Fuchs SE

Dear ladies and gentlemen, welcome to the first quarter 2023 Analyst Conference Hall of FaxPetrol CE. 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 for the Analysts of FUCE to ask a question. May I now hand over to Lutz Hagemann, Head of Investor Relations at FaxPetrol CE, who will start the meeting today. Please go ahead.

Yeah, good afternoon ladies and gentlemen, this is Lutz Ackermann speaking. On behalf of Fuchs-Fitterlob, I wish you a very warm welcome to today's content call on the Q1 results. All the relevant documents have been uploaded this morning at 7 a.m. and you can find them on the IR section of our homepage. And with me on the call today is Isabel Adert, CFO of Fuchs-Fitterlob and Isabel will walk you through the presentation in a second. As always, after the presentation, we will have the Q&A session where you have the opportunity to ask questions. Having said that, I would like to hand over to Isabelle. Isabelle, please go ahead.

Thank you, Vince, and warm welcome from outside as well. I'm happy to guide you through the numbers of what we believe was a very successful start into the year 2023. we saw major improvements of all relevant KPIs we looked at. Sales here in the year compared to quarter one 2022 is up 16%. That's a majorly sales price driven increase. And once more reveals the successful implementation of price increases due to the raw material price increases we saw over the last 18 months And now we can harvest the fruit of that. Good signal as well is that our EBIT is up significantly as well. So the price increases not only cover the raw material price increase, but at least partially the general inflation as well. We anticipated at end of Q4 that we saw the inflection point of the EBIT margin drop due to the A very special situation last year with the war in Europe, the subsequent price increases in raw materials. And this now showed true. Our EBIT margin in Q1 is at 11%, so up 1.2 percentage points compared to Q4. So we see a sequential improvement here. And another good news is our free cash flow is up significantly compared to Q1 of last year. We look at $52 million worth of free cash flow, which is majorly due to the lower net working capital buildup compared to what we saw last year. So having said this, we are happy to confirm our outlook we've given to the capital market roughly five weeks ago. The economic environment we are looking at is still uncertain. So assumptions we put into the outlook haven't changed significantly since then. We're still looking at a war in Europe. We're looking at increasing tensions between the US and China. We are still in an environment of interest increases, of high inflation rates. So this is where we are happy that we say we've started successfully into the year. and confirm the outlook was given to you a couple of weeks ago. Looking into a little bit more detail behind those numbers, I think the number speaks for itself, $936 million worth of sales, highest ever record quarter to Fuchs in terms of sales volume. in terms of how many tons do we sell to our customers are stabling out. So this is still reflecting the wait-and-see mentality we see in the market currently. There's a lot of uncertainty out there. So if you look at the EFO Consumer Climate Index, we are still way below 100, which you would somehow interpret as positive consumer sentiment. So as of today, we're looking at a number of 93. And this is something we can obviously feel when we talk to our customers, to our partners as well, that there's a lot of uncertainty in the market. And this is something, obviously, that will still continue throughout this part of the rest of the year. Looking at our average development, this makes us equally proud and happy as the development of the sales, 11% up. year on year compared to quarter one. And to reflect on that, I think quarter one last year was still a relatively normal quarter since January, February were not yet impacted by the war in Russia and Ukraine. That only happened end of February. And we had a very good quarter, first quarter of 22 in China as well. So putting that into perspective, this is a result we are very satisfied with. To look into the details a little more, the sales growth we are looking at is purely organic. So there are no acquisitions that account for this. 17% we managed to do out of our own efforts, out of the excellent work of our sales force, managed to put the price increases through. And the management of our customers, of our partners, that volumes are stable. Currency impact obviously is something we are expecting as kind of a headwind for this year. If you remember last year's numbers, we had a lot of tailwinds from currency since the euro became weaker against almost all other currencies, especially the currencies relevant for us, so the RMB and the US dollar. This only happened majorly in quarters two and three of the year. This is why you still see relatively small numbers here, but we expect that number to increase throughout the remainder of the year and somehow be seen as counter-effect of what we saw in terms of currency development in 2022. Looking at our P&L, I think This is a performance we can be satisfied with. So gross profit is up by 10% as well, which means obviously we didn't only increase our sales, but our profit, and we have reached the inflection point. So I think same picture here. Obviously, compared to quarter one last year, we still see margins slightly behind, but we saw the inflection point and sequential improvement of margin developments compared to the fourth quarter. Functional cost is up as well. This is subject to the high inflation rates we saw and some shortages, especially in Europe when it came to energy supplies. So obviously we do not only see the full year impact of the price increases we put into place last year, but the full year impact of the cost as well. Major driver behind this was by far the personal cost increase, so not additional people we hired, but the higher salaries to cater for the inflation rate, and then higher freight, higher energy costs that went into this. CapEx above prior year level might be a little misleading. We still stand by the $80 million total CapEx volume for this year. But what we see here is a more equal distribution throughout the year. So, this is already in our free cash flow. So, a little bit more or a lower impact expected throughout the remainder of the year. Networking capital developed nicely as well. We see a small increase compared to what we would have expected, which is driven by the higher receivables you can imagine. high sales volumes like that come with a high amount of receivables, but the growth is under proportionate, which means that 25% working capital in terms of sales we saw at the end of last year decreased to 24% to the end of quarter one. And this is a trend we like and a trend we want to continue throughout the remainder of the year. This in total means we managed to increase our free cash flow from $13 million quarter one last year to $52 million, and this is the number we are extremely happy with. Taking a deep dive into the regions, I think the general message is that we saw good development in all of the regions, but I think special contribution this time came from EMEA. We saw high sales price growth sales growth numbers of 15%. Usually EMEA is a relatively mature region for us, so we expect to see higher growth rates in the other regions. In the first quarter, EMEA performed particularly well. The major reason for this was that we saw great developments in almost all countries. You can see that here it's Germany, Great Britain, South Africa, but as well countries as Sweden or Poland. First, negative currency impacts have been recorded already, but obviously at a lower scale than what we would expect in most of the other regions. A major driver behind that obviously is that a lot of our EMEA business is in Europe. Our EBIT is at 50 million, so that means EMEA accounts for almost half of the group. at equity results on prior year levels for the contribution we see there, which is a very good result as well, given that most of our equity companies, or some of them, are in countries with very high inflation rates, with hyperinflation. So this is something that was managed quite well by the local management teams as well to deliver the same result as last year in that 2% environment. Looking at the Asia-Pacific region, this is a result we are happy with as well. I'd like to put that into perspective for you a little. Sales is up compared to prior year, which is a result to volume recovery, volume growth in a lot of the subregions, as well as the price increases we put into place, showing the full year effect. Compared to last year, we still see a little shortfall in China. Q1 in 2022, China was a very strong quarter, whereas Q1 for this year was still influenced by the ripple effects of the COVID lockdowns that were released in December. So we saw very high infection rates in January, going well into February, the ripple effects of the Chinese New Year. So we see the economy in China overall recovering a little slower than we had hoped for at the beginning of the year. Quarter one, we still had some impact. Quarter two, we see that it slowly starts to pick up, but we believe that it will take well into the second half of the year until China will be back to a more normal level of economic activity again. And what we hear from our colleagues in China is, that it really takes some time until the stimulus packages that were issued by the Chinese government really show their full effect. Taking the China development out of the equation, all other countries we have in that region, so mainly Australia, India, Southeast Asia, showed positive contributions. So the small decline, we see an EBIT of $1 million. is caused by the shortfalls in China compared to the quarter one 2022, which was a very strong quarter in China. All other sub-regions contributed positively with especially nice developments in Australia and in India. Last but not least, our Americas region, very good improvement as well to say it grew by compared to the prior year. Obviously, right now, still with a little tailwind from the dollar development, this is something we expect to turn around in the course of the year. But we saw very nice development all over the region, so high volumes in North America, the U.S., in Mexico, but in South America as well. The automotive market in the U.S., which will be the major growth driver, obviously, of this region, is a little behind expectations. So initially, beginning of the year, we expected the market to go back to 15.5 million sold cars in 2023. This will most likely not happen, so we expect to grow, but potentially not to the extent we had hoped for at the beginning of the year. Now looking at what does this do with our liquidity, how does this contribute to the cash flow? It's already stated we saw $52 million in the first quarter, which for us is a very strong quarter, the first quarter. So high earnings after tax and an underproportionate growth in net working capital. But the other changes we see here is majorly caused by VAT impact. resulted in $52 million free cash flow before acquisition. So we are well on our way to deliver on the outlook we've given of around about $250 million for the entire year. Share buybacks are continuing as expected. The small acquisition payment you see here is the last payment we did for ELITE. This is a pure cash flow. In fact, it was already digested. in our P&L last year, but cash out was only beginning of this year. So that means the first quarter enabled us to reduce the negative net liquidity, and we expect to turn this back into positive throughout the remainder of the year. Taking a quick look at how our working capital developed, because I know this has been a discussion a lot of us have had last year. We put a lot of effort into analyzing and actively managing our working capital since I joined the company, and we are happy to see that the level decreased. We saw 25% working capital worth of sales end of quarter four, and this now decreased to a level of 24% end of the first quarter. You can see that inventory slightly declined despite the high sales volumes we saw there and that our receivables minus liabilities decreased under proportionately given the strong sales growth we saw. So I think this is positive news and this is efforts we will continue throughout the remainder of the year Since we believe that 25, we already stated that it's not the level we are aiming for when it comes to working capital. Neither is 24%, but we now put into place the measures of monitoring and managing our working capital and expect that number, so working capital percent of sales to further decrease throughout the remainder of the year. Having presented those numbers, we are reiterating The outlook we gave to the market five weeks ago. So we are still aiming for mid-single-digit growth in terms of sales, which is organic growth only, from high business volumes and price lag effects. But obviously, of course, the full-year impact of the price increases we put into place has the highest impact in quarter one. So the impact we would see in the subsequent quarters will be smaller, obviously, pure mathematical effect than what we saw in the first quarter. Added at 390 million, the measures are still in place. The measures to track cost inflation to define countermeasures are in place. But, of course, we're still looking at the bigger impact of the FX impact to COOMS. And the assumptions we put into this number haven't changed significantly. So we are reiterating the guidance of 390 million round about that in terms of EBIT. SVA above prior year due to the higher earnings and free cash flow at 250 million. We believe we put a nice stepping stone. Lower working capital buildup has shown to become true. So we are confident that those numbers are still true as of today. To put a little perspective into what is our price development and how do our raw material prices of the products we purchase have developed. This is a little mixed picture. When we talked beginning of this year, we said for us the biggest uncertainty is the development of our raw material prices of the raw material basket we buy. This statement is still as true today as it was a couple of months back. So what we saw is that our base oil in groups one and two further decreased slightly globally, even though we still saw some bounce-back effects even in EMEA. But I think, as you can see nicely in this graph, we see that the development of the prices is coming back to The same picture we saw beginning of 2022, which is that the base of Group 1 and 2 prices are somehow closer in the region than what we saw throughout last year. Base of Group 3, this is still influenced by, we call it structural tightness here. but majorly because we only have two big companies that can provide the quality we need, and one is still under pressure. Most of us have talked about this already. All other things we buy, which from a value point of view accounts for roughly 60% of our spend, remains on a very high level. From the indications we see so far, we do not expect a huge change in Q2. So, a slight decrease at base, something summarizes of what we've seen at the start of the quarter. What does that mean for our pricing? It means there's not that much pressure yet, of course, to lower our sales prices as well. Even the price variation tools as we calculated now, they show some effects, but not to the extent we expected at the beginning of the year. So, what we can say the situation is more or less unchanged. prices remain at a very high level from the input as well as from the output side. And we still need to wait and see how the long-term trend of this will develop and when the point will come that we see an inflection here as well with prices sustainably going down. Okay. So that brings me to the end of my presentation and I head back to Luz.