Fuchs SE (FPE3) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the analyst conference call of FUCHS PETROLUB SE. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Lutz Ackermann, who will lead you through this meeting. Please go ahead.

Yes. Good afternoon, ladies and gentlemen. This is Lutz Ackermann speaking. On behalf of FUCHS PETROLUB, I wish you a very warm welcome to today's conference call on the Q1 figures. As always, all the relevant documents have been uploaded at 7:00 a.m. this morning on the IR section of our home page. With me on the call today is Dagmar Steinert, CFO of FUCHS PETROLUB. And as always, Dagmar will run you through the presentation in a second, which will then be followed by a Q&A session. Having said that, I want also to highlight our Capital Markets Day, which we have on 28th of June this year. And the registration is already open. And we are happy for your participation and are looking forward to that event. Having said that, I would like to hand over to Dagmar. Dagmar, please go ahead.

Thank you, Lutz, and a very warm welcome from my side as well. I would like to start with Chart #2, our highlights for the first quarter '22. We had quite a good start into the year, yes, even in this continued challenging environment. We report EUR 808 million sales. That's 16% more than last year. Our earnings, our EBIT is EUR 93 million, and that's EUR 8 million -- or 8% below previous year. But previous first quarter '21 was an extraordinary strong quarter. So what have you seen in the first quarter '22? Our sales growth is mainly price-driven, and we had a strong focus on increasing our sales prices. We have higher gross profit year-on-year, but we see as well a strong cost inflation, especially for freight costs, for energy costs and, of course, salary and wages. In this challenging environment, anyhow, we updated our outlook, but I will come to that later. So let's turn to Page #3 where we see our sales development for the last, yes, 2 years. Just to remember here, in the second quarter in 2020, we've seen the decrease due to the COVID pandemic. In the second half of this year, there was a recovery. And of course, we had a very strong quarter in the fourth quarter 2020, and we had a very strong first quarter '21. Of course, there are some catch-up effects included. Year-on-year, I already mentioned it, our sales increased by 16%. If we compare the first quarter '22 with the first quarter '21, the sales increased by 9%. Coming now to the quarterly EBIT development on Page #4. There, you can see the volatility of the last 2 years; the decrease in the second quarter 2020 with strong recovery by the year-end 2020; the very strong quarter in the first quarter '21, where we had the tailwinds in raw material prices; then during the year '21, earnings came down. Now in the first quarter '22, we see again better earnings. And there, our earnings and our performance as well is more price-driven. I would like to turn to Page #5 where we have an overview of the group sales. We see a 12% organic growth, and all regions contributed to that, but with a different attitude. Our region EMEA and Americas grew organic 15% and 18%. In Asia Pacific, the organic growth rate was just 5%, and that is mainly driven by China with a difficult start into the year. We have some currency gains for the whole group. They amount up to EUR 25 million or 4%. I'm turning now to Page #6, our earnings summary for the first quarter. With this 16% sales increase, we managed to increase our gross profit by 3%. This is unproportionately, but that reflects the deep increase of raw material costs. Looking at the other function costs, they went up by 10%, and that is driven by inflation, of course, driven by higher freight costs and significantly higher personnel costs. Our gross margin improved by 1.4 percentage points in the first quarter '22 compared to the first quarter '21. Year-on-year, our gross margin is down 4.2 percentage points. The EBIT, I already mentioned, EUR 93 million in the first quarter '22. But that is -- yes, it is below year-on-year below the first quarter '21. But looking a bit broader on that figure, it is at the level of our, yes, peak year in 2018. Coming now to the CapEx, that was EUR 11 million, slightly below the previous year figure. And our net operating working capital in absolute numbers increased by 33% year-on-year, and that is due to the sharp increase in raw material costs and disrupted supply chain. Of course, that affects our free cash flow before acquisitions, which came in EUR 13 million compared to EUR 31 million in the previous year. With that, I would like to come to the regions, starting with EMEA region on Page #7. There, we see a sales increase by 15%, which is mainly price-driven as well. Our EBIT before equity accounts to EUR 42 million, which is below previous year's figure. The earnings of the equity companies are the same. We have a decline especially in Germany and in Southern Europe. On Page 8, Asia Pacific, which you'll see that our sales are up by 11%. That is mainly price-driven as well. But the development of sales, of course, reflects the difficult start of China, which dominates that region. We have positive currency effects, which account to 6%, as the Chinese renminbi is a very strong currency. Our EBIT in this region is EUR 29 million, so EUR 5 million below previous year, and that's due to the performance in China mainly. On the next chart, #9, our region North and South America. There, you can see that sales are up 27% and a strong organic growth is 18%. Of course, as well, we have quite some significant positive currency effects. Our earnings -- our EBIT is slightly up, of course, due to positive business development in South America, and currency effects play a role as well. With that, I would like to turn to Page #10, our development of the net operating working capital. As you can see, in the first quarter '22, our net operating working capital in absolute numbers is EUR 748 million and, as a percentage of sales, 23.1%. In the first quarter '21, this number was EUR 561 million in absolute figures and 20.1% of sales. That reflects the massive raw material price inflation and disruptions in supply chain. Therefore, I would like to call your attention to Chart #11 where we expressed our uncertainty which we see. We have the Russians' invasion into the Ukraine with the sanctions against Russia, which has quite some effects on supply chain, availability of raw material and, of course, prices. We see the zero-COVID strategy in China, which has a high-risk potential, not only for the local economy in China, but as well for the global economy because they are a global supply chain -- or a lot of global supplies which need supplies from China. Therefore, we see the further ongoing strong increase in raw material prices and the significant cost inflation, mainly in freight, energy costs and, of course, wages and salaries, but everything is getting more expensive. These all end up in really tightening supply chain situation and, of course, in problems with raw material availability. We experienced significant shortages in raw materials and our customers as well. So that are the, yes, things which gives us a really high uncertainty about the -- yes, it's very difficult to estimate how the full year will perform. On the next chart, Chart #12, you see just an overview about the development of raw material prices. The red curve is the crude oil, and the other one are the lines for the SN 150 in the regions in Europe, U.S. and Asia. And as you can see, the starting point is January '22. There's a massive increase already in the first quarter. And of course, we expect our base chemical and additive prices as well as base oils to further increase in the running year. With that, I would like to come to the outlook for '22, which reflects all these mentioned uncertain environment. We keep our expectations for the sales development in a range between EUR 3 billion and EUR 3.3 billion. That reflects organic growth and, of course, our global setup and our ability to increase our sales prices. On the EBIT, we stick to our range of 36 -- EUR 360 million to EUR 390 million, but adjusted that we expected at the lower end of this range and more on prior year's level. We are still -- we still have a strict cost management. But of course, we see a strong increasing raw material prices. We see the inflation, as already mentioned, and therefore, we adjust our expectations to the lower end of that range. Of course, that has an impact in our fixed value-added expectations. It will be below previous year. As we originally said, we see it on previous year's level. Our free cash flow before acquisitions, there, our outlook in March this year was around EUR 220 million. Due to the strong increase in raw material prices and the supply chain disruption, we expect that we need a much higher or a significant higher number for our net operating working capital. And therefore, our expectations today, looking at the free cash flow before acquisitions for the full year, will be significant below EUR 220 million. So far, a short overview about our performance of the first quarter. And now I'm happy to answer your questions.

[Operator Instructions] We have a first question, it's from Markus Mayer of Baader Bank.

I have 3 questions, if I may. First of all, you said volumes from Germany and also the earnings have been quite down in Q1. Was this mainly automotive-related? Or was this across all industries? That would be my first question. Second question in relation to it, what are the demand trends in the different end-customer industries? I guess automotive in Europe was down. It might be up in U.S. and North Asia. But what about the other industries? And also, how does this go into the second quarter? And then the last question is on the shortage in raw materials, you said. In what regions do you have, what kind of raw material shortages and what raw materials are in particular short? And how is your supply situation and now invest you -- the situation with war in Ukraine, are any suppliers you saw previously now able to deliver? Or is this more related to the logistical issues, which you are obviously in a different market with particular in Asia, I guess?

Yes. Thank you, Markus, for your questions. Regarding the first question about the performance in Germany, in Germany, our Speciality business had quite a good performance. I mean, overall, looking at the development of the first quarter of the group, our growth in sales is price-driven. And overall, we have slightly less volume. Coming now to Germany, we have -- yes, the performance besides the Speciality business is not that good. So we have a volume decrease. And as Germany has quite a chunk of business of automotive industry, yes, that's one main reason. Then you asked about the performance of all industries in all regions. And overall, the automotive industry remained difficult. But we see as well, coming to Asia Pacific, we've seen the difficulties in China. And there, we have less volumes as well. But that goes across, let me say, all industries. It goes across all industries in Europe, in Asia Pacific and Americas, yes, less volume [ decline ] and -- but had somehow weaker performance compared with the other regions in the year '21. Your third question regarding shortage in raw materials, we see raw material shortage across the board in all regions and in all -- yes, sort of raw materials change, yes, day by day. So there is no shortage in just some special materials like semiconductors or chips. It changes and it goes really across the board. And you asked about the impact of our suppliers regarding Ukraine and Russia. As we have no direct supply from Ukraine or Russia, there is no direct impact. But of course, there might be an indirect impact, but of course, it's difficult to say.

The next question is by Matthew Yates of Bank of America.

I've got a couple of questions. I was wondering if you could go into a bit more detail about the volume performance through Q1. You're suggesting that volumes were slightly down in aggregate. Could you separate that between auto and industrial to give us a sense of just how tough the auto environment has been? And then any sense of, from your customers, what the sort of inventory levels look like and whether they are preparing for a second half pickup in production rates? The second question is around the top line guidance, the sales guidance. It's been left unchanged. Presumably, you're now working on a scenario of lower volumes at higher prices than you may have thought originally. So in terms of prices, if you put through roughly a 15% increase in Q1, with that move, continue to move higher in base oils and additives that you showed in the presentation, how much additional price increases should we be thinking about for the coming quarters to catch up on that cost inflation?

Yes. Thank you, Matthew, for your question. Regarding the volume development in the first quarter, sorry, but we don't provide figures for like to separate automotive industry and industrial as both customer groups buy both, yes, kind of product. But maybe I can give you another deeper insight in the volume development of the first quarter, just breaking it down to the region. So overall, we had a slight volume decrease in the first quarter compared to the first quarter '21. And in Americas, it's nearly nothing. And it has the volume decline at the biggest impact in the region, Asia Pacific, which is due to China. You asked about the -- if we have any sense of the inventory levels for our customers, not really, but our order books are built, and we don't have the feeling that they are like, let's stop picking from our customers that they want to build up their inventory or for whatever reason. It's just somehow, I guess, as we try to see what are we able to get and what do we need that we take it if it's available and not wait. And you are absolutely right, our adjusted outlook somehow reflects due to the, yes, inflation and higher prices, somehow a bit lower volumes than originally expected and, of course, higher prices. The price development or how is it going on, maybe I can give you -- I think I didn't mention it in the presentation. If you look at our first quarter '22 compared to previous year's quarter, we see just around, yes, 30% raw material price increases in that time, and we managed to increase our sales prices around 20%. And of course, this always goes along with the delay, with a timely delay between 3 to 6 months until you see it. So I hope that answers somehow your questions.

Look forward to seeing you all at the CMD in a few months.

The next question is by Isha Sharma of Stifel Europe.

Could you help us understanding how sticky are these prices? So you have been very successful in passing on the costs because of -- these kind of costs we haven't seen in the past. But could you help us, to what proportion of this could be a bit sticky? I assume in the Speciality business, like it might be that some of this pricing is sticky especially when the raw material costs come down eventually. And my second question is on net working capital. You had probably assumed an inflow for 2020 to when you gave the guidance at the end of last year. So is that the correct assumption? Or you did expect an outflow and now you just expect a higher outflow?

Yes. Thank you for your question, Isha. I will start with the last one, our NOWC and cash flow, in our original guidance, we expected an outflow for net operating working capital as well because we guide for -- we guided and we still guide for organic growth. And then, of course, you need at least a bit more net operating working capital now due to the inflation or high inflation still growing, we expect a higher outflow. About the question, our pricing and how sticky these prices are, of course, the system from country to country, from customer to customer, from industry to industry, so there is no general rule. And I can't give you now some like expectations or figures or anything because every calculation would be wrong to estimate this proportion of prices. If raw material prices come down, we'll stay at a high level for that time. But the fact is as we have the time lag in passing it through, of course, the same counts for a time lag if we decreased our sales prices and our customers' benefit that goes along with the time lag as well. So -- and of course, some prices stay as they are and levels go down. So there is no general rule for that.

The next question is by Oliver Schwarz of Warburg Research.

The first one would be on the outlook. Ms. Steinert, if I got you correctly in regards to, firstly, price increases and, first and foremost, cost increases that are still ongoing, I think I might be right to assume that we'll see more margin pressure in Q2 than in Q1 as the Russian invasion of Ukraine was only by the end of February and the sanctions came into place somewhere in March. So Q2, basically, you will feel the full impact of all those headwinds that we are currently facing. And hence, the margin might be more under pressure than in Q1. If I look at the quarterly run rate, EUR 93 million in EBIT for the first quarter, maybe at least according to my assumption, a bit less in Q2, might I be correct to assume that you are, let's say, banking on a V-shape recovery, so basically, a recovery of the margin in H2 to achieve your full year guidance? That would be my first question.

Yes. Thank you, Oliver, for the difficult question. Regarding the outlook because, to be honest, nobody really will know what's going to happen in the next month in this environment, of course, you are totally right. Looking at Q2 where we will see the impact at least or the full impact of the Chinese lockdown because it started in, yes, mid of March, but happened to stay in place like whole April and a lot of people expect or hope that it gets a bit released in May and June. But of course, nobody knows. And looking at, yes, Ukraine and Russia, as the invasion was on the 24th of February, the first quarter has not a significant impact out of that or direct impact. Of course, indirect, immediately, prices went up. You know that better than we do. And of course, we see -- or we will see in the second quarter more of the direct impact out of that. But our business in Ukraine and Russia is 2% to 3% of group sales, so let's not -- that's not such a big number. And the indirect impact regarding supply chain disruption, that's the question. And that's the question as well looking at the situation in China, what will be the impact on supply chains from these lockdowns and the disruptions in logistics. But of course, you mentioned margin pressure, so looking at percentage margin, of course, with having in mind or bearing in mind the high inflation, the percentage margin, of course, will come even more under pressure. Does it somehow answer your question? Or...

It does. That was very clear. May I assume that at least from the numbers you already have of April, you saw, let's say, the volume decline, especially in Asia because of China, to become even more, let's say, pronounced than you have seen in the, let's say, in the aggregate, which was Q1?

Yes.

Okay, cool. Lastly, looking at net working capital, its development, I guess, sales outstanding and so on is not really moving that much. However, due to the cost inflation, obviously, not working -- net working capital, sorry for that, net working capital requirements have increased in Q1 and are bound to increase even further in the oncoming quarters, at least that's what I'm taking from your guidance of significantly below the originally, let's say, provided number of EUR 220 million. Looking at those numbers, would you agree that the net working -- sorry, the free cash flow number that you are likely to achieve in 2022 will be above last year's level despite the envisaged decline?

Yes, it will be definitely above last year's number of EUR 90 million. First of all, in the last year, there was the, yes, impact from others, these tax payments, which we, of course, don't see in the running year. And as we already built up our net operating working capital matters in the year '21, due to the inflationary environment, as you know, I can't tell you it may be the same number, but it won't be more. It will be less, but it's very difficult at that early stage in the year to really get a reliable number for that. We will concrete that as soon as we are able to do it. But I can assure you, our free cash flow before acquisition will be above last year's number.

Very helpful. And my last question in that row would be your neighbor over the fence, BASF, decided to shut down all its operations in Russia and Belarus. Similar to your company, their direct involvement in these countries are not really significant in comparison to the overall sales generation. However, they cited the implementation of the...

Our railway here across the street.

All sirens are going off. Coming back to the topic. Your neighbor across the fence, BASF, decided to shut down their, permanently, their Russian activities due to the implementation of the next round of sanctions by the EU. Do you feel compelled to follow suit, so basically, to shut down your operations in Russia as well by the end of July due to the sanctions? Or are you, for whatever reasons, exempt from the necessity of shutting down?

Well, we are not, as of today, planning to shut down completely our Russian activities. Of course, we comply with all the sanctions, with all sanctions which are given from the EU, from the Ukraine, from U.S., even the Russian sanctions, of course. So we carefully comply with all the sanctions. We cut our, yes, supply business with Russia because in the past, we used to deliver our -- yes, some raw materials and finished products to Russia, to our Russian company that, of course, we cut and we don't support them anymore in any aspect. So they work by themselves and just on a local basis and just for the local market. And of course, that ends up in that business. But there is no -- for us, there is no, yes, reason to totally close that business because with our products, we provide food industry and everything, and I think that's an important industry for the people living there.

The next question is by Lars Vom-Cleff, Deutsche Bank.

I've got just one left, and I'm trying to get a better qualitative feeling for your guidance. It is well noted that you have decided not yet to lower your EBIT guidance range, but only state that we should expect the full year results to rather come in at the lower end. How confident are you to at least reach the lower end of your guidance range? Or to put it differently, based on what you know as of today, and I admit that there are lots of variables included, do you think it's a stretch? Or does it still include a buffer?

Well, thank you, Lars, for your question. It's a difficult question. But as you see, we kept our range in place. So as of today, with all these uncertainties, the really weak start, of course, looking across the ocean to Asia Pacific to China in April and everything, we expect full year EBIT to be more on the lower end on prior year's level. But as we kept the range in place, if things would turn out to be not as bad as something might be seeing today, there are even -- we might even be on the other level of that range.

[Operator Instructions]

SO there are no further questions. I think we can close the call at this stage. So we're happy for your participation in this conference call. And if there are any further questions, don't hesitate to contact us, we're happy to help. And yes, having said that, we would close this call. Thanks.

Thank you very much, and enjoy your weekend.

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