Fuchs SE

from the automotive aftermarket sector. We have positive currency effects in Australia, but they are offset by negative effects from Asia. Looking at the EBIT, the region Asia-Pacific doubled the EBIT. They report 34 million for the first quarter 21. Turning to the region America, page number 11, you can see the sales are previous year's level. We have an organic growth of 6% in America and the first quarter 2020 was as well as the region EMEA not affected by COVID-19. The external growth of 8 million or 7% is due to the acquisitions in the previous year 2020. Due to the strong Euro, we have negative currency effects, as already mentioned, and they amount to minus 12% in the first quarter 21. On the earning side, EVIT is up 33% to 16 million for the first quarter. On the next chart, on chart number 12, we want to give you a overview about what happens on the raw material price side. We have seen significant price increases from the beginning of the year in January, February, March, and one or the other base oil nearly almost double prices. And yeah, it's something which we haven't seen in that impact ever before. we will see negative impact on our margins in the second and third quarter. And of course on our selling price, as we pass through raw material price increases with a bit of a time lag due to our contracts, we expect of course higher sales due to price increases. With that, I would like to turn to page number 13, to our outlook for the full year. Based on the development of sales and earnings in the first quarter, the stronger than expected recovery of the global economy, and significant higher raw material prices, we raised our outlook. Sales, we expect to come in in a corridor between 2.7 to 2.8 billion euros. This, as said before, is based on the strong demand and price increases from our side. On the EBIT, we expect it to come in for the full year in a corridor between 330 million and 340 million. As we face higher raw material prices and supply chain disruption, we will have negative effects on our cost side and our margin. On the other hand, of course, with some higher sales, that's why we increased our output. The focus value added will increase slightly, and on the free cash flow before acquisition, you see a reduction of around 50 million and that's due to the increased business and of course where we see due to the purchasing price increases and our selling price increases that we see the need of a higher level of net operating working capital. Coming to the next chart, number 14, we just would like to remind you that we have a different development regarding our first half year and our second half year. So in the first half year, 21, we compare ourselves with the week first half 2020, which was impacted by COVID-19 in the first quarter in Asia Pacific mainly. in the second quarter in Americas and EMEA. And where we see in the second half year, the recovery with the record quarter in the fourth quarter 2020. And we will have definitely a weaker second and third quarter and compared to previous year, we expect the second half of the year 21 to come in below previous year. With that short presentation, we would like now to turn to Q&A, and I'm happy to answer your questions.

So operator, please take over for the moderation of the Q&A session.

Thank you. Ladies and gentlemen, we will now begin our question and answer 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 questions answered before you 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. And the first question we received is from Martin Rudiger of Kepler-Chevreux. Your line is now open, sir. Please go ahead.

Thank you and good afternoon, Ms. Steinert. I have three questions and I would like to ask them one by one. So I would like to start with the first one. This is on raw materials and especially on page 12 of your handout. Can you rank the upcoming margin squeeze in the second quarter by region? I mean, would it be fair to assume the biggest margin squeeze in Q2 will be in Asia and in America? because the increase in raw material price charts is stronger year-to-date than in Europe. And in this context, would it then be also logic that once the production issues, for example, in Texas are solved, that these are the regions where you should expect the quickest easing in raw material prices later in this year?

Yes. Thank you, Mr. Ruediger, for your questions. It's a bit like looking into a crystal ball how the raw material price increases develop further. We wanted to give you some details, some insights with that chart number 12 you refer on. And yes, you're right. You see different development of raw material price increases. but of course we have different product mix within this region and different margins and of course due to the product mix we need different raw materials and overall it's more or less somehow let me say, balanced or leveled out as we pass through the price increases we face on a local basis. That means if there's a region with a higher raw material price increase, they are forced to increase their selling prices to a higher level. Therefore, I don't see that much such a difference regarding the disruption of the supply chain. There might be differences. Of course, that depends how refineries manage their turnaround and how long time it takes. And then, of course, where you get the supply you need. And regarding our price rounds, as we increase our selling prices, we already of course did it, but we will see effects in the second quarter.

The second question is on the organic sales growth of 15% in the first quarter. And I understood that you have raised some selling prices in March already for your small clients, which do not have price variation clauses. So maybe you can help us to understand how much pricing contributed to this 15% organic sales growth. Was it 1% or 2% or even higher?

Well, I would say it... not significant what the increase of our selling prices is reflected in the first quarter because most of our price increases are effective in April, in May, come in March, yes, but then of course it's a question At what time did the customer order? And even if there is a price increase starting in March, the order might be days before. And then, of course, even if it's a sale in March, it might be with old prices. So the pricing effect overall in the first quarter is minor.

My final third question is on the reconciliation line in the regional performance. In the past, you complained about the issue that your German automotive OEM clients did not give you approval for the Pentacene products produced in China. This was the reason why you still had to export the Pentacene products from Germany to China. which has been reflected in this reconciliation line and in your introductory remarks you mentioned obviously this was still the case in q1 now what i wonder is with this current super high demand in china and i guess it's it cannot get better when will you get approval by your customers in china for local production of entertainment

I don't know. We work on it, but it's again looking into a crystal ball. If it's 21 or if it will be 22, I've got no idea. It's a bit more difficult regarding to the pandemic.

Okay, thank you.

Next question received is from Max Meyer of Bader Heide. Your line is now open. Please go ahead.

Good afternoon, Dagmar. I have also three questions I will also ask one at a time as Martin did. The first one is again on the demand. We've heard from other companies, in particular from private ones. So far, it's only anecdotal evidence, but we have heard that there was double sourcing, in particular automotive customers. Have you also experienced this? And in addition to this, there's also was the rumor that there was pre-buying due to the significant price increases which are effective for the second quarter, in the second quarter, which you have also basically flagged. Would you also see that there was a kind of a pre-buying? That would be my first question.

Well, we have a strong demand We have very strong demand in the first quarter, in the fourth quarter last year, and there might be one or the other pre-buying or advanced purchasing in it, of course, but regarding our OEM customers, as we have there usually a price, a contract with price variation clauses, and there we pass through raw material price increases with a time lag of three to six months. So in quite some part of our business, we will see there a significant margin increase in the second and third quarter as the price increase with this contract is coming into force on a later stage in September and August. So they have no reason to do some pre-buying or advanced purchasing.

Okay, understood. Thank you for this. The second question would be again on the demand there. Maybe you can shed some light where if there was a stronger demand in automotive or at industry applications, I guess it was more automotive-driven. Is this industry demand, if this is the case, do you think that this industry demand is just lagging and will then accelerate in the second or third quarter, or is there something structural in it?

Well, when we look at the fourth quarter of the last year, that was mainly driven by She might have an automotive lubricant. And in the first quarter, we've seen a pickup of industry demand as well. So both is from automotive and industrial lubricant demand. There is no lack anymore.

Okay. Understood. Okay. Thank you for this. And then the last question would be on the capex saving in 2021. Maybe you can help us how the capex spending will be spent then over the year.

Well, we expect for the full year around 80 million Euro capex on level of depreciation. And in the first quarter, we spent only 15 million. 20 million would have been a quarter. So from today's point of view, I expect the 80 million. And there won't be a quarter where we will have half of the amount. It will be spread out over the next quarter.

Okay. Thank you so much.

Next question received is from Sam Perry of Credit Suisse. Your line is now open. Please go ahead.

Hi, Dagmar. Hi, Lutz. Thanks for taking the question. Just on raw materials, thanks for the chart. Can you remind us what proportion of your raw materials are base oils? I was thinking it was only around 50% or slightly less. With the remainder of additives, what sort of inflation are you seeing in those products. And then also with the guidance, what is your assumption regarding raw materials from here? So do you assume they stay flat due to exit rates or is your assumption that they increase further from here? Thank you.

Well, looking at the proportion of base oils from our raw materials, uh... or uh... what do you think that uh... higher if you look at the uh... where you will uh... it uh... thirty forty uh... pretend of our raw material uh... but of course it depends on the uh... product or product mix as well and uh... looking at the price development of additives and packages that with the, yeah, time lag as well as we usually have with our biggest supplier as well contract with price variation clauses and therefore we still benefit from lower, not lower prices, but from prices with no significant price increases. They will come to a later stage.

Sorry, so just to be clear, for the remaining 70 or 60 to 70% in terms of value of raw materials, you're saying limited to cost inflation?

Yes. It will come later.

And where do you expect raw materials to go from here for the remainder of the year?

I can't give you a number for that right now. And for us it's always the balance between our selling prices and the raw material prices. So it's our challenge to increase our prices as much as we needed.

Great, thank you very much.

The next question received is from Oliver Schwarz of Warburg Research. The line is now open. Please go ahead.

Thank you for taking my question. I've got only one remaining. When looking into the different regions, is there currently a variety or a huge variety in the taxes you have to pay, or is that mostly similar to what we see in the group level?

Thank you. Yeah. Well, the tax level, there is no significant difference. It's more or less similar to the group level on an average as it is. Yeah, there are no big exceptions.

Okay, thank you.

And the next question is from Eleanor Seddon of UBS. Your line is now open, madam. Please go ahead.

Hi there. Yeah, congrats on the quarter. And yeah, first question from me is just whether you could talk a little bit about the run rate out of the first quarter and into the second quarter. So the top line trends that you've described in your results, were those accelerating through Q1? Are there any that you're seeing continue to accelerate or any that you think might decelerate through the rest of the year?

Thanks. Well, of course, we don't know how the crisis developed. If you look, for instance, to India, which have a major impact of the crisis. On the other hand, China and America increased their expectations for GDP growth. and Germany as well. The start into the second quarter on the demand side is still good.

Okay, great. Thank you very much. Oh, actually one more if I could squeeze one in. Do you have any visibility on rough impact from the cold spell in America that you've mentioned for your America's business and any comment on the underlying business X that impact? Thanks.

We didn't get the question. Sorry, maybe you can repeat it again.

Yeah, of course. So in the North America's business, there's clearly an impact from the cold spell that that region experienced. Are you able to in any way give insight into what level of impact you think that was for your results, and a comment on the underlying business apart from that impact.

Well, North America, we report 6% organic growth, so our business in North America is nicely growing. At the first quarter in the previous year, it was not affected from the crisis, but yes, In America, there is an impact of the cold weather in the first quarter in Texas. And what we see, just for example, is, of course, that one or the other supplier had damaged pipes. And, of course, it takes some time to get it all and due to that there are shortages in one or the other raw material in America and disruptions or delays in the supply chain. But these difficulties regarding the supply chain we are facing everywhere, not only in America, we face it in Europe, we face it in China. and it's a hard task to manage that, but so far we are doing it quite well. Great, thank you.

Before we take the next question, just a reminder, if you would like to ask a question, please press the 01 on your telephone keypad. And the next question is from Sebastian Bray of Nuremberg.

Good morning, and thank you for taking my questions. I would have two, please, both strategic. The first is on electric vehicles. Could you please give a sense of the amount of sales that Fuchs is currently making to this value chain, either via its Blue EV brand or via other? Is about €40 million on an annualized basis a reasonable guess? The second question is on longer-term procurement of raw materials. If transport fuel demands in Europe and the U.S. goes into reverse longer-term and refineries start to shut, can FUC start to source its base oils based upon bio-based feedstocks or recycled inputs? How does the group think about its raw material procurement on a 10 to 15-year basis? Thank you.

Thank you, Sebastian, for your question.

Your first one regarding our amount of sales with products for electric vehicles. I'm sorry, I can't give you an answer and I can't give you a good or bad feeling if your guess is the right guess because as our customers are not only like the VMs but the suppliers and therefore we have a lot of products which go into reheaters but we don't know are these electric reheaters, are these reheaters with combustion engine or hybrids. Then of course we have products which are for electric applications and so on, but we don't have a sales number available so far with this group-wide. Our view on longer term procurement and the supply chain or disruptions of the supply chain. Our R&D team is for years working on finding new raw materials, new raw material sources. Sustainability is a strategic and important task force and We aim to use more bio-based feedstock as we do today, as we already use some, but not in a very big amount. And we are open for life cycles and recycling, and we are working strategically on that, and not only strategically. but our R&D team in their daily work.

That is understood. Thank you. Dagmar, I appreciate you cannot quantify the exact number of sales flowing from Fuchs into the electric vehicle chain, but if I were to say if Fuchs has the same or higher or lower market share for EV applications relative to traditional ones, Which of those statements would you agree with?

Sebastian, I'm sorry. I can't give you an answer.

Understood. It was worth a try. Thank you.

The last question for today is from Isha Sharma of FIFA Europe. The line is now open. Please go ahead.

Hi, Dagmar. Thank you for taking my question. Do you expect China to continue to be as strong? What kind of regional development do you see into April? I appreciate that you see still strong demand. Could you help us with the regional split as well, please? Thank you.

Well, if you look at all expectations regarding the growth economic growth in China. It's very strong, a strong GDP growth. I think it's the highest worldwide. And it's across all industries. It's strong in automotive, but as well as in other industries. And as we finished our growth initiative, our investment program in the last year in 2020. And we have two very modern new production plants in China. We, as I said, we manage like 46% sales growth in China in the first quarter. a very strong growth in the fourth quarter, so our setup in China is very good and we are prepared to grow even further with a strong demand for a longer time.

Thank you. Actually, that would have been my second question. How much incremental volumes can we expect for the full year coming from your recent CapEx initiative?

As we don't report volume figures, as we can easily increase volumes if we increase batch sizes, we are able to add additional shifts. But in China we opened a new plant a year ago. We enlarged that plant already in the planning phase. There is enough space, there is enough room to even enlarge further if we would need that. In our second production plant in the north of China. We enlarged it two years ago and there's still as well enough space and room to even further expand. So capacity in China is not at all a restriction for us.

Perfect. That's very helpful. So it is fair to assume that this is a sustainable growth rate in China, or at least for the year we can imagine.

Not 46%, I would say. But I believe we will see a strong growth in China, yes.

That's very helpful. Thanks a lot for that.

As we receive no further questions, I hand back to Mr. Ackermann.

Yeah, thank you very much. With that, we have come to the end of today's conference call. Thank you very much for your participation. And as always, if you have any further questions after the call or over the next days, please don't hesitate to contact us. Thank you and goodbye.

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