Fuchs : Transcript analyst call FY 2022

Full Year Results 2022

Wednesday, 8th March 2023

FUCHS Petrolub - Full Year Results 2022

Wednesday, 8th March 2023

Operator: Dear ladies and gentlemen, welcome to the Fiscal Year 2022 Analyst Conference Call of FUCHS Petrolub SE. This conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity for the analysts of FUCHS to ask questions.

May I now hand over to Lutz Ackermann, Head of Investor Relations at FUCHS Petrolub SE, who will start the meeting today. Please go ahead.

Welcome and Introduction

Lutz Ackermann

Head of Investor Relations, FUCHS Petrolub SE

Welcome

Yeah, 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 am very happy for the call, and I am 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 Isabelle 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 in our IR section of our home page at 7.00 this morning and you can find them there. Having said this, I would like to hand over to Stefan. Stefan, please go ahead.

Highlight FY 2022

Stefan Fuchs

Chief Executive Officer, FUCHS Petrolub SE

Challenging year

Ukraine war

Thank you, Lutz, and hello to all of you. It's nice to meet you again, also if it is only virtual. We have today published what we think is very good results for a very challenging year last year. If I say very challenging, we all remember 24th February, when the terrible war started in Ukraine, which now unfortunately lasts over 12 months already and we continue to condemn that war. And we can only hope that there will be soon a solution if it's at the negotiation table.

China's COVID policy

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 December and January, and the country almost came to a complete standstill towards the end, so, in one of our largest growth markets, and we were quite bound.

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FUCHS Petrolub - Full Year Results 2022

Wednesday, 8th March 2023

Supply chain issues and inflation

And all of that led to a further disruption of the supply chain, which anyway, had issues after 2020/21 with the Texas freeze at that time. We saw significant raw material cost increases all year long, 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, it was, for us, a very good result.

Board member changes and additions

If we 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 will see our colleague Lutz Lindemann, he was our CTO for many years. He is in the group since more than 25 years, a really wonderful guy. He is a PhD chemist, but he understood the business in and out and 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 two months, and then we will be back to five people in the board.

I think we are very happy with Isabelle. We don't want to introduce her again because I think you all met her at the Capital Markets Day and numerous conferences, but that was a great addition to her team. As is Sebastian, our new CTO. They are both fairly young, and both - I mean, Isabelle came directly from the outside, Sebastian came two years ago. It 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 contracts expire normally at the end of this year, and they've got another five-year extension from 1st January 2024 until 30th December 2028. So, I think it's a good combination of people who were a long time with FUCHS, and with two additions. And I think it is a fairly young board, and therefore, I can only say we, as a team, are very happy together.

Diversity and Inclusion

If you go to the next page, diversity is a big matter for us. And we were proud last year because, in the year 2021, amongst all listed German companies, DAX, MDAX and SDAX, we keep the place number three. And in the year 2022, we actually hit the place number one, and it is measured with the women quarter in the board and in the supervisory board, as well as the equal pay principle. And I think that it is something which Isabelle took into her hands last week and made us very proud, and 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.

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FUCHS Petrolub - Full Year Results 2022

Wednesday, 8th March 2023

Financial Report 2022

Isabelle Adelt

Chief Financial Officer, FUCHS Petrolub SE

Highlights FY 2022 - FUCHS successfully completes challenging year 2022

Thank you, Stefan and Lutz, and warm welcome from my side as well to what is my first financial results presentation for the FUCHS Group. Very much looking forward to that. And, as Stefan already mentioned, I think the headline says it all, 'FUCHS successfully completes challenging year 2022'.

So, turning the clocks back a little bit more than a year, I think none of us would have expected what has happened during the year, with the terrible war in the Ukraine and then all the 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 we purchase of 70% over the last two 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% and this is on the prior year level. We think this is a good performance due to the circumstances we were looking at.

So, there are two things to mention here to put this into good factor[?] for you, is on the one hand side, the strong price increases. Once we do this, we have two effects. So, point one, we see a lag effect. The moment we increase our prices to the customers, it 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 is very important to partner up with our customers, to be transparent and somehow share the pain of this increasing price environment.

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

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

Sales development

I will now guide you through a little bit more in detail and we will come to the outlook in dividends on 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

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FUCHS Petrolub - Full Year Results 2022

Wednesday, 8th March 2023

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 had suffered quite a bit.

Two things we didn't like, was one, the impact the loosening 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, that had some impact on our December results in China.

The same thing holds for the cold 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 and delivery in the US when temperatures dropped that significantly.

EBIT development

How does that look 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 had some local mix effects for the same impacts we just talked about when we saw the sales slide, as well as some impacts 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 as well as expected as to be for the full year, so a good result.

FY 2022 group sales

To look at little bit more into the details. Where did 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 strong tailwinds by currency, which was more than €100 million or 4%.

FY 2022 earnings summary

To give you a little summary of our earnings, how has this developed? We already talked about the sales increase, so I am not going through this again, but to share with you, the view on the other line items. Obviously, gross profit is up, but the margin suffered. This is due to those two facts we already discussed. So, point one, we had the lag effect; once we increased 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. And then, of course, part of it was sharing the pain 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 costs 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, so this is something obviously we need to absorb.

And then two other main drivers are obviously, as with all other companies probably as well, freight, which grew by somewhere around 20%. You might think while there was a relief on

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