Fuchs SE (FPE3) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to 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 start the meeting today. Please go ahead.

Yes. Good afternoon, ladies and gentlemen. Lutz Ackermann speaking here. On behalf of FUCHS PETROLUB, I wish you a very warm welcome to today's conference call on the half year figures. With me on the call today is Dagmar Steinert, CFO, and as always, Dagmar will run you through the presentation in a second. All the documents have been uploaded on the IR section of our homepage at 7:00 a.m. this morning, so you can find everything there. Having said that, I would like to hand over to Dagmar. Please go ahead.

Thank you, Lutz. Good afternoon, ladies and gentlemen, and I will lead you through our presentation and would like to start with Chart #2. So here, you have the highlights of our first half year, and we had a solid first half in a really difficult market environment. Our sales are up 16% year-on-year, and that's mainly price-driven. Our EBIT was EUR 180 million is down 6%, but the last year was really strong and had positive effect from the corona situation. Overall, the global crisis situation remains difficult and it's very uncertain. Having a slide view at our outlook for the full year '22, we upgraded somehow our sales outlook where we said it will be now at the upper end of the range between EUR 3 billion and EUR 3.3 billion. Everything else is unchanged. And I just would like to remember you on our long financial -- long-term financial targets, which we published roughly 4 weeks ago when we had our Capital Market Day. And where we are still really confident that we are going to fulfill. I come now to Chart #3, our sales development on a quarterly basis. As already said, half year figures are up 16%. But if you look at the quarterly development, Q2 '22 to the first quarter '22, our sales are up 3%. And overall, you can see the massive impact of inflation and sales price increases. Year-on-year, the second quarter is up 16% to 17%, which is in line with the full half year figures. Turning to the next page, #4, our EBIT development on a quarterly basis. Here, as already mentioned, we are below previous year figure, EUR 11 million. And on a quarterly basis, second quarter '22 compared with the first quarter '22 it's minus 6% and quarter-to-quarter Q2 '22 to Q2 '21, it's down 3%. So I think we quite delivered. Coming to Chart #5, our sales development, our sales bridge, first half '21 to first half '22. As you can see, overall, we have a strong organic growth, 12%, we have no significant external growth, and we have a tailwind from the currency side due to a weak euro. So we gained 4% on the currency side. Overall, as already mentioned, our sales growth is price driven. So we see, of course, less volume. On the next chart, Chart #6, which we have our earnings summary. With our increasing sales number we managed that our gross profit could be increased by in absolute figures, EUR 27 million or 5% on a year-on-year basis. This 5%, of course, is -- this growing is below the sales growth and that's due to the high price increases on the raw material side. The other function costs are up 12%, and that's driven by especially higher freight costs, energy and of course, significant higher personnel costs. Overall, our earnings are down 6% year-on-year, and our EBIT margin is 11% compared with 13.5% in the previous half year. We have compared with previous year a lower CapEx figure. And if you look at the number of our net operating working capital outflow, there you can see that this number increased. Our free cash flow before acquisitions came in at EUR 0 compared with EUR 12 million in the previous year. And we come later to a chart where you can see the net operating working capital development, which, of course, is the driver for our free cash flow. And I just would like to remind you that in the last year, in the year '21, for the full year, we reported a free cash flow before acquisitions of EUR 90 million. And besides a high outflow for net operating working capital, we also had a significant one-off burden due to tax payments. Coming now to the regions on Chart #7, our region, EMEA. EMEA managed to increase sales by 16%, and that is, again, as for the whole group, mainly price driven. We see a strong organic growth of 15% and of course, less currency effects as overall for the group currency is due to the weak euro, but there are some positive currency effects from South Africa and Great Britain. We have negative effects from Poland and Sweden. But overall, it's a balanced number. We've seen within our countries in the region EMEA, most countries with double-digit growth rate. And anyhow, our EBIT is 10% lower than previous year's figure. And that's especially case in Germany, Southern Europe and of course, we had a EUR 3 million write-off for equity stake in Africa. In our region, Asia Pacific and Chart #8, our sales are up 7% but that's now mainly driven by currency effects as, of course, China is a big portion of our region, Asia Pacific and the -- due to the lockdown in China as a result of a zero-COVID strategy, of course, sales are down in China. We see positive organic growth in Southeast Asia and Australia. The earnings or the EBIT of the region was EUR 55 million, is 13% lower than the very strong first half of the year '21. There, we had a lot of like catch-up effects from corona. Of course, we have a significant lower contribution from China, but on the other hand, Southeast Asia and Australia have earnings growth. On Chart #9, North and South America, we see a strong sales growth, 34% and of course, a very high currency effect with 13%. That's mainly North America. Here again, in this region, the organic growth is price burden. Looking at the earnings... [Technical Difficulty]

Dear participants, please hold the line. We have some technical issues. Speakers, please follow your presentation, you will be hearable now.

Okay. Thank you. I hope we didn't miss a lot. I would now jump in at Chart #10, our net operating working capital development. There, you can see a significant increase in the second quarter. And here, we have now an absolute number, EUR 845 million compared with EUR 671 million by year-end '21. And these, yes, growth or increase is due to inflation, due to the price increases, which, on the one hand, of course, are reflected due to our price increases in the receivables. On the other hand, of course, on inventory. And there, we not only have the inflation effect, the price, but as well, we built up some safety stocks with regard to the uncertain supply situation or routine and these -- the amount of increase of net working capital, of course, was burn to our free cash flow for the full year. Coming to Page #11, just some geopolitical overall remark, what like the uncertainties for the rest of the year, we have the -- still the war in Ukraine. We have got the element of late in -- a potential work within raw material price. We have the potential reduction of gas supply, which, of course, might drive the demand side. We have China zero-COVID strategy. We have overall the unsecureness in supply chain situation, problems with raw material availability, and of course, supply chain interruption on the customer side, of course, affect demand. So moving to Page #12 to give you a high-level overview about the price development on the raw material side. The red line is the crude oil, but we don't buy crude oil. And anyhow, as you can see, crude oil, the dates are as of July 19 there, it still went up. What does that mean for our light space oil supply? That are the light blue lines where you can follow the development. Of course, you see significant increases from the beginning of the year. And on the other hand, looking at SN 150 in Europe, slightly came down by the mid of the July. On the other hand, Asia too SN 150 does climb up and in the U.S. is somehow leveled out. So overall, what do we expect for the time to come for the rest of the year? We still see visibility of more increases on base oil [indiscernible]. With that, I would like to turn Page #13 to our outlook for the rest of the year. And as already mentioned, looking at the sales, we see these high inflation. And of course, that is the reason why we now see our sales at the upper end of the range of EUR 3 billion to EUR 3.3 billion. All the other outflow figures are unchanged. We stick to our earnings [Technical Difficulty], which is lower end of the range between EUR 360 million to EUR 390 million, [indiscernible]. This, of course, will be below prior year according to our EBITDA outlook. And as we, of course, increased our capital employed and therefore, our cost of capital due to the increase of net operating working capital. And our free cash flow before acquisitions will [Technical Difficulty] free cash flow in the first half of the year, we managed as well in the previous year in '21 to generate quite a lot of cash flow in that second half. And with that, I would like to finish my short presentation, and I'm happy to answer all your questions. So go ahead.

[Operator Instructions] And the first question is from Markus Mayer Baader Bank.

I have 2 questions, if I may. The first one is on Asia Pacific, you said that there was, of course, a significant positive currency effect. But can you shed some light on the volume effects due to the lockdowns there should have been several negative effects? And also here, how these developments have been normalized over the second quarter and also during the third quarter? And second question is, in general, on price increases, as I said, for most of the regions, the organic growth was mainly price-driven. How does it look like for the second half or for the third quarter in particular? And also, how was the start of July and the start of the third quarter in a different kind of region from the one you said?

Yes. Thank you, Markus, for your questions. And I will start with the last one, how our start of July was in the third quarter. As it is -- demand is not finished, it's really impossible to mention something to that. Overall, looking at the second quarter at the development, the beginning of the second quarter was much weaker than the end of the second quarter. And price increases, your question regarding price increases in the second half. Of course, we increased our prices in several countries overall already several times. And there will be more price increases in the second half of the year. But of course, if you negotiate the price increase, it always takes some time until you see it in your P&L. So of course, we will see a higher effect of price increases in the second half maybe compared to the first half, but we are still like running behind. Looking at the region, Asia Pacific, your question regarding volume. I mean sales in Asia Pacific went up 7%, and that was, yes, currency driven and there due to China, of course, where we had really dropped in the beginning of the second quarter. So the volume figure or the negative volume figures even a bit more than the sales growth.

Next question is from Michael Schaefer, ODDO BHF.

Sticking to the APAC question, maybe some clarification on that one. Looking isolated in the second quarter, you reported APAC down minus 5%. If I got you correctly, basically, this was the only region where we have seen negative volume effect. So if I take basically the negative volume you've reported on a group basis, this indicates something like a 17% volume decline in the second quarter in APAC on a stand-alone basis. So just a clarification whether this is about right? The second question is basically on the raw materials outlook. Well, looking at what you presented as kind of base oil prices, it looks like at least currently, it has seen some sort of during -- so I wonder whether you can shed some more light on how you see basically the various raw mat components evolving maybe splitting into base oil on the one hand and maybe chemicals, what you see there, what's sort of coming? And as a follow-up, third, last but not least, on your price increase initiatives, I recall a couple of quarters ago, you were very busy with implementing, let's say, new contractual structures, primarily with the European client base in order to account for, let's say, diverging price trends and raw material price trends, which you haven't accounted for before and with the indexation. So I wonder whether this -- whether you can shed some more light on the progress you've made in between and how we think should think going forward in tracking -- the price is tracking basically the raw mat evolution more correctly? Any kind of input would be helpful.

Yes. Thank you, Michael, for your questions. Regarding the question, volume or negative volume in the region Asia Pacific, yes, that's the only, well, region where we have like negative, yes, payers more than the increase of the currency headwind -- payment of currency. Our outlook for the raw material development to split that between base oil and additives is not that easy because we see a different development in the different regions or in the different countries. It's, of course, a mix effect is a question of currency and the question of availability. And we expect chemical additives to still slightly increase and base oils, of course, it all follows somehow supply and demand. And of course, all the geopolitical situation plays a big role. We made a lot of progress with our programs to manage and to increase prices and mentioned Europe, and there, we are on a really good way and very much, but we still have to follow up somehow, might be more the region, Asia Pacific but there's a different price development due to different currency effects and so on. So it's a different situation. It's a complex situation over the whole group. But I can assure you that lower management is highly aware of that. And we follow up that regularly, not only on a monthly basis, but on a weekly basis, and we make progress.

The next question is from Martin Roediger, Kepler Cheuvreux.

I have 3 questions, and actually, they're all follow-up questions from the previous 2. Sorry that I have not fully understood now. On Europe, it seems to be that you have still difficulties to pass on higher raw material costs to your customers on time. Is it fair to assume that roughly 3/4 of the cost inflation has been passed on to your customers and there is still 1 quarter to come in Q3? Or is the ratio more towards 50-50? That's the first question.

Well, Martin, our Europe or Germany, of course, is more impacted by the automotive industry or automotive business. And there, of course, it's not only the question of contract with price variation clauses where the, yes, increasing sales prices come in a bit later. On the other hand, there's still, of course, is quite a weak or we still see quite a weak automotive business. And therefore, the earnings side in the region, EMEA is affected by that.

And the second question is on the situation in China. Are the lockdowns now over? Is the business back to pre-COVID level? And to which extent did the lockdowns impact your EBIT in Q2? Rough indication.

Yes. Well, in China, we didn't have to shut down our own plan. But due to the lockdowns of these mega cities, of course, demand was affected and logistic was difficult. And therefore, we had a significant drop in the business, and we are still not back on pre-crisis level. We recover, but we are still not back on precrisis level.

Even not at the end of the second quarter?

No, not at the end of the second quarter.

Okay. And finally, on the 11% organic sales growth in the second quarter, I understood that volumes were down. So all of this 11% or more than 11% of that organic growth was price driven. So do I understand it correctly that your volumes on a group level is down by low single digit or by mid-single-digit percentage rate?

Well, it's mid-single digit percentage rate..

The next question is from Riya Kotecha, Bank of America.

My first one is on your free cash flow guidance. You used to maintain that versus your April 29 guidance. So can you walk us through what the moving parts are into the second half? I know you mentioned that the European base oil prices slightly dipped, but it seems like the Asian one is still ticking upwards. So do you expect that to reverse going forward? And in turn, what does that mean for, say, your margin progression into the second half? That's my first question.

Well, to our free cash flow guidance, I know might be a bit annoying, but it's not very concrete. As we said, it's significantly below the original expected EUR 220 million. And I mean, what we see in the first half is the massive increase in [indiscernible]. A lot is pricing, it's just inflation. And of course, that is something which everybody faces. On the other hand, we increased the volume of our inventory and build up more safety stocks to be able to produce, to deliver. And with our -- yes, it's my expectation on the cash flow for -- regarding the second half of the year, there shouldn't be again, such a massive increase in net operating working capital. It's unsure, so I can't promise you that there will be no increase, no further increase, but definitely not the increase we've seen in the first half of the year. And of course, that something which really drives cash or our cash generation and -- but it's a high uncertainty. Margin. So your question regarding the margin, well, every margin is affected by inflation and we -- as we try to somehow make clear when we published our long-term financial targets, at this time, we look rather at absolute figures and not at a margin. But of course, margin is important, but in times of inflation it's just mathematics that margins are squeezed.

That's clear. And just another quick one on the raw materials and the development of base oil prices. They don't seem to be tracking the crude oil price one-on-one. What are indicators that you use or follow that gives you the confidence that these will sort of stabilize at the 2Q levels?

Well, it's not a confidence. It's just if you look at the curves, it seems like it. And I mean, nobody knows what's going to happen the next weeks or months. And I mean, if, for instance, Russia would like stop gas delivery, I guess, it's very short and that it will somehow affect even base oil prices. So it's just looking at the price... [Technical Difficulty]

I am not sure I can hear you.

Yes. Sorry, there seems to be an issue with the line. We got the speakers lost just for a moment, please. So please continue with the question and the answering of the question again.

Yes. First of all, I would like to apologize that we somehow have technical problems today. Really sorry for that. Yes. The last question was regarding raw material price development and base oil price development and [Technical Difficulty] yes, it's all very [indiscernible] and we're looking at the past sort of development in the last week [indiscernible] stable [Technical Difficulty] but it truly would affect somehow base oil prices. [Technical Difficulty] spot on the raw material prices as they are, and we will see forward going on.

Any additional questions from your side?

Yes. I just have one last one, [indiscernible] the lines on a bit exactly, but maybe I can hear you a bit better now. So my last one is with the North American division. I want to know how the organic growth looks like versus your expectations, particularly in terms of volumes? Are you seeing sort of new orders come in? Are you successful with securing new contracts as you sort of ramp up your new capacity there?

Well, we still overall situated in the group that maybe have more order than [indiscernible] as well is that demand overall [indiscernible]. [Technical Difficulty]

Sorry, can you confirm, you said that you have more orders than you're expected to deliver, but you see demand coming down? So your line broke.

I said for the whole group, overall, that we still are in the situation that we are a bit behind with our delivery. But that we as well noted that the demand is slightly coming down.

Okay. Right. But in North America, it's better than expected?

Well, North America is the same situation. What I just mentioned is account for the whole group.

[Operator Instructions] We have no further questions coming in. I hand back to you.

Yes. I would like again to apologize for the technical problems. And yes, but anyhow, I hope you somehow got the information and if not, please reach out to us, reach out to our IR team, and I wish you a great weekend.

Yes. Thanks. And if there's anything unclear, please don't hesitate to contact us and looking forward to the next time. Bye-bye.

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