Fuchs Petrolub SE (OTCPK:FUPEF) Q1 2019 Earnings Conference Call May 3, 2019 6:00 AM ET
Thomas Altmann - Head, IR
Dagmar Steinert - CFO
Conference Call Participants
Ben Gorman - UBS Investment Bank
Knud Hinkel - Pareto Securities
Sebastian Bray - Berenberg
Markus Mayer - Baader-Helvea
Michael Schäfer - Commerzbank
Martin Roediger - Kepler Cheuvreux
Oliver Schwarz - Warburg Research
Welcome to the Q1 2019 Results Analyst Conference Call of Fuchs Petrolub SE. At our customers request, this conference will be recorded. [Operator Instructions].
May I now hand you over to Thomas Altmann who will lead you through this conference. Please go ahead, sir.
Thank you. Good morning, ladies and gentlemen. On behalf of Fuchs Petrolub, I would like to welcome you to our conference call on the Q1 2019 results. On the call with me today is our CFO, Dagmar Steinert. She will take you quickly through the presentation in a minute, and then she's happy to take your questions. The presentation is also available on our website at fuchs.com under the IR section. Before we begin, allow me to point you to our Safe Harbor statement, which you will find at the end of our presentation deck.
With this, I would like to hand things over to Dagmar.
Thank you, Thomas. Good morning, ladies and gentlemen from my side as well. Before we start, I would like just to point out that we adjusted our segment reporting starting with Q1 2019 and it's in-line with our internal organization as my colleague Ryan [ph] is now responsible for the whole region in the year. And all the numbers you find in the presentation on our quarterly statements are comparable.
So now with that, I would like to start with chart number 2 with our highlights. Our stays [ph] stable at previous year's level with €643 million. Our earnings before interest and tax are down by 16% to 77 million, and this decline was planned. Our outlook 2019 remains unchanged and we expect a sales increase or sales growth between 2% and 4% and we expect for the full year a decline in EBIT between minus 6% to minus 5% but that includes the one off effect we had in the third quarter 2018 on a comparable basis, we expect EBIT a bit to decline of minus 5% to minus 2%.
If you come now to chart number three, you can see our quarterly sales development and as you can see €643 million in the quarter we also reported in the third quarter of 2018, which was a weak quarter and in the first quarter of 2018. On chart number four, you can see the group sales was -- it looks fairly flat, of course, but organic growth was minus 1% and we had tail-wind from currency of 1% but it's nothing really spectacular. Therefore, I would like quickly to come to chart number five where we're going to have a look at our regional sales development.
In Europe, Middle East and Africa, we have decline intake of 4% as well as in Asia Pacific. Currency doesn't play any role in this region and in America, which is dominated by North America we see a growth of 12% but there we've got the strong U.S. dollar and this gives us a tail-wind of 4%. In Europe, Middle East and Africa, especially in Germany, our sales are affected by the weak automotive market and in Asia Pacific it's mainly China, where we see decline in sales as well as a result of the weak automotive industry.
If we now have a look at our income statement for the first quarter of 2018 you can see that we -- sales from previous year's level that we show a gross profit which is down by 4% and that's the result of on the one hand of slightly higher raw material costs compared with the previous year's quarter. As you all know, these raw material cost increases can only be passed on with a time lag and of course, we've got higher expenses due to our growth initiative in the first quarter of 2019 mainly depreciation and personal expenses that's something of course, which affects our other financing costs as well, which increase by 4%. So, overall, we report an average before equity, the 75 million, that is 14 million or 16% below previous year's quarter. On the equity side, we are missing of course, the contribution of our Swiss [ph] joint venture which we sold in the third quarter of 2018. Therefore, we report an EBIT of €77 million after €92 million in the previous year's quarter. And earnings after tax are down €12 million to €55 million. On the next chart, 7, you just get an overview of our quarterly EBIT development. And in the third quarter 2018, there's this €12 million one-off gain included. Without that, it would have been €92 million. And so you can see we had really weak start into the year 2019.
Coming to Chart #8, our EBIT by regions. And just to remind you, as I said in the beginning, all the previous year's figures are comparable. So that are the numbers we are going to report in this shape in the future. So in Europe, Middle East and Africa, our earnings, our EBIT declined by 24% to €38 million. This has primarily happened in Germany, as I said, due to the weak automotive industry. In Asia-Pacific, we see a decline from €28 million to €21 million. That's €7 million. And that's particularly in China. In America, North and South America, we see a slightly increase of €1 million from €13 million to €14 million. And there, of course, we got as well a tailwind from currencies. Overall, the group reports €77 million.
I would now like to turn to our cash flow statement on Page 9. And as you can see with earnings after tax which are €12 million below previous year's quarter, we've got higher amortization and depreciation. But we needed €60 million less cash, which is tied up in our net operating working capital. So with that, we managed after higher CapEx of €60 million to show a free cash flow before acquisitions of €13 million.
The next chart, Page #10, gives you an overview about the development of our net operating working capital. And our NOWC remains still in the first quarter 2019 on the high level we showed by the end of 2018. But I would like to point out that we just opened our new plant in China beginning of April. And therefore, we built up quite some inventories by the end of 2018 and in the first quarter 2019 to manage these movements of production.
With that, I come to our next chart, #11, with a short summary about the first quarter 2019. As pointed out, we have a decrease in sales in EMEA and Asia-Pacific. And that is mainly due to the weakness of the automotive market in China and Germany. In Americas, we continue to grow organically. And with that, we managed the show a flat sales development for the whole group. We see positive currency effect in Americas due to the strong U.S. dollar. And within the other regions, currency don't play any role in the first quarter. Compared with the first quarter 2018, we see slightly increased raw material costs. And due to our growth initiatives, we see mainly higher depreciation and personnel expenses. And therefore, our earnings are below the comparable figure of the quarter of last year.
Now I would like to come to our outlook. It's Chart #12. It's unchanged. It's what we published in March, so like 6 weeks ago. And so I think I don't have to go through all these numbers now. But I want to point out that we expect a stronger second half of the year 2019 compared with a weaker first half 2019. And with that, I just would like to give you one other information. On Page 14, you'll find just some numbers of where the quarterly figures 2018 are comparable with our new structure.
But with that, I would be at the end of my short presentation. And now I would like to take your questions.
[Operator Instructions]. The first question received is from Markus Mayer from Baader-Helvea.
Three questions from my side. The first one is on this Chinese plant opening now in January. You said this, of course, caused some capital effect. How long do you think should the rest of this effect will take? And in particular, there's so far still parts or a part of your Chinese customers have delivered from Germany. What overall effect do you expect from this kind of plant opening? That would be my first question.
Okay. So thank you, Markus. Well, our Chinese plant opening in April, as I've said, we had to build up some inventory to assure that we are able to deliver our customers. And you should see the relief in the second quarter. Regarding our intercompany business, which comes from Germany, that's still ongoing. Because now after we have opened our new plant, we are able to approach our customer to get approval for local production. But that's a very long process. And I don't expect it to happen very soon.
Okay. And the second question is on the raw material cost increase again in Q1. And as far as I see it, at least when I look on your gross margin level, there were a number of cost increases of 2017, '18 that have not yet fully passed on to your customers. At least then the gross margin is a good indication. So therefore, maybe you can split up the gross margin of the additional costs in relation to the ramp-ups and then the growth initiatives and the higher raw material costs, that would be helpful that we see what was the raw material cost effect and what was the cost inflation effect.
Well, in the first quarter 2019 compared with the first quarter 2018, we see a decrease in volume and comparable -- nearly comparable effect in prices. And therefore, it's a mix -- it's a product mix effect, of course, as well. And in the gross margin, of course, there are the production costs included. And there, we've got in the first quarter 2019 higher depreciation compared with the first quarter 2018. So that's something which is included there as well. And besides depreciation, personnel expenses as well.
Okay, understood. And then my last question would be on this mentioned raw material cost increase. We see only the base oil prices. But most of the base oil prices here really came down. So I assume you had price decreases for the additives. Maybe you can shed some light on this as well.
Well, if I compare the first quarter '19 with the fourth quarter 2018, we've got more or less a flat development of raw material prices. But the first quarter '19 compared to the first quarter '18, base oils are slightly up. And you're right, yes, it's more on the additives and chemicals side.
The next question we received is from Ben Gorman from UBS.
Just a few quick ones for me. First of all, in terms of autos sort of going through the year, you talked about a stronger H2. And I just wanted to get an idea of what you're sort of basing that on in terms of that market recovery. And do you basically need to see a reasonable level of growth in autos in the second half in order to see that sort of translate to you guys? Or is some of the strength also coming from the new plants ramping up, et cetera? That's the first one.
And then secondly, can you just help me a little bit on your restatements? It looks like the impact on Europe and from the restatements moving Africa is slightly different. In the first 3 quarters, sort of negative €1 million, but then in the final quarter of last year, positive €10 million. So I just wondered whether that now means that there's a significant amount of license income being recognized in this division. Or is it a fair way to think about the profitability of South Africa last year? And I'll just leave at those two.
Well, Ben, thank you for your questions. I would like to start with the easy one with the restatement. Yes, you are right, it's not only moving Africa from Asia-Pacific, Africa to EMEA or Europe, it's as well license. In the full year 2018, we adjusted our segment reporting for the adjustments in our license system. And we did that when we made our full year reporting. And the full year is comparable. And now within the first quarter 2018 -- 2019, we, of course, made the first quarter 2018 comparable. And that was the last slide is for, to give you the impact for the next quarter on a comparable basis, just to give you a bit of a hand for that.
Regarding the second -- or your first question, yes, we expect a stronger second half of 2019. And of course, we expect somehow the markets to recover. I'm sure you are aware that, for instance, in China, there's a reduction of VAT for cars already in place. And we will see if it impacts demand. And we expect as well somehow, of course, a better development of the automotive market in Germany.
Maybe if I can just follow up quickly on autos, any indication sort of through April in terms of a pickup? I know obviously you guys have an order book, so it's pretty immediate or it depends on some inventory levels further down the supply chain. Any indications from April?
Well, so far in April, as we have a short visibility and everything, but we are still somehow waiting for a pickup.
The next question we received is from Sebastian Bray from Berenberg.
I would have two, please. The first is on the current level of CapEx at the company, the €180 million or so from memory that is expected for this year. How much of that is directed to growth? And how much is directed to improving efficiencies? Or put another way, is there likely to be a substantial ramp-up in volumes in H2 of the year that would help you meet your guidance for new plant, moving aside from your China facility?
And the second one is the margin, as I look at it, for the first quarter of 2019, if you were to exclude factors that you think of as one-offs, either increased investment to support the business or, for example, ramp-up costs in China, what exactly would the ramp-up costs be? Are we talking €3 million, €4 million, €5 million of one-offs in the quarter? Or how is that working?
Yes, Sebastian. Thank you for your questions. I will start with your second one regarding the margin. There are no significant one-offs in there, of course, as one or the other figure from China included. But if I have a look at our production cost, for instance, where we've seen increasing depreciation and increasing personnel expenses, that's not a one-off, that's sustainable. And the question about CapEx, we want to spend €180 million this year, where that's a record number for us. And of course, all this CapEx as far as it is production-related somehow will improve our efficiencies and -- for growth or for more capacity is I would roughly say that it's not a number out of my, more or less, out of my stomach.
I would say, well, for new plants like Sweden, expansion in Russia, expansion in U.S.A., we will expand in Germany, that's quite an amount. But there are as well spending, for instance, for a new office building here at our headquarter. And of course, there's maintenance CapEx included. And this CapEx or these growth initiatives, what will give us additional capacity is, of course, for like medium-, long-term view and won't necessarily result in the second half with an immense growth. Just to remember, I mean, for the full year 2019, we expect a sales growth between 2% to 4%.
In terms of the -- how to put this, am I right in saying that the majority of this record level of CapEx is, therefore, not going to be directed towards volume growth but improvement of existing efficiencies? Is that right or...
No, not -- it's not right. It's both. It's for additional capacities for growth, but it's as well if we modernize, if we build new plants, of course, we will improve our efficiency. So it goes hand-in-hand.
And can I just put the word efficiency after some scrutiny here? Does efficiency mean producing more volumes with the same plant? Or does it mean cutting your production cost but see if you can get back to your historical levels of EBIT margins or...
Well, efficiency means, of course, at the end, less costs. But less costs would result in higher first half rate in improving quality, in saving time, in -- so there's, of course, lots of measurement for efficiency. And yes, that's -- I would...
The next question received is from Knud Hinkel from Pareto Securities.
I would like to rephrase the question of Sebastian and ask you if you can help to strip out how much of the drop in EBIT is due to the growth initiatives and how much is due to mix and volumes. So in the presentation, you said that depreciation is up €4 million and you also incurred €2 million higher function costs. But I don't -- I did not understand how much in gross profit is -- how much decrease -- the gross profit increased due to the growth initiatives and how much of that is due to mix and volumes. That's my first question.
Second question, if I may, how much does it take until a plant that is newly erected run at full capacity, so one year, two years or less? And third question would be on the contribution of a holding -- of the holding to EBIT. That increased, if I got that correctly, from €1 million to €4 million in the first quarter. Maybe you can elaborate on that as well.
Yes, Knud, you're welcome. Well, starting with your last question, the contribution of the holding to EBIT, of course, it's licensees. But as well, the increase of €3 million, the main portion of that is due to intercompany elimination or less elimination of intercompany sales. Then you had a question about our gross profit regarding what is our margin, our margin [indiscernible] to what is mix and volume with our other things. Well, we see higher production costs. And out of this €8 million decrease in gross profit, roughly half is regarding to like raw material prices and half is due to higher production costs.
And your third -- or your second question was how long it will take to ramp up a new production, if I remember it right. Well, as we just like started our production, our new plant in China, we closed our one in Shanghai and we moved it to Wujiang. Of course, you have to do one or the other batch to ramp up production. But [indiscernible] very fast. If I think about our new grease plant in the U.S., which we opened in 2017 or '18 -- '17. There, it took us close to 1 year to ramp up production because these sophisticated greases, that's like a different kind of a production. And it needs more time to ramp something up. But with the, let me say, normal, quite modern or very modern production site for lubricants, we are very fast in ramping up.
[Operator Instructions]. The next question we received is from Martin Roediger from Kepler Cheuvreux.
Only three clarification questions. Regarding your guidance, you reiterated your guidance. Is that the sign that the earnings drop in Q1 is in line with your expectations when you published the Q4 numbers and you have given the guidance for 2019?
When we published our full year report 2018 and gave the guidance for 2019, we already pointed out that we expect a weak start into the year and that we expect a weaker first half 2019 compared with the second half 2019.
Okay. The second question is on your -- on the mix effect you mentioned regarding the gross margin. Is it fair to say that the activities in the automotive space has normally high gross margin, therefore, low COGS, cost of goods sold and therefore, on the other hand, higher selling expenses? Is that the right thinking how you had this mix effect?
Well, regarding our automotive business, it's -- of course, it's a wide range with the mix picture as well. In general, if we are looking at our like OEM business, which accounts for like 30% of our business, in general, it has like lower gross margin because there are no more or less expenses, of course, afterwards. But if we look, for instance, in aftermarket business and the automotive business, there, we have really nice gross margins. And in China, we are suffering from a weakness in both markets, not only like [indiscernible] OEM business but as well in the other automotive-related business.
Okay. And the third clarification question is on the increased depreciation charges, up €4 million in the year-over-year comparison. How much of that is due to the changes from IFRS 16?
I knew you would ask that question. It's €2 million.
The next question we received is from Mr. Michael Schäfer from Commerzbank.
Two, I have still. On the one hand, on the Americas, so you posted a nice organic growth on the top line side, surprised to see margins declining. So just a bit of question, what's the reasoning behind this one? Is this due to a higher share of automotive now kicking in sort of product mix effect? Or what has driven basically the margin decline there in the Americas in the first quarter?
And the second one is, sorry, it's coming back on your outlook statement basically. So when I got you right and then basically you pointed on sustainable cost increases, either way in D&A or personnel expenses, and you haven't factored in any kind of relief on the cost side in the second half, if I got you right, what you said earlier on. So you are entirely relying on volume improvement in the second half in order to make your outlook. Is this the right way of thinking?
Yes. It's more or less the right way of thinking. Of course, we expect in the second half volume growth. And that's reflected in our outlook. And regarding our depreciation or personnel expenses, they won't be -- it's sustainable as we already spent some money for our investments, and on the other hand, employed the people. And we are really happy to have these people onboard. Regarding Americas, you asked for the decline of margins. This is mainly two things. Of course, we are affected by currencies and South American currencies as well, for instance, where we've seen in Argentina like high inflation. Then there are still some price increases in Americas to be seen in our P&L, which are already in place.
The next question we received is from Oliver Schwarz from Warburg Research.
Just a confirmation, the increased inventories, as you stated, that the raw material prices more or less remained the same. Is that, let's say the prelude to shifting the production from one Chinese facility or your old Chinese facility to the new one? Is that, let's say, inventory buildup, so you can serve your customers from inventory once you have to cease production in the one plant and move it to the other one? Or is this more or less you being caught with lower than originally anticipated demand that led to a certain buildup in inventories? That would be my first question. The second question, I'd like to piggyback here on Martin's question regarding IFRS 16 impact on depreciation. Obviously, depreciation seems to have increased not only due to the IFRS 16 effect but also due to the higher level of CapEx. You have been spending for the last couple of years above depreciation. Might it be a right way to think about that, that by the end of the year on group level, we might see a depreciation charge, give or take, around about €75 million for the year?
And a third question would be on the changes resulting from the adjustment you made to your reported figures, which can be found on Page 14, I think it is, on your presentation. Especially the consolidation line seems to have had a huge impact or seems to have been hugely impacted by this. How are we to think about that line progressing on an annual basis? Last year, you recall that a surplus of €11 million on the EBIT line and holding/consolidation. Given holding costs, there seems to be a lot of income from licenses and others. How is that to develop in the future? Are we in for, let's say, a steady increase of that number? Or are holding costs mounting up for reasons of higher spending, higher costs that are not attributable to the regions? How are we to think about that one? That would be my third and final question.
I would like to start with your first question, inventories and our NOWC buildup. In the fourth quarter 2018, we've seen higher inventories, higher NOWC due to lower demand in the fourth quarter. And we already started to build up some inventories in China. In the first quarter 2019, we built up more inventories in China to be able to shift the production from one side to the other side without impacting our customers. Our depreciation for the full year, as you pointed out and you expect, €75 million for the full year 2019. As usual, '18 in the first quarter, €2 million are in line with IFRS 16. So for the full year 2019, we expect a number of €8 million for IFRS 16.
And of course, increasing depreciation compared with the previous year of, I would say, I don't know, €75 million for the full year would be quite a good number. Our consolidation and holding numbers, our EBIT in 2018 was €11 million for the full year 2018, of course, reflects the higher income from licensees. And if we increase our sales, our -- if you show our expected growth, of course, licensees should go up in line. But on the other end, we are building up one or the other function, which is in favor of our global processes and standards. So I don't expect that number for the next time to be significantly different.
Very clear. May I have an additional question, sneak it in here?
Yes, of course.
The oil price has been rising much at a very high pace, at least for the last couple of weeks and months. If that was to continue and if that was to be reflected in at least in the base oil prices, especially in the second half of this year, would that jeopardize your guidance regarding the EBIT development, especially in the light that it takes you 3 to 6 months at least to pass on higher raw material prices on to your customers? Or is your guidance from your point of view that conservative that it could also, let's say, sustain an impact from a significant increase in raw material prices?
If we would see a significant increase in raw material prices, that is not included in our guidance. But I want to point out, if crude oil prices are increasing, there are still the refinery margins. And it doesn't necessarily mean that base oil prices follow immediately a crude oil price.
As far as there are no further questions, I hand back to Mr. Altmann.
Thank you all for joining us today and for your interest in FUCHS. If you have any further questions, please don't hesitate to contact me later. We will be back with a conference call on the H1 results on August 1. And just a reminder from my side, please remember to register for our Capital Markets Day on June 25 if you want to participate at that very interesting day. Thank you very much, and goodbye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.