In a recent earnings call, Fuchs SE (Fuchs), a global lubricants company, presented a mixed financial picture for the first half of the year, marked by slightly lower sales due to price adjustments in response to decreased raw material costs. Despite this, the company achieved a 9% increase in EBIT to €18 million and improved its EBIT margin to 12.4%.
Fuchs SE also reported a significant rise in earnings per share and is nearing the completion of a share buyback program. The acquisition of LUBCON has been finalized, enhancing Fuchs' product offerings. Chief Financial Officer Isabelle Adelt expressed confidence in the company's ability to meet its full-year guidance.
Key Takeaways
- Sales dipped due to pricing adjustments linked to lower raw material costs.
- EBIT climbed by €18 million, a 9% year-over-year increase, boosting the EBIT margin to 12.4%.
- Earnings per share saw a considerable rise, and a share buyback is almost complete.
- The acquisition of LUBCON has been successfully closed, expanding the company's portfolio.
- Fuchs SE is optimistic about achieving its annual targets, despite a decrease in free cash flow caused by higher net working capital.
Company Outlook
- Fuchs SE anticipates stable or slightly increasing prices for base oil and additives in the latter half of the year.
- The company is on track to meet its sales, EBIT, and free cash flow targets for the year.
- A Capital Markets Day is scheduled for December.
Bearish Highlights
- The decrease in free cash flow was due to the accumulation of net working capital.
- Dividend payments and share buybacks have impacted net liquidity.
Bullish Highlights
- The aftermarket business is strong and offsets weaker OEM business.
- Positive volume development is observed across various geographies and industries, including semiconductors, medical technology, and aerospace.
- The company's order books are well filled, with no significant volume reductions.
- Fuchs SE remains confident in the growth projections for the APAC region, particularly with positive consumer behavior and order intake in China.
Misses
- The year 2022 is seen as an outlier due to significant sales spikes, making other periods appear flat.
Q&A Highlights
- Discussions included EBIT recovery drivers in the EMEA region, the performance of the Americas, and the impact of freight costs.
- The company is not heavily reliant on container shipping or air freight, primarily utilizing road and rail transport.
- The type of drivetrain in vehicles is not a concern for Fuchs as long as car sales continue to rise.
- Fuchs is positioning itself as a strategic partner for Chinese companies aiming to expand globally, despite challenges in China.
Fuchs SE, with its ticker symbol Fuchs, has demonstrated resilience in the face of market fluctuations, maintaining a positive outlook for the future. The company's performance and strategic positioning suggest a cautious yet optimistic approach as it navigates through the remainder of the year. Fuchs SE will release its Q3 figures on October 30, which will provide further insights into its financial trajectory.
Full transcript - None (FUPEF) Q2 2024:
Lutz Ackermann: Good afternoon ladies and gentlemen. On behalf of Fuchs SE, I wish you a very warm welcome to today's conference call on the half year figures. With me on the call today is, Isabelle Adelt, our CFO. And as always Isabelle will run you through the presentation in a second and then we will have the Q&A session afterwards. All the documents you can find on the IR section of our home page since 7 AM this morning. And having said this, I would like to hand over to Isabelle. Isabelle, please go ahead.
Isabelle Adelt: Thank you, Lutz, and a warm welcome from my side as well. We are delighted to guide you through what we believe are good numbers for the first half year of the Fuchs Group. So looking at the highlights of what we present today, we have some very good KPIs which are perfectly in line with what we predicted in the beginning of the year, despite some adverse developments you can read in the newspapers or see on TV and obviously what is currently happening all over the world. But we are delighted that we can confirm the outlook for this year. Some highlights of what we saw in the last three months and the first six months of the year. Sales are slightly down, but this is only driven by price adjustments due to lower raw material prices. But as you can see, of course, more moderate than what our input costs did. This is why despite lower sales, we were able to up our EBIT by €18 million or 9% year-over-year compared to where we were at the same time last year. This of course helps us as well to contribute to our midterm EBIT margin target. We are now 12.4% compared to 11% at the same time last year. This is a very good development, because looking at top line, we can see we are back to volume growth. Sales prices are down more moderately than our input costs and we have some adverse currency effects due to the relatively stronger Euros -- a Euro especially compared to US dollar, Chinese RMB, but a couple of other currencies as well. But at the same time we were able to really hold on to the good margins and manage our costs very diligently. So we are satisfied with how the results turned out. All of this led to an earnings per share which is significantly higher year-over-year. And we're happy to report that we are very close to completing the share buyback. So just to remind you, we announced that we want to buy back 4 million of each share class, which we've done as of last week for the preference shares. And we are about to conclude the ordinary shares in the next couple of days. Free cash flow is lower than last year, but according to our expectations, major contributor to the difference we see is the net working capital buildup. So what we see now is that we are back to a more normal pattern in terms of development. If you remember last year, we concluded 2022 with a net working capital over sales of 25%. So we put a lot of effort into reducing safety stock and really getting everything to a normal level. This year we see the normal pattern we've had in pre-COVID years too of a build up in the first half of the year and then a subsequent ramp down in the second half of the year. One highlight to mention before we go into the numbers in a little more detail is the closing of the LUBCON acquisition. We already announced that in our last call that we signed the deal. And now we're happy to report that as of July 26, we closed the deal. And we can now full throttle include what we believe is a very nice addition to the portfolio to the rest of the Group, as well as include the LUBCON numbers obviously into our Group numbers as of August 1. So now, looking into the numbers in a little bit more detail. Sales, as said, we are down year-over-year, but flat over last year. So what does that mean? In total, we already said prices are down a little bit. Majorly driven by our price variation clauses, plus we have a negative impact from foreign currency which would in the conclusion mean of course would be a negative impact overall. We are flat because we had more volume in Q2 this year than we had in Q2 last year, and this is what we already discussed and what we promised you in Q1. We had a slight deviation end of Q1 due to the Easter break being early. But we caught up even a little bit more than that during Q2. In terms of EBIT development compared to last quarter two of 2023, we are up 14%. And I think this is a very good achievement with, of course, different contributions. But I think for me what is the highlight of this number and why is it so high? There is contribution from all regions. Last year I think it was more the pattern. We always said EMEA is developing very strongly and the rest of the world is rather flattish and this has turned this year. So EMEA, yet, again had a very strong contribution. But the same is true for China, for Australia, for India, for the US, for Mexico and a lot of other countries. And this is once again stressing the strength of the group and confirms that the decentralized setup we are having is the right one for us as a group. To shed a little bit of light into where actually the decline in sales comes from. On the next slide you see that as announced we do not have any external impacts yet. This will come starting Q3 with the acquisition and the integration of the LUBCON Group. But if you look at where the deviation comes from, the organic part of minus 1% is a combination of high volumes, yet slightly lower sales prices. And on the other hand side, a little bit of headwind from currency because compared to beginning of the year, the Euro is significantly stronger compared to a lot of other currencies and this is what is obviously reflected in the numbers as well. So looking at the P&L and summary, for me this is a very sound picture. Sales slightly down, obviously, but big step up especially in gross margins, so compared to last year at the same time almost three percentage points. This is due to a variety of reasons. One is really good price realization; one, is a lot of focus we put onto procurement into procurement, procurement conditions; and one is operational excellence. So becoming more efficient, more effective in how we utilize our factories. And all of that combined led to a better gross margin, significantly better gross margin end of the first half of the year. At the same time, we were able to manage our other functional costs quite diligently. We have a little bit of tailwind from lower freight and lower energy costs compared to the year before. But, of course, we were not able to offset all of the personnel expenses, the increases given that we saw relatively high labor cost growth rates over the last two years especially. But in total, the higher margin, we generated the higher profit was able to offset. And this is why we are happy to report a step up in terms of EBIT margin of 1.4 percentage points compared to last year, and a step up in EBIT total of €18 million. CapEx is a little lower year-over-year, but this is only due to timing. So we still stand by the commitment we made that we want to invest basically the same amount we depreciate every year. So this is what we're targeting at for this year too. The net working capital we briefly talked about already. So this is the normal seasonal pattern. We usually see the ramp up in terms of receivables and inventories over the first half of the year and then subsequent decline over the second half. Shedding a little bit more light on the different regions. As already stated EMEA is developing nicely again, so very strong performance, similarly strong as what we saw last year in terms of growth rates. In terms of sales, they are down a little bit more than the other regions. This is majorly driven by the price variation clauses, compared to the other regions. And EMEA has more OEM business and this is where we had to adjust prices accordingly, but nothing really to worry about. And the negative currency impacts in EMEA, they are almost nonexistent and this is due to the fact that we have a lot of different currencies in the EMEA region. So as South Africa and Eastern Europe especially were a little bit weaker and we got some headwind from currency. UK gave us some tailwind and those somehow added up quite nicely. When we now move on, as already said, what for me is one of the biggest highlights this first half of the year is that we have a positive contribution from all three regions. This includes APAC as well. So if you look at this, we are looking at organic growth, volume-wise as well as price-wise, and we only have slightly lower sales because of the high FX impact we are looking at. So, this is majorly China and Australia obviously. Compared to first half of last year, China developed really nicely. Our management team there has done a fantastic job, really positioning us and repositioning us in the market giving the overcapacity we see there. So we are back to very, very nice growth rates and the same holds for India and Australia. Although Australia, especially the first quarter was a little weaker due to the heat and the lower agricultural activity, but this was partially at least compensated by high mining activity in the country. Compared to last year as well, we see a step-up in terms of EBIT as well as EBIT margin. And this story nicely continues looking at North and South America. So we're looking at organic growth rates as well with very good contributions, especially from the specialty lubricant business in the US with a big contribution from our acquisition Nye as well as very favorable development in Mexico. The high negative currency impact, this is only partially US dollar, a good portion of that is contributed by Argentina as well. Whilst our Argentina business is still very small, of course, high inflation accounting has its negative flip side on that too. So this is where we see a relatively high negative impact on top line. Major contributor to that would be the Argentinian peso. But compared to last year, I think as well very consistent picture, slightly lower sales, only due to currency impact. So this is a translational impact only no transactional effect, much higher EBIT, so resulting in a much better EBIT margin. Looking at how our net liquidity developed. I think most of that has already been said. Higher earnings after tax than we had at the same time this year the same -- maybe in the same point in time in 2023. CapEx is slightly behind expectations, but we believe that this gap will close throughout the course of the year. Net working capital, we are where we expected to be mid of this year. So we will see this net working capital build up in terms of total value as well as in terms percentage of revenue unwind throughout the rest of the year, and those other changes paints very consistent picture too. This is majorly accruals and provisions for bonus payments and for tax payments, given they're usually at the highest end of the year, most of that has been paid in the first half of the year, and now we're slowly building up the provisions for 2024. So this number will likely turn into positive throughout the remainder of the year. Of course, other impacts on net liquidity since December, was a dividend we paid after our shareholder assembly as well as the share buyback. It's just indicated the share buyback will be concluded and we will then basically be through with that. So, no additional big for the cash out planned throughout the remainder of the year. To give you a little bit more insight into working capital, I think here you can see that quite nicely. So we usually have the low point of working capital end of Q4 and we then see a sequential step-up in Q1 and Q2, and then basically further reduction in the second half of the year. This is what we've seen this year as well, and we are comfortable with that development and reiterate our free cash flow guidance since we expect the unwind effect we see every year in the second half of the year. And if you look at the numbers they are still relatively moderate. To remind you we said we are guiding for a net working capital level on average in between 21% and 22%. So, we are perfectly in line with that expectation. To give you a little bit insight on how pricing played out and how it developed. So in Q2, combined with Q1, we saw a slight up-tick in Groups 1 and Groups 2 in terms of base oil, whilst Group 3 is still slightly down. But we expect that to stabilize or even slightly pick up in the rest of the year. And I think same almost holds for additives and other raw materials we buy for production, although this is a relatively wide field, given the number of materials we buy and the number of geographies we operate in. So this will be the picture what we expect to happen in the second half of the year. Pricing being stable or slightly up really depending on the region, depending on the material we are looking at. But from what we see now, we do not expect any real spikes in terms of raw material costs, but rather a modest and flattish development. So, putting all of what we've just heard together. I think we are very confident reiterating our guidance. Given that we are at half year, we hit the half year mark more or less in terms of sales and in terms of EBIT. So despite the adverse environment and the macroeconomic conflicts we are all aware of, we are very confident to reiterate what we promised to deliver in March and what we reiterated in Q1 as well. In terms of free cash flow, this is the normal seasonal development. So we continue the guidance of slightly above 80% in terms of cash conversion towards €250 million since we expect 0.1 the positive impact from the unwind of the working capital and 0.2 then the positive contribution come the end of the provisions for bonus accruals and for tax accruals. So, all of this will contribute and we are confident we can hit or possibly even exceed those targets come end of the year. And before we move into Q&A some more update, we promised to you in our Q1 call. So, we now fix the location for our Capital Markets Day, which will take place in December. And we are delighted to announce that we will hold the Capital Market together with one of our strategically very important clients, DMG MORI. We will meet at their location, basically at their customer center in Pfronten, which is in the South of Germany, closest to Munich. Registration and more details will come soon, but please already block your calendars. We will have a dinner on December 4, and then the main event will take place together with DMG MORI on December 5. So having said this, I will hand back to Lutz, and we can start the Q&A session.
Lutz Ackermann: Yes. Thank you for that, Isabelle. And we can directly go into the Q&A. So, a moderation maybe up -- please moderator -- operator, take over for the moderation of the Q&A session. Thank you.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Michael Schaefer from ODDO BHF. Please go ahead. Your line is open.
Michael Schaefer: Yeah. Thanks for taking my three questions. The first one is on EMEA. I wonder whether you can shed a bit more color on, let's say, the key drivers behind the EBIT recovery, despite the flat organic sales. So if I recall correctly, we had something like minus 7% organic decline in the first quarter, then it was flat now in the second. So how have volumes evolved primarily, given that you have a very strong OEM exposure there? So key drivers would be very helpful. The second one is on Americas, which looks like the key outperforming region. And so I wonder, we look for almost record margins in the second quarter in the Americas. And if my math is right, then even record levels on a quarterly basis in terms of EBIT contribution in that region. So you pointed to Nye and the Mexican business. So how sustainable is what we have seen in the second quarter, in the upcoming quarter? So this would be my second question. The third one is overall on your Group seasonality. I recall previous calls where you basically pointed to the typical seasonality, that the third quarter is the peak quarter of the year. And so therefore, we should expect basically a ramp up throughout the year. I wonder whether this is still valid and whether the seasonality picture you've provided before? Thank you.
Isabelle Adelt: Yes. Thanks for your questions, Michael. Happy to shed a little bit more light into that. So looking into EMEA first you asked for key drivers. So I think what is a very important statement to make is that Fuchs is much more than just OEM business obviously, right? We have a very diverse customer base. We are exposed to a lot of industries and this is really what is helping us to grow in terms of volumes. So in total EMEA volumes are up year-over-year compared to what we did last year. And I mean, of course, there's a lot of different contributors a lot of different countries. So it's quite difficult to give you a general statement like what is the main industry or what is the main driver. But what we can say that EMEA found the same strength they had last year with good contributions for almost all countries. So of course everybody is looking at Germany and Germany is developing very nicely, especially, in terms of price realization. But we have amazing contributions yet again from Poland which is currently the fastest growing market we have in Fuchs for us. We have good contributions from Italy, from Spain, from the Nordics, from Great Britain, from South Africa. So really I think across the board all geographies. And then really playing out the strength our exposure to so many different end markets. I think of course automotive industry is an important market but it's not the only one. And when we look at automotive we, of course, have quite a big portion of automotive aftermarket as well which is independent from the auto production because as long as the car is on the street you need to exchange our products quite frequently. And this is I think really what makes the EMEA region that strong. Looking at Americas, if you ask me if there is a sustainable development for sure. But I mean when you recover what we discussed in Q1 is that we said our specialty business is really strong and this is majorly Nye, but Ultrachem and our normal specialty division as well. So this is performing really nicely. And especially for next year we see a little bit more upside to that too because what we still see is that our normal would say the bread and butter business we have so the metalworking or the industry business is doing okay, but there's still this little wait-and-see mode to see really how the elections turn out and where investment should be made. So this is something we really expect to come back next year. And then last but not least Mexico. I think we have a fantastic management team in Mexico who is very good at acquiring new customers and bringing in additional volumes. So there we see a growth where we believe this is sustainable, and especially, if even more US companies decide to invest in the US. We usually follow them so we can have a good contribution there as well. In terms of profitability so we are happy. US or Americas in total for that sake is back to the good margins. This is honestly speaking nothing we haven't seen before. So what I would rather like to frame it they're back to old strength with the entire portfolio they have now with a little wider geographical distribution with more legs to stand on plus our procurement department in the U.S. has done a fantastic job really including the US and more corporate contracts so we can benefit from much better purchasing conditions than we could in the past. And regarding seasonality for me there wouldn't be any reason to say it has changed compared to previous years. So what we usually see is a ramp up throughout Q1 up to Q3 but then usually a relatively weaker Q4 due to the Christmas break to the China Golden Week break Thanksgiving in the US and so on and so forth. And this is what we would currently expect for the rest of the year too.
Michael Schaefer: Thank you very much.
Operator: Thank you. We'll now move on to our next question. Our next question comes from the line of Martin Roediger from Kepler Cheuvreux. Please go ahead. Your line is open.
Martin Roediger: Yes. Hello. Good afternoon. I have also a few questions starting with the momentum in the second quarter. I saw that obviously, volumes plus 3% Q2, while it was flattish in Q1. So obviously there is an improvement. Do you see that already during the quarter that month-over-month is getting better and better. And you – that means also that at the beginning of Q3, what you see in terms of demand is that trend – also this favorable trend is that continuing at the beginning of the third quarter? That would be my first question. Secondly, coming back to the EBIT margin in Americas, which was rather strong. But I have the impression that the region is highly contrasted. North America very strong including United States and Mexico and South America very weak because of Argentina. So would it be fair to say that there is a quite huge gap in profitability between North America and South America, let's say, 1000 basis points in EBIT margin? And the third question is on freight costs. You mentioned in your speech that they went down I guess also in Q2 year-over-year. But we hear right now that freight costs for container shipping are rocketing as we speak. Is that a concern for you? Thank you.
Isabelle Adelt: Thanks for your questions, Martin. So happy to shed a little bit more light on that. So I mean I think we've seen a nice momentum in terms of volume growth and this is what we invested into over the last couple of years. So we are very happy we can finally start to harvest those fruits. And in terms of momentum month-over-month, it's a little difficult to say honestly speaking, given there are different number of working days in the month. We have national holidays, for example, a lot of national holidays in Europe in May. We've had the Easter break even in March. We've had the Chinese New Year break in February. So it's a little bit difficult to really give some kind of guidance in terms of month-over-month improvement. But what I can confirm what we currently see in our order books and what we see like how the market is developing in all of our big markets, it's a favorable development and we expect that trend to continue throughout the rest of the year. Although, it's really difficult to say every month we are getting better because there are different things to consider. For example, now to come the summer vacation in a lot of days. So for some weeks, it will be a little slower. Then we have upcoming, we have a Chinese Golden Week beginning of October. So there are so many effects to consider that we say we are confident to confirm that this trajectory of volume growth will continue from what we see in our older books but it will not be sequential like every month more than a month before. There's some seasonality in there too. In terms of margins in the Americas, you're perfectly right. So of course when you look at the numbers, I would say more than 90% of the Americas result is the region North America, which includes Canada, our three US entities and Mexico. And this is by far the strongest profit contributors for that reason. So looking at South America, I think to put that into perspective, our South America operations is very small, so we only have bigger locations or you can even call them bigger in Brazil and in Argentina. I mean if you read the newspaper both of the countries are not in the most favorable macroeconomic environment and political environment for that matter. So I think this is why it's fair to say that sales development as well as margin development is not as good in South America as in North America, where we have a much more stable environment to operate in and much more legs to stand on. Honestly, speaking than in South America. Regarding freight costs, it's true they came down. So you're correct as well that freight for container ships increased but luckily, we would say, more than 90% of what we do is road and rail. So we are not really that much dependent on neither container ships nor air freight. And this course you need to look into the different industries. But on average this came down quite a bit in the first half of the year.
Martin Roediger: Thank you.
Operator: Thank you. We'll now move on to our next question. Our next question comes from the line of Isha Sharma from Stifel. Please go ahead. Your line is open.
Isha Sharma: Hi, good afternoon. I have two questions left, please. We saw a bit of volatility in terms of the segment margins. So could you please help us reconcile regional trends that you saw from Q1 to Q2? We saw of course, EBIT margin getting better in EMEA, but also Americas whereas it was weaker in Asia. How should we think about it in the second half; and in that perspective for the full year, please? And then could you please also talk about what you see currently in the market into Q3 so far in terms of end markets and regions please?
Isabelle Adelt: Yeah, sure. Happy to take that Isha. So in terms of regional development, you're correct that overall we had a favorable development, but of course, just looking at margins step up in EMEA with the Americas, whilst APAC was slightly down. But I think, I mean, major contributor to that was honestly normal seasonal effect. So the margin especially in China was stronger in Q1. But this is always the month or the time ramping up to Chinese New Year is usually the strongest month of the entire year for China and we had the entire January this year. So this is just the normal season of seasonal development and not an indicator that we see a downturn or anything in the APAC region. And I think what we expect to see is very similar development to the years before. So hopefully, another step up in the direction towards our target margin in Q3. And then historically, a little weaker margin in Q4 due to the fact that we will have holidays all over the world with Thanksgiving, with Christmas, we're usually looking at slightly lower volumes lower sales compared to the other quarters and thus a little lower margins. So this would be the expectation for all regions. And from what we've seen there's nothing that we say one region is developing stronger or there's any cause for concern in the APAC region. This is just the normal seasonality of Chinese New Year given how big a share China is in that region. And what we currently see in Q3, I would say is more or less continuing the trend we've seen in the last quarter. So a very good development in all regions good order intake. And I think again good contribution from a variety of different industries, especially, of course, the specialty segment we've mentioned a couple of times which has exposure to semiconductors, to medical technology, to aerospace. We are now really looking forward of the contribution of the LUBCON Group, because this gives us exposure to some very interesting end segments too, such as railway business, medical as well. So they are very strong in the building industries like MVF plates cardboard boxes all of that which will be very cool. Automotive aftermarket has been performing really strong. Industry has grown nicely. So I think this is really what I would put in as that basically our many legs to stand on help us to continue this growth trajectory in almost all locations.
Isha Sharma: Thank you very much.
Operator: Thank you. We'll now move on to our next question. Our next question comes from the line of Riya Kotecha from Bank of America (NYSE:BAC). Please go ahead. Your line is open.
Riya Kotecha: Hi. Good afternoon. I've got two questions please. My first one is a follow-up on a question before, and that's about the business development through the quarter. Can you give us an idea of the exit rate of the second quarter in terms of volumes? And more specifically, speak a little bit about June. And the reason, I ask that is it leads to my second question which is, can you give us a bit more detail on the drivers for FUCHS's volume growth that was mid single-digit percentage in the second quarter relative to the Western European market for autos that was down double-digit. And seemed from the industry production data like it really deteriorated in June. And I appreciate that FUCHS has many different end markets and also didn't see a huge spike up when there was a strong autos market. But is there a reason that you think explains the divergence between the company's volumes and the underlying market? For example, are you gaining share or are there some bright spots end-market-wise? And on a more midterm basis would there be a reason why that business development wouldn't reflect the underlying market in that sense? Thank you.
Isabelle Adelt: Sure. I'm happy to take that on. So a lot of questions. In terms of business development, volume development, this has been relatively steady I would say. So, of course, April compared to the year before was a little stronger, but that again was just the Easter break. So the year before it was in April this year it was in March. And then for May and June, I think we saw good order intake, and I couldn't really name one of the months that was stronger or that we saw a decline. And we see this nice trend now really continuing well into July. So there's nothing that you could say that was slowing down in June. If even I would say we saw a mild pickup. Drivers of the volume is really from across the board, I would say, from a lot of different geographies into a lot of different end markets. And from that honestly speaking, I wouldn't even include -- or exclude the auto market, but maybe to try to give some perspective on this. So, of course, what we do is much more than just passenger cars and new car production. As we have a lot of aftermarket business this has grown really nicely in the first half of the year. But the same is true for agricultural production for trucks for heavy-duty vehicles. Whilst of course passenger car production was a little weaker, but not that we see that as a significant contributor to the business. And then on the other hand side, especially, the specialty applications were really strong in the first half of the year. Medical technology, renewable energy, semiconductors, just to name a few serving for us. This gives us very good confidence that we can continue this growth. If you remember especially last Capital Market Day, we talked a lot about our segmentation approach so that we really strategically and in a very focused way start to look at end markets, start to understand what our position is how big the market potential is and just use what we already know how to do in the Group in different countries. And I think this is what you can see now as well. So those are the fruits we now harvest in terms of just somehow copy and paste what we've done in other markets already to new locations. And this is what is giving us a lot of tailwind in what are difficult -- what is the difficult environment. But I mean as you rightfully said, so even when the auto market was up, we didn't profit from it as much as you would have expected. The same as now passenger cars are down. But for us it's not, I would say, a market that is big enough to really have an impact on the entire FUCHS Group, and especially, not overshadowing all of the effort we put into the segmentation approach the development of the specialty business basically the broad base we can grow from in terms of automotive too.
Riya Kotecha: Thanks. That's really helpful. I've just got one follow-up question please. And that's on looking forward into 3Q and beyond. I know the company's got some pretty close relationships especially with the German auto OEMs or the first fill business. So can you give us any color or anecdotal information on what your key customers are saying about volumes going into the third quarter and beyond? There's been news articles and anecdotal evidence from other places the market that say that there might be extended summer shutdowns that might be an impact on the 3Q production rates. So just wanted to hear what your thoughts are? And what your conversations with your customers suggest? Thank you.
Isabelle Adelt: So I think from, I mean, from what I can share and what we hear in the market when we talk to our customers, of course, I mean, the atmosphere is not bullish, and they're not overly ambitious, but we do not see huge reductions in volumes yet. So the order books are still filled pretty well. Of course, a little slower than what we've seen in the last two years, especially when they were still working on getting rid of the backlog. But from what we currently see the market is still pretty much intact. And I mean you cannot forget that when we talk to the OEMs, we do a lot of what we call like genuine brand or -- like white label business for them as well, which is what they use in their shops. And this business is still running really nicely. So I think overall the market is in shape quite well.
Riya Kotecha: Okay. That's really helpful. Thanks so much.
Operator: Thank you. [Operator Instructions] Our next question comes from the line of Konstantin Wiechert from Baader-Helvea. Please go ahead. Your line is open.
Konstantin Wiechert: Yes. Hi. Thank you for taking my question. If I may. You talked a lot about right now about the OEMs. I see I have another one on that. I think you invested increasingly amounts of R&D into auto products for your battery electric vehicles, especially in the high performance area. So I would just wonder if there would be any slowdown, further slowdown from what we currently heard in the first half in Europe, so far. How that would impact maybe your midterm growth projections if rates of -- if the share of ICEs stays longer than previously expected and shares of electric vehicles consequently lower? And maybe also second one. You also again expressed confidence on the APAC region for the third quarter, but nonetheless I think that was also a sizable part of your bridge to your 2025 EBIT target. So if you could also give some more color here, how you currently see the consumer behavior in China? And whether that still looks for you like this part of the bridge can be achieved from the APAC region? Or whether that's becoming more challenging?
Isabelle Adelt: Sure, happy to shed some light on that Konstantin. So I mean you're right we invested quite a bit of R&D work and especially like strategy alignment work. And how do we want to position ourselves for e-mobility. But openly speaking we are happy as long as the number of cars sold goes up. And we don't really mind what kind of drive-train we are talking about. So if it's an ICE (NYSE:ICE), Battery Electric Car, even Fuel Cell. So we have products that go into all of those cars. So as long as the number of cars is going up, we are good. What we currently see especially in Europe and the U.S. in the more mature market is, as you rightfully said the number of cars of e-cars not picking up as fast as everybody would have wished for. This is a lot of infrastructure restrictions not enough energy available what have you. For us, honestly speaking it's not -- nothing too concerned about, given, I mean we have products in all of those drive-trains. We have a lot of aftermarket business which go away much slower than Rudolf Fuchs filled business obviously. So I think we are in a very good position. And I think to add to that, of course we are in a lucky position compared to a lot of other Tier 1, Tier 2 suppliers that we do not really need to have a lot of CapEx and adjust our machine park our production lines for e-mobility. I mean look at it like this we are a batch manufacturer. For something like the EDFs or the Thermal fluids we can use the same production lines we already have for engine oils, for gear oils right now. So it's really just a question of batches coming in maybe a small tank here and there for new products. That's basically it. So we have a much higher flexibility due to our low -- basically our low value creation we have in-house given we just buy the products we then blend for those kind of applications. So for us, I mean either way, as long as the number of cars and the car population is growing, we are very happy about that development. Looking at the APAC region, I mean that's a big region with a lot of different trends in all the countries. Maybe let's pick out the biggest three. So I think in China, I think everybody knows it's not as easy to do business in China anymore as it used to be pre-COVID. But I think now really our strategy of In China, For China with a very strong independent management team has really paid off. So they managed to win over a lot of new domestic business. And we are currently starting with an initiative on key account management for the big Chinese players especially in the E-mobility and the Wind market. So for us this has turned out really nicely. But I think you're right. So I think consumer behavior consumer sentiment in China is still a little depressed. And they're suffering from overcapacity. But this is why a lot of those Chinese players are now looking to expand and to internationalize. And we are currently positioning ourselves as partners for them to do so. So what we currently see is more the role of China shifting towards In China, For China from In China, For the world to help us develop those markets and those accounts when for example, BYD (SZ:002594) now everybody knows that expands their factories to Mexico and Hungary that we can be their partners and be there with them to support them with those ambitious plans. What we currently see is that we have nice growth rates in India as well. So of course still significantly smaller than China, but in terms of growth it's our fastest-growing country we see over the last couple of years in that region. And for us, looking into the future, this will be a more and more interesting market too. And I think we are really happy that we now added another small factory in India with a LUBCON acquisition, so we can really be closer to the market than we could before that. And then to complete the big three in the APAC market, I think Australia mining activity is still pretty much intact. So, for us given that most of the business we have in Australia's mining business is a nice growth driver for the future as well. So, I'm still very confident with the APAC contribution we had in our mid-term strategy.
Konstantin Wiechert: All right. Thank you so much.
Operator: Thank you. We'll now move on to our next question. Your next question comes from the line of Oliver Schwarz from Warburg Research. Please go ahead, your line is open.
Oliver Schwarz: Hello ladies and gentlemen. Just one question from my side. I'm wondering about the contribution of holding consolidation, which came down quite a bit from last year's numbers. Is there probably something amiss when it comes to who contributed what because that coincides a bit with the huge increase in profitability in the U.S.? And given your recent acquisition -- last year's acquisition there, you stated that you want to export more from the U.S. to other regions. So, what is the mechanics behind that? That would be my question. Thank you very much.
Isabelle Adelt: Thanks for your question Oliver. So, this time very easy answer to that. So, what we show is really segment results. So, all of the intercompany profits that are within one region are already eliminated, but not -- rightfully said, for example when we deliver from the U.S. to China and the main impact behind that was just higher elimination of intercompany profits in our inventories and our warehouses. But we expect that number to come down by year end too. But a major contributor was really the internationalization of the Nye business. So, formerly most of that was driven out of the U.S. But as we saw that it developed so nicely in the U.S., we said okay the local management teams need to be more in-charge. So, we shipped inventories to other locations like China especially, but like Germany too. They still fit in the inventories partially. And as you can imagine nice margin development, nice intercompany margin development too. And this is actually the only influence factor there.
Oliver Schwarz: Thank you very much.
Operator: Thank you. We'll now move on to our next question. Your next question comes from the line of Anil Shenoy from Barclays (LON:BARC). Please go ahead, your line is open.
Anil Shenoy: Hi, good morning. And just a couple of questions please. First question is on raw material prices. Now, they've been very volatile between 2020 to 2023, but in the last few quarters, they haven't seemed to move a lot. And FUCHS earnings have become much more predictable now. You even stopped giving the graph in the presentation where you give the prices for each of the base oils now. So, are we to understand that we have reached a stage where we can now stop worrying about the base oil or additive prices and assume that if there is a 5%, 10% kind of a change, then it will be offset with higher prices? So, that's first question. And second question is on seasonality that we can expect in Q3. Last year we saw a 16% jump in EBIT from Q2 to Q3 and the jump was pretty much in all of the regions. So, is there a chance that we can expect that kind of a jump between Q2 to Q3 in 2024 as well? Thank you.
Isabelle Adelt: Thanks for your questions Anil. So, regarding raw material pricing, well, I think this is the $1 million question anyways. So, I think I mean what we've seen in especially 2021 and 2022 was unprecedented with a 70% price increase in only 18 months. And this is when we started to plot the graph to somehow guide you a little bit how pricing developed and you could see really ups and downs all over the place. So, what we've seen in the last couple of months or even quarters is that we are back to a more normal situation. But still, of course, prices are still on a very high level currently. And this is why to be fair I think, nobody right now, can give you any real guidance if that's it now and we are in a more normal new situation where prices will somehow relax a little more at one point in time. But I think from what we've seen over the last four or five quarters, we are back to a much more normal development than where we've been in 2021 and 2022, given that we rather see developments of let's say, 2% 3% 4% up and down, but not those huge spikes of 15% here 20% there anymore. And we somehow expect at least start this year that this kind of trend will continue. Maybe a slight uptick, but not crazy double digit growth rates again. And this is why we said, at one point in time this graph, we started to plot in beginning of 2022, became meaningless because you had those huge spikes and suddenly everything else was flat. So as soon as we see any new developments that we are worth reporting, we might think about how to change that going forward in terms of, how we report on it. In terms of seasonality, Q2 Q3 so you're correct, that we usually see a step up in Q3, although I think last year was really extraordinary when you look at the step up, especially driven by China for sure. I mean given that the first half of the year was still comparatively weak, with everybody trying to bounce back to COVID and trying to navigate the new normal, but we had some swings and roundabouts in other regions too. So I think we are expecting a step up, but not order of magnitude, the same percentage as we saw last year. Because otherwise, any guidance would be a little shaky, obviously.
Operator: Thank you. We'll move to our next question. Our next question comes from the line of Martin Roediger from Kepler Cheuvreux. Please go ahead. Your line is open.
Q – Martin Roediger: Yes. Just a follow-up question. Based on your charts, you have provided in the past, your sales to the highway vehicle manufacturers is 15%. And this is cars and trucks. And your exposure to vehicle components manufacturers that are Tier 1 to 2 clients is 18%. But they also supply products to the car industry, so I would like to understand, what is your exposure to OEM cars, if you combine your direct sales and your indirect sales?
Isabelle Adelt: So, I mean I think it hasn't really changed in the long run. So, we usually look at that. We say, we have something like 40% 45% of our total sales go to the automotive industry. Maybe we say, roughly half of that heavy-duty, half of that passenger cars. But this includes obviously, everything from first fill, from really Tier 1 Tier 2, where we have a lot of specialty greases to automotive aftermarket, with our own aftermarket brands as well as like the private label the white label business. So I think this hasn't changed compared to the last few years.
Q – Martin Roediger: The reason I'm asking was to figure out, to which extent your aftermarket business performed so well that it compensates for the weak OEM business?
Isabelle Adelt: Yes, I mean let's say, Martin our -- as we say, really passenger car business roughly 20% of our sales, which includes aftermarket business. And still I mean -- of course, passenger car business is a little weaker, but it's not down completely. And you cannot forget, we are operating in a lot of different regions. For example, when you look at China, the volumes are up currently from what we see. And this I think taking all of that into account is why we are not suffering as much from what everybody is talking about, than some people would anticipate.
Q – Martin Roediger: Okay. Thank you.
Lutz Ackermann: Okay.
Operator: Thank you. There are no further questions, at this time. So I'll hand the call back to Lutz for any closing remarks.
Lutz Ackermann: Yes. Thank you for your participation. With this, we have come to the end of today's conference call. And if there are any more questions left, don't hesitate to contact me. Otherwise, we speak next time when we release the Q3 figures, which is on October 30. So until then, have a nice summer and so you may now disconnect.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.