RHI Magnesita Regulatory News (RHIM)

RHI Magnesita N.V.

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

Annual Financial Report 2017

RHI Magnesita has today published its Annual Financial Report for the financial year ended 31 December 2017 (the "Annual Report 2017").

In compliance with Listing Rule 9.6.1 a copy of the Annual Report 2017 will be submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM. The Annual Report 2017 is also available to view and download on the RHI Magnesita website at www.rhimagnesita.com.

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 2017. 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 2017.

Enquiries:

RHI Magnesita N.V.

Eduardo Gotilla, Head of Corporate Finance and Investor Relations

Tel +44 (0) 20 3823 3661

E-mail: eduardo.gotilla@rhimagnesita.com

Stefan Rathausky, Head of Corporate Communications

Tel +43 50213-6059

E-mail: stefan.rathausky@rhimagnesita.com

RESULTS FOR THE YEAR ENDED 31 DECEMBER 2017

Transformational year and strong financial performance

21 March 2018, London. RHI Magnesita N.V. (LSE: RHIM), a global leading supplier of refractory products, systems and services, announces its audited results for the year ended 31 December 2017.

Highlights

· Successful completion of the merger of RHI and Magnesita and the subsequent admission of RHI Magnesita N.V. to the Premium Segment of the London Stock Exchange

· Integration progressing well, with senior management in place. "One face to the customer" deployed in sales and fully integrated production and supply chains

· Adjusted pro-forma revenue of €2,677.2 million, up 11%, driven by sales growth in both steel and industrial divisions, supported by a more favourable market environment

· Adjusted pro-forma EBITA of €304.1 million, up 39%

· Adjusted pro-forma EBITA margin of 11.4%, up 230bps from the previous year, driven by higher sales and the Company's initiatives to improve operational efficiencies

· Net Debt/Adjusted pro-forma EBITDA of 1.9x, after the acquisition of the control of Magnesita in October 2017

· Faster realization of synergies by one year: €40 million in 2018 and the balance of €70 million in 2019

· The Board of Directors will propose a dividend of €0.75 per share, to be paid on 2 July 2018. The proposed dividend is subject to the approval by the Annual General Meeting of Shareholders, to be held on 7 June 2018

Commenting on the results, Chief Executive Officer, Stefan Borgas and Chairman, Herbert Cordt, said:

"2017 was a truly transformational year for the business, which will go down in the company history as the year when we successfully implemented and completed the merger of RHI and Magnesita. The listing on the Premium Segment of the London Stock Exchange at the end of October was a resounding success for RHI Magnesita. The merger reshapes the landscape of the sector as RHI Magnesita is now the global market leader and the driving force of the industry.

In addition to the cross-border merger, RHI Magnesita recorded a strong operating performance in the financial year which is attributable to the company's efficient operations, improving macroeconomic environment and the engagement of all employees worldwide. Global steel production outside China increased by 4%. The combined adjusted pro-forma revenue is up by 11% while adjusted pro-forma EBITA grew by 39%. The continued shortage of raw materials from China resulted in higher material input costs, which are being gradually passed-on in higher prices. Supplying our customers reliably throughout this period continues to be our primary focus. We would like to thank our customers for their continued support and trust.

2018 will be another important year, which has started well for RHI Magnesita and the Board is looking forward to the coming year with confidence."

For further enquiries, please contact:

RHI Magnesita N.V.: Stefan Borgas, CEO

Octavio Lopes, CFO

Eduardo Gotilla, Head of Corporate Finance and Investor Relations

Stefan Rathausky, Head of Corporate Communications

+44 (0) 20 3823 3661

+43 50213-6059

Conference call

The Company will host a teleconference at 9:00am (GMT) this morning to discuss the results. For conference call details, please visit the RHI Magnesitas' website https://ir.rhimagnesita.com/conference-call/.

About RHI Magnesita

RHI Magnesita is the result of the combination of RHI and Magnesita to form the global leading supplier of high-grade refractory products, systems and services 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, among others. With a vertically integrated value chain, from raw materials to refractory products and full performance-based solutions, RHI Magnesita serves more than 10,000 customers in nearly all countries around the world.

The Company has unmatched geographic diversification with more than 14,000 employees in 35 main production sites and more than 70 sales offices. RHI Magnesita intends to use its global leadership position in terms of revenue, greater scale, complementary product portfolio and diversified geographic presence around the world to target opportunistically those countries and regions benefitting from more dynamic economic growth prospects.

For more information please visit: www.rhimagnesita.com

Strategic priorities

Enabling enhanced strategic growth by joining forces in the course of 2017, we created the globally leading refractory producer RHI Magnesita.

· Strategic rationale of the merger

This merger of RHI and Magnesita can clearly be seen as a strategic combination that captures synergies, drives efficiencies by establishing a leading market position, whilst strengthening our global geographic cluster, leveraging technology capabilities and raw material integration.

The strategic rationale for the combination was to complement one another's footprints and become a more competitive, vertically integrated global provider of products, systems and services in the refractory industry. As a result of our extended geographical reach and product and services portfolio, RHI Magnesita has enhanced access to the core markets, customer base and geographical regions. Upon completion of the combination, RHI Magnesita has become the leading player in the global refractory market. A market, which is otherwise characterized by high fragmentation and intense competition with more than 2,000 competitors worldwide. Though, we see clear indications that the market will consolidate strongly especially driven by efforts of the Chinese authorities in the mid-term to long-term.

Due to the increased scale, enhanced market position and cost synergies of the merger, RHI Magnesita is well positioned to compete and grow further in this consolidating industry. RHI Magnesita's defined strategy is to be seen in this light and focuses on capturing growth options while delivering identified synergies and pivots around our vision to become the driving force of the refractory industry. Thus, it is comprehensively developed around five main topics, which we are tackling over the medium term: Markets, Portfolio, Technology, Competitiveness and People. These pillars give us the framework to structurally purse growth ambitions while ensuring success in the integration and not losing technological focus.

Our focus for the year ahead

· Markets: Global lead with strong local organizations and significant market positions

Our objective is to be a clear market leader in all major markets. Taking into account the differing market trends and our position in the respective regions, a selective market approach will be taken. In developed markets such as North America, Europe and South America, we will focus on ensuring full integration of the companies and capitalizing all synergy potentials. In developing countries such as China and India, our strategic approach is more focused on enhancing our local market positions by strengthening the local teams and our operational footprint.

· Portfolio: Comprehensive refractory product portfolio including basic, non-basic, functional products and services in high performance segments

RHI Magnesita has already developed a leading market position in basic products especially in linings for the steel industry. It is our clear goal, to further extend our current market position in high end/quality application through product portfolio extensions especially in non-basic and functional product segments. RHI Magnesita, with its high vertical integration, is able to rely more on stable supply of raw materials. Recycling refractory material is important not only for economic but also for environmental reasons.

· Technology: Top solution provider in the refractory industry with an extensive portfolio based on innovative technologies and digitalization

RHI Magnesita has always attached great importance to research and development. The innovative power is based on decades of hard work and driving edge technological research. RHI Magnesita's global research team consists out of almost 300 employees, of which one third have masters and PHDs in refractories or similar topics, working out of 2 research hubs and 2 centres globally. Additionally, RHI Magnesita's technical marketing staff of around 400 employees services all customers worldwide. We will continue investing in R&D to create products, which have a distinct competitive advantage by costs or by product performance. Furthermore, we will deepen our knowledge about our customers' processes in order to maintain our competitive advantage.

· Competitiveness: Cost competitive and safe production and sales network supported by lowest cost

G&A services

The recent market environment is characterized by excess capacities in many customer industries and aggressive export strategy of Chinese producers. We expect this to continue but on a lower level than before. Though, we believe that the high pressure on the market prices and on the profitability of manufacturers, and subsequently also on suppliers will remain.

Therefore, competitiveness is the backbone of RHI Magnesita's future success. This includes execution of derived synergies but also to extract cost efficiencies along the whole value chain. This remains essential in the prevailing market environment. Therefore, we have commenced various projects to ensure the optimal set-up of our plants and our global supply chain.

· People: Hire, retain and motivate talent and nurture a meritocratic, performance driven, client-focused and friendly culture

Our employees are the single most important success factor. The merger of RHI and Magnesita has created a true global player and this we need to ensure in all levels of our corporation. Therefore, we are developing ways to further enhance global careers, enhancing geographical, gender and functional diversity and generally about to establish a culture of trust and openness. We believe in our young talents and built a meritocratic environment in which they can nurture.

· Link to remuneration

To ensure the full focus of our top management, strategic priorities for 2018 and beyond have been allocated to respective managers and will be a core base for the long-term remuneration system of RHI Magnesita.

Divisional Performance

RHI Magnesita comprises two divisions, Steel and Industrial. With its Steel Division, RHI Magnesita provides its customers with a broad range of customized solutions and comprehensive packages for steel production consisting of refractories (basic and non-basic mixes and bricks), machinery, flow control systems, and Full Line Service solutions. The Industrial Division provides refractory solutions for the cement, lime, non-ferrous metals and glass industries as well as the environment, energy and chemicals sectors.

Steel Division

Refractories demand from the steel industry is directly associated with the number of furnaces in operation (with respect to linings) and the steel volumes produced (with respect to flow control systems). In the long run, the number of furnaces usually correlates with the development of steel production. Therefore, in the long run the overall refractories demand from the steel industry correlates with steel production.

Sales to the Steel Division accounted for 67.3% of the Company's total revenue in 2017, compared to 64.9% in 2016. Revenue amounted to €1,308.8 million in 2017, up by 22.2% when compared to 2016. This improvement was largely due to the strong pick-up in steel production in 2017, in addition to the two months of Magnesita's sales that started to be consolidated in November 2017. As a result, gross profit in 2017 stood at €302.7 million, representing 23.1% of the Steel Division's sales 290 bps higher than 2016.

According to the World Steel Association, steel output in 2017 reached 1.69 billion tonnes, up 5.3% from 2016. In Europe, the improvement of the underlying market was the main driver for RHI Magnesita's sales performance in the region during the year.

A combination of antidumping measures, economic growth and robust exports boosted the performance of sectors using steel. Steel output in EU increased by 4.1 % compared with 2016, with the strongest growth recorded in Austria, France, Germany, Italy, Poland and Spain.

In North America (excl. Mexico), steel output increased by 4.6% year-on-year. After a few years of decline, the US steel industry recovered on the back of higher internal demand, stronger economic activity and supported by the trade cases enacted in 2016. Steel output in the US posted a 4% increase year-on-year, despite higher imports, which continue to impact the local industry. Capacity utilisation improved to 75% in 2017 from 70% in 2016. Sales in the region outperformed the market, as key growth initiatives came into fruition, with two new EAF plants starting production during the year.

Higher deliveries in Latin America were driven by the 7.7% surge in steel production year-on-year, with Brazil (+9.9%), Mexico (+6.3%) and Argentina (+12.1%) posting strong performance. Production in Brazil was driven by the positive momentum for flats - led by the auto sector demand - and exports, led mainly by the ramp-up of CSP. Likewise, the expansion in Mexico was boosted by the combination of higher internal demand, which grew by 4.4% year-on-year, and exports, which jumped 15.4%. In Argentina, the positive performance was driven by higher demand and supported by the renaissance of public works and infrastructure projects.

Steel production in the CIS remained virtually flat year-on-year. Lower production in Ukraine was offset by

higher output in Russia and Moldova. Business in Russia, the most important market in the region, recorded mid-single digit growth, with higher deliveries to EAF, ladle and tundish applications. Moreover, market share gains in flow control contributed to sales growth in the region.

Performance in Africa was slightly positive. The Egyptian market reacted positively to the implementation of import duties on billets from several countries, in addition to the stronger local demand. In South Africa, steel production was adversely affected by higher imports from China, but rebounded in the second half as antidumping and import duties led refractory consumption to return to normal levels.

The market environment in Asia-Pacific was dominated by China and its effect on all steel-producing countries, as it remains a major exporter to the region. In 2017, several countries implemented antidumping measures on steel products from China. Initiatives by the Chinese government to cut capacity, improve product quality, rationalise and modernise the local industry led to lower Chinese exports and higher steel prices. Countries like Thailand, the Philippines and Malaysia were among the biggest beneficiaries of such developments, with steel output increasing significantly over 2016. Concurrently, Vietnam has become one of the largest steel producers in the region after the ramp-up of Formosa Ha Tinh Steel Corporation during 2017. Finally, steel output in India recorded a 6.2% increase over 2016. Sales in Asia-Pacific recorded double-digit growth in 2017, with positive performance across the product spectrum.

Industrial Division

RHI Magnesita supplies its Industrial Division customers with high-grade refractory systems. Through the

continuous expansion of its technological capabilities and problem-solving expertise, RHI Magnesita can provide a wide range of services required by the complex demands of its customers.

Demand for Cement/Lime is closely linked to the construction industry. Production of, and demand for, nonferrous metals are closely associated with the market price of such non-ferrous metals, including nickel, zinc, copper, aluminium, tin and lead. Demand for glass is also linked to the construction industry as well as automobile industry. In the environmental, energy and chemicals business, demand is closely linked to the development of the oil price, which is the main driver for new projects.

Sales to this Division accounted for 29.7% of the Company's total revenue, compared to 32.6% in 2016. Revenue from sales to the Industrial Division amounted to €577.6 million in 2017, up 7.2% compared to 2016. This improvement was largely explained by the positive performance of sales to the cement segment, in addition to the two months of Magnesita's sales that started to be consolidated in November

2017. Gross profit for 2017 amounted to €130.2 million, representing 22.5% of the Industrial Division sales. In comparison to 2016, gross margin was 70 bps lower in 2017.

Cement/Lime

Revenue contribution of the cement business increased from 35.2% of the Industrial Division sales in 2016 to 38.8% in 2017, and as a percentage of the Company's total revenue, represented 11.7% in 2017 (2016: 11.5% in 2016). Sales to cement customers amounted to €226.8 million in 2017, up 19.8% from the €189.3 million obtained in 2016. Such improvement was driven by a significantly better market environment in 2017, especially in the second half of the year. The raw material crisis in China also influenced the demand for refractories as customers anticipated orders to secure supply.

Regarding the market environment in 2017, demand for cement in China continued to rise in 2017 with the development of construction projects. China is by far the largest cement producer in the world and the largest RHI Magnesita market for cement products. Nevertheless, the Chinese government has recently prohibited capacity expansion in 2018 with the objective to eliminate inefficient capacity and replace it with more modern and environmentally friendly facilities.

In India, the second largest cement producer worldwide, demand declined year-on-year, influenced by lower investments in infrastructure and housing projects. Sales in the region remained nearly stable over 2016, with new contracts offsetting the weaker underlying demand.

In Europe, cement production performed positively after several years of constant decline. In North America, the year was also very positive for the cement industry, with higher demand and consequently higher capacity utilization. RHI Magnesita sales exceeded market growth, buoyed by a greenfield project in the region.

Lower activity in Latin America drove weaker performance of the repair business in the region. Demand in Brazil, which suffered massive declines in the previous years, has apparently stabilised, despite still being at low levels.

Nonferrous metals

Revenue contribution of the non-ferrous business was slightly lower in 2017, from 27.2% of the Industrial Division sales in 2016 to 25.3% in 2017. As a percentage of the Company's total revenue, this segment represented 7.6% in 2017 (2016: 8.9% in 2016). Sales to nonferrous customers remained stable in 2017, at €147.7 million, compared to €146.5 million in 2016.

Despite recovering metal prices in 2017, there were virtually no greenfield projects in most of the non-ferrous segments in the year, consequently, reducing most of the business to standard repairs with very few major new relining activities. Nickel, which had recovered since the mid-2016, lost ground in the first half of 2017. Zinc continued the strong upwards rally to close the year at the highest level in five years, while copper only picked up significantly after the summer. Lead and aluminium also ended the year at significantly higher levels compared to 2016.

In 2017, sales to the lead sector were weaker, especially because of two important relining projects in Mexico and the US delivered in 2016. Furthermore, demand from copper and aluminium customers in China was slightly weaker in 2017. On the other hand, higher sales were recorded to the Chinese copper and nickel industries. A positive trend continued in Africa with capacity expansion planned or already in development. The highlight in the region was the supply for a new plant in Algeria, in addition to several repair orders in Algeria, Libya, Nigeria and South Africa, which also contributed to the positive performance in the region. RHI Magnesita also supplied to large relining projects in ferronickel in New Caledonia and for a ferrochrome Kazakh smelter.

Other process industries

Other process industries are comprised mostly of glass, EEC (environment, energy and chemicals) and mineral industries. In 2017, this segment accounted for 35.9% of the Industrial Division sales (2016: 37.6%) and 10.8% of the Company's total revenue (2016: 12.3%). Revenue in 2017 amounted to €209.8 million, up by 3.5% over the €202.7 million recorded in 2016.

The strategic decision to carve out the fused cast businesses led to higher profitability in the glass business. This decision was based on the increasing price pressure driven by the oversupply from India and China. Demand of refractories for the glass industry improved during the year, especially from flat glass, as greenfield projects globally came into operation throughout the year. For the container glass segment, demand remained nearly flat year-on-year. Repair activities started to recover, however, from more efficient plants in which refractory life is usually longer.

Sales to the EEC segment were flat compared to 2016, as oil and gas prices had recovered to a level that could trigger new investments.

Financial Review

Adjusted Pro-forma Results (unaudited)

The reported statutory results consolidate ten months of results for RHI and two months of results for RHI Magnesita, which means that the consolidated financial statements only include two months of results of Magnesita Refratários. As such, in an effort to provide comparable information for the two-year time period, the Directors have carefully considered it appropriate to provide and analyse adjusted pro-forma results for the combined Group as if it had always existed.

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 EBIT.

Adjusted pro-forma results are stated before the impact of Items such as: divestments, restructuring expenses, merger-related adjustments and other non-merger related other income and expenses, which are generally non-recurring.

The tables below reconcile the reported results to adjusted pro-forma results for 2017:

(1) Purchase price allocation

(2) Foreign exchange variations booked within Other Operating Income & Expenses

(3) (i) Divestments related to the merger-control remedies imposed by European Commission of the production sites in Marone, Italy (RHI), Lugones, Spain (RHI) and Oberhausen, Germany (Magnesita) and fused cast business in San Vito, Italy, and Sherbinska, Russia; and (ii) the suspension of production in Aken, Germany.

Revenue

Adjusted pro-forma revenue for 2017 was €2,677.2 million, a 11.1% increase over the adjusted pro-forma revenue of €2,409.1 million achieved in 2016. The increase reflects sales growth in both the Steel and Industrial Divisions, supported by strong industrial production globally.

Adjusted pro-forma sales to steel totalled €1,913.1 million, up by 14.2% over 2016 adjusted pro-forma sales. The robust performance was largely driven by the 5.3% increase in world steel production in 2017. According to the World Steel Association, global steel production totalled 1.69 billion tonnes, compared with 1.61 billion tonnes in 2016, with output expanding in almost all regions, with steel production increasing simultaneously in Europe, North America and South America, after a few years of production declines. In addition, RHI Magnesita's growth initiatives evolved constructively, especially in the US, Brazil and India, where deliveries growth surpassed underlying steel market growth.

Adjusted pro-forma revenue of the Industrial Division grew by 2.6% in 2017, to €658 million, compared to €642.1 million in 2016. Growth was led by the cement segment, especially in the second half of the year. The raw material crisis in China also influenced the demand for refractories, as some customers anticipated orders to secure supply. Despite recovering metal prices in 2017, there were virtually no greenfield projects in the non-ferrous segment in the year, thus reducing most of the business to standard repairs with very few major new relining activities. Demand for refractories from the glass industry improved during the year, especially from flat glass, as some projects came online during the year. For the container glass segment, demand remained nearly flat year-on-year. Finally, sales to the EEC segment were flat compared to 2016, as oil and gas prices have not recovered yet to a level that would trigger substantial new investments

Reported Group revenue amounted to €1,946.1 million, up by 17.9% over 2016 as a result of growth in both steel and industrial sales, as explained above, and the consolidation of Magnesita revenues from 1 November 2017. Reported revenue from the Steel Division totalled €1,308.8 million in 2017, whereas the Industrial Division amounted to €577.6 million.

Adjusted pro-forma EBITA

Adjusted pro-forma EBITA was €304.1 million, 38.7% above the adjusted pro-forma obtained in 2016. Adjusted pro-forma EBITA margin reached 11.4%, up 230 bps compared to the adjusted pro-forma margin in 2016. The improvement was mostly driven by higher sales with resulting better fixed cost dilution, in addition to the Company's initiatives to improve efficiency in its operations.

The refractory raw material markets suffered a dramatic change after the Chinese government enforced stricter environmental controls that caused temporary and permanent closures of raw material facilities during the year. This measure caused a significant imbalance between supply and demand and, consequently, Chinese-sourced raw material prices skyrocketed. Prices for the two main magnesite-based raw materials, dead-burned magnesia and electro-fused magnesia, from China have more than doubled during the year and remain well above historical levels. This environment created significant challenges for all refractory producers and forced price adjustments across the supply chain. Moreover, the environment created scarcity of important raw material for the refractory industry across the globe. RHI Magnesita's partially vertically integrated business model, with high quality raw material sources, allowed the Company to ensure supply to its customers while managing to maintain competitive costs.

Reported EBITA, which does not exclude transaction costs, merger related adjustments, foreign exchange variations, disposed businesses and non-merger related expenses, which are generally non-recurring, amounted to €56.7 million in 2017, with a 2.9% margin.

Dividends

For the financial year 2017, the Board of Directors will propose a dividend of €0.75 per share, which corresponds to a dividend payment of €33.6 million for the shareholders of RHI Magnesita N.V.. The proposed dividend is subject to the approval by the Annual General Meeting of Shareholders on June 7, 2018 and was not recognized as a liability in the consolidated financial statements 2017.

Working capital

Working Capital performance is measured in both absolute values and as a percentage of total sales. Cash flow generation from trading working capital amounted to €10.8 million, with a higher consumption of inventories being offset by an improvement on the trade payables terms. Absolute values for working capital at year end amounted to €610.2 million. Working Capital intensity, measured as a percentage of adjusted pro-forma 2nd half annualized revenue, stood at 22.2% at the end of 2017. At the end of 2016, RHI and Magnesita, had combined working capital equal to €667.8 million, equivalent to 27.8% of adjusted pro-forma 2016 revenue.

Net debt

Net debt amounted to €750.8 million at year-end, compared to €298.8 million in the previous year. The net debt number already includes the acquisition of the control of Magnesita in October 2017 and the proceeds of the merger-related divestments received in November 2017. Leverage, measured by net debt/ adjusted pro-forma EBITDA, stood at 1.9x at year-end.

Synergies

We continue to successfully implement our planned integration actions and remain very confident in achieving significant synergies. We expect synergies of at least €40 million to flow into the profit and loss in 2018 and €70 million are now expected to be fully captured by 2019. Total cash restructuring costs to achieve these synergies are projected to amount to €70 million, of which €53 million have already been expensed in 2017. Most cash outflows related to these restructuring costs will be incurred over 2018.

90% of the initial synergies are a result of expected (i) SG&A reductions, (ii) lower procurement costs with external suppliers due to the consolidation of the procurement efforts of the two companies after the merger and (iii) optimization of the enlarged production network, with reductions in production and supply chain costs. At this point, these initiatives are either already implemented or backed by a comprehensive execution plan. A dedicated integration team is working on several additional fronts which may lead to incremental savings that will be communicated when they reach an adequate maturity level.

Due to the very high volatility in the global raw material markets the planning uncertainty has increased and could provide additional risks but also upsides.

RHI Magnesita expects to complete a very significant refinancing of its capital structure over the course of 2018, taking advantage of its strong financial standing and significantly lower leverage ratios than anticipated when these facilities were originally structured. With that, the Group is confident that net interest expenses will be reduced by at least €10 million in 2018 and €20 million in 2019, in comparison with the adjusted pro-forma net interest expenses of approximately €50 million expected for RHI Magnesita in 2018, in light of the facilities outstanding as of 31 December 2017, notwithstanding the increase of treasury rates in the G10.

Integrated Tender Offer

The Group is required - in accordance with Brazilian laws and regulations - to make a mandatory public offer in Brazil that must be addressed to all remaining Magnesita shareholders and must 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 has decided to combine the mandatory offer with a so-called "Delisting Tender Offer" in an Integrated Tender Offer and filed the respective request with the Brazilian Securities Commission in November 2017.

According to the original and subsequent filings, shareholders of Magnesita will have the option of selling each Magnesita share in exchange for (i) R$17.81, 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 share or (ii) for a cash-only alternative consideration.

The consideration of the cash-only alternative offer will be the higher of (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.

Since the cash plus shares option was equivalent to R$57.73 on 28 February 2018, based on RHI Magnesita's share price and the exchange rate prevailing on that date, the Group expects that substantially all of Magnesita's minority shareholders will tender their shares and opt for the cash plus shares consideration. If 100% of Magnesita minority shareholders tender their shares and opt for the cash plus shares consideration, the Group will disburse R$445.7 million, adjusted by SELIC from 26 October 2017 until the date of the settlement of the auction of the Integrated Tender Offer, and issue an additional 5,000,000 shares.

The Integrated Tender Offer is expected to be completed during 2018.

Other Reported Financial KPIs

Finance costs

Net financial result amounted to €30.6 million in 2017, compared to €21.2 million in 2016. The increase was essentially driven by the consolidation of two months of Magnesita's P&L in 2017 and, to a lower extent, the increase of the net debt due to the acquisition of Magnesita at the end of October 2017.

Taxation

The Group taxation charge, excluding specific adjusting items (i.e. non-capitalized tax losses and temporary differences of the financial year, deferred tax expense due to tax rate changes and one off non-deductible expenses), was €6.3 million (2016: €25.8 million). The effective tax rate, excluding specific adjusting items, was 26.6% (2016: 24.4%). Note 44 of the financial statements provides additional information on the Group's taxation charge.

Net result

RHI Magnesita reported a loss of €12.9 million in 2017, compared to a €75.9 million profit in 2016. The loss was driven by transaction costs, merger related adjustments, foreign exchange variations, disposed businesses and non-merger related expenses, which are generally non-recurring.

Pension

The Group sponsors multiple pensions plans whose liability are subject to future asset performance, interest rate fluctuations, actuarial assumptions, benefit plan changes and government regulations. The majority of the Group's obligations fall under defined benefit pension plans in its subsidiaries in Austria, Germany, United States and Brazil. The total net liability amounted to €308.7 million at the end of 2017. Note 28 of the consolidated financial statements provides additional information on the Group's pension plans.

Cash flow

Cash flow generation in 2017 was mainly driven by the increase in free cash flow from operations of €221.6 million, an increase of 36.2% over the €162.7 million generated in 2016. The net cash flow from investing activities totalled a positive income of €33.3 million, driven by the net cash inflow of €45.1 million from acquired subsidiaries (cash disbursement less the cash and cash equivalent received from the acquired company). Additionally, the proceeds from the divestment businesses in the amount of €30.6 million also led to a positive cash flow from investing activities. Net cash flow from financing activities added up €16.4 million, which resulted from the funding raised relating to the acquisition of Magnesita, as described in Note 26. The Group had an overall cash generation of €271.3 million in 2017.

Capital expenditure

We continue to invest in our strategic priorities with investments of €72.0 million in 2017, in line with the €70.8 million invested in the previous year.

Going concern and viability statement

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.

The Directors have assessed the viability of the Group over a three-year period to December 2020, the period covered by the latest business plan, taking account of the Group's current position, individual asset performance forecasts, current net gearing ratio as disclosed in note 58 of the consolidated financial statements and the potential impact of the principal risks.

The business plan considers the Group's cash flow, capital commitments, financial resources, debt covenants and other key financial risks. Part of the process for the listing at the London Stock Exchange, was a detailed stress test based on this business plan. This test reviewed the viability considering major risk (including changing market conditions, access to financial instruments, ability to capture the planned synergies, exchange rate scenarios, production interruption) and focused in detail on the period from 2018 till June 2019. Because the business plan covers a longer period and the impact of the considered risks was modelled for the full span, the Directors could assess the viability for the Group over a three-year period.

The Directors believe that the Group is well-placed to manage its principal risks successfully. In making this statement the Directors have considered the resilience of the Group, taking account of its current position, the risk appetite, the principal risks facing the business in severe but reasonable scenarios, and the effectiveness of any mitigating actions. Based on this assessment, the Directors have a reasonable expectation that the Group and Company will be able to continue in operation and meet its liabilities as they fall due over the period to December 2020. The Directors have determined that the three-year period to December 2020 is an appropriate period having regard to the Group's business model, strategy principal risks and uncertainties, and viability.

Principal Risks and Uncertainties

Risk framework

A bottom up identification and assessment process was conducted for the first time in the combined company after the closing of the merger transaction. This process is based on the direct and full integration of all functional and operational managers, uniform structures and methods as well as the use of a professional software and makes sure that material risks can be discussed and monitored adequately by the senior executives and the Board.

The Board is aware of the central importance of a formally approved risk policy and risk appetite specifying the nature and extent of the risks acceptable to the Group. The future design of such a risk policy for the combined company and its alignment with the corporate strategy are currently in working in progress and in preparation for discussion with the Board.

Risks considered to be unacceptable because of their natures or their potential financial or qualitative impacts are being mitigated by appropriate strategies. The implementation and effectiveness of the defined mitigation measures are being reviewed continuously. For that purpose, the impacts of risks are considered before and after the implementation of those mitigation measures.

The risks identified in the following are those the Board considers to be the principal ones 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. Also, the Group is facing other risks than the one mentioned here, some of them being currently unknown or not considered to be material.

Internal Control System

The Board is ultimately responsible for maintaining effective risk management, which includes the Group's risk governance structure, the Group's system of internal controls and the Group's internal audit approach.

The Group has implemented an internal audit function, with a dual reporting line to the CFO and the Audit Committee. The internal audit function is an integral part of the Group's risk management framework, providing assurance to the Audit Committee and the Board on the effectiveness of mitigation actions and internal controls.

The internal audit function conducts its activities in a risk based manner, developing an audit plan, based on the results of the risk assessment of various business units and strategic priorities that are approved by the Audit Committee.

The internal audit function conducts systematic and ad hoc operational audits and special investigations, reporting the most relevant observations and recommendations regarding the effectiveness of the risk management and internal control procedures to the Audit Committee.

The group has in place a risk management and an internal control system in relation to its financial reporting process and the process of preparing the financial statements. These systems include policies and procedures to ensure that adequate accounting records are maintained and transactions are recorded accurately and fairly to permit the preparation of financial statements in accordance with the applicable accounting standards.

The Board reviews the effectiveness of the system of internal financial, operational and compliance controls and the risk management. The Board examines whether the system of internal controls operated effectively throughout the year and will make recommendations when appropriate.

These systems are based on the three lines of defence model that the Company has implemented, supported by an internal control guideline reflecting the responsibility for risk management and internal controls at all management levels.

The internal audit function supports these systems by activities based on risk oriented audits and the Company's internal control guideline and standards.

For the accounting process, an accounting handbook is available that addresses all the internal control issues into the accounting process.

No matter how comprehensive a risk management and control system may be, it cannot be assumed to be exhaustive, nor can it provide certainty that it will prevent negative developments from occurring in the Group's business and business environment or that response to risk will be fully effective. The Group's risk

management framework is designed to avoid or mitigate rather than to eliminate the risks associated with the accomplishment of the Group's strategic objectives. It provides reasonable assurance but not absolute assurance against material misstatement or loss.

In 2016, the Group had not identified any major failings in its internal risk management and control system.

Statement of Directors' responsibilities

The Directors are responsible for preparing the Company's Annual Report. The Company's Annual Report comprises the Strategic Report, the Governance Report, the Consolidated Financial Statements, the Company's Financial Statements and some other information. The Directors are responsible for preparing the Annual Report in accordance with applicable law and regulations. The Directors are required by law to prepare the Annual Report for each financial year. 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. In preparing the Annual Report, the Directors are required to:

(a) select suitable accounting policies and then apply them consistently;

(b) make judgements and accounting estimates that are reasonable and prudent;

(c) state whether applicable IFRS as adopted by the European Union and the relevant provisions of the Dutch Civil Code have been followed, subject to any material departures disclosed and explained in the Annual Report; and

(d) prepare the Annual Report on the going concern basis, unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose, with reasonable accuracy at any time, the financial position of the Company and the Group and enable them to ensure that the Annual Report complies with applicable law and, as regards the consolidated financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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, 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.

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.

as of 31.12.2017

from 01.01.2017 to 31.12.2017

from 01.01.2017 to 31.12.2017

from 01.01.2017 to 31.12.2017

from 01.01.2017 to 31.12.2017

to the Consolidated Financial Statements 2017

PRINCIPLES AND METHODS

(1) General

RHI Magnesita is a globally operating industrial group. The core activities of the RHI Magnesita Group comprise the development and production as well as the sale, installation and maintenance of high-grade refractory products and systems which are used in industrial high-temperature processes exceeding 1,200°C. RHI Magnesita supplies customers in the steel, cement, lime, glass and nonferrous metals industries. In addition, RHI Magnesita products are employed in the environment (waste incineration), energy (refractory construction) and chemicals (petrochemicals) sectors.

The ultimate parent undertaking of the Group is RHI Magnesita N.V., a public company with limited liability under Dutch law. The company 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 Wienerbergstraße 9, 1100 Vienna, Austria.

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 established 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 Consolidated Financial Statements are prepared as of the reporting date of the Annual Financial Statements of RHI Magnesita N.V.. The financial year of RHI Magnesita N.V. corresponds to the calendar year. Insofar as financial years of companies included in the Consolidated Financial Statements do not end on the reporting date of RHI Magnesita N.V. on 31 December due to local legal requirements, interim Financial Statements are prepared for the purpose of consolidation. The reporting date of the Indian subsidiaries Orient Refractories Ltd., RHI Clasil Private Limited and RHI India Private Limited is 31 March.

The Consolidated Financial Statements for the period from 1 January to 31 December 2017 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. 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 available-for-sale financial assets, derivative financial instruments and plan assets for defined benefit obligations, the Consolidated Financial Statements are prepared in accordance with the principle of historical acquisition and production costs. The measurement methods applied to the exceptions are described in the following.

The preparation of the Consolidated Financial Statements in agreement with generally accepted accounting and valuation 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 prepared by the Board of Directors and authorized for issue on 20 March 2018 and is subject to adoption at the Annual General Meeting of Shareholders on 7 June 2018.

(2) Initial application of new financial reporting standards

In the financial year 2017, the following revised financial reporting standards including the changes in other standards, which are also adopted by the EU, were applied for the first time:

1) according to EU Endorsement Status Report of 27.02.2018

IAS 7 "Statements of Cash Flow: Disclosure initiative"

The amendments to IAS 7 on the Statement of Cash Flows require additional information on changes in financial liabilities. The additional information affects both cash and non-cash changes. In order to meet the new disclosure requirements, additional information is presented in Note (49).

(3) Other changes in comparative information

In order to improve the informative value of the Consolidated Financial Statements as of 31 December 2017, the following changes in presentation were made compared to the previously published Financial Statements:

The line item operating EBIT was eliminated from the Consolidated Statement of Profit or Loss because in the newly formed RHI Magnesita Group this represents no longer a key figure for measuring performance. Consequently, the former separately presented items result from derivatives from supply contracts, impairment losses, income from restructuring and restructuring expenses are now presented as other income and other expenses (see Notes (39) and (40)).

Liabilities to fixed-term or puttable non-controlling interests of €32.0 million (31.12.2016: €32.5 million), which were previously included in financial liabilities (Note (26)), were reclassified to other financial liabilities (Note (27)) as this presentation is more appropriate.

Personnel provisions in the Consolidated Statement of Financial Position are reported separately as provisions for pensions (Note (28)) and other personnel provisions (Note (29)).

The information for the previous year was adjusted accordingly for all the above-mentioned changes in presentation.

(4) New financial reporting standards not yet applied

The IASB issued further standards, amendments to standards and interpretations, whose application is, however, not yet mandatory for the year 2017. They were not applied early on a voluntary basis.

The following accounting standards were adopted by the EU by the time of the preparation of the RHI Magnesita Consolidated Financial Statements:

1) according to EU Endorsement Status Report of 27.02.2018

IFRS 9 "Financial Instruments"

IFRS 9 was published in July 2014 and subsequently endorsed by the European Union on 22 November 2016. 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 will implement IFRS 9 per 1 January 2018 using the modified retrospective approach, meaning that the 2017 comparative numbers in the 2018 Financial Statements will not be restated. Any impact of IFRS 9 as of 1 January 2018 will be recognised directly in equity.

RHI Magnesita has reviewed the impact of this new standard and has concluded that the impact is limited to the following:

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". For RHI Magnesita Group this new classification only means that the assets currently classified as "available-for-sale" or "financial assets at cost" will be classified as "fair value through other comprehensive income" or "fair value through profit or loss", whereas all assets in the category "loans and receivables" will be recorded at "amortised cost". Receivables that are part of factoring agreements will be classified as "fair value through profit or loss". The resulting effect on the measurement of the financial assets will be immaterial for RHI Magnesita Group.

With regard to the impact of the expected loss model on trade and other current receivables RHI Magnesita concluded that the impact is immaterial. 

IFRS 15 "Revenue from Contracts with Customers"

IFRS 15 provides uniform regulations for revenue recognition which are applicable to all contracts with customers. IFRS 15 supersedes IAS 18 "Revenue" and IAS 11 "Construction Contracts". The decisive factor for revenue recognition is no longer the transfer of significant risks and rewards, but rather, when the customer obtains control over the goods and services agreed and can benefit from them.

IFRS 15 introduces a five-step model to determine revenue recognition. According to this model, the contract with the customer and the separate performance obligations therein has to be identified. Then the transaction price must be determined and allocated to the identified performance obligations. Revenue must then be recognised separately for each performance obligation in the amount of the allocated pro-rata transaction price. For this purpose, criteria were defined which distinguish between satisfying a performance obligation either at a point in time or over time.

IFRS 15 is applicable to financial years starting on or after 1 January 2018. The RHI Magnesita Group will apply the modified retrospective method. Under this method, IFRS 15 is applied to those contracts that are not yet complete as of 1 January 2018. The cumulative effect of the initial application will be recognised as an adjustment of the opening balance of group reserves in the item retained earnings as of 1 January 2018.

In an implementation project, RHI Magnesita analysed its business models in respect of the new regulations. Based on the analyses performed the effects of the initial application of IFRS 15 on the Consolidated Financial Statements are as follows:

If contracts with customers include the delivery of products, revenue is recognised at the time when control over the products is passed to the customer in accordance with IFRS 15. Based on the individual Incoterms rule agreed in the customer contract, time of transfer of control over the products is determined. The Incoterms rules describe mainly the tasks, costs and risks involved in delivery of goods from the seller to the buyer. 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. Therefore, the estimated effect from the initial application of IFRS 15 will result in a reduction of retained earnings as at 1 January 2018 in the amount of about €6.2 million.

By applying IFRS 15, additional separate performance obligations can be identified in supply contracts with customers. When multiple independent performance obligations are identified, the transaction price has to be allocated to the components by reference to their relative standalone selling prices in the future. Accordingly, temporary shifts may occur in revenue recognition. The impact on revenue recognition is of minor importance.

In addition to delivering products, the RHI Magnesita Group also provides various services. When services represent separate performance obligations within a contract, a corresponding transaction price has to be allocated to the service component. This may influence the timing of revenue recognition. Moreover, it causes an increase in revenue from providing services at the expense of revenue from the sale of products. The impact on revenue recognition is of minor importance.

In the Steel segment, multi-component contracts with variable payment arrangements are concluded in some cases. For such contracts, the transaction price depends on the customer's production performance (e.g. amount per ton of steel produced in the customer aggregate serviced). Pursuant to the current provisions on revenue recognition according to IAS 18, revenue for those refractory products is recognised in the Group based on the production performance achieved by the customer. If the customer already obtains control over the refractory products with the installation of the refractory materials in the aggregate, revenue must be recognised at this time in accordance with IFRS 15. Since the consideration to be paid by the customer is completely variable, revenue in the Group must be determined on the basis of an estimate. In such cases, revenue from refractory products is recognised earlier in accordance with IFRS 15. In the Consolidated Statement of Financial Position, receivables from customer contracts that have not been invoiced yet lead to the recognition of a contract asset. Most of the products supplied to the customers in this business model are consumables with very high turnover. Consequently, RHI Magnesita Group determined that revenue will only be recognised earlier and thus will have an effect on the Consolidated Financial Statements for those customer aggregates in which refractories with long durability are applied. As far as other products or services apart from refractory products represent separate performance obligations in such multi-component contracts, a variable transaction price has to be allocated to the components by reference to their relative standalone selling prices. This may influence the timing of revenue recognition. However, no material changes in revenue recognition are expected for such contracts with variable payment arrangements.

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.

As a lessee, RHI Magnesita can apply IFRS 16 based on the retrospective method or the modified retrospective method with optional simplification rules; the option chosen has to be applied consistently to all leases of the Group. RHI Magnesita currently intends to initially apply IFRS 16 as of 1 January 2019. At present it is still undecided which transition method the Group will choose and whether the exemption options will be used.

RHI Magnesita has started to assess the possible effects on the Consolidated Financial Statements, but can currently not determine the precise effects of the application of IFRS 16 on the reported assets and liabilities. Due to the fact that obligations from rental and leasing contracts of €56.9 million exist in the RHI Magnesita Group as of 31 December 2017 (31.12.2016: €66.7 million) (see Note (60)), RHI Magnesita expects a significant extension of the Statement of Financial Position due to the initial application of IFRS 16. Together with the resulting shift between EBIT and net finance costs as well as the shift between cash flow from operating activities and financing activities, the Group expects a significant impact on the presentation of the asset, financial and earnings 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:

1) according to EU Endorsement Status Report of 27.02.2018

(5) Group of consolidated companies

In addition to RHI Magnesita N.V. as the parent company, the RHI Magnesita Consolidated Financial Statements include the Financial Statements of 112 subsidiaries (31.12.2016: 77) and of the RHISA Employee Trust, Sandton, South Africa.

In 2017 two joint ventures and two associates are accounted for under the equity method. In the previous year, the Group held only one investment in a joint venture. 19 (31.12.2016: three) subsidiaries and three (31.12.2016: three) other investments which are considered to be immaterial for the financial position and performance of the RHI Magnesita Group due to their suspended or minimal business activities are not included in the Consolidated Financial Statements.

The group of consolidated companies developed as follows:

Changes in the group of consolidated companies in the reporting year 2017

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.. 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. Shares of Magnesita are listed on the Novo Mercado segment of the Brazilian Stock Exchange in São Paulo ("Novo Mercado"). The strategic rationale for the acquisition is to create a global, leading refractory company and become a more competitive, vertically integrated global provider of products, systems and services in the refractory industry.

The purchase price amounts to €296.8 million and was paid in the form of 5,000,000 newly issued ordinary shares of RHI Magnesita N.V. and €117.3 million in cash. The closing price of EUR 35.9 per share was used as a basis for determining the fair value of the issued ordinary shares.

The preliminary fair values of the acquired assets and liabilities according to IFRS at the acquisition date are presented as follows:

The purchase price allocation has not been finalized yet, as the valuations of the acquired assets and liabilities assumed have not been completely finalized. From today's perspective the Group expects further fair value adjustments mainly on property, plant and equipment, intangible assets, inventories, provisions and deferred taxes.

The remaining preliminary goodwill of €171.7 million essentially reflects expected synergies achieved by optimizing production capacities and cost structure as well as new business of the enlarged Group. Goodwill is not deductible for tax purposes.

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

Trade receivables comprise gross contractual receivables amounting to €145.0 million, of which €14.3 million are estimated as presumably irrecoverable, resulting in a fair value of €130.7 million. In case of receivables from joint ventures and associates of €17.8 million as well as other receivables amounting to €27.1 million the fair value corresponds to the gross amount. Due to the short-term nature of receivables, the Group assumes that the future cash flows correspond to the fair value.

The acquisition-related costs reported under administrative expenses in the consolidated income statement amount to €24.4 million for the current financial year and €12 million in the previous year. In addition, the Group recognised €9.1 million issue costs, less income tax amounting to €0.3 million, directly in equity.

In the period from November to December 2017, Magnesita generated revenue of €172.2 million and profit after income tax of €6.3 million. If the acquisition had been carried out at 1 January 2017, consolidated revenue would have amounted to €2,677.2 million and profit after income tax to €118.4 million. The pro-forma annual revenue and profit after income tax were determined under the assumption that the fair value adjustments and merger control divestments would have also been made as of 1 January 2017.

The Group is required - in accordance with the share purchase agreement (SPA) and Brazilian laws and regulations - to make a mandatory public offer in Brazil which must be addressed to all remaining Magnesita shareholders and must 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 and has filed with the Brazilian Securities Commission the respective request.

According to the original and subsequent filings, shareholders of Magnesita will have the option of selling each Magnesita share in exchange of

(i) R$17.81, 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 will be the higher of:

(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.

Since the cash plus shares option was equivalent to R$57.73 on 28 February 2018, in light of the RHI Magnesita share price and the exchange rate prevailing on that date, the Group expects substantially all of Magnesita's minority shareholders to tender their shares and opt for the cash plus shares consideration. If 100% of Magnesita's minority shareholders tender their shares and opt for the cash plus shares consideration, the Group will disburse R$455.6 million, adjusted by SELIC from 26 October 2017 until the date of the settlement of the auction of the Integrated Tender Offer, and issue an additional 5,000,000 shares.

The Integrated Tender Offer is expected to be completed during 2018. The difference between the amount paid in the Integrated Tender Offer and the book value of non-controlling interest acquired will be recognised directly in equity.

Acquisition of Agellis

On 13 October 2017, RHI Magnesita acquired 100% of the shares of Agellis Group AB (Agellis), located in Lund, Sweden. Agellis provides products optimizing the molten metal processing, aimed at increasing quality, reducing maintenance and assisting safety. This technical know-how was the main reason for the acquisition. The purchase price amounts to €5.6 million whereof €5.0 million were paid in cash and €0.6 million represent the recorded liability for an earn-out agreement. The earn-out is based on the revenue outcome of the financial year 2020 and will be paid in July 2021. The estimated earn-out corresponds to 52% of the maximum earn-out and has been discounted with the transaction internal rate of return.

The fair values of the acquired assets and liabilities according to IFRS at the acquisition date are presented as follows:

Goodwill amounting to €2.4 million primarily refers to the value of potential new customers and, to a limited extent, the assembled workforce. Goodwill is not deductible for tax purposes.

Other additions

Additions are related to the establishment of the RHISA Employee Trust, Sandton, in South Africa with effect from 13 March 2017. The operating activities of the RHI Magnesita Group in South Africa are subject to the Black Economic Empowerment legislation. Based on this, the RHI Magnesita Group has transferred 25.4% of the shares in RHI Refractories Africa (Pty) Ltd. to a trust, whose beneficiaries are employees of RHI Refractories Africa (Pty) Ltd. The trust is fully consolidated in the Consolidated Financial Statements since the RHI Magnesita Group can exercise a controlling influence on the trust due to the contractual terms and conditions.

In addition, RHI Feuerfest GmbH, Vienna, Austria, was included for the first time in the Consolidated Financial Statements with effect from 19 May 2017. This company took over the operating activities after the corporate restructuring of former RHI AG.

Furthermore, RHI Magnesita N.V. which is based in Arnhem, the Netherlands, and has its place of management in Austria, was established on 20 June 2017 and subsequently fully consolidated. As of 26 October 2017, after completing the corporate restructuring of RHI AG, the company became the ultimate parent of the RHI Magnesita Group.

Disposals

At the end of October 2017, all shares in the two entities REFEL S.p.A., San Vito al Tagliamento, Italy, and CJSC "RHI Podolsk Refractories", Moscow, Russia (together subsequently called Fused Cast) were sold.

In order to satisfy the conditions imposed by the European Commission to approve the acquisition of Magnesita, the Group sold its magnesia-carbon bricks business concentrated in Oberhausen, Germany, as well as its entire dolomite business in the European Economic Area, which consisted of 100% shares in Dolomite Franchi S.p.A., Brescia, Italy, and its production site in Lugones, Spain (together subsequently called merger control divestments) at the end of November.

The net assets disposed at the date of deconsolidation consist of the following items:

The result from deconsolidation is determined as follows:

The loss was recognised in other expenses in the Consolidated Statement of Profit or Loss. The selling price for the merger control divestments of €42.6 million consists of €40.0 million paid in cash and €2.6 million deferred consideration that will be due on the second anniversary of the disposal. The loss from deconsolidation of the merger control divestments includes an investment reimbursement obligation of €3.7 million to the former subsidiary Dolomite Franchi S.p.A.. The selling price for fused cast amounted to €0.3 million and was paid in cash.

Changes in the group of consolidated companies in the previous year

On 4 March 2016, the subsidiary RHI United Offices Europe, S.L. (100%), based in Lugones, Spain, was established and included in the Consolidated Financial Statements as of this date. On 1 September 2016, the subsidiary RHI United Offices America, S.A. de C.V. (100%), based in Monterrey, Mexico, was established. The purpose of these companies is the provision of internal administrative services.

With effect from 12 May 2016 the subsidiary RHI Rückversicherungs AG (100%) based in Vaduz, Liechtenstein, was liquidated.

As of 6 June 2016, all shares (100%) in RHI Monofrax, LLC, Wilmington, USA, were sold. The net assets disposed at the date of deconsolidation consist of the following items:

The result from deconsolidation is determined as follows:

The loss, taking into account the transaction-related costs of €0.5 million incurred in the USA, was recognised in other expenses in the Consolidated Statement of Profit or Loss. The selling price of US$1 was paid in cash.

Companies of the RHI Magnesita Group

The main operating companies of the RHI Magnesita Group pursue the following core business activities:

The following list shows all companies in which RHI Magnesita holds a share of at least 20% (with the exception of the RHISA Employee Trust):