Fuchs Petrolub SE
Q4 2017 Earnings Call Transcript

Published: 21 Mar 2018

[Executives:]

Thomas Altmann - Head of Investor Relations Stefan Fuchs - Chief Executive Officer Dagmar Steinert - Chief Financial Officer

[Analysts:]

Knud Hinkel - Equinet Bank Daniel Buchta - MainFirst Bank Michael Schäfer - Commerzbank Heiko Feber - Bankhaus Lampe Ben Gorman - UBS

[Stefan Fuchs:]

Good afternoon and welcome to our Analyst Conference. I’m more than happy to be here with Dagmar Steinert my colleague on the Board, our CFO. Also together with [indiscernible] and with Thomas Altmann. As usually Dagmar and I will go through a presentation and later on we are more than happy to entertain a discussion with you. During the discussion, please wait until you get a mic on your hand that because we have people on the telephone and then it’s easier to follow. We have published our data today there was no surprise. You have seen the numbers more or less before. I think there was a more specified outlook and a little bit more need to our CapEx planning, but first of all summary slide. we have been really happy about the year 2017. We had a sales growth of 9% which was really almost all by organic growth and we have reached a new level of €2.5 billion. We had strong organic growth in Asia Pacific, Africa and the Americas. We had a little bit of external growth in North America due to acquisition made in the year before and we had a slight negative currency effect. Our EBIT grew under proportionate by about 1% to €373 million. The reason behind the under proportion increase is mainly margins and higher expenses as we plan them to our investment program. The earnings per share went up by 4%, over proportionate most of the over proportionate reasons behind is the U.S. Tax Reform. So in the year 2017, we had some book gains due to our deferred taxes and as of 2018 we will see some real savings due to a lower tax rate in the U.S. we have proposed a dividend increase of 2%, the 16th dividend increase in a row to our shareholder simply early in May and we have specified the outlook 2018 to call sales 3% to 6% and earnings 2% to 4% and to generate a free cash flow before acquisitions at last year’s level. As in every year, I show you quickly the quarterly development on Slide number 3 with regards to sales, so we had a very strong start to the year 2017 in quarter one. We also had a very good quarter two and for us the quarter three was a little bit weak last year. So we always know notice that during different years there is always one quarter which is not as high as ours. So in the year 2017 that was quarter three and we see that the same development on Slide number 4 on the EBIT development. It is on start in the year 2017, good second quarter and then a weaker third quarter and again regular normal fourth quarter to come at the end of the day to the increase of €2 million or 0.5%. For you, we made a summary on our strategy. The name of the game for us is profitable growth. I think we have enormous potential if we are able to internationalize our sales worldwide. That means nothing else than to take the entire product portfolio which we have in countries where we have double-digit market shares to other large growth countries where we historically have focused on only one of two of our niches or product applications. And then therefore, it is easier set and down. We need educated sales people, we need R&D people, we need product managers. But we have clear plans with global project leaders and teams around to internationalize our basis by organic growth. This does not mean that we will pass any acquisition potentials, but we have an internal plan which we follow up. We have the capabilities to manufacture locally in 33 plants and I think that’s a big asset we have. What we see with sales of about €2.5 billion now, some of you, like Dr. Müller, he knows us with €1 billion and then we came to €1.5 billion and then we came to €2 billion, now it’s €2.5 billion. We need global standards. We need global processes and we need a global presence appearance. That is very, very clear and we welcome that global standard is mainly with regard to IT, but also through manufacturing equipment. As you know the claim of the Company is lubricants, technology and people. Our people are our backbone. We are now with more than 5,000 employees. Very important today in the digital world is the employer branding to be really the same all over the world. The culture is important. Our culture still spins around our five core values, like trust, respect, reliability, integrity and creating value. But it’s also important to see that we called people by 40% over the last five years, through acquisitions and organic growth plus we also had some fluctuation, it means you always have to on board all the new team members into our own culture and have to develop ourselves. Talent management is important, so we have global talent pools, every two years with around 50 young talents we develop on our own and learning is also very important part of our HR management. We all know about the disruptions, e-mobility and digitalization. To digitalization, I will come in a minute. E-mobility is very important for us. I personally believe there is a hype in the politics and in the press. E-mobility is an issue which will not go away, it will increase. But for me, the combustion engine and the diesel engine will not disappear in 10 years time. There will be clearly hybrids and other things, but our world will change. So we have dedicated R&D teams. We have dedicated product managers just to make sure that we have [antenna] (Ph) on the e-mobility side. All-in-all we want to be an agile network structure. So if you think back 10 to 15 years you had a country MD and all the communication to the headquarter was for him or her and today we have global network. So our R&D people talk to each other without any hierarchies, our purchasing people, our marketing people, our IT people that puts quite some stress in the organization, but I think that’s what we want to have to be an agile network based on our common values. We have a made a mini acquisition last week, just to answer that question before it’s raised, there are now meaningful sales behind FluidVision. But FluidVision was a small piece of a puzzle to our digital world. So first all the lubricant for our customers remains to be a black box. We always say the lubricant is the like the plug of an engine. And people would like the lubricant to talk, because the lubricant experience a lot of stress in the machine with regard to heat, ware, et cetera and then the question is how can we make the lubricant talk? First of all, we need to get a sensor into it which is easier in some of metal working fluids, it’s more difficult in a car engine. So first of all, this FluidVision gives us a technology to put in a sensor into the fluid. The sensor without any wires involved can measure three different data and submit it to us and to our customers and we can recommend immediate actions and our customers and we can make some trend analysis out of it. So far, our sales people went to the customer once a week, take a sample, send the sample with the overnight carrier to our lab, then we make a lab testing then we transmit the data via e-mail back. So I think that’s more modern world and then that helps us clearly to make one more step if created on own company [indiscernible] as I told you last year and then it’s just one piece of the puzzle they can now utilize to take onboard for other world regions. So far from my side, I give it back to Dagmar now, I will come back later before we go into our question round.

[Dagmar Steinert:]

Thank you. Today we published our annual report and as you can see the title as New Thinking coming from two years ago, growing together. Last year, it was in motion. So that somehow reflects our way the Fuchs Group, is moving or is moving forward and the rates reflecting our culture. But now let’s get a bit deeper into facts and figures. As you can see here on chart number seven, the Group sales, 2017 was a successful year for the Fuchs Group. We achieved a strong organic growth in all regions and our growth rate of over 9% is similar to our organic growth. This organic growth was mainly volume driven. The external growth took part in North America. These two smaller acquisitions in 2016 and on the currency side, we lost what we gained on the external growth side. The development of the currency change during the year in the first half of 2017 we had tailwind and in the second half we faced headwind. Now I would like to tell you something about our sales by customer location. These regions are not similar to our segment regions, to our segment reporting, because we are talking about sales by customer location. As you can see we face double-digit growth in Asia-Pacific, Africa as well as in Americas and the proportion of sales in these two regions increased while the proportion of European sales decreased from 54% to 51%, but nevertheless in Europe we had growth as well. If you now just keep this €1,262 million sales by customer location in Europe in mind, then I will come to the next chart where we have got the regional sales by segment. Here you can see if you look at the figure for Europe that is €1,515 million and that means that there are roughly €250 million which are produced in European companies, but shipped outside Europe. Two-thirds of that is going to Fuchs Company, so it’s intercompany sales which is eliminated in the consolidation and there you can see that is number increased by roughly €50 million and of course, there are additional sales which go directly from Europe to overseas customers. What else you can see here, we have got great organic growth not only in Europe, but as well in Asia-Pacific, Africa with 20% and Americas with over 9%. So overall for the Group, it’s a plus of 9%. So what about the gap between sales and EBIT, our earnings, our EBIT is on the previous level increased by €2 million and what are the reasons for that. You can see it here on the chart number 10, on the raw material side we faced price increases which we are only able to pass on to our customers with the time lag. Then we have changes in the product and customer mix in the region. Due to our higher investment we have increased scheduled amortization and depreciation of €6 million in 2017. We had to do an impairment of goodwill in our Swedish company with €6 million and then we had some gains with €4 million on a reversal of write offs or write downs of trade receivables. So overall we faced higher cost base not only on the depreciation side, but as well on IT cost and normal increases on the wages and so on. If we have a look at the earnings or at the EBIT by regions, we can see that Europe is below previous year. There of course the €6 million impairment been included. So if you adjust that it’s still below previous year. We had lower earnings in UK due to the Brexit, because there we faced or due to the weak British pound, of course the prices for raw materials are much higher and in addition the translation of the earnings in euro of course than it was last. In Sweden we had a weaker operational environment and our German companies which had a really good growth on the sales side, but a big portion of that was for our inter-company deliveries to Asia, especially to China. There of course the margin is a bit lower. Therefore at the end, the EBIT of Europe is below previous year what you can see in the margin as well. Asia Pacific Africa showed an EBIT of €134 million compared to €127 million in the previous year and that was like the increase in sales there of course, but there is a bit of a like product mix as well. The share of product with our Pentazine acquisition which we did in 2015 increased a lot and we had really good development in Australia and South Africa. It’s a mining business and that reflects the figures there. In Americas, we have €3 million as our previous year and that’s not only due to the acquisitions which has been quite smaller, but again to a better development in North America and slightly better development in South America. If you have a look at the figure holding consolidation, it’s on the same level as previous year, in former years that in quite a smaller number. I’m coming now to the income statement. There of course we talked about sales, about the EBIT, but if you have a look at the gross profit there is reflected the higher raw material prices as well a portion of the higher depreciation due to new plans which we started to depreciate in 2017. The other function cost there included is goodwill impairment, there is R&D cost included which increased quite a lot and these are the function costs increased over proportional compared with the gross profit. Therefore, our EBIT before equity is just a bit more than 1% above previous year. Form our Company’s consolidated at equity, the biggest ones are our Turkish joint venture where we had some losses due to the currency and our Saudi Arabian joint venture there we faced just the overall weak economic environment. On the EBIT we talked about, it’s €2 million above previous year and earnings after tax are €9 million above and this gain of €7 million, two-third of that are due to the Tax Reform in the U.S. but that’s more like a bookkeeping gain because it was due to deferred taxes and therefore, our earnings after tax €269 million. Coming on to chart number 13, we have got a very solid balance sheet and cash flow and even with an increase in total assets we managed to increase our equity ratio from 72% to 75%. So looking at the goodwill, you can see this impairment of €6 million and some currency losses and of course you see this increase in 2015 which was due to the acquisition of Pentazine and Statoil. Coming to the net liquidity, or cash flow. On the net liquidity side, we increased our net liquidity from €146 million to €160 million. The cash flow is a bit weaker than in the year before and that’s the question of net operating working capital and the question of higher CapEx, higher investments. But I will give you some more details in a minute. Our investments into the future are of course not only our R&D expenses which increased by €3 million from €44 million to €47 million. But as you can see from 2013 there the number was €31 million, within the five years, it’s not double, but it’s more than two-thirds increase. On the CapEx side, you can see our growth initiative in 2016 and 2017, together it’s close to 200 and more than 200 and else - what you can see is the amortization and depreciation, that’s only here the scheduled ones which grow steadily up. Now we have got €53 million well not year-by-year because that number will increase in the upcoming years as well of planned amortization and depreciation. Our net operating working capital increased in 2017. Now we have got compared with our sales, a level of 2.3% compared with 21.8% in the year before and that reflects on one hand our increasing business. As you remember we increased our sales by 9% and quite a portion of that has been saved in Asia Pacific where we faced these increasing intercompany deliveries. These intercompany deliveries on one hand needs a longer time for transportation, but as well as higher security stocks. So we had to build up our inventories. That is as well reflected in the number of days which came up from 79 to 81. In total numbers, our net operating working capital in 2017 is roughly €550 million. On chart 16, there are some details to the net operating working capital and as you can see the name of the game is inventories, we are quite stable on the payable side and the receivable side, but on the inventories that is the dominating figure and in 2018 and 2019, we will see that, how we manage it. We will stay on a higher level of net operating working capital, because we need to localize production to bring that down. To sum it up, in the cash flow, we have got the numbers, earnings after tax are above previous year from depreciation, we got gain on the cash flow again, but we lose it on the changes in net operating working capital and of course in the higher CapEx. So at the end, our cash flow is €142 million after €205 million in the previous year. But this €142 million free cash flow before acquisition is still a high number. As you can see on the next slide, this free cash flow before acquisition is enough to payout the dividend to our shareholders and yielding to increase the net liquidity. So it’s still a high number and we are able to finance the whole CapEx, the whole investment we have to do out of our own funds. Our Fuchs Value Added which is our key performance indicator at least for remuneration of management, it was calculated by the EBIT as the earnings figure which is on previous year level and of course by the cost of capital and cost of capital of course is just the interest rate multiplied with the capital employed and due to increasing net operating working capital. And of course higher investments, higher CapEx, it’s not a surprise that the capital employed is steadily increasing and therefore our cost of capital went up by close to 8%. Therefore, our Fuchs Value Added is below previous year, but still again that’s a very high level and we earned quite a lot added value with our activities. To sum it up, in 2017, we had a successful year. Our sales growth was volume driven, it’s an organic sales growth and with 9% organic growth we exceeded our original expectation. The higher raw material prices and the other cost increase and changes in the product and customer mix lead to a less than proportional increase in our earnings. As I said before, raw material price increases can only be passed on with a time lag. We have seen a very strong international business and along with that we had higher inventories and increasing net operating working capital. Our investments, our CapEx increased according to our plan and the free cash flow is below previous year, but that is to some portion as well business related. Now, before I come to the outlook, we see again like on the highlight on the first chart that we proposed to the Annual Meeting, a 2% higher dividend payment and that reflects our stable dividend policy and I would like to ask you just to keep in mind that even if the earnings per share increased by close to 4%, so that was mainly due to bookkeeping issue and if you compare this 2% with the 0.5% increase in EBIT that reflect our confidence in the future. Now I would like to come to the outlook, what do we expect for the year 2018. Again, we expect sales growth, volume growth and organic sales growth and our sales should increase in the range between 3% and 6%. We have seen some slightly negative sales growth due to the sale of our activity in Dormagen which we sold in December 2017, but that’s just a smaller number, it’s around €11 million. On the EBIT side, we expect an increase in the range between 2% to 4%, that’s again as in the year before a bit under proportionate through the sales growth, but we still have of course a higher cost base due to our investments and we invest quite a lot in new and in existing plans. We invest a lot in R&D and of course in our people. In 2018, we expect our CapEx to reach a new all time high of €140 million and we will give you some more details to that number on how we expect the development of the CapEx in the coming years and this €140 million of course reflected in our expectation in the Fuchs Value Added and free cash flow before acquisitions in our outlook 2018. And with that, I would like to handover to Stefan again.

[Stefan Fuchs:]

Okay, talking about the CapEx normally you do CapEx either for growth when you add capacity or for replacements of old facilities or for more efficiency. I think one of the good examples for all three components is our new plant in Beresfield, Australia. This is on the east coast in the Newcastle. We talk about [indiscernible] where all the nice wines come from you think. This is I think it’s the largest coal loading harbor in the world in Newcastle. So it’s a heavy coal and then mining region so we supply there. Eastern Australia and up to Brisbane, Northern Australia. So our mining business was growing significantly. We do also for other industry products there, but we are now in the phase of shutting down our old plant which is in Newcastle which came with essentially acquisitions like I don’t know 35 years ago fairly old and worn-out plan. We have built a new plant here which is really state-of-the-art, the nice part is what I mentioned before we have global processes and standards. If you look on the blending technique and the manufacturing in Kaluga, Russia and to that facility its exactly the same. This is all stainless steel, it’s really very, very nice we have opened it about four weeks ago and as I said before that’s our new standard and it gives us more capacity for the growing Australian business. On the next slide, many times for the people who came here more often in recent years, I showed you the slide with our growth initiative 2016 to 2018 with certain bullet points underneath. We have said this is €300 million, it’s very difficult for us to plan CapEx out of one specific region, in the large sites to do CapEx operations is not so easy. But we were able actually to spend more in those three years which doesn’t mean that for the same projects we pay more, but we made newer projects. So instead of €300 million it will be €340 million. If you remember what Dagmar told you it was €200 million for the year 2016 and 2017 and we budgeted for a €140 million for the year 2018. It’s really difficult for us to say at the end of today is it at €120 million, €130 million or €140 million. If all goes right, it will be €140 million. One of the biggest parts this year will be the new plant in Wujiang in China and near Shanghai. It’s also investments in Mannheim in Chicago, Kaiserslautern, we started Swedish plants or there are some parts. I think the big news for all of you today was that we have specified the CapEx also for the next coming three years. We say it will be over €100 million per year again. So we have a calling depreciation rate year-by-year, Dagmar showed you was plus €6 million in the year 2017. So we will come closer to the number again in the year as of 2022, but we think the next three years it will be again somewhere just over €100 million per year. Mainly emphasis will be Germany, China and United States, our three largest markets plus obviously all other markets like UK, if we do something, or in Brazil if it would ever come up or in Russia as we have plan. So there will be some other investments, but the key emphasis will be on our three main plants or main countries, Germany, China and the U.S. where we also want to have our manufacturing hubs for the regions. Following 2022 onwards, we think it will be coming back on par of our scheduled increase annual amortization/depreciation. I think for me this is really good news, because we continue to invest and we have lot for example planned for a 9% growth in 2017 and it’s really good to cater for future growth. It’s also good for technological changes and the changed product mix. For example, our OEM specialty grease plant in Chicago is geared more towards the e-mobility scene in the future with more grease applications in the car. We will build a similar thing in Yingkou in China which is also part of that 2019 to 2021 investment. So we have somehow tried to show that in the graph, you see here our investment for the years before was around the €50 million line and we always told you it will go back to somewhere around €50 million. But we are no longer €1.5 billion so within seven years we went from €1.5 billion to €2.5 billion. So also our maintenance depreciation is more than €50 million and that is going to go up to €70 million, €80 million I think in the future. And that this green arrow will somehow just give you an indication that after the period we believe it comes back again to a higher level of the depreciation at that time. We have launched a press release yesterday. Under German Corporate Law, a regular board member has a few year contract and we can only prolong the contract maximum one year ahead of time. So we had four contracts expire at the end of the year, was Lutz Lindemann and Ralph Rheinboldt who were long on the Board, they had five year contracts. And Dagmar and Timo as it was their first contract it was three year contract which is part of our in-house governance. It’s a first time members get a three year contract and then five years in the future. So they were all too. So Lutz and Ralph are 19 years at the company, they have got an extension of five years. Timo is eight years at the company, Dagmar five years at the company, also both got a five extension, so congratulations to Dagmar. I look forward to that. I think it’s also a good signal for continuity. It’s really a nice team I like to work together. My contract only, before you ask, something in the middle of 2021, so it’s now time to prolong that. That was I it think that from Dagmar and myself. If you have questions, don’t forget to wait for the microphone that everybody can hear you, not in the room so much but more on the telephone.

[Q - Knud Hinkel:]

Knud Hinkel from room. Two questions. You mentioned the CapEx initiatives and the reason for that growth efficiency improvement, replacement. Can you help us understand what is the payback time for these investments or the return on investments, you are calculating these investments? And secondly, you indicated in your outlook that you expect further margin pressure and you mentioned that is primarily related to the investments in CapEx, hiring people and higher R&D spending. I would like to know what is your expectation on your raw materials and here maybe you can different between base oils and additives? Thanks.

[Stefan Fuchs:]

Okay. First of all, let’s start with the latter question. This is something we had before here in the round very often. There is no global answer possible. First of all you have countries with exchange rates. So for example, in China, you don't have the petrochemical industry. So a lot of raw material is imported into China, not necessarily by us, but by our suppliers. You have the U.K., Australia, South Africa and Brazil, who are also very much dependent on their currencies. You have the Europe where you buy chemicals in euro and base oil is also somehow linked to the dollar and then you have the big U.S. where everything is linked to the dollar. So very often the currency plays quite a role and we have always explained if the euro get strong, we can exchange the profits out of the U.S., and out of China to a lesser degree. Therefore, we get some help in Europe in purchasing due to the base oil pricing. More or less we can say that base oil and as you know we have about a 100 different base oil cuts. So it’s fully synthetic, [indiscernible] Group 3, Group 4 and they went up in the second half of last year and they continue to be high or even go up slightly more. This is always followed somehow a little bit at a slower pace from all the chemicals and in additives. And then yes, we are actively out with price increases and that was one reason why we said last year we grew under proportionate, because it took us longer than we had expected last year and let's see how much count we can make up on that part. CapEx, I can tell you whenever - let's say from a regional perspective we propose a capital expenditure, it must goes to [indiscernible] pieces of wood. The one is [indiscernible] on the DCF and the other part is in the technical side of our CTO and we calculate all of them, but what you want to know what is the return on investment on the €140 million. We won't give you an answer on that, but certainly when you grow your volumes by 9% necessarily, you talk about a full blending plant or more and if you continue to grow by 5% a year we more or less talk about almost the full blending plant, or significantly more capacities at our other plants. We have still some older sites like Chicago and Mannheim where we do the modernization while we run. It’s always easier Beresfield, in Kaluga and in China where you build new plants, they are always more efficient. But I think this is a phase in our history where we really invest into our future and there won't be a return from day one. Let make the one example from our grease plant in Chicago. We had as you know in 2017 quite a burden because we finalized the grease plant. We had [indiscernible] with our own products and then it takes almost a full-year for getting all the approval to our customers. All OEM related and IT related oil or grease [indiscernible] so you goes with a technical level for our customers, plus you need a site approval. So our customers do not allow us to switch manufacturing sites without them certifying the receiving site. So 2017 for our new grease plant in Chicago which was about €25 million was almost nothing here, also we had running, we had depreciation and we had all the people involved. We have now and we also have to say without arrogance, the market was not lining up for us. So we have still to develop the business, we see large potential there. So we have now slowly getting volumes in the plant this year and it runs up to expectations, but certainly there is such investment there's always two, three, four years where you don't have the full return that comes after time. This is a strategic investment in the future. On the grease side, I think that that's quite a good one. On Beresfield, for example as I told you, it's more capacity and more efficiency, but also partly replacing. You replace an old site which is completely written off with a new site. Yes it's more efficient, yes we have more capacity, but you have also the depreciation which you didn't have with the old site. So this is not an answer where [indiscernible] on those €700 million over the six years X percent return.

[Dagmar Steinert:]

I would like to add just one thing to that, if you look at our incentive of system, our Fuchs Value Added related bonus system which is implemented world-wide, that bonus system, I think it’s the right one, but of course it burdens you if you have higher investments, higher CapEx. So you can be really sure that we made up our mind with these investments, good ones and necessary ones, do they help us for the future or not.

[Daniel Buchta:]

Daniel Buchta from MainFirst. Three questions if I may. The first one on the CapEx side again, I mean it’s quite a significant pickup to your former guidance and I mean just to get a feeling underlying what has changed that again there will be such a massive step up in 2018 and the years after. Did you under invest or basically your growth assumption is much better than they were a few years ago. The second one on Americas, I mean obviously 2017 was a very good year and growth came back, but it was runner against the low base because especially the industrial businesses was weak in the years before. What do you expect here for 2018, is it possible to kind of to show that growth again. And then the third one on the goodwill write-down in Sweden, I mean probably I assume that this is related to the step up lubricant acquisition. What are the problems you are seeing here and why was it necessary after such a short time? That’s it, thank you.

[Stefan Fuchs:]

I will start with the last question. We made two large acquisitions in 2016, the one was Pentazine which was the easier ones so to say, because we took at the end of day their technology and the whole is to our worldwide infrastructure. They sold it because they didn’t have the infrastructure so that was fundamentally easy one and the one part we complain about in the NOWC that we have higher inventories is because we ship much more volumes to China than we have ever anticipated. And again, its same like I told you on the grease side, we need the customer to approve our manufacturing sites and he was not yet willing to do so not because it’s not a high quality site but it takes the customer a lot of effort to certify the manufacturing sites. So that is one of the reasons for us, we complained about it in the NOWC. On the other side we sell significantly more than we initially anticipated. I somehow compare Statoil with essentially which we did 30 years ago. It was more a regional expansion and at the end of the day we have still to prove what I said internationalize the Fuchs business. So we have to roll out all our specialties into the Swedish market and we have localized a lot of products into Poland and Russia out of Sweden. So Statoil supply Poland and Russia out of Sweden and we localized it in the Fuchs Russia and Fuchs Poland. The [indiscernible] created in Sweden was a little bit bigger than we anticipated, plus when we took over the Nordics business, the oil and gas exploration went down which is quite some business part of the Norwegian and Swedish countries. That was another reason, so I think it’s a matter of time and it was like a precautionary measure that we took of half of the goodwill on Sweden. I don’t regret the acquisition, I still think it is good, but it’s totally different compared to the Pentazine one, it just takes more time to roll out the product portfolio into that market. And when we look at Americas, 2017 yes was a good year, but I think there is much more potential in the Americas. As you know, again coming back to my strategy slide, when I say internationalize the business, the U.S. for us was mainly metal working and mining and China is heavy automotive. I want to make China heavy in industrial and automotive and I want to also bring automotive into America. That’s the name of the game, so therefore we still see a lot of potential in the U.S. And that is probably the one country honestly where we have under invested over the last 15 years which we now recoup. This is not an answer to all our CapEx in the Group, but in the U.S. maybe we have underinvested for some time and we said clearly we have a global standard and if you go in our industrial part of the United States we took out of 15 acquisitions [indiscernible] and this is no longer the future. So as I explain to you, we have bought [indiscernible] warehouse of about I don’t know 11000 square meters, so we move all the raw materials there and while we manufacture, we built a whole half new blending platform for metal working fluids. We demolished the first other half, then we build second half which is tough during manufacturing, but this will be a state-of-the-art plant and I think for the future that’s the right way forward and the same we do on the [indiscernible] side. Yes we might have underestimated, the global standards and which we want to have, but we say now is the time and we pushed it through. We have the money, but we have not seen 9% growth also for 2017 and also some of you - outlook 2018 as disappointing, that’s cool. But for me I mean based on today’s values, say we call another 3% to 6%, this is just again the full blending plan there. So therefore I think we now say we have a standard, we have a blend which is solid through the countries. That’s the reason behind it.

[Michael Schäfer:]

Michael Schäfer, Commerzbank. Three questions from my side if my may, trying to bridge the gap basically to your flat free cash flow. You explained what you are looking for in terms of CapEx and the deltas probably then higher net working capital. So looking further beyond 2018 or structurally at least, your business is shifting at least growth wise towards Asia. So is this the right assumption basically that going forward we have to assume much more capital absorption coming from this angle basically, so net working capital remains a major drain for the company for quite a while and not just one or two years? This would be my first question. The second one is coming back to your CapEx and your outlook, part of the explanation was that you are looking for and/or you need to invest into new products and also technology. So I wonder whether you can shed some more light on what you mean by this one? And the last one is a more housekeeping question. We have seen the holding other lines quite fluctuating over the quarters in 2017 partly due to the shift in shipment to Asia from Europe et cetera, consolidation effects. But thinking into 2018, 2019, so how we should probably think how this one is developing as a structure of shipping out of Europe into Asia will probably stick?

[Stefan Fuchs:]

Can you repeat your first question for me please?

[Michael Schäfer:]

Yes, the first question was you are probably investing into net working capital as you have projected is at least for 2018. The question is whether your shift towards stronger growth in Asia compared to the Americas and Europe whether this has a structural component and this is basically pushing more pressure on net working capital, so therefore we will see a significant drain in net working capital or build up in net working capital also in the years to come. Thank you.

[Stefan Fuchs:]

First of all, when you look at the NOWC, your first question which you repeated at the end, then Dagmar showed you here the cash flow. When you look at the minus €78 million we see on slide 17, NOWC, if you take our 9% sales growth, which Dagmar said was I don’t know €206 million or €209 million more sales and you apply 22% of it, 60% of that NOWC increase is just cost related and the other 40% was mainly due to the Germany, China Pentazine product line where we have not yet the approval to produce locally. Once we are ahead of the problem, we would think that the NOWC goes down. We don’t know whether the 20% is still a valid benchmark. For us, we still tied with, but we certainly think 22% for the long-term is too high. But we clearly think minimum to 2018 and good part of 2019 we have to continue to ship those products from Germany to China which okay is not ideal, but the nice thing is that the sales are there, they are significantly higher than we initially planned. That was on the first question.

[Dagmar Steinert:]

On the question regarding the line holding consolidation, it’s now on a level of €13 million or €14 million and we expect that to be around that number in the next year as well, because one portion is holding, there is no structural change and the other ones are the gains from intercompany delivery which are taken out and as long as our intercompany business is growing we will have higher number. If we start this localization of the production then of course that number will come down.

[Stefan Fuchs:]

CapEx versus new products and technology, our new product flow is more on the OEM grease side which we have 3C concept which we have done in Chicago and we will do it in China and Chicago was €25 million. We don’t think in China we will be as much because we have already a grease plant on that sites with 50 utilities, but certainly it’s quite an amount more on the new product side, on the technology side, it’s partly on the way how we manufacture OEM fluids with our own standards and they are approved. If you do it in the same way in the bigger countries we get that certification trigger from our customers. So this is more or less the new procedures and the new technology part we want to fulfill.

[HeikoFeber:]

Hello. Okay. Heiko Feber here Bankhaus Lampe. My question would be with regards to the impact from the intercompany deliveries on the margin, if you look at Europe and Asia-Pacific both are down 150%. So it has no margin impact on that side, so neither region seems to benefit from that one, but if the intercompany deliveries at some point in time maybe 2019 disappear, would you expect the margin to benefit from that one? And the other question I would have is on the impact from pricing initiatives. So you said that you have problems in passing on raw material price increases, so most of the organic growth last year came from volumes and do you expect this also be mainly from volumes in 2018 as well. So when do you expect price increases to contribute to organic growth?

[Stefan Fuchs:]

I mean, on the margins, when we localize a product mathematically it might impact the region margins, but the Group margin, I mean, we might have some more freight, but also in China as I said before some of the raw materials have to be imported. It's for us easier handling. So we don't have to touch everything three times, but for the Group margin it should not be a huge impact. On 2018, I would think we see a price impact also on the sales side which is not huge, might be 1% or 2% on the Group level, I can’t tell you that exactly, but there should be one yes obviously if price increases. So last year Dagmar showed you the slide with 9%, and she said it was almost all made by volumes. when volume and sales are not exactly the same, there's also the mix component in world, but more or less I think we should see some inflation to pricing, otherwise we wouldn't push through any price increases which we are doing at the moment.

[Heiko Feber:]

Maybe just one follow-up on the raw material prices because you - the raw material prices are €1.4 billion. So let's assume that increased by 10% and you pass it on it would be 5% higher sales volumes or is it - when you say 1%, is it only minor increase in your raw material prices just to get a feel?

[Stefan Fuchs:]

I haven’t said we increase our raw materials by 10% because there is no global answer. You have countries like the U.K. our sell to raw material increase is significantly higher due to the pound devaluation. On the other side we also export out of the U.K. traditionally. So you get some help to that. So there is not one underlying answer to that. And with all the currencies in world and the different pricing in the different markets, I can’t give you a legitimate answer to that.

[KnudHinkel:]

Knud Hinkel from Equinet Bank. A follow-up on the EBIT guidance question. What as dollar assumptions is baked into your guidance and secondly could you mind me why the model is much better than Asia and Americas and Europe as a whole product mixing thing, because a simple mind like me would assume that it's much costlier to grow in so far untapped areas than –or a network with higher density and certainly can you already provide margin guidance after the best of the growth initiative has settled. So what is a ballpark number for your margin beyond 2020, 2021, 2022? Thank you.

[Stefan Fuchs:]

I think Dagmar will answer most of those questions, but you know when you look long-term a couple of year ago we introduce a new line which has EBIT before income from participation, so before the equity, so I think when we look at percentages that's the percentage we should look at, because we have quite a equity result and this is no sale [indiscernible]. When you look from the EBIT before income from participation or before at equity result in the last year still 2014 to 2016 we had about 15.5% and in the year 2017 that was income that we loss the full point and we always said we strive that number to be a minimum of 15% and we want to continue to grow profitably which means adding top-line dollars not diluting that margin. Now last year we were half of point below our minimum expectation where we say we want to be at 15% and we were a full point below the previous year. So I think that's what you are asking more or less to work on the EBIT before at equity results, and then I think on the margin differences and the U.S. dollar assumptions.

[Dagmar Steinert:]

Well I will start with the margin differences between Europe and Asia Pacific and America. First of all, of course we have got higher market in Europe compared with the other two regions and in Europe we have got lots of different countries and a higher number of companies that means of course that we get overall a higher admin cost, because you got for averaging a company you have to fulfill all the regulations. And we have got in Europe much more like complex structure compared with the other regions. I think that's the one of the reasons, then of course it's a question of local supply, because we try to - as we produce locally we have got our local supply as well. So that's another things which just to take into account and it's a question of product mix as well. In Asia Pacific or half of that region in China and China for instance we have got a much higher automotive share compared with America or compared with Europe where it’s a bit more leveled out like in the whole Group. So they acquired a lot of regional differences. Your question regarding our guidance and U.S. dollar what exchange rate we took, we usually take the October exchange rate so for our assumptions it was October 2017 and if we try to relate our assumptions or recalculate it with January exchange rates then we had slightly currency loss again. So with the October exchange rate there is already a currency loss compared with the full 2017 year and with January 2018 exchange rate there is a small slightly additional loss on top of it.

[Stefan Fuchs:]

I think it is also important when you look later on for our first quarter, because you started last year with positive momentum, if you know first quarter positive on the currency is second quarter slightly positive, third quarter slightly negative and the fourth quarter was already almost minus 4% and that's even a little bit higher number to be expected for the first quarter and we compared to a high base of last year. As I told you in the beginning, first quarter last year was the best quarter this year is there split between March and April so don’t expect the loans in quarter one I think it will be a good quarter but at the end of the day comparison you compare significantly different dollar Renminbi and dollar Euro and Euro Renminbi situations than last year.

[Ben Gorman:]

Thanks very much. Ben Gorman, UBS. May be even more of a conceptual point, you said that you thought that the e-mobility hype was sort of a bit overdone. How do you context with the loss of share in terms of diesel in your opinion and what does your strategy or how has it changed going into 2018 given the amount of announcements you had in the second half of 2017 from OEMs on the e-mobility topic? That’s the first one. And may be just second one in terms of competitive dynamics in Asia. Obviously there is lots of discussion about your intercompany sales. But how much of this is really you are trying to take share rather than maintain with sort of happy customers and how much of that is you trying to keep them happy rather than take the value on price versus some competitors? Thanks.

[Stefan Fuchs:]

I mean when you look back on page number nine, Dagmar showed you an organic sales growth of 20% in Asia and our Asia is predominantly China plus Australia and South Africa and significantly more smaller countries. 20%, I mean we want to keep our customers happy, but we added 20% real business last year in Asia and this mainly came out of China which was really outstanding. So the name of the game is growing there in all segments. With regard to e-mobility, I can be a little bit more open towards the press in the morning. I don’t like the hype at the moment and I do not understand that certain CEO says the diesel will die or the combustion engine will die. I personally think and I don’t bite the e-mobility away. The e-mobility comes very fast and especially in countries like China where if they can regulate license plates in Shanghai and Beijing it will come. But I do not know at the end of the day whether the combustion engine will die in 30 years or whether the diesel will die. There is no answer on the energy. In Germany we are happy, because the electricity is there, but where as we come from, people, there is still the fuel cell not discussed, you know the fuel cell is better than pure e-car. It’s not clear how better it will function, it’s not clear where all the lithium comes from. So there are so many open questions that I personally think there will be many more generations of engine and gear oil be developed in the future. We want to keep also our people, but needless to say we have dedicated product management and R&D to run behind all the e-mobility potentials we are seeing. And since you are new in the round, others might remember, we have always applications which might follow - so in the old car or older car until two years ago from your power steering, this was more or less like a metal thing and you pull your steering wheel and it gave a direct impact metal-to-metal on the axle and there was steering wheel fluid in there which was a high technology hydraulic oil from outside, it’s entirely that whole application. Today you have an electric steering wheel which only gives an impulse, but you need a very, very expensive grease, because it’s a small piece application with a huge impact for many years in a car. So we don’t see significantly less sales, because it’s a tough business to get those approvals from those manufacturers so we have quite a market share there. And this is one application where the oil fill away and we have a grease application. So you need to be [indiscernible]. If you compare a pure e-car with a combustion engine, yes there is definitely no engine oil. There is already narrow discussion which there is really no gear oil because the engine oil will fall away, there might still be a gear oil in between the e-engine and the axle. For sure, there is an [indiscernible] fluid and more different greases. And therefore if you define it up on this opportunity because I think when we are not in the mass engine oil market in the United States for example in [indiscernible] in world markets, it’s not our business. But when it’s more technology wise specified I think it’s more opportunity than there is cost, but it will take significantly longer than many people think. And I personally want to motivate our R&D people on the gear oil side and the combustion engine. And if you look into annual report, 30% of our business is what is so called automobile market. Automobile for us is passenger car, but it’s trucks, it’s off highway what we call construction equipment, agricultural equipment. I do not think that there is a better resolution for those things for like 200 tonne loaders in mining industries. So therefore, I personally think I don't want to wipe that the e-mobility thing away, but it's a little bit overstressed at the moment. But definitely when you go to big OEMs, also you can’t talk to the people, you talk to all the time, you need to go to different people, because when you talk to engine developer, Volkswagen or BMW for them it's something which can never happen because it would eliminate that the shops, also they have dedicated departments, if not dedicated companies. So you need to also have dedicated people to talk. It’s totally different, people do and organizations to talk to. But China the share will increase. This is the Chinese system. They don't give out new license plates for combustion engines in Beijing. This is the end of the story.

[Dagmar Steinert:]

I just would like to add one thing, because if you are talking about immobility or combustion engine, there is all these hybrid or plug-in hybrids in between and they got both, they got a combustion engine and an electric engine and I think there we benefit from both sides as well. So this is only black and white.

[Stefan Fuchs:]

Exactly and if you go to our homepage, we have a new online magazine, which is called Evolve. That's quite interesting article in about e-mobility, it’s quite interesting to read in our main internet in the online magazine, it’s quite interesting to read.

[Ben Gorman:]

Just a very quick one. On employees, the number of employees increased by 3% in full-year 2017, but I wonder that the number of employees in your administration increased by 14% and also in absolute terms, the highest increase maybe 100 people. Why do you expand the administration? Thanks.

[Dagmar Steinert:]

We need some more administration just to fulfill our regulation process, but 14% sounds a good match for me. I mean, what we see within these numbers, we included [indiscernible] I think fully put into admin and not to the different functions, and of course, we adjusted 2016 figure as well. But that might be a small reason for that and then in Germany there I can just talk about Germany, of course, we have got a higher number of part-time worker in administration. That's more common than in production of R&D or marketing and sales, but if you look at our functions, there is no structural change or structural shift, but, yes, one or the other provision is added, because if the Group grows, we sometimes need to increase our people for admin as well and the last year’s - at least in my team everybody had to do quite some more hours and yes but I will have a look at that.

[KnudHinkel:]

Once again Knud Hinkel from Equinet Bank. Two small questions from my side. Firstly on tax rate, you mentioned some special effects in 2017, how does your guidance look going out for the next year? And secondly on acquisitions, you have put a lot of emphasis on organic growth in the past and also in the coming years, but in the past you have done some really sizeable acquisitions, so how does the pipeline look out at present, are there any interesting targets out there? Some remarks would be helpful. Thank you.

[Dagmar Steinert:]

I will start with the tax rate and Stefan will answer the acquisition question, because he loves that one. Looking on the tax rate in 2016 it was 31% and in 2017 it came down 2% to 29% and ongoing tax rate I would say should be I would calculate with 30% or something between 29% and 30% but that's very detailed so to calculate with 30% should be a good range, but it will be a bit less than it used to be due to these U.S. Tax Reform.

[Stefan Fuchs:]

On the acquisition side, I have a personal business, but as I said life is not a pony farm we need to wait until the certain things are solved. I would not expect a larger one in the next 12 months, personally I don’t see one. I always say the likely hood of the deals like with Ultra Cam where you buy something between €15 million and €20 million sales always higher than the large ones like with Pentazine and Statoil which was like each €140 million therefore it's EBIT on one-time, but at the moment I don’t see very large ones being available in person.

[KnudHinkel:]

Just asking about the price increases again to understand, per region how many price increases could you potentially make per year and how many have you done in 2017 how many would potentially follow in 2018 just to have an idea let's say per region and per customer so on like-for-like basis just on average?

[Stefan Fuchs:]

I can't answer that question precisely, but when you talk for example on the UK we needed a price increase before the raw materials went up only because of the currency, because in UK there is no mortgage finally, there is no chemical plant, all ingredients get imported, but the question is and in the U.S. at the moment we are already like in the second round, but the question is announcing a price increases to one thing. If you then turn it into an effective price increase that's the other thing. Always for us it's more difficult other times where there is like a very slow pricing increase coming [indiscernible] inflation off course we do price increases, but they are not very efficient at the moment when the pricing goes up a little bit more what we have seen for example in the U.S. then it's easier to push through a more efficient one. So each margin is different, but if there is only a minimal it's tough, but we have seen more significant changes in certain countries in last six months. So I don’t say it's easy, but I therefore that the question is how many price increases did you make is not so important as the question is how efficient. I think you are also at different new to the round, we also have contract pricing so we have quite a number customers which are on almost like rail tracks you know we have certain mechanisms and formulas which we review every three months and then sometimes if the raw material pushes up significantly or goes down significantly sometimes the formulas don’t work then we have to sit down with the customer, but that works pretty well mainly in the automotive business and in the mining industry.

[Dagmar Steinert:]

So if there are no more questions - but as one more.

[KnudHinkel:]

And the last question to the U.S. dollar and I mean you have regions that grow very different at present so has that also change your U.S. dollar sensitivity, your EBIT sensitivity of the dollar for instance. I think in the past year you guided for 40% of EBIT is back to the U.S. dollar is that the still is a good number going forward?

[Stefan Fuchs:]

Don’t forget on the U.S. dollar we earn significant money in the U.S. so we calculate the earnings less effectively in the Euro, but in Europe we buy certain amounts of our raw material basket mainly on the base oils at least indirectly dependent on the dollar. So there is a benefit. And we always say more or less it keeps the level.

[Dagmar Steinert:]

Yes, and we always said, if you look at our sales, we sell less in U.S. dollar than we purchase and we buy in U.S. dollar. So there is a kind of a gap.

[Dagmar Steinert:]

So if there are no more questions, I would like to thank you very much. And I hope that you know as well as we look really positive into the future and we expect sales and earnings growth and not only for the running year, but for the future as well. And we are prepared for it and thanks again.

[Operator:]

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