Fuchs Petrolub SE
Q3 2018 Earnings Call Transcript

Published: 30 Oct 2018

[Executives:]

Thomas Altmann – Head of Investor Relations Dagmar Steinert – Chief Financial Officer

[Analysts:]

Martin Roediger – Kepler Cheuvreux Markus Mayer – Baader-Helvea Ben Gorman – UBS Michael Schafer – Commerzbank Andreas Heine – MainFirst Sebastian Bray – Berenberg Knud Hinkel – Equinet Philipp Currle – DZ Bank

[Operator:]

Ladies and gentlemen, thank you for standing by. I’m Haley, your Chorus Call operator. Welcome, and thank you for joining the Fuchs Petrolub Financial Results Q3 2018 Analyst Conference Call. [Operator Instructions] I would now like to turn the conference over to Thomas Altmann. Please go ahead.

[Thomas Altmann:]

Thank you, Haley. Good afternoon, ladies and gentlemen. My name is Thomas Altmann, and I would like to welcome you to the Fuchs Petrolub conference call on the Q3 2018 results. With me on the call is our CFO, Dagmar Steinert. As usual, Dagmar will give you a short presentation, which is then followed by a Q&A session. All documents have been published this morning on our webpage under the Investor Relations section. I will now hand over to Dagmar.

[Dagmar Steinert:]

Good morning, ladies and gentlemen, from my side, and thank you for joining us. I would just like to jump in into Chart number two, where you’ll see our highlights for the first nine months. And as you can see, our sales significantly grew close to €2 billion, representing an increase of 5%. We see organic growth across all three regions, but the growth rate decreased in the third quarter. Still, negative currency effects are impacting our sales and EBIT number, but this declined during the course of the year. Coming to the EBIT, where you see an increase by 6% to close to €300 million, but this is including a one-off effect of €12 million, I will come later on to that. We updated our outlook a couple of days ago, and I will give you more details on that later. Turning now to the next slide, number three. You see the sales development for the year 2016, 2017 and 2018. And as you can see, each year is representing another step. Looking a bit more closely to the third quarter 2018 or to the third quarter 2017, these both quarters didn’t really meet our expectation. Coming to the next chart, our group sales for the first nine months. You can see that we report an organic growth of 9%. And as I said before, the organic growth rate decreased over the course of the year. And what we see as well that we lose 4% on the currency side. So we still have quite a lot of negative currency impact, but that came a bit down as well. I’m coming now to our overview of the regional sales growth. If you have a look at the region Europe, you can see that sales increased by 3%. And Europe after nine months is reporting over €1 billion. The organic growth is 5%, and we’ve seen an organic growth in almost all countries. In Germany, the growth rates decreased, and there, we’ve got, well, a bit less. It’s the German, well, OEM as well as our intercompany sales, which we sell to our Chinese daughter. Coming now to Asia-Pacific, Africa, where we report an organic growth of 15%. Here, we must say that this organic growth is – continue very high in Australia, South Africa and India. We still have high organic growth rate in China on a, well, I would say, high-single-digit percentage. But in the third quarter, the growth rate in China slowed down compared to the first half of the year. In the region Asia-Pacific, Africa, we are losing 5% on the currency side. If we have a look at the region, America, North and South America, you can see that there, we’ve got strong organic growth in North America. For North and South America, we report 11% organic growth. But we more or less lose everything on the currency side, so our organic growth is more or less totally offset by negative currency effects. Now I would like to come to the income statement, and it’s Chart number six. And our income statement continues to be really negatively impacted by these negative currency effects, which come through translation. And that you will see more or less in every number. Another thing, looking at our income statement, which is, I would say, a bit special this quarter, is our equity line because there, you’ve got two impact

[Operator:]

[Operator Instructions] First question is from the line of Martin Roediger of Kepler Cheuvreux. Please go ahead.

[Martin Roediger:]

Thank you and good afternoon. I have two questions. First, on your EBIT margin in Americas and here, I refer to Q3 only. And it was quite soft, the margin, because sales were up nicely in Q3 on good organic sales pull, but earnings were down year-over-year as well as quarter-on-quarter. Can you shed some light on that? Is that all dedicated to the aforementioned – the previously mentioned higher logistic costs? Or is there also any time lag again from passing on raw material costs to customers? Or is that – is there also some impact from any idle cost from any, let’s say, lower utilization rates that you had in Q3 versus previously? This second question is on the EBIT margin in Asia in Q3. And here, I refer to before at-equity earnings because you explained in detail you had equity earnings in Saudi Arabia and in Turkey. So before at-equity earnings, the margin here in Asia was also not really strong. Can you also explain that? What is the reason for that? Also here, some utilization rate effects or some pass-through effects from raw materials, that will be very helpful.

[Dagmar Steinert:]

Yes, thank you for your questions, Mr. Roediger. I will start with the first one, with the EBIT margin in Q3 in America. In Q3 in America, we – well, we faced higher logistics cost, but we did it already in the first half of the year, but they increased. And we’ve got – yes, smaller amount of – like, one-off because we had the ransomware attack in North America. So our whole IT landscape was affected, and we had to work on it. We had to replace things. So therefore, we had some, I would say, yes, one-off costs. And then, of course, we see the currency effect in South America. And if you just have a look at the, yes, quarterly sales figure, you’ll notice that in North and South America, we are a bit above €100 million. But then, if we face, like, €1 million more cost, of course, it really affects the rate. And in the year 2017, there was a slightly positive effect in it. So that’s how it is. In the region Asia-Pacific, Africa, before equity, our margin – our EBIT margin before equity in the third quarter came down to 14.1%. In the first half of the year, it was slightly above 15%. And there, of course, as I’ve said, we see a bit of a slowdown in – especially in China. We still got really nice organic growth rate, but it’s slowing down. And hence – of course, our cost base is still there. It affects somehow the margin. And due to the currency, of course, we face there some higher raw materials as well. And of course, there’s always the question of product mix.

[Martin Roediger:]

Thank you.

[Dagmar Steinert:]

You are welcome.

[Operator:]

The next question is from the line of Markus Mayer of Baader-Helvea. Please go ahead.

[Markus Mayer:]

Yes, good afternoon. Three questions, if I may. Maybe it’s best if I ask them one by one. The first one is on price increases – new product price increases. When I look at your gross margin, it still doesn’t look like that you had been able to pass on the higher raw material costs in the third quarter. So when do you expect that this is again happening? As I think you said at the end of September that your raw material costs basically remained flat over the last four months. So therefore, we only expect the effect on gross margin. That’s my first question.

[Dagmar Steinert:]

Well, thank you, Mr. Mayer. In our third quarter, we are missing volume as the sales figure slowed down. And if you miss volume, but you still got, of course, full depreciation and production costs anyhow, it affects a bit of the margin. But what we see as well due to negative currency effects is slightly increasing raw material costs. And therefore – and still, there are some price rounds out there, which are not reflected in our figures.

[Markus Mayer:]

Then my second question is on your new guidance. The lower end of this organic growth range means specifically that you expect no growth – no organic growth in the fourth quarter. If I assume that you might have had a different price effect running into Q4, which doesn’t mean that you basically would have run by 3% volume decline. Do you expect you can see kind of destocking on fourth first quarter? Or why this caution – where can this caution come?

[Dagmar Steinert:]

Well, you know that we’ve got a very short visibility in our, yes, sales, and that we don’t have any, like, order backlog. And our order intake is always with a really timely flow notice. And we’ve seen a weak September. And we see our customers with all these uncertainties out there. And today, looking at – well, especially our third quarter, looking at September, we are a bit cautious. And therefore, we said that our EBIT before one-off should be on previous year or is expected to be at previous year, and our sales will come down as well. Yes, we expect a very weak fourth quarter.

[Markus Mayer:]

Okay. And then my last question is on the free cash flow. Your presentation showed free cash flow, including the sector’s divestment. Could you remind us what the cash flow effect of divesting was? So the effect is clear, but what’s the cash flow effect?

[Dagmar Steinert:]

The cash flow effect was €15 million. €14 million. €14 million or €15 million. €14 million, I think.

[Markus Mayer:]

$14 million okay thank you.

[Operator:]

The next question is from the line of Ben Gorman of UBS. Please go ahead.

[Ben Gorman:]

Thanks very much. Just a few from me. Could you just clarify a few more items of the cost in the Americas region? You mentioned the one-off, specifically the ransomware attack, I just wondered whether you can quantify that at all? And then whether you could quantify the logistic cost inflation year-on-year as well. I’m just trying to gauge sort of how sensitive you could be from fluctuations in FX into the end of the year in Latin American region. That’s the first question. The second one is staying on the same region actually and just wondering about any mechanism you might have in terms of dollar pricing in LatAm. So how much of the strong organic number is simply sort of a mechanical offset to the weak FX? And then, just switching over for the final question on autos in Asia. Can you give us an idea of – you mentioned still growing in China. Is that true of Chinese autos still growing as well? Or is the rest of the business sort of making up for a negative print – and potentially negative print in China at the end of the year, especially given the incentive announcements this week? Thanks very much.

[Dagmar Steinert:]

Yes. I will start with the last question regarding China and our growth. China is still growing even if it slowed down, and we are growing there across all industries. So we are still – compared with the previous year, we are still growing in automotive industry as well. Coming now to our cost in America in the third quarter. Well, anyhow, the logistic cost in America increased somehow, I would say, around 10%, and that’s quite a lot. Looking at the region Americas, it’s dominated by North America; and South America is 5% of the – roughly of the whole region. And there, of course, it’s quite – it’s weaker. And there, higher currency effects are in it. So as I said, it’s dominated by North America and the…

[Ben Gorman:]

Sorry, was that 5% of the whole region in South America? Just wanted to the numbers right.

[Dagmar Steinert:]

Yes, yes. Yes, it’s right. It’s Brazil and Argentina. Because Mexico, for us, is – counts to North America. And in the third quarter, we had this, as said, ransomware attack. And of course, one-off costs to fix it. And it’s not only the one-off cost, which you – where you have the cash out for consignments and everything and one or the other, new hardware. But of course, it’s – overtime for your own people and everything. And well, I can’t really or I don’t want to give you really now a number. It’s – yes, looking at one quarter, it’s got an impact on the margins, but I wouldn’t like to, like, adjust it or something like that.

[Ben Gorman:]

Maybe I can just follow up on that quick point here if that’s all right. And is there any chance of sort of insurance payout on the back of that? Or is that’s a cost and no expectation of getting any back?

[Dagmar Steinert:]

No. They are now insurance costs, and that’s gone. But we’ve seen – we’ve been quite happy that it’s happened on a Friday. So we already have the weekend to work on to fix it and didn’t lose too many days of – working days where we even couldn’t be able to sell anything.

[Ben Gorman:]

Okay, great thanks. Thanks for clarify.

[Operator:]

The next question is from the line of Michael Schafer of Commerzbank. Please go ahead.

[Michael Schafer:]

Yes. thanks for taking my two question. Michael Schafer here from Commerzbank. Sticking to Americas, I just – still fresh in my head, so what – where the sequential decline in profitability comes from. I mean, you lost €2 million of EBIT quarter-over-quarter. You’ve shown a recovery until the second quarter and now you posted something like 12% of organic sales growth in the third quarter. So are we talking about €2 million of extra costs here associated to the IT recovery because all the other things, I mean, logistics costs have been higher. Also H1, rather – I’ve seen the relief on the FX side than the burden in the first – in the first half or at least the burden was not so high in the third quarter. So some sort of additional clarification would be helpful. Is it kind of negative mix effects we might have seen in the third quarter? And then what does this mean also for the fourth quarter? This will be my first question. And the second one is on your guidance, and what does it mean basically? Now you look for something like a flat EBIT on more operational basis. Does this also mean that we should translate this into rather flattish dividend for the year – for the fiscal year 2018? Those will be my two questions. Thank you.

[Dagmar Steinert:]

Yes, thank you Mr. Schafer. Well, in Americas or North America, the one – or the costs regarding this ransomware attack are, yes, less than €1 million, but as I said, I can’t give you a precise number. And of course, as always, if you look at these quarters, you’ve got question of cutoff. So some hundreds, thousands more here or less there, if it’s not that precise. And it’s always very hard to have a look just at three months. Product mix, of course, is always a question if you look at a month or at a quarter. And therefore – but our expectation for the fourth quarter for the region America is in line with the development of the third quarter. That means we expect, well, less slowdown compared with Europe or the region Asia-Pacific. But our expectations for the fourth quarter are not that good today. Well, we will see. The impact of our adjusted guidance on our dividend policy, as we’ve got this day, this dividend policy and we always say that there won’t be a cur in dividends even if there would be a year, yes, making less than previous year, something like that. We already said talked the dividend together with the supervisory board in March when we’ve got our full year figures. But if you look at our dividend history and how we increased our dividend year-by-year compared with the increase in earnings, our increase in dividends used to be even higher than the increase in earnings. So that’s all I’m able to tell you, yes, regarding that topic today.

[Michael Schafer:]

Okay, thank you.

[Operator:]

The next question is from the line of Andreas Heine of MainFirst. Please go ahead.

[Andreas Heine:]

Yes, Maybe a couple of short ones. Do you have any experience how fast you would see this tax cut impact in China in your own books? So if there is really a kind of revitalization on the automotive market in China, would you already see this in your books this year? That’s the first question. And coming back to North America, you have now in Q4, if my math is right, a tailwind from currencies. And it is still the region with the highest organic growth, so I would assume that at least in this region, you would be able to show in Q4 rising earnings. Can you comment whether that – if this true? And maybe lastly, from your comments on China and Europe, it is specifically the automotive industry where you are concerned about. Is the automotive industry from your mix perspective, most interesting, more interesting than other industries so that you have the slowdown in the automotive industry also a negative mix in margin impact? These are my questions.

[Dagmar Steinert:]

Well, starting with the automotive industry. As the automotive industry accounts for 29% of our customers, of course, it’s an important business for us, but it’s not, I would say, dominating our business. And we’ve seen there a slowdown in Germany. We’ve seen there a slowdown in China as well. And – but the adjustment of our outlook is not only regarding the difficulties in the automotive industry. It’s as well the overall uncertainty regarding economic situations and this increasing, yes, I must say, global trade dispute where nobody really knows how much the impact will be. Then of course, there’s still this pending Brexit, where nobody knows how it comes out. And so there is so much uncertainty out there, and our customers are affected. And as you know, there are lots of profit warnings out there. Of course, we expect one or the other impact on our numbers and our figures as well. In China, well, we are – yes, we might be a bit cautious, but we don’t expect in the fourth quarter to – yes, to come back to the gross level we’ve seen in the first half of the year. And then you had one more question regarding the fourth quarter in America, but I lost it somehow. What was it?

[Andreas Heine:]

Yes, that basically now you have a tailwind, so you were correctly referring that all of your organic growth was lost with the FX headwind. Going into Q4, you should have now a tailwind, having in mind that Latin America is only 5% of your sales where you have still quote some headwind. But the U.S. dollar should be, on a year-on-year comparison, a tailwind in Q4 and you have strong organic growth still in this particular region. And having in mind that the margin squeeze in Q3 was more caused by one-offs, I would assume that then you have here quite a nice plus and then quite some minus in the three other regions.

[Dagmar Steinert:]

Well, let’s wait and see how the currency develops further because yes, there are always uncertainties if the President of the United States announces something. And of course, if we have a tailwind from currencies from the U.S. dollar, well, that of course affects the, yes, raw material pricing in other countries so – which are not – which don’t report or – in U.S. dollar. And this – there we’ve seen – yes, I wouldn’t say a decoupling, but the currencies developed like a bit different. So I would assume tailwind and headwind might set off.

[Andreas Heine:]

Okay thanks.

[Operator:]

[Operator Instructions] The next question is from the line of Sebastian Bray of Berenberg. Sebastian Christian August Bray

[Sebastian Bray:]

I would have three, please. The first concerns the splits between price and volume growth expected to be moving into Q4. I think some of the prior questions focused on margin development and the lag in passing through price and kind of passing through raw material increases. Are you finding that over the coming quarter or 2, it would take longer to pass through pricing increases because some customers are showing volume weakness? That’s my first question. The second one is on the free cash flow guidance for the full year. From memory, you’ve had quite a strong performance in the first nine months. And I think the guidance would imply you only did €20 million or so of free cash flow in Q4. Are you guiding essentially for an inventory build in the hope of demand coming back into the market from Q1, Q2 next year? And finally, a quick question on the run rate that you are seeing in industries ex automotive into 2019. Is this low – leaving aside macroeconomic uncertainty, is the main reasons you have had to revise your guidance down solely related to auto? Or are you also starting to see weakness in other industries? Thank you.

[Dagmar Steinert:]

Mr. Bray, thank you for your questions. First, to come to your questions between – the split between price and volume and our expectations for the fourth quarter. As we’ve had these slowdown in sales in the third quarter, I wouldn’t expect much on a volume growth in the fourth quarter. And regarding your question about our cash flow. Yes, our free cash flow after nine months is €120 million. And previous year was €140 million. So as you said, it’s correct, €20 million more to come. But we see as well in the fourth quarter, €60 million – or between €60 million and €70 million CapEx to come. And having that in mind, I think it’s – our outlook is quite reasonable regarding that figure. And I don’t want to stress the automotive industry. Our updated outlook, of course, is not totally relying on the development of the difficulties of the automotive industry, but that was the main driver in the third quarter. But we see, of course, uncertainties and weakness overall.

[Sebastian Bray:]

Thank you very much.

[Operator:]

We have a follow-up question from the line of Martin Roediger of Kepler Cheuvreux. Please go ahead.

[Martin Roediger:]

Thanks. Just very minor questions. The equity participations assets you have sold in Q3 in Europe, this joint venture, where you got €12 million onetime gain, can you name these assets you have sold? Secondly, looking at your organic sales growth in Q3, which was 6.5%, is it fair to say that all of this organic sales growth in Q3 was pricing and there was basically no volume growth in Q3? And looking – I see that your CapEx is steadily increasing in your view but also when I look at sequential data, there is a nice acceleration in CapEx. However, your depreciation charges seems to be stable in Qs 1, Q2 and Q3. Where does that come from, this decoupling? Normally, D&A charge should increase in line with CapEx increase. Or did I mishear?

[Dagmar Steinert:]

Mr. Roediger, you don’t miss anything, and thank you for your question. Starting with the depreciation. As there are still projects going on, for instance, our new plants in China. So we see there the CapEx. But we won’t depreciate before we start the production. Another example, our expansion of our plans in Kaiserslautern, where we just started now with the depreciation, so you don’t find it in the numbers of the first quarter or in the nine months completely. And overall, depreciation came up in the third quarter. But the full effect of our CapEx, where we’ve seen – of the CapEx 2018, where we’ll see depreciation, of course, in 2019, as it always is. In your question regarding our equity, the company where we sold our share. That was the Swiss MOTOREX business, where we had a joint venture with BUCHER, and we sold the share to our partner. And just to give you some more insight, the yearly at-equity income from that shareholding was between €1 million and €2 million year-by-year.

[Martin Roediger:]

The question on volumes and price in Q3?

[Dagmar Steinert:]

Volume and price in Q3. We had some volume growth in Q3 but we see less in Q4.

[Martin Roediger:]

Thank you very much.

[Operator:]

Your next question is from the line Knud Hinkel of Equinet. Please go ahead.

[Knud Hinkel:]

Yes, good afternoon, thanks for taking my questions. I’ve got three ones, please. The first one is my thinking was always that automotive has below-average margins with you. And so I expected margins to go a little bit up when the share of automotive business fell. So where – am I wrong here? Maybe you can help explain that. Secondly, looking a little bit through Q3, 4, would you say that growth number as you guided in Q4 would be also a possibility to exist or to prevail in the next year, in the next fiscal year? And thirdly, on CapEx. You had said that you will have €130 million instead of €140 million as guided before. Is that a delay or should we add this number to the CapEx guidance you gave for the next year?

[Dagmar Steinert:]

Okay. Thank you, Mr. Hinkel, for your questions. I will start with the CapEx one. That’s, like from today’s expectations, just a delay. And we stick to our projects, we will complete them. And we stick to our investment initiatives. And regarding numbers for the year 2019, we are in our budgeting process. And as usual, we will give you more detail and our outlook in March 2019 when we publish our full year report. So therefore, I can’t tell you anything about 2019 today. Your question regarding automotive margin. Yes, in general, regarding the gross profit margin, usually our automotive business has lower margin compared to the industrial business, where we see more costs in the following lines in the P&L. But that’s still reliable. But just like short term, looking at the quarter, looking at quarterly earnings, of course, you don’t see that impact somehow immediately. And I mean, looking at our sales figure, we didn’t drop our sales drastically – or it slowed down, but it’s not an effective rate.

[Knud Hinkel:]

Okay. Thanks.

[Operator:]

We have a follow-up question from the line of Markus Mayer of Baader-Helvea. Please go ahead.

[Markus Mayer:]

Two questions remaining. One is in Brexit. What kind of effect do you already expect in the fourth quarter on your business? And how big is your UK. exposure as far as it would’ve been – or would be relatively? And then my second question is regarding of your underutilized balance sheet. After now, your share price shed by nearly 20%, and you are – perhaps not a good year. Today, you have to pick up your CapEx cycle. Is – are now share buybacks an option for next year? That’s my second question.

[Dagmar Steinert:]

Well, our UK exposure is, I would say, around 5% of our whole business regarding sales.

[Markus Mayer:]

Of the whole group? Or perhaps some of the group?

[Dagmar Steinert:]

Yes. So that’s not that much. And regarding our investment or, yes, initiative and all the things we still have ahead of us, I would say let’s work on our business, our CapEx program and everything. And from today’s point of view, I don’t see the room for a share buyback program and – but we will see how things develop.

[Markus Mayer:]

Okay. Thank you.

[Operator:]

The next question is from the line of Philipp Currle of DZ Bank. Please go ahead.

[Philipp Currle:]

I have two – one – or one question, sorry. To what extent does the development of the – your intercompany business affects the business in the region Europe in Q3? I mean, you mentioned that the car demand in China is declining and your Chinese business had a declining growth rate. In the past, the intercompany business had a significant effect on the growth rate in Europe. So that declining car demand should obviously affect your intercompany business and, therefore, your business in Europe. Thanks for taking this question.

[Dagmar Steinert:]

Thank you for your question. In Europe, we had – in the first half year, in Q1 and Q2, we had quite, I would say – regarding Europe, highly organic growth. And I always pointed out that part of this organic growth is due to intercompany business, where we’ve got our third-party sale in China. And in the third quarter, as especially Germany, slowed down; and in the third quarter, region Asia-Pacific as well; and China. We see in Europe both. So we report 1% organic growth in Europe, and that’s due to less intercompany sales and due to less third-party sales in Europe.

[Operator:]

In the interest of time, we have to stop the Q&A session. I hand back to Thomas Altmann for closing comments.

[Thomas Altmann:]

Thank you, everyone, for joining today. Our next call will be on the full year 2018 results on March 20. Our preliminary figures will be published on the 21st of February. I wish you a good rest of the week. Bye.

[Operator:]

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining in, and have a pleasant day. Goodbye.