Fuchs SE

Dear ladies and gentlemen, welcome to the analyst conference called Fox Petrolub SE. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions for analysts. If any participant has difficulties hearing the conference, please press star key for a buzzer on your telephone for great assistance. May I now hand you over to Lutz Ackermann, who will start the meeting today. Please go ahead.

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

Thank you, Lutz. Good afternoon, ladies and gentlemen. And I will lead you through our presentation and would like to start with chart number two. So here you have the highlights of our first half year. And we had a solid first half in a really difficult market environment. Our sales are up 16%. year on year, and that's mainly price driven. Our EBIT with 180 million is down 6%, but the last year was really strong and had positive effects from the corona situation. Overall, the global crisis situation remains difficult and it's very uncertain. Having a slight view at our outlook for the full year 22, we upgraded somehow our sales outlook where we said it will be now at the upper end of the range between 3 billion and 3.3 billion. everything else is unchanged. And I just would like to remember you on our long-term financial target, which we published roughly four weeks ago when we had our capital market day and where we are still really confident that we are going to prefer. I come now to chart number three. our sales development on a quarterly basis. As already said, half-year figures are up 16%, but if you look at the quarterly development, Q2 22 to the first quarter 22, our sales are up 3%. And overall, you can see the massive impact of inflation and sales price increases. Year on year, the second quarter is up 16% to 17%, which is in line with the full half-year figures. Turning to the next page, number four, our EBIT development on a quarterly basis. Here, as already mentioned, we are below previous year figure, 11 million, and on a quarterly basis, SECOND QUARTER, 22, COMPARED WITH THE FIRST QUARTER, 22, IT'S MINUS 6%. AND QUARTER TO QUARTER, Q2 22 TO Q2 21, IT'S DOWN 3%. SO I THINK WE QUITE DELIVERED. COMING TO CHART NUMBER FIVE, OUR SALES DEVELOPMENT, OUR SALES BRIDGE. first half 21 to first half 22. As you can see, overall, we have a strong organic growth, 12%. We have no significant external growth, and we have a tailwind from the currency side due to a weak euro. So we gained 4% on the currency side. Overall, as already mentioned, OUR SALES GROWTH IS PRICE DRIVEN, SO WE SEE, OF COURSE, LESS VOLUME. ON THE NEXT CHART, CHART NUMBER SIX, WE HAVE OUR EARNING SUMMARY. WITH OUR INCREASING SALES NUMBER, WE MANAGED THAT OUR GROSS PROFIT COULD BE INCREASED BY IN ABSOLUTE FIGURES 27 MILLION or 5% on a year-on-year basis. This 5%, of course, is growing below the sales growth, and that's due to the high price increases on the raw material side. The other function costs are up 12%, and that's driven by especially higher freight costs, ENERGY AND OF COURSE SIGNIFICANT HIGHER PERSONAL COSTS OVERALL OUR EARNINGS ARE DOWN SIX PERCENT YEAR ON YEAR AND OUR EBIT MARGIN IS 11 PERCENT COMPARED WITH 13.5 PERCENT IN THE PREVIOUS HALF YEAR WE HAVE COMPARED WITH PREVIOUS YEAR A LOWER CABEX FIGURE AND IF YOU LOOK AT THE NUMBER of our net operating working capital outflow. There you can see that these numbers increased. Our free cash flow before acquisition came in at zero compared with 12 in the previous year. And we come later to a chart where you can see the net operating working capital development, which of course is the driver for our free cash flow. And I just would like to remind you that in the last year, in the year 21, for the full year, we reported a free cash flow before acquisition of 90 million. And besides a high outflow for net operating working capital, we also had a significant one-off burden due to tax payments. Coming now to the regions, on chart number seven, our region, EMEA. EMEA managed to increase sales by 16%, and that is, again, as for the whole group, mainly price-driven. We see a strong organic growth of 15%, and, of course, less currency effects, as overall for the group, currency is due to the weak euros, But there are some positive currency effects from South Africa and Great Britain. We have negative effects from Poland and Sweden. But overall, it's a balanced number. We've seen within our countries in the region EMEA, most countries with double-digit growth rate. ANYHOW, OUR EBIT IS 10% LOWER THAN PREVIOUS YEARS BIGGER, AND THAT'S ESPECIALLY THE CASE IN GERMANY, SOUTHERN EUROPE, AND OF COURSE, WE HAD A 3 MILLION EURO WRITE-OFF FOR EQUITY STATE IN AFRICA. IN OUR REGION, Asia Pacific and chart number eight, our sales are up 7%. But that's now mainly driven by currency effects, as of course China is a big portion of our region, Asia Pacific, and due to the lockdowns in China as a result of the zero COVID strategy, of course, sales are down in China. We see positive organic growth in Southeast Asia and Australia. The earnings or the average of the region was 55 million is 13% lower than the very strong first half of the year 21. There we had a lot of like catch-up effects from Corona. Of course, we have a significant lower contribution from China, but on the other hand, Southeast Asia and Australia have earnings growth. On chart number nine, North and South America, we see a strong sales growth, 34%, and of course, a very high currency effect with 13%. That's mainly North America. Here again in this region, the organic growth is price driven.

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

Okay, thank you. I hope you didn't miss a lot. I would now jump in at card number 10, our net operating working capital development. There you can see a significant increase in the second quarter. And here we have now in absolute numbers 845 million compared with 671 million by year-end 21. And this growth or increase is due to inflation, due to the price increases, which on the one hand, of course, are reflected due to our sales price increases in the receivables. On the other hand, of course, in inventory. And there, we not only have the inflation effect, the price, but as well, we build up some safety stocks with regard to the uncertain supply situation or VC. And these... increase of net operating capital, of course, was a burden to our free cash flow. Coming to page number 11, just some geopolitical overall remarks. What are the uncertainties for the rest of the year? We have still the war in Ukraine. We have the development of plate in other countries with more material rights. We have the potential reduction of gas supplies, which of course might drive the demand side. We have China's zero-COVID strategy, We have overall the unsecureness in the supply chain situation, problems with raw material availability, and of course, supply chain disruptions on the customer side, of course, affect demand. Coming to page number 12 to give you a high-level overview about the price development on the raw material side. The red line is the crude oil, but we don't buy crude oil. And anyhow, as you can see, crude oil, the dates are as of July 19. They still went up. What does that mean? for our base oil supply. That are the blue lines where you can follow the development. Of course, you see significant increases from the beginning of the year. And on the other hand, looking at SN150 in Europe, slightly came down by the mid of July. On the other hand, Asia, And in the U.S., it's somehow leveled out. So overall, what do we expect for the time to come for the rest of the year? we still see the possibility of more increases, like increases on base oil prices as well as on federal and federal. For that, I would like to turn to page number 13 to our outlook for the rest of the year. And as I already mentioned, looking at the sales, we see this high inflation. And of course, that is a reason why why we now see our sales at the upper end of the range of $3 billion to $3.3 billion. All the other outlook figures are unchanged. We stick to our earnings outlook that we see at the previous year's level. which is the lower end of the range between 360 to 390 million. Of course, will be below prior year according to our EBITDA outlook. And as we, of course, increase our capital employed and therefore our cost of capital due to the increase of net operating working capital. And our free cash flow before acquisition will be free cash flow in the first half of the year. We managed as well in the previous year in 21 to generate quite a lot of cash flow in that second half. And with that, I would like to finish my short presentation, and I'm happy to answer all your questions. So go ahead.

Ladies and gentlemen, if you have a question for our speaker, please dial 021 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 021 to answer your question. If you're using speaker equipment today, please lift the hands right before making your selection. Remembering, please, for the first question. And the first question is for Markus Mayer, Baader Bank. Your line is now open.

Yeah, good afternoon, Dagmar. Good questions, as I make. The first one is on Asia-Pacific. You said that there was, of course, a significant positive currency effect, but can you shed some light on the volume effect as due to the lockdowns, there should have been several negative effects and also here how these developments have then normalized over the second quarter and also going into the third quarter? Second question is in general on price increases. As you said, for most of the regions, the organic growth was mainly price driven. How does it look like for the second half or for the third quarter in particular? And also, how was the start of July or the start of the third quarter in the different kind of regions from the volume side? Thank you.

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

Okay. Thank you so much.

The next question is from Michael Schaefer, AutoBHF. Your line is now open.

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

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

Thank you very much.

The next question is from Martin. Your line is now open.

Hello, good afternoon. I have three questions and actually they are all follow-up questions from the previous two. Sorry that I have not fully understood you. On Europe, it seems to me that you have still difficulties to pass on higher raw material costs to your customers on time. Is it fair to assume that roughly three quarters of the cost inflation has been passed on to your customers and there is still one quarter to come in Q3 or is the ratio more towards 50-50? That's the first question.

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

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

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

You're not in June? Pardon? You're not at the end of the second quarter?

No, not at the end of the second quarter.

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

Well, it's percentage rate.

Okay, thanks a lot. Thank you.

Thank you. The next question is from Rhea Kadecha, Bank of America. Your line is now open.

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

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

Okay, thanks. That's clear. And just another quick one on the raw materials and the development of the base oil price. If, you know, they don't seem to be tracking the crude oil price one-on-one, what are indicators that you use or follow that give you the confidence that these will sort of stabilize at the 2Q levels?

Well, it's not a confidence. It's just if you look at the curves here, it seems like it. And I mean, nobody knows what's going to happen the next weeks or months. And I mean, if for instance, Russia would like stop gas delivery, I guess it's very certain that it will somehow affect even base oil prices. So it's, Sorry, I'm not sure I can hear you.

Yeah, sorry, there seems to be an issue with the line. We got the speakers lost. Just one moment, please. Thank you. So please continue with the question and the answering of the question again.

Yeah, first of all, I would like to apologize that we somehow have technical problems today. Really sorry for that. Yeah, the last question was regarding from the price development in base oil. price development, and our expectations. Yeah, it's all very insecure, unsure, and looking at the graphs for the development of the last week, it seems very stabilized. But having in mind the geopolitical crisis, if Russia would stop proactively, I'm sure it would impact somehow even later on the crisis. So, yeah, it's just like having a spot on the raw material prices as they are, and we will see how it's going on.

Any additional questions from your side?

Yeah, I just have one last one. Sorry, the line's been a bit crackly, but maybe I can hear you a bit better now. So my last one is with the North American division. I want to know how the organic growth looks like versus your expectations, particularly in terms of volumes. Are you seeing sort of new orders come in? Are you successful with securing new contracts as you sort of ramp up your new capacity there?

Well, we still overall have a situation in the group that we have more orders than we are able to deliver. But what we noticed as well is that demand overall comes to be down.

Sorry, to confirm, you said that you have more orders than you're expected to deliver, but you see demand coming down. So your line is a little bit bad.

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

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

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

Okay, that's clear. Thank you.

So far, we have no further questions. As a short reminder, if you would like to ask a question, please press the round one on your telephone keypad We have no further questions coming in. I hand back to you.

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

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

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