Fuchs SE

Dear ladies and gentlemen, welcome to the third quarter 2023 analyst conference call of Fuchs SE. This conference will be recorded. As a reminder, all participants will be in listen-only mode. After the presentation, there will be an opportunity for the analyst of Fuchs to ask questions. May I now hand over to Lutz Ackermann, Head of Investor Relations at Fuchs SE, who will start the meeting today. Please go ahead.

Yeah, good afternoon, ladies and gentlemen. This is Lutz Ackermann speaking. On behalf of Fuchs SE, I wish you a very warm welcome to today's conference call on the Q3 results. With me on the call today is Isabel Adelt, our CFO. And as always, Isabel will run you through the presentation, which is then followed by a Q&A session. All the documents have been uploaded this morning, 7 a.m., and you can find them on the IR section of our homepage. Having said this, I would like to hand over to Isabel. Isabel, please go ahead.

Thank you and warm welcome from my side as well to what is not only a sunny day in Mannheim, but looking at our results and what we would Characterize as a record record quarter in folks history So we are now after only nine months standing at two point seven billion worth of sales Still up six percent year-on-year strongly price driven growth, obviously and Then what I like most, an EBIT at $313 million, 12% up, so much stronger than sales, which means we are back to profitable growth. And we were able to present the Q3 EBIT margin standalone at 12.9%. So sequential improvement for the third quarter this year to force fourth step up. And this is something we are very proud of because it's really, for us, marks an inflection point on our journey to our mid-term EBIT margin target. And then last but not least, obviously my favorite number, the free cash flow. This by far exceeded our expectations. We put in place strict working capital management programs. I will talk through that a little later. but that we were standing at $330 million, even surpassing our great habit. This is even for us something we maybe would have dreamt of, but that exceeded our expectations. As you can see in the guidance, the free cash flow guidance, we raised again, but I will come to this at the end of the call. Now looking at the development quarter by quarter, sales so far $6. percent up, like for like, so free of FX effects. This number would be even slightly higher. If we remember last year, especially Q3, this was the time when we had dollar parity, one dollar for one euro, and the RMB was particularly strong. What we see now is obviously a little bit of headwind that goes into the numbers in comparison to last year. And we for sure have a small impact from the price variation clauses we have with some of our customers. So far, the sales development is in line with our expectations. And we are closing what we believe, looking at the trends in history, is yet another successful quarter in terms of top line development. Looking at the volumes, we see them recover as well. We still had a slight shortfall after the first half of the year. But now, taking out the Russia effects out of the equation, we are on prior year's volume, which, given the current circumstances, for us is a very good development, given the terrible war we now see in Near East, the war in Ukraine that is still happening, China recovering slower. So we are very happy about confirming the volumes we saw last year at end of the third quarter. Looking at our EBIT, This development, to me, is even more striking. So it's 6% up in sales, but 12% up in EBIT. We see our margin recovering, which is a very good sign. And especially Q3 now marks a record quarter. In history of folks, we've never seen a quarter with an EBIT like this. Despite the fact that we had some kind of headwind from currency, So we already talked through that we had some effect on the top line. The same effect is obviously in the bottom line as well, given the US dollar and the RMB compared to the euro are much weaker now than they were a year ago. So I think this is something we are very proud of, and we are happy that we could close the third quarter according to our expectations. Looking at where the growth comes from, And this is very similar for top and bottom line, obviously. All of what we achieved this year is organic growth. So we do not have an impact from any acquisitions we did last year. That would say we somehow need to correct that number. And as you can see, organic growth would be at 11%. If it wasn't for the negative currency impact of minus 5%, we now see this is what we somehow already expected beginning of this year, since we had a huge tailwind last year when the euro was relatively weaker. But we hope that this is then, after this year, stabilizing a little bit more so we can get back to more normal currency effects as come next year. Looking at our P&L, where does the higher result and especially the better margin come from? Well, from the fact that we were able to increase our sales prices that successfully during last year. Looking at us compared to our competition, we can only say that our sales team have done amazing jobs, really pushing through the raw material costs and negotiating those price increases with our customers. So we were really happy we could benefit from that effect throughout the entire year. What we see now is that our gross profit grew by 8% with a very good margin, 0.5% up year on year. So we are now getting closer to our target margin again, which is a very good development. At the same time, despite the high inflation, our functional cost only grew by 6%, which obviously means we reached the inflection point and EBIT margin now at 11.6% for the full year, but Q3 standalone was 12.9%, and this is a trend we really like to see. Investments, as before, we still stand by our word that we say 80 million per year, so roughly the volume of our depreciation, since we do not want to eat in our substance but reinvest into the business. As you can see, we are well on track to $55 million after third quarter, one to come. So this should be in the ballpark of $80 million for the rest of the year. Then networking capital, our efforts we put in there have really proven to be successful. So when we look at our networking capital in terms of sales development from end of last year, 25% at points, we are now down to almost 23%. which is a very good development. So despite the fact that we see growing sales, and you would eventually expect networking capital to go up slightly, we see a big release, which really helped us on our way to a fantastic free cash flow before acquisitions of $330 million. Now I'd like to take the opportunity to talk you through our regional developments a little bit. So this year, by far, the outstanding region is the EMEA region. And this is not due to the fact that we have Germany in there as our mother country, but almost all countries with double-digit growth rates compared to last year, which is a fantastic development. I would particularly like to mention the development in Great Britain, but in Poland, in Sweden, in France, and Italy as well. So I think the entire team, they have done a great job in terms of managing pricing, but developing the market in what are difficult times, especially for the European economy. And this is why we still stand by the guidance we gave beginning of the year. Now, a lot of things in the course of the year have turned against us. We see China not bouncing back as fast as we would have wished for. We now see a strike of the automotive unions. But we are very confident that with this great development we see in EMEA, and which we expect to continue until end of the year, we are well set towards reaching the targets we gave ourselves beginning of this year, with, as already said, significant contributions from almost all entities. Having said this, of course, we have much lower FX impact in the Euro region than we have in all other regions. Obviously, since a lot of our business is in Euro, but we have strongly performing countries like Great Britain, like Poland, who suffer a little bit from the stronger Euro as well. So we see those minus 2% we see here, but not as big as the numbers with the headwind we will see on the next slides. Looking at the Asia Pacific region, I think we are very proud to report that our sales increased and we had a positive business development and price increases in almost the entire region, which covers Australia and Southeast Asia, particularly with very good development in India, but as well in countries like Vietnam, where we now build our new factory. But of course, The big country in this region is China. And what we see to date is a lower Abbott contribution of China since the recovery is not taking place as fast as we would have expected it or would have wished for beginning of the year. We still see a little bit weaker export economy in China. We see growth rates coming back to what we believe will be around 4% this year. but not back to historic highs we've seen in the past. And of course, in China, the weaker renminbi is an issue in terms of buying raw material. So this is something we see our China team doing a fantastic job in terms of really making sure we get new contracts in, that we can substitute the missing export volume with local volume. But of course, this includes a lot of effort and includes a very competitive situation in the market. So I think in terms of volume, we are good. But yet, to be shown from China, they can be back to historic growth. And then last but not least, North America. Very strong growth rate and very positive development in terms of sales and earnings as well. And this does not come from the U.S. only, but from almost the entire region. So country I would like to mention is Mexico, which is now really becoming behind the big three players we have for Germany, China, and U.S. A good contender around place four and five. They're always fighting their place with Australia. They have done a fantastic development, a lot of new great customer wins. And the same in Brazil. They are developing very nicely. We just bought a new factory, and we are in the process of ramping that up as well. So I think for us, very strong development in the region. Despite the fact that they had a lot of headwind from FX effect, they were still able to show really convincing growth. What we, however, do not know yet is how big the impact throughout the fourth quarter will be from the strikes of the automotive unions that are currently happening in North America. So far, this has cost the economy in America $8 billion already. And we are quite positive since we saw the first agreements that could be reached with Ford yesterday. So we hope that all of the other automobilists will follow quite soon. But this is yet to be seen. So the union said they can afford another eight weeks of strike. We hope it will not come down to that scenario. But this is yet to be seen how long the strikes will last and how long all of those production units will be closed in the US. But from not so good news to my favorite slide of the day, free cash flow before acquisition. We already talked through that. Great earnings, great networking capital, development. And then obviously some tailwind from the fact that we have higher provisions for things such as tax, such as provisions for our incentives for our people due to the great results. So we ended up at 330 million, which means around about 160 million for Q3 only. And that implies that from last year, December, where we had the negative net liquidity, We were able to turn that around to now a positive net liquidity again, despite the fact that we spent over $200 million worth of dividends on the share buyback, which for me is an excellent achievement for the first nine months of the year. One major contributor to this was for sure the net working capital. As you can see, we put a lot of effort Decentrally into managing our inventories, managing receivables and liabilities. And I think we can now harvest the fruit from that. So we see inventories coming down significantly compared to Q3 last year. We lost more than three percentage points in working capital. So this is a positive news, even if I said last. We came from more than 26% and we're now at 23.1. Not exactly what our target level is, but a reduction of three percentage points or more than three percentage points, something we're extremely proud of. But we will continue the efforts we put into place and make sure that we reach our target corridor in between 21 and 22%. Having said this, we are very confident to reiterate our guidance for sales and EBIT. So far, we do not see any signs, especially looking at EBIT, that we can reach or even exceed this number by end of this year. So far, everything is running according to our expectations. And we are very happy that for the second time this year, we can up our free cash flow guidance. Given we are at 330 already, it would be a little weird to stick to the 300. but we believe we can get another good contribution till end of this year. So having said this, I think really excellent development, especially given the market we are in and the little shaky situations with a lot of other chemical companies issuing profit warnings. Last but not least, I would like to talk a little bit through pricing since this is obviously for us always one of the major influencing factors and one of the major drivers behind our pricing but our margin as well. So what we see right now is quite diverse development. So on the one hand side, we have across the globe the base on one and two purchases where we saw somehow the low base during Q2 or Q3, but what we see is that they are on the rise again. And this is a trend we're observing in all regions. An expectation is that they will continue to go up. Base 03, I think we've talked a lot about the structural tightness of the market we have seen last year. This is now fully resolved. We see prices coming back to normal, and we expect that downward trend to continue. at least throughout the next weeks or months. For additive packages and raw materials, this is, of course, a little bit harder to grasp since there are so many different materials we are looking at. But what we see, some of them have come down, however, only slightly. So what we expect is that they somehow start to stabilize now and could potentially even increase slightly in 2024. And with that, I would like to close the presentation part of the call and open the floor for your questions.