Fuchs Petrolub SE (FUPEF) CEO Stefan Fuchs on Q2 2020 Results – Earnings Call Transcript

Fuchs Petrolub SE (OTCPK:FUPEF) Q2 2020 Results Conference Call July 30, 2020 7:00 AM ET

Company Participants

Thomas Altmann – Head of Investor Relations

Stefan Fuchs – Chief Executive Officer

Dagmar Steinert – Chief Financial Officer

Conference Call Participants

Markus Mayer – Baader-Helveamy

Isha Sharma – MainFirst Bank

Knud Hinkel – Pareto Securities

Sam Perry – Credit Suisse

Michael Schäfer – Commerzbank

Jean-Baptiste Rolland – Bank of America Merrill Lynch


Dear ladies and gentlemen, welcome to the Analysts Conference Call of Fuchs Petrolub SE. At our customer’s request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode and after the presentation, there will be an opportunity for the analyst first to ask questions. [Operator Instructions]

And now hand over to Thomas Altmann, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.

Thomas Altmann

Thank you, [indiscernible] and good afternoon to everyone. On behalf of Fuchs, I would like to welcome you to our conference call in context of our H1 2020 results. On the call with me today is our Stefan Fuchs, CEO and Dagmar Steinert, our CFO.

Let me go briefly to our agenda for today. As usual, Dagmar will quickly take you through the H1 results, following this Stefan will give you some very interesting insight of our 2025 strategy. After the presentation, we will have a Q&A session. You can find the half year financial report, the fact sheet, our own press release and our conference call presentation on our website at fuchs.com under the IR section.

Having said this, I will now hand things over to Stefan.

Stefan Fuchs

So, good afternoon or good morning to all of you. I think it is a big pleasure for Dagmar and my myself, but we also accompanied by a lot of colleagues here. Beside of Thomas is also Kelvin Jörn from our Investor Relations Department, Tina of our Public Relations and [indiscernible] our Finance Department.

If you know we would have invited you in Frankfurt today as a substitute of our initial invitation in March, but CORONA is still there. So therefore, I think we make it online. Dagmar will go through the financials issue and I will later on, defer to our strategy poses, which is a part of our FUCHS2025 journey – we are more than happy the entertainment discussion and take all your questions.

So Dagmar it is all yours now.

Dagmar Steinert

Thank you Stefan. So Good morning ladies and gentlemen from my side. And let me start with the chart number four. The COVID-19 pandemic has heavily impacted our business. Although regions have seen partly significant declines in sales and earnings in the past months.

In the first half year, sales decreased by 14 year-on-year by earnings were down 29%. In April this year, which has been the outlook for the current year as a result of the considerable impact of the crisis.

Based on today’s assessment of the effect, we have determined a new forecast for the financial year 2020 and expect a decline in earnings in the range of 25%. A second wave is not taken into account in the current forecast for the full-year.

Our quarterly sales development chart number five, reflect the current situation. The crisis began in China in February, continued there in March. Our regions EMEA and Americas were only slightly affected at the end of Q1. By contrast, when wave fully hit the Western word in April and May, actually upward trend was already emerging in Asia with the strong June. In Q2 sales decrease by 23%.

Group sales chart number six are down by14% as already mentioned. The organic decline in sales intensified in the course of a year, in the first quarter it was minus 6% and in the second quarter minus 23%. External growth is generated by our acquisitions in North America and Australia. And we see slightly negative currency effects.

The regional sales growth chart number seven shows a mixed picture. Our region EMEA, record a decline in sales for 14%. In the first quarter sales has been on previous year’s level, in the second quarter sales are down by 28%. So nearly third. All major companies are affected like Germany, Spain, France, Italy and the UK. Asia Pacific record the decline in sales of 15% in the first half year.

In Q1 sales has been down by 14%, in Q2 only 5%. That reflects the upward trend in Asia especially in China. In America sales are down 15% year-on-year. In the first quarter, sales increased by 4% due to external growth. Second quarter sales are down by 33%. The crisis identified organic decreases in the first quarter.

Let us now turn to our income statement chart number eight. Our diversified product portfolio was helpful in many countries. FUCHS was classified as a system critical company, resulting in only temporary plant closures in a few smaller plants. Significant declines were observed among customers in the automotive industry. However, the areas of specialty applications and aftermarket business benefited.

Finally, the high share of material costs and relatively low sale of fixed costs provided some breathing room regarding the sale. By using short-term work or similar work model, introducing a hiring and driver freeze and systematically implementing further cost saving measures. The effects of the crisis on our earnings are further mitigated.

Gross profit was down by 12%. We have seen a slight decrease in gross margin in the second quarter due to product mix. Year-to-date the gross margin of 34.8% is higher than in the first half of 2019. Other functions costs were reduced by €7 million year-on-year despite increased cost based as a result of CapEx and acquisitions. Our EBIT is down by 29%. Despite this decline, we were able to generate a double-digit EBIT margins with 10%.

Our quarterly EBIT developments that is chart number nine, reflect the impact of the crisis and everything which are already mentioned. In the first quarter our EBIT is by 6%, in the second quarter by 50%. So overall in the first half by 29%.

With that I would like to turn to chart number 10, EBIT by regions. Our EBIT in EMEIA is down the third year-on-year at €56 million. We see an earnings decline in almost all countries. France, Spain and the UK record the strongest decrease. Germany is also significantly affected. Asia-Pacific recorded comparatively small decline in EBIT of three million.

The impact of the crisis weakens over the course of the year and China in particular recovered quickly. America reports strongest growth in earnings. EBIT to €14 million. After a weak first quarter COVID-19 identified earnings decline in the U.S.. South America is also heavily impacted by the crisis.

I come now to chart number 11 cash flow. The free cash flow before acquisitions is a €15 million position and a previous year’s level. We have a negative impact from the earnings decline and the increase in net operating working capital.

Positive impact results from other cash outflows and lower investments. With that, we have still a very strong balance sheet structure and a secure financial position. Our net debt adjusted for lease liabilities amount to €6 million. So, we are nearly debt free.

On the next chart number 12, the development of our net operating working capital. You can see that it increased. In absolute number, it is still on the level of the first quarter, but more than 30 million above the year-end of 2019. Inventory increased partly due to preparations for planned relocation in Sweden and Australia, and increases in safety stock of raw materials.

That brings me now to our earnings summary chart number 13. To sum it – sales decrease in all regions. EMEA and Americas impacted most by the crisis in the second quarter. In Asia Pacific in June, it is on pre-crisis levels, mainly due to China. Our cost savings take effect, other functions costs are down by €7 million despite our increased cost base driven by acquisitions and CapEx. And we have a new outlook for the running year.

If you have a look at chart number 14, our new outlook for 2020 that reflect the current situation. As already stated at the beginning of our call, there is the high uncertainty, effect of the crisis on supply chain, production and customer demand cannot be reliably estimated. On today’s assessment of the effect of the crises, we expect an average decline in the range of 25% for the full-year 2020.

With that short overview about the first half of 2020, I would like to hand over to Stefan to give you more insights in our FUCHS2025 strategy. And I will be happy at the end of Stefan’s presentation to answer your questions.

Stefan Fuchs

Thank you, Dagmar. I go directly to Slide number 16, where you see the headline, new mindset for future challenges and obviously the second quarter we have been very busy with Corona and then everything out that pandemic on the world, I think so far, we have really done very well in securing our employees with around 20 cases on about 5,800 employees.

So I think so far, so good, but we have also taken the time to continue to push forward our big future project the FUCHS2025 journey and especially the strategy parted in FUCHS2025. And I want to go through the pogrom if you allow.

So on page 17 you see the violation for FUCHS2025. We think the new solutions require new way of operating and new ways of operation requires a new approach and a fresh mindset. And we see the whole wave of digitization, which I think with the Corona now it actually got boosted, our customer requirements get more global, day-by-day, we see the e-mobility impact slowly coming. And that is always the search and also the fact of potential new business models.

And if you go to Page number 18, you see the three key elements of the FUCHS2025 training. So the one part is the culture that we aim for a hierarchy free communication and then open feedback culture. The second part is the structure is how we work more aligned and more efficient with all our internal stakeholders, which are our companies in the regions on the one side, our global divisions on the other side and our global functions here in Mannheim.

On the strategy path I come to a second, but just to highlight a little bit of history, we started the program in the fourth quarter of 2018. The strategy path was started in March of 2019 and we are proud to present to you the strategy part 15 months later.

Also wanted to mention to you normally we had for the last 20-years plus, we always hit at the end of March our Global Management meeting, where we invite our global leaders and to discuss with them our future plans. And this year was the big rollout event planned for the strategy rollout of FUCHS2025. And needless to say, due to Corona we had to cancel them at the end of March.

And in the same week, we made a FUCHS2025 virtual where we invited all our employees, and we had up to 1500 people participating in the sessions and event from Monday to Friday and we have I think an overwhelming feedback.

I think is the penetration of organization was actually significantly better than during the GMM. And we liked it so much that we will do another one end of November and then with our team set up, that wasn’t an easy exercise for us, there was a lot of content to cover. So I think, aside of all the Corona downsides, that was for us a very positive experience.

On page 19, you see our vision being first choice, we want to be first choice for our employees and for our customers, but also for our shareholders. We want to build on our things, which helped us to get to where we are today. But we want to more globally align our organization to make our vision come true.

And then you go to Page number 20. You see what we believe our strength. So first of all, I think we have a full product offering all over the world, and there is no other lubricant company with the global span and the full product offering.

You also see the topic of what we call local entrepreneurs in 60 plus countries. So, we have 60 subsidiaries, and obviously a couple of very big ones like in China, the U.S. and Germany. But we also strategically want to be personally present in Romania, in Chile in the smaller countries because we want to serve our customers, there not fully stimulus.

The other part is our performance driven culture, and our loyal employee base. And this is really important to us. He have really great employees who are dedicated to walk the extra mile. And therefore I think that takes times. On the other hand, we want to really achieve to be the partner for our customers that are their needs in lubrication solutions.

So, specifically, we don’t say in lubricants, but in lubrication solutions, because you this lubrication means more than just a few lubricants. And normally the lubricants play a smaller role in the whole equation of our customer. But they have a big impact. And therefore we want to provide them solutions, including the services.

We want to achieve a better global alignment through harmonized standards and procedures within our Group. We want to leverage our experience and explore existing opportunities, especially in Asia and America total -.

We were calling over the last 19-years through acquisitions, through organic, but our product offering and our market penetration is not homogeneous around the world, and then we see gaps in certain countries and those gaps for me are quite large opportunities and we want to go after them. We want to continuously improve the Co2 footprint of our products based on the lifecycle assessment, I come to that a little bit later. And we want to become the employer of choice.

So, when you go to Page 21, you see the outcome and we have defined six strategic pillars. Now first of all, I want to tell you that we established a strategy dialogue team. We had an outside consulting firm helping us to orchestrate the discussion. But we had no strategy consulting firm in our house that was important to ourselves. And the strategy dialogue team of folks involved all our stakeholders.

So, for example, we have three large deals in from Germany, China in the U.S., we had regional VPs and we had global functions in from IT, from finance, from R&D, from supply chain from sales and global sales division. And since they came up the strategy we have already a buy in of our main stakeholders, we did not want to sit here in the Ivory tower in Mannheim and develop something which nobody goes after. So, those six pillars are the guiding principle for our strategy moving forward, and I want to go through this, so each one with you.

So, if you go to Page 22, you see the global strengths and when you look at our company that we come from and those of you who know us for a longer time, we are very performance driven and I think we are very well done difficult just in regard to EBIT and capital needs.

However, we also allow for quite some time our MDs to do cherry picking you know with that part offering, you can pick on certain lubricants, whether it is automotive aftermarket, automotive first fill, – mining, specialties or industrial and we have come a long way, but we have now a little bit of carpet with holes and those holes we want to fill and this is for us potential holes.

Therefore, we have defined global segments very specific segments like for example food or cutting and [finding] (Ph) or automotive interior equipment. And then we have also Head of Global business segments defined to coordinate coordinated in worldwide and around those segmentations.

We have scanned the markers, what the market offers. And then we have made a self assessment. And then we have defined those gaps. And you have now made a planning phase on the segmentation for the year 2021 until 2025 from our regions, but also from our global coordination points. And this we are going to align the next I think four months in order to come up with our first budget 2021 based on those segments. I think that is an entirely new learning curve for us, but I think it offers large cost potential.

And on the second bullet point, you can see we have larger market shares in Europe like in Poland, UK, Germany, but also Australia. But not as much in the U.S. and Asia-Pacific. And therefore, we expect over proportionate cost in those regions. And we want to also work on our planned profile because we think we can strengthen the FUCHS plan and to use this also for future sales.

If you go on Page 23, you see the pillar of customer and market focus. So first of all, we want to achieve maximum customer proximity and we want to utilize cross selling opportunities because I think we have strengths like no one else, but we still do not utilize it.

Sometimes we only sell a product to one customer, but the customer needs also significant other products that you also sell but offer to the customer. And it is one face to the customer I think is the one big part.

The second part is assumes a global service portfolio. We have defined our [Indiscernible] it is our idea pool within the FUCHS, and now they were spitting out the first couple of prototypes products like for example [indiscernible] where we can help our customers to coordinate their bulk tank levels and have a direct IT link for the ordering points.

We have also done a lot of work with regard to condition monitoring of water – metalworking fluids or for example, on the e-commerce side. So those are ideas we want to implement in our mainstream business more and more.

And we want to become the market leader in the segments we target obviously we can’t target all the defined segments at once. But we want to go step-by-step, and we also want to systematically introduce new business models within our world of lubrication.

If you then go on page 24, and our mission statement is lubricants technology people. So obviously we want to become the technology leader, increase our innovation, power of our chemistry, surfaces, imperative from appearance, et cetera.

We want to also introduce digital solutions and platforms. And then I think very important, we are global yet, but we are still perceived as German-centric with regard to [Indiscernible] colleagues in China and the U.S.

But most of the [Indiscernible] capacities that is in Germany. Therefore, we have a distinct goal to say we want to bring the U.S. and China to the same technological level as we have in Germany to have this see up strategy moving forward.

Page 25 is operational excellence with the goals of the FUCHS our plans have been very local. We has now invested a lot of money in our manufacturing footprint, we have I think invested over 500 million over the last couple of years. And as Dagmar has told you as of 2021 we plan to bring down the investment down to the level of depreciation, which is still around 80 million to be invested.

But we want to have a global manufacturing and distribution network. We want to also standardize our manufacturing and procurement procedures. Doesn’t mean that we have not done this so far, I think what we have invested now, it is pretty much the same around the world when it comes to fees or certain oil manufacturing. Also important is the data transparency and factors behind.

Then we come to Page 26, which is people and organizations. Again, I refer to mission statement, lubricants technology people. So, our people playing an important role. We want to be the employer of choice. We want to strengthen our global talent acquisition and retention, develop our people more- introduce competence models and have international top quotations in order to also bring for example, the chemist from China to the U.S. or to Germany vis-à-vis.

If you go into part of sustainability, I want to come back a little bit to what we call the life cycle assessment. So, sometimes it is interesting when you take a more sophisticated product, it has gone to more refining policies, for example, fully synthetic base oil has more refining console than the regular base oil.

Now therefore there is two footprint from a purchasing standpoint might be worse – later you use the material, it is significantly better because it has less change in goals. It stays longer in the machine, and this is what we call the life cycle assessment. Then the CO2 footprint of our products becomes more and more a specification for the development of new OEM products.

So, I think the better we get in this ecological sustainability path, the more we can also use it as a selling point. Obviously ecological sustainability we want to be a CO2 neutral gate-to-gate which for us is not as difficult as for many other chemical companies, because it is not too much happening between our gate. Until 2025, we also want to be neural in front of our gate and later on the entire life cycle of a lubricant.

On the economical part, we are interested in the sustain of mentioning a sales number for 2025, which especially the Corona time seems the people have problems making forecast for the next quarter would not be responsible. But we clearly say positive lookout and 16% EBIT margin is the margin we aim for. And obviously, there is corresponding increase of FUCHS value-added. Social sustainability, I think we have come a long way there and we just want to further promote projects in various companies.

On page 28, that is just a summary of highlights which is profitable growth, technology leadership, employer of choice, better market penetration, over proportionate growth in Asia and the Americas, and then the whole sustainability question.

And to sum it up to you on Page 29, our action points and the first one, I think I elaborated on this. I think very important to us is this extensive market segment report, and in addition, I think it is important to mention for those six strategic pillars. We have several strategic initiatives, which pay into those strategic goals and those strategic initiatives are staffed by cost functional teams.

So normally we have an initiative owner and then we have a steering committee. Most pages, not with any Germans in, so with Australian people in Chinese, U.S. Europe so I think that again for our people, it is very important that we include the entire world.

Obviously there is a strong emphasis of innovation service solutions and new market perspective, and joint approach if this whole strategy and the development of our corporate culture program to be able to leverage our strong cultural foundation what we have with our further strategy execution.

So that sums up, where we stand today. This is a long-term project. As I said, If we now learn to do the first part of 2021 based on the segmentation, and work on those lots of projects within our strategic initiatives, and we will further update you in the next meeting we will have, so far for my side.

Dagmar Steinert

Now, we are pleased to get your questions. Go ahead please.

Question-and-Answer Session


Ladies and gentlemen, we will now begin a question-and-answer session. [Operator Instructions]. And the first question is from Markus Mayer, Baader-Helveamy. Your line is now open. Please go ahead.

Markus Mayer

Good morning. One question from my side for the FUCHS2025 strategy. Just that you want to focus on markets and segments. If not, it is focused before this also then to try the growth of the company. Can you share some light on what kind of errors this might be the system also, for example, modest or deferring highlighted a few years ago, that you might look into the automotive aftermarket in the U.S. or some more information on this would be helpful.

And secondly, also on the consolidation side, I guess the current environment might trigger consolidation in particular family owned companies, which now I realize that this kind of crisis might take longer. Maybe you can also shed some words here, if you think that there is growing M&A pipeline and if you will be active there? Thank you.

Stefan Fuchs

Thank you Mr. Mayer. I want to come back first to the consolidation part. If you know my answer is that we always talk to competitors all the time. Obviously within the frame of entitles. Some talks so longer, some are talks shorter. The one part, I can answer you clearly. Yes, you want to take part of the consultation. The other part is, I don’t see increased activity at the moment.

So I think probably there are some which might come into financial term oil, because if you are not totally healthy walking into such crises you might become a problem. But I can’t see more activity now. But obviously, we fresh up all our contacts, we are in continuous talks. So it is not that we don’t want to due to Corona go home. That is not the case.

And just regard to segmentations. When you say segments, we have not focused on, I want to precise that those are segments we have focused on in certain countries, but not all over the world. And I think that is the close part.

So we know how to do the business, but we have just -. And you are right, our U.S. business, which was giving us lots of cash dividends over the last 25-years. A lot of it is focused on metalworking on the mining industry and specialties, which we want to call further, but there we see gaps in the OEM business and in the automotive aftermarket.

So for U.S., it will be probably more automotive and if you go to China, another very successful good course in town is our Chinese business. And from their history, they are very good in the OEM and very good in aftermarket and still underrepresented in mining specialties and metal roofing.

So this is one of the obvious ones and so we go out the world. So we have segment wind, for example, or for people that are good in 10 companies and not in others. And I think there it is also one of the task of those global business segment manager to then say, listen, you have not elected to be an emphasis in your country but it is the fourth largest country in that segment in the world and there is no longer the liberty to let go after the business based upon to segmentation idea.

Markus Mayer

Okay, very clear. Thank you.


The next question is from Isha Sharma, MainFirst Bank. Your line is now open. Please go ahead.

Isha Sharma

Hi good afternoon everyone. Thanks for taking my questions. I just have a more strategic questions for you. So the one thing that you mentioned regarding the 2025 strategy is that you don’t want to use distributors and want to be closer to your customers. What is your current setup? Could you please remind us? And is different based on the reason? Why I’m asking is because in China the penetration is quite difficult without distributed it how I understand it. So what would be your strategy there specifically and then maybe, if you answer then maybe I asked my second question after this.

Stefan Fuchs

Thanks Isha. It is a good question and one, I was sure that the question will come, so we are not against distributors clearly not. So, for example, we have in specific segments, we have business, we have one plan to get all the businesses probably $50,000 and we achieved this somewhere in the two business in the United States or invest in China we can’t service now our own. So those business we do so distinct distributor than and we like working with them. But we also looking entire countries or entire businesses to distributors. Obviously the automotive aftermarket also we have distributor. So I would say I own 70% we do direct.

Dagmar Steinert

Yes 70% to 75% direct so it is 25 to one quarter distributors.

Stefan Fuchs

Again strategically important, technology applications, we want to do it direct. Automotive aftermarket for example is more around logistics availability and the brand, not so much about this technology aspect of the application.

Isha Sharma

Understood, thank you. The other question is more mid long-term, your target of 15% EBIT margin, could you please explain what this is based on, because in the past, you have even achieved 17%? However, there have been a gradual decline now in the past five years for different reasons. It would be very helpful if you could help us understand how the business has structurally changed in the last 10 years, and how, what should we expect going forward in terms of for stoplight and for stability?

Dagmar Steinert

Well, our target is the 15% EBIT margin, mid or long-term. Historically, we have been shown like 17% EBIT margins, but as Stefan explained in the past, there was in one or the other countries, the case that there was cherry picking on certain things special industry or product or applications.

And since then, we had very strong close car and a strong track record. And if you are a company with our size, it is just a question of margin or margin points. It is a question of volume, of course as well. And therefore, it is always a combination. And within EBIT margin of 15% we think, at least that should deliver our business. And the other aspect is that the last year is we have face higher regulations in all countries worldwide, and to fulfill these regulations.

You need quite a lot of people, departments. If it is for audit certifications like everything and in the past that was not that much, let me say needed or important. And of course, if you have quite some people looking and take care for these functions they just like cost money, but they don’t [indiscernible].

And for FUCHS2025 as it is a name is our strategy for let me say it is a long-term strategy, but our target speakers of course. More effect for that range, and not for the next 20-years or 30-years, so let us wait and see where we will end up.

Stefan Fuchs

And also, if you go back, for example to the year 2015 and 2016, you see EBIT margins of 16.5%, we have a constant contributions and cost profit margin, but the heaviest for everything goes high, the exchange rate was in the high direction, the raw material project was in the high direction.

And I think don’t take the peak if possible, I would love to make 20%, but – we don’t allow our people to fine tune only, we have mangers that must be 20% but limited on goals. I think that is the part that he said all over only one to 15% goal.

Dagmar Steinert

And just to add one other thing, as you know us we don’t report adjusted EBIT or earnings figures and due to the acquisitions of the last year, the share of amortization of customer lists is quite a number by now, but we believe that normal – business we have to own it and therefore we don’t adjust it.

Isha Sharma

Right understood, that is very helpful. But strategically and from the competitive landscape perspective in general, how you see the market, there is not much that has changed and yet in the last decade is that the correct way to think about it that there are different factors that have professional margin, but then surely we should see sort of similar a number that he has seen in the past maybe in the month peak, but at least the gradual improvement.

Stefan Fuchs

Fair, I mean, what we have seen, if you go back like a for the decade, I mean, what we have seen is clearly more concentration. So, all our customers is more and more global pricing. I mean, you don’t get away with a higher price in country A, than the headquarters and country B paying less. I mean this is all history it is all cleaned up.

What we also have seen is a concentration amongst the suppliers. So clearly smaller ones became part of a bigger ones and so we would have biggest supplier now. And as I already said before, we have fairly good competition with commercial oil companies. But I always look at them like a sinus curve.

There s some years they are very focused on lubricants and other years they have less time to focus on lubricants. My own assumption is now this personality faction clumps, many of them have introduced. We might see a face of less focus on lubricants. But still, they are the market leader just by volume. So don’t underestimate them.

Isha Sharma

Right understood. That is very, very helpful. Thank you so much.


And the next question is from Knud Hinkel, Pareto Securities. Your line is now open. Please go ahead.

Knud Hinkel

Yes. Thanks a lot for taking my two questions. I would like to go back to the first year numbers for secondary as possible first of all regarding your gross profit margin. So now that everything was going in some directions. And there are very hefty movements, top-line volumes and so forth. Your gross profit looks very small. I guess there are some part this year that says push the gross profit up or down. And so I guess raw materials are a little bit down. But customers ask for better discount. So maybe you can better going to better [Indiscernible] in that regard that would be helpful. That would be my first question.

Second question on China, which looks very good. And also from other companies that we see some kind of V-shaped recovery there. Question for me is and maybe you can help me to understand it. As you are already a very long time in the company, how self sustaining is that recovery in China? Could China gold continue to recover? Is other regions and other continents are still being to recover from the downturn in the second half. So, assessment here would be also very helpful. Thanks a lot.

Stefan Fuchs

Okay, thank you for your question. My personal opinion on your last question is the China will be deep our nation after the crisis. There is a big gift everybody else. We see what is happening in the United States at the moment.

All of that things which was like a global, or like a nationwide crisis is all going away at the moment. You see racial fights in the country. You strange president election. So I think the United States is doing steps in the wrong direction is my own assumption.

And I think, this Corona crisis, the political set of this dictatorial command and control system helps them because if they lock all their 700,000 people because of 10 Corona and 50 people, nobody dares to complain.

If you watch what is happening in the U.S. and in Germany is different. And with their stimulus programs and their financial resources, I think it is sustainable. It gives you certain ups and downs. But if you ask me, if you look into South America, and Africa, where in all those countries, China is a big hand on critical raw material. China will be key nation in the future. This is my personal expectation, whatever that means to us.

The other part and the margins. And we hit 35% in the first quarter and 33% in the second quarter. It looks like decline, don’t look at those margins to me. I mean, we hit so significant business development and our U.S. was found like almost 50% in some months. Our Chinese business went up in some months, and this is a low OEM and some more specialty. So there is such a huge mix in that market I think that become the – on those two quarters, if you ask me.

We have seen certain raw material prices but our prices did not fall according to the crude oil prices and as you know, to keep to our systems, it takes a couple of months. And also I’m sure you will ask us tonight this question later and you have see that you have focus at moment, so it will take even longer to wash out the more expensive raw material and the cheaper ones so there is a certain time delay.

Dagmar Steinert

There is some time delay and we have slightly increasing production cost.

Stefan Fuchs

Due to the CapEx.

Dagmar Steinert


Knud Hinkel

Okay. Thanks a lot.


The next question is from Sam Perry, Credit Suisse. Your line is now open. Please go ahead.

Sam Perry

Hi, Stefan, hi Dagmar. Thanks for taking my questions. Just a couple from me. The 2025 strategy, do you have any changes to the cash flow allocation policy and with the CapEx program coming to an end? And I think also, just if I look at expansionary CapEx hat was spent to this program, that is the sort of earnings trajectory. When do you think the return on this capital will come though? And then I guess lastly, you just tend to just now Stefan, but what permit that to working capital into the second half?

Stefan Fuchs

Okay. Maybe I will answer working capital and Dagmar come back to the other question. The working capital on the one hand, you see that probable number of 28%. our method, correct me if I’m wrong, but we take the second quarter times four and then we apply the receivables and the inventory and the payable, so hope you see the second quarter was so low that mathematically that percentage goes up. We have not seen a major deterioration in our receivable it was really good, obviously our payables go down and then the inventory is there.

We have made a couple of external influences or let’s say internal special situations we moved plants in Australia and in Sweden. So, in Sweden we are now opening up our own plant that will be move out of rented plant form [Statoil] and in Australia we moved from the new plant into our own plants and in both countries, we have to stock up finished product.

Then he made a strategic decision in March, because we did not know whether the supply chains are holding up in the Corona crises. We got a lot of critical [indiscernible] North of Italy and a lot of other countries will be stock up raw material and in certain countries we had a significant downturn in business, and then you always have too much talk.

So with that in mind. Yes, we have too much inventory at the end of June, but when you look forward, don’t get the cash proceeds one to one to your cash flow, because if the business picks up again, you also need again more receivables.

So the NOWC percentage number should come again down to a more meaningful number closer to this 20%. And yes, we have too much inventory and this is for us high goal to work down at the moment, so much to the NOWC.

Dagmar Steinert

And your question, there was some of the return on the capital spend, when it comes and you see it, to be honest, I don’t know. We need top-line growth to see significant return on the capital spend.

And in this time with Corona, of course, we don’t know, when we come back to old levels, but I’m very confident looking at our FUCHS2025 initiative. Our strategy and all the initiatives behind that, when we are going to make to fulfill that, that will help us to grow. And that is one part of the story. The other one is of course, with our CapEx programs.

We modernized, we replace old plants through new ones. We started with implementing production standard processes. And that, of course, helps us to improve our efficiency and that we will see gains as well. But today, I’m sorry, I can’t give you answer how long it will take.

Stefan Fuchs

If you look at the FUCHS2025, we have not yet seen the outcome of our internal planning of all our people which were few in the end of May. I assume that there is a huge demand for more people and for IT investments. I think that with our plan set up with a grip for the next coming years.

And even if you go back to the depreciation level is €80 million still for us in amount which is over in the top before our base load. So we still have all even including the 80 million depreciation level for €5 million to €10 million project at a time.

And so I think for myself for the next couple of years, we can clearly stick to the target and we will, I mean the integration over €500 million. And I think all of our plans are now at a stage each clear. There might be investments in both markets like Russia for example that is now made the second phase of potentially for at the size. But all-in-all, a single our major markets, we are all established.

Sam Perry

Great. Thanks very much guys.


[Operator Instructions]. And the next question is from Michael Schafer, Commerzbank. Your line is now open. Please go ahead.

Michael Schafer

Yes good morning to all of you. Three questions from my side, two on a more strategic level. In terms of operational excellence year for to achieving sufficient supply structure and I guess all the capacity I have seen is targeting just one. So maybe can you give us a kind of idea, where you currently are in terms of APAC self sufficiency in contrast or what you are shipping basically from EMEA over there may be looks increases. So, what was the kind of production volume you basically increase in the years to come which in order to be self sufficient there in APAC? So, that would my first question.

Second one is the journal alignment also from let say target setting and incentive scheme on the management side. And you now focus more indeed on the segmentation of the alongside segments rather than regions. So, the question is how do you make sure basically doesn’t do cherry picking exercises you might have seen over the past years are not coming through again and are basically, more spheres alongside the segment structure you are putting in place in the stock market share gains in the various segments or how do you do this? This would be my second question.

And the third one is around short-term. Looking to the third quarter, maybe give us some sort of idea how basically the various reasons kicked off in July. What do you see there in APAC, Europe and the Americas, that would be very helpful? Thank you.

Stefan Fuchs

Thanks for your questions. Coming back to the first one with Asia. Yes, now actually, in the course of developing local products developed in China for Chinese OEMs. I think that is probably one to do in the future more and more, because it doesn’t have to be to importable material and then blend it globally and ship it to a Chinese OEM. So there is the big deal is global sourcing, and global manufacturing and global customers.

I do think that some of those formulations will overtime make their way take also into Europe and potentially the United States. Then you are asked about the production volume. I think we have the site, we are meeting in are actually meeting, we have two large plans of failure. We have a large site in India and we have two wonderful plants in China.

So the more manufacturing volume comes to me just to makes sense they came from or more blenders, but you don’t have to build a new plant. That is part of our modular CapEx part. So I think the more expensive stuff for done.

But as of today we still ship volumes out of Germany into Asia which is mainly coming back to the [indiscernible] acquisition where we still wait for the final customer problem. So it is a fee how many years that takes to get all the approval for so there is still some of that going on. But those are priority number one localization FMCSA alone, but we are not in the full time off season on those one.

The second part was on the general alignments target setting. I mean, we have two principles in our group, the number one KPA is the FUCSH where you are really married the profit with the cash and number two is call incentivization. And we pay all our countries on the local incentives, we know that any incentive system has also downsides.

And as we explained earlier on, if you want to make a strategic epic, sometimes we keep some adjustments for two, three years on the CapEx side to the country when we calculate the cost of capital employed, but I must say we have no opposition from the competition or if I say cherry picking this is a long-term development.

All our companies we are very eager and very much motivated to work on the segmentations. And very often you see those are if a limited amount of countries for a global segment approach and we have more volatility applications than we can afford from our internal sector so we don’t have the opposition.

And what we also do sometimes we pay double incentives on the global business segment base and on local company, which for us is okay so we don’t see major opposition that will be the one of the other conflict, but those one we will solve.

Dagmar Steinert

Okay. I will answer your question regarding Q3 development starting with Asia Pacific. In Asia Pacific we have a very strong rule, especially with China about pre-prices level. And of course, China is like the biggest part of that region. And in July we see as well good a order intake and should be a good month.

In Europe, we had quite very weak April and May or in EMEA, and a better June, but still of course below pre-crisis levels and In July, it is. Well, I would say not getting worse again. America more or less the same, even weaker April and May in America and a better June, but both regions, Europe and the Americas in June and we don’t expect them in July, the same of still below pre-crisis levels.

Michael Schafer

Very helpful. Thank you very much.


The next question is from Jean-Baptiste Rolland, Bank of America. Your line is now open. Please go ahead.

Jean-Baptiste Rolland

Hi, good morning and thank you for taking my question. I would have just one please. I apologize I joined a call a little bit later and may have missed some first nations around the 15% margin. I think most of the explanations you gave around your targets were related to structural aspects. So, I just would like to understand number one to ensure there is in your forecast, you are assuming a 15% small margin. So what are you making assumptions for recovery from the current price, are you assuming that we will be normal like that mid-cycle level kind of margins by this time. I also noticed that if I look out – I have, I mean over the past let’s say 15-years in between 2005 and 2019, you actually achieved an average margin of 15%. And the gross organic that you pointed was about 5.5% give or take. Can we also expect to midterm of similar level of growth of organic or would you expect this to, to achieve the lower or potentially higher, given the lower margin targets you are talking about versus the past five years average? Thank you.

Dagmar Steinert

Thank you for that question. Our 15% EBIT margin is a mid long-term is the target. Of course, today we have a 10% in the first half year, far away from that, in the past year to arrive, we already achieved that level. And we had strong organic growth in the last two or three years, but like 10 years before, and with the crisis, we have the opposite situation. We have decline in sales and not organic growth.

So, what is the question? First of all, of course, when we come back to pre-crisis level. And then our strategy was for 2025 will be the engine for our organic growth, which we expect. But we can’t give you more details in which range in which year. It is impossible today. And therefore, I’m sorry, I can’t give you maybe a sufficient answer on an average organic grocery, because the price crisis affect everything.

Jean-Baptiste Rolland

Very clear. Can I just follow up and trying to understand or clarify. I just want to make sure that the message you are giving today is not the margin is going to be is basic to lower level versus what you printed in 2016 or 2017. Without at least an expectation that the market on the steady state basis is not slowing down. My question is you long-term continue to expect growth potential for the company as around 5% 6% give or take. I just don’t like. I know it is not the kind of crystal ball question, but I’m just talking about your expectation and how you see the potential for growth for FUCHS long-term on this. Thank you.

Dagmar Steinert

Well if I look at our market share, you are right. We have a significant growth potential. And looking at Asia-Pacific or Americas. We have the market share roughly about 2%. So you can imagine what our growth potential is. Of course, not all our definitely relevant market, but even our market share for the specialties for special lubricants is increasing. Therefore, there is such a big growth potential out there.

Stefan Fuchs

I think the entire 2025 is a cold campaign. But I must also admitted, one of supervisory board presidents in the past 40 years always remember 11th commandment is to not extrapolate. He extrapolated at the end of last year and number for 2025, which we have covered it again.

Because the question now is where do we end up in 2021 and 2022 region a 105% of the pre-crisis and 90% of pre-crisis and be lower. And therefore, it is impossible for us to answer your question more specifically. But as you mentioned before, and I will repeat all set, but this segmentation idea is the under presentation in many countries, we see a really significant growth potential for us in the future.

Jean-Baptiste Rolland

Thank you very much. Appreciate the answer. Thanks.


The next question is from [Indiscernible] UBS. Your line is now open. Please go ahead.

Unidentified Analyst

Hello. Thanks for taking the time this morning. Two questions, I just want to say now. So we in our discussion of the 2025 plan for you, I’m just wondering whether you are able to provide any thoughts around your CapEx environment. Of course, it is been raised for a few years to try and drive a growth with theoretically before COVID going to be a little reduced this year. So just wondering whether you are having the same kind of current theoretically normalized levels or whether the big chunky type of grass. And you are hoping to decrease it, or are you actually going up with the range driving for more growth. So that is the first one.

And then secondly, also thinking about margin but that is not on goal. So just wondering and just how long do you have any volatility of how raw material as a bit of toward for you and just how you develop your SG&A expenses in the next kind of short to medium time of period? Thanks.

Dagmar Steinert

I would start with question regarding our CapEx. As you might know, we had a longer CapEx plan where we originally wanted to come backlog come down at depreciation level in 2022. With COVID-19, we intent now to do that one year earlier in 2021 and we will reduce our CapEx in the running year 2020 from roughly 150 million to 120 million.

Therefore, but we didn’t stop any of our bigger projects, which we really need. And, we just had a look at smaller projects and put forward them at the depreciation level of around 80 million for the next years that give us enough room to perform that program as well.

Stefan Fuchs

On the margin visibility, we have two interest normally that the raw material pricing and we have the currencies. I think raw material prices went down in the last couple of months, but we see them slowly going up again in the United States for example so there is a small intake upward now. So, we a view this.

On the other hand we see the euro getting much stronger at the moment compared to the U.S. dollar other currencies, which means that most of the chemicals are played in U.S. dollars. There will also be a negative impact due to the currency side.

On the strong euro, yes, with the euro dominated countries which is half of our business, it is an advantage on the other side it is a disadvantage. So, I think on balance, we all see major down or upward trends in our percentage margin.

Unidentified Analyst

Okay. Thanks very much.


And we have a follow-up question from Knud Hinkel with Pareto Securities. Your line is now open again.

Knud Hinkel

Thanks a lot. I got a question on the capital structure. So your balance sheet looks quite strong. With regard to business model, I know that business is very cash generative. I know that you do not approach. But now that you have new strategy in place maybe that has also changed in the meantime. So maybe you can share your thoughts on that. Thanks.

Dagmar Steinert

So, our balance sheet structure is really strong that is unchanged and there is no intention to make a significant change in our balance sheet structure. As you know, our business generates quite a good cash flow and even in a crisis we delivered a positive free cash flow before acquisitions in the first half year. And of course, we stick to our dividend policy as well. But, now those thoughts about changing our balance sheet structure.

Knud Hinkel

Okay. That is what I thought.


And we have no further questions at this point. So I hand back to Mr. Fuchs for closing remarks.

Stefan Fuchs

So if there are no further questions, thanks a lot for the interesting discussion, you can rest assured that we work on our future. We are not administering what we have today. And we are not fine tuning what we have today. We continue to invest in our future and I think, we will walk and talk moving forward.

The big question is really, how the economy will develop in the next coming months. If you know it will currently now step-by-step come up a little bit, there is the whole question is as I said before will it be 80% of the pre-COVID level or 105% that nobody knows, we have to see.

I think we are in excellent conditions. And yes, I personally hate to lose, I hate to go down in politics. But on the other side, I’m also proud of where we stand today. We made the acquisition, which was a strategic acquisition in our terms was not cheap. But we wanted to have it as extremely future applications.

We paid out an increase dividend and all of that we are still almost cash neutral with minus €5 million or €6 million that I think we can be open. Therefore we have a robust balance sheet, we have a stable shareholder. I think the business model continues to be grateful. I look optimistic in the future. And I’m not depressed by a [indiscernible] that I can tell you.


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

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