FUPPF - Fuchs Petrolub SE (FUPEF) Q4 2022 Earnings Call Transcript

2023-03-08 14:30:05 ET

Fuchs Petrolub SE (FUPEF)

Q4 2022 Earnings Call Transcript

March 08, 2023 07:00 AM ET

Company Participants

Lutz Ackermann - IR

Stefan Rudolf - CEO

Isabelle Adelt - CFO

Conference Call Participants

Markus Mayer - Baader Helvea

Martin Rodiger - Kepler Cheuvreux

Michael Schaefer - ODDO BHF

Oliver Schwarz - Warburg Research

Andrew Stott - UBS

Riya Kotecha - Bank of America

Isha Sharma - Stifel

Lars Vom-Cleff - Deutsche Bank

Presentation

Lutz Ackermann

Yes. Good afternoon, ladies and gentlemen. This is Lutz Ackermann speaking. On behalf of Fuchs Petrolub, I wish you a very warm welcome to today's conference call on the fiscal year figures.

With me on the call today, and I'm very happy for the call, and I'm very much looking forward to that is Stefan Fuchs, our CEO, on for the first time in the conference call; our CFO, Isabelle Adelt. Stefan and Isabel will run you through the presentation, as always, which will be then followed by a Q&A session. As always, all the relevant documents have been uploaded at our IR section of our home page at 7:00 a.m. this morning, and you can find them there.

Having said this, I would like to hand over to Stefan. Stefan, please go ahead.

Stefan Rudolf

Thank you, Lutz, and hello to all of you. It's nice to meet you again also. It's only virtual. We have today published what we think is a really good result for a very challenging year last year. And if I say very challenging, we all remember February 24, when the terrible war started the Ukraine, which now unfortunately lasts over 12 months already. And we continue to condemn this war. We can only hope that there will be soon a solution at the negotiation table. But at the end of the year, we had another massive impact on our business, which was the COVID policy in China. I mean we had the impact all over the year with the zero COVID policy, but then towards the end of the year, they went from one extreme to the other. And we had about 98% of our people infected with COVID in the months of both December and January. And the country almost came to a complete still-stand towards the end.

So in one of our largest growth market, we were quite down. And all of that led to a further disruption of the supply chain, which anyway, had issues after 2020, '21, which takes us at least at that time. We saw significant raw material cost increases all year on, also coupled with energy price increases. Also, we are not as intensive as some of the other chemical industries. But all of that was topped up with high inflation rates of 10% in the US, in Germany, more than 15% in countries like Poland. So for me, it was really a challenging year. And I think bearing that in mind that we were down in China and made up for it in all the other countries was for us a very good result.

If you move on, we have issued a couple of press releases now regarding our Board, and we are now complete for the years to come. On the very right, you'll see our colleague, Lutz Lindemann. He was our CTO for many years. He's in the group since more than 25 years, a really wonderful guy. He is a PhD in chemist, but he understood the business in and out, and then we are sorry to let him go, but it was his wish to always retire when he hits the age of 63, which will be in May. So he will move out of the Board at the end of March and then stay on for another 2 months. And then we will be back to 5 people in the Board. I think we are very happy with Isabelle. I don't want to introduce again because I think you all met her at the Capital Markets Day and at numerous conferences, but that was a great addition to our team. As is with Sebastian, our new CTO. They're both fairly young. And both -- I mean, Isabelle came directly through the outside. Sebastian came 2 years ago, is also, I think, a good mixture with continuous people who are there for the long term and then also get some ideas from the outside. And yesterday, we made a press release that with Timo and Ralph, their contract expires normally at the end of this year. And they've got another 5-year extension from January 1, '24 until December 30, '28. So, I think it's a good combination of people who were a long time with FUCHS and with 2 additions. And I think it's a fairly young squad. And therefore, I can only say we as a team are very happy together.

If you go to the next page, diversity is a big matter for us. And we were proud last year because in the year '21, amongst all listed German companies, DAX, MDAX and SDAX, we hit the place number 3. And in the year 2022, we actually hit the place number 1. And this is measured with the women quota in the Board and in the Supervisory Board, as well as with the equal pay principle. And I think that is something which Isabelle took into her hands last week and made us very powerful. I just wanted to mention it here.

Now, I hand over to Isabelle and she will run you through all our numbers and I look forward to that.

Isabelle Adelt

Thanks, Stefan and Lutz, and warm welcome from myside as well too, what is my first financial results presentation for the FUCHS Group. Very much looking forward to that.

I mean Stefan already mentioned, I think the headline says it all. FUCHS successfully completed challenging year 2022. So turning the clocks back a little bit more than a year, I think none of us would have expected what's happened during the year with the terrible war in the Ukraine and then other ripple effects we saw. So, we are very happy that we were able to increase our sales strongly for the first time ever, more than €3 billion worth of sales volume in the FUCHS Group, which is a 19% increase year-over-year. This is majorly price driven since we saw an uptick in raw material costs in goods repurchase, up 70% over the last 2 years. And our sales team did an amazing job passing on those price increases to customers, as well as discussing substitution of ingredients in the products for the customers in case something was not available.

So, I think this is why we were able to -- in this challenging environment to increase our sales by 19%. EBIT is on prior year level. We think this is a good performance due to the circumstances we were looking at. So, there are 2 things to mention here to put this into the factor for you is, on the one hand side, the strong price increases. Once we do this, we have 2 effects. To point one, we see a lag effect. At the moment, we increased our prices to the customers that takes between 8 to 12 weeks until those price increases really hit our P&L. And of course, on the other hand side, in times where you see unprecedented increase in raw material pricing, for us, it's very important to partner up with our customers to be transparent and somehow share the time of this increasing price environment.

On the other hand side, we suffered a little bit from the continued COVID lockdowns at the end of the year, the easening of the COVID policy in China in volume sales as well as we saw a decline in China, which is one of our 3 biggest markets in the FUCHS Group and one of our strongest profit contributors. So, this means the rest of the group was able to compensate for China in the shortfalls we saw because of Russia and the Ukraine.

To pour a little bit water into the wine, we as well saw our FVA coming down. Why is that? Well, in times of rising prices, of course, with net working capital, so mainly inventories and receivables towards customers go up as well. We saw an negative impact of €200 million this year alone. In combination with the rising interest rates, this had an impact of 16% minus compared to last year.

I will now guide you through a little bit more in detail and we'll come to the outlook and dividends in slides to come. So looking at the next slide, you will see our quarterly sales development. We are quite happy with what happened in Q4. We saw a very, very strong organic growth with good contributions from all regions, especially strong performance by the EMEA region on Q3 level and well above prior year. What was good to see, we saw an uptick in demand from the automotive market in Germany again, which was the first time after the industry has suffered quite a bit.

What 2 things we did imply was point one, the impact with easening of the COVID restrictions had on the economy in China. In December alone, more than 50% of our employees were impacted. This was more or less the same across the entire country. And we are now looking into the economy coming back to normal. So, we think this will be somewhere in the course of Q2. But obviously, this had some effects on our December results in China. Same thing holds for the coach front we saw in the US. A lot of our products over there are water-based. So, this had quite an impact on our performance on delivery in the US when temperatures dropped significantly.

How does that looks like when we look into our EBIT development on the next slide? Well, a strong finish to the year, €85 million, which is on prior year level. Obviously, we have some local mix effects with the same impacts we just talked about when we -- when we saw the sales slide as well as some impact on the year-end where we usually do our inventory cycle counts and then the devaluation of the inventories. But we think, overall, EBIT came out where the consensus expected it to be for the full year. So a good result.

To look a little bit more into the details, where does the growth come from. All of the growth we had was organic growth. So almost no contribution by newly acquired companies. Although one thing I'd like to mention the acquisition of Nye, we did a couple of years back, performed exemplary well and had a very big contribution to our growth. So, this was a really nice acquisition. And in the past year, we saw a strong tailwind by currency, which was more than €100 million or 4%.

To give you a little summary of our earnings, how does this developed? We already talked about the sales increase. I'll not go into this again, but to see a little bit of a view on the other line items. Obviously, gross profit is up, but the margins suffered. This is due to those 2 effects we already discussed. So point one, we have the lag effect. Once we increase the prices, it takes a little bit of time to really show in the margin. So part of this, we will now see recovering this year. But then, of course, part of it was sharing the time with our customers and meeting somewhere in the middle once prices grew too much.

Other functional costs grew as well at 14%, so slightly under proportionate to sales, which led to a decrease in the EBIT margin, but not at the same level we saw in the gross profit. What were the major contributors when you look at functional cost. Point one, obviously, and looking at personnel costs as a whole, we increased our personnel cost by more than €40 million last year. Most of that was due to inflation and the salary increases we gave to our employees. And we only increased the number of employees themselves very modestly, but this is obviously something we need to absorb.

And then 2 other main drivers are, obviously, for all other companies probably as well, freight, which grew by something around 20%. You might think, well, there was a relief in freight cost. Yes, this is true for sea freight, but more than 80% of the freight, we are looking at either street or rail, and this is still going up slightly. And then next thing is energy. Luckily, we are not a heavy energy consuming entity. So the 20% increase we saw in this cost is not a nice thing, but it's not hitting us that heavily.

The bigger effect of the energy price increase and gas price increase will have in Europe, we saw in the raw material pricing because our suppliers passed them on to us. We believe the EBIT margin we see now is the inflection point. We are well set for this year because we have the price increases, we have good cost management in place. So, we believe the margin will pick up from here on.

To give you a little view on the regions how they develop, EMEA and good organic growth, which I think is really worth mentioning, looking at what the region suffered from. So included in those numbers is the performance of Russia and Ukraine as well. Obviously, both countries were a decline in volumes for other reasons, and then there's still a little bit stressed automotive market. So, I think the sales organization in EMEA did a very, very good job to pass the prices, especially raw material prices were skyrocketed most compared to other regions on to the customers. Plus, we did another round of price increases, especially in Germany as of January 1st to cater for the higher energy and personnel costs we have in our production.

Looking into the Asia Pacific region, I think it's really worth mentioning we have a growth in sales despite the effect we saw in China. And China is one of the 3 heavy weights in our company. So, we always talk about the big 3, which is Germany, US and China. China suffered from the lockdowns. Nevertheless, the region in terms of sales managed to grow, which I think is a very, very nice thing to say because we see the -- for us, rather small countries like India, Southeast Asia and Australia are picking up nicely. Obviously, China being one of our major contributors to EBIT as well. We were not able to compensate the entire shortfall we saw there in the Asia Pacific region. But as already stated, the other regions were able to compensate that.

Most of that came from last but not least, our Americas region, with the highest pickup in sales today as well. We saw really nice pricing by our sales organization. So, I think what is worth mentioning here, we always talk about Americas being one of our biggest regions, amongst Germany and China. But this is not our core US business alone, but very nice contribution by Mexico, which for the first time surpassed €100 million worth of revenues. And Nye Lubricants, which is our acquisition from a couple of years back, they developed really nicely. Canada coming along very nicely, serving the development we put into this market in the past years and the effort is now paying off. And we see that we have a lot of different growth engines in this region. So, we managed to grow the EBIT, almost as strong as we grow our sales.

What does that mean in terms of cash? So of course, we already talked about the net working capital impact, rising costs and raw material leads to higher inventories and lead to higher receivables. We'll put a little more detail to that in a minute. But I think those €200 million lilliput our free cash flow. We still came out at a little more than €60 million, which, from my point of view, is a good result, taking into account this €200 million working net working capital increase. As it happens then for rest, we will be looking at a cash conversion of almost 100%. And so I think this is a message to really let us sink in. And we still see that with the net liquidity we have on hand, we would have been able to pay out dividend. So only the share buyback program we are doing put us below the line in terms of net liquidity.

We had short-term financing last year. We already started to pay this back now in January, and we are very confident that in the course of the year, we will be able to pay all of this back. To give you a little bit more light into what happened to working capital, obviously, very huge impact from the pricing increases. We put in very thorough working capital management at the end of the year. This is one of my first halves when I started in November and among the countries that's really nicely managing inventories, managing receivables to set free some cash. And I think good news about that is looking at inventories, this is pure price driven. So, we went down slightly compared to prior year inventory volumes and the entire increase we see here is price driven.

Receivables, same wholesale. We do not see any change in payment behavior. We do not see any change in that. We do not get our money from the customers. So, I think this is good news because this means once prices go down again, this will start to unwind. Having said this, I mean, of course, cash flow is not where we expected this to be for this year. But we think this was really an extraordinary year with a net working capital increase with the share buyback. So, we are proposing to increase the dividend by 4% per preference share and per ordinary share. And dividend increased 21 consecutive years in a row. I think this was really good news from my point of view. And this means we are increasing the dividend per share, as well as the total amount we're paying to our shareholders.

How are we looking at the year to come? I think this is what most of you have been waiting for. We believe we can increase our sales, single-digit percentage organic growth. This is what we promised, and this is what we are looking at. This would be price as well as volume driven. Of course, we are always aiming at increasing our volumes. I think this is an easy one. Pricing, obviously, we started to the year with higher prices. We gradually increased over the course of the last year. And we are looking at what potentially could be a full-year effect. But to be very honest with you, this is the number where we see the most uncertainty because nobody really knows what will happen to the raw material pricing.

For the first time in the history of FUCHS, we are in a position where we see -- where we saw raw material prices coming up and staying at a very high level. So for us, it's very hard to predict how they will develop. I will give a little bit more detail to that in a minute once we talked about the other numbers because the basket we are looking at is a very mixed back. So for us, we need to see how that behaves and what it does in the sales.

However, we are very confident with the EBIT number we're giving you, we put in place strict cost management measures, cost monitoring. We will, of course, see full-year effects of some of the increases we saw in costs last year, like personnel, like freight as well. Energy prices are a mixed bag. This is why we didn't include them as in some countries, they are coming down, in some they're not. But I think for us, it's very important. We won't potentially not be looking at lag effect again. This is why the EBIT margin, I strongly believe will start to pick up again towards our target we gave ourselves for the end of, let's say, the 2020 years. And we believe that we will see a nice growth.

FVA, we need to see how that develops. Obviously, with the still high working capital number to the capital employed with rising interest rates. So, we believe that this will pick up as well, but potentially not that much above prior years we'll wish to. Good news linked towards the capital market is that we expect free cash flow to be back to normal level or even slightly higher of our target to generate a cash conversion of 80%. What is the assumption behind this? Since we don't really know what the prices will be, we said we will not need additional working capital or hardly any additional working capital to cater for the additional sales we are planning to generate. And this is why this number is even slightly above, 80%.

To give you a little bit more insight, last but not least, into what I meant when we talked about raw material prices. Here you can see the comparison of Group 1 and Group 3 oils, which is the most frequent base fluids we are using to produce our products, but be careful still only catering for, in total, the base fluid is 40% of the raw material we buy in terms of value. This picture couldn't look more different. This curve you see at the top, which somehow goes up steeply and then goes down is the Group 1 in Europe, which is closest to the crude oil. So, you can see very high volatility, and that started with a war in Ukraine. When you look how that developed in the other regions, similar, but at a much lower level and you see that the prices are not below the level we saw a year ago yet. And when you then look at the Group 3, you can still see numbers are stabilizing or even picking up. And this is why for us, it's very hard to predict right now how this trend will continue.

Now, I will hand back to Stefan, who will give you a little bit more insight about what we're doing in terms of e-mobility.

Stefan Rudolf

Yes. Thank you, Isabelle.

As you know, we spent quite an amount of time within our FUCHS2025 strategy to look at the 3 megatrends; mobility change, digitalization and sustainability. And I think here with regard to the mobility change, I want to have a highlight today on e-mobility and within the e-mobility part on the battery itself. And therefore, if you look, we have, I think, a full product offering with regard to oil lubricants and performance fluids within the battery in the whole life cycle, and we can provide that all over the world.

So what is the lifecycle of a battery? For us, it's the manufacturing of the battery. It's actually the assembly of the battery, which is quite complex and then the usage of the battery with the loading and unloading. And the same picture, again, with some more details. You see here in the manufacturing of the batteries, first of all, you have a metal shelf where we provide stamping lubricants, the metalworking fluids, forming oils and there we have existing business today. You also need promotion, protection and clearance. And then when you go to the assembly of the battery, you have so called what we call heat conductive paste or what they call it gap fillers in the industry. When you assemble the electrolyte and the whole of the battery pack into the outer shell, you need thermal fluids and for the cooling, you have got within the battery pack, you have got the electrolytes where we have a joint venture, as you know, last year with E-Lyte, where we have now a scaling up of the manufacturing.

We need a connector base. We provide coding for the schools, which are utilized there, and they can promote protection. When you then utilize the e-car on the road, you need thermal fluids for the e-loading stations. You again need also for the socket, you need a for connector piece for protection and clearance. So I think that clearly shows our way of doing business is to have a full system and application approach for our customers and not only like one specific product, and we just supply a new and the old one is emptied. But I think for us, it's important that we have a holistic view on the process and help them from the beginning to the end. I think to -- that is the end of my battery part.

But then to just show one more time, the full e-car, you see the other products used. This is mainly the electric drive fluid, which we mentioned before, which you need in the so-called feel of the e-engine. It's also the bear increase for electric motors, which is very interesting and the compressor oil for the heat pump and many other more dedicated products. As you know, all the 30 different pieces for the suspension for the brake, the airbags, the sun roof, the seat adjustment and all of those things, they will stay in the regular combustion engine car as well, as do the shock absorber, but those other parts are like new applications. And normally, what we see, you have a fewer number of competitors because that is really a high-tech cover, which is actually quite good for us.

I think that leads us to the end of the presentation. And now we look forward to have minimum another 2 halves now or longer for your questions and discussions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Markus Mayer from Baader Helvea.

Markus Mayer

I have 2 questions. First one, of course, is on the -- how have you experienced the start of the year. In particular, have you seen already opening effects in China? Have this been visible? Or have they only flagged by your customers so far?

And my second question would be again on net working capital. Looks like that it's still quite elevated with 25% net working capital to sales. In the past, it was more around €21 million to €23 million. Should we expect you to reduce net working capital further over the long run? And as far as I have understood, basically in the free cash flow guidance, there is basically 0 net working capital effect included. This is just a clarification question.

Stefan Rudolf

Thanks a lot for your questions. How we have seen the start of the year is as the last year ended a little bit like in a similar way. So, I see, we see a strong business in the Americas, continue to see also within Europe, especially Germany. If you remember, 2022 was more of a slow start in Germany, then towards the end it was stronger. So, we see that part. With China, I think we really need to wait until the first quarter is over because last year, they had the China New Year in February. This year, it was in January. So, you need to see the combined. But January was still impacted from the zero COVID, not only our people but also other characterizes other people, the influenced stuff. So all in all, I think the start of the year proved our outlook we have given for the entire year.

Isabelle Adelt

And Markus, towards your working capital question, you're absolutely right that levels are still elevated. And we are planning to further reduce them. To give you an exact number on what our target is in terms of working capital percentage of sales is quite difficult because there was a change compared to what we saw in the previous year. But 25% is too high. So the right level will be 21%, or 22% or 23%. We will need to see. But we have a consistent approach to challenge our countries to look into how fast it is moving? What do we really need? How much raw materials versus in stock we have on hand?

So, this is managed quite diligently, and we expect that to come further down. And you're absolutely right. In terms of free cash flow, we only anticipated limited additional working capital. So, I would divide this into two main answers. We say at current pricing level, we expect working capital to come down in percent of revenue. So this means for this additional €150 million, we are planning to do in terms of sales, we do not need massive investment into working capital. What happens with the pricing and the net working capital effect related to pricing? On this question, we simply don't know. This is why we didn't build it into our guidance.

Markus Mayer

Okay. And maybe if I can steal another question, Isabelle. When you started, you said that you have also looked at the different kind of business units of FUCHS and that you see also optimization potential also in terms of forecasting, but also in terms of being more efficient on a holding level. Can you give us more color on this? How quick do you expect then the effects to come? Is it really something you expect to hit the numbers of FUCHS this year? Or is it more something for the next years out? That would be also helpful.

Isabelle Adelt

I think in terms of your first question, forecasting quality, I think, generally, the folks at FUCHS is quite skilled at doing this because we have strong local entrepreneurs. They really know their markets. They know their business. They know what's happening out there. So I think, honestly, to improve this, this will be -- point one is stretch and point one of my first priority.

When it comes to cost management and performance management, I would say, as a whole, this is definitely something on the agenda. So, I believe we're really putting in benchmarks and comparing how our countries are doing specific things. We can for sure put in place some quick wins. But for the big contributions, the likes of HANA implementation, this will for sure take a little longer and will not show in the numbers this year.

Operator

Thank you. We will take our next question. Your next question comes from the line of Martin Rodiger from Kepler Cheuvreux.

Martin Roediger

I have 3 questions, please. As far as I understand, you were not able to fully pass on increased costs to your customers in last year. So, you continue with price hikes this year. What is the amount of price hikes you currently implement as we speak? Do we talk about a low single digit, mid-single digit or high single-digit price hike?

The second question is on your Russian activities. You have a plant in Kaluga. Do you expect any write-downs on that plant because your key customer, Volkswagen is currently selling its plant in Kaluga?

And the third question that is in particular for Isabelle. In the past, FUCHS Petrolub ratio of raw materials was 60% in additives and 40% in base oil when it comes to the raw material build, not on the volumes. Did this ratio change in recent years? Because Isabelle, you mentioned in your speech that the chart you provided on Page 14 about the raw material basket, that these raw materials represent 40% of your raw materials. So as base oil Group 2, base oil Group 4 and base oil Group 5 are missing, is it fair to assume that the ratio has changed?

Stefan Rudolf

Thank you, Martin. I'm always glad you ask, Isabelle specifically. So she will answer the last 2 questions. I will answer the first question. So the first question was with the fully passed all of the raw material costs, yes, we achieved, I think, to pass them on fully despite the running behind impact. And as I've told you already last year, for me, in my 25 years, it's the first time that raw materials went up significantly, but now for many, many months, they never came down.

So if you remember, 2008, 2009, but also 2020, they skyrocketed and sharply decreased again. This time, the decrease never came. We pushed them all through. And although we were early on, we made numerous counter price increases. We also catered for increased energy and freight expenses. But we also know we have an additional €350 million in working capital on the same volumes. And I think, as I was told by my mentor, there are no free lunches. We also need to cater for that, especially when you look at the books value added.

We are doing some large rounds of price increases right now. And therefore, the longest discussion we had with regard to the outlook of our sales top line because it's so difficult. On the one hand, it should go up because we have the full-year impact on the higher prices now. On the other hand, maybe there comes a time, I don't know when, end of second quarter, third quarter, maybe never, that prices might go down. So, there will also be a certain giving back. Also the exchange rates are a little bit different. So it was really hard for us to put down a top line estimate. And therefore, we said we keep this one.

At the moment, we have no significant pressure from customers to do something in a big manner. And I think also very important, when you look at Page number 19 of the presentation from Isabelle in order, based on Q1 going up and down, this is for the European picture. So in Asia, it was not the same. It was not as deep. In the US, it was a little bit less as well. And if you look at our entire raw material basket, we see no big change at the moment. And FUCHS still continues to be very high. The additives and the chemical providers or suppliers have the same problem like we encountered on the capital employed with the fixed cost. So, we don't see any huge release coming up soon. The good thing about FUCHS is we have a very strict valuation method. We say no move of raw materials or finished products in 6 months with a 50% write-off. No move in 12 months with 100% write-offs. So, we have a clean book. And the only good thing is with regard to working capital that the supply situation has eased. So, we don't need to always stock certain raw materials anymore. So, so far from my side with regard to increases, price hikes, et cetera.

Isabelle Adelt

And then I will take your additional question, Martin. So on Russia, I think very simple answer. We are currently not expecting that we need to write-down the value of the factory. Why is that? Well, I mean, of course, we implemented everything we had to do to comply with the sanctions. So we ringfenced the organization. There are no intercompany deliveries then to Russia anymore. We have a solid check of who we delivered to in Russia. They're completely on their own cut-off from the rest of the FUCHS Group. But we said we are still -- we still have to take care of our -- roughly, I think, 130 employees we have over there. The volumes are down slightly. However, they are still doing profitable business. They are delivering to their local customers. And luckily, we have a very broad industry coverage in Russia as well. So, so far, we do not see that the business is not profitable anymore and that we are looking at an impairment.

The second question was....

Stefan Rudolf

Split between raw materials.

Isabelle Adelt

Split between raw materials. Sure. So, I think the 40-60 is still a good indication. I mean, obviously, this somehow is a little volatile month-over-month. Sometimes we buy more base fluids. Sometimes we buy more additives, chemicals, but I would say this is still valid for, let's say, looking at the entire group and the entire year.

Operator

Your next question comes from the line of Michael Schaefer from ODDO BHF.

Michael Schaefer

On the first one, just looking back into the fourth quarter, maybe you can help us understand basically the very strong finish in Europe, whether you see this as a kind of any particular major drivers of some restocking at automotive, which may be not sustainable and related to the fourth quarter review as well in the US, the impact from the freeze. Is there anything you can quantify? So, this would be my first question on the Q4.

Then certainly back to the outlook. So, I understand basically your cautious view when it comes to pricing, but it looks like that you took a cautious view on raw mats evolution throughout '23 when it comes to your top line without, i.e., taking a bit more -- maybe a kind of moderation of prices into the second half. To what extent have you baked in any kind of cost relief helping the P&L basically then in the second half? So, this would be my second question.

And then maybe, in particular, on China. So, can you help us understand maybe the kind of China sales drop you have experienced in '22? And when it comes to volumes and prices and hence, the kind of base from where we expect them to jump on into '23. So, this would be my 3 questions.

Stefan Rudolf

So thanks a lot, Michael, for your questions. We saw a pickup of the OEM business within Europe, especially in Germany, and we don't have a huge stocking potential because our products are there only for a few days, and then they are needed. So, they can't stop our products for many weeks and have a stock-up. So what we also see from the car industry, there was a certain backlog on some of the car demand. So, we don't see that at the moment. It's a temporary part only. And the freeze in the US caught us a little bit, but it's not such a significant thing that you see in additional half month, let's say, within January or February. But we saw a good US business in towards the end of the year, also at the beginning of this year. Don't forget, we also have an outstanding operation going on in Mexico where we do $100 million in sales. So, that is also a big part of our Americas, plus Nye continues to flourish really well.

With China, we saw a higher single-digit volume decrease last year, which was probably the sharpest decrease towards the end of the year and the very beginning of this year. We assume that towards the end of the first quarter, they will pick up again in China. So, I think that's the estimate we can give as of today on the pricing part and the raw material evolution and the outlook.

Isabelle?

Isabelle Adelt

Yes. Sure. Yes, Michael, from my side as well to put the outlook into perspective, we simply don't know what will happen on the raw material pricing. That's what we're looking into a glass ball. This is why we didn't build it into our outlook. Yes. So what we said, okay, we assume the pricing level we have right now and then look into the factors we can influence, which is growing the business organically with the segmentation of the market, so organic growth which is cost management. And obviously, the absence of the lag effect we saw in the last year, which in terms of free cash flow is that we figured in a decrease -- sorry, only a slight increase in working capital due to better working capital management. But what we did not figure in is a reduction in working capital due to, say, lower prices and hence, lower inventories.

Michael Schaefer

Can I just sneak in a follow-up on your raw mats basket. On this 60% chemicals part, how do you see this evolving basically?

Stefan Rudolf

More or less the same as we explained to you our pricing. So at the moment, they are still in the last phases of trying to either maintain or have slightly increased. So therefore, we see our entire raw material basket not moving at the moment. And this is also pretty much leading to where that goes.

Operator

We will take our next question -- your next question comes from the line of Oliver Schwarz from Warburg Research.

Oliver Schwarz

Firstly, I'd like to ask on CapEx. You stated that you'd like to invest in 2023, roughly the same number as in 2022, which is €80 million, given that we had some inflation to say the least. In the meantime -- and you are trying to make inroads at least into the battery into the electromobility market. In actual terms, that seems to be value-wise a lower number than compared to 2022. So is it that you are, let's say, toning down on selected projects? Or are there just not sufficient number of projects to invest in? Why is that number below depreciation also in 2023? That would be my first question.

My second question would be on the 2025 target for FUCHS, which is in EBIT terms, €500 million. Using this €390 million in EBIT as a starting point, that would indicate growth rates, EBIT growth rates, both in 2024 and in 2025 of roughly 13.5%. Can you quickly elaborate how you are trying to climb that hill, please?

And lastly, we heard about your activities in Russia. I'd like to know whether there is for you as the FUCHS Group or the FUCHS SE, any let's say, way or means to extract cash from your Russian enterprises?

Stefan Rudolf

Thanks a lot, Oliver. I start with the CapEx number. First of all, I think when you look at depreciation, you need to distinguish between depreciation of fixed assets, purchase price allocation and the immaterial part. And either Lutz, Isabelle can give you the exact breakdown. So, we are not below the depreciation number of the fixed assets. So when we compare apples with apples.

On the other hand, FUCHS was pretty mean with the CapEx, let's say, from 2000 until 2015, then we opened the valve. And once we opened the valve, you have plenty of projects. So, we don't miss any projects. So don't underestimate us. What we have done is, clearly, we set the €80 million goal to have a cap on for the time being, because we said this was a massive campaign. And at the moment, we don't see any additional facilities like we build Wujiang in China or we build in Sweden a new plant. We don't see that. We have a plant project in Vietnam, but Vietnam is a very small market for us today. So the project is also not so big as in the other companies.

The biggest project for this year is the specialty grease plant in China. That's an interesting one. And the €80 million itself always allow for some midsized projects. Yes, there is inflation. But at the end of the day, we wanted to keep that goal, but we don't do stupid things. So let's say, if we see some big opportunity, you can always give something in addition, but that's the budget we have for the moment.

And with regard to e-mobility, let's say, the service rollouts and the EDFs we do in our macular blending equipment we have today and the electrolyte was something what was part of our press release for E-Lyte. So, that's all factored in. So really nothing else to be said on the CapEx. Obviously, our 2 important colleagues on the region, they always want a little bit more, but I think it's good that Isabelle is a little bit sleep at the moment because we also made a promise to you, and I think that's very sound moving forward.

Isabelle Adelt

Sure. And then let me take on the other 2 questions. I will start with the cash from Russia question because that's the easier one. Do we see that we can extract cash from Russia? Yes, but at very limited rate. And so we got the approval to pay our dividend, but this is only possible in installments over the next 2 years. So, I think what we see is that moderately it is possible, and we're doing what we can. But when you look into the end structures of our holding, you will see that for the intercompany loan, Russia, obviously, got to build the plant.

We wrote that down because we do not believe within the next 3 years to 4 years, we will be able to get that cash out of Russia, although what we already said before stands. The business is profitable. They're self-sufficient. They are still generating cash. So the only issue are the restrictions we see in terms of getting capital out of the country. So, we are working with the banks who are on site and see to get as much out as we can. But the cash we still have in the country, optimistically, is not that much. So, we're not overly worried about that.

Our way towards the €500 million, this is still our target. It is an ambitious target. We know that, but we strive to achieve this. So what is the way towards going there? I mean, we say on one hand side, we grow our sales. Major contributor to this will be the segmentation we put into place 2 years, 3 years back that we look into what are the segments we want to play in. And we don't only do automotive. This is what people often forget. We do industry. We do specialty business. We have mining.

So, we really look into what kind of competencies do we have into the group, what kind of white spots do we have in the group when we look into market. And we are now structurally sharing that knowledge and rolling out different competency, different products throughout the group. And we believe that this will enable us to grow and grow profitably.

And then on the other hand side, obviously, continuing the strict cost management, we are doing to look into how many people do we really need to hire, what kind of processes systems can we improve. This will obviously not come through all of it this year, but in the years to come. But this is something we are continuously working towards as well.

Operator

Your next question comes from the line of Andrew Stott from UBS.

Andrew Stott

I just had 2, actually. One was around the volume performance in '22 and maybe what that means for '23 and beyond. So minus 4% against what was obviously a very good year, prior year, doesn't look like a bad performance at all considering you put prices up 19%. And what's your feel for market share within that performance? I mean, it's a question more about your philosophy of pricing. So are you pricing with the expectation that some of your customers will walk away? Are you trying to protect that volumetric share? So that's the first question.

And the second question, I might have missed it. I think Isabelle, you mentioned something around the fixed cost guidance for '23. So, I'm going back to the slide where you mentioned the '22 performance because that clearly did eat away a bit at your margins in '22. So yes, any sort of broad guidance that you can share on fixed cost on SG&A would be very helpful.

Stefan Rudolf

Yes. Thanks a lot for your questions. First of all, with regard to pricing, I have quite an aggressive stance because I understand there's always the discussion of how far can you push the envelope. But at the end of the day, if you tell to a salesperson, increase the price, but don't lose a customer, he's not going to increase the price properly. So, we really pushed hard. But the good thing is we were out of the gate early on in the year, and we did smaller rounds of price increase, rather like six times 5% and one time 30%. And the good thing -- and we are not arrogant to our customers. So, we were very transparent, but in a firm manner.

The good thing is last year, the customers couldn't go anywhere because of the availability part. We could actually jump in from the one or the other time when some of our suppliers did not have such a foresight in the planning of their raw materials. So all in all, we did not lose any significant volumes last year due to our pricing. When you look at the overall volume development, and we have done the study for ourselves and you take the full volume and then you take out China and then you take out [indiscernible], Belarus, Ukraine and Russia, was all the export out of Europe in some of those markets. Actually, all the other countries increased their volume, which satisfied me because there was a drop in China. One, it's still largest of the contributor. And you are down by a high single-digit percentage amount and other countries make up for it, make me look at it much, much more positive than we couldn't last.

Isabelle Adelt

And to take your question on SG&A guidance. So, I believe we will not see the same rate of pickup we saw last year. However, I think same as we saw on a positive note in terms of pricing that we will not have the lag effect anymore, but the full year impact of the better prices. The same obviously holds for a functional cost as well. So, I believe also something between 1/3 and half of what we saw last year will add on top to make sure to cater for the full-year effect of personnel expenses, freight and energy versus the big three to now.

But what we are doing, we are very carefully looking at where do we add fixed costs. So what we do right now is that we do not hire a lot of new people, but we wait how we start into the year and a lot of things we are planning to do, we wait for our first forecast to come in. We wait for our first quarter to come in and to really see how that turns out, how the market is developing. There's still a lot of uncertainty. So, we are very cautious in terms of adding to our fixed cost base. So, I do not believe that we will see a tick off like we saw last year again.

Operator

Your next question comes from the line of Riya Kotecha from Bank of America.

Riya Kotecha

I have three questions, please. First, on the 2023 EBIT guidance and path to the 2025 target, the guide for this year suggests an incremental €25 million in absolute EBIT year-on-year, which means that in order to reach the €500 million target simplistically that incremental contribution in 2024 and 2025 would have to accelerate to more than €50 million annually. And I want to understand what the reasoning is behind the step-up from 2024 rather than have a more evenly phased profit contribution from 2023 onwards?

My second question is with regards to the Nye acquisition in North America. That seems to be contributing positively above and beyond just the run rate effects. Can you give more color on how you realize synergies here? And have the results of this acquisition being in line with your expectations or exceeded them? And to this point, can you provide more color on if M&A will be a bit more of a focus in 2023 and if we should expect this soon?

My last question is on EVs. Given the specific applications described in the lifecycle of an EV, have you been able to better quantify what might be the FUCHS lubricant content in an EV compared to combustion engine?

Stefan Rudolf

Okay. Thanks a lot for your questions. Maybe I'll start with the last question. We still are not very much in favor to say what's the content of a car in the combustion engine and in the EV because our market share in the EV market will be higher than in the engine oil markets for light vehicles because it's a much more narrow market with less competitors. Anybody who calls for their local tool can get an engine or a specification. They buy the package [indiscernible], they mix it with 2 base oils, they have an approved product. This is different with the EDFs and the thermal fuels. Therefore, I can answer you the question. I think on the EV car, all Europe is involved. If you have 100% market share, it might be [indiscernible] below combustion engine curve, but our market share will be higher. And I think that will compensate for that.

The other part with regard to Nye, Nye significantly outperformed our expectations, and that will still be a very nice acquisition. It was the first time in my life that I was shown a hockey stick during negotiations, and we paid an earn-out on that, that they succeeded the hockey stick. And we renegotiated the earn-out successfully, but they do really outstanding within the US, but also now using our worldwide infrastructure outside of the US to sell their products in markets like Europe or in Asia, which they have done through distributors before. So nice, cool when you say there is more focus on M&A. We have never changed our focus on M&A. It's always the same answer.

We have a clear list of companies we would like to acquire. The list changes over time to the 3 megatrends and to the external impacts. But we continuously talk to many people, and we would hope to conclude something this year, but I can't give you any promise as always. It depends on the specific situation of each of the family selling something always as a larger company and there's been of something. But M&A, we don't need it for our 2025 plans, but we would love to continue to do M&A as we have done in the past.

Isabelle Adelt

And to go back to your EBIT question, yes, you're absolutely right. This is an ambitious target, but same as with our products we're selling, we like challenges, we like conditions. So what do we believe will be different in the years to come. I mean, listen, the last 2 years, we somehow had the issue, raw material prices were skyrocketing and our sales force was really focused on discussing price increases with our customers, discussing the substitution of materials, which sounds easy, but really it's not when you approach an OEM and say, listen, we can produce the product but we somehow need to exchange some of the ingredients.

So, they didn't really have a lot of time to focus on volume growth and to focus on developing the segment. So, we believe that starting from this year, this will be different again. And our sales force can put on a different path and really focus on growing the segment and growing volumes again. So once we see that, we believe that the EBIT will pick up much quicker and we have it evenly distributed more or less over '24, '25.

And the next thing, obviously, we are taking a much closer look on cost management now with what I spoke, for example, already said with hiring less people or really more carefully looking at where do we need additional people. We're managing our costs, managing our resources, putting in place new standards, selling less ingredients will be the success to be taking the next step towards the €500 million.

Operator

Your next question comes from the line of Isha Sharma from Stifel.

Isha Sharma

I just have two, please. Could you help us with your specific expectation in terms of volume by businesses and regions, please? Where do you see the most potential here?

The second one is, if you could please quantify the impact from the frost wave in North America. I'm just trying to understand the exit rate for Q1 estimate. And in this regard, are you expecting your earnings to be more second-half weighted in 2023?

Stefan Rudolf

I think with regard to the outlook, we look forward, I think, to a solid first quarter. So it's not that we have all the hopes for the third and the fourth quarter. That's the one part with regard to specific expectation. So coming back to the frost in the US, it will not counter that we have like 4 months in the first quarter in the US. So it will have some impact. But I think if you have a backlog, it takes some time to get rid of the backlog because all of our customers had their backlogs as well.

With regard to specific volume expectations, I think, as we have said before, we really estimate that starting in the second quarter, we see a rebound in China. And otherwise, we have budgeted for volume increases in Europe as well as in the Americas. And as Isabelle already outlined on our segment approach, we have budgeted in 2022 business development, which we moved 1 year to the right to 2023 because last year, our sales people were fully engaged with pricing and the raw material availability issues. And this year, we have none of both. So, I think they really have time to go out and get their plans executed, and we see some good results already happening also, therefore, that is I think our outlook for this year, which I find more positive because we have significantly less cost challenges as we had last year.

Isabelle Adelt

Maybe, Isha, to add on the frost damage side. To be very clear, we do not see permanent damage like when you have those pictures in mind of the refineries in Texas, this was really a temporary impact. At the moment, it's very cold outside. For us, there's a limitation to move the product around to them out of the warehouses because they will freeze. But it's not that our plant or our production availability was somehow, somewhat smoother now, and we need to rebuild, but this was really pure temporary end of December, beginning of January impact. So once the temperatures rose, again, we could go back to full capacity.

Isha Sharma

Sure. My question was only regarding the underlying EBIT for Q4, which then I could extrapolate it was not that I expect the frost to continue. I was just hoping to see what your underlying EBIT was in the fourth quarter.

Lutz Ackermann

Okay. Are there any more questions from your side? Otherwise, we have come to the end of today's conference call. So maybe this is the last chance to ask the questions if you have one.

Operator

[Operator Instructions] We have the last question. And the last question comes from the line of Lars Vom-Cleff from Deutsche Bank.

Lars Vom-Cleff

Yes. I promise to be quick, keeping an eye on the time. Looking -- I also have questions about your guidance. I mean, is it fair to assume that this is rather a minimum EBIT guidance you published, especially that you have not provided us with a range this time, rather a single amount? Because if I do a quick back of the envelope calculation and divide your €390 million by the €3.6 billion sales target, it would imply a margin recovery of around about 10 basis points, which looks very conservative to me, given the qualitative statements you also made during your -- with regards to the outlook.

Stefan Rudolf

I think that's a clear question for Isabelle.

Isabelle Adelt

Thanks, Stefan. No, I wouldn't say this is a minimum guidance, but we said, okay, we somehow do -- I mean I personally like to do guidance a bit differently. This is where it comes from, that we don't have ranges anymore, but rather spot rate because it's water like precious. That's the only reason behind. €390 million is due to our best knowledge of how the market and how the raw material pricing will behave this year. So for us, this is really glass ball. We don't really know what happens. So it can be -- if the prices do not really recover, we don't see the same lag effect in a different direction. It can be -- they go down by 20%. So, we will see a strong uptake in terms of EBIT. So, this can go into both directions.

We saw that last year as well. That suddenly it was very difficult for us to give a guidance. I mean Stefan did a really nice quote earlier towards the press in March, as somehow stopped hoping for the price to go down because somehow it never happened. We still didn't see this. So, this for us is such a big uncertainty. And as you know, I mean, pricing for us is really the core around raw material prices, how we do our prices, how our asset develops. And for us, it's really difficult to tell right now.

Lars Vom-Cleff

Understood. I saw a Bloomberg headline accompanying your balance sheet press conference where it says, you want to keep your '23 margin stable at around 11%. Is that a figure you mentioned and you explicitly try to reach? Or where does that come from?

Isabelle Adelt

No, I think we didn't have it calculated. But no, we didn't mention 11%. This is just, I think, the same exercise we did for the €390 million divided by €3.6 million.

Lars Vom-Cleff

Excellent. Understood. And then maybe the last one. There was another headline saying you want to reach your EBIT target of 15% or above 15% by the end of the 2020 year. I guess this is the latest date until which you intend to have reached this margin and you wouldn't rule out to be able to reach it earlier, right?

Isabelle Adelt

We would love to reach it earlier, obviously. But I mean we are talking -- and for me, this is very important about the sustainable EBIT margin of 15%. I mean, obviously, once prices go down, we will see this margin narrow again. But for us, it's really important to think about what do we need to change structurally, how do we want to put our sales force in terms of the segmentation, what kind of systems and processes do we need. And this takes more than a year or 2 to implement, honestly speaking. And this is why we said 2025 is not realistic, but will be more towards the end of the 2023.

Lars Vom-Cleff

I understood.

Operator

There seems to be no further questions. So, I will hand back for closing remarks.

Lutz Ackermann

Yes. Thank you for the participation today. So this is the end of the conference call, and we would like to thank you very much for the participation. And we are looking forward to the next conference call, which will take place on our day of the Q1 reporting, which will be not too far away on 28th of April. And have a good time until then. Bye-bye.

Stefan Rudolf

Thanks a lot.

Isabelle Adelt

Thank you. Bye-bye.

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Fuchs Petrolub SE (FUPEF) Q4 2022 Earnings Call Transcript