Fuchs Petrolub SE
Q1 2017 Earnings Call Transcript

Published: 28 Apr 2017

[Executives:]

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

[Analysts:]

Martin Rödiger - Kepler Cheuvreux Daniel Buchta - Main First Bank Michael Schäfer - Commerzbank Markus Mayer - Baader Bank Knud Hinkel - Equinet AG Andrew Heap - Berenberg Bank Oliver Schwarz - Warburg Research

[Operator:]

Ladies and gentlemen, thank you for standing by. My name is Jasmine, your conference call operator. Welcome and thank you for joining the Fuchs Petrolub Analyst Conference call. Joining today’s call presentation all participants will be in a listen-only mode. The presentation will be follow-up question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Thomas Altmann. Please go ahead.

[Thomas Altmann:]

Thank you. Good afternoon, ladies and gentlemen, welcome to our Q1 2017 earnings conference call. My name is Thomas Altmann, Head of Investor Relations with Fuchs Petrolub. With me today, Dagmar Steinert, CFO of Fuchs. Let me hand over directly to Dagmar for a short presentation which is as usual followed by the Q&A session. Dagmar Steinert, the floor is yours.

[Dagmar Steinert:]

[from our side:]

Let me turn to Slide 3 to give you a better overview what happened. On a quarterly basis the compare a strong first quarter 2017 with recent quarter 2016. In the year 2016 for second quarter was quite strong. Therefore in our views it is better to compare the first half of the year 2016 with first half of the year 2017. Coming now to the next Slide number 4. There we can see how our sales developed. We see an organic growth of 9%, €51 million and that organic growth is across on region. I come later in detail to the region. Our acquisitions in North America contributed 1% to our growth in sales and from the currency we had 2% growth as a tailwind. Overall as I said at before 12% growth in sales. But I would like to give you some more details about the development of sales in our regions. I would like to start with Europe where we see an organic growth of 5.5% and just slightly negative currency effect of 0.2%. In Europe, we had to good sales growth in Germany and in the UK, but I would like to remind you that in the first quarter 2016 the development in Europe was quite weak. In Asia Pacific Africa to see an organic growth of 21%. This strong growth was mainly in China, but also in Australia and South Africa. Due to currency we gain another 4% as well that is for strong South African went and the Australian dollar. In America due to the economic recovery in North America and Brazil we see an organic growth of remarkable at 9%. There we have as well 7% or 7.4% external growth due to our Chevron and Ultrachem acquisition the year before. Overall 9% organic growth in the whole group. If you turn now to the income statement of the first quarter 2017 we see this remarkable earnings and sales increases. And as I said before, the first quarter 2017 is quite strong. We picked up the good development of the last quarter of 2016 and we compared with the weaker quarter 2016. And of course as influenced by the Easter holidays because in 2016, the Easter holidays has been in the first quarter in 2017 we have Easter in the second quarter. So I just would like to repeat that in our – as it's better to compare the first half of 2017 which we will published in August with the first half of the year 2016. If I turn your attention to our gross profit, you can see that our gross profit went up by 10% and that's less than our sales increased. That’s due to mix and price effect. There's a change in the product mix and we have some price effect as well. But our other function costs increases also unproportional and therefore we are able to show an increase in the EBIT before equity of 11.3%. And after our equity income, our EBIT is up 11%, it’s €94 million of €85 million in the year before. Our earnings after tax are even more up 12.6% that's due to our tax rate where we had a gain of one percentage point. If you have a look at our EBIT development by the quarters, you can see that it's somehow changed we are now comparing somehow apples-with-apples because in 2016, we had all the times influenced by the big acquisitions Pentosin and Statoil, and they are – now we are comparing some of the same numbers. And you can see that we have the last three quarters EBIT of €94 million and just the first quarter 2016 and the second quarter 2016 are somehow different. I'm sure you're going to ask one question, why our EBITDA for first quarter 2017 is on the same level as last quarter 2016, while on the sales side we see an increase in sales if I compare these two quarters. Just to give you an answer on that now that is the main impact is in the fourth quarter 2016, the year end booking and the position other income and expenses. We had in the fourth quarter 2016 some positive effect of plan amendments in the pension plans in UK. There was a positive effect we had some release acquisition and we had some currency gains. So that has got nothing really to do with the operating business. If I come now to our next slide to the EBIT by regions, you can see that of course Europe still remains the biggest portion of our group earnings and there is got an increase of EBIT by €3 million or 6%, which goes along with the sales increase. And for the EBIT, the same belongs as belong to the sales there is a significant roles in Germany. If you come now to Asia-Pacific Africa, we have an increase in EBIT of €5 million from €29 million to €34 million that’s more than 15%, but sales went up higher. Therefore, the margin - the EBIT margin before equity in Asia-Pacific Africa is below the previous year's quarter. And we had additional OEM business in Asia-Pacific, Africa with slightly lower margins and that’s one of the reasons. In America, we saw an EBIT of €17 million that's €2 million more than the previous year’s quarter and that's an increase of 12%. But the EBIT margin before equity came down in America minus 1.6 percentage points. In America, we have seen positive earnings trend in the U.S. and we have seen Brazil picking up slightly. Anyhow the margins came down. We had gains in the mining business on the sales side, but with some lower margins. And in America, we had some non-recurring items, but overall with an increase in sales of 12% and the margins will go up again. Coming now to the cash flow of the first quarter 2017, the free cash flow is €15 million above the previous year and that’s 55% and I think it’s remarkably good number. Wherever it comes from of course from our higher earnings, earnings after tax increased by €7 million, but as well we have been able to decrease the number of the capital, which we need for our working capital. So here the amount of money came down from €32 million to €25 million. On the CapEx side, you will see the same number as in the year before €40 million and you know that we are having our €300 million investment of CapEx program and we will see in 2017 more or less the same number we've seen in 2016, so overall an improvement in free cash flow. Our employees came up in the first quarter by 47 people that was mainly in Europe and mainly in marketing and sales and production. I would now like to come to our unchanged outlook because today we are confirming our outlook. And based on the good start to the year, you might think that our outlook may seem some more cautious, but we see some risks with regard to the macro economic developments with the political environment and you all know the topic if it’s the Brexit and the question how stable is the – if it’s the election in France or the question what will happen in the U.S. and there are lots of things. Therefore, we confirm our full-year outlook at this time and still see sales growth between 4% to 6%, but that's mainly organic without the currency effect and slightly lower EBIT increase 1% to 5%. And yes, it’s so much from my side and now we are happy to take your questions.

[Operator:]

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Martin Rödiger of Kepler Cheuvreux. Please go ahead.

[Martin Rödiger:]

Thank you and good afternoon, and thank you for taking my three questions. First, on the EBIT margin development. Can you quantify the non-recurring items in Asia, the mix effects in Australia and in Americas and the higher input costs in the first quarter? And secondly, you mentioned at the last Analyst Meeting that you expect also a margin dilution from the higher depreciation charges as well as higher staff costs. Is that still – has that also played a role in Q1 or was the effect just negligible because the staff numbers increased by only 1.7% and the depreciation charges increased by just 2 million. And finally, on the regional development. I saw that also the organic growth obviously in Australia, South Africa and Brazil seems to have improved quite substantially. And in the past, you were not really happy with these three regions, so Australia, South Africa and Brazil. Can you help me to understand what is changed regarding these three regions in recent time that you are now more optimistic on these regions? Thanks.

[Dagmar Steinert:]

Yes. Thank you for your questions Mr. Rödiger. To start with your first question about the EBIT margin development and non-recurring items, just to make it clear, we only have non-recurring items in the segment America and we don't want or we don’t name the number is of course very low single-digit million number. It’s nothing really which is important for the group, but in the first quarter the numbers are smaller and therefore even 1 million would make a big difference in terms of percentage of increase. And therefore, yes. I thing that's all I'm able to say to that. Our higher depreciation you’ll see in the first quarter 2017, an increase of €2 million and of course there are all things which reduce a bit the margin. That's right, but we're not going to address these figures and we've got of course higher personnel expenses, personnel cost, but the things we face and that are our higher – our cost base gets higher. And therefore, we said that in March already we see our EBIT increase a bit less than our sales increase and there nothing really changed. The organic growth you mentioned in Australia, Brazil and South Africa. In Australia we picked up. We had some really good improvement in the mining business. In Brazil it's more or less the question of an overall economy development. And in South Africa our activities are picking up after they've been for some while more or less flat.

[Martin Rödiger:]

Maybe I have – a lot will asked in follow-up question on the raw materials. Have you been fully able to pass on all raw material increase to your customer in the first quarter and or do you want to convey that the mix effect in the first quarter was more important than the raw material effect?

[Dagmar Steinert:]

In the first quarter in general, we haven’t seen significant raw material effect or increase in raw material cost. We will see that in the upcoming month, in the second quarter and because it always need sometime after it comes to our books. So in the first quarter, there is no effect out of increasing raw materials in there on a significant effect. And therefore the decrease in the gross margin is due to mix effect, product mix effect and when we set price effect that means that we have the one of the other order or of course it comes from the product mix with lower margin.

[Martin Rödiger:]

Thank you very much.

[Operator:]

The next question comes from the line of Daniel Buchta of Main First Bank. Please go ahead.

[Daniel Buchta:]

Yes, good afternoon, everybody, and thank you very much for taking my questions. I also have three ones. In the press release, you got it to have seen some Easter benefits. I assume it's especially in Europe, but also partly in America, and can you quantify this or is it just more in one percentage point range? Is it more two percentage points and what does this mean for Q2? Is it fair to assume especially for Europe to see a slowdown? That's the first question. The second one in, can you just elaborate a bit that current trends you're seeing in Q2 so far, is there already a slowdown or do you see a continuation of the very favorable trends you saw in Q1? And the last one on the guidance, I mean you touched it already a bit, I mean on the back of the strong Q1 especially on the topline performance? Do you – it’s kind of would imply the slowdown especially in the second half probably is it more higher comps that you're seeing there or is it really just that you see the underlying trends might become less favorable. That’s it from my side? Thank you very much.

[Dagmar Steinert:]

Okay. Mr. Buchta, thank you. The Easter benefit, we are not – first of all not able to quantify and we don't want to quantify it. It's just to point out that we have a base effect and that we compare a weak quarter Q1 2016 with a strong quarter Q1 2017. And of course an Easter effect is mainly Europe, maybe a bit in other countries as well. But it's just evidence. The current trend in April, we don't see really a slowdown at the moment. But it's just more feeling because we haven't got any numbers yet for April the month hasn't even finished and in our guidance it's just the – all these questions of risks and challenging environment that we don't see there today any room to increase our guidance and of course it's a base effect here as well. And as I pointed out in the sort presentation, due to the quarterly development, I think it's very important to compare the first six months of 2017 with the previous year, and you as well of course will have a better view about the development compared to the previous year.

[Daniel Buchta:]

Great, thank you very much.

[Operator:]

Next question comes from the line of Michael Schäfer of Commerzbank. Please go head.

[Michael Schäfer:]

Yes, thanks for taking my two questions if I may. First one is on APAC. I try to get a better understand and what happens there in the first quarter showing such a strong organic growth repeating basically what you have shown into the fourth quarter already. While on the other hand do you have seen a significant dilution on the EBIT margin side in contrast to what you have reported the year before and but also the quarter before on the fourth quarter. So you mentioned end contracts are probably adversely affecting the mix effect there. But this was probably also the case already in the in the fourth quarter. So I'd like to get a better view what happens there. And also related to APAC, shall we assume basically given that you've probably picked up a major order maybe in the fourth quarter, first quarter that this is strong organic growth is at least continuing in the second and the third quarter until comps are getting tougher and this kind of dilution on the EBIT margin side is going to continue in the course of the year, this would be let’s say my first question. And the second one is on your networking capital significantly improved in the first quarter 2017 despite a strong increase in sales. So how is this evolving basically in the course of 2017? Should we assume a normalization year on a networking capital drain? Thank you.

[Dagmar Steiner:]

Thank you, Mr. Schäfer. Your first question regarding the Asia-Pacific, we had a very strong organic growth in the fourth quarter 2016 and in the first quarter 2017 in China, in the OEM business. And in the fourth quarter, we’ve been somehow surprised as well about that really strong growth. We didn't expect that and it hasn't just been like year-end buying due do some tax benefits, which has been cut by the Chinese government and the organic growth just continued in the first quarter 2017. For the upcoming month, we see if you look at our overall outlook, of course somehow it slowdown because we stick to our outlook and therefore we can't expect an organic growth for the whole group to continue to be 9% each quarter. Your question regarding the dilution of the EBIT before equity margin in Asia-Pacific, where we’ve seen reduction of 0.8% that's the mix effect of course and well it's a question of small numbers of course as well, because I mean the first quarter, three months very small numbers and I'm not always sure of the every single costs cutoff really exactly and we compare here – that’s basic that you compare a very strong quarter with slightly weaker quarter in the year before. And just to point it out, Asia-Pacific, Africa has a great development even in EBIT. It's an increase of over 15%. Our improvement in net operating working capital is compared with the first quarter 2016 really good, but in 2016 you might remember we have this implementation of SAP in the whole production of our Lubritech activities and therefore we had some delays in delivering product and every thing. And obviously in the first quarter 2016 might not be representative for the normal net operating working capital. And on the other hand, of course our net operating working capital in total or as a percentage of sales is came up 2016 a bit. But one reason is these increasing intercompany deliveries out of the Pentosin business, which we acquired in 2015.

[Michael Schäfer:]

Okay. Just sort of follow-up you on the APAC margins. You're saying basically that your organic growth is probably declining in the next couple of quarters, I don’t really understand why, but let's take it this way. Does this mean basically the sales mix will enrich again and hence this will be the driver for margins moving up during the upcoming quarter, so how should we think about this one?

[Dagmar Steinert:]

Well, as you know you visibility for our sales, our order is very short because we don't have any order backlog and we don't have the long-term contracts. Therefore, its more expectations and it's difficult to presume and let's wait and see.

[Michael Schäfer:]

Okay. Thank you.

[Operator:]

Next question comes from the line of Markus Mayer of Baader. Please go ahead.

[Markus Mayer:]

Hi. Hello, everybody. So add-on question firstly on net from capital to sales ratio, how do you seethe development given the expected raw material cost increases in 2017? And then secondly, again on this non-recurring item in North America, am I right that was a negative one-off and just as a [indiscernible] cash on this mix effect in Asia and portfolio one-off or is this – just started to therefore that sustainable and maybe as [indiscernible] they have the lower margins on this business and that’s basically my question.

[Dagmar Steinert:]

Okay. Just to start with these one-off items in America, yes that was – is a negative effect.

[Markus Mayer:]

Okay.

[Dagmar Steinert:]

And our margins in Asia Pacific, Africa where we are in the first quarter 1.8% below previous year. I believe that we won't see for the full-year in terms of margin the number we've seen before so minus 0.8%.

[Markus Mayer:]

Basically this negative effect just been leveling out whether or should be shrink on that?

[Dagmar Steinert:]

Somehow yes.

[Markus Mayer:]

Okay.

[Dagmar Steinert:]

And you had a question about net operating working capital and sales ratio, but I didn’t get it right.

[Markus Mayer:]

Yes, the question is basically if the current net from capital to sales ratio is good run rate going forward in particular given your expectation that raw material cost will start to rise for you in the second quarter?

[Dagmar Steinert:]

Okay. Well, the raw material price increase which we expect today or which we see will be in general overall 1% to 2% even if some raw materials or the increase is higher with other players, so it’s a mix effect as well of course, but 1% to 2% maybe 3%, it’s difficult to predict, but something around that number we would definitely see.

[Markus Mayer:]

That’s net from capital ratio of 2

[Dagmar Steinert:]

Yes.

[Markus Mayer:]

Okay. Perfect. Thank you.

[Operator:]

Next question comes from the line of Knud Hinkel of Equinet AG. Please go ahead.

[Knud Hinkel:]

Hi, good afternoon, everybody. Thank you for taking the question. If I may first one would be whether you have seen any contribution from your newbuild equity factories in Q1 already. Second question on the tax rate, you said you saw an improvement by one percentage point, question is whether that is going to be sustainable in the course of the year? And last question is a follow-up to the raw material, how long do you think it will take to pass through the increased raw material at the second quarter. Is that the usual six months or do you think that might take longer? Thank you.

[Dagmar Steinert:]

Thank you, Mr. Hinkel. Well, your first question the contribution of our new grease factory in Chicago, actually none at all because we are still in the pace of ramping up their production and we've got an officinal opening in May, but we won't see a bigger contributions before 2018 because it will take some time to ramp up to build up the whole production with all this different product. In terms of tax rate, we expect for the full-year tax rate of around 30% and the improvement we've seen in the first quarter is just due to the [indiscernible] in connection with dividends because we always collect dividends from our local subsidiaries to payout our dividend to our shareholders in May. The raw material cost, it’s still unchanged that means that we always need one to two quarter, so three to six months at least to pass-through raw material prices increases. So there are nothing changed in the setup or in the way we treat that and that's one of the reasons why in our outlook, the EBIT increase is below sales increase, because we just got there this timeline.

[Knud Hinkel:]

Okay, thank you.

[Operator:]

Next question comes from the line of Andrew Heap of Berenberg. Please go ahead.

[Andrew Heap:]

Hi, Dagmar, thanks for taking my questions. Firstly, could you elaborates a bit more on the end market development and so – in different regions where you see different industries picking up and I know you said mine was improving, but also touch on the automotive market. And also would you be able to comment if you think there was any pre-buying from customers in anticipation of any of this inflation? And then finally on the CapEx, do you still feel confident of reaching around $100 million by the end of the year, given that your quite far below a quarters up? Thanks.

[Dagmar Steinert:]

Okay. Yes, Andrew, thank you for your questions. To start with your last one, our CapEx that’s always the same, in the first quarter our CapEx spending is quite low. You’ve seen it in 2016 as well where we reached $93 million for the whole year and you’ve the same number in the first quarter. So that's just normal. The same happens every year and our CapEx spending – well if you split the CapEx spending for a whole year, it is due to the billing and everything mainly in the second half of the year.

[Andrew Heap:]

Okay.

[Dagmar Steinert:]

Regarding pre-buying from customers, we don't see – we are not aware that a pre-buying is taking place and the different end markets, which are in our different regions overall. There is nothing much to say in Europe if got over all industries, a good growth in North America, in Australia, we got a good increase in the mining industry in China, but in North America as well. We had good development in the automotive business, but automotive business here doesn’t only mean passenger cars is of course trucks, heavy vehicles and these things as well. But we haven't seen any really bad development of any industry in one of these regions.

[Andrew Heap:]

Okay. Great. Thanks.

[Dagmar Steinert:]

You are welcome.

[Operator:]

The next question comes from the line of Oliver Schwarz of Warburg Research. Please go ahead.

[Oliver Schwarz:]

Yes. Thank you for taking my question. I'm still trying to get my head around the strong growth in Asia. You just pointed out following the question that growth in China was – in Asia was predominantly driven by the automotive industry, while in Australia that the mining industry is still alive and kicking and came back to let’s say more strengths than before. However, searching from the numbers of car producers in Asia it seems like your growth is ahead of markets. So are you in the position to claim that you have gained market share? Is that existing customers that have just ordered more or did you win new customer or consumer groups that could explain the significant increase in sales that started already in Q4 last year? And that brings us back I think to the question of sustainability because Dagmar you said that it's unlikely to be sustainable this kind of growth until the end of this year because basically it is unlikely that those growth rates are sustainable. But I haven't yet gotten an impression that you have given a reason for that. Could you help me out with that please?

[Dagmar Steinert:]

Yes. Oliver. Well due to our short visibility and all these uncertainty in the overall environment, we just don't see anything to adjust our outlook for the full-year because just one good quarter and when we made our outlook, we expected already a strong first quarter in 2017 that was not really a big surprise. We don't see any reason to increase our outlook, and especially China, yes, we’ve got really good growth and higher organic growth in the overall industry or the market. It is with existing customers and it’s a mix – that’s a question of mixed effect. We had some new customers, but nothing really were to mention. Well a strong increase in the OEM business and partly due to our Pentosin business.

[Oliver Schwarz:]

Right. I might throw in a last question, have you seen that way of so to speak breaking already are at least coming, in the second quarter have you seen any indications of a slowdown yet?

[Dagmar Steinert:]

As April hasn’t ended by now and we get the first number of course some days later, but. I’m in contact with my colleagues and we haven't seen a big slowdown yet.

[Oliver Schwarz:]

Okay. Fair enough. Thank you very much.

[Dagmar Steinert:]

You are welcome. End of Q&A

[Operator:]

There are no further questions at this time. I’ll hand back to Dagmar Steinert for closing comment.

[Thomas Altmann:]

Since there's no further question, this was it from our side. Thank you very much for your interest in listening. We wish you a very good weekend and see you next time.

[Dagmar Steinert:]

Thank you very much.

[Operator:]

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