Fuchs SE

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

Thank you, T. And good afternoon to everyone. On behalf of Fuchs, I would like to welcome you to our conference call to discuss the results of the first nine months of the year 2020. On the call with me is Dagmar Steinert, our CFO. As always, Dagmar will take you through a short presentation, which is then followed by the Q&A session. You can find the quarterly statement, the fact sheet, our earnings press release, and our conference call presentation on our website at fuchs.com under the IR section. With this, I would like to hand things over to Dagmar.

Thank you, Thomas. Ladies and gentlemen, welcome to our conference call for our first nine-month results. We saw business conditions improving during the third quarter despite the crisis global effects. Let me start with chart number two. Our group sales reached 1.7 billion euro. That's 11% below last year. EBIT came in at 203 million euro. That's 17% down year on year. Our free cash flow developed positively. The free cash flow before acquisitions was up significantly year-on-year at €122 million, despite a decline in earnings. We saw a strong improvement in our financial position. Our net liquidity, adjusted for lease liabilities, amounts close to €100 million. End of June this year, it was minus €6 million. This development confirms us in our decision to continue our investment program with a sense of proportion even under the current difficult conditions. By the end of September, we spent close to 90 million in our future, 14 million euro less compared to the previous year. We are looking ahead to the remaining month with cautious optimism and have therefore also revised our forecast for the full year 2020 based on the assumption that there will not be any major lockdowns in our key regions in the last quarter, we currently anticipate a decline in earnings in the range of minus 15%. In July, we had expected a decline of minus 25%. With that, I come to chart number three. The quarterly sales development shows our recovery in the third quarter. The crisis began in China in February, continued there in March. The Western world was fully hit in April and May. The upward trend that was already emerging at the end of the second quarter continued in the past few months with growth in China and a recovery in Europe and America. In the third quarter, sales reached €620 million, up over 20% compared with the second quarter. Chart number four, our group sales are down by 11%, as already mentioned. So organic decline in sales shows improvement in the course of the year. Just to remember, organic growth in Q1 was minus 6%. In Q2, minus 23%, and in Q3, it was minus 4%. The positive contribution from acquisition was offset by negative currency effect. If you look at the regional sales growth, that's chart number five, starting with EMEA, EMEA records minus 12% decline in sales. The region improved in the third quarter. Compared with Q3 2019, sales were down minus 8%. In the second quarter 2020, sales were down minus 28%. Almost all companies are affected by declines in sales, like UK, France, Spain, Italy, and Germany are most affected. Coming to Asia Pacific, This region records a minus 5% decline in sales to €509 million. Asia-Pacific posts a very good third quarter and sales above the previous year's quarter. Compared with the second quarter 2020, sales were up 9%. The external growth is from the acquisition of Nulong. This was the manufacturer of lubricants for the automotive retail sector in Australia in April 2019. Looking at North and South America, there we see a decline in sales of minus 12%. The region improved in the third quarter. Year on year, sales were down 7%. In the second quarter, sales were down 33%. and the organic declines reduced considerably in the third quarter. In the second quarter this year, it was minus 42%. In the third quarter, it is minus 11%. The strong euro causes negative currency effects in all regions. Let us now turn to our income statement, chart number six. Operating business considerably exceeded expectations in the third quarter, especially in September. In the first nine months, gross profit is down by €57 million, or 8%. Our cost savings take effect. The other function costs are reduced by €14 million year on year, despite an increased cost base as a result of acquisitions. Adjusted for acquisitions, our savings come to almost 30 million euros. The equity income is on previous year's level with 7 million euros. Our EBIT is down by 17% after 29% in the first half 2020. Our EBIT margin for the first nine months declines to 11.7%. In the third quarter, the EBIT margin is 14.7%. Having a look at chart number seven, our quarterly EBIT development. That reflects the impact of the crisis and our strong third quarter. In Q1, EBIT is down by 6%. In Q2, by 50%. And in Q3, it's up by 2%. With that, I would like to turn to chart number eight and to have a look at the EBIT development by regions. EMEA with an EBIT of 102 million euro is down around 22% year on year. Asia Pacific is up 4% year on year with an EBIT of 70 million. North and South America with an EBIT of 29 million euro reduced earnings decline from minus 50% in the first half to minus 29% after nine months. On chart number nine, you see the quarterly EBIT development by regions. In EMEA, an upward trend is noticeable in almost all countries after a weak second quarter. Countries most affected by COVID-19 are France, Italy, Spain, and the UK. Germany is also significantly impacted. Their equity income is at previous year's level. Asia Pacific posts a very good third quarter, exceeding the previous year. The positive development is driven by a strong third quarter in China. We see declines in earnings, particularly in India and South Korea. North America, post-earning in the third quarter above previous year, although the third quarter 2019 was impacted by bad debt. Negative effect of the pandemic in South America weakened slightly at a high level. Looking at chart number 10, the free cash flow before acquisition is at 120 million euros, 30% above previous year. We have a negative impact from the decline in earnings. A positive impact results from working capital management and other cash outflows and lower capex. The other cash outflows are based on taxes. We have a strong balance sheet structure and a secure financial position. Just to remember you, net cash adjusted for lease liabilities amounts to $97 million after minus $6 million in the first half 2020. The net operating working capital chart 11 improved significantly. The relation to annualized quarterly sales is 21.5% after 28.5% in the second quarter. And we are already below last year's number. I want to skip chart number 12, our earnings summary. That is just to give you a summary which you can read by yourself. With that, I would like to come to chart number 13, our revised outlook for the running year. In view of the business performance in the first nine months and the improved prospects for the global economy, we expect a decline in earnings in the range of minus 15%, previously minus 25%. Nevertheless, due to potential disruptions from COVID-19, we remain cautious and refrain from providing a more detailed guidance. Turning to chart 14, Yesterday, we acquired Polizai, a high-performance lubricant manufacturer in the US. Polizai employs 21 people, and they generate sales of 8 million euro per annum. This acquisition is, for us, a great addition to our speciality business in North America. With this, our short presentation ends here, and now we will start the Q&A session.

Thank you. We will now begin our Q&A session. If you have a question for our speakers, please dial 01 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 02 to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. Our first question is from Max Bahr from Bahr de Helvia. You may begin your question, sir.

Good morning, Markus Meyer, Bahr de Helvia. Three questions, if I may. The first one is on this recovery momentum you've seen in the third quarter, in particular in September. Did this in particular came from the automotive or more from the industrial lubricant space? That would be my first question and then ask the other questions one by one.

Okay. Thank you, Markus. Well, this recovery or good performance in the third quarter, especially in September, it was both. We see it in automotive and industrial. I mean, in automotive, when we have increasing business in, like, first fill, of course, we see a growth from our first-tier supplier as well as metalworking.

Okay. And then my second question would be on the national capital reduction, the national capital sales ratios now back to more or less back to levels we have seen in 2014 and 2015. Is there a further downside than more to the 2014 level or is this now a level where you say we are quite satisfied with this and the downside might be only limited?

Of course, I'm not satisfied with that level. It's a great achievement and a great improvement from the whole team. But, of course, the target is lower and I expect more. But I don't really expect more to come this year in these difficult times because if you've got these changing demands and these challenges regarding the supply chain where you might have a higher demand inventories in one or the other raw materials of course it is very difficult to exactly manage the level of working capital but it's like mid or long term of course it's not a level I'm happy with but for the time being it's great to have this achievement

Okay, thank you. And then my last question, Dagmar, on M&A over the past weeks, you have announced two small acquisitions. Can this just out of accident or has the M&A window again opened and that have been dudes which have been in the pipeline for years?

Well, our M&A window is always open and it's more a question of like closing a transaction, and come to the signing of a contract. And with one or with some acquisitions, of course, you talk a long time. With others, it might be a bit less time. But therefore, as I always said, our policy didn't change. And we are open for smaller or medium-sized bought-on acquisitions. a big target or a big opportunity as an acquisition, but smaller board-on acquisitions are always on our agenda.

Okay. Thank you so much.

Thank you. Our next question is from Martin Rudiger from Kepler Sherbrooke. You may begin your question, sir.

Yes. Hello. Good afternoon. Yeah, also three questions, and I also would like to ask them step by step. First, on the gross margin, you mentioned as reasons that A, the product mix changes, and B, decreased raw material costs. Can you at least give us a hint if these two reasons had the equal weight of the background, or was product mix more important and decreased raw material costs less important?

Well, if I look at our raw material costs, we have seen lower base oil prices compared with previous year. And we've seen, I would say, it's half raw material prices and half product mix as a rough assumption, because it's always very difficult in this time, in this development for a quarter or for like these nine months with these totally different regional development during the year to exactly analyze the impact. Like for instance in the second quarter when we had these hit in the western world in Europe and in America, of course, we had quite a high level of raw materials in our stock. We had a very high net operating working capital. And in the third quarter, when we produced and sold, of course, we used quite a portion of this raw material. which we then didn't have to buy on a stock price again. Therefore, sorry, I can't give you more details. I hope it somehow helps a bit.

It helps a bit. I mean, on the currency, especially dollar is rather weak at this point. I mean, you mentioned that already. I would like to understand a bit more. You have on the one hand translation losses because of earnings in dollar regions are less worth in euro terms. On the other hand, you benefit from a weak dollar when you buy some raw materials. So I would like to understand, did you make the math if dollar weakness is a net positive or a net negative for you?

Well, as you already said, what you see in sales, of course, that's the translation. That's just the translation effect, what we report as currency. As a rough estimate, of course, you can, for the translation, take the same percentage from EBIT. On the other hand, looking at raw material on the supply chain, what we mainly buy US dollar linked and looking there for instance in Europe, of course, we benefit from a strong Euro. Therefore, that somehow compensates, of course, the translation effect which we see in the P&L.

That's clear. But did you make the math? What is more important? Or is it net balancing each out?

Well, it's not always net balancing out. I mean, we've got a lot of currencies within our group and a lot of weak currencies. If you look at South America, okay, it's a small portion of our business. But South America, South Africa got a weak currency. The Russian currency is not very strong. So it's not only US dollar.

Okay. And then the final one, very minor. I think to remember that you have a joint venture in Turkey. I think the name was Opet or something like that. And you have been rather proud of that. But we see that right now the Turkish currency is rather weak. So is there a risk for write-down at some point in your future?

I don't see a risk of write-down in the current situation. The Turkish currency is very weak, but in local currency, our joint venture has a great performance. Just due to translation, it's positive, but due to translation, of course, less earnings are in our books. But there's no... at the moment, risk at all for impairment or write-down.

Okay. Thank you very much.

Thank you. If you have a question for our speakers, please dial 01 on your telephone keypad now to enter the queue. Our next question is from Isha Sharma from Main First Bank. You may begin your question.

Hi, good afternoon. Isha Sharma from Main First. Thank you for taking my question. I have two, please. If you look at the margin in Q3, it has improved to 14.7%, and we've last seen this in 2018. My question would be how much of this is the cost relief? Just an indication would be great as well. and how much of it is just the underlying operational development. That would be the first one. And then on the second one, if you could help us with the guidance, I do understand that the visibility is very low and in general, we have seen other companies also being cautious on guiding for Q4. So do you include the current situation of light lockdowns across Europe within your guidance? And if the situation pertains, do you think this is more reasonable or is there some downside to it?

Yeah, thank you, Isha, for your question. Looking at our EBIT margin in Q3, of course, part of that is our cost savings. As we had a headcount freeze, as we have more or less no T&E expenses at all, And we had in the third quarter still some positive effects from like short time working or other similar programs. But more or less all of them ended in August or slightly one or the other but minor still was in September. So it is more Our margin is, I would say, dominated by our operating performance and the demand, which we've seen in the third quarter. Looking at our guidance, yes, we have low visibility. That's unchanged. There are two more months to go. We had a very strong September. We have quite a... Our performance in October is not bad. And today we don't have any, like, lockdowns or shutdowns of companies or, like, economies. It's more a question what happens with consumers... what they do, and the situation today is different compared to the situation we had in March and April this year. Therefore, as from today, the impact or the negative impact we expect out of that should be less than in the beginning of the year, and to like to reach our guidance, we need in the fourth quarter an EBIT of around $70 million.

Sorry, I lost the line. All right, thank you, thank you so much. Just the last part where you said in the fourth quarter you need to reach the guidance, you need

Yeah, to reach our guidance for the full year, minus 15% EBIT, there we need like an EBIT in the fourth quarter of around 70 million. And I just said the situation today is not really comparable with the situation in April, May, or March, April, May this year. As of today, we don't have any lockdowns of industries or companies. All the shops are still open. Of course, there will be some negative impact, but we don't know. Do we see it in November already, maybe in December? As of today, we stick to our guidance, which we gave on 15th of October.

Right, but as you've published in the press release, it is a bit optimistically cautious, right? So there is a bit of caution still involved in the... Of course, of course, yes. Okay, thank you very much.

Thank you. Our next question is from Axel Hollinghouse from DZAC Bank. You may begin your question, sir.

Yes. Hello, thank you for taking my question. I have just a little one. You said you were talking about some bad debt provision in America. So could you please specify a little bit?

Yes, we had in 2019, we had to write off some receivables as one of our customers went into Chapter 11 and we had their I think it was 2 to 3 million, 4 million euro number in the previous year.

Okay, thank you. Thank you. Our next question is from Roger Bach from Commerce Bank. You may begin your question. Hi, Roger Bach. You may begin your question.

Hi, can you hear me? So thank you for taking my question. I have a question regarding your liquidity position. So I've seen that you have very solid balance sheet and a very good liquidity profile. Are you planning to keep it that way? Or for example, you may be wanting to take more debt for business expansions or for bolt-on acquisitions? Thank you.

Well, if you follow our liquidity development, year end 2019, we had roughly 200 million euro cash in hand. Then we had our acquisition of Nye in January. where we spent 95 million. And then, of course, we had our dividend payment in May with 134 million euros. Therefore, we had to take some debt. And as we usually are quite strong in generating cash flow, we manage now to have again 100 million positive cash in our hands. And as this shows, if there are any potential acquisitions that we like to do, it's no doubt we are going to finance that. And on the other hand, we have our stable dividend policy, which is unchanged. which is not related to earnings per share or something like that. And we are committed to that. And yeah, that's I think all I have to say to that topic.

Okay, thanks. But are you planning to say like keeping a positive cash position, like net cash position? Or is it just like if you have to issue more debt for...

acquisitions would also be back if you are in that that position well for me it's also okay to have a net debt position if i have a look on our balance sheet of course our cost of capital could be optimized if we have a higher debt position our pensions are more or less fully funded First of all, you have to find a nice target or a lot of nice targets to come into a situation that we need to go into a net debt position to finance that.

Okay, understood. Thank you for your answer.

Thank you. If you have a question for our speakers, Please dial 01 on your telephone keypad now to enter the queue. Our next question is from Mr. Roland from Bank of America. He may begin a question.

Hi. Good morning, Dagmar, and thank you for taking my questions. I just wanted to get clarity on two things. You first mentioned that you had some ticking up in... The first field business, sorry. Could you provide a little bit more clarity around whether you basically went on new platforms or new models, if anything was related also to sales, for example, in hybrid vehicles, which were recently a subsequent part of the EV mix in Europe? And second question related to raw materials. What should we expect the raw materials to be over the next six months and how should that affect your gross margin? Thank you.

Well, thank you for your question. Our first real business, we don't know into which new platforms or whatsoever it goes. as of course it is linked to or if we sell a first gear oil or engine oil to an OEM we don't know if it goes into a hybrid or not because it's a combustion engine product therefore that's not visible for us but of course we know that we gain one or the other contract regarding e-mobility or that we are in the position of delivering lubricants for hybrids. And we have a lot of lubricants in our portfolio which are related to a car but have nothing to do with the powertrain. as it's not related to the engine. The raw material development, which we see short term, is that we expect raw material prices to go up slightly. And of course, as always, we have contractors price variation clauses on the one hand, and on the other hand, It is our daily business to manage to then, of course, pass this through to our customers. But that always has a time lag between three and six months. So if there's an environment of increasing raw material prices, it usually has a short-term effect. margin squeeze effect on our net contribution, but then of course we pass it through and we will see higher margins again.

Thank you so much. Can I just squeeze in an additional question about Topline? It's pretty clear what you're expecting in terms of EBIT. given your guidance, but what sort of top-line evolution should we expect?

These times are very difficult. We just felt quite confident with our earnings number to give you somehow a number what you can expect for the full year. Looking at our sales development, of course, it's maybe a bit more difficult, but we are not so far away from the consensus number, I think. But I can't give you more details on that.

Okay. Very curious. Thanks very much.

Thank you. As there are no further questions, I'll hand the session over to Ms. Steinert for closing statement.

Okay, thank you. Please allow me some personal words because today it was the last earnings call of my colleague Thomas Altman for Fuchs. As Thomas is leaving us by year end, he's looking for new challenges. Thomas, you have played a key role in shaping our investor relations work. It has been always a great pleasure working with you. Thank you for that and your significant contribution. And on behalf of the participants, I would like to say farewell to you. Thanks a lot.

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