Fuchs Petrolub SE
Q3 2020 Earnings Call Transcript

Published: 3 Nov 2020

[Operator:]

Dear, ladies and gentlemen, welcome to the Analyst Conference Call of FUCHS PETROLUB SE. At our customer's request, this conference will be recorded. As a reminder, all participants will be in the listen-only mode. After the presentation, there will be an opportunity for the analysts of FUCHS to ask questions. [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.

[Thomas Altmann:]

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 fact sheet, 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.

[Dagmar Steinert:]

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 effect. Let me start with Chart #2, our group sales reached €1.7 billion that's 11% below last year. EBIT came in at €203 million, that's 17% down year-on-year. Our free cash flow developed positively. The free cash flow before acquisition was up significantly year-on-year at €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 €100 million. And of June this year, it was minus €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 €90 million in our future, €14 million less compared to the previous year. We are looking ahead to the remaining months with cautious optimism and has therefore also revised our forecast for the full year 2020. Based on the assumption that there will 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 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, this growth in China and a recovery in Europe and America. In the third quarter, sales reached €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 remember, organic growth in Q1 was minus 6%, in Q2 minus 23%, and in Q3, it was minus 4%. The positive contribution from acquisition was offset by negative currency effects. If we look at the regional sales growth, that's Chart #5, starting with EMEA, EMEA records 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 UK, France, Spain, Italy and Germany are most affected. Coming to Asia Pacific, this region records a minus 5% decline in sales to €509 million. Asia Pacific posts 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 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 declines 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 effect 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 €57 million or 8%. Our cost savings take effect. The other function costs are reduced by €14 million year-on-year, despite an increased cost base as a result of acquisition. Adjusted for acquisition, our savings come to almost €30 million. The at equity income is in previous year's level with €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 was in EBIT of €102 million is down around 22% year-on-year. Asia-Pacific is up 4% year-on-year. There's an EBIT of €70 million. North and South America was an EBIT of €29 million, produced earnings declined from minus 50% in the first half to minus 29% after 9 months. On Chart #9, you see the quarterly EBIT development by region. 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 UK. Germany is also significantly impacted. The at equity income is at previous year's level. Asia-Pacific post a very good third quarter exceeding the previous year. The positive development is proven by a strong third quarter in China. We see declines in earnings particularly in India and South Korea. North America reports earning 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 acquisition is €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 Texas. We have a strong balance sheet structure and a secure financial position. Just to remember you, net cash adjusted for lease liabilities amounts to €97 million after minus €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 €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:]

Thank you. We will now begin our Q&A session. [Operator Instructions] One moment please, for the first question. Our first question is from Max Mayer from Baader Helvea. You may begin your question, sir.

[Markus Mayer:]

Yeah, good morning. Markus Mayer, Baader Helvea. A few questions, if I may. The first one is on this recovery momentum you've seen in the third quarter, in particular in September. 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 other questions one by one.

[Dagmar Steinert:]

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 a growth from our first tier supplier as well as metalworking.

[Markus Mayer:]

Okay. And then my second question would be on the net capital reduction, the net capital to sales ratio is now back to more or less back to levels we have seen in 2014 and 2015. Is there further downside than more through [sophisticate service] [ph] went down to this 2014 level or is this now a level where you say we are quite satisfied with this and the downside might be only limited.

[Dagmar Steinert:]

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 this difficult time, because if you've got these, yeah, changing demand, and these, yeah, challenges regarding the supply chain, where you might to - yeah, have a 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's like - mid- or long-term, of course, it's not a level I'm happy with. But at the - for the time being, it's great to have this achievement.

[Markus Mayer:]

Okay, thank you. 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 is this - has the M&A window again opened and that have been due which have been in the pipeline for years?

[Dagmar Steinert:]

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

[Markus Mayer:]

Okay, thank you so much.

[Operator:]

Thank you. Our next question is from Martin Rödiger from Kepler Cheuvreux. You may begin your question, sir.

[Martin Rödiger:]

Yes, hello, good afternoon. I have, yeah, 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 cost less important?

[Dagmar Steinert:]

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, it's half raw material prices and half product mix as a rough assumption, because it's always very difficult in this times, 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 these 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 very high net operating working capital. And in the third quarter when we produced and sold, of course, used quite a portion of this raw material, 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.

[Martin Rödiger:]

It helps a bit. I mean, on the currency, 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 dollar weakness is a net positive or a net negative for you?

[Dagmar Steinert:]

Well, as we've already said, what you see in sales, of course, that's a translation. That's just a translation effect what we report as currency. 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 on the supply chain, what we mainly by U.S. dollar linked and looking there, for instance, in Europe, of course, we benefit from a strong euro. Therefore, that somehow compensated, of course, the translation effect, which we see in the P&L.

[Martin Rödiger:]

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

[Dagmar Steinert:]

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.

[Martin Rödiger:]

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 right down at some point in the future?

[Dagmar Steinert:]

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 translations. 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.

[Martin Rödiger:]

Okay. Thank you very much.

[Operator:]

Thank you. [Operator Instructions] Our next question is from Isha Sharma from MainFirst Bank. You may begin your question.

[Isha Sharma:]

Hi, good afternoon. Isha Sharma from MainFirst. Thank you for taking my question. 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 lockdowns across Europe within your guidance? And if the situation pertains, do you think this is more reasonable? Or is there some downside to it?

[Dagmar Steinert:]

Yeah, thank you, Isha, for your question. Looking at our EBIT margin in Q3, of course, part of that is our cost saving, as we had a headcount freeze, as we have more or less no G&E expenses at all. And we had in the third quarter still some positive effects from like short time working or other similar programs. But more or less, all of them ended in August or slightly one or the other, but minor still was in September. So it is more - our margin is, I'd 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, the 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 like to reach our guidance we need in the fourth quarter EBIT of around €70 million.

[Isha Sharma:]

Sorry, I lost the line. All right. Thank you. Thank you so much. Just the last part where you said in the fourth quarter, you need to reach the guidance?

[Dagmar Steinert:]

Yeah, to reach our guidance for the full year minus 15% EBIT there we need like an EBIT in the fourth quarter of around €70 million. And that I just said the situation today is not really comparable with the situation in April, May - or March, April, May, this year. As of today, we don't have any lockdowns of industries or companies, all the shops are still open. Of course, there will be some negative impact. But we don't know do we see it in November already, maybe in December, or as of today, we are - we stick to our guidance, which we gave on 15th of October.

[Isha Sharma:]

Right. But as you've published in press release, it is a bit optimistically cautious, right? So there is a bit of caution involved in the…

[Dagmar Steinert:]

Of course. Yes.

[Isha Sharma:]

Yeah, right. Okay, thank you very much.

[Operator:]

Thank you. Our next question is from Axel Herlinghaus from DZ Bank. You may begin your question, sir.

[Axel Herlinghaus:]

Yes. Hello, and then, thank you for taking my question. I've just a little one. You said or you were talking about some bad debt provision in America. So could you please specify that a little bit?

[Dagmar Steinert:]

Yes. We had - in 2019, we had to write-off some receivables as one of our customers went into Chapter 11. And we had, I think, it was €2 million to €3 million, €4 million number in the previous year.

[Axel Herlinghaus:]

Okay. Thank you.

[Operator:]

Thank you. Our next question is from [Roger Bach] [ph] from Commerzbank. You may begin your question. Hi, [Roger Bach] [ph], you may begin your question.

[Unidentified Analyst:]

Hi, can you hear me? So thank you for taking my question. I have a question regarding your liquidity position. So I think that you have very solid balance sheet and a very good liquidity profile. Are you planning to keep it that way or for example, you maybe wanting to take more debt for business expansions or for both on acquisitions? Thank you.

[Dagmar Steinert:]

Well, if you like follow our liquidity development, year-end 2019, we had roughly €200 million, cash in hand, then we had our acquisition of Nye in January, where we spent, yeah, €95 million. And then, of course, we had our dividend payment in May with €134 million, therefore, we had to take some debt. And as we usually a quite strong in generating cash flow, we manage now to have again €100 million positive cash in our hand. And as this shows, if there are any potential acquisitions, which we like to do, it's no doubt, we are going to finance that. And on the other hand, we have our stable dividend policy, which is unchanged, which is not related to earnings per share or something like that. And we are committed to that. And yeah, that's, I think all I have to say to that topic.

[Unidentified Analyst:]

Okay, thanks. But are you planning to, say, like keeping a positive cash positions like net cash position? Or is it just like, if we - if you have to issue more debt for acquisitions, it's also be fair if you're in net debt position?

[Dagmar Steinert:]

Well, for me, it's also okay to have net debt position. If I have like a look on our balance sheet, of course, our cost of capital could be optimized, if we have a higher debt position, our pensions are more or less, fully funded. But first of all, you have to find a nice target or a lot of nice targets to come into a situation that we need to go into a net debt position to finance that.

[Unidentified Analyst:]

Okay. Understood. Thank you for your answer.

[Operator:]

Thank you. [Operator Instructions] Our next question is from Mr. Rolland from Bank of America. You may begin your question.

[Jean-Baptiste Rolland:]

Hi, good morning, Dagmar, and thank you for taking my questions. I just wanted to get clarity on 2 things. You first mentioned that you had some ticking up in the refill - the first fill business - sorry. Could you provide a little bit more clarity around whether you basically went on new platforms or new models, if anything was related also to sales, for example, in hybrid vehicles, which were recently a subsequent part of the EV mix in Europe? And second question related to raw materials, what should we expect the raw materials to be over the next 6 months? And how should that affect your gross margin? Thank you.

[Dagmar Steinert:]

Well, thank you for your question. Our first fill business, it's - we don't know into which like new platforms or whatsoever it goes as, of course, it is linked to - or if we sell first gear oil or engine oil to OEM, we don't know if it goes into a hybrid or not, because it's a combustion engine product. Therefore, that's not visible for us. But, of course, we know that we gain one or the other contract regarding e-mobility or that we are in the position of delivering lubricants for hybrid. And we have a lot of lubricants in our portfolio, which are related to a car, but have nothing to do with the powertrain, as it's not related to the engine. The raw material development, which we see, yeah, short-term is that we expect raw material prices to go up slightly. And, of course, as always, we have contractors' price variation clauses on the one hand, and on the other hand, it is our daily business to manage to, then, of course, pass this through to our customers. But that always has a time-lag between 3, 6 months. So if there's an environment of increasing raw material prices, it usually has a short-term margin squeeze effect on our net contribution. But then, of course, we pass it through. And we will see via margins again.

[Jean-Baptiste Rolland:]

Thank you so much. Can I just squeeze in an additional question about top-line? It's pretty clear what you you're expecting in terms of EBIT, given your guidance. But what sort of top-line evolution should we expect?

[Dagmar Steinert:]

Well, as these times are very difficult, we just felt quite confident with our, yeah, earnings number to give you somehow next number what you can expect for the full year. Looking at our sales development, of course, it may be a bit more difficult. But we are not so far away from the consensus number I think - and but I can't give you more details on that.

[Jean-Baptiste Rolland:]

Okay, very, very clear. Thanks very much.

[Operator:]

Thank you. As there are no further questions, I'll hand the session over to Ms. Steinert for closing statement.

[Dagmar Steinert:]

Okay, thank you. Please allow me some personal words, because today it was the last earnings call of my colleague, Thomas Altmann, for FUCHS, as Thomas is leaving us by yearend. He's looking for new challenges. Thomas, you have played a key role in shaping our Investor Relations work. It has been always a great pleasure working with you. Thank you for that and your significant contribution. And on behalf of the participants, I would like to say farewell to you. Thanks a lot.

[Thomas Altmann:]

Thank you.

[Operator:]

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