Welcome to the RHI Magnesita 2023 full-year results presentation. We're hosting it in London today for all of you who are with us, through the teleconference. Three key messages today. First, 2023 was a really difficult year from a market perspective. Sales volumes declined by 5%, like for like, reflecting the weakness in the key markets and market, especially construction but also transportation. Second year of declining steel volumes, steel output globally. Four out of five of our regions faced these declining sales volumes. There's no change in sight. Actually, first half of 2024 is probably going to be worse than 2023. Second message, we still have resilient financial results, especially considering the backdrop we have in the markets. This has been delivered by consistent operational execution improvements.
It's all the hundreds of little activities from the last years, all much of this on the back of these very significant investments that we've made into the network, but also step by step by step improvements in our planning processes. Lots of lessons from the post-COVID years that we are able to put into life. We are now stepping up investments into that piece, into our digital platform, because in reality our systems and processes have been designed in the 1980s, so they all need an upgrade. The third theme of 2023 is we're leading the consolidation in the refractories refractory industry. Last year we could complete six acquisitions, nine acquisitions in total since, in the last two years. Integrating these acquisitions is actually the real work here, and this is very much work in progress. It's a main task ahead of us.
2024 is very much focused internally on acquisitions. I'm proud to say we have really great people that joined our company, even small acquisitions. The people that came is fantastic. Before we go into the numbers, let me spend a little bit more time on health and safety, because I have to stand here in front of you and express our really deep sadness because we had two fatal accidents in Austria in recent months. This is sad and takes away the joy for great financial results or any kind of joy, because this is health and safety should be a value is a value for us that makes this totally unacceptable. I can assure you, after these fatalities, life inside RHI Magnesita will change. We cannot just have an accident report and continue like before.
Our general accident has been going down year by year. It's not bad. It's actually improving. The number of total accidents has gone down quite well. But having lost two lives, we cannot and we will not return to where we were before. We have started a very deep, broad response program that will take us several months with immediate activities and actions and things we change. We will also, in one or the other case, spend money and increase our cost because we cannot take this risk anymore. The specific root causes have been already eliminated. But in the one case the funeral happened today, all the colleagues, of course, went there and the mourning is big. You will hear more about this change in mindset in RHI Magnesita over the next quarters. We will take you on this journey. Let's go to the financial results.
Oh, I'm the one to operate here. The revenue increase was driven by acquisitions. Without those, we wouldn't have had a revenue increase. Our EBITDA the same. But the margin actually declined slightly. This is a first glimpse on what's really going on out there in the market. It remained resilient at 11.4%, so the absolute number went up. But the margin, I think, is a first indication of the real tough market environment out there. This is a $409 million EBITDA delivered against the guidance, the last guidance at least, that we gave out of $380 million. So we had a pretty good, strong fourth quarter, mainly driven by industrial projects. It's an improvement of 19% against the original outlook that we had at the beginning of the year. That's not because the market was better, but that's very much because the activities we did internally went well.
Of course, also we could close one or two acquisitions more than we had even hoped at the beginning of the year. But more satisfactory than the growth in EBITDA is the in-depth trading requirement in that trading environment for us as a management team is actually the cash flow performance. We've had more than 100% cash conversion with a cash flow of EUR 413 million. This was supported, of course, by a decrease, EUR 123 million decrease in working capital, release of working capital. Ian will give you all the components of this just in a moment. We were therefore able to keep gearing at 2.3 x despite investing over $400 million, so pretty much the entire cash flow, in acquisitions during 2023. We are demonstrating with this that we can very well control our gearing within the guided range while continuing to execute acquisitions, substantial acquisitions.
Return on invested capital, the bottom line of the bottom lines, is a really important metric for us. As we invest to grow into the business, we have to increase profitability still more to deliver a better return on invested capital than we have. It's not a disaster, but we're not happy with this 10.7%. There's room for improvement clearly here in the midterm. The small decline in ROIC was expected given the stage of the M&As and of the investments. So this doesn't make us all too nervous. Prior to realizing the synergy of the acquisitions, we can't very much increase here, or we couldn't have done that in 2023. Our return on invested capital even now is higher than many competitors and many industrials, as we could realize based on the many insights that we have obtained during our M&A activities.
I can tell you none of the companies we buy are at that level, so we still have opportunities to upgrade the industry here. RHI Magnesita's goal is to substantially to sustainably increase the ROIC as we generate value from these strategic investments. So let's go to them. M&A growth on a resilient base business. We were able to grow revenue by 10% in 2023 in constant currency terms. The decline in sales volume in our base business and also the volumes in the acquired companies' business, because they're in the same market than us, because their base also went down, reduced revenue by 3%. But this was offset by restoring prices, in particular in the industrial market, where price had a significant effect. I'll get into that in a moment. The main growth in revenue came from M&A, which contributed 9% revenue growth.
Acquisitions delivered EUR 56 million of EBITDA in 2023, exceeding the EUR 40 million that we guided at the beginning of the year or in the middle of the year, and show an early validation of these M&A-linked growth strategies. We haven't delivered many of the synergies yet, of course, because it's too early. The price index chart on the bottom left here is important for the entire context of the results and also for the outlook. On average, pricing in steel was flat in 2023 versus 2022, but there was an increase in non-steel in industrial pricing that came because the pricing in the previous years was suppressed. Therefore we had a recovery effect in 2023 back to more or less the long-term margin levels that we should have in the industrial business.
However, you should also see that from the first quarter of 2023 onwards, pricing declined in both areas, industrial and steel. So it went up early in the year from a catch-up in industrial, but then started to decline to go down. And we expect this downward trend to continue in 2024 due to lower raw material and other input costs. This leads to slowly reducing refractory pricing due to the pass-through effect worldwide. It's the normal cycle in our industry, and it's okay as long as it stays under control and there's not too erratic of a panic among competitors. So far, so good. But the trend continues, and eventually we hope that we can still defend the margins. So let's go and take a look at the two businesses a little bit more in detail.
Steel business delivered a solid performance with a 4% increase in revenues, again, all M&A supported, because the base business was 3% lower there. The sales volumes declined by more than the world steel production numbers show, because they show -1%. Our base business is -3%. That reflects some destocking. And then there are some individual items in certain regions that contribute to this, but from one or two very big customers that we have. So it's exceptional items here. Overall, RHI Magnesita was able to keep its market share in the global steel market. We're also able to hold pricing flat despite lower input costs for the industry. But the benefits of lower costs for us and for most other refractory producers also was offset entirely by a higher fixed cost because of the low production volumes.
We all operate plants way below full capacity, especially in the second half of the year in our case. Therefore, gross margin was stable also at 22.3%. If you look at the steel performance by region, you can see the variations here pre and post M&A. We put both numbers so that you can better compare and get a transparency. All regions except India saw a flat or declining steel production in 2023, particularly weak in North and South America and Europe in the traditional markets. In North America, Europe, and China, our sales volume declined by more than local steel production due to mostly customer-specific destocking or decision of certain steel plants to idle their capacity, in which we had particularly high market share. It's not a market share loss, but it's linked to this effect.
Typically, also electric arc furnace-based steel plants, where we have an overproportionate market share, adapt to demand volatility much faster than blast furnace steel plants. Of course, as we have a higher market share there, we get impacted more on the way down as well as on the way up. Therefore, you have this difference to the world steel numbers. If we include the sales volumes from the businesses that we acquired during the year, we significantly outperformed local market growth, of course, also in India, in Europe, and in China, especially there. This has enabled us to grow revenue in four out of five regions despite the challenging demand backdrop, proving the value of our M&A strategy. After 25% growth in steel revenues this year, the India-West Asia-Africa business unit is now our second largest region after North America and bigger than Europe.
The majority of our revenue in the industrial business of revenue growth came from here. In the industrial business, we benefited from higher volumes due to M&A, actually more M&As in industrial than in steel, and strong pricing dynamics with average pricing 50% higher than 2022. I already explained the margins in 2022 were quite subdued, so there's a catch-up effect because the industrial business segment is a late cycle business, much later than the steel business, with price and margin developing differently. They're just a different cycle, so we cannot one-on-one or we should not one-to-one ever compare. Our customers' CapEx cycle in the industrial segment is different, and we're linked to this. In the steel industry, of course, we're linked in the consumption process.
We will likely see now a decline in the industrial volumes in 2024 and a decline in pricing because many less CapEx projects come to execution. The prices now for new contracts into the future get adapted to the lower input costs that we have. A characteristic of 2023 is that we increased cement and lime sales volumes by 25%. You see this in the chart. Why? Because almost entirely because of the acquisition of Dalmia in India, which is a very significant player in the cement market in India, where we were hardly present before. So in the India-West Asia-Africa region, cement sales went up by 111%. It's now roughly the same weight as the cement business in the rest of the group. It's one of the things that our M&A strategy should deliver is close these gaps where we have them.
Let's talk about sustainability before we can jump into the, or Ian will jump into the numbers. We continue to lead the refractory industry in the sustainability area, and we are proud of this. Each year, we've been able to increase the proportion of raw materials that we're sourcing from recycled waste. We are not yet at the end of this process, although every percentage, of course, of another increase becomes technologically and also economically more challenging due to increasing efforts that are required to clean these waste streams and make good raw materials out of them. As we are acquiring businesses with low or no recycling content, the process starts again and again.
The average recycling rate reduces for a short while because we buy businesses without any recycling yet, usage yet, until this newly acquired business or the plants catch up and get to the group level or surpass the group level. It's part of the integration activities. Recycling remains a very effective way to reduce emissions from the overall refractory production chain because of the high CO2 footprint of mined or fresh raw materials. For every ton of recycled material that we use, we avoid the emission of 1.5 tons of CO2 on average. Since our industry is a relatively large emitter, these add up to very significant savings. In our case, 1.3 million tons of CO2 emissions saved since 2018 just in our own network.
Overall, we are on track to achieve our 2025 target of 15% CO2 emission reductions, not just through recycling, but it's the major part. We also maintain high ESG ratings with all of these independent agencies that you can see some of them here. We have ambitions to further improve these ratings even. They cover more, of course, than just CO2 emissions. We score highly across the board in all of them, but CO2, of course, is the big challenge for us. Finally, let me talk about M&A. Just briefly, I've mentioned it the whole time already. We have completed nine acquisitions since December 2021, six of them in 2023. Every transaction fits our main criteria that we have to see a path to delivering substantial synergies against the acquired EBITDA within two to three years, at least 30%. That's always what we have said.
Overall, we are pleased with the direction of travel that we have here. We're happy that we've been able to achieve these deals to deliver them. As I mentioned earlier, these have been weak years in the refractory industry for many, many producers. That's why the timing to do these acquisitions now wasn't that bad. We are not just buying businesses, but we get really committed and knowledgeable and really energized people. It's a process when the people get to know us. But once they are there, the engagement is really fantastic. It's really great. The consolidation opportunity of the industry remains. We are building a broad refractory business balanced between steel and industrial segments and with the ability to provide comprehensive solution contracts, which is a key differentiator for a customer. This is possible because of the breadth of the portfolio and the breadth of the reach.
Logistics and procurement synergies are often a key driver of the benefits that we can extract due to the significant impact that these cost components have on our business. We have grown in the target geographies of India, Türkiye, and China like we have planned. We have added two major flow control plants to expand our presence in that product segment. We have expanded our strong position in magnesite and dolomite-based so-called basic refractories, basic from a chemical perspective. We have been expanding into the non-basic or alumina-based refractories to complement our portfolio. We still have an active M&A pipeline, still with a focus on East Asia, also North America and the Middle East. We are seeking to add further scale on alumina-based refractories also.
If suitable further opportunities are not available, we will be able to degear the balance sheet through effective integration of the acquisitions that we have made to date. And that degearing can be really, really fast. Finally, you see the M&A financials here. The acquisitions delivered EUR 56 million of EBITDA in 2023, exceeding the EUR 40 million guidance that we had when we closed these deals. And it validates the hypothesis of our strategy. I think at least it's an early validation for the time being. We are starting to see the positive results from the synergies and the increased exposure to the high-growth geographies like India, for example. Today, we are guiding that 2023 acquisitions should contribute around EUR 80 million to the EBITDA in 2024, mainly based on the annualization effects, but also due to some synergies that can already make it into the P&L next year.
They will then, of course, continue to add value in 2025, at that time driven by the synergies. The acquisitions that we have completed had a net debt impact of EUR 314 million, including the cash consideration, the net debt that we have consolidated, and the investments that we've made into working capital because it changes the footprint, of course. The cash outflow on M&A is offset by cash inflow from the acquired businesses and by the EUR 100 million equity raise that we could make in India completed in the first half of this year. Enough overview and broad talk. You're all anyway very interested in the numbers, Ian. Your show.
Thanks, Stefan. As Stefan highlighted, from a financial perspective, we delivered a strong performance in what was a difficult environment. Our revenue was up 8% to EUR 3.6 billion as pricing and M&A offset the effect of lower volumes.
EBITDA increased 7% to EUR 409 million, with an EBITDA margin of 11.4%, broadly in line with the 11.6% in the prior year. The slight decrease in margin is a result of the weaker vertical integration margin offsetting what was a record refractory margin. Total adjusted financial charges were EUR 92 million. Within this, net interest expenses on debt and cash were EUR 35 million against our guidance of EUR 40 million. Other financial expenses were EUR 27 million against guidance of EUR 25 million, so up slightly due to higher pension charges on the M&A. Currency translation losses are also reported within financial expenses, and these were EUR 30 million following the devaluation of the Argentinian peso and the Turkish lira. The effective tax rate was 24%, in line with our guidance of 23%-25%. Adjusted EPS increased from 498, increased to 498 from 482 in the prior year.
The board has recommended a final dividend of EUR 1.25 per share. Together with our interim dividend of EUR 0.55, this represents a full-year dividend payout of EUR 1.80 per share, which is in line with our policy of a maximum of a 3x dividend cover. It represents a dividend yield of 4.3% against our most recent closing share price. Whilst the near-term outlook for our industry remains uncertain, the board is confident to recommend a 13% increase in the dividend compared to 2022 due to the strong cash generation and the resilient margins that have been delivered in recent years. Revenue increased 8% to EUR 3.6 billion. In constant currency terms, this was a 10% increase given the weakening of the US dollar and the Indian rupee against the euro during the year. We experienced a 5% drop in sales volumes in our base business excluding M&A.
This turned out to be exactly as we guided at the beginning of 2023. The revenue impact of this was material, almost EUR 250 million. We offset this through three things. Firstly, M&A, which contributed EUR 356 million. Secondly, higher pricing in the industrial segment where prices were up 15% year-over-year. And finally, our strategic sales initiatives to increase sales in target geographies, in flow control, and in solutions. Adjusted EBITDA increased 7% to EUR 409 million. The currency headwind that we spoke about in revenue is balanced out at an EBITDA level by the weaker Argentinian peso and the Chinese yuan. Both of those have a cost-benefit for us. The key drivers of the improvement in EBITDA were improved pricing, the strategic sales initiatives, and the EUR 39 million additional contribution from newly acquired businesses.
This more than offsets the impact of lower sales volumes and weaker fixed cost absorption. As Stefan mentioned, our fixed cost absorption was down as we reduced production in response to weaker demand, and we sought to reduce our inventory levels. Over time, our business has earnings, and it has margin upside from a normalization in our sales volumes, a normalization in our production volumes, and a normalization in the vertical integration margin together with the delivery of the M&A synergies. We delivered a resilient EBITDA margin of 11.4%. But it is a story of two parts. We recorded a record refractory margin of 9.7%. This reflects the investments and improvements that we have made in our production network and the disciplined approach to SG&A reductions, to cost management, and pricing that we've implemented over the past four years.
In contrast, the vertical integration margin is currently at an all-time low. Last year, the margin was 1.7%. It contributed EUR 61 million to EBITDA, which is down EUR 23 million from 2022. We expect the vertical integration margin to soften further this year and to average around 1% in 2024. This is happening because demand for refractories and therefore demand for refractory raw materials are at low levels, and this is pushing down pricing. At the same time, we are running our raw material sites at low levels of capacity utilization, which impacts our fixed cost absorption. While the vertical integration margin is low, it is positive. It is making an EBITDA contribution. This means that we are still able to source raw materials from our sites at a cost of production which is lower than the price to buy these raw materials in the market.
We continue to expect that in a normal demand environment, we can sustainably generate between 2.5 and 3.5 percentage points of margin from our raw material assets. We experienced unprecedented cost inflation in 2021 and 2022 driven by higher energy, higher raw materials, and higher freight costs. You may recall in our 2022 year, we reported that our cost inflation was almost 20%. At that time, we demonstrated that we could pass on these cost increases to our customers with over EUR 600 million of price increases in 2022. In 2023, input costs reduced for freight, for energy, and for raw materials. This benefit was very largely offset by higher labor inflation. You can see this very clearly if you look at the chart in the top left where you compare the cost of goods sold for 2022 and 2023 excluding M&A.
Our unit costs remained high in 2023 given the weak fixed cost absorption as our plants operated at around three-quarters of their capacity in the second half of last year. We had a significant increase, you recall, in working capital in 2021, the first half of 2022 driven by these increased input costs and, importantly, our commitment to ensure that we seamlessly supplied our customers during a period when global supply chains were not stable. Since then, we've been working steadily to optimize, to reduce where possible the working capital that is required to effectively operate our global network and to seamlessly supply our customers. We are pleased that in 2023, we were able to release EUR 123 million of working capital in our base business before M&A. This has happened from a combination of reducing inventories to their target coverage ratios and close management of our receivables.
M&A added EUR 159 million to our working capital balance. This is either working capital that came with the business or that we invested in subsequent to completion. You can also see, importantly, that we have reduced our working capital financing to below EUR 300 million. In recent years, working capital has been reducing as a proportion of our revenue and our working capital. This does, however, have an impact of increasing our reported working capital intensity. And we are doing this because there isn't a cost advantage to be gained from increasing the absolute working capital financing further at this time. As you can see in the top left, we reduced working capital intensity from 25.4% down to 23% before M&A. M&A then pushed that up to 24.2%. And certainly, our expectation is that we would maintain the intensity in 2024 at around that 24% level.
On CapEx, we have passed the peak years of investment into the production optimization plan, which was at its highest point in 2021. Total CapEx on the base business in 2024 is guided at EUR 140 million. This includes EUR 10 million associated with the completion of the Brumado project, which is about to start its production ramp-up. It also includes EUR 35 million of a three-year investment totaling EUR 100 million into rebuilding our digital architecture and further upgrading our planning capabilities. This is the lowest level of CapEx on the base business since 2019, bearing in mind particularly that these are nominal numbers, so unadjusted for the impact of inflation over that period.
In addition to the base business, we have CapEx that we'll spend on the M&A of EUR 30 million as we invest to integrate these operations, in some cases to make some expansions, to modernize, and then also to maintain those acquisitions. Of that 30, approximately EUR 10 million is sustainable maintenance CapEx that we would expect to see going forward. One of the highlights of 2023 has been the strong cash generation. We generated operating cash flow of EUR 413 million. This is 101% conversion from EBITDA into operating cash flow. And strong cash generation has been a hallmark of our business for many years. The exception was the 18 months of post-COVID recovery with its global supply chain challenges. But if you look at the 18 months since then, so from July 2022 to December 2023, we've generated operating cash flow of over EUR 650 million.
Free cash flow over that same 18-month period was just short of EUR 450 million. Looking at the net debt bridge on the right, our M&A investments in 2023 were roughly 80% funded by free cash flow and the India equity raise of EUR 100 million. Finally, on net debt, our net debt increased from EUR 1.2 billion to EUR 1.3 billion. On a pro forma basis, net debt to EBITDA was flat at 2.3x. As in previous years, we continue to maintain pretty robust levels of liquidity headroom, EUR 1.3 billion. To further manage the financial risk, we refinanced over EUR 600 million of debt facilities in 2023 to maintain the long-dated amortization profile that you see on the bottom left-hand side. Almost 70% of our debt is on fixed rates. Our average cost of debt, while it's been rising, is a very competitive 3.3%.
It has increased only because of the increase in the base rate. The margin has not changed in recent periods. With that, I'll say that we are all very proud of the financial results that we delivered in 2023 despite the weak macro environment. I'll now hand you back to Stefan for some closing comments.
Thanks, Ian. Let me summarize and maybe put a little bit more gloomy atmosphere into the room. We are forecasting this very, very weak market environment, especially that we saw in the second half of 2023, to continue. The key end markets of construction and transportation remain subdued almost everywhere in the world. We, in addition to this, see quite a significant reduction, pullback in glass and in non-ferrous metals volumes for our business in 2024 because of a lack of projects. We know that we will also experience further pricing pressure from competitors as they might get nervous about low plant utilization and are losing hope. This would be an acceleration of this slight price decline trend that I showed you at the beginning of the presentation.
Refractory prices follow lower raw material prices, and it depends very much on the speed with which this happens, whether this impacts us negatively on the margins or not. If, on the other hand, there's a recovery, we don't know where it should come from in 2024. But if there is one, then we're well set up to benefit from the operational gearing and from the fixed cost dilution benefits that we could see. In any case, production volumes in 2024 in RHI Magnesita will be slightly higher than 2023 because production volumes will match sales volumes as we now have the inventory coverage pretty much in all the regions in the world that we want. For the purpose of your modeling, we assume that sales volumes in 2024 in the base business excluding new M&A will be in line with 2023.
I can assure you this is not at all a pessimistic outlook, not at all. If we look in the first quarter, we are running behind. On top of that flat base, of course, we have the annualization of M&A, and that should increase our shipped volumes by around 10%. As I mentioned before, these acquisitions in total will contribute around EUR 80 million EBITDA to RHI Magnesita in total. Not additional, but in total. Raw material margins are expected to continue to decline on average, stay at this very low level of the fourth quarter of around 1% in line with where we are at the moment.
If we pull it all together with the M&A contributions being offset by weaker vertical integration contributions and pricing pressure and possibly volume downside, adjusted EBITDA in 2024 is guided to be at least in line with current consensus of approximately EUR 410 million and a margin of around 11%. Let me try to put this in context. As we move through what has been a really significant downturn in the global steel and cement markets and construction and transportation sectors, it's maybe worth taking a stock of the long-term context in order not to get panicked. The decline in steel production in 2022 and 2023 was more significant than the decline during COVID and worse than the China-led downturn in 2015. We have to go back 15 years to the global financial crisis in 2009 to see the same sharp decline in steel production.
We have often talked to you about the resilience of our margins throughout these downturns to demonstrate that we can remain profitable also in the volatile markets. I think 2023 and hopefully 2024 also are examples of this resilience. Our products are essential for our customers. Without us, they cannot operate. We have the pricing discipline to pass on any increases to our cost of production to our customers relatively quickly. Please take a look at what happened this time around. Unlike 2009 or 2015 or 2020, we did not see this time a substantial reduction in our margins despite the reduction at our customers' demand. Our EBITDA margins remain consistently at around 15% now. This is because our business model has become more agile, more efficient, and we're just counting on volatility. Therefore, we are more responsive to volatility.
Underlying all of this are, of course, fundamental structural improvements that we have taken through the significant investments in our production network. We have now accelerated these investments or augmented these investment benefits with the acquisitions that we have done. These investments are not complete, like Ian has explained. We have just embarked at an over EUR 100 million additional investment over the next three years into completely rebuilding our digital architecture and upgrading all of our planning capabilities. In the longer term, after this and over and above, we also eventually need to tackle the ultimate decarbonization of our value chain down to zero. The quantification and timing of this is still a work in progress. We are doing all of this whilst our vertical integration margin is at an all-time low.
We have the scope, of course, for this to increase back to the 2.5%-3.5% range, where it should be in a normal market. Our refractory margin, however, has never been higher than today. Our M&A program so far has been executed during a weak period for the refractory industry. We believe it's very well timed and so far well executed. Let me close with the investment case. Since we have increased the scale and the cash generation of our business so significantly over the last few years, I want to leave you with a comparison that will hopefully open to your eyes what we have achieved and where perhaps we can go from here. If you look at our UK-listed peer group, you will see that we have comparable EBITDA and free cash flow to the FTSE 100 companies.
There's nobody with a higher free cash flow yield at today's share price. We don't need to publish aspirational future cash flow targets because we're already delivering these targets six quarters in a row. Not only do we start from this position of strong absolute performance, but we also have an exciting growth story based on our successful M&A in the last two years that we intend to continue, which is unique. On top of this, we have potential for significant operational gearing in case of a recovery whenever this happens, not if it happens, whenever it happens. We are the market leader in India, the fastest refractory market in the world. I'm very proud to be able to present to you such a story with such an incredible group of people around the world that keep me young and active and all of us challenged every day.
I look forward to taking your questions and having great discussions.
Please.
Thank you. Mark Davies Jones from Stifel, too, if I may. Firstly, on M&A, you want to keep going on the M&A front. You've got a lot of businesses. What does the pipeline look like in terms of addressable market? And where would you be focusing, either geographically or product-wise? And then on the vertical integration margin, is there anything you can do on that side? Is there any way you can take cost out of that business, or is it simply a question of waiting for prices to rise again?
On the M&A pipeline, let me stay general. We have many targets like we did in the past, so there's no dry up here. Our firepower is in the same order of magnitude than it was. The rest is due to timing. There could be a year where we can only execute EUR 50 million or EUR 100 million worth of acquisitions, but there could be a year where it exceeds the EUR 400 million. It depends very much on which transaction comes where. But geographically, we want to look at Southeast Asia and North America, where we have done not enough, we think. And from a product perspective, we want to continue to look at the alumina-based refractories and possibly at raw materials. Leading to your second question, what can we do on the vertical integration margin? Well, I think the Brumado rotary kiln that now comes on stream is a good component.
We can only do two things. We can eliminate high-cost plants and reduce our overall cost. That's what we are doing internally. And then we can help competitors to consolidate so that they finally start to add value to themselves. We would very much love our raw material competitors to be extremely profitable. But they need help for this. Any other thoughts, Ian?
Clearly, efficiency is a really important piece of this and making sure that we are optimizing our production mix. We have, for example, a product range M30 out of Brumado, which makes very nice returns. It's how we run the rotary kilns. Recycling comes into our backward integration margin. Clearly, there too, there's a very strong focus on the yields that we achieve and the efficiency of the process.
Please.
Hey, Vanessa Jeffriess from Jefferies. Just on the volumes, it sounds like given the declines you're expecting in industrial, there's probably a bit of growth in steel to make it overall flat. Is that right? And are there any geographies outside India where you're seeing customers feel a bit better in steel?
Yeah. I mean, that's the logical deduction. If industrial volumes go down and overall volumes stay flat, then steel volumes should go up. I hope that this happens. But outside of India, I think there's very little volume growth expected. North America, we don't see much impulses for growth in construction or transportation until after the elections. And basically, this is next year. Europe goes through a series of elections this year until there's new impulses coming from maybe a different EU Commission, which is more focused on infrastructure, defense, and sectors that could contribute. It will also be 2025. China is in structural change, so we don't see any growth from construction or transportation. And South America looks a little bit better now as opposed to one year ago, but it's too small to really give a big growth impulse. So left is India, maybe the Middle East.
And then just on the M&A outperformance in 2023, was the M&A outperformed across the board, or are there any specific acquisitions outperformed?
It's a little bit here and there. Of course, the earlier M&A, the ones we closed earlier in India, for example, they started with quite a lot of difficulties in the first quarter, and the velocity went up very, very nicely. So there, because we already closed these deals a year ago, there are some synergies already in the P&L. So it's more in those that got closed earlier as opposed to the P-D acquisition that we only closed in October. So there's not much synergy there yet.
It's also right to say that pretty much all of the M&A that we have completed is substantially delivering on the investment cases that we approved.
We just did the postmortem review of the three early M&As from early 2022 with our board. All very positive.
Hi, Katherine Hearne from Berenberg. You discussed the customer-specific destocking in the steel division. I was wondering if you could give any more color on how you saw that progress through the period and if that's still something you're expecting to impact you in 2024?
Yeah. So this was especially pronounced in Europe, where there was a lot of steel sales that were higher than steel production, somewhat also in the U.S., but to a lesser extent. In the rest of the world, this was more moderate. I mentioned before also there were some area-specific effects in the difference between steel refractory sales into the steel industry and the steel production. If you take Southeast Asia, for example, we have a very, very large customer in Vietnam that was shut down for a long time. So because we have a very high market share there, of course, we suffered overproportionately. And that large customer counts a lot in the context of that market. Similar case in Mexico also, where we had a very large customer being offline for a while. And that was the other effect next to destocking.
Thank you.
Hi, I'm Mark Fielding from RBC. Can I just talk a little bit about the profit bridge into 2024 and the different moving parts? And I suppose the one that sort of stands out to me, obviously, you've very clearly laid out the acquisition benefits to profits. But with volumes being flat and your production now matching volumes, does that mean that EUR 30 million under absorption impact on EBIT goes away as well, and that's a positive, too? And then maybe talk about the other side of it, the negatives from materials integration, etc.?
Yeah. Mark, so the simple answer is yes on the fixed cost absorption. So I think about it in three buckets. So the first piece, as you say, is the M&A adding EUR 40 million. Around 45% of that's coming through simply because of the annualization of transactions that were completed during the course of the year.
We then have the -EUR 25 million impact of lower backward integration margin. That's this temporary impact as we go from 1.7% down to 1%. And then we have the residual EUR 15 million, which is really driven by two things. One is the impact of a better fixed cost absorption. We've spoken before. We were almost at EUR 90 million of fixed cost under absorption, a EUR 30 million increment last year. As we now run our plants at around 80% of capacity utilization, there will be a benefit coming through, not the full benefit, but there will be a benefit coming through. That is then offset by the impact of lower prices and a little bit of lower margin. The volume impact, there is no volume impact on our base business.
Bridge-wise, M&A contribution +EUR 40 million, pricing -EUR 40 million, backward integration -EUR 25 million, fixed cost under absorption +EUR 25 million. Yeah, ±EUR 5 million here and there. For a CEO, it's not that important. But those are the buckets. Yeah. But the risk here is in pricing. If you make the calculation, EUR 40 million hit from pricing is not much. And the fixed cost under absorption only works if the volumes are the same. Otherwise, this thing so it's not an optimistic forecast.
Afternoon, Dom Convey from Numis. To, if I may, Stefan, you touched at the beginning at the point about lapping tougher comps in the first half. So I just wondered whether you could perhaps give us a little bit more color on how you see the shape of sort of profitability in 2024. But I appreciate it's early. And secondly, just in terms of India, maybe delving into that a little bit more detail, any commentary there specifically on pricing? And I'm thinking more in terms of competitive environment rather than necessarily raw material deflation. But anything there in terms of margin outlook in India would be great. Thank you.
Yeah. Let me take the India one, and maybe, Ian, you can talk about the shape of the curve next year, this year. India pricing, there is some room for concern because it comes and it comes from two areas. First, there's a big push towards Indianization of production. And as a result, the imports from China will go down because that's where it comes from, right? India imports very little from other regions, mostly from China. And of course, what happens if suppliers lose their supply position? They drop prices, especially Chinese. It's just this behavior. And that could lead to pricing pressure in India. The second source for pricing pressure comes from overheating. Everybody in the refractory industry is excited about India, and everybody wants to build a plant there. Unfortunately, there are not enough people thinking of buying a plant, but most want to build a plant.
We can see in one particular product category where there's already overcapacity. If they stop further construction, that overcapacity will be absorbed over the next three or four years, but not immediately. There's, I think, additional pricing pressure possible from this source as well. So far, Indian margins are okay, but not blockbuster.
Dom, from a weighting perspective, in 2023, we were EUR 200 million EBITDA in the first half, EUR 209 million in the second half. We have a very similar profile for 2024. So there isn't a big change in our order book going into the second half of the year. And therefore, we haven't embedded any big improvement as we go into the second half of the year. As Stefan highlights, we've actually started the year with a bit of a headwind, particularly around our backward integration, where actually we're currently, at the beginning of this quarter, operating at well below that 1%. But we expect that that will improve as the year progresses. But relatively similar H1, H2 split.
Any questions in the call, in the telephone line? Do you mind? Can we go there?
We have one question from the phone line from Jonathan Hurn from Barclays. Please go ahead.
As for that cash conversion, obviously, 101% in FY 2023 and a really solid performance. How do we think of that sort of cash conversion rate going forward? That was the first one. The second one was just in terms of your sort of digital architecture investment. Obviously, there's EUR 35 million going into that pretty much every year for the next three years. I mean, can you just talk about or just elaborate a little bit about the benefits to the group that you will get from putting in that investment, please? Thank you.
All right. Let me take the IT one, and then, Ian, you can take the cash conversion question, please. We have an SAP system that was originally designed in the 1980s, which from its base architecture is still in place. It was designed for an Austrian company with some plants in Germany and exports. We merged with Magnesita. They had a similar system for a Brazilian company with plants in the U.S. and exports. Now we have really a truly global business. The entire system doesn't work anymore. It's also 20th-century technology, server farms with a I mean, everything is old. So think about the first 2/3 of this as infrastructure replacement. It's not going to give any benefits for now. It's just costing money. But if we don't do it, we're eventually not going to be able to operate our company anymore.
Once we've moved to a totally cloud-based system with proper technology capabilities in terms of data analytics and data lake harvesting and hopefully, then, some artificial intelligence capabilities that can take advantage of this data lake, hopefully, we will get some benefits from this, some efficiency benefits from this, some accuracy benefits from this. We think at this point in time, they will be more in the area of lower capital invested because we're going to be more efficient, especially with our entire supply chain, and not so much on the P&L side with giving us lower cost of goods. But we haven't been able to quantify it because we can't simply yet test these kinds of technologies until we have the first pilots in the middle of next year.
Jonathan, on the question of cash conversion, we run internally a figure of 90% cash conversion as being a sustainable through-the-cycle number.
Okay. That's very clear. Thank you.
Yes, Harry.
That's Harry Phillips from Peel Hunt. Getting confused. Worked at too many places. Just trying to think about the vertical integration margin and sort of heading for 1% this year. And I'm trying to find the chart, and I can't find it straight away. But in looking at that vertical integration margin, is it just simply if prices are at X, the margin becomes Y, and that's simple math? And if it's down at A, then the margin is 1%? Or I'm assuming it's a bit more complicated than that. And so I'm just wondering, how much more complicated is it?
So Harry, that's substantially correct. So there are two parts to it. So the first, as you say, is the price and the external market to buy that specific raw material. And that's a price including freight. And clearly, during 2023, we have found freight rates coming down, which makes material out of China more competitive. The second piece that you then deduct from that is our cost of production. And our cost of production, just like at the finished goods plants, is very much impacted by two things. One is what raw material are you producing? And secondly, what level of loading of the raw material plant do you have? Now, we would want to run our raw material plant at higher loading than the finished goods plant, but they have been low in 2023. And that then increases the relative cost of it, and it reduces the margin.
What we would anticipate is that that margin will improve somewhat over time as we run these plants at a more normalized level of utilization.
Then in terms of getting back to the 2.5-3 cycle, which that chart shows, and obviously, you had the extremes in 2018 when China sort of spiked and everything else. We put that to one side. But when you sort of plan into the outer years, do you model 2.5-3, or do you run it at a more conservative level? I mean, I suppose I'm trying to ask is how aspirational is returning to that normal 2.5-3? Is that realistic or best hope, if you like?
2.5-3.5 is what we model internally. We've also made investment in our production optimization plan in Europe and in Brazil, which makes an incremental contribution. We expect pricing to normalize at some point when demand for refractories improves. We don't equally expect to go back to the 2018 numbers, 5% margin, because we can also see the level of unutilized capacity that exists in that end-to-end market, which will, over time, if prices do spike, actually put a dampener on it.
Mark Fielding from RBC. So just actually following up on the earlier comment about pricing and how that's the negative risk. I mean, as I look at that sort of chart, you provided about pricing through the year. I mean, it feels like pricing in the second half was probably down high single digit on the first half overall. And yet, profits weren't substantially down, even if you back out the M&A. So I suppose I'm just thinking, what is the difference for next year that makes pricing a big negative when you've been able to avoid it being a big negative this year?
Pricing isn't. We can't see pricing just by itself. But unfortunately, pricing is not automatically and in a fixed formula linked to cost. As long as pricing moves in the same amount and cost, it's okay. That's what happened in the second half of this year. But when competitors lose discipline and they reduce pricing faster than costs have reduced, then we get into this downside scenario that I talked about. This is the issue.
Have you actually seen evidence of that so far, or?
Look, it depends on how paranoid we looked. We actually see evidence of this all the time because there's always some competitor somewhere who does a crazy thing. Probably somebody says this about us in individual cases. But I mean, I think we are super disciplined on this and actually we have a super granular overview on this as well in the meantime. But by and large, it's not a wave yet. But these individual cases of crazy deals, they're not gone. We still hear about them every week.
One final follow-up to that is just if we think back to 2019, you obviously made an attempt at that point to raise prices more sort of unilaterally based on the value added to your customer. The industry didn't support it at that point. I mean, do you feel like the last couple of years have taught the industry more about their pricing and their pricing power and that they could just be more disciplined going forward? Obviously, you're not saying there definitely will be based on your guidance, but.
I hope so. This is the market leader role that we have, that we try to teach the industry or teach competitors in different markets that price reductions don't gain you any market share, at least not structurally. It helps in one semester, but you lose it again later, and then you're worse off than if you hadn't done it. That's what our message is. My feeling is our products are much more valuable than they are paid for for our customers. So margin shouldn't be at 15% EBITDA, but much higher than this compared to the value that we contribute. So I think we're still underpaid, but it's a work in progress. In Europe, the situation is more disciplined than it was. That's clearly clear. In South America, the situation is more disciplined by and large. North America always was very disciplined.
India is a little bit more faster-moving because it's closer to China, and China is terrible. Chinese competitors don't seem to care about value at all, really. It's horrible. Because the volumes in China shrink, there's more of this Chinese material popping up here and there. Wherever we have a Chinese competitor, we have local competitors who sometimes panic. That's where this panic comes from. Of course, you have different behaviors of buyers also. Mostly, our customers value very much the stability of supply, the quality of supply, the reliability, the emergency capabilities that we keep for them, the local-for-local supply so that they are independent from shipping disruptions and things like that. Customers, by and large, value this.
But there are also customers who don't, who come to us and use every single quote they get from a Chinese guy and say, "Either you go down, or we kick you out 100%." Okay, this is, I guess, the normal behavior that sometimes you have in negotiations between salespeople and procurement people. So by and large, that's fine. But there are these exceptions. And if that spreads, then we can very well go into a more ugly phase. Any more questions in the call? No, that's not the case. No more questions in the room for the time being? Well, thank you very much for being with us and for supporting us throughout the years and also supporting us in the course of the next years. Goodbye from London.
Thank you.