Fuchs SE

Good afternoon, ladies and gentlemen. This is Loz Ackermann speaking. I wish you a very warm welcome to today's conference call on the Q1 figure, which we released this morning. 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 you can find on the IR section of our homepage since 7 AM this morning. Having said this, I would like to hand over to Isabel Go ahead.

Thank you, Liz. And a warm welcome from my side as well to the presentation of our Q1 results. As Liz said, all information were uploaded this morning. But we would like to take the opportunity to give you a little more insight on how we started into the year. So if you look at our highlights section, I think what we can say is that we had a good start into the year according to our expectations. and that the good trend we saw in the second half of the year, year 2023, continued. As already indicated in the call we had a couple of weeks ago, our guidance and therewith our expectations were based on flat pricing compared to the end of last year. And this is what you see reflected in the Q1 numbers now. We have a little lower sales. This was expected given we have a little bit of a, let's say, cyclicity within the quarters in our business due to the relatively lower pricing compared to the first quarter of 2023. Plus, we saw a little bit of headwind from currency effects. What exactly that was, we will talk about later in this call. At the same time, our EBIT is up year over year, driven by all regions. So if you recall our calls we had in last year, the message was usually driven by the EMEA region. But now we really see all regions back to strength with some lowlights and highlights. We will run through the regions later in this call. But this for me is an absolute positive that we see that the entire world is driving those results now. And those two numbers taken together result in another step up in margin. compared to the last quarter last year, as well as compared to Q1 2023. Free cash flow, given that we put in place a quite thorough working capital management program in 2023, is now back to, let's say, the normal pattern you see in the folks' business. So we have the usual net working capital built up in Q1 and Q2, and then a lower working capital frequently in Q3, Q4 again. This is due to the fact, especially compared to last year, that we significantly reduced our payables and inventories last year, and now we are back to a more normal pattern. All of that taken together would say a good start, healthy start into the new year. We see the good trends continuing, and this is I think not surprisingly, while we confirm the outlook, we stated mid of March for the full year 2024. Before I start with the numbers, I'd like to come to a highlight of an acquisition we did that was announced just a couple of weeks ago. So we signed a binding offer to acquire the LoopCon Group, a German-based family-owned company headquartered close to Frankfurt. who is specialized in the grease segment. We're really happy that after negotiating a little bit, we were able to close that deal, given that this is really fitting to our focus we have in the niche and the specialty product segment. And LoopCon said focus on greases, but in a little bit different segments than we are usually exposed to, such as paper, cloth, rail a little bit more, pharma and stuff like this. And we really believe that we can leverage our global footprint to have a similar success story as we've seen for Nye in the past. So this for me is one of the absolute highlights we had in the first quarter or now the beginning of the second quarter. Together, I think you've already signed a strategic partnership with a Mercedes-Benz spare parts segment to really join forces here. So I think from a strategic point of view, from a positioning point of view, some steps we have taken in the right direction. And now, given we are on our Q1 results, call back to the numbers. As said, our sales development slightly below prior year, but luckily this is not volume effect, but a mix of price and FH. Of course, a little bit down on prior year, but if you compare that to the Q1 performances in previous years, we can still see a solid growth. And this is nothing that causes worry from our point of view, but completely as expected in terms of lower pricing compared to Q1 2023. At the same time, we were able to increase our EBIT of the quarter. It was the best Q1 in a huge number of years. I think last time we had such a good result, at least I was not with the group, but I think 107 million in one quarter, especially given the cyclicity you see in our business in terms of earnings usually. This is an extremely good result and with contributions of all the regions. I will run through who contributed and what went really well in a couple of minutes. To shed a little bit more light on how organic growth in terms of EBIT or a little bit decline in terms of sales and currency impacts are distributed, you can see that in terms of sales, it's more or less split into half. So the organic decline is pricing driven exclusively and then we have kind of a negative impact surprisingly from currency again since the euro is relatively strong plus first what what we see is that due to the high inflation environment we have a relatively big impact considering the size of the country from Argentina but this is only due to the high inflation accounting application we see here And this is contributing quite a bit to the negative currency development. But all in all, I'd say a perfectly healthy P&L we're looking at. So I think very similar picture to what we've seen in the last year. A slight decline in sales, but at the same time, a step up in terms of profit, and in terms of margin. If you compare the gross margin we're able to have now compared to prior year, it's a step above almost three percentage points and slightly above previous quarter as well. I think this is where we really see all of the good price management of our salespeople as well as the operational excellence programs coming into effect. At the same time, we were able to manage our other functional costs in a really good manner. Despite the high inflation we saw or still saw last year, our functional cost increased by $3 million only, which is underproportionate. And this is why compared to last year, we were able to increase our EBIT by 4% to a margin of 12.2% in the first quarter, which is 1.2 percentage points above prior year and a good step towards reaching our mid-term margin target of 15% EBIT margin again. Then below EBIT leading over to our free cash flow, I think CAPEX is in line with our expectations. We still stand by our promise that we say CAPEX at the same amount as we have depreciation, which is roughly 80 million a year. Last year we had 20 million exactly. Now there is a little phasing in there, but I think nothing substantial. Biggest change compared to last year is the networking capital development. But I think message I already gave on the first slide, this is the more normal pattern that we see slide networking capital build up in Q1 and Q2, and then have the counter effect in quarters three and quarters four. And this is what we are expecting in this year as well. This is why $15 million is in line with what we expected. And this is why we confirm our guidance in terms of free cash flow as well. Now let's take a look into the regions. As said, what I really like looking into this is that we have good contributions from all regions this time. EMEA is continuing the strong performance we saw last year. So I think sales down a little more than in group average, which is due to the fact that most of the price declines were driven by our price variation clauses. And especially in Germany, we have comparatively higher share of those variation clauses than in the rest of the group. But apart from that, the single contracts were managed really well. And when you look at the margin, we were able to hold on to higher prices compared to how the raw material cost developed. Because at the same time, sales were down 7%, EBIT was up by 8%, with big contributions from, we'll say, all companies in the regions, all countries. So it's really hard to just pick one to stress. But if I wanted to make a really positive mentioning for contributions, it would be the UK and Poland. which last year were our country's number four and five after the big three contributors. And they really continue their good performance they showed last year and this year. The Asia-Pacific region, majorly driven by China, obviously, is making a recovery as well. And there, once again, it shows how effective our operating model and our decentralized structure is. We see China getting back to old strength and continuing the really good performance we saw in Q3 and Q4 last year after they recovered from the COVID restrictions. India did a really nice step up compared to last year as well. The rest of the region had a relatively weaker start into the year, but we'll say after a very strong year last year where they compensated with partially for the Chinese development and Some impacts like, for example, the little slower agricultural development in Australia. Nothing to worry about and in line with our expectations, what we planned for. And we can now see that China is taking the lead again in that region after last year where it was the rest of the region. So really good performance sales down less than in the rest of the world. And our EBIT up majorly contributed by China and by India. Last but not least, our Americas region. Here we see a very nice development after a rather flattish last year again, with, I would say, good contributions from especially the northern American sphere. So we see really nice development in Canada, despite, let's say, some import disruptions in Mexico due to new legislations. and let's say some hiccups of the local government to make sure all the companies can still import a really good performance in Mexico too. And I would say especially to mention really good performance of our specialty division nine, namely in the Americas. But I think as already stated in our last call, there would say the general, the bread and butter business in America is still relatively slower given that the economy is currently still in a little bit of wait-and-see mode to see how the elections in November will turn out, since very different stimuli for the industry are expected depending on who will win those elections. South America is slightly below prior year. This is mainly due to the difficult macroeconomic situation over the region but particularly in Argentina I already mentioned that a little earlier there's a high inflation environment they have the new government now really okay challenging exchange rates and this is what we see in the results but luckily for us South America is not such a big part of the region given that Mexico is accounted for now northern American results So overall, we could still show a really nice step up in terms of EBIT in this region, too. Looking at our net liquidity, I think nothing out of the ordinary. Earnings after tax directly contributed with a negative effect of the net working capital buildup. But still, we are in a net cash position despite spending 33 million on our share buyback program in that quarter. So still perfectly healthy liquidity situation and a perfectly healthy balance sheet. To remind you once again of the net working capital development, this is what I already mentioned earlier. If you look at how high the level was beginning of last year's bill, this is now back to, I would say, a little more normal development. compared to prior year given the elevated levels in especially 22 and 23 due to the high pricing effects we had in our raw materials, but due to shortage of materials and a little bit more safety stock for some of the rarer materials as well. Now we are back to what I already mentioned, our target level of between 21 to 22%. And we expect to see this more normal pattern of the increase in the first half of the year and then decrease in the second half of the year. I already mentioned pricing. And what we see here is, I would say, a very mixed picture. So we saw a slight decline in some of our material groups in the first half of the first quarter. But then we saw especially Group 1 and Group 2 stabilizing. Group 3, very different indicators. and relatively stable environment for additive packages, other raw materials too. This is why looking into this year, even I would say a little bit more challenging than still a couple of weeks ago to predict where raw material pricing is going, since especially in the Group 1 and Group 2, we see that prices started to firm up and we somehow reached bottom already. So this is something we will monitor quite closely because it could obviously have an impact on our pricing. And having said all this, we are still very confident to reiterate the outlook we stated on March 12th, namely 3.6 billion worth in revenue with an EBIT of 430 million. both of which would be all-time highs in the history of the folks group. With a solid free cash flow, a little bit above our mid-term guidance, and another step up in one of our major KPIs for our management, the SBA. So overall, we are looking positively into the future. And I think the guidance we put out a couple of weeks ago is still valid for this year since we've had a good start into 2024. Then to end my presentation on a high note, we would like to share save the date with you. We are planning to have another capital market day this year on December 5th. So please save the date. More details with the location will be announced quite soon together with the registration. We just wanted to make sure you have that in your diaries and hopefully a lot of you will be able to join us on that day. Having said this, I come to the end of my presentation of our Q1 results and I would like to open the floor for questions now.

Thank you. To ask a question, please press star, one, one on your telephone and wait for your name to be announced. To withdraw your question, please press star, one, and one again. Please stand by while we compile the Q&A roster. We will now take the first question from the line of Rhea Kotecha from Bank of America. Please go ahead.