Fuchs SE (FPE3) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the analyst conference call of Fuchs Petrolub SE. At our customers' request, this conference will be recorded. [Operator Instructions] I may now hand you over to Lutz Ackermann, who will lead you through this conference. Please go ahead, sir.

Yes. Good afternoon, ladies and gentlemen. This is Lutz Ackermann speaking. On behalf of Fuchs Petrolub, I would like to wish you a very warm welcome to today's conference call on the half year figures. As always, all the relevant documents have been uploaded on our IR section on our home page this morning. And with me on the call today is Dagmar Steinert. Dagmar will run you through the presentation in a second, which is then followed by a Q&A session. Yes, Dagmar, I would like to hand over to you, and please go ahead.

Thank you, Lutz. A warm welcome from my side as well, and thank you for joining us today. I will start with Chart #2, our highlights chart for the first half 2021. As you can see, after a strong start to the year, our business performed well again in the second quarter. Overall, we generated sales of EUR 1.4 billion, and that's 26% above prior year. Our earnings, our EBIT increased disproportionately by 71% to EUR 191 million. This sales growth is strongly driven from the automotive industry in China. In the second quarter, first price increases are implemented. And what's very important, our sales and EBIT in the first half '21 is also above the prior crisis year 2019. The supply chain situation continues to be tense, and there is no relief being for the next month. Anyhow, based on these positive business development in the first 6 months, we are more optimistic in our view into the second half of this year, and we raised our outlook. Our sales, we expect to come in at the upper end of the range of EUR 2.7 billion to EUR 2.8 billion. Our EBIT range we increased to EUR 350 million to EUR 360 million. And of course, our FUCHS Value Added, our most important KPI, increased, and we see it for the full year '21 around EUR 200 million. Now I would like to turn to Chart #3, our sales development by quarter. As you can see, our first quarter '21 and our second quarter '21 are both above all quarters of the precrisis year 2019. As already mentioned, in the second quarter, we've seen first price increases compared with the first quarter, and that's the reason for the increase. Coming to the next chart, the quarterly EBIT development, Chart #4. This follows, of course, the development of the sales. And you see our quarterly earnings in '21 are above the quarter 2019. And of course, you see the impact of the crisis in 2020 with these very weak second quarter. Our best quarter, Q4, in the previous year, which contains a one-off compensation. So the level of our earnings in '21 is still on a high level. But you can see in our second quarter that our margin is sequentially weaker due to higher raw material prices. With that, I would like to turn your attention to Chart #5, our group sales. We see an organic growth of 27% or EUR 307 million. Compared with the first half 2019, we have an increase of 9%. The external growth is due to acquisitions in 2020 in North America and the negative currency effects mainly due to Americas. We see, on the one hand, the weak U.S. dollar and, of course, high inflation in the South American countries. These sales increase or significant year-on-year upturn is volume-driven, and we have in all regions higher sales, but of course, most dynamic in Asia Pacific, mainly China. On the next Chart #6, our net operating working capital. You see quite a high number for our net operating working capital of EUR 624 million or 21.8 percentage points in relation to annual sales of the last quarter. As an impact of the high volume growth in sales and, of course, on these increased raw material prices, and there, of course, this both effects pushed our inventory as well as trade receivable. And of course, this increase in net operating working capital, it's a timely issue that, of course, impacts our cash flow. But before I come to the cash flow, I will give you an overview about our earnings, starting with Page #7 for the full group. With these strong sales growth, we improved our gross profit by 27% or over EUR 100 million, and it comes in at EUR 497 million. We reported a gross margin of 35.2% in the first half of this year. This is 0.4 percentage points above the last half year. Looking into the quarter, we see in the second quarter this year with a margin of 32.9%, a margin, which is 2.7 percentage points lower than in the first quarter of this year, of course, due to the increase in raw material prices. Looking at the other function costs, we see an increase as well, but it's [ underproportional ] compared with the gross profit, and it's mainly driven by selling -- higher selling expenses. And therefore, our EBIT is up by 71% year-on-year and our EBIT margin is 13.5 percentage points after 10% in the last year. Our CapEx is lower, more or less nearly half. But as you know, we finished our big CapEx program in the last year. With that, I would like to come to the regions, starting with Europe, Middle East, Africa on Page #8. As you can see, sales are up above 20%. And -- but the last year, of course, was hit hard by the pandemic. Compared with 2019, the year before the pandemic, sales 6% higher. We have seen in almost all countries in this region a high double-digit growth rate. Above average rises in South Africa and Russia as well as France, Spain and Italy. The weak Eastern European currencies, of course, have an impact on our sales as well. Due to this growth rate in sales, we have a significant growth in earnings in almost all countries, also compared to the first half of 2019. On the next page, on Page #9, you see the region Asia Pacific. There, the last year was less impacted from corona compared with the other regions. But on the other hand, we have a high dynamic demand in Asia Pacific, especially in China, which remains to benefit from the strong demand of the automotive sector. In the first half, sales are up 33% and 19% up on the precrisis level in the first half of 2019. Looking at the earnings on the EBIT, we see a significant earnings growth in almost all countries, but of course, highest absolute growth in China, of course, which is dominating [indiscernible] by India. On the next page, #10, the region North and South America as well report higher sales compared to previous year and higher sales compared to 2019. But of course, we have to keep in mind that in 2020, we had the acquisition in North America of Nye. Looking at the earnings, North America doubled earnings compared with the previous year, but this was highly impacted by bad debts as well as pandemic. We've seen as well quite a considerable recovery in all South American countries, which in the last year have been hit very hard by corona. On the next page, on Page 11, you see the development of raw material price increases in 2021 as this is, for us, something we've never seen in this impact before and which, of course, affects our business. As you can see, in Europe and America, somehow the increases need to stabilize a bit but, of course, remain on a high level. We still expect margin pressure to continue in the second half of the running year. And of course, we are ongoing increasing our selling prices and try to mitigate the margin compression. With that, I would like to come to our outlook to Page #12. And as already mentioned, due to the strong first half year, we rise our expectation and are more optimistic regarding the second half of this year. And we expect our sales to be at the upper end of the range of EUR 2.7 billion to EUR 2.8 billion. Our EBIT range we increase to a range of EUR 350 million to EUR 360 million. And that, of course, impacts our -- positive impact our FUCHS Value Added that we see around EUR 200 million. Our expectations for the free cash flow before acquisitions stayed around EUR 110 million. And there, you have to keep in mind, of course, that the strong demand as well as the increasing raw material prices impact net operating working capital where you've seen in the cash flow statement already a high number. With that, I would like to come to last chart for the outlook for the cash flow because I know that might be harder to understand. And therefore, we put this chart in our presentation where you a bridge to give you explanation from the free cash flow before acquisition from 2020 to the free cash flow before acquisition for the running year, which we expect to come in at EUR 110 million. Of course, we will have compared with 2020 a positive impact from our earnings after-tax. We will additionally have a positive impact from our lower CapEx as we spend around EUR 80 million in '21. And in 2020, we spent EUR 122 million. And now I will come to the net operating working capital where you see quite a big negative impact. On the one hand, you have to keep in mind, in 2020, we had a cash inflow of EUR 34 million as we had less business overall. And in the running year due to the high demand and price increases, we have to build up net operating working capital. So there is a swing. And then with other changes, we have another swing. In the last year, in 2020, we had everybody reduced advance payments for taxes. And at the end of the year, we came out better than originally expected. Therefore, we had to pay -- we had -- in 2020 in December, we had higher tax liability, which is, of course, positive for cash flow. And in the year '21, of course, we have to -- the cash out of these tax liabilities. In addition, we have higher advance tax payment in '21 for the running year. And therefore, of course, we have there like turnaround again. In 2020, there was a cash inflow from others of EUR 25 million. And in '21, there will be an outflow. And these both seems the reason why our cash flow is just around EUR 110 million in the running year. I hope that, that explanation gives you a better feeling on that number. And with that, I would like to close the short presentation and would like to answer your questions.

Okay. Please, operator, take over for the moderation of the Q&A session.

[Operator Instructions] The first question is by Markus Mayer of Baader Bank.

Two questions, if I may. The first one is on the volume or the split of the organic growth in the first half volumes versus price versus the expected split in the second half. Is my assumption right that the first half organic growth mainly was volume-driven, and then potentially in the second half, there will be a significant price effect on organic growth? But more flavor on this would be of interest. And then I will ask my second question afterwards.

Okay. Thank you for your question. Well, if you compare the first half '21 with the first half '20, you are absolutely right, that's volume-driven. If I look on a quarterly basis, in the first quarter '21, it still was volume-driven. And now in the second quarter, compared to second quarter to the first quarter '21, we already see effects from price increases.

But how big have been these price effects sequentially, so very significant? Or will, in particular, didn't kick in, in the third quarter and the first quarter?

Well, we see the second quarter in sales EUR 17 million above the first quarter of this year. And that is price-driven.

Okay. Good. And my second question would then -- several questions in one question, but it's certainly around the Chemtool plant fire at your U.S. competitor and also partly additive supplier, Lubrizol. The question will be -- or the questions would be, how do you think this will impact you? And how -- if you have the chance to gain market share in the U.S. grease market and if my assumption of that Lubrizol has roughly 30% market share at U.S. greases from this plant is correct. And also where your grease plant in Chicago is currently capacity utilization, can you basically step into this lack of current capacities or kind of flavors, this would be quite interesting.

The answer -- the short answer is yes. We will benefit. We don't know to which extent. I mean the -- yes, it was the fire in the U.S. where the Chemtool site totally burn. And we already see customers from Chemtool approaching us to get products from us, and we expect that it will take at least up to 2 years until everything is built up again. And of course, one or the other products will be produced not by us, but I guess, from [indiscernible] because that is quite common in the U.S., but we expect, of course -- or we will try to have a positive effect on them.

And I had a question, the capacity utilization of cargo plant, is this already at full capacity? Or will you still have center capacity to also serve then the additional Lubrizol customers?

We still have additional capacity to serve that customer. So there won't be any capacity restraints regarding that.

Okay. Great. But then -- and also the new plant in Germany -- new grease plant in Germany is also up and running. What do you mean by that?

It's up and running. We started production, I think, half a year, something around that, ago. Then yes, it's running. But it's a different kind of greases as it's -- Germany is fully aware of greases. And in Chicago and Harvey, we are more producing greases with [indiscernible].

Okay. And just a last question on this. The customers of Lubrizol, are -- I guess they are mainly in the industrial manufacturing field, where also then the approvals for the grease are less severe than they are for automotive, is this correct?

That's correct. You are quite familiar with the market. Yes.

Okay. And see you soon then in September in our contracts.

Yes. Looking forward to that.

The next question is by Martin Roediger of Kepler Cheuvreux.

I have also a few questions, and I would also like to ask them one by one. With the strong momentum, you may have seen also at the end of Q2 continue at the beginning of Q3. So I would like to know what does your order book tell you for right now, July, August and so that we get a flavor on the demand momentum continuing?

Well, as you know, like, we have a very strong visibility, and therefore, order backlog doesn't really play a role for us. But of course, it gives us visibility for a couple of weeks. And it's -- yes, it's a mixed situation because on the one hand, of course, we still see good demand. On the other hand, regarding the automotive industry and the shortage of semiconductor and so on, there are more plants closed from customers. And of course, we expect in the third quarter, therefore, somehow less demand from that side. But today, we don't really have that much visibility.

Okay. Can you hear me?

Yes, we can hear you. Go ahead.

Yes.

Okay. Sorry. Another question on the raw material price inflation, which you also show in your chart, but your Q2 results have been quite well, and the burden appeared to be less worse than feared. Is it also partly because of accounting? So sometimes from other companies looking of raw materials first in, first out? Or is it an average pricing of input cost so that the bigger effect from the raw material price inflation is still to come in the third quarter?

We use for accounting for raw material prices the average prices, and that is the reason why I said in the last conference call that the first quarter is not really impacted from -- that much from increasing raw material prices and, of course, increasing selling prices from our side. And in the second quarter, we see both. We see starting the effect from our price increases. And on the other hand, as mentioned, with the lower gross margin in the second quarter compared with the first quarter, that is the raw material price increase impact as well. Therefore, we will have the main negative impact from that in the second and in the third quarter. And our price increases, which we already implemented, are seen partly in the second quarter. We will see, of course, more in the third quarter, but we will see as well higher raw material prices in the third quarter. And yes. So it's -- you're right. It always comes into P&L with some time lag.

And the final question from my side is, did you already also benefit from a better mix in the second quarter because we see right now automotive companies also changing the mix of their product portfolio, more selling SUVs and electric cars and less all the bread and butter cars or the smaller cars? So is -- has that been also favorable for you in your mix in your portfolio?

Well, we always have, of course, a bit of impact from product mix quarter-by-quarter. But in the second quarter compared with the first quarter, there is no big impact from a product mix. It's just volume-driven that is better than originally expected.

The next question is by Sebastian Bray of Berenberg.

I have 2, please. The first is on levels of absolute volume sales at FUCHS. Now relative to the last time, earnings were peaking around 2017, 2018 time. How are volumes now relative to the 2017, 2018 period? I'm just trying to get an idea for what exactly has happened to the profitability per ton over the last 3 to 4 years. And my second question is on the CapEx outlook. How -- where relative to your initial expectations are you in terms of capacity utilization? And if demand remains strong, when exactly do you think you'd need to go substantially above the level of EUR 80 million per annum?

Sebastian, I will start with your second question with the CapEx. As we finished our big investment program or initiative, which was not only adding capacities, it was modernizing, increasing efficiency, somehow implementing a certain level of operations within the group. And with the year '21, 1 year earlier than originally expected, we are back to levels of amortization depreciation around EUR 80 million. And this gives us enough room for small and medium-sized project besides maintenance and everything. And therefore, even if we need to add capacity, we won't exceed material this level of CapEx, and you won't see such a CapEx program again because there is enough room in our CapEx budget. And of course, looking at capacity, as we produce in batches, we could quite easily increase better, therefore, increase somehow capacity. And even if demand remains near at that level, we wouldn't run out of capacity. Coming to your second -- to your third question, which I answer the second question, about profitability per ton, we don't give that information as it is always -- it is very simple to say that the volume, that's the profitability, but then you have to get very deep into it, like looking at product, product groups. This kind of information, we are not willing to give them or to make it public because that would give competitors information how we do our pricing and everything. And as you know, that there's this ongoing trend towards lower volume lubricants. And so just looking at the volume doesn't necessarily mean that if there is the same level of volume or less volume that is -- that's a decrease in business. But anyhow, we increased our volume. That information, of course, I can give you. And if you, for instance, look at the year 2020 besides the prices where we bought Nye, this very specialized lubricant company in North America, and they are highly profitable and -- but they produce extremely low volume products. So we added to our group some profitability but hardly added any volume. So even there, it would be somehow misleading, and I hope you understand that we don't give more information on that side.

Yes, of course, that's helpful. Then if I may extend that, is there any reason why you think FUCHS in the longer term would not be able to return to the levels of profitability that we saw in 2017, leaving aside the current increase in raw material prices?

No, no. Medium, long term, we should definitely come back to already seen profitability levels, yes.

The next question is by Isha Sharma of Stifel.

I just actually have one left now. On the raw material cost inflation in the past whenever there was an uptick, and I do appreciate that the -- you have not seen something as drastic at this time. However, we have seen a fluctuation of close to 100 to 150 bps from 1 quarter to another in your profitability. I do understand that it might take a little bit of time because that shows in your P&L, but are there other costs or other reasons for OpEx to be higher than in the past that we might not see a quicker recovery in profitability? Or is it fair to assume that when the prices stabilize, the raw material costs stabilize, then you will be able to swing back the profitability pretty fast?

Thank you for your question, Isha. Well, if raw material price increases stabilized, then of course, it's just a question of some months that we will come back to better margins as there is always this time lag, of course, 3 to 6 months. On the OpEx side, what we say today is, of course, besides higher selling costs due to the strong demand, we have significantly higher cost of freight as logistic costs are increasing sharply. And it's somehow -- sometimes even difficult to get containers, flights, then, of course, for instance, in Germany due to the high water, streets are disturbed and trains are not running. So there's quite a sharp increase in logistic costs, and that, of course, drives OpEx. Looking at OpEx in total, these 2 areas are the main increases, I mean, what will be ongoing, but that's already in the numbers -- is cost for IT as we as well as other companies go more for like Software-as-a-Service, which you see directly in OpEx and not in CapEx.

The next question is by Eleanor Seddon of UBS.

I've actually got a couple at this time. So the first one is just around demand trends in the automotive market. We've rushed on it. I'd be interested to know globally on a more evaluation that way. So for example, we know APAC is strong, but if you could talk about activity between APAC and EMEA, that would be really helpful. And yes, there's a next one after you dealt with that one.

I'm not sure if I got your question right. You want to have more insights on the automotive industry in APAC or...

No, in EMEA and the Americas. So I think general understanding is APAC is strong. If you have more comments beyond that, then obviously, feel free to add.

Yes. No, APAC is strong, as you said, but as well as like Europe, Germany and even America, but you have to take into account our activities in North America regarding automotive industry are not that big. And for our business and our customers, we see there a good demand, and it's performing well.

Okay. Brilliant. And then turning to CapEx. Obviously, you've guided for -- or previous comments around an EUR 80 million figure roughly in line with depreciation. It doesn't -- it seems like you're tracking a little bit lower than that at the moment. Is there a lot more spending to come in the second half or if some projects that's being pushed a little bit into next year?

We haven't pushed anything into the next year. It should come in the second half. But of course, it's always a question, some of them might be shifts or delays but not because we shifted, but maybe that there are -- materials are not available or too long delivery time for some machinery or technical equipment, but no shifts or delays from our side.

Great. Cool. And the last little one was we were just talking about -- or you were just talking about the freight challenges, for example, in Germany. Do you have any communications from those providers kind of how long they expect that disruption might continue or when they expect to be back to business as normal?

No, we don't have it. Of course, it's different from like company to company or any operation. And we are really lucky as we as a group are not direct affected. And it's just like indirect through maybe logistic. So for instance, in our plant in Germany, we get less material via rail as there are disruptions on the railway, but I don't know how long this will take. So there are more -- there's more done by truck, just as an example.

[Operator Instructions] There are no further questions at this time, so I hand back to Lutz Ackermann for closing remarks.

Yes. Thank you very much, operator. Thank you for the participation today at our conference call. As always, if you have any further questions, don't hesitate to contact us. Otherwise, we see us at the next conference call, which takes place on 29th of October. And until then, stay safe, and have a nice day. Bye-bye.

Thank you very much. Bye-bye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.