Fuchs SE (FPE3) Earnings Call Transcript

Dear, ladies and gentlemen, welcome to the analysts conference call of FUCHS PETROLUB SE. At our customers' request, this conference will be recorded. [Operator Instructions] Now may I hand you over to Thomas Altmann, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.

Thank you, Pete, and good afternoon to everyone. On behalf of FUCHS, I would like to welcome you to our conference call to discuss the results of the first 9 months of the year 2020. On the call with me is Dagmar Steinert, our CFO. As always, Dagmar will take you through a short presentation, which is then followed by the Q&A session. You can find the quarterly statement, the factsheet, our earnings press release and our conference call presentation on our website at fuchs.com under the IR section. With this, I would like to hand things over to Dagmar.

Thank you, Thomas. Ladies and gentlemen, welcome to our conference call for our first 9 months results. We saw business conditions improving during the third quarter despite the crisis global effects. Let me start with Chart #2. Our group sales reached EUR 1.7 billion, that's 11% below last year. EBIT came in at EUR 203 million, that's 17% down year-on-year. Our free cash flow developed positively. The free cash flow before acquisitions was up significantly year-on-year at EUR 122 million, despite a decline in earnings. We saw a strong improvement in our financial position. Our net liquidity adjusted for lease liabilities amounts close to EUR 100 million. End of June this year, it was minus EUR 6 million. This development confirms us in our decision to continue our investment program with a sense of proportion even under the current difficult conditions. By the end of September, we spent close to EUR 90 million in our future, EUR 14 million less compared to the previous year. We are looking ahead to the remaining months with cautious optimism and have, therefore, also revised our forecast for the full year 2020. Based on the assumption that there were not be any major lockdowns in our key regions in the last quarter, we currently anticipate a decline in earnings in the range of minus 15%. In July, we had expected a decline of minus 25%. With that, I come to Chart #3. The quarterly sales development shows our recovery in the third quarter. The crisis began in China in February, continued there in March. The Western world was fully hit in April and May. The upward trend that was already emerging at the end of the second quarter continued in the past few months with growth in China and a recovery in Europe and America. In the third quarter, sales reached EUR 620 million, up over 20% compared with the second quarter. Chart #4. Our group sales are down by 11%, as already mentioned. The organic decline in sales shows improvement in the course of the year. Just to remember, organic growth in Q1 was minus 6%; in Q2, minus 23%; and in Q3, it was minus 4%. The positive contribution from acquisitions was offset by negative currency effect. If we look at the regional sales growth, that's Chart #5, starting with EMEA. EMEA reports minus 12% decline in sales. The region improved in the third quarter. Compared with Q3 2019, sales were down minus 8%. In the second quarter 2020, sales were down minus 28%. Almost all companies are affected by declines in sales, like U.K., France, Spain, Italy and Germany are most affected. Coming to Asia Pacific. This region recorded the minus 5% decline in sales to EUR 509 million. Asia Pacific posted a very good third quarter and sales above the previous year's quarter. Compared with the second quarter 2020, sales were up 9%. The external growth is from the acquisition of NULON. This was the -- our manufacturer of lubricants for the automotive retail sector in Australia in April 2019. Looking at North and South America. There, we see a decline in sales of minus 12%. The region improved in the third quarter. Year-on-year, sales were down 7%. In the second quarter, sales were down 33%, and the organic decline reduced considerably in the third quarter. In the second quarter this year, it was minus 42%. In the third quarter, it is minus 11%. The strong euro causes negative currency effects in all regions. Let us now turn to our income statement, Chart #6. Operating business considerably exceeded expectations in the third quarter, especially in September. In the first 9 months, gross profit is down by EUR 57 million or 8%. Our cost savings take effect. The other function costs are reduced by EUR 14 million year-on-year despite an increased cost base as a result of acquisitions. Adjusted for acquisitions, our savings come to almost EUR 30 million. The at equity income is on previous year's level with EUR 7 million. Our EBIT is down by 17%, after 29% in the first half 2020. Our EBIT margin for the first 9 months declined to 11.7%. In the third quarter, the EBIT margin is 14.7%. Having a look at Chart #7, our quarterly EBIT development. That reflects the impact of the crisis and our strong third quarter. In Q1, EBIT is down by 6%; in Q2 by 50%; and in Q3, it's up by 2%. With that, I would like to turn to Chart #8 and to have a look at the EBIT development by regions. EMEA, with an EBIT of EUR 102 million, is down around 22% year-on-year. Asia Pacific is up 4% year-on-year, with an EBIT of EUR 70 million. North and South America, with an EBIT of EUR 29 million, reduced earnings decline from minus 50% in the first half to minus 29% after 9 months. On Chart #9, you see the quarterly EBIT development by regions. In EMEA, an upward trend is noticeable in almost all countries after a weak second quarter. Countries most affected by COVID-19 are France, Italy, Spain and the U.K. Germany is also significantly impacted. The at equity income is at previous year's level. Asia Pacific posted a very good third quarter, exceeding the previous year. The positive development is driven by a strong third quarter in China. We see declines in earnings, particularly in India and South Korea. North America reports earnings in the third quarter above previous year, although the third quarter 2019 was impacted by bad debt. Negative effect of the pandemic in South America weakened slightly at a high level. Looking at Chart #10. The free cash flow before acquisitions is at EUR 120 million, 30% above previous year. We have a negative impact from the decline in earnings, a positive impact results from working capital management and other cash outflows and lower CapEx. The other cash outflows are based on taxes. We have a strong balance sheet structure and a secure financial position. Just to remember you, net cash adjusted for lease liabilities amounts to EUR 97 million after minus EUR 6 million in the first half 2020. The net operating working capital, Chart 11, improved significantly. The relation to annualized quarterly sales is 21.5% after 28.5% in the second quarter, and we are already below last year's number. I want to skip Chart #12, our earnings summary. That is just to give you a summary, which you can read by yourself. With that, I would like to come to Chart #13, our revised outlook for the running year. In view of the business performance in the first 9 months and to improve prospects for the global economy, we expect a decline in earnings in the range of minus 15%, previously minus 25%. Nevertheless, due to potential disruptions from COVID-19, we remain cautious and refrain from providing a more detailed guidance. Turning to Chart 14. Yesterday, we acquired PolySi, a high-performance lubricant manufacturer in the U.S. PolySi employs 21 people, and they generate sales of EUR 8 million per annum. This acquisition is, for us, a great addition to our specialty business in North America. With this, our short presentation ends here, and now we will start the Q&A session.

[Operator Instructions] Our first question is from Max Mayer from Baader-Helvea.

It's Markus Mayer, Baader-Helvea. Two -- Three questions, if I may. The first one is on this recovery momentum you've seen in the third quarter, in particular, in September. What did this, in particular, came from the automotive or more from the industrial lubricant space? That would be my first question, and I'll ask the other questions one by one.

Okay. Thank you, Markus. Well, this recovery or good performance in the third quarter, especially in September, it was both, we see it in automotive and industrial. I mean, in automotive, when we have increasing business in like first fill. Of course, we see growth from our first tier supplier as well as metalworking.

Okay. And then my second question would be on the net capital reduction, the net capital/sales ratio is now back to -- more or less back to levels we have seen from '14 and '15. Is there a further downside then more to -- sort of this went down to 2014 level? Or is this now a level where you say, we are quite satisfied with this and the downside might be only limited?

Of course, I'm not satisfied with that level. It's a great achievement and a great improvement from the whole team. But of course, the target is lower, and I expect more. But I don't really expect more to come this year in these difficult times because if, of course, this change in demand and these challenges regarding the supply chain where you might do have higher inventories in one or the other raw materials, of course, it is very difficult to exactly manage the level of working capital. But it -- like mid- or long term, of course, it's not a level I'm happy with. But for the time being, it's great to have this achievement.

Okay. And then my last question, Dagmar, on M&A. Over the past weeks, you have announced 2 small acquisitions. It can be just out of accident or this has the M&A window again opened and that have been due, which have been in the pipeline 3 years?

Well, our M&A window is always open, and it's more a question of closing a transaction and come to the signing of a contract. And with one or with some acquisitions, of course, we talked a long time with others. It might be a bit less time. But therefore, as I always said, our policy didn't change, and we are open for smaller or medium-sized bolt-on acquisition. We don't see a big target or a big opportunity as an acquisition, but a smaller bolt-on acquisitions are always on our agenda.

Our next question is from Martin Roediger from Kepler Cheuvreux.

I have, yes, also 3 questions, and I also would like to ask them step by step. First, on the gross margin. You mentioned as the reasons that, A, the product mix changes and B, decreased raw material costs. Can you at least give us a hint is that these 2 reasons had the equal weight of the background? Or was product mix more important and decreased raw material costs less important?

Well, if I look at our raw material costs, we have seen lower base oil prices compared with previous year. And we've seen, I would say, a tough raw material prices and half product mix as a rough assumption because it's always very difficult in this time, in this development for a quarter or for like these 9 months with these totally different regional development during the year to exactly analyze the impact. Like, for instance, in the second quarter, when we had this hit in the Western world, in Europe and in America, of course, we had quite a high level of raw materials in our stock. We had a very high net operating working capital. And in the third quarter, when we produced and sold, of course, we used quite a portion of this raw materials, which we then didn't had to buy on a stock price again. Therefore -- sorry, I can't give you more details. I hope it somehow helps a bit.

It helps a bit. And I mean, on these currencies, especially dollar, is rather weak at this point. I mean you mentioned that already. I would like to understand a bit. You have, on the one hand, translation losses because of earnings in dollar regions are less worse in euro terms. On the other hand, you benefit for a weak dollar when you buy some raw materials. So I would like to understand, did you make the math, if the dollar weakness is a net positive or net negative for you?

Well, as you already said, what you see in sales, of course, that's the translation. That's just the translation effect, what we report as currently. As a rough estimate, of course, you can, for the translation, take the same percentage from EBIT. On the other hand, looking at raw material or on the supply chain, what we mainly, yes, by U.S. dollar-linked and looking there, for instance, in Europe, of course, we benefit from a strong euro. Therefore, that somehow compensates, of course, the translation effect, which we see in the P&L.

That's clear. But did you like the math? What is more important? Or is there -- is it net balancing each out?

Well, it's not always net balancing out. I mean we've got a lot of currencies within our group, and a lot of weak currencies. If you look at South America, okay, it's a small portion of our business. But South America -- South Africa got weak currency. The Russian currency is not very strong. So it's not only U.S. dollar.

Okay. And then the final one, very minor. I think you remember that you have a joint venture in Turkey. I think the name was OPET or something like that. And you have been rather proud of that. But we see that right now, the Turkish currency is rather weak. So is there a risk for write-down at some point in time in your future?

I don't see a risk of write-down in the current situation. The Turkish currency is very weak. But in local currency, our joint venture has a great performance. Just due to translation, it's positive. But due to translation, of course, less earnings are in our books. But there is no, at the moment, risk at all for impairment or write-down.

[Operator Instructions] Our next question is from Isha Sharma from MainFirst Bank.

Isha Sharma from MainFirst. I have 2, please. If you look at the margin in Q3, it has improved to 14.7%. And we've last seen this in 2018. My question would be, how much of this is the cost relief? Just an indication would be great as well. And how much of it is just the underlying operational development? That would be the first one. And then on the second one, if you could help us with the guidance. I do understand that the visibility is very low. And in general, we have seen other companies also being cautious on guiding for Q4. So do you include the current situation of light load across Europe within your guidance? And if the situation pertains, do you think this is more reasonable? Or is there some bond factor?

Yes. Thank you, Isha, for your questions. Looking at our EBIT margin in Q3, of course, part of that is our cost savings, as we had a headcount freeze, as we have more or less no G&A expenses at all. And we had, in the third quarter, still some positive effect from like short-time working or other similar programs. But more or less, all of them ended in August slightly one or the other, but minor still was in September. So it is more -- our margin is, I would say, dominated by our like operating performance and the demand, which we've seen in the third quarter. Looking at our guidance, yes, we have low visibility. That's unchanged. There are 2 more months to go. We had a very strong September. We have quite -- our performance in October is not bad. And today, we don't have any like lockdowns or shutdowns of companies or like economies. It's more a question what happens with consumers, what they do. And the situation today is different compared to the situation we had in March and April this year. Therefore, as from today, the impact -- or the impact -- negative impact we expect out of that should be less than in the beginning of the year. And to -- like to reach our guidance, we need in the fourth quarter an EBIT of around EUR 70 million.