflects the current views and perspectives of the management on the evolution of macro-economic environment, conditions of the mining and refractories industries, company performance and financial results. Any statements, projections, expectations, estimates and plans contained in this document that do not describe historical facts, and the factors or trends affecting financial condition, liquidity or results of operations, are forward-looking statements and involve several risks and uncertainties.

This document should not be construed as legal, tax, investment or other advice. This document does not constitute an offer, or invitation, or solicitation of an offer, to subscribe for or purchase any securities, and neither any part of this document nor any information or statement contained herein shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. Under no circumstances, neither the Company nor its subsidiaries, directors, officers, agents or employees be liable to third parties (including investors) for any investment decision based on information and statements in this document, or for any damages resulting therefrom, corresponding or specific.

The information presented or contained in this document is current as of the date hereof and is subject to change without notice. RHI Magnesita has no obligation to update it or revise it in light of new information and / or in face of future events, safeguard the current regulations which we are submitted to. This document and its contents are proprietary information of the Company and may not be reproduced or circulated, partially or completely, without the prior written consent of the Company.
 

Consolidated Statement of Financial Position

as of 31.12.2018

in € million

Notes

31.12.2018

31.12.20171)

ASSETS

 

 

 

 

 

 

 

Non-current assets

 

 

 

Goodwill

(11)

117.4

120.2

Other intangible assets

(12)

334.4

373.0

Property, plant and equipment

(13)

1,094.8

1,141.7

Investments in joint ventures and associates

(14)

21.8

21.4

Other non-current financial assets

(15)

18.0

25.1

Other non-current assets

(16)

34.3

24.2

Deferred tax assets

(17)

171.1

140.1

 

 

1,791.8

1,845.7

Current assets

 

 

 

Inventories

(18)

717.8

654.5

Trade and other current receivables

(19)

481.2

522.6

Income tax receivables

(20)

18.4

13.5

Other current financial assets

(21)

38.6

34.1

Cash and cash equivalents

(22)

491.2

442.4

 

 

1,747.2

1,667.1

 

 

3,539.0

3,512.8

 

 

 

 

 

 

 

 

EQUITY AND LIABILITIES

 

 

 

 

 

 

 

Equity

 

 

 

Share capital

(23)

48.3

44.8

Group reserves

(24)

752.2

574.0

Equity attributable to shareholders of RHI Magnesita N.V.

800.5

618.8

Non-controlling interests

(25)

84.8

226.9

 

 

885.3

845.7

Non-current liabilities

 

 

Borrowings

(26)

844.8

983.8

Other non-current financial liabilities

(27)

49.5

55.5

Deferred tax liabilities

(17)

78.4

64.7

Provisions for pensions

(28)

304.3

308.7

Other personnel provisions

(29)

78.5

82.5

Other non-current provisions

(30)

109.2

115.7

Other non-current liabilities

(31)

10.3

9.0

 

 

1,475.0

1,619.9

Current liabilities

 

 

 

Borrowings

(26)

321.6

241.8

Other current financial liabilities

(27)

15.0

17.4

Trade payables and other current liabilities

(32)

756.9

678.2

Income tax liabilities

(33)

32.2

16.1

Current provisions

(34)

53.0

93.7

 

 

1,178.7

1,047.2

 

 

3,539.0

3,512.8

 

 

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

Consolidated Statement of Profit or Loss

from 01.01.2018 to 31.12.2018

in € million

Notes

2018

20171)

Revenue

(35)

3,081.4

1,950.1

Cost of sales

(36)

(2,344.5)

(1,543.4)

Gross profit

 

736.9

406.7

Selling and marketing expenses

(37)

(128.9)

(101.2)

General and administrative expenses

(38)

(208.4)

(143.1)

Other income

(39)

43.9

10.4

Other expenses

(40)

(44.9)

(107.3)

EBIT

 

398.6

65.5

Interest income

(41)

9.7

5.6

Interest expenses on borrowings

 

(48.5)

(23.6)

Net expense on foreign exchange effects and related derivatives

(42)

(81.3)

(50.8)

Other net financial expenses

(43)

(42.6)

(13.6)

Net finance costs

 

(162.7)

(82.4)

Share of profit of joint ventures and associates

(14)

10.1

11.0

Profit/(Loss) before income tax

 

246.0

(5.9)

Income tax

(44)

(58.9)

(4.9)

Profit/(Loss) after income tax

 

187.1

(10.8)

attributable to shareholders of RHI Magnesita N.V.

 

158.1

(17.4)

attributable to non-controlling interests

(25)

29.0

6.6

 

 

 

 

 

 

 

 

in €

 

 

 

Earnings per share (basic and diluted)

(51)

3.52

(0.43)

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita and the changes in presentation.

 

Consolidated Statement of Comprehensive Income

from 01.01.2018 to 31.12.2018

in € million

Notes

2018

20171)

Profit/(Loss) after income tax

 

187.1

(10.8)

 

 

 

 

Currency translation differences

 

 

 

Unrealised results from currency translation

(7)

(20.3)

(49.3)

Deferred taxes thereon

(17)

0.9

1.7

Current taxes thereon

 

0.0

(0.4)

Reclassification to profit or loss

 

0.0

40.7

Deferred taxes thereon

 

0.0

(5.7)

Current taxes thereon

 

0.0

(0.5)

Cash flow hedges

 

 

 

Unrealised fair value changes

(53)

(6.8)

0.6

Deferred taxes thereon

(17)

1.8

(0.1)

Reclassification to profit or loss

(53)

0.0

0.5

Deferred taxes thereon

(17)

0.0

(0.1)

Share of other comprehensive income of joint ventures and associates

(14)

0.1

0.0

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

 

(24.3)

(12.6)

 

 

 

 

Remeasurement of defined benefit plans

 

 

 

Remeasurement of defined benefit plans

(28)

(11.5)

(11.3)

Deferred taxes thereon

(17)

3.0

2.9

Share of other comprehensive income of joint ventures and associates

(14)

0.0

(0.1)

Items that will not be reclassified to profit or loss

 

(8.5)

(8.5)

 

 

 

 

Other comprehensive (loss) after income tax

 

(32.8)

(21.1)

 

 

 

 

Total comprehensive income/(loss)

 

154.3

(31.9)

attributable to shareholders of RHI Magnesita N.V.

 

137.9

(30.7)

attributable to non-controlling interests

(25)

16.4

(1.2)

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

Consolidated Statement of Cash Flows

from 01.01.2018 to 31.12.2018

in € million

Notes

2018

20171)

Profit/(Loss) after income tax

 

187.1

(10.8)

Adjustments for

 

 

 

income tax

 

58.9

4.9

depreciation

 

124.8

66.2

amortisation

 

28.6

13.4

impairment losses of property, plant and equipment and intangible assets

0.0

19.8

income from the reversal of investment subsidies

 

(0.5)

(1.2)

write-ups/ impairment losses on securities

 

0.3

1.9

losses from the disposal of property, plant and equipment

 

1.4

1.5

gains from the disposal of securities and shares

 

(0.7)

0.0

losses from the disposal of subsidiaries

 

0.0

19.3

net interest expense and derivatives

 

92.5

13.3

share of profit of joint ventures and associates

 

(10.1)

(11.0)

other non-cash changes

 

18.1

82.0

Changes in

 

 

 

inventories

 

(56.7)

(89.3)

trade receivables

20.0

12.1

other receivables and assets

 

(29.5)

7.6

provisions

 

(59.4)

(15.2)

trade payables

 

55.1

111.1

prepayments received on orders

 

30.2

9.1

other liabilities

 

2.1

20.6

Cash generated from operations

 

462.2

255.3

Income tax paid less refunds

 

(67.9)

(41.9)

Net cash inflow from operating activities

(47)

394.3

213.4

Investments in subsidiaries net of cash acquired

0.0

45.1

Proceeds from the sale of subsidiaries net of cash disposed of

 

0.0

30.6

Investments in property, plant and equipment and intangible assets

 

(122.6)

(72.0)

Cash inflows from the sale of property, plant and equipment

 

2.9

2.7

Investments in/ cash inflows from non-current receivables

 

0.4

(0.2)

Investments in securities

 

(121.2)

(11.8)

Cash inflows from the sale of securities and shares

 

118.4

21.8

Dividends received from joint ventures and associates

 

11.0

10.8

Investment subsidies received

 

2.1

1.2

Interest received

 

8.2

5.1

Net cash (outflow)/inflow from investing activities

 

(100.8)

33.3

Share issue costs

 

(6.2)

(3.0)

Capital contribution to associates

 

(1.4)

0.0

Proceeds from sale of non-controlling interests

 

9.2

0.0

Acquisition of non-controlling interests

 

(80.1)

(0.6)

Dividend payments to shareholders of the Group

 

(33.6)

(29.9)

Dividend payments to non-controlling interests

 

(1.1)

(1.1)

Proceeds from non-current borrowings and loans

 

489.8

459.8

Repayments of non-current borrowings and loans

 

(650.9)

(375.6)

Proceeds from current borrowings and loans

 

245.1

0.0

Repayments of current borrowings and loans

 

(151.0)

0.0

Changes in current borrowings

 

26.4

(8.3)

Interest payments

 

(71.1)

(24.9)

Cash flows from derivatives

 

(20.1)

8.2

Net cash (outflow)/inflow from financing activities

(48)

(245.0)

24.6

Total cash flow

 

48.5

271.3

Change in cash and cash equivalents

 

48.5

271.3

Cash and cash equivalents at beginning of year

 

442.4

182.9

Foreign exchange impact

 

0.3

(11.8)

Cash and cash equivalents at year-end

(22)

491.2

442.4

 

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

 

 

 

 

Consolidated Statement of Changes in Equity

from 01.01.2018 to 31.12.2018

 

 

 

 

 

 

 

 

 

in € million

Share
capital

Additional
paid-in
capital

Mandatory reserve

 

Notes

(23)

(24)

(24)

 

31.12.20171)

44.8

165.7

288.7

 

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

 

 

 

 

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

 

 

 

 

01.01.2018

44.8

165.7

288.7

 

Profit after income tax

-

-

-

 

Currency translation differences

-

-

-

 

Market valuation of cash flow hedges

-

-

-

 

Remeasurement of defined benefit plans

-

-

-

 

Share of other comprehensive income of joint ventures and associates

-

-

-

 

Other comprehensive income after income tax

-

-

-

 

Total comprehensive income

-

-

-

 

Dividends

-

-

-

 

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

3.5

139.8

-

 

Sale of non-controlling interests without loss of control

-

-

-

 

Acquisition in non-controlling interests without change of control

-

-

-

 

Share-based payments

-

-

-

 

Transactions with shareholders

3.5

139.8

-

 

31.12.2018

48.3

305.5

288.7

 

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

 

 

 

 

 

 

 

 

 

in € million

Share
capital

Additional
paid-in
capital

Mandatory reserve

 

Notes

(23)

(24)

(24)

 

01.01.2017

289.4

38.3

-

 

Profit after income tax

-

-

-

 

Currency translation differences

-

-

-

 

Cash flow hedges

-

-

-

 

Remeasurement of defined benefit plans

-

-

-

 

Share of other comprehensive income of joint ventures

-

-

-

 

Other comprehensive income after income tax

-

-

-

 

Total comprehensive income

-

-

-

 

Dividends

-

-

-

 

Issue of ordinary shares related to business combinations

5.0

174.5

-

 

Share issue costs, net of tax

-

(8.8)

-

 

Change in non-controlling interests due to addition to consolidated companies

-

-

-

 

Transactions with shareholders

5.0

165.7

-

 

Disposal of defined benefit plans

-

-

-

 

Downstream merger from RHI AG to RHI Magnesita N.V.

(249.6)

(38.3)

288.7

 

Reclassifications

(249.6)

(38.3)

288.7

 

31.12.20171)

44.8

165.7

288.7

 

 


 

 

 

Group reserves

 

 

 

 

 

Accumulated other comprehensive income

 

 

 

 

Retained earnings

Cash flow hedges

Defined
benefit plans

Currency translation

Equity attributable
to shareholders
of RHI Magnesita N.V.

Non-controlling interests

Total equity

 

(24)

(24)

(24)

(24)

 

(25)

 

 

281.9

0.1

(107.7)

(54.7)

618.8

226.9

845.7

 

(6.0)

 

 

 

(6.0)

(0.6)

(6.6)

 

1.8

 

 

 

1.8

-

1.8

 

277.7

0.1

(107.7)

(54.7)

614.6

226.3

840.9

 

158.1

-

-

-

158.1

29.0

187.1

 

-

-

-

(8.5)

(8.5)

(10.9)

(19.4)

 

-

(5.2)

-

-

(5.2)

0.2

(5.0)

 

-

-

(6.6)

-

(6.6)

(1.9)

(8.5)

 

-

-

-

0.1

0.1

-

0.1

 

-

(5.2)

(6.6)

(8.4)

(20.2)

(12.6)

(32.8)

 

158.1

(5.2)

(6.6)

(8.4)

137.9

16.4

154.3

 

(33.6)

-

-

-

(33.6)

(1.2)

(34.8)

 

-

-

-

-

143.3

-

143.3

 

7.2

-

-

0.2

7.4

1.7

9.1

 

(59.4)

0.1

0.1

(10.9)

(70.1)

(158.4)

(228.5)

 

1.0

-

-

-

1.0

-

1.0

 

(84.8)

0.1

0.1

(10.7)

48.0

(157.9)

(109.9)

 

351.0

(5.0)

(114.2)

(73.8)

800.5

84.8

885.3

 

 

 

Group reserves

 

 

 

 

 

Accumulated other comprehensive income

 

 

 

 

Retained earnings

Cash flow hedges

Defined
benefit plans

Currency translation

Equity attributable
to shareholders
of RHI Magnesita N.V.

Non-controlling interests

Total
equity

 

(24)

(24)

(24)

(24)

 

(25)

 

 

331.0

(0.7)

(100.3)

(49.0)

508.7

15.3

524.0

 

(17.4)

-

-

-

(17.4)

6.6

(10.8)

 

-

-

-

(5.7)

(5.7)

(7.8)

(13.5)

 

-

0.8

-

 

0.8

0.1

0.9

 

-

-

(8.3)

-

(8.3)

(0.1)

(8.4)

 

-

-

(0.1)

-

(0.1)

-

(0.1)

 

-

0.8

(8.4)

(5.7)

(13.3)

(7.8)

(21.1)

 

(17.4)

0.8

(8.4)

(5.7)

(30.7)

(1.2)

(31.9)

 

(29.9)

-

-

-

(29.9)

(1.2)

(31.1)

 

-

-

-

-

179.5

-

179.5

 

-

-

-

-

(8.8)

-

(8.8)

 

-

-

-

-

0.0

214.0

214.0

 

(29.9)

-

-

-

140.8

212.8

353.6

 

(1.0)

-

1.0

-

-

-

-

 

(0.8)

-

-

-

-

-

-

 

(1.8)

-

1.0

-

-

-

-

 

281.9

0.1

(107.7)

(54.7)

618.8

226.9

845.7

 

 

PRINCIPLES AND METHODS

 

 

 

Notes

to the Consolidated Financial Statements 2018

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 nonferrous 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 2018 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. Under this method, revenue is offset against the expenses incurred to generate it, which are allocated to the functions production, sales and administration.

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.

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 26 March 2019 and is subject to adoption at the Annual General Meeting of shareholders on 6 June 2019.

2. Initial application of new financial reporting standards

In 2018, 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 2018.

Standard

Title

Publication
(EU endorsement)1)

Effects on RHI Magnesita
Consolidated Financial Statements

New standards and interpretations

 

 

IFRS 9

Financial Instruments

24.07.2014
(22.11.2016)

No material effects

IFRS 15

Revenue from Contracts with Customers

28.05.2014/
11.09.2015
(22.09.2016)

Timing differences in revenue recognition

IFRS 15

Clarifications to IFRS 15 Revenue from Contracts with Customers

12.04.2016
(31.10.2017)

Timing differences in revenue recognition

IFRIC 22

Foreign Currency Transactions and Advance Consideration

08.12.2016
(28.03.2018)

No effect

Various

Annual improvements to IFRS Standards 2014-2016 Cycle

08.12.2016
(07.02.2018)

No effect

Amendments of standards

 

 

IAS 40

Transfers of Investment Property

08.12.2016
(14.03.2018)

Not relevant

IFRS 2

Classification and Measurement of Share-based Payment Transactions

20.06.2016
(26.02.2018)

No effect

IFRS 4

Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts

12.09.2016
(03.11.2017)

Not relevant

1  According to EU Endorsement Status Report of 11.02.2019.

 

IFRS 9 "Financial Instruments"

IFRS 9 was published in July 2014 and endorsed by the European Union on 22 November 2016. It is to be applied effective 1 January 2018. IFRS 9 includes revised guidance on classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets and new general hedge accounting requirements. The standard replaces existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. RHI Magnesita implemented IFRS 9 on 1 January 2018 using the modified retrospective approach, meaning that the 2017 comparative numbers in the 2018 Consolidated Financial Statements are not restated. The impact of IFRS 9 as of 1 January 2018 amounting to €1.8 million was recognised in equity - additional information on that effect is disclosed in the table at the end of Note (2) summarising the effects of the initial application of IFRS 9 and IFRS 15. No reclassifications between different components of equity were required due to the initial application of IFRS 9.

With regard to the revised classification and measurement principles, IFRS 9 contains three classification categories: "measured at amortised cost", "fair value through other comprehensive income" and "fair value through profit or loss". The standard eliminates the existing IAS 39 categories: "loans and receivables", "held to maturity" and "available-for-sale". The resulting effect of the reclassification of the financial assets due to the adoption of IFRS 9 was immaterial.

Subsequent accounting differences may arise due to the new classification under IFRS 9. Shares in investment funds that were previously classified as "available-for-sale", with respective changes in fair value accounted for through other comprehensive income, are now classified as "fair value through profit or loss" as the payments made in connection with the funds do not solely constitute payments of principal and interest. Changes in fair value are therefore recognised in profit or loss. In addition, equity instruments from the "at amortised cost" and "available-for-sale" categories were classified as "fair value through profit or loss".

For the category "measured at amortised cost", IFRS 9 replaces the previously applied incurred loss model under IAS 39 with the expected loss model. The expected loss model implies a three-stage model for financial assets. Stage 1 is applied when the credit risk has not risen significantly and an investment grade rating exists. Consequently, a risk provision for credit losses expected from possible default events within the next twelve months has to be recognised. Stage 2 is applied when the credit risk of receivables has risen significantly, in which case a risk provision amounting to the expected credit losses that result from all default events over the remaining term of the instrument has to be recognised. Stage 3 is equivalent to default. IFRS 9 requires a simplified impairment approach for trade receivables and contract assets that do not contain a significant financing component. With this simplified approach, the risk provision is to be recognised according to Stage 2. Therefore, the expected credit losses are recognised over the remaining term of the instrument. The initial application effect in equity resulting from the impairment of trade receivables after deduction of deferred taxes amounted to €1.8 million, which is shown in retained earnings.

In accordance with the transition provisions for hedge accounting laid out in IFRS 9, the Group applied the IFRS 9 hedge accounting requirements prospectively from the date of initial application on 1 January 2018. The Group's qualifying hedging relationships in place as at 1 January 2018 also qualify for hedge accounting according to IFRS 9 and were therefore regarded as continuing hedging relationships.

The following table provides information about the impact of IFRS 9 only. It states each class of financial assets and financial liabilities as well as the respective carrying amounts under the original category IAS 39 compared to the new IFRS 9 category.

in € million1)

Original measurement category IAS 392)

Measurement category IFRS 92)

Carrying amount as per IAS 39 31.12.20173)

Carrying amount as per IFRS 9 01.01.2018

Interests in subsidiaries not consolidated (FAAC)

AC

FVPL

0.8

0.8

Available-for-sale investments (AfS)

FVOCI

FVPL

0.4

0.4

Available-for-sale securities (AfS)

FVOCI

FVPL

12.6

12.6

Available-for-sale shares (AfS)

FVOCI

FVPL

2.4

2.4

Securities designated as fair value through profit or loss (FAFVTPL)

FVPL

FVPL

2.3

2.3

Interest derivatives designated as cash flow hedges

-

-

1.5

1.5

Non-current receivables from disposal of subsidiaries (LaR)

AC

AC

2.6

2.6

Other non-current financial receivables (LaR)

AC

AC

2.5

2.5

Trade and other current receivables4) (LaR)

AC

AC

412.5

414.9

Other current financial receivables (LaR)

AC

AC

0.1

0.1

Financial assets held for trading - securities (FAHfT)

FVPL

FVPL

32.3

32.3

Financial assets held for trading - derivatives (FAHfT)

FVPL

FVPL

1.7

1.7

Cash and cash equivalents (LaR)

AC

AC

442.4

442.4

Financial assets

 

 

914.1

916.5

Liabilities to financial institutions (FLAAC)

AC

AC

953.0

953.0

Perpetual bonds (FLAAC)

AC

AC

215.3

215.3

Senior notes (FLAAC)

AC

AC

55.6

55.6

Other financial liabilities (FLAAC)

AC

AC

1.7

1.7

Financial liabilities held for trading - derivatives (FLHfT)

FVPL

FVPL

40.9

40.9

Liabilities to fixed-term or puttable non-controlling interests (FLAAC)

AC

AC

32.0

32.0

Contingent consideration for acquired subsidiaries (FLFVTPL)

FVPL

FVPL

0.6

0.6

Trade payables and other current liabilities5) (FLAAC)

AC

AC

507.0

507.0

Financial liabilities

 

 

1,806.1

1,806.1

1  FAAC: Financial assets at amortised cost.

    AfS: Available for sale financial instruments.

    LaR: Loans and receivables.

    FAHfT: Financial assets held for trading.

    FLAAC: Financial liabilities measured at amortised cost.

    FLHfT: Financial liabilities held for trading.

    FLFVTPL: Financial liabilities measured at fair value through profit or loss.

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

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

    FVOCI: Financial assets measured at fair value through other comprehensive income.

3  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

4  Thereof non-financial receivables per 01.01.2018: €110.1 million.

5  Thereof non-financial liabilities per 01.01.2018: €171.2 million.

In addition to this table, a change took place for receivables from long-term construction contracts previously accounted for using the percentage of completion method according to IAS 11. These receivables were reclassified from non-financial receivables to financial receivables and are now included in trade and other current receivables in accordance with IFRS 15.

IFRS 15 "Revenue from Contracts with Customers"

IFRS 15 replaces IAS 18 "Revenue" and IAS 11 "Construction Contracts" as well as the corresponding interpretations. RHI Magnesita Group applied IFRS 15 using the modified retrospective approach with effect as of 1 January 2018. The cumulative effect of initial application was therefore recognised as an adjustment to the opening balance of retained earnings as of 1 January 2018 without restating the comparable period. Changes from the initial application of IFRS 15 arose in the following areas:

·      Revenue from the delivery of products is recognised at the point in time when control over the products is passed to the customer, which is determined based on the individual Incoterms rules agreed in the customer contract. In the course of contracts for the delivery of refractory products, control of the goods is passed to the customer typically when physical possession has been transferred to the customer. Therefore, for the Incoterms rules CPT (Carriage paid to), CIP (Carriage and Insurance paid to) as well as for CFR (Cost and Freight) and CIF (Cost, Insurance and Freight) it was determined, that the time of passing control deviates from the time of transfer of significant risks and rewards. As a result, revenue will be recognised at a later point in time than previously under IAS 18. Therefore, the effect from the initial application of IFRS 15 resulted in a reduction of trade and other current receivables in the amount of €28.4 million and in an increase of inventories in the amount of €19.9 million. The negative equity effect from the reversal of revenue from the delivery of products, after deduction of deferred taxes, amounted to €6.6 million as of 1 January 2018.

·      Changes in presentation of expected penalty fees were necessary. Previously, expected penalty fees were recognised as provisions, whereas according to IFRS 15 they are considered as variable consideration and therefore shown as either a contract liability or refund liability. Consequently, a total amount of €4.3 million was reclassified from current provisions to trade payables and other current liabilities as of 1 January 2018 in the Consolidated Statement of Financial Position.

·      Receivables from long-term construction contracts in the amount of €11.7 million were reclassified to trade receivables within the same item of the Consolidated Statement of Financial Position trade and other current receivables as of 1 January 2018 because RHI Magnesita's right to consideration is unconditional.

The summary of the effects on the individual positions of the Statement of Financial Position from the initial application of IFRS 15 as of
1 January 2018 is shown in the table at the end of this Note. For the purpose of the transition to IFRS 15, the Group did not apply the available optional practical expedients.

The following tables show the effects of IFRS 15 for the Consolidated Statement of Financial Position as of 31 December 2018 and the Consolidated Statement of Profit or Loss from 1 January to 31 December 2018.

in € million

31.12.2018
as reported

Adjustments
IFRS 15

31.12.2018
without application of IFRS 15

Inventories

717.8

(25.0)

692.8

Trade and other current receivables

481.2

25.6

506.8

Current assets

1,747.2

0.6

1,747.8

ASSETS

3,539.0

0.6

3,539.6

 

 

 

 

Group reserves

752.2

5.5

757.7

Equity attributable to the shareholders

800.5

5.5

806.0

Non-controlling interests

84.8

0.1

84.9

Equity

885.3

5.6

890.9

Trade payables and other current liabilities

756.9

(10.5)

746.4

Income tax liabilities

32.2

1.7

33.9

Current provisions

53.0

3.8

56.8

Current liabilities

1,178.7

(5.0)

1,173.7

EQUITY AND LIABILITIES

3,539.0

0.6

3,539.6

 

in € million

as reported

Adjustments
IFRS 15

without application of IFRS 15

Revenue

3,081.4

32.3

3,113.7

Cost of sales

(2,344.5)

(25.0)

(2,369.5)

Gross profit

736.9

7.3

744.2

EBIT

398.6

7.3

405.9

Profit before income tax

246.0

7.3

253.3

Income tax

(58.9)

(1.7)

(60.6)

Profit after income tax

187.1

5.6

192.7

attributable to the shareholders

158.1

4.9

163.0

attributable to non-controlling interests

29.0

0.7

29.7

 

Summary of the effects of the initial application of IFRS 9 and IFRS 15

in € million

31.12.20171)

Effects of the initial application of
IFRS 9

Effects of the initial application of
IFRS 15

01.01.2018

Deferred tax assets

140.1

(0.6)

1.7

141.2

Non-current assets

1,845.7

(0.6)

1.7

1,846.8

Inventories

654.5

0.0

19.9

674.4

Trade and other current receivables

522.6

2.4

(28.4)

496.6

Current assets

1,667.1

2.4

(8.5)

1,661.0

ASSETS

3,512.8

1.8

(6.8)

3,507.8

 

 

 

 

 

Group reserves

574.0

1.8

(6.0)

569.8

Equity attributable to the shareholders

618.8

1.8

(6.0)

614.6

Non-controlling interests

226.9

0.0

(0.6)

226.3

Equity

845.7

1.8

(6.6)

840.9

Deferred tax liabilities

64.7

0.0

(0.2)

64.5

Non-current liabilities

1,619.9

0.0

(0.2)

1,619.7

Trade payables and other current liabilities

678.2

0.0

4.3

682.5

Current provisions

93.7

0.0

(4.3)

89.4

EQUITY AND LIABILITIES

3,512.8

1.8

(6.8)

3,507.8

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

 

3. Other changes in comparative information

Consolidated Statement of Financial Position

The Statement of Financial Position per 31 December 2017 was adjusted for the final fair values of the acquired assets and liabilities of Magnesita. The details of the effects are shown in Note (5) Group of consolidated companies under Acquisition of Magnesita.

Consolidated Statement of Profit or Loss

The Statement of Profit or Loss 2017 was adjusted for the effects of the subsequent measurement of the values determined in the final purchase price allocation of Magnesita.

Additionally, in order to improve comparability with other FTSE 350 companies and ensure better understanding of the entity's financial performance, certain items in the Statement of Profit or Loss 2017 were reclassified. As of 31 December 2017, the effect on revenue amounted to €4.0 million, on gross profit to €(23.3) million, on EBIT to €50.8 million and on net finance costs to €(50.8) million. Variable commissions in the amount of €(27.3) million as of 31 December 2017 were reclassified from selling and marketing expenses to cost of sales and the expenses for strategic and merger-related projects (2017: €24.4 million) are now presented in other expenses, instead of general and administrative expenses. Variable commissions are costs directly linked with revenue. This reclassification should ensure better interpretation of these costs. Foreign exchange gains and losses as well as the effects from derivatives were reclassified from other income and expenses to a separate line item in net finance costs which is called "Net expense on foreign exchange effects and related derivatives". This reclassification was done because the majority of foreign exchange effects are incurred due to financing activities and the effects from derivatives are related to foreign exchange effects.

Additionally, interest expenses on borrowings are now reported as a separate item due to its significance. Other net financial expenses include all remaining financial income and expenses. The information for the previous year was adjusted accordingly.

Consolidated Statement of Cash Flows

Cash flows from derivatives in the amount of €8.2 million were reclassified from cash flow from operating activities to net cash flow from financing activities because they are related to foreign exchange effects of financing activities.

Segment reporting

In 2018, RHI Magnesita reorganised its internal structure and reporting. The activities formerly concentrated in the Raw material segment are now split between the Steel and Industrial segment. Each segment serves different customers and generates exclusively external revenue. The gross profit serves the management of the RHI Magnesita Group for internal performance management. The profit of joint ventures and associates, net finance costs and income taxes are managed on a group basis and are not allocated. The information for the previous year was adjusted accordingly.

4. New financial reporting standards not yet applied

The Group has chosen to not early adopt the following new and revised IFRSs, that have been issued by the IASB, but are not yet mandatory:

Standard

Title

Publication
(EU endorsement)1)

Mandatory application for RHI Magnesita

Expected effects on RHI Magnesita Consolidated Financial Statements

New standards

 

 

 

IFRS 9

Prepayment Features with Negative Compensation

12.10.2017 (22.03.2018)

01.01.2019

No effect

IFRS 16

Leases

13.01.2016
(31.10.2017)

01.01.2019

Material effects expected

IFRIC 23

Uncertainty over Income Tax Treatments

07.06.2017 (23.10.2018)

01.01.2019

No effect

Amendments of standards

 

 

 

IAS 28

Long-term Interests in Associates and Joint Ventures

12.10.2017 (08.02.2019)

01.01.2019

No effect

1  According to EU Endorsement Status Report of 11.02.2019.

 

IFRS 16 "Leases"

General impact of application of IFRS 16 Leases

The accounting standard IFRS 16, which was issued in January 2016, supersedes IAS 17 "Leases" and the related interpretations and is applicable to financial years beginning on or after 1 January 2019. Accounting for the lessor according to IFRS 16 is comparable to the current regulations. In contrast, accounting will change fundamentally for the lessee with the application of IFRS 16. In future, most leases will have to be recognised as assets and liabilities in the Statement of Financial Position of the lessee, regardless of whether they are considered operating or financing leases under the previous criteria of IAS 17. 

According to IFRS 16, a lessee recognises a right of use, which represents his right to use the underlying asset, and a liability from the lease, which reflects the obligation of lease payments. Exemptions are provided for short-term leases and assets of minor value. Moreover, the type of expenses related to these leases will change since IFRS 16 replaces the straight-line expenses for operating leases with a depreciation charge for rights of use and interest expenses for liabilities from the lease. In the Consolidated Statement of Cash Flows, there is a shift from cash flow from operating activities to cash flow from financing activities since the repayment of leasing liabilities must in any case be shown as cash flow from financing activities. 

RHI Magnesita has chosen the modified retrospective application of IFRS 16 in accordance with IFRS 16:C5(b). Consequently, the Group will not restate the comparative information.

RHI Magnesita will make use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to apply to those leases entered or modified before 1 January 2019.

The change in definition of a lease mainly relates to the concept of control. IFRS 16 distinguishes between leases and service contracts on the basis of whether the use of an identified asset is controlled by the customer. Control is considered to exist if the customer has:

·        The right to obtain substantially all of the economic benefits from the use of an identified asset; and

·        The right to direct the use of that asset.

RHI Magnesita will apply the definition of a lease and related guidance set out in IFRS 16 to all lease contracts entered into or modified on or after 1 January 2019.

Impact on Lessee Accounting

IFRS 16 has no economic impact on the Group. It has no effect on how the business is run, nor on cash flows for the Group. It does however have a significant impact on the way the assets, liabilities and the Statement of Profit or Loss of the Group are presented, as well as the classification of cash flows relating to lease contracts.

On initial application of IFRS 16, for all leases (except as noted below), RHI Magnesita will:

·        Recognise right-of-use assets and lease liabilities in the Consolidated Statement of Financial Position, initially measured at the present value of the future lease payments;

·        Recognise depreciation of right-of-use assets and interest on lease liabilities in the Consolidated Statement of Profit or Loss;

·      Separate the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within operating activities) in the Consolidated Statement of Cash Flows.

Furthermore, on initial application RHI Magnesita will make use of the following practical expedients:

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

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

·        Treating leases for which the lease term ends within 12 months of the date of initial application as short-term leases.

For short-term leases (lease term of 12 months or less) and leases of low-value assets, the RHI Magnesita Group will opt to recognise a lease expense on a straight-line basis as permitted by IFRS 16.

Based on a preliminary assessment, it is expected that the RHI Magnesita Group will recognise right-of-use assets and corresponding lease liabilities of €62.0 million in respect of all these leases. The impact on profit or loss is estimated to be a decrease in other expenses by €13.3 million, an increase in depreciation by €12.6 million and an increase in interest expense by €0.6 million.

Under IAS 17, all lease payments on operating leases are presented as part of cash flows from operating activities. Under IFRS 16, the cash generated by operating activities is expected to increase by €13.3 million and the net cash outflow in financing activities is expected to increase by the same amount.

For existing finance leases RHI Magnesita does not expect an impact on the amounts recognised in the Group's Consolidated Statement of Financial Position.

The following financial reporting standards were 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

 

 

 

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

IAS 19

Plan Amendment, Curtailment or Settlement

07.02.2018

01.01.2019

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

Various

Annual Improvements to IFRSs 2015-2017 Cycle

12.12.2017

01.01.2019

No effect

1  According to EU Endorsement Status Report of 11.02.2019.

5. Group of consolidated companies

Changes in the group of consolidated companies in the previous year

Acquisition of Magnesita

On 26 October 2017, RHI Magnesita N.V. via its indirect, wholly-owned subsidiary Dutch Brasil Holding B.V. obtained control in Magnesita Refratários S.A. and its subsidiaries (Magnesita) after acquiring 50% plus one share and corresponding voting rights in Magnesita Refratários S.A. The acquisition led to a cash inflow of €50.2 million (purchase price paid of €117.3 million less acquired cash and cash equivalents of €167.5 million).

The fair values of the acquired assets and liabilities at the acquisition date have been adjusted according to IFRS 3 compared to the Consolidated Financial Statements 2017 over the course of the measurement period. The final fair values of the assets and liabilities recognised as a result of the acquisition are presented as follows:

in € million

Preliminary fair value

Adjustments made

Final fair value

Property, plant and equipment

439.0

251.2

690.2

Other intangible assets

161.4

160.2

321.6

thereof customer relationships

122.0

(20.0)

102.0

thereof mining rights

0.0

185.1

185.1

Investments in joint ventures and associates

9.9

(9.1)

0.8

Other non-current financial assets

4.3

0.0

4.3

Other non-current assets

16.3

0.0

16.3

Deferred tax assets

49.9

(35.5)

14.4

Inventories

244.7

1.0

245.7

Trade and other current receivables

175.6

(7.4)

168.2

Income tax receivables

9.2

0.0

9.2

Other current financial assets

42.7

0.0

42.7

Cash and cash equivalents

166.2

0.0

166.2

Assets held for sale

33.6

0.0

33.6

Non-current financial liabilities

(550.8)

0.0

(550.8)

Deferred tax liabilities

(0.3)

(91.6)

(91.9)

Provisions for pensions

(81.0)

0.0

(81.0)

Other personnel provisions

(1.5)

0.0

(1.5)

Other non-current provisions

(51.7)

(62.9)

(114.6)

Other non-current liabilities

(2.0)

0.0

(2.0)

Current financial liabilities

(131.4)

0.0

(131.4)

Current derivative financial liabilities

(0.2)

0.0

(0.2)

Trade and other current liabilities

(238.4)

(6.8)

(245.2)

Income tax liabilities

(10.1)

0.0

(10.1)

Current provisions

(25.8)

(21.4)

(47.2)

Liabilities relating to assets held for sale

(9.4)

0.0

(9.4)

Net assets

250.2

177.7

427.9

Non-controlling interest

(125.1)

(88.9)

(214.0)

Proportional share of net assets acquired

125.1

88.8

213.9

Goodwill

171.7

(88.8)

82.9

Purchase price

296.8

0.0

296.8

 

The goodwill of €82.9 million essentially reflects expected synergies achieved by optimising production capacities and cost structure as well as new business of the enlarged Group. Goodwill is not deductible for tax purposes. The goodwill has been allocated to cash-generating unit Steel - Linings in the amount of €82.1 million and to cash-generating unit Industrial - Raw Material in the amount of
€0.8 million.

The table below provides information on the carrying amount of goodwill:

in € million

 

Preliminary goodwill recognised per acquisition date as at 31 December 2017

171.7

Adjustments relating to business combination fair values

(88.8)

Exchange rate differences 2017

(1.4)

Goodwill recognised as at 31 December 2017

81.5

Exchange rate differences 2018

(1.7)

Goodwill recognised as at 31 December 2018

79.8

 

Non-controlling interests have been measured at their proportionate share of Magnesita's identifiable net assets.

Material adjustments to final fair values since prior reporting date

Intangible assets arising from non-patented technology and customer relationships were recognised in the purchase price allocation to the amount of €11.5 million and €102.0 million respectively. Discounted cash flow models were applied to value these intangible assets. The reason for the fair value adjustment of customer relations was that higher quality information was obtained over the course of the reporting period. Furthermore, since the valuation of property, plant and equipment was not completed as of 31 December 2017, valuation of intangible assets arising from customer relationships could not be considered final. The increase in the value of property, plant and equipment in the measurement period reduced the fair value of the customer relationships to a varying degree because of the associated higher contributory asset charges.

As at the previous financial reporting date, the preliminary fair value of property, plant and equipment was approximated by using mainly historical book values because the technical valuation was not completed at the majority of the production sites. After completion of the valuation of property, plant and equipment within the measurement period, fair value amounts to €690.2 million and was determined by external appraisers applying a replacement cost approach.

As part of the business combination, the Group recognised intangible assets for mining rights arising from three significant mines in Brazil and the USA. These were initially not recognised as at 31 December 2017, as insufficient data was available at that time. After finalisation of the purchase price allocation fair value of the mining rights amounts to €185.1 million. The intangible assets arising from mining rights were valued using discounted cash flow models, based on the life-of-mine plans as at the acquisition date. Expected cash flows are based on estimates of future production, margins, operating costs and forecast capital expenditure. The value of PPE items that form part of the mines (but valued separately) was deducted from the value of the mining rights in order to avoid double counting.

The total amortisation of the acquired technology, mining rights, and customer relationships in the current reporting period amounts to €11.2 million (11-12/2017: €2.2 million). The total depreciation of property, plant and equipment increased by €37.1 million in 2018
(11-12/2017: €6.3 million) as a result of the fair value adjustments.

A liability for an unfavourable contract was recognised as at the previous reporting date, the value of which has been adjusted and finalised during the measurement period. The fair value of the liability amounts to €109.3 million. This value was calculated using a discounted cash flow model based on foregone profits compared to market conditions, the term of the contract, assumptions of future costs and an appropriate discount rate. The provision for an unfavourable contract has been amortised by €10.0 million (11-12/2017: €1.6 million) in other income and €(8.7) million (11-12/2017: €(1.0) million) were accrued as interest expense in the current reporting period.

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 has 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 first close of the ITO, the Group acquired an additional 35.2% of shares in Magnesita, increasing its ownership from 50% plus one share to 85.2% as of 31 December 2018. The fair value of the consideration is €228.5 million and includes a cash part in the amount of €85.2 million, including transaction costs, and the issue of 3,518,008 new ordinary shares of RHI Magnesita N.V. These shares were delivered to the minority shareholders and admitted to trading on the London Stock Exchange's main market on 17 December 2018. The closing price of £36.62 per share on that day was used for the determination of the fair value of the issued ordinary shares totalling up to €143.3 million. The cash part of the consideration has been settled on 20 December 2018 and 35.2% of the Magnesita shares were transferred to the Group. The carrying amount of Magnesita's net assets in the Group's Consolidated Financial Statements on the date of acquisition was €450.0 million. Consequently, the carrying amount of non-controlling interests acquired amounts to €158.4 million. This transaction results in a decrease in equity attributable to shareholders of RHI Magnesita N.V. in the amount of €70.1 million.

Subsequent to the first close of the ITO, the remaining shareholders had three months to elect from the two options (''Supervening Acquisition Period"), which ended on 10 March 2019. These effects are disclosed in Note (63).

Companies of the RHI Magnesita Group

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 Mineração 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

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

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 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 the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete.  Those provisional amounts are adjusted within twelve months of the acquisition to reflect new information about facts and circumstances that existed as of the acquisition date.

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.

For step acquisitions the difference between the carrying amount to be transferred and the fair value at initial full consolidation, is realised through profit or loss.

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.

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 undernet 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. Non-monetary items in foreign currency are carried at historical rates.

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 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)

1 € =

31.12.2018

31.12.2017

2018

2017

ARS

43.10

22.93

32.58

18.65

BRL

4.44

3.96

4.29

3.60

CAD

1.56

1.50

1.53

1.46

CLP

793.69

735.00

753.18

733.37

CNY

7.87

7.78

7.81

7.61

INR

79.88

76.40

80.45

73.36

MXN

22.49

23.56

22.70

21.27

NOK

9.94

9.85

9.62

9.30

GBP

0.90

0.89

0.89

0.87

CHF

1.13

1.17

1.15

1.11

ZAR

16.46

14.75

15.45

15.02

USD

1.14

1.20

1.18

1.12

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.

Leased property, plant and equipment that qualifies as a finance lease, is capitalised at the market value of the asset or the lower present value in accordance with IAS 17. The leased assets are depreciated on a systematic basis over the useful life. The payment obligations resulting from future lease instalments are discounted and recorded as liabilities. Current lease payments are apportioned between a finance charge and the amortisation of the outstanding liability. As of the reporting date, the amount of property, plant and equipment leased through finance leases is low. All other leases are treated as operating leases with payments expensed.

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

 

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 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 RHI Magnesita Group the 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 the 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 RHI Magnesita's production process. These factors determine cash inflow to a significant extent and consequently form the basis for the CGU structures of RHI Magnesita.

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 also 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 10.1% and 13.0% in the year 2018. In the previous year, the discount rates ranged between 5.7% and 8.6%. The increase of the discount rate resulted from annual update of the peer group parameters as well as considering the location of the CGU's assets (as a cash outflows originator) in the discount rate determination methodology.

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 Long Term Plan 2019 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 also technological improvements, the growth rates for the individual CGUs are determined.

 

2018

2017

 

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

11.3%

0.9%

88.4

8.6%

0.9%

90.1

Steel Division - Flow Control

11.3%

0.9%

27.3

8.5%

0.9%

28.3

 

The remaining goodwill of €1.7 million (31.12.2017: €1.8 million) is spread among the remaining CGU's, all of them having sufficient headroom.

Result of impairment test

Based on the impairment test conducted in the financial year 2018, the recoverability of the assets was demonstrated in all CGUs.

As in the previous year, no reversals of impairments were made in the financial year 2018.

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, 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.

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 takes 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 regards 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 34.9% (31.12.2017: 12.5% to 35.0%) 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 initially measured at the transaction price according to IFRS 15 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).

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 income.

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. No provisions are necessary.

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 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 chosen on the basis of the interest on high-quality corporate bonds issued with adequate maturities and currencies are applied to determine the present value of pension obligations. In countries where there is no 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 according to 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 developed 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. The fair value of these options as well as any adjustments of the fair value are measured at every reporting date and 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 a contract obligation 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.

With regard to 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 also 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) the 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. Thus, only one single performance obligation, the performance of a management refractory service, exists. Further information is provided under Note (10). With regard 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. Thus, it is concluded that a significant reversal of revenue is highly unlikely once the uncertainty no longer exists. 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 (whatever 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 nine 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, nonferrous 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, 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 transaction price depends on the customer's production performance, (e.g. quantity of steel produced in the customer aggregate serviced) the management has determined that the promise to transfer each of the products and services to the customer is not separately identifiable from the other promises 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 single performance obligation, performance of a management refractory service, exists.

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 €1,427.4 million at 31 December 2018 (31.12.2017: €1,512.9 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 taking into account 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.

There was no triggering event in 2018.

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 2018 or by minus 10% in the contribution margin would not result in an impairment of goodwill recognised (carrying amount 31.12.2018: €131.2 million, 31.12.2017: €38.7 million) nor in an impairment charge to intangible assets with indefinite useful lives (carrying amount at 31.12.2018 and 31.12.2017: €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 a number of 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 orientation 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, however, 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).

 

 

31.12.2018

31.12.2017

in € million

Change of assumption
in percentage points
or years

Pension plans

Termination benefits

Pension plans

Termination benefits

Present value of the obligations

 

506.6

55.5

517.1

58.1

Interest rate

+0.25

(14.0)

(1.5)

(14.9)

(1.5)

 

(0.25)

15.0

1.5

15.7

1.6

Salary increase

+0.25

0.9

1.5

0.8

1.6

 

(0.25)

(1.7)

(1.4)

(0.7)

(3.5)

Pension increase

+0.25

10.3

-

10.6

-

 

(0.25)

(10.1)

-

(10.2)

-

Life expectancy

+1 year

17.2

-

18.3

-

 

(1) year

(17.3)

-

(23.6)

-

             

 

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 €162.2 million (31.12.2017: €209.4 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 which is further explained in Note (5) Group of consolidated companies.

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.

RHI Magnesita is continually adapting its global presence to better serve its customers and maintain its competitive advantage. As a result, in this way the Group maintains discussions with tax authorities about functions transferred between related parties and their exit value, however due to its nature, they do not impact the Group's accounts.

When determining the amount of the capitalisable deferred tax assets, an estimate of the management is required regarding the amount of future taxable income and the expected time. 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 €92.7 million (31.12.2017: €75.4 million) would have to be increased by €0.6 million (31.12.2017: €0.8 million) or reduced by €0.6 million (31.12.2017: €0.9 million).

NOTES TO THE CONSOLIDATED STATEMENT OF
FINANCIAL POSITION

 

 

 

 

11. Goodwill

Goodwill developed as follows:

in € million

2018

20171)

At beginning of year

122.1

40.2

Acquisitions of subsidiaries (Note 5)

0.0

85.3

Reclassified as held for sale

0.0

(0.4)

Currency translation

(2.8)

(3.0)

Cost at year-end

119.3

122.1

Accumulated impairment at beginning of year

(1.9)

(2.4)

Currency translation

0.0

0.1

Reclassification as held for sale

0.0

0.4

Accumulated impairment at year-end

(1.9)

(1.9)

Carrying amount at year-end

117.4

120.2

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

 

12. Other intangible assets

Other intangible assets changed as follows in the financial year 2018:

in € million

Mining rights

Customer relationship

Internally generated intangible assets

Other intangible assets

Total

179.2

100.0

47.6

143.1

469.9

(9.8)

(2.1)

0.0

(2.6)

(14.5)

0.0

0.0

2.9

1.2

4.1

0.0

0.0

0.0

(2.5)

(2.5)

0.0

10.8

0.0

(10.0)

0.8

169.4

108.7

50.5

129.2

457.8

0.8

1.1

30.2

64.8

96.9

0.0

0.0

0.0

(0.8)

(0.8)

3.9

6.5

3.9

14.3

28.6

0.0

0.0

0.0

(1.3)

(1.3)

0.0

10.2

0.0

(10.2)

0.0

4.7

17.8

34.1

66.8

123.4

164.7

90.9

16.4

62.4

334.4

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

 

Other intangible assets changed as follows in the previous year:

in € million

Mining rights

Customer relationship

Internally generated intangible assets

Other intangible assets

Total1)

0.0

0.0

45.9

114.0

159.9

(5.9)

(2.5)

(0.2)

(5.9)

(14.5)

185.1

102.5

0.0

36.1

323.7

0.0

0.0

4.1

1.5

5.6

0.0

0.0

0.0

(0.6)

(0.6)

0.0

0.0

(0.6)

(0.3)

(0.9)

0.0

0.0

(1.6)

(1.7)

(3.3)

179.2

100.0

47.6

143.1

469.9

0.0

0.0

27.7

61.1

88.8

0.0

0.0

(0.2)

(2.1)

(2.3)

0.8

1.1

3.8

7.7

13.4

0.0

0.0

0.8

0.0

0.8

0.0

0.0

0.0

(0.6)

(0.6)

0.0

0.0

(0.6)

0.2

(0.4)

0.0

0.0

(1.3)

(1.5)

(2.8)

0.8

1.1

30.2

64.8

96.9

178.4

98.9

17.4

78.3

373.0

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

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

The customer relations of Magnesita have a carrying amount of €90.0 million (31.12.2017: €116.1 million) and a remaining useful life of 10 to 14 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 €23.4 million (31.12.2017: €26.0 million) and a remaining useful life of 19 to 59 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 2018 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

Total

Cost at 01.01.20181)

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 01.01.2018

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

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

 

 

in € million

Real
estate,
land and
buildings

Raw material deposits

Technical
equipment,
machinery

Other plant, furniture and fixtures

Prepayments
made and
plant under construction

Total1)

Cost at 01.01.2017

453.7

32.1

877.9

294.2

43.8

1,701.7

Currency translation

(16.3)

(0.2)

(26.3)

(6.7)

(2.3)

(51.8)

Acquisitions of subsidiaries

224.7

4.5

390.8

15.9

54.4

690.3

Additions

6.5

1.5

13.6

8.8

34.4

64.8

Retirements and disposals

(20.4)

0.0

(24.4)

(9.5)

0.0

(54.3)

Reclassifications

7.3

1.0

16.5

6.1

(30.0)

0.9

Reclassified as held for sale

(25.4)

(5.1)

(92.5)

(10.6)

(0.9)

(134.5)

Cost at 31.12.2017

630.1

33.8

1,155.6

298.2

99.4

2,217.1

Accumulated depreciation 01.01.2017

285.6

24.5

639.3

229.6

0.9

1,179.9

Currency translation

(5.3)

0.0

(11.2)

(5.0)

(0.1)

(21.6)

Depreciation charges

8.7

0.4

42.8

14.3

0.0

66.2

Impairment losses

9.4

0.0

7.9

1.1

0.3

18.7

Retirements and disposals

(19.6)

0.0

(23.1)

(9.0)

0.0

(51.7)

Reclassifications

0.4

0.0

0.0

0.0

0.0

0.4

Reclassified as held for sale

(22.4)

(3.6)

(79.9)

(10.3)

(0.3)

(116.5)

Accumulated depreciation 31.12.2017

256.8

21.3

575.8

220.7

0.8

1,075.4

Carrying amounts at 31.12.2017

373.3

12.5

579.8

77.5

98.6

1,141.7

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

In 2017, impairment losses of €18.7 million were mainly caused by the restructuring of operations in Germany and Brazil. They are related to the Steel segment.

The item prepayments made and plant under construction includes plant under construction with a carrying amount of €129.9 million (31.12.2017: €96.5 million), with the modification of the smelter at the site in Radenthein, Austria, representing the largest investment project under construction in 2018.

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

31.12.2018

31.12.20171)

Investments in joint ventures

19.6

20.7

Investments in associates

2.2

0.7

Carrying amount at year-end

21.8

21.4

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

Joint ventures

The RHI Magnesita Group holds a share of 50% (2017: 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

2018

2017

Revenue

38.8

40.3

Profit before income tax

17.9

20.8

Depreciation

1.5

1.5

Interest expense

0.2

0.2

Other comprehensive income

0.0

(0.2)

Total comprehensive income

17.9

20.6

 

Income taxes on the share of profit of MAGNIFIN amounting to €2.4 million (2017: €2.7 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

31.12.2018

31.12.2017

Non-current assets

8.9

9.3

Current assets (without cash and cash equivalents)

11.2

10.2

Cash and cash equivalents

16.5

19.7

Non-current liabilities and provisions

(4.0)

(4.0)

Current provisions

(1.3)

(1.2)

Trade payables and other current liabilities

(2.9)

(2.7)

Net assets

28.4

31.3

 

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

in € million

2018

2017

Proportional share of net assets at beginning of year

15.7

15.6

Share of profit

9.4

10.8

Share of other comprehensive income (remeasurement losses)

0.0

(0.1)

Dividends received

(10.8)

(10.7)

Other changes in value

0.0

0.1

Proportional share of net assets at year-end

14.3

15.7

Goodwill

4.9

4.9

Carrying amount of investment at year-end

19.2

20.6

 

In the course of the acquisition of Magnesita in 2017 the Group acquired interests in an immaterial joint venture with a carrying amount of €0.4 million as of 31 December 2018 (31.12.2017: €0.1 million). The Group's share of the profit after income tax, other comprehensive income and total comprehensive income in 2018 amounts to €0.3 million (November and December 2017: less than €0.1 million).

Associates

As part of the acquisition of Magnesita in 2017 the Group acquired two immaterial associated companies with a carrying amount of
€2.2 million as of 31 December 2018 (31.12.2017: €0.7 million). In the course of the purchase price allocation the fair value of one associate was determined as zero at the acquisition date. The Group's share of the profit after income tax for 2018 amounts to €0.3 million (November and December 2017: €0.1 million). Total comprehensive income including other comprehensive income of €0.1 million amounts to €0.4 million (November and December 2017: €0.1 million).

15. Other non-current financial assets

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

in € million

31.12.2018

31.12.2017

Interests in subsidiaries not consolidated

0.7

0.8

Other investments

0.0

0.4

Marketable securities and shares

15.0

17.3

Interest rate swaps

0.6

1.5

Non-current receivables from disposal of subsidiaries

0.0

2.6

Other non-current financial receivables

1.7

2.5

Other non-current financial assets

18.0

25.1

Accumulated impairments on investments, securities and shares amounted to €4.3 million (31.12.2017: €3.8 million).

16. Other non-current assets

Other non-current assets include the following items:

in € million

31.12.2018

31.12.2017

Tax receivables

20.7

9.9

Prepaid stripping costs

6.8

8.0

Judicial deposits

3.7

3.7

Plan assets from overfunded pension plans

2.1

2.0

Prepaid expenses

1.0

0.6

Other non-current assets

34.3

24.2

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:

 

31.12.2018

31.12.2018

2018

31.12.20171)

31.12.20171)

20171)

in € million

Deferred tax assets

Deferred tax liabilities

Expense/(Income)

Deferred tax assets

Deferred tax liabilities

Expense/(Income)

Property, plant and equipment, intangible assets

20.1

159.7

(25.1)

52.1

219.8

(29.9)

Inventories

33.3

5.6

(9.8)

20.5

(1.6)

(1.5)

Trade receivables, other assets

7.7

7.1

(24.8)

6.4

38.4

(11.5)

Pensions and other personnel provisions

69.6

(0.2)

2.3

70.2

0.3

6.4

Other provisions

26.1

1.6

(0.1)

25.9

(0.7)

3.9

Trade payables, other liabilities

18.0

4.4

10.6

26.6

4.7

(1.4)

Tax loss carried forward

96.1

 

29.9

134.6

-

8.4

Offsetting

(99.8)

(99.8)

 

(196.2)

(196.2)

-

Deferred taxes

171.1

78.4

(17.0)

140.1

64.7

(25.6)

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

As of 31 December 2018, 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 €47.8 million (31.12.2017: €26.0 million). Deferred Tax Assets have been recognised because the companies concerned are expected to generate taxable income in the future.

Tax loss carryforwards totalled €467.7 million in the RHI Magnesita Group as of 31 December 2018 (31.12.2017: €609.7 million). A significant part of the tax loss carryforwards originated in Austria and Brazil where their deduction can be carried forward indefinitely. 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 €155.1 million (31.12.2017: €157.7 million) were not recognised. Of these losses, €5.8 million (31.12.2017: €3.4 million) will expire in 2021, while the remainder will be carried forward indefinitely.

In addition, no deferred tax assets were recognised for temporary differences totalling €5.1 million (31.12.2017: €16.2 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 €1,085.7 million (31.12.2017: €667.0 million) and deductible temporary differences of €501.1 million (31.12.2017: €295.6 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:

 

31.12.2018

31.12.20171)

in € million

Current

Non-current

Total

Current

Non-current

Total

Deferred tax assets

78.0

93.1

171.1

11.0

129.1

140.1

Deferred tax liabilities

2.9

(81.3)

(78.4)

78.8

(14.1)

64.7

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

18. Inventories

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

in € million

31.12.2018

31.12.20171)

Raw materials and supplies

176.8

183.7

Work in progress

140.8

122.1

Finished products and goods

391.9

331.5

Prepayments made

8.3

17.2

Inventories

717.8

654.5

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

Inventories include €2.3 million (31.12.2017: €9.0 million) carried at net realisable value. Net impairment losses amount to €2.6 million (2017: €4.0 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

31.12.2018

31.12.20171)

Trade receivables

349.9

394.9

Receivables from long-term construction contracts

0.0

11.7

Contract assets

1.9

0.0

Other taxes receivable

87.6

77.0

Receivables from joint ventures and associates

11.3

12.0

Prepaid expenses

3.0

3.7

Receivables from disposal of investments

2.6

0.0

Receivables from property transactions

2.2

2.5

Emission rights

1.7

1.6

Receivables from employees

1.7

1.3

Receivables from non-consolidated subsidiaries

0.3

0.3

Prepaid transaction costs related to financial liabilities

0.0

2.5

Receivables from personnel welfare foundation

0.0

0.8

Other current receivables

19.0

14.3

Trade and other current receivables

481.2

522.6

thereof financial assets

367.2

412.5

thereof non-financial assets

114.0

110.1

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

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

Trade receivables with a total nominal value of €34.0 million were assigned as security against financial liabilities as of
31 December 2018 (31.12.2017: €34.0 million).

20. Income tax receivables

Income tax receivables amounting to €18.4 million (31.12.2017: €13.5 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

31.12.2018

31.12.2017

Marketable securities

36.3

32.3

Derivatives in open orders

1.0

0.8

Forward exchange contracts

1.1

0.9

Other current financial receivables

0.2

0.1

Other current financial assets

38.6

34.1

Accumulated impairments on other current financial receivables amounted to €1.1 million (31.12.2017: €1.1 million).

22. Cash and cash equivalents

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

in € million

31.12.2018

31.12.2017

Cash at banks

426.7

373.2

Money market funds

61.9

67.5

Cheques

2.5

1.4

Cash on hand

0.1

0.3

Cash and cash equivalents

491.2

442.4

 

Cash and cash equivalents include restricted cash totalling €42.5 million at 31 December 2018 (31.12.2017: €80.8 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. €23.8 million (31.12.2017: €75.8 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 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 consists of 48,337,047 ordinary shares at €1 each share as of 31 December 2018.

The authorised share capital of RHI Magnesita N.V. amounts to €100,000,000 divided into 100,000,000 ordinary shares, of which 48,337,047 ordinary shares are issued and outstanding as explained before.

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

Additional paid-in capital

At 31 December 2018 as well as at 31 December 2017, 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 includes 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 as well as unrealised currency translation differences from monetary items which are part of a net investment in a foreign operation, net of related income taxes. 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, the currency translation differences of these monetary items previously recognised in other comprehensive income are reclassified to profit or loss. In 2017, the Group reassessed its internal financing structure and as a result reclassified accumulated losses of €38.9 million to the Statement of Profit or Loss. Due to the disposal of Fused Cast accumulated foreign currency translation losses of €1.8 million were reclassified to the Statement of Profit or Loss. The corresponding tax effect led to an income of €6.2 million.

25. Non-controlling interests

Non-controlling interests in Magnesita

Non-controlling interests held a share of 50% minus one share in the company Magnesita Refratários S.A. and its subsidiaries ("Magnesita") until 20 December 2018. After completion of the Integrated Tender Offer, the non-controlling interests were reduced to 14.8%. Total comprehensive income of the year 2018 attributable to non-controlling interests of Magnesita reflects this development in ownership structure. 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 (5). 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.

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

in € million

31.12.2018

31.12.20171)

Non-current assets

969.7

1,008.1

Current assets

561.0

647.7

Non-current liabilities

(400.6)

(734.4)

Current liabilities

(676.0)

(498.4)

Net assets before intragroup eliminations

454.1

423.0

Intragroup eliminations

(3.9)

(0.1)

Net assets

450.2

422.9

Percentage of non-controlling interests

14.8%

50.0%

Carrying amount of non-controlling interests

66.7

211.5

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

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

in € million

2018

11-12/20171)

Revenue

1,067.5

172.2

Operating expenses, net finance costs and income tax

(1,011.4)

(163.8)

Profit after income tax before intragroup eliminations

56.1

8.4

Intragroup eliminations

(3.4)

0.0

Profit after income tax

52.7

8.4

thereof attributable to non-controlling interests of Magnesita

26.3

4.2

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

in € million

2018

11-12/20171)

Profit after income tax

52.7

8.4

Other comprehensive income

(24.4)

(13.3)

Total comprehensive income

28.3

(4.9)

thereof attributable to non-controlling interests of Magnesita

14.2

(2.5)

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

The following table shows the summarised Statement of Cash Flows:

in € million

2018

11-12/2017

Net cash flow from operating activities

164.9

46.5

Net cash flow from investing activities

(10.2)

18.7

Net cash flow from financing activities

(258.5)

(2.8)

Total cash flow

(103.8)

62.4

 

Non-controlling interests in Orient Refractories Ltd.

Non-controlling interests hold a share of 33.5% (31.12.2017: 30.4%) in the listed company Orient Refractories Ltd. (in the following "ORL"), based in New Delhi, India. ORL is allocated to the Steel segment. In August 2018, the Group sold 3.1% of the shares in ORL. The carrying amount of ORL's net assets in the Group's Consolidated Financial Statements on the date of the sale was €53.9 million. Consequently, the carrying amount of non-controlling interests sold amounts to €1.7 million. The cash part of the consideration received is
€9.1 million. This transaction results in an increase in equity attributable to shareholders of RHI Magnesita N.V. in the amount of
€7.4 million.

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

in € million

31.12.2018

31.12.2017

Non-current assets

24.3

25.6

Current assets

56.0

48.8

Non-current liabilities

(6.3)

(6.8)

Current liabilities

(19.6)

(16.6)

Net assets before intragroup eliminations

54.4

51.0

Intragroup eliminations

(0.4)

(0.2)

Net assets

54.0

50.8

Percentage of non-controlling interests

33.5%

30.4%

Carrying amount of non-controlling interests

18.1

15.4

 

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

in € million

2018

2017

Revenue

91.0

77.9

Operating expenses, net finance costs and income tax

(81.6)

(70.1)

Profit after income tax before intragroup eliminations

9.4

7.8

Intragroup eliminations

(0.2)

0.1

Profit after income tax

9.2

7.9

thereof attributable to non-controlling interests of ORL

2.7

2.4

 

in € million

2018

2017

Profit after income tax

9.2

7.9

Other comprehensive income

(2.3)

(3.6)

Total comprehensive income

6.9

4.3

thereof attributable to non-controlling interests of ORL

2.2

1.3

 

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

in € million

2018

2017

Net cash flow from operating activities

9.5

6.4

Net cash flow from investing activities

(1.8)

(1.0)

Net cash flow from financing activities

(3.6)

(3.8)

Total cash flow

4.1

1.6

 

Net cash flow from financing activities includes dividend payments to non-controlling interests amounting to €1.2 million (2017:
€1.1 million).

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 01.01.2018

0.1

(0.1)

(7.6)

Unrealised results from currency translation

-

-

(11.0)

Unrealised results from fair value change

0.2

-

-

Remeasurement of defined benefit plans

-

(1.9)

-

Transactions with non-controlling interests without change of control

(0.1)

(0.1)

10.7

Accumulated other comprehensive income 31.12.2018

0.2

(2.1)

(7.9)

 

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

31.12.2018

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

 

 

Total

Remaining term

in € million

31.12.2017

up to 1 year

2 to 5 years

over 5 years

Export credits and investment financing

346.4

65.6

280.0

0.8

Syndicated Financing

266.2

0.0

266.2

0.0

Bonded loans ("Schuldscheindarlehen")

230.5

0.0

162.0

68.5

Other credit lines and other loans

102.1

102.1

0.0

0.0

Accrued interest

7.8

7.8

0.0

0.0

Total liabilities to financial institutions

953.0

175.5

708.2

69.3

Perpetual bond

215.3

64.3

0.0

151.0

Senior notes

55.6

1.1

54.5

0.0

Other financial liabilities

4.8

1.6

3.1

0.1

Capitalised transaction costs

(3.1)

(0.7)

(2.4)

0.0

Borrowings

1,225.6

241.8

763.4

220.4

 

RHI Magnesita Group optimised its financial structure in 2018. In the first quarter, the Group refinanced the syndicated financial agreement, which was concluded in July 2017, with a new €305.6 million five year term loan of the Austrian export credit agency (OeKB). The refinancing extends the final maturity of the term loan by one year, from June 2022 to June 2023. This new syndicated term loan replaces the existing €477.2 million syndicated financial agreement for which only €266.2 million had been drawn down. Cash inflows from the new term loan in the amount of €305.6 million are shown in the Consolidated Statement of Cash Flows in proceeds from non-current borrowings and loans, whereas cash outflows from the redemption of the syndicated loan in the amount of €266.2 million are included in repayments of non-current borrowings and loans. In addition, on 3 August 2018 the Group raised a new unsecured five year term loan amounting to US$200 million and a revolving credit facility in the amount of US$400 million with a syndicate of 10 international banks. The proceeds of the borrowings have been used to redeem the entire amount of the outstanding Magnesita Perpetual Bonds and Senior notes and other export credits and investment financing, which will generate significant interest expense savings as well as ensure higher liquidity.

€34.0 million (31.12.2017: €34.0 million) of the liabilities to financial institutions are secured by receivables. As at 31.12.2017 €2.6 million were secured by cash and cash equivalents.

Net debt/adjusted EBITDA is the most important financial covenant of the loan agreements. Calculation of net debt/adjusted EBITDA is shown under Note (55). Compliance with the covenants is measured predominantly on an annual or semi-annual basis. Covenant ratio is limited at 3.5. Breach of covenant will lead to repay the debts prior to maturity. During 2018 and 2017, the Group met all covenant requirements.

For liabilities of €1,052.6 million (31.12.2017: €1,109.9 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.

Taking into account interest swaps, 55% (31.12.2017: 34%) of the liabilities to financial institutions carry fixed interest and 45% (31.12.2017: 66%) 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

31.12.2018 Carrying amount in € million

Interest terms
fixed until

Effective annual interest rate

Cur-
rency

31.12.2017 Carrying amount in € million

2019

EURIBOR + margin

EUR

132.0

2018

EURIBOR + margin

EUR

369.6

 

LIBOR + margin

USD

221.7

 

LIBOR + margin

USD

54.4

 

Interbank Deposit Certificate (CDI) + margin

BRL

113.9

 

Interbank Deposit Certificate (CDI) + margin

BRL

145.5

 

Variable interest rate + margin

EUR

34.0

 

Variable interest rate + margin

EUR

34.0

 

3.77%

EUR

3.0

 

4.11%

USD

18.3

 

 

 

 

 

4.15%

USD

13.4

 

Various - variable rate

Var.

16.5

 

Various - variable rate

Var.

16.0

 

 

 

 

 

Various - fixed rate

Var.

10.5

 

 

 

 

2019

0.68%

EUR

10.0

 

 

 

 

 

0.72%

EUR

7.1

 

 

 

 

 

3.77%

EUR

3.0

 

 

 

 

 

1.59%

EUR

4.0

2020

1.28%

USD

32.8

2020

4.19%

USD

70.7

 

2.30%

EUR

12.4

 

4.98%

USD

62.4

 

 

 

 

 

7.50%

BRL

8.2

2022

1.74%

EUR

62.0

2022

1.74%

EUR

63.0

 

4.60%

EUR

3.0

 

4.60%

EUR

3.0

2023

1.56%

EUR

196.2

 

 

 

 

 

1.12%

EUR

109.4

 

 

 

 

 

3.94%

USD

174.8

 

 

 

 

2024

3.10%

EUR

35.0

2024

3.10%

EUR

37.0

 

 

 

 

 

3.20%

EUR

5.5

 

 

 

 

 

4.00%

EUR

9.6

 

 

 

1,146.7

 

 

 

945.2

 

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 fixed-term and puttable non-controlling interests in Group companies. This item of the Consolidated Statement of Financial Position consists of the following items:

 

31.12.2018

31.12.2017

in € million

Current

Non-current

Total

Current

Non-current

Total

Derivatives from supply contracts

0.9

20.0

20.9

6.8

33.4

40.2

Interest rate swaps

0.0

7.3

7.3

0.0

0.2

0.2

Derivatives in open orders

0.0

0.0

0.0

0.5

0.0

0.5

Derivative financial liabilities

0.9

27.3

28.2

7.3

33.6

40.9

Fixed-term or puttable non-controlling interests

14.1

22.2

36.3

10.1

21.9

32.0

Other financial liabilities

15.0

49.5

64.5

17.4

55.5

72.9

 

Additional explanations on derivative financial instruments are provided under Note (54).

28. Provisions for pensions

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

in € million

31.12.2018

31.12.2017

Present value of pension obligations

506.6

517.1

Fair value of plan assets

(223.9)

(228.6)

Funded status

282.7

288.5

Asset ceiling

19.5

18.3

Net liability from pension obligations

302.2

306.8

thereof assets from overfunded pension plans

2.1

1.9

thereof pensions

304.3

308.7

 

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

in € million

31.12.2018

31.12.2017

Active beneficiaries

101.4

107.9

Vested terminated beneficiaries

68.7

71.9

Retirees

336.5

337.3

Present value of pension obligations

506.6

517.1

 

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

in %

31.12.2018

31.12.2017

Interest rate

3.3%

3.1%

Future salary increase

2.7%

2.8%

Future pension increase

2.2%

2.1%

 

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 (31.12.2017: AVÖ 2008-P) demographic calculation principles for salaried employees from the Actuarial Association of Austria. In Germany, the Heubeck 2018 G (31.12.2017: Heubeck 2005 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 €125.8 million (31.12.2017: €122.6 million) of the present value of pension obligations and for €26.4 million (31.12.2017: €26.1 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 €155.1 million (31.12.2017: €158.6 million) of the present value of pension obligations and for €0.7 million (31.12.2017: €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 €74.2 million (31.12.2017:
€73.7 million) of the present value of pension obligations and for €61.8 million (31.12.2017: €60.0 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 2018 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 €53.0 million (31.12.2017: €60.7 million) of the present value of pension obligations and holds €69.6 million (31.12.2017: €76.5 million) of assets, although only €53.0 million (31.12.2017: €60.7 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 €62.6 million (31.12.2017: €62.3 million) of the present value of pension obligations and for €34.6 million (31.12.2017: €36.3 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

2018

2017

Net liability from pension obligations at beginning of year

306.8

234.7

Currency translation

(1.9)

(2.3)

Acquisition of subsidiaries

0.0

81.0

Pension cost

11.6

8.5

Remeasurement losses

12.2

6.0

Benefits paid

(17.3)

(17.8)

Employers' contributions to external funds

(9.0)

(3.3)

Reclassifications

(0.2)

0.0

Net liability from pension obligations at year-end

302.2

306.8

 

The present value of pension obligations developed as follows:

in € million

2018

2017

Present value of pension obligations at beginning of year

517.1

289.2

Currency translation

(3.0)

(7.9)

Acquisition of subsidiaries

0.0

240.3

Current service cost

3.9

3.3

Past service cost

(0.5)

0.0

Interest cost

15.2

7.2

Remeasurement losses/(gains)

 

 

from changes in demographic assumptions

7.8

(0.6)

from changes in financial assumptions

(5.8)

6.1

due to experience adjustments

2.7

2.2

Benefits paid

(31.1)

(23.1)

Employee contributions to external funds

0.5

0.4

Reclassifications

(0.2)

0.0

Present value of pension obligations at year-end

506.6

517.1

 

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

in € million

2018

2017

Fair value of plan assets at beginning of year

228.6

56.4

Currency translation

(1.2)

(5.9)

Acquisition of subsidiaries

0.0

174.6

Interest income

7.7

2.3

Administrative costs (paid from plan assets)

(0.3)

(0.2)

Income on plan assets less interest income

(6.6)

3.0

Benefits paid

(13.8)

(5.3)

Employers' contributions to external funds

9.0

3.3

Employee contributions to external funds

0.5

0.4

Fair value of plan assets at year-end

223.9

228.6

 

The changes in the asset ceiling are shown below:

in € million

2018

2017

Asset ceiling at beginning of year

18.3

1.9

Currency translation

(0.1)

(0.3)

Acquisition of subsidiaries

0.0

15.3

Interest expense

0.4

0.1

Losses from changes in asset ceiling less interest expense

0.9

1.3

Asset ceiling at year-end

19.5

18.3

 

At 31 December 2018 the weighted average duration of pension obligations amounts to 12 years (31.12.2017: 12 years).

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

in € million

2018

2017

Current service cost

3.9

3.3

Negative past service cost

(0.5)

0.0

Interest cost

15.2

7.2

Interest income

(7.7)

(2.3)

Interest expense from asset ceiling

0.4

0.1

Administrative costs (paid from plan assets)

0.3

0.2

Pension expense recognised in profit or loss

11.6

8.5

 

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

in € million

2018

2017

Accumulated remeasurement losses at beginning of year

119.3

113.3

Remeasurement losses on present value of pension obligations

4.6

7.7

Expenses/(Income) on plan assets less interest income

6.6

(3.0)

Losses from changes in asset ceiling less interest

0.9

1.3

Accumulated remeasurement losses at year-end

131.4

119.3

 

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

 

31.12.2018

31.12.2017

in € million

Active market

No active market

Total

Active market

No active market

Total

Insurances

0.0

39.1

39.1

0.0

38.4

38.4

Equity instruments

4.7

18.5

23.2

4.8

23.1

27.9

Debt instruments

14.3

49.2

63.5

17.2

45.2

62.4

Cash and cash equivalents

32.3

4.1

36.4

35.0

0.4

35.4

Other assets

57.9

3.8

61.7

60.8

3.7

64.5

Fair value of plan assets

109.2

114.7

223.9

117.8

110.8

228.6

 

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 2019, RHI Magnesita expects employer contributions to external plan assets to amount to €4.8 million and direct payments to entitled beneficiaries to €17.1 million. In the previous year, employer contributions of €4.8 million and direct pension payments of €17.9 million had been expected for the financial year 2018.

29. Other personnel provisions

Other personnel provisions consist of the following items:

in € million

31.12.2018

31.12.2017

Termination benefits

55.5

58.1

Service anniversary bonuses

19.4

19.4

Legacy share-based payment programme

1.6

2.9

Semi-retirements

1.9

1.4

Lump-sum settlements

0.1

0.7

Other personnel provisions

78.5

82.5

 

Provisions for termination benefits

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

in %

31.12.2018

31.12.2017

Interest rate

2.1%

1.7%

Future salary increase

3.9%

3.8%

 

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

2018

2017

Provisions for termination benefits at beginning of year

58.1

58.5

Currency translation

0.0

(0.1)

Current service cost

1.6

1.5

Interest cost

0.9

1.0

Remeasurement losses/(gains)

 

 

from changes in demographic assumptions

1.1

0.0

from changes in financial assumptions

(2.3)

5.1

due to experience adjustments

0.5

0.4

Benefits paid

(4.4)

(4.1)

Reclassification

0.0

(0.4)

Reclassification as held for sale

0.0

(3.8)

Provisions for termination benefits at year-end

55.5

58.1

 

Payments for termination benefits are expected to amount to €3.5 million in the year 2019. In the previous year, the payments for termination benefits expected for the year 2018 amounted to €3.0 million.

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

in € million

2018

2017

Accumulated remeasurement losses at beginning of year

27.9

23.6

Remeasurement (gains)/losses1)

(0.7)

5.6

Reclassification as held for sale

0.0

(1.3)

Accumulated remeasurement losses at year-end

27.2

27.9

1  Including €0.0 million (2017: €0.1 million) from a joint venture accounted for using the equity method.

At 31 December 2018 the weighted average duration of termination benefit obligations amounts to 11 years (31.12.2017: 11 years).

Provisions for service anniversary bonuses

The measurement of provisions for service anniversary bonuses is based on an average weighted interest rate of 1.7% (31.12.2017: 1.4%) and takes into account salary increases of 3.7% (31.12.2017: 3.6%).

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

31.12.2018

31.12.2017

Present value of semi-retirement obligations

5.1

5.0

Fair value of plan assets

(3.2)

(3.6)

Provisions for semi-retirement obligations

1.9

1.4

 

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

Contract obligations

Labour and civil contingencies

Demolition/
disposal costs,
environmental damages

Other

Total

91.1

9.4

10.8

4.4

115.7

(9.7)

(1.0)

(0.2)

(0.1)

(11.0)

0.0

(0.4)

0.0

(0.1)

(0.5)

0.0

0.0

0.0

(0.1)

(0.1)

1.7

0.3

1.9

0.5

4.4

9.8

0.0

0.0

0.0

9.8

(9.1)

0.0

0.0

0.0

(9.1)

83.8

8.3

12.5

4.6

109.2

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

 

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 €80.0 million as of 31.12.2018 (31.12.2017:
€87.8 million)
. Furthermore, provisions for contract obligations amounting to €3.2 million (31.12.2017: €1.9 million) are due to contracts for logistics services and the procurement of raw materials.

The provision for labour and civil contingencies primarily comprises of labour litigation provisions against RHI Magnesita in a total of
323 cases amounting to €7.1 million (31.12.2017: €8.3 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 €5.9 million (31.12.2017: €4.6 million) and various sites in the United States amounting to €6.1 million (31.12.2017: €5.8 million).

The other provisions primarily include provisions related to tax litigation procedures in Peru regarding corporate income tax of fiscal year 2009 amounting to €2.7 million (31.12.2017: €2.6 million) and judicial action filed in Colombia related to corporate income tax of fiscal year 2010 amounting to €1.9 million (31.12.2017: €1.5 million).

31. Other non-current liabilities

Other non-current liabilities consist of the following items:

in € million

31.12.2018

31.12.2017

Deferred income for subsidies received

6.2

4.7

Liabilities to employees

2.5

2.8

Contingent consideration for acquired subsidiaries

0.6

0.6

Miscellaneous non-current liabilities

1.0

0.9

Other non-current liabilities

10.3

9.0

thereof financial liabilities

0.6

0.6

thereof non-financial liabilities

9.7

8.4

 

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

31.12.2018

31.12.20171)

Trade payables

502.5

467.6

Contract liabilities

64.8

0.0

Prepayments received on orders

0.0

24.1

Liabilities to employees

99.6

99.2

Taxes other than income tax

30.0

23.2

Payables from commissions

13.0

13.2

Payables from property transactions

9.2

4.8

Customers with credit balances

7.3

6.5

Liabilities to joint ventures and associates

5.4

9.1

Liabilities to non-consolidated subsidiaries

1.0

1.6

Other current liabilities

24.1

28.9

Trade payables and other current liabilities

756.9

678.2

thereof financial liabilities

539.3

507.0

thereof non-financial liabilities

217.6

171.2

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

Contract liabilities mainly consist of prepayments received on orders. Prepayments received on orders as of 31 December 2017 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 €1.6 million (31.12.2017: €3.7 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 €32.2 million (31.12.2017: €16.1 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, commenting and case law regarding the respective tax laws as well as past experiences, adequate liabilities have been recognised as far as apparent.

34. Current provisions

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

in € million

Restructuring costs

Demolition/ disposal costs,
environmental damages

Warranties

Contract obligations

Guarantees provided

Other

Total

1.1.20181)

37.6

9.3

4.4

26.2

2.9

9.0

89.4

Currency translation

(0.4)

0.0

(0.2)

(2.0)

0.0

(0.4)

(3.0)

Utilised

(25.2)

(2.9)

(3.3)

(18.7)

0.0

(3.2)

(53.3)

Reversals

(7.0)

(0.7)

(0.2)

(2.4)

0.0

0.0

(10.3)

Additions

4.1

1.7

2.0

9.7

0.1

1.9

19.5

Reclassifications

1.0

0.0

0.0

8.3

0.0

1.4

10.7

31.12.2018

10.1

7.4

2.7

21.1

3.0

8.7

53.0

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita and of the initial application of IFRS 15.

Provisions for restructuring costs amount to €10.1 million as of 31 December 2018 (31.12.2017: €37.6 million) and primarily consist of benefit obligations to employees due to termination of employment resulting from corporate reorganisation of RHI Magnesita.

The item demolition and disposal costs, environmental damages includes an amount of €2.5 million (31.12.2017: €2.7 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 €11.5 million (31.12.2017: €16.9 million). The amortisation of this provision led to an income of €10.0 million in 2018. Furthermore, provisions for other unfavourable contracts amounting to €6.7 million (31.12.2017: €6.9 million) and provisions for unfavourable contracts related to contracts for logistics services and the procurement of raw materials totalling €2.9 million (31.12.2017: €2.4 million) are included.

Provisions for guarantees provided include obligations from sureties and guarantees to banks and insurance companies in the country and abroad. The exact due date of the cash outflow is uncertain.

The item other provisions includes provisions for real estate transfer tax amounting to €1.3 million (31.12.2017: €2.4 million) resulting from corporate reorganisation of RHI Magnesita as well as a provision for the share-based remuneration programme of the members of the former Management Board of RHI AG of €1.4 million (31.12.2017: €1.4 million).

In addition, provisions for legal proceedings including attorney's fees amounting to €3.2 million (31.12.2017: €3.1 million) are included in the item other provisions. It is currently uncertain when precisely the cash outflow is due.

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.

NOTES TO THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS

 

 

 

 

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 (50).

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 €32.6 million (2017: €24.0 million), of which development costs amounting to €8.3 million (2017: €4.6 million) were capitalised. Income from research grants amounted to €3.8 million (2017: €3.8 million) in 2018. Amortisation and impairment of development costs amounting to €3.8 million (2017: €4.3 million) are recognised under cost of sales.

39. Other income

The individual components of other income are:

in € million

2018

20171)

Result from derivatives from supply contracts

19.6

4.9

Amortisation of Oberhausen provision

10.0

1.6

Income from restructuring

5.4

0.3

Income from the disposal of non-current assets

2.2

0.9

Miscellaneous income

6.7

2.7

Other income

43.9

10.4

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita and the changes in presentation.

Income from restructuring amounting to €5.4 million results from the reversal of acquisition-related provisions for redundancy programmes.

40. Other expenses

Other expenses include:

in € million

2018

20171)

Restructuring costs

(22.3)

(62.7)

Expenses for strategic projects

(13.5)

(24.4)

Losses from the disposal of non-current assets

(3.0)

(7.6)

Impairment losses

0.0

(2.1)

Miscellaneous expenses

(6.1)

(10.5)

Other expenses

(44.9)

(107.3)

1  Adjusted to reflect the changes in presentation.

Restructuring costs primarily relate to costs incurred in connection with the corporate reorganisation of RHI Magnesita, including costs for termination of employment amounting to €5.4 million. Furthermore, dismantling and demolition costs amounting to €3.7 million and expenses for unused logistics services in the Porsgrunn plant, Norway, amounting to €3.9 million (2017: €4.4 million) are included. In 2017, restructuring costs included expenses incurred in connection with the acquisition-related global restructuring programme totalling €35.3 million and the disposal of the dolomite and fused cast business amounting to €23.0 million.

Expenses for strategic projects amounting to €13.5 million mainly include legal and consulting fees for the acquisition and integration of Magnesita and the related corporate reorganisation of RHI Magnesita. For the acquisition of Magnesita, costs totalling €33.5 million were incurred in 2017. They were primarily related to legal and other advisory fees and fees for the consulting investment banks. Of the total costs, €24.4 million were recognised in profit or loss and €9.1 million were accounted for as a deduction from equity since these costs were directly attributable to the issue of RHI Magnesita shares in 2017. €3.0 million were cash-effective and formed part of capital expenses for the issue of shares in the Consolidated Statement of Cash Flows.

41. Interest income

This item includes interest on cash at banks and similar income amounting to €8.8 million (2017: €2.8 million), interest income on financial receivables amounting to €0.2 million (2017: €0.2 million) and interest income on securities and shares amounting to €0.7 million (2017: €2.5 million), of which €0.4 million (2017: €2.0 million) is accounted for by impaired securities.

42. Foreign exchange effects and related derivatives

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

in € million

2018

2017

Foreign exchange gains

98.6

68.2

Gains from related derivative finanical instruments

4.5

14.2

Foreign exchange losses

(160.2)

(126.3)

Losses from from related derivative finanical instruments

(24.2)

(6.9)

Net expense on foreign exchange effects and related derivatives

(81.3)

(50.8)

The net expense on foreign exchange effects and related derivatives results 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.

43. Other net financial expenses

Other net financial expenses consist of the following items:

in € million

2018

20171)

Interest income on plan assets

7.3

2.2

Interest expense on provisions for pensions

(15.2)

(7.2)

Interest expense on provisions for termination benefits

(0.9)

(1.0)

Interest expense on other personnel provisions

(0.3)

(0.3)

Net interest expense personnel provisions

(9.1)

(6.3)

Unwinding of discount of provisions and payables

(15.6)

(0.9)

Interest expense on non-controlling interests

(5.3)

(3.3)

Impairment losses on securities

(1.4)

(1.9)

Expenses from the valuation of put options

(1.0)

(0.9)

Gains from the disposal of securities and shares

0.7

0.0

Other interest and similar expenses

(10.9)

(0.3)

Other net financial expenses

(42.6)

(13.6)

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita and the changes in presentation.

 

44. Income tax

Income tax consists of the following items:

in € million

2018

2017

Current tax expense

75.9

30.5

Deferred tax expense/(income) relating to

 

 

temporary differences

(46.7)

(34.0)

tax loss carryforwards

29.7

8.4

 

(17.0)

(25.6)

Income tax

58.9

4.9

 

The current tax expense of the year 2018 includes tax expenses for previous periods of €7.1 million (2017: €2.8 million) and income from income tax relating to other periods of €0.5 million (2017: €8.6 million). In 2018, €3.8 million are related to an ongoing tax audit respectively tax loss forfeit in Germany. In 2017, €6.7 million were attributable to the reversal of a provision related to a tax audit in Germany.

In addition to the income taxes recognised in the Statement of Profit or Loss, tax income totalling €5.7 million (2017: €4.1 million), which is attributable to other comprehensive income, was also recognised in other comprehensive income. In 2017, tax expense totalling €6.3 million was reclassified from other comprehensive income to the Statement of Profit or Loss.

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

2018

20171)

Profit before income tax

246.0

(5.9)

Income tax expense calculated at 25% (2017: 25%)

61.5

(1.5)

Different foreign tax rates

1.8

(0.7)

Expenses not deductible for tax purposes, non-creditable taxes

10.1

20.4

Non-taxable income and tax benefits

(32.3)

(7.1)

Tax losses and temporary differences of the financial year not recognised

9.5

11.9

Utilisation of previously unrecognised loss carryforwards and temporary differences

(0.2)

(1.2)

Recognition of previously unrecognised loss carryforwards and temporary differences

(0.7)

(5.8)

Change in valuation allowance on deferred tax assets

1.2

3.7

Deferred tax expense due to tax rate changes

(1.8)

(12.9)

Deferred income tax relating to prior periods

2.4

3.3

Current income tax relating to prior periods

6.7

(5.8)

Other

0.7

0.6

Recognised tax expense

58.9

4.9

Effective tax rate (in %)

23.9%

(83.1)%

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

Deferred tax expense due to tax rates changes is primarily attributable to the reduction of the corporate income tax rate in Norway from 24% to 23% (2018: €(0.9) million) and an increase in corporate income tax rate in Turkey from 20% to 22% (2018: €0.4 million). In 2017, deferred tax expense due to tax rates changes was primarily attributable to the reduction of the corporate income tax rate in the United States from 35% to 21% (2017: €(7.5) million) and in Norway (2017: €(1.1) million). Non-taxable income and tax benefits include the SUDENE tax regime amounting to 20.4 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.

45. 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 2018 and the previous year:

in € million

Cost of sales

Selling and marketing expenses

General and administrative expenses

Other income/ expenses

Total 2018

(79.2)

0.0

(2.8)

0.0

(82.0)

1,550.8

0.6

2.4

0.0

1,553.8

409.6

72.8

106.2

5.6

594.2

133.5

7.9

12.0

0.0

153.4

(27.5)

(0.2)

(4.2)

(9.9)

(41.8)

357.3

47.8

94.8

5.3

505.2

2,344.5

128.9

208.4

1.0

2,682.8

 

in € million

Cost of sales

Selling and marketing expenses

General and administrative expenses

Other income/ expenses

Total 20172)

(27.3)

0.2

(3.9)

1.5

(29.5)

919.2

4.0

5.3

(0.3)

928.2

259.2

72.4

100.2

22.8

454.6

75.8

0.4

6.0

17.2

99.4

(8.5)

0.0

(6.9)

(10.5)

(25.9)

325.0

24.2

42.4

66.2

457.8

1,543.4

101.2

143.1

96.9

1,884.6

1  Including impairment losses on property, plant and equipment and intangible assets.

2  Adjusted to reflect the effects of the final purchase price allocation of Magnesita and the changes in presentation.

 

Cost of materials includes expenses for raw materials and supplies, and purchased goods of €1,321.3 million (2017: €759.0 million) as well as expenses for services received, especially energy, amounting to €232.5 million (2017: €169.2 million).

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.

46. Personnel costs

Personnel costs consist of the following components:

in € million

2018

2017

Wages and salaries

474.0

360.1

Pensions

 

 

Defined benefit plans

3.7

3.4

Defined contribution plans

5.2

3.4

Termination benefits

 

 

Defined benefit plans

1.6

1.5

Defined contribution plans

1.5

2.0

Other expenses

2.9

1.5

Social security costs

73.7

68.7

Fringe benefits

31.6

14.0

Personnel expenses (without interest expenses)

594.2

454.6

 

Personnel costs do not include amounts resulting from the interest accrued on personnel provisions. They amount to €9.1 million (2017: €6.3 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.

47. Net cash flow from operating activities

Other non-cash expenses and income include mainly the net interest expenses for defined benefit pension plans amounting to
€9.1 million (2017: €6.3 million), net remeasurement losses of monetary foreign currency positions and derivative financial instruments of €14.5 million (2017: €51.2 million). In 2017, other non-cash funding of provisions for restructuring amounted to €13.6 million.

48. Net cash flow from financing activities

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

 

 

Cash changes

Non-cash changes

 

in € million

01.01.2018

 

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

 

 

 

Cash changes

Non-cash changes

 

in € million

01.01.2017

 

Changes in foreign exchange rates

Additions to consolidated companies

Interest expense and other changes

31.12.2017

Liabilities to financial institutions

475.5

60.1

(13.3)

407.9

22.8

953.0

Perpetual bond

0.0

0.0

(5.6)

217.9

3.0

215.3

Senior notes

0.0

0.0

(1.4)

56.3

0.7

55.6

Liabilities to fixed-term or puttable non-controlling interests

32.5

(3.2)

(1.7)

0.0

4.4

32.0

Other financial liabilities and capitalised transaction costs

7.7

(3.4)

(0.1)

0.1

(2.6)

1.7

Prepaid transaction costs related to financial liabilities

0.0

(2.5)

0.0

0.0

0.0

(2.5)

Changes of financial liabilities and assets arising from financing activities

515.7

51.0

(22.1)

682.2

28.3

1,255.1

 

49. Total interest paid and interest received

Total interest paid amounts to €72.4 million in the reporting period (2017: €25.6 million), of which €0.3 million (2017: €0.1 million) is included in cash flow from operating activities, €1.0 million (2017: €0.6 million) in cash flow from investing activities and €71.1 million (2017: €24.9 million) in cash flow from financing activities.

Total interest received amounts to €8.5 million for the financial year 2018 (2017: €5.1 million), of which €0.2 million (2017: €0.0 million) are included in cash flow from operating activities and €8.3 million (2017: €5.1 million) in cash flow from investing activities.
 

OTHER DISCLOSURES

 

 

 

 

50. Segment reporting

Segment reporting by operating company division

The following tables show the financial information for the operating segments for the year 2018 and the previous year:

in € million

Steel

Industrial

Group 2018

Revenue

2,204.3

877.1

3,081.4

 

 

 

 

Gross profit

522.4

214.5

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

1,666.3

948.0

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

 

in € million

Steel

Industrial

Group 20171)

Segment revenue

1,312.6

637.5

1,950.1

 

 

 

 

Gross profit

284.4

122.3

406.7

 

 

 

 

EBIT

 

 

65.5

Net finance costs

 

 

(82.4)

Share of profit of joint ventures and associates

 

 

11.0

Profit before income tax

 

 

(5.9)

 

 

 

 

Depreciation and amortisation charges

(53.0)

(26.6)

(79.6)

 

 

 

 

Segment assets 31.12.2017

1,941.9

742.2

2,684.1

Investments in joint ventures and associates 31.12.2017

 

 

21.4

Reconciliation to total assets

 

 

807.3

 

 

 

3,512.8

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

135.5

17.8

153.3

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita and the changes in presentation.

 

Revenue amounting to €317.5 million (2017: €195.5 million) was realised with one customer in 2018, which is included in the Steel segment. No other single customer contributed 10% or more to consolidated revenue in 2018 or 2017. Companies which are known to be part of a group are treated as one customer.

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 2018

Shaped products

1,110.3

580.5

1,690.8

Unshaped products

336.8

196.2

533.0

Management refractory services

616.0

0.0

616.0

Other

141.2

100.4

241.6

Revenue

2,204.3

877.1

3,081.4

 

In 2017, revenue was classified by product group as follows:

in € million

Steel

Industrial

Group 20171)

Shaped products

654.8

436.0

1,090.8

Unshaped products

252.9

123.6

376.5

Management refractory services

334.5

0.0

334.5

Other

70.4

77.9

148.3

Revenue

1,312.6

637.5

1,950.1

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 €100.9 million (2017: €67.9 million) is transferred over time and an amount of €140.7 million (2017: €80.4 million) is transferred at a point of time.

Segment reporting by country

Revenue is classified by customer sites as follows:

in € million

2018

20171)

Netherlands

25.8

14.1

All other countries

 

 

USA

407.9

195.3

Brazil

333.2

92.5

India

245.3

204.1

Germany

183.4

137.3

PR China

165.7

121.9

Mexico

161.0

119.3

Italy

131.6

105.7

Canada

92.2

70.8

Russia

86.9

59.0

Other countries, each below €62.9 million (2017: €44.8 million)

1,248.4

830.1

Revenue

3,081.4

1,950.1

1  Adjusted to reflect the changes in presentation.

 

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

31.12.2018

31.12.20171)

Brazil

520.7

595.6

USA

233.1

236.4

Austria

220.6

214.0

Germany

198.6

210.0

PR China

160.1

158.7

India

58.0

58.8

Mexico

34.5

33.4

France

31.8

37.1

Turkey

30.6

31.8

Other countries, each below €18.6 million (31.12.2017: €19.1 million)

58.6

59.1

Goodwill, intangible assets and property, plant and equipment

1,546.6

1,634.9

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

 

51. 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.

 

2018

20171)

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

158.1

(17.4)

Weighted average number of shares

44,963,615

40,682,053

Earnings per share (in €)

3.52

(0.43)

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

 

52. Dividend payments and proposed dividend

Based on a resolution adopted by the Annual General Meeting of RHI Magnesita N.V. on 7 June 2018, dividends totalling €33.6 million were paid out to the shareholders in 2018 for 2017, which corresponded to a dividend of €0.75 per share.

For 2018, the Board of Directors will propose a dividend of €1.50 per share for the shareholders of RHI Magnesita N.V. The proposed dividend is subject to the approval by the Annual General Meeting on 6 June 2019 and was not recognised as a liability in the Consolidated Financial Statements 2018.

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

53. 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.

 

 

 

31.12.2018

01.01.2018

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

0.8

0.8

Investments

FVPL

3

0.0

0.0

0.4

0.4

Marketable securities

FVPL

1

14.5

14.5

14.9

14.9

Shares

FVPL

1

0.0

0.0

1.9

1.9

Shares

FVPL

3

0.5

0.5

0.5

0.5

Interest derivatives designated as cash flow hedges

-

2

0.6

0.6

1.5

1.5

Non-current receivables from disposal of subsidiaries

AC

-

0.0

-

2.6

-

Other non-current financial receivables

AC

-

1.7

-

2.5

-

Trade and other current receivables2)

AC

-

367.2

-

426.6

-

Other current financial assets

 

 

 

 

 

 

Marketable securities

FVPL

1

35.2

35.2

32.3

32.3

Shares

FVPL

1

1.1

1.1

0.0

0.0

Derivatives

FVPL

2

2.1

2.1

1.7

1.7

Other current financial receivables

AC

-

0.2

-

0.1

-

Cash and cash equivalents

AC

-

491.2

-

442.4

-

Financial assets

 

 

915.0

 

928.2

 

Non-current and current borrowings

 

 

 

 

 

 

Liabilities to financial institutions

AC

2

1,153.6

1,165.6

953.0

966.1

Perpetual bonds

AC

1

0.0

0.0

215.3

217.0

Senior notes

AC

2

0.0

0.0

55.6

55.6

Other financial liabilities and capitalised transaction costs

AC

2

12.8

12.8

1.7

1.7

Non-current and current other financial liabilities

 

 

 

 

 

 

Derivatives

FVPL

2

20.9

20.9

40.9

40.9

Interest derivatives designated as cash flow hedges

-

2

7.3

7.3

0.0

0.0

Liabilities to fixed-term or puttable non-controlling interests

AC

2

36.3

36.3

32.0

32.0

Other non-current liabilities

 

 

 

 

 

 

Contingent consideration for acquired subsidiaries

FVPL

3

0.6

0.6

0.6

0.6

Trade payables and other current liabilities3)

AC

-

539.3

-

507.0

-

Financial liabilities

 

 

1,770.8

 

1,806.1

 

Aggregated according to measurement category

 

 

 

 

 

 

Financial assets measured at FVPL

 

 

54.1

 

52.5

 

Financial assets measured at amortised cost

 

 

860.3

 

874.2

 

Financial liabilities measured at amortised cost

 

 

1,742.0

 

1,764.6

 

Financial liabilities measured at FVPL

 

 

21.5

 

41.5

 

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

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

2  Thereof non-financial receivables per 01.01.2018: €98.4 million.

3   Thereof non-financial liabilities per 01.01.2018: €175.5 million.

In the RHI Magnesita Group marketable securities, derivative financial instruments, shares, investments 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, investments 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 €0.6 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.

Financial 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 financial liabilities are only shown in the notes. The fair value of the perpetual bond is based on price quotations at the reporting date (Level 1), all other liabilities are 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/IAS 39

The effect of financial instruments on the income and expenses recognised in 2018 and 2017 is shown in the following table, classified according to the measurement categories defined in IFRS 9/IAS 39:

in € million

2018

2017

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

1.4

0.0

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

(1.2)

0.1

Net loss from financial assets and liabilities measured at amortised cost

(123.5)

0.0

Net gain on available-for-sale financial assets recognised in profit or loss

0.0

0.5

Net loss from loans and receivables as well as financial liabilities at amortised cost

0.0

(87.7)

Net gain on financial assets and financial liabilities classified as held for trading

0.0

12.2

 

The net gain on available-for-sale financial assets recognised in the Consolidated Statement of Profit or Loss includes income from securities and shares, income from the disposal of securities and shares, as well as impairment losses and income from reversals of impairment losses. According to IFRS 9 these financial instruments are now included in the fair value through profit or loss category, hence the corresponding gains or losses are included in the gains or losses from financial assets  measured at fair value through profit or loss.

The net loss arising from loans and receivables as well as financial liabilities 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. According to IFRS 9 these financial instruments are now included in the amortised cost category, hence the corresponding gains or losses are included in the gains or losses from financial assets and liabilities measured at amortised cost.

The net gain of financial assets held for trading and financial liabilities includes unrealised results from the measurement of a long-term commodity futures contract as well as 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 IAS 39 and interest income from securities. According to IFRS 9 these financial instruments are now included in the fair value through profit or loss category, hence the corresponding gains/losses are included in the gains/losses from financial assets and financial liabilities measured at fair value through profit or loss.

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

Net finance costs include interest income amounting to €9.5 million (2017: €5.0 million) and interest expenses of €69.5 million (2017: €26.5 million), which result from financial assets and liabilities which are not carried at fair value through profit or loss.

54. Derivative financial instruments

Commodity forward

The RHI Magnesita Group concluded 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 9.2.6) 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 €20.9 million at 31 December 2018 (31.12.2017: €40.1 million). The corresponding present value of the cash flows for the agreed electricity supply totals €71.3 million at 31 December 2018 (31.12.2017: €83.4 million); the present value of the cash flow at market price amounts to €50.4 million (31.12.2017: €43.3 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 US$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 US$50.0 million (31.12.2017: US$160.0 million) ends in the second half of 2020. The interest and compensation payments for this hedging relationship are due semi-annually. Fixed interest rates amount to roughly 1.3%; the variable interest rates are based on the LIBOR.

Two interest rate swaps measured at fair value through profit or loss with an original maturity until 2019 and with a nominal volume of €12.2 million (31.12.2017: €17.2 million) were early settled in the current reporting period. Total expense in 2018 of this transaction amounts of €0.3 million and is recognised within other net financial expenses.

In 2017, a hedging relationship with a nominal value of €50.0 million ended on 31 July 2017. The expense of €0.2 million recognised in other comprehensive income was reclassified to profit or loss and recognised within other net financial expenses.

The fair values of the interest rate swaps totalled €(6.7) million at the reporting date (31.12.2017: €1.3 million), which is shown within other non-current financial assets in the amount of €0.6 million(31.12.2017: €1.5 million) and within other non-current financial liabilities in the amount of €7.3 million (31.12.2017: €0.2 million) in the Consolidated Statement of Financial Position. For the year ended, €6.8 million (2017: €0.2 million) have been recognised within other comprehensive income. In 2017, an expense amounting to €0.5 million has been reclassified from other comprehensive income to profit or loss and recognised within other net financial expenses. No ineffectiveness has been recognised in profit and loss.

Forward exchange contracts

As of 31 December 2017, there were no material open forward exchange contracts. The nominal value and fair value of forward exchange contracts as of 31 December 2018 are shown in the table below:

 

 

31.12.2018

Purchase

Sale

Nominal value
in million

Fair value in € million

EUR

USD

USD

182.0

1.1

USD

INR

EUR

890.0

0.0

Forward exchange contracts

 

 

1.1

 

55. Financial risk management

Financial risks are incorporated in RHI Magnesita's corporate risk management and are centrally controlled by Group Treasury.

None of the following risks have a significant influence on the going concern of the RHI Magnesita Group.

Credit risks

The maximum credit risk from recognised financial assets amounts to €915.0 million (31.12.2017: €914.1 million) and is primarily related to investments with banks and receivables due from customers.

The credit risk with banks related to investments (especially cash and cash equivalents) is reduced as business transactions are generally only carried out with financial institutions with a good credit rating.

To counteract the default risk related to these transactions, receivables from customers are hedged as far as possible through credit insurance and collateral arranged through banks (guarantees, letters of credit), Credit and default risks are monitored continuously, and provisions are formed for risks that have occurred and are identifiable.

In the following, the credit risk from trade receivables is shown classified by customer industry, by foreign currency and by term.

This credit risk, which is hedged by existing credit insurance, letters of credit and bank guarantees, is shown by customer segment in the following table:

in € million

31.12.2018

31.12.2017

Segment Steel

250.3

294.3

Segment Industrial

99.6

100.6

Trade receivables

349.9

394.9

Credit insurance and bank guarantees

(139.8)

(158.1)

Net credit exposure

210.1

236.8

 

The following table shows the carrying amounts of receivables denominated in currencies other than the functional currencies of the group companies. The carrying amounts of the receivables in the functional currency of the respective Group company are included under other functional currencies:

in € million

31.12.2018

31.12.2017

US Dollar

75.4

96.0

Euro

11.6

9.9

Pound Sterling

5.8

3.8

Other currencies

7.0

7.9

Other functional currencies

250.1

277.3

Trade receivables

349.9

394.9

 

The movement in the valuation allowance in respect of trade and other receivables and contract assets during the year was as follows. Comparative amounts for 2017 represent the allowance account for impairment losses under IAS 39.

 

2018

2017

in € million

Individually assessed -
credit impaired

Collectively assessed -
not credit impaired

 

Accumulated valuation allowance at beginning of year under IAS 39

34.4

0.0

35.2

Adjustment on initial application of IFRS 9

(5.7)

3.3

-

Accumulated valuation allowance at beginning of year under IFRS 9

28.7

3.3

35.2

Currency translation

(1.1)

0.0

(1.1)

Addition

5.0

0.0

11.2

Use

(3.0)

0.0

(3.2)

Reversal

0.0

0.0

(5.6)

Net remeasurement of loss allowance

 -

(2.1)

0.0

Reclassification as held for sale

0.0

0.0

(2.1)

Accumulated valuation allowance at year-end

29.6

1.2

34.4

 

For trade receivables and contract assets, for which no objective evidence of impairment exists, lifetime expected credit losses have been calculated using a provision matrix as shown below:

in € million

Trade receivables - days past due

31.12.2018

Not past due

less than 30 days

between 31 and
60 days

between 61 and
90 days

between 91 and
180 days

more than 180 days

Total

Expected credit loss rate in %

0.05 - 0.45%

0.11 - 1.08%

0.50 - 7.04%

1.39 - 13.33%

2.27 - 17.63%

5.86 - 33.81%

 

Gross carrying amount

294.0

34.0

7.6

3.2

2.8

4.0

345.6

Life time expected credit loss

0.4

0.1

0.1

0.1

0.2

0.3

1.2

 

in € million

Trade receivables - days past due

01.01.2018

Not past due

less than 30 days

between 31 and
60 days

between 61 and
90 days

between 91 and
180 days

more than 180 days

Total

Expected credit loss rate in %

0.02 - 0.32%

0.03 - 0.73%

0.11 - 5.63%

0.19 - 10.59%

0.28 - 14.06%

0.71 - 76.86%

 

Gross carrying amount

310.5

46.2

19.3

7.2

4.2

9.6

397.0

Life time expected credit loss

0.4

0.1

0.2

0.2

0.2

2.3

3.4

 

Liquidity risk

Liquidity risk refers to the risk that financial obligations cannot be met when due. The Group's financial policy is based on long-term financial planning and is centrally controlled and monitored continuously at RHI Magnesita. The liquidity requirements resulting from budget and medium-term planning are secured by concluding appropriate financing agreements. As of 31 December 2018, the RHI Magnesita Group has a credit facility of €319.3 million (31.12.2017: €317.2 million) at its disposal, which is unused and available immediately. These lines of credit were concluded with different international banks in order to ensure independence of banks. The companies of the RHI Magnesita Group are integrated into a clearing process managed by Central Treasury and provided with financing limits in order to minimise the need of borrowings for the Group as a whole.

Non-derivative financial instruments

An analysis of the terms of non-derivative financial liabilities based on undiscounted cash flows including the related interest payments shows the following expected cash outflows:

 

 

 

Remaining term

in € million

Carrying amount 31.12.2018

Cash
outflows

up to 1 year

2 to 5 years

over 5 years

Liabilities to financial institutions

 

 

 

 

 

fixed interest

116.1

127.3

2.7

88.5

36.1

variable interest

1,037.5

1,100.9

338.6

732.9

29.4

Other financial liabilities and capitalised transaction costs

12.8

15.2

2.2

12.3

0.7

Liabilities to fixed-term or puttable non-controlling interests

36.3

211.8

14.2

18.4

179.2

Contingent consideration for acquired subsidiaries

0.6

0.6

0.0

0.6

0.0

Trade payables and other current liabilities

539.3

539.3

539.3

0.0

0.0

Non-derivative financial liabilities

1,742.6

1,995.1

897.0

852.7

245.4

 

 

 

 

Remaining term

in € million

Carrying amount 31.12.20171)

Cash
outflows

up to 1 year

2 to 5 years

over 5 years

Liabilities to financial institutions

 

 

 

 

 

fixed interest

176.7

202.7

60.6

96.8

45.3

variable interest

776.3

858.1

146.5

683.7

27.9

Perpetual bond

215.3

309.5

79.1

52.9

177.5

Senior Notes

55.5

66.0

5.2

60.8

0.0

Other financial liabilities and capitalised transaction costs

1.7

1.8

0.9

0.8

0.1

Liabilities to fixed-term or puttable non-controlling interests

32.0

161.0

10.1

12.3

138.6

Contingent consideration for acquired subsidiaries

0.6

0.6

0.0

0.6

0.0

Trade payables and other current liabilities

507.0

507.0

507.0

0.0

0.0

Non-derivative financial liabilities

1,765.1

2,106.7

809.4

907.9

389.4

1  Adjusted to reflect the effects of the final purchase price allocation of Magnesita.

Derivative financial instruments

The remaining terms of derivative financial instruments based on expected undiscounted cash flow as of 31 December 2018 and
31 December 2017 are shown in the table below:

 

 

 

Remaining term

Carrying amount 31.12.2018

Cash flows

up to 1 year

2 to 5 years

over 5 years

 

 

 

 

 

0.6

0.6

0.5

0.1

0.0

1.0

1.0

1.0

0.0

0.0

1.1

1.1

1.1

0.0

0.0

 

 

 

 

 

20.9

22.2

1.0

21.2

0.0

7.3

8.1

2.4

5.7

0.0

 

 

 

 

Remaining term

Carrying amount 31.12.2017

Cash flows

up to 1 year

2 to 5 years

over 5 years

 

 

 

 

 

1.5

1.5

0.9

0.6

0.0

1.7

1.7

1.7

0.0

0.0

 

 

 

 

 

40.9

43.5

7.5

28.8

7.2

 

Foreign currency risks

Foreign currency risks arise where business transactions (operating activities, investments, financing) are conducted in a currency other than the functional currency of a company. They are monitored at the group level and analysed with respect to hedging options. Usually the net position of the Group in the respective currency serves as the basis for decisions regarding the use of hedging instruments.

Foreign currency risks are created through financial instruments which are denominated in a currency other than the functional currency (in the following: foreign currency) and are monetary in nature. Important primary monetary financial instruments include trade receivables and payables, cash and cash equivalents as well as financial liabilities as shown in the Consolidated Statement of Financial Position. Equity instruments are not of a monetary nature, and therefore not linked to a foreign currency risk in accordance with IFRS 7.

The majority of foreign currency financial instruments in the RHI Magnesita Group result from operating activities, above all from intragroup financing transactions, unless the foreign exchange effects recognised to profit or loss on monetary items, which represent part of a net investment in a foreign operation in accordance with IAS 21, are eliminated or hedged through forward exchange contracts. Significant provisions denominated in foreign currencies are also included in the analysis of risk.

The following table shows the foreign currency positions in the major currencies as of 31 December 2018:

in € million

USD

EUR

MXN

CAD

Other

Total

Financial assets

651.5

104.1

0.4

23.1

71.4

850.5

Financial liabilities, provisions

(938.6)

(241.7)

(21.5)

(6.8)

(45.7)

(1,254.3)

Net foreign currency position

(287.1)

(137.6)

(21.1)

16.3

25.7

(403.8)

 

The foreign currency positions as of 31 December 2017 are structured as follows:

in € million

USD

EUR

MXN

CAD

Other

Total

Financial assets

583.9

88.5

(0.1)

22.7

48.6

743.6

Financial liabilities, provisions

(727.5)

(218.6)

(18.6)

(2.4)

(47.1)

(1,014.2)

Net foreign currency position

(143.6)

(130.1)

(18.7)

20.3

1.5

(270.6)

 

The disclosures required by IFRS 7 for foreign exchange risks include a sensitivity analysis that shows the effects of hypothetical changes in the relevant risk variables on profit or loss and equity. In general, all non-functional currencies in which Group companies enter into financial instruments are considered to be relevant risk variables. The effects on a particular reporting period are determined by applying the hypothetical changes in these risk variables to the financial instruments held by the Group as of the reporting date. It is assumed that the positions on the reporting date are representative for the entire year. The sensitivity analysis does not include the foreign exchange differences that result from translating the net asset positions of the foreign group companies into the Group currency, the Euro.

A 10% appreciation or devaluation of the relevant functional currency against the following major currencies as of 31 December 2018 would have had the following effect on profit or loss and equity (both excluding income tax):

 

Appreciation of 10%

Devaluation of 10%

in € million

Gain/(loss)

Equity

Gain/(loss)

Equity

US Dollar

27.0

27.0

(33.0)

(33.0)

Euro

12.4

12.4

(15.1)

(15.1)

Mexican Peso

1.9

1.9

(2.3)

(2.3)

Canadian Dollar

(1.5)

(1.5)

1.8

1.8

Other currencies

(2.3)

(2.3)

2.7

2.7

 

The hypothetical effect on profit or loss at 31 December 2017 can be summarised as follows:

 

Appreciation of 10%

Devaluation of 10%

in € million

Gain/(loss)

Equity

Gain/(loss)

Equity

US Dollar

20.3

20.3

(24.8)

(24.8)

Euro

11.9

11.9

(14.5)

(14.5)

Mexican Peso

1.7

1.7

(2.1)

(2.1)

Canadian Dollar

(1.8)

(1.8)

2.3

2.3

Other currencies

(0.4)

(0.4)

0.3

0.3

 

Interest rate risks

The interest rate risk in the RHI Magnesita Group is primarily related to financial instruments carrying variable interest rates, which may lead to fluctuations in results and cash flows. At 31 December 2018, interest rate hedges amounting to a nominal value of €305.6 million (31.12.2017: €17.2 million) and a nominal value of US$250 million (31.12.2017: US$160.0 million) existed; a variable interest rate was converted into a fixed interest rate through an interest rate swap.

The exposure to interest rate risks is presented through sensitivity analyses in accordance with IFRS 7. These analyses show the effects of changes in market interest rates on interest payments, interest income and interest expense and on equity.

The RHI Magnesita Group measures fixed interest financial assets and financial liabilities at amortised cost, and did not use the fair value option - a hypothetical change in the market interest rates for these financial instruments at the reporting date would have had no effect on profit and loss or equity.

Changes in market interest rates on financial instruments designated as hedges as a part of cash flow hedges to protect against interest rate-related payment fluctuations have an effect on equity and are therefore included in the equity-related sensitivity analysis. If the market interest rate as of 31 December 2018 had been 25 basis points higher or lower, equity would have been €3.8 million (31.12.2017: €0.5 million) higher or lower taking into account tax effects.

Changes in market interest rates have an effect on the interest result of primary variable interest financial instruments whose interest payments are not designated as hedged items as a part of cash flow hedge relationships against interest rate risks, and are therefore included in the calculation of the result-related sensitivities. If the market interest rate as of 31 December 2018 had been 25 basis points higher or lower, the interest result would have been €0.1 million (31.12.2017: €0.5 million) lower or higher.

Other market price risk

RHI Magnesita holds certificates in an investment fund amounting to €12.0 million (31.12.2017: €12.6 million) to cover the legally required protection of personnel provisions of Austrian group companies. The market value of these certificates is influenced by fluctuations of the worldwide volatile stock and bond markets.

In 2015, an energy supply contract with a term until the year 2023 was classified as a derivative financial instrument in and the fair value of the financial liability amounts to €20.9 million at 31 December 2018 (31.12.2017: €40.1 million). If the quoted forward prices at 31 December 2018 had been 20% higher or lower, EBIT would have been €10.1 million (31.12.2017: €8.7 million) higher or lower. In contrast, if the borrowing costs relevant for discounting had been 25 basis points higher or lower at the reporting date, EBIT would have been
€0.2 million (31.12.2017: €0.3 million) higher or lower.

56. Capital management

The objectives of the capital management strategy of the RHI Magnesita Group are to secure going concern at all times by creating a solid capital base to finance growth, investments, to increase shareholders value on a sustained basis and to generate adequate returns to enable attractive dividend payments to the shareholders and to service debt.

The RHI Magnesita Group manages its capital structure through careful monitoring and assessment of the overall economic framework conditions, credit, interest rate and FX risks and the requirements and risks related to operations and taking into account strategic projects.

As the Group optimised its financial structure in 2018 and there are only two months of Magnesita results in the Consolidated Statement of Profit or Loss in 2017, the key figures of capital management for 2017 are not comparable. Therefore they are not included in the disclosure.

The capital structure key figures at the reporting date are shown below:

 

31.12.2018

Net debt (in € million)

638.9

Net gearing ratio (in %)

72.2%

Group leverage

1.16

 

Net debt, which reflects borrowings net of cash and cash equivalents and marketable securities, is controlled by Corporate Treasury. The main task of the Corporate Treasury department is to execute the capital management strategy as well as to secure liquidity to support business operations on a sustainable basis, to use banking and financial services efficiently and to limit financial risks while at the same time optimising earnings and costs.

The net gearing ratio is the ratio of net debt to equity.

The key performance indicator for net debt in the RHI Magnesita Group is the group leverage, which reflects the ratio of net debt to adjusted EBITDA. It is calculated as follows:

in € million

31.12.2018

EBIT

398.6

Amortisation

28.6

Depreciation

124.8

Other operating income and expenses

1.0

Adjusted EBITDA

553.0

 

 

Total debt

1,166.4

Cash and cash equivalents

491.2

Marketable securities

36.3

Net debt

638.9

 

 

Group leverage

1.16

 

In both 2018 and 2017, all externally imposed capital requirements were met. The Group has sufficient liquidity headroom within its committed debt facilities.

RHI Magnesita N.V. is subject to minimum capital requirements according to its articles of association. The articles of association stipulate a mandatory reserve of €288,699,230.59 which was created in connection with the merger.

57. Contingent liabilities

At 31 December 2018, warranties, performance guarantees and other guarantees amount to €43.0 million (31.12.2017: €39.8 million). Contingent liabilities have a remaining term between two months and three years, depending on the type of liability. Based on experiences of the past, the probability that contingent liabilities are used is considered to be low.