Fuchs SE

Dear ladies and gentlemen, welcome to the analyst's conference call of Fuchs Petrolup SE. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode, and after the presentation, there will be an opportunity for the analysts of Fuchs to ask questions. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Thomas Altman, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.

Thank you, Aurelia, and good afternoon to everyone. On behalf of Fuchs, I would like to welcome you to our conference call in the context of our H1 2020 results. On the call with me today is Stefan Fuchs, our CEO, and Dagmar Steiner, our CFO. Let me go briefly through our agenda for today. As usual, Dagmar will quickly take you through the H1 results. Following this, Stefan will give you some very interesting insights about our Fuchs 2025 strategy. After the presentation, we will have a Q&A session. You can find the half-year financial report, the fact sheet, our earnings press release, and our conference call presentation on our website at fuchs.com under the IR section. Having said this, I will now hand things over to Stefan.

So, good afternoon or good morning to all of you. I think it's a big pleasure for Dagmar and myself, but we are also accompanied by a lot of colleagues here. Aside of Thomas, it's also Kelvin Yeun from our Investor Relations Department, it's Nina Konsakra from our Public Relations and Benke Schlindwein from our Finance Department. As you know, we would have invited you in Frankfurt today as a substitute of our initial invitation in March, but Corona is still there, so therefore I think we make it online. Dagmar will go through the financials with you, and I will later on refer to our strategy process, which is a part of our FUCS 2025 journey, and then we are both more than happy to entertain a discussion and take all your questions. So Dagmar, it's all yours now.

Thank you, Stefan. So good morning, ladies and gentlemen, from my side. And let me start with chart number four. The COVID-19 pandemic has heavily impacted our business. All global regions have seen partly significant declines in sales and earnings in the past month. In the first half year, sales decreased by 14% year-on-year, while earnings were down 29%. In April this year, we suspended the outlook for the current year as a result of the considerable impact of the crisis. Based on today's assessment of the effect, we have determined a new forecast for the financial year 2020 and expect a decline in earnings in the range of 25%. A second wave is not taken into account in the current forecast for the full year. Our quarterly sales development, chart number five, reflects the current situation. The crisis began in China in February, continued there in March. Our regions, EMEA and Americas, were only slightly affected at the end of Q1. By contrast, when the wave fully hit the Western world in April and May, a clear upward trend was already emerging in Asia with a strong June. In Q2, sales decreased by 23%. Group sales, chart number six, are down by 14%, as already mentioned. The organic decline in sales intensified in the course of the year. In the first quarter, it was minus 6%, and in the second quarter, minus 23%. External growth is generated by our acquisitions in North America and Australia. And we see slightly negative currency effects. The regional sales growth, chart number seven, shows a mixed picture. Our region, EMEA, records a decline in sales of 14%. In the first quarter, sales have been on previous year's level. In the second quarter, sales are down by 28%, so nearly a third. All major companies are affected, like Germany, Spain, France, Italy, and the UK. Asia-Pacific records a decline in sales of 15% in the first half year. In Q1, sales have been down by 14%, in Q2 only by 5%. That reflects the upward trend in Asia, especially in China. In America, sales are down 15% year on year. In the first quarter, sales increased by 4% due to external growth. In the second quarter, sales are down by 33%. The crisis intensifies organic decreases in the first quarter. Let us now turn to our income statement, chart number eight. Our diversified product portfolio was helpful. In many countries, Fuchs was classified as a system-critical company, resulting in only temporary plant closures in a few smaller plants. Significant declines were observed among customers in the automotive industry, however, the areas of specialty applications and aftermarket business benefited. Finally, the high share of material costs and the relatively low share of fixed costs provided some breathing room regarding sales. By using short-time work or similar work models, introducing a hiring and travel freeze, and systematically implementing further cost-saving measures, the effects of the crisis on our earnings were further mitigated. Gross profit was down by 12%. We have seen a slight decrease in gross margin in the second quarter due to product mix. Year to date, the gross margin of 34.8% is higher than in the first half of 2019. Other functions costs were reduced by 7 million Euro year on year, despite increased cost base as a result of capex and acquisitions. Our EBIT is down by 29%. Despite this decline, we were able to generate a double-digit EBIT margin with 10%. Our quarterly EBIT development, that is chart number nine, reflects the impact of the crisis and everything which I already mentioned. In the first quarter, our EBIT is down by 6%, in the second quarter by 50%, so overall in the first half by 29%. With that, I would like to turn to chart number 10, EBIT by region. Our EBIT in EMEA is down roughly a third year on year at 56 million Euro. We see an earning decline in almost all countries. France, Spain, and the UK record the strongest decrease. Germany is also significantly affected. Asia Pacific records a comparatively small decline in EBIT of 3 million. The impact of the crisis weakened over the course of the year, and China in particular recovered quickly. America reports strongest drop in earnings, a bit halved to 14 million euros. After a weak first quarter, COVID-19 identified earnings decline in the U.S. South America is also heavily impacted by the crisis. I come now to chart number 11, cash flow. The free cash flow before acquisition is with 15 million euro positive and at previous year's level. We have a negative impact from the earnings decline and the increase in net operating working capital. Positive impact results from other cash outflows and lower investments. With that, we have still a very strong balance sheet structure and a secure financial position. Our net debt, adjusted for lease liabilities, amounts to 6 million euros. So we are nearly debt free. On the next chart, number 12, the development of our net operating working capital, you can see that it increased. In absolute numbers, it is still on the level of the first quarter, but more than 30 million above the year end of 2019. Inventories increased partly due to preparations for plant relocation in Sweden and Australia, and increases in safety stocks of raw materials. That brings me now to our earnings summary, chart number 13. To sum it up in a nutshell, sales decreased in all regions. EMEA and Americas impacted most by the crisis in the second quarter, In Asia Pacific, in June, it is on pre-crisis level, mainly due to China. Our cost savings take effect. Other functions costs are down by seven million Euro, despite our increased cost base driven by acquisitions and capex. And we have a new outlook for the running year. If we have a look at chart number 14, our new outlook for 2020, that reflects the current situation. As already stated at the beginning of our call, there is a high uncertainty. Effects of the crisis on supply chain, production, and customer demand cannot be reliably estimated. On today's assessment of the effects of the crisis, we expect an average decline in the range of 25% for the full year 2020. With that short overview about the first half 2020, I would like to hand over to Stefan to give you more insights in our FUCS 2025 strategy, and I will be happy at the end of Stefan's presentation to answer your questions.

Thank you, Dagmar. I go directly to slide number 16. where you see the headline, New Mindset for Future Challenges. Obviously, in the second quarter, we have been very busy with Corona and then everything around that pandemic around the world. I think so far, we've really done very well in securing our employees. We had around 20 cases on about 5,800 employees. So I think So far, so good, but we have also taken the time to continue to push forward our big future project, the FUCS 2025 journey, and especially the strategy part within FUCS 2025. And I want to go through the program with you now. So on page 17, you see the why question. Why have we done FUCS 2025? We think that new solutions require new ways of operating. And new ways of operation require a new approach and a fresh mindset. And we see the whole wave of digitization, which I think with the corona now, it actually got boosted. Our customer requirements get more global day by day. We see the e-mobility impact slowly coming and there's always the surge and also the threat of potentially new business models. And if you go to page number 18, you see the three key elements of the FUCS 2025 journey. So the one part is the culture, where we aim for a hierarchy-free communication and an open feedback culture. The second part is the structure, is how we work more aligned and more efficient with all our internal stakeholders, which are our countries and regions on the one side, our global divisions on the other side, and our global functions here in Mannheim. The strategy part I come to a second, but just to highlight a little bit the history, we started the program in the fourth quarter of 2018. The strategy part was started in March of 2019 and we are proud to present to you the strategy part 15 months later. One part I also wanted to mention to you, normally we have for the last 20 years plus, we always had at the end of March our global management meeting. where we invite our global leaders and to discuss with them our future plans. And this year was the big rollout event planned for the strategy rollout of FUCS 2025. And needless to say, due to Corona, we had to cancel that at the end of March. And in the same week, we made a FUCS 2025 virtual roadshow where we invited all our employees. And we had up to 1500 people participating in the sessions. And it went from Monday to Friday, and I think an overwhelming feedback. I think the penetration of the organization was actually significantly better than during a GMM. And we liked it so much that we will do another one end of November. And then with our team set up, that was an easy exercise for us. There was a lot of content covered. So I think, you know, aside of all the corona downsides, that was for us a very positive experience. On page 19, you see our vision being first choice. We want to be first choice for our employees and for our customers, but also for our shareholders. We want to build on our strengths, which helped us to get to where we are today. But we want to more globally align our organization to make our vision come true. And when you go to page number 20, you see what we believe our strengths are. So first of all, I think we have a full product offering all over the world. And there's no other lubricant company with that global span and that full product offering. You also see the topic of what we call local entrepreneurship in 60 plus countries. So we have 60 subsidiaries and obviously a couple of very big ones like in China, the US, and Germany. But we also strategically want to be personally present in Romania, in Chile, in the smaller countries because we want to serve our customers there, not through distributors. The other part is our performance-driven culture and our loyal employee base. And this is very important to us. We have really great employees who are dedicated to walk the extra mile And therefore, I think that's a big strength. On the other hand, we want to really achieve to be the partner for our customers around their needs in lubrication solutions. So specifically, we don't say in lubricants, but in lubrication solutions, because, you know, this lubrication means more than just a few lubricant. Normally, the lubricants play a smaller role in the whole equation of our customers, but they have a big impact. And therefore, we want to provide them solutions, including services. We want to achieve a better global alignment through harmonized standards and procedures within our group. We want to leverage our experience and explore existing opportunities, especially in Asia and America. What does that mean? You know, we were growing over the last 19 years through acquisitions, through organic growth. but our product offering and our market penetration is not homogeneous around the world. And we see gaps in certain countries and those gaps for me are quite large opportunities and we want to go after them. We want to continuously improve the CO2 footprint of our products based on the life cycle assessment. I come to that a little bit later. And we want to become the employer of choice. So when you go to page 21, You see the outcome, and we have defined six strategic pillars. Now, first of all, I want to tell you that we established a strategy dialogue team. We had an outside consulting firm helping us to orchestrate the discussion, but we had no strategy consulting firm in our house. That was important to ourselves, and the strategy dialogue team of Fuchs involved all our stakeholders. So for example, we had the three large CEOs in from Germany, China, and the US. We had regional VPs in. We had global functions in from IT, from finance, from R&D, from supply chain, from sales, and we had our global sales divisions in. And since they came up with the strategy, we have already a buy-in of our main stakeholders. We did not want a city in the ivory tower in Mannheim and develop something which nobody goes after. So those six pillars are the guiding principle for our strategy moving forward. And I want to go through each one with you. So if you go to page 22, you see the global strength. And when you look at our company where we come from and those of you who know us for a longer time, you know we are very performance driven and I think we are very well done with regard to EBIT and capital needs. However, we also allowed for quite some time our MDs to do cherry picking. With that broad offering, you can pick on certain lubricants, whether it's automotive aftermarket, automotive first fill, whether it's mining, specialties, or industrial, and we have come a long way, but we have now a little bit of carpet with holes, and those holes we want to fill, and this is for us potential growth. Therefore, we have defined global segments very, you know, specific segments like, for example, food or cutting and grinding or automotive interior equipment. And we have also head of global business segments defined to coordinate, coordinated worldwide. And around those segmentations, we have scanned the market, you know, what the market offers. And then we have made a self-assessment. And then we have defined those gaps. And we have now made a based on the segmentation for the year 21 until 25 from our regions, but also from our global coordination points. And this we are going to align in the next, I think, four months in order to come up with our first budget 2021 based on those segments. I think that's an entirely new learning curve for us, but I think it offers large growth potential. And on the second bullet point, you can see we have larger market shares in Europe, like in Poland, UK, Germany, but also in Australia, but not as much in the US and Asia Pacific and therefore we expect over proportionate growth in those regions. And we want to also work on our brand profile because we think we can strengthen the Fuchs brand and to use that also for future sales. If you go on page 23, you see the pillar of customer and market focus. So first of all, We want to achieve maximum customer proximity, and we want to utilize cross-selling opportunities because I think we have a strength like no one else, but we still do not utilize it. Sometimes we only sell a product to one customer, but the customer needs also significant other products which we also sell but don't offer to the customer. And this one phase to the customer, I think, is the one big part. The second part is, I think, the global service portfolio. You know, we have defined our Inoviga as our idea pool within the Fuchs Group. And now they were spitting out the first couple of prototype products, like, for example, tank telemetry, where we can help our customers, you know, to coordinate their bulk tank levels and have a direct IT link for reordering points. We have also done a lot of work with regard to condition monitoring of water-miscible metalworking fluids. or for example on the e-commerce side. So those are ideas we want to implement in our mainstream business more and more. We want to become the market leader in the segments we target. Obviously we can't target all the defined segments at once, but we want to go step by step. And we also want to systematically introduce new business models within our world of lubrication. If you then go on page 24, And our mission statement is technology, lubricants, technology, people. So obviously we want to become the technology leader, increase our innovation power around chemistry, surfaces, alternative raw materials, etc. We want to also introduce digital solutions and platforms. And then... I think very important, we are global, yes, but we are still perceived as German-centric with regard to R&D. I mean, we have good R&D colleagues in China and the US, but most of the R&D capacity we have in Germany. And therefore, we have a distinct goal to say we want to bring the US and China to the same technological level as we have in Germany, to have this three-hub strategy moving forward. Page 25. It's operational excellence. With the growth of the Fuchs Group, our plans have been very local. We have now invested a lot of money in our manufacturing footprint. We have, I think, invested over 500 million over the last couple of years. And as Dagmar has told you, as of 2021, we plan to bring down the investment down to the level of depreciation, which is still around 80 million to be invested. But we want to have a global manufacturing and distribution network. We want to also standardize our manufacturing and procurement procedures. Doesn't mean that we have not done that so far. I think what we have invested now is pretty much the same around the world when it comes to grease or certain oil manufacturing. Also important is the data transparency and the factors behind. Then we come to page 26, which is people and organization. Again, I refer to our mission statement, lubricants, technology, people. So our people play an important role. We want to be the employer of choice. We want to strengthen our global talent acquisition and retention, develop our people more, introduce competence models, and have international job rotations in order to also bring, for example, a chemist from China to the U.S. or to Germany and vice versa. If you go then to the part of sustainability, I want to come back a little bit to what we call the life cycle assessment. So sometimes it's interesting when you take a more sophisticated product, it has gone through more refining processes. For example, a fully synthetic base oil has more refining gone through than the regular base oil. Now therefore the CO2 footprint from a purchasing standpoint might be worse. Later on, when you use the material, it's significantly better because it has less change intervals, it stays longer in the machine, and this is what we call the life cycle assessment. And the CO2 footprint of our product becomes more and more a specification for the development of new OEM products. So I think the better we get in this ecological sustainability part, the more we can also use that as a selling point. Obviously, ecological sustainability, we want to be CO2 neutral gate to gate, which for us is not as difficult as for many other chemical companies because it's not too much happening between our gates. Until 2025, we also want to be neutral in front of our gate and later on, on the entire life cycle of a lubricant. On the economical part, you are interested in? we sustain of mentioning a sales number for 2025, which especially in the Corona times, I think where people have problems making a forecast for the next quarter would not be responsible, but we clearly say profitable growth and 15% EBIT margin is the margin we aim for. And obviously with a corresponding increase of our FUCS value added. Social sustainability, I think we have come a long way there. We just want to further promote our projects in various companies. So on page 28, there's just a summary of six highlights, which is profitable growth, technology leadership, employer of choice, better market penetration, over proportionate growth in Asia and the Americas, and then the whole sustainability question. And to sum it up, you find on page 29 our action points. And the first one I think I elaborated on is I think very important to us is this extensive market segment approach. And in addition, I think it's important to mention for those six strategic pillars, we have several strategic initiatives which pay into those strategic goals. And those strategic initiatives are staffed by cross-functional teams. So normally we have an initiative owner, and then we have a steering committee. Most cases, not with any Germans in. So with Australian people in, Chinese, US, Europeans. I think that, again, for our people was very important that we include the entire world. Obviously, there's a strong emphasis on innovation, service solutions, and new market perspectives. And a joint approach is this whole strategy with the development of our corporates culture program to be able to leverage our strong cultural foundation, what we have, with our first strategy execution. So that sums up where we stand today. This is a long-term project, as I said. We now learn to do the first budget 2021 based on the segmentation and work on those lots of projects within our strategic initiatives. And we will further update you in the next meetings we will have. So far from my side.

Now we are pleased to get your questions and, yeah, go ahead, please.

Ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial 0 and 1 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial 0 and 2 to counter your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. And the first question is from Marcus Meyer, Vardabunk. Your line is now open. Please go ahead.

Yeah, good morning. One question from my side for this focus 2025 strategy. You said you want to focus on markets and segments you have not yet focused before. Is this also then to drive the growth of your company? Can you shed some light what kind of areas this might be? Is this then also, for example, more of this what you've already highlighted, I think, a few years ago, that you might look into the automotive aftermarket in the U.S. or some more information on this would be helpful. And then, secondly, also on the consolidation side, I guess that this current environment might trigger consolidation, particularly family-owned companies, companies which now realize that this kind of crisis might take longer. Maybe you can also set some words here if you think that there's a growing M&A pipeline and if you will be active there. Thank you.

Thank you, Mr. Meyer. I want to come back first to the consolidation part. As you know, my standard answer is that we always talk to competitors all the time, obviously within the frame of antitrust. Some talks go longer, some talks are shorter. The one part I can answer you clearly, yes, we want to take part of the consultation. The other part is I don't see increased activity at the moment. So I think probably there are some which might come into financial turmoil because if you are not totally healthy walking into such a crisis, you might become a problem. But I can't see more activity now, but obviously, We fresh up all our contacts we have in continuous talks. So it's not that we don't want to due to corona. That's not the case. With regard to the segmentations, when you say segments we have not focused on, I want to precise that those are segments we have focused on in certain countries, but not all over the world. And I think that is the gross part. So we know how to do the business, but we have just not done it. And you are right. Our US business, which was giving us lots of cash dividends over the last 25 years, A lot of it is focused on metalworking, on the mining industry and specialties, which we want to go further. But we see there, we see gaps in the OEM business and in the automotive aftermarket. So for the US, it would be probably more automotive. And if you go to China, another very successful good horse in town is our Chinese business. And from their history, they're very good in the OEM and very good in the aftermarket. still underrepresented in mining specialties and metalworking. So this is one of the obvious ones and so we go around the world. So we have segment wind, for example, or food. We do very good in 10 countries and not in others. And I think there is also one of the tasks of those global business segment managers to then say, listen, you have not elected there to be an emphasis in your country, but it's the fourth largest country in that segment in the world, and there's no longer the liberty to not go after the business. That's part of the segmentation idea.

Okay. Very clear. Thank you.

The next question is from Isha Sharma, Main First Bank. Your line is now open. Please go ahead.

Hi. Good afternoon, everyone. Thanks for taking my questions. I just have a more... strategic questions for you. So the one thing that you mentioned regarding the 2025 strategy is that you don't want to use distributors and want to be closer to your customers. What is your current setup? Could you please remind us? And is it different based on the region? Why I'm asking is because in China, the penetration is quite difficult without distributors is how I understand it. So what would be your strategy there specifically and which region is it? Then maybe if you answer, then maybe I ask my second question after this.

Thanks, Isha. It's a good question and once I said it, I was sure that the question will come. So we are not against distributors, clearly not. So for example, we have in specific segments, we have business where one plant, if you get all the business, is probably $50,000, which is somewhere in the Brunei, in the United States or in Western China. we can't serve it on our own. So those business we do through distinct distributors and we like working with them. But we don't want to give entire countries or entire businesses to distributors. Obviously, the automotive aftermarket very often, we also work with distributors. So, Dagmar, I would say around 70% we do direct.

Yeah, 70, 75% direct. So it's 25, just one quarter distributors.

But in strategically important technology areas, We want to do it direct.

Understood.

That's very helpful. Automotive aftermarket, for example, is more around logistics, availability in the brand, not so much about the technology aspect of the application.

Understood. Thank you. The other question is more mid-long term. Your target of 15% EBIT margin, could you please explain what this is based on? Because in the past, you have even achieved 17%. However, we have seen a gradual decline now in the past five years for different reasons. It would be very helpful if you could help us understand how the business has structurally changed in the last 10 years and what should we expect going forward in terms of both top line and profitability. Thank you.

Well, our target is 15% EBIT margin mid or long term. historically we've been shown like 17% EBIT margin but as Stefan explained in the past there was in one or the other country the case that there was cherry picking on let me say special industries or products or applications and since then we had a very strong growth path and a strong track record. And if you are a company with our size, it's not just a question of margin or margin point, it's a question of volume, of course, as well. And therefore, it's always a combination. And with an EBIT margin of 15%, we think at least that should deliver our business. And the other aspect is that the last year has faced higher regulations in all countries worldwide. And to fulfill these regulations, you need quite a lot of people, departments, if it is for audit, certifications, like everything. And in the past, that was not that much, let me say, needed or important. And of course, if you have quite some people looking and take care for these functions, They just like cost money, but they don't, yeah, earn one euro, one euro sales. So, and FUCS 2025, as it is a name, is our strategy for, let me say, it's a long-term strategy, but our target figures, of course, are more set for that range and not for the next 20 or 30 years. So let us wait and see where we will end up.

And also if you go back, for example, to the years 15 and 16, you see EBIT margins of 16.5%. You know, we have a constant contribution and cross-profit margin, but we have years where everything goes right. The exchange rates go in the right direction, the raw material pricing goes in the right direction, and this, I think, don't take the peaks. If possible, I would love to make 20%, but what Dagmar writes today, we don't allow our people to fine-tune only. we had managers that said it must be 20% but they limited their own growth and I think that's the part where we said all over all we want to have that 15% growth.

And just to add one other thing as you know us we don't report adjusted EBIT or earning figures and due to the acquisitions of the last year the share of amortization of customer list is quite a number by now but we believe that normal business we have to earn it and therefore we don't adjust it.

Right, understood. That's very helpful but strategically and from the competitive landscape perspective in general how you see the market there is not much that has changed in let's say the last decade. Is that the correct way to think about it that there are different factors that have put pressure on margin but then slowly we should see sort of similar changes a number that we have seen in the past, maybe not the peaks, but at least a gradual improvement.

I mean, what we have seen, if you go back like a full decade, I mean, what you have seen is clearly more concentration. So on our customers, it's more and more global pricing. I mean, you... don't get away with a higher price in country A when the headquarters in country B paying less. I mean this is all history, it's all cleaned up. What we also have seen is a concentration amongst the suppliers. So clearly smaller ones became part of bigger ones and so you have bigger suppliers now. And as I always said before, we have very good competition with the major oil companies, but I always look at them like a sinus curve. Some years they're very focused on lubricants and other years, where they have less time to focus on lubricants. My own assumption is now with the personnel reduction plans, many of them have introduced, we might see a phase of less focus on lubricants, but still they are the market leaders just by volume, so don't underestimate them.

Right. Understood. That's very, very helpful. Thank you so much.

And the next question is from Knut Inkel, Pirated Securities. Your line is now open. Please go ahead.

Yeah, thanks a lot for taking my two questions. I would like to go back to the first year numbers for a second, if it's possible. First of all, regarding your gross profit margins, So now that everything is going in some directions and there are very hefty movements, top line and other stuff and volumes and so on and so forth, your gross profit looks very small. So I guess there are some forces here that push the gross profit up or down. So I guess raw material is a little bit down. but customers ask for better discounts, so maybe you can better rental energy in that regard. That would be helpful. I put my first question. Second question, on China, which looks very good, and we hear also from other companies that we see some kind of V-shaped recovery there. Question for me is, and maybe you can help me to understand it, as you are already a very long time in the country, how self-sustaining is that recovery in China? Could China continue to recover if other regions, if other continents are still to recover from the downturn in the second half? So an assessment here would be also very helpful. Thanks a lot.

Okay, thank you for your questions. My personal opinion on your last question is that China will be the power nation after the crisis, with a big gap to everybody else. You see what is happening in the United States at the moment. You know, all of their strengths, which was like a global or like a nationwide pride, is all going away at the moment. You see racial fights in the country. You see a strange president election. So I think the United States is doing steps in the wrong direction. This is my own assumption. And I think, you know, this Corona crisis, the political setup with a dictatorial command and control system helps them because if they lock away 700,000 people because of 10 Corona infected people, nobody dares to complain. If you watch what is happening in the US and in Germany, it's different. and with their stimulus programs and their financial resources, I think it is sustainable. It will see certain ups and downs, but if you ask me, if you look into South America and Africa, where in all those countries, China has a big hand on critical raw materials, China will be the nation in the future. That's my personal expectation, whatever that means to us in the world. The other part on the margins, We have 35.4% in the first quarter and 33.9% in the second quarter. Looks like a big line. Don't look at those margins to me. I mean, we have so significant different business developments. Our US business was down almost 50% in some months. Our Chinese business went up again. We had some months with high OEM sales and low OEM sales and more specialty. So there's such a huge mix impact, Dagmar, I think, that we can't read a pattern on those two quarters, if you ask me. We have seen certain lower raw material prices, But our prices did not fall according to the base, to the crude oil price you've seen. And as you know, to creep through our systems, it takes a couple of months. And also, I'm sure you will ask us the nice net overrating working capital question later, and you see that we have too much stock at the moment, so it'll take even longer to wash out the more expensive raw materials and the cheaper ones. There is a certain time delay.

There is a certain time delay and we have slightly increasing production costs.

Due to the CAPEX program. Okay, thanks a lot.

The next question is from Sam Perry, Credit Suisse. Your line is now open. Please go ahead.

Hi, Stefan. Hi, Dagmar. Thanks for taking my questions. Just a couple from me. The 2025 strategy, do you have any changes to the capital allocation policy there and with the CapEx programme coming to an end? And I think also just I look at the expansionary CapEx that was spent to this programme versus the sort of earnings trajectory there. When do you think the return on this capital that you've spent will come through? And then I guess lastly, you just hinted to it just now, Stefan, but what can we expect for working capital into the second half? Thank you.

Okay. Maybe I'll answer the working capital, and Dagmar comes back to the other question. The working capital, on the one hand, you see the horrible number of 28,000 Our method, correct me if I'm wrong, but we take the second quarter times four and then we apply the receivables and the inventory and the payables. So obviously the second quarter was so low that mathematically the percentage goes up. We have not seen a major deterioration in our receivables, which was pretty good. Obviously our payables go down and then the inventory is there. We have made, we had a a couple of external influences, or let's say internal, but special situations. We move plants in Australia and in Sweden. So in Sweden, we are now opening up our own plant, and we move out of the rented plant from Statoil. And in Australia, we move from the new lawn plant into our own plants. And in both countries, we had to stock up Finnish products. Then we made a strategic decision in March because we did not know whether the supply chains are holding up in the Corona crisis. We got a lot of critical raw materials out of Northern Italy and out of other countries. So we stocked up raw materials. And in certain countries, we had a significant downturn in business and then you always have too much stock. So that in mind, Yes, mea culpa, we have too much inventory at the end of June. But, you know, when you look forward, don't add the cash proceeds one-to-one to your cash flow because if the business picks up again, you also need again more receivables, you know. So the NOWC percentage number should come again down to a more meaningful number closer to the 20%. And yes, we have too much inventory, and this is for us a high goal to work that down at the moment. So much to the NOWC side.

And your question, the return on the capital spent, when it comes, when we see it, to be honest, I don't know. We need top-line growth to see significant returns on the capital we spend. And in this time with corona, of course, it's... We don't know when we come back to old levels, but I'm very confident looking at our 2025 initiative, our strategy, and all of the initiatives behind that when we are going to make, yeah, to fulfill that, that will help us to grow. That's one part of the story. The other one is, of course, with our CapEx program, we modernized, we replaced old plans through new ones. We started with implementing production standards, processes, and that, of course, helps us to improve our efficiency. And there we will see gains as well. But today, I'm sorry, I can't give you an answer How long will it take?

If you look at the FUCS 2025, we have not yet seen the outcome of our internal planning of all our people, which was due to the end of July. I assume that there is a huge demand for more people and for IT investments. I think that with our plan set up, we are equipped for the next coming years. And even if we go back to the depreciation level, it's then 80 million euro is still for us an amount which is over and above what we call our base load. So we still have room, even including the 80 million depreciation level, for 5 to 10 million euro projects at a time. And so I think for myself, for the next couple of years, we can clearly stick to the target, and we will. I mean, we have invested over 500 million euro, and I think all of our plans are now at a stage which are great. There might be investments in growth markets like Russia, for example, where we have now made the second phase of potentially four at the site. But all in all, I think on our major markets, we are all established.

Great. Thanks very much, guys.

And there are currently no further questions. So as a reminder, if you would like to ask a question, please press zero and one on your telephone keypad now. And the next question is from Michael Schaefer, Commerce Bank. Your line is now open. Please go ahead.

Yeah. Good morning to all of you. Three questions from my side, two on a more strategic level. In terms of operational excellence, you referred to achieving self-sufficient supply structure, and I guess all the CapEx we have seen is targeting this one. So maybe give us a kind of idea of where you currently are in terms of APEC self-sufficiency in contrast to what you're shipping basically from EMEA over there maybe in the loops and creases. So what's the kind of production volume you basically increase in the years to come in order to be self-sufficient there in APEC? So this would be my first question. Second one is the general alignment also from let's say target setting and incentive scheme on the management side. And you now focus more indeed on the segmentation of the alongside segments rather than regions. So the question is how do you make sure basically that indeed those cherry picking exercises which we might have seen over the past years are not coming through again and are basically more steered alongside the segment structure you're putting in place. I mean, is there kind of market share gains in the various segments, or how do you steer this? So this would be my second question. And the third one is, rather than a short-term look into the third quarter, Maybe give us some sort of idea how basically the various regions kicked off in July. What do you see there in APEC in Europe and in the Americas? This would be very helpful. Thank you.

Thanks for your questions. Coming back to the first one with Asia, we are now actually in the course of developing local products. developed in China for Chinese OEMs. I think that's what we want to do in the future more and more because it doesn't help if you import the raw material and then blend it locally and ship it to a Chinese OEM so that the big deal is local sourcing and local manufacturing and local customers. I do think that some of those formulations will over time make their way back also into Europe and potentially the United States. When you ask about the production volume, I think we have the sites we are needing. We have two large plants in Australia, we have a large site in India, and we have two wonderful plants in China. So the more manufacturing volume comes means just an extension of a tank farm or more blenders, but you don't have to build a new plant. And that's part of our modular CapEx part. So I think the more expensive stuff was done, But as of today, we still ship volumes out of Germany into Asia, which is mainly coming back to the Pantocene acquisition, where we still wait for the final customer approval. So you just see how many years that takes to get all the approvals through. So there's still some of that going on, but those are priority number one localization efforts we are still on. But we are not in the full driver's seat on those ones. The second part was on the general alignment target setting. I mean, we have two principles in our group. The number one KPA is the Fuchs value, where we really marry the profit with the cash. And number two is a strong incentivization. And we pay all our countries on the local incentives. We know that any incentive system has also downsides. And as we explained earlier on, If you want to make a strategic capex, sometimes we give an adjustment for two, three years on the capex side to that country when we calculate the cost of capital employed. But I must say we have no opposition from the countries. If I say cherry picking, this is a long-term development. All our countries were very eager and very much motivated to work on the segmentations. And very often we say it's a limited amount of countries for a global segment approach. And we have more, you know, voluntarily applications than we can afford from our internal structure. So we don't have that opposition. And what we also do, sometimes we pay double incentives on a global business segment base and on the local country, which for us is okay. So we don't see major opposition. There will be the one or the other conflict, but those one we will solve.

Okay, I will answer your question regarding Q3 development, starting with Asia-Pacific. In Asia-Pacific, we had a very strong June, especially with China, above pre-crisis level. And, of course, China is like the biggest part of that region. And in July, we see... as well a good order intake and should be a good month. In Europe we had quite very weak April and May or in EMEA and a better June but still of course below pre-crisis level and in July it is well I would say not getting worse again America, more or less the same, even weaker April and May in America, and a better June. But both regions, Europe and America, in June, and we don't expect them in July the same, still below pre-crisis level.

Very helpful. Thank you very much.

The next question is from Jean-Baptiste Roland, Bank of America. Your line is now open. Please go ahead.

Hi, good morning, and thank you for taking my question. I would have just one, please. I apologize, I joined the call a little bit later and may have missed some of your explanations around the 15% margin. I think most of the explanations you gave around your target were related to structural aspects. So I just would like to understand, number one, to ensure there is, in your forecast, you're assuming a 15% margin margin. What are you making as an assumption for recovery from the current crisis? Are you assuming that we will be normal, let's say, at mid-cycle level kind of margins by this time? I also note that if I look at, I mean, over the past, let's say, 15 years, in between 2005 and 2019, you actually achieved an average margin of 15%. And the growth organic that you printed was about 5.5% give or take. Can we also expect mid-term a similar level of growth of organic, or would you expect this to actually be lower or potentially higher given the lower margin target you are talking about versus the past five-year average? Thank you.

Thank you for your question. Our 15% EBIT margin is the mid-long term, it's the target. Of course, today we are with 10% in the first half year, far away from that. In the past, yes, you are right, we already achieved that level, and we had strong organic growth the last, well, not the last two or three years, but like 10 years before, and with the crisis, we have the opposite situation. We have declining sales and not organic growth. So with the question, first of all, of course, when we come back to pre-crisis level, and then our strategy with FOOX 2025, will be the engine for our organic growth, which we expect, but we can't give you more details in which range and which year. It's impossible today. And therefore, I'm sorry, I can't give you maybe a sufficient answer on an average organic growth rate, because the crisis affects everything.

Very clear. Can I just follow up and try to understand or at least clarify? I just want to make sure that the message you're giving today is not that the margin is going to be, is basically at the lower level versus what you printed in 2016 or 2017. without at least an expectation that the market, on a steady-state basis, is not slowing down, i.e., my question is, do you long-term continue to expect a growth potential for the company at around 5%, 6%, give or take? I know it's – I apologize. It's not like a – I know it's not – it's a kind of crystal ball question, but I'm just talking about your expectation and how you see the potential for growth for Fuchs long-term on this. Thank you.

Well, if I have a look at our market shares worldwide, we have significant growth potential. And looking at Asia Pacific or America, we have a market share, I don't know, roughly about 2%. So you can imagine what our growth potential is. Of course, it's not all our, let me say, relevant markets. But even our market share for specialities, for special lubricants, is increasing. Therefore, there is such a big growth potential out there.

I think the entire book 2025 is a growth campaign. But I must also admit that one of our supervisors in the past told me, always remember, the 11th commandment is do not extrapolate. We extrapolated, you know, at the end of last year, a number for 2025, which we have populated again, because the question now is, where do we end up in 21 and 22? Is it 105% of pre-crisis? Is it 90% of pre-crisis or 80%? We don't know, and therefore it's impossible for us to answer your question more specifically. But as we mentioned before, And I don't want to repeat all of that, but with the segmentation idea and with the underrepresentation in many countries, we see really significant growth potential for us in the future.

Thank you very much. Appreciate the answer. Thank you.

The next question is from Anna Serin, UBS. Your line is now open. Please go ahead.

Hello. Thanks for taking the time this morning. two questions. I'll just run through them both now. So in the discussion of the 2025 plan for you, I was just wondering whether you're able to provide any thoughts around your CAPEX development. Of course, it's been raised for a few years to try and drive your growth. It was theoretically before COVID going to be a little reduced this year. So I was just wondering whether you're hoping to sustain it at kind of current theoretically normalized levels or whether the big chunky expenses are out of the way and you are hoping to decrease it or are you actually going the opposite way and driving for more growth so that's the first one and then secondly also I was thinking about margin but from a slightly different angle so I was wondering just how long do you have any visibility of how long you expect raw materials to provide a bit of a tailwind for you And just how do you kind of hope to develop your SG&A expenses in the next kind of short to medium term, up to kind of two years? Thanks.

I would start with your question regarding our CapEx. As you might know, we had a longer CapEx program where we originally wanted to come back or come down to the depreciation level. in 22. With COVID-19, we intend now to do that one year earlier in 21, and we reduced our capex in the running year, 2020, from roughly 150 to 120 million. But we didn't stop any of our bigger projects, which we really need and we just had a look at smaller projects and postponed them. As the depreciation level of around 80 million for the next years will give us enough room to fulfill then these programs as well.

On the margin visibility, we have two impacts normally. We have the raw material pricing and we have the currencies. I think raw material prices went down in the last couple of months, but we see them slowly going up again in the United States, for example. So there's a small impact upwards now. So we have to view that. On the other hand, we see the euro getting much stronger at the moment compared to the U.S. dollar and other currencies, which means that most of the chemicals are traded in U.S. dollars. There will also be a negative impact due to the currency side. On the strong Euro, yes. In the Euro-dominated countries, which is half of our business, it's an advantage. On the other side, it's a disadvantage. So I think on balance, we don't see major down or upward trends in our percentage margin.

Okay. Thanks very much.

And we have a follow-up question from Knut Hinker, Paris Securities. Your line is now open again.

Thanks a lot. I got a question on the capital structure. So your balance sheet looks quite conservative with regard to the business model. I know that business is very cost-generated. I know that you do not fancy a lot of approach, but now that you have a new strategy in place, maybe that has also changed in the meantime. So maybe you can... share your thoughts on that with us. Thanks.

Well, our balance sheet structure is very strong. That is unchanged and there's no intention to make a significant change in our balance sheet structure. As you know, our business generates quite good cash flows and Even in a crisis year now, we delivered a positive free cash flow before acquisitions in the first half year. And of course, we are addicted to our dividend policy as well. But there are no thoughts about changing our balance sheet structure.

Okay. That's what I thought.

And we have no further questions at this point, so I hand back to Mr. Fuchs for closing remarks.

So if there are no further questions, really, thanks a lot for the interesting... discussions, you can rest assured that we work on our future. We are not administering what we have today and we are not fine-tuning what we have today. We continue to invest in our future and I think we will walk the talk moving forward. The big question is really now how the economy will develop in the next coming months. It will step for step come up a little bit. The whole question is As I said before, will it be 80% of pre-crisis level or 105%? That nobody knows. We have to see. I think we are in excellent condition. And yes, I personally hate to lose. I hate to go down in profits. But on the other side, I'm also proud where we stand today. You know, we made the Nye acquisition, which was a strategic acquisition. In our terms, it was not cheap. But we wanted to have it as it's really future applications. We paid out an increased dividend. And all of that, we are still... almost cash neutral with minus five or six million euros that I think we can be proud of. And therefore we have a robust balance sheet. We have a stable shareholder. I think the business model continues to be great. So I look optimistic in the future and I'm not depressed by Corona, that I can tell you.

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