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Dear ladies and gentlemen, welcome to the Analyst Conference Call of FUCHS PETROLUB SE. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Thomas Altmann, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.
Thank you, Aurinia, and good afternoon to everyone. On behalf of FUCHS, I would like to welcome you to our conference call to discuss the results of our first quarter 2020. On the call with me is Dagmar Steinert, our CFO. As always, Dagmar will take you through our presentation, which is then followed by a Q&A session. You can find the quarterly statement, the factsheet, our earnings press release and our conference call presentation on our website at fuchs.com under the IR section. With this, I would like to hand things over to Dagmar.
Thank you, Thomas. Good afternoon, ladies and gentlemen. Thank you for joining us. I hope you and your families are doing well. For us, the health of our employees is also our highest priority. We already addressed some concerns during our March conference call regarding the impact of COVID-19 pandemic. However, we did not foresee a global pandemic with such huge impact on the global economy. Worldwide, all countries are confronted with this challenge, and countermeasures from governments and companies all over the world are focusing on people's health and safety. At FUCHS, we maintain production in most of our plants, just Argentina and India is closed due to government reason. Our entire team is doing a remarkable job. But now let me turn to our business. On Chart #2, Highlights, you can see that COVID-19 pandemic in China has already left its mark on FUCHS' quarterly results. Group sales are down by 4% and EBIT is down by 6%. Any outlook for the global economy is currently highly uncertain, if not impossible. We are expecting a significant drop in earnings in the order of 50% in the second quarter, and this represents a significant decline in earnings of around 30% for the first half of the year 2020. And the outlook for the full year 2020 is not possible under current circumstances. On the next chart, our quarterly sales development shows our weak start into the year 2020 compared with the weak first quarter 2019, and it is almost on the level of Q4 2019. The first quarter is usually the weakest quarter for us. Nevertheless, we will see further declines in the second quarter. Turning now to our first quarter group sales, Chart #4. In a challenging economic environment, we see an organic decline of 6%, which was partly offset by external growth of 2%. This external growth results from our acquisitions in Australia in April 2019 and in North America, it was ZIMMARK in November 2019 and mainly NYE in January 2020. There are hardly any currency effect. I will now focus on the development of sales by region, Chart #4 -- Chart #5. EMEA is at previous year's level with sales of EUR 401 million. The business in the first quarter is largely unaffected by the COVID-19 crisis. And Germany benefits from high intercompany deliveries to China. Asia Pacific shows a sharp decline in sales of 14%. Organic, it's minus 16%. Especially in China was a drop in sales in February. In March, we had a slight upward trend. The external growth in Asia Pacific is from the acquisition of NULON in Australia in April 2019. North and South America increased sales by 4%, but report negative organic growth of minus 6%. North America had a weak fourth quarter in 2019 and continued with a weak start into 2020. Our U.S. business is impacted by downturns in coal mining and the weak automotive market. External growth of 10% is mainly due to the acquisition of NYE in January 2020. Let's now move on to our income statement. We had weak sales as a result of the COVID-19 pandemic. Gross profit is EUR 1 million higher compared with previous year. Slightly higher manufacturing costs are offset by pricing and raw material cost savings compared to Q1 on a year-on-year comparison. That results in a positive upward trend in gross margin. In the first quarter 2020, our gross margin is 35.4% versus 33.7% in the first quarter 2019. Other function costs are up EUR 6 million despite cost savings, that is mainly driven by the acquisitions. Depreciation and amortization is also higher due to our growth program. Therefore, EBIT is down 6% or EUR 5 million to EUR 72 million. If we have a quick look at the quarterly EBIT development, that shows the same picture as a quarterly sales development. A weak first quarter, below the fourth quarter 2019 and below previous year, which was as well a weak start into the year 2019. So now let's look at the EBIT by region, starting with EMEA. EMEA increases EBIT of EUR 5 million to EUR 43 million. The impact of the crisis is still small in the first quarter. And Germany, as already mentioned, had a good start, thanks to high intercompany deliveries to China. Poland as well showed a good performance. Coming to Asia Pacific. There, we see the effect by the crisis, by COVID-19, and EBIT is down EUR 4 million year-on-year. The significant drop in business in China in February is a dominant factor for that development. In North and South America, we report a lower EBIT of EUR 2 million year-on-year, and the lower sales due to weak automotive market and mining industry burned the EBIT. Additionally, in North America, we had more bad debt provisions. In holding consolidation, you see that EBIT is down by EUR 4 million due to the elimination of intercompany profit. Let us now focus on the cash flow statement. Free cash flow before acquisition amounts to minus EUR 4 million in the first quarter 2020. The main reason is the significant increase in net operating working capital. We increased inventories in China due to the slump in business and these stronger intercompany sales from Germany. CapEx is at EUR 31 million, on the expected level, and cash out for acquisitions, NYE and our 3 African joint ventures, amounts to a cash outflow of EUR 95 million. On the next slide, our net operating working capital is visualized. We will keep you updated of the development in the following quarters, and of course, is expected to come down again. Now I want to give you a short earnings summary. We have an organic sales decrease in Asia Pacific and Americas. Region EMEA is stable at previous year's level. The external growth in Asia Pacific is due to NULON, our acquisition, and in Americas due to the acquisition of ZIMMARK and NYE. Our increased gross profit compensates slightly higher manufacturing costs. This positive upward trend in gross margin from previous year continues, and our gross margin now is at 35.4%. Our other function costs are up by 4% despite cost savings, and that is mainly driven by the acquisitions. Depreciation and amortization is also higher due to the growth program, which is already in place since 2016. Therefore, our EBIT is lower year-on-year at EUR 72 million compared with EUR 77 million. With that, I would like to come to our outlook, which reflects the current situation. As already stated at the beginning of our call, there is a high uncertainty effect on the crisis on supply chain. Production and customer demand cannot currently be reliably estimated. An adjusted outlook for the full year 2020 is not possible under the current circumstances. The difficult market environment is set to deteriorate in the second quarter, and we expect a significant EBIT drop in the order of 50%. FUCHS is well positioned to respond to the crisis and has a solid financial position. The stability and the structure of our balance sheet form a solid foundation for further development. There is a positive effect from the low proportion of fixed costs and the high proportion of materials, which gives us breathing room with regard to sales. In addition, our solid balance sheet is a basis for an appropriate liquidity position and sufficient precautions already have been taken to maintain liquidity even after dividend payments, which we intend to pay, of course, next week after our Annual General Meeting. With that, so far, a quick overview about our current situation, the development of our first quarter, and now I will be glad to answer your questions.
[Operator Instructions] And the first question is from Isha Sharma, MainFirst Bank.
So first one, if you could please elaborate on the underlying trends that you see on a regional basis? Specifically, what is the sustainability of the recovery or the uptrend that you see now that is reflected in your order book? And also, if you could please explain what is the basis of your assumption for a 50% decline in earnings in Q2? Do you assume deteriorating environment? Or do you expect the environment to stabilize from here on? That would be helpful. My second question would be on net operating working capital as a percentage of sales. Despite the lower earning business activity, is it fair to assume that this can be explained by the strong demand in China, and therefore, the shipments from Germany adding to the higher number? And in that respect, also CapEx was almost flat. So how should we think about the quarterly progression given that the guidance for the full year is EUR 120 million? Or are you flexible on that number and why this might be lower than expected? Those are my questions.
Yes. Thank you for your question. I will start with the trends on a regional basis. Well, starting with Asia Pacific, as already stated, China is improving already in March, and that is still an ongoing trend. The rest of Asia, the -- well, Australia is -- wasn't that much affected by COVID-19, and the rest of Asia, the smaller countries are, of course, affected, and for instance, in India, everything is locked down. The other countries, our sites are all open, and we are working on, let me say, lower level. Looking at Europe, of course, it will be a very difficult second quarter. As you know, lots of production sites of our customers are closed. Therefore, of course, we have cancellation of orders, low order intake and everything. And looking at America or North America, North America had a weak last quarter in 2019, a weak first quarter 2020, and we don't really see there room for big improvement. Therefore, overall, Asia Pacific will be developing better while Americas and Europe will be lower.
And in that respect, the assumption of the decline in Q2?
Yes, of course, that's the basis for our assumption of decline in Q2. As you know, we've got a short visibility. And -- but what we see and what we see on development, even with the uncertainty, brings us to our assumption that we see a earnings decline of 50% in Q2. Your question about net operating working capital development. Yes, that is China, that -- significantly higher inventories in China due to the stop of business in February and then, of course, starting again on a lower level. And as we had a lot of higher intercompany sales and shipments from Germany to China, which helped, of course, the earnings in the region EMEA and -- but which is eliminated on a group level, and we will see there, of course, lower inventories in the future. Then you had a question about our CapEx development on a quarterly basis. We expect EUR 120 million CapEx for the year 2020. We still stick to the number we published in March this year because that is, yes, due to our growth program, and as you know, we've got quite a lot of running projects which we want to finish, which we don't stop, and we will spend EUR 120 million CapEx as expected in 2020.
The next question is from Martin Roediger, Kepler Cheuvreux.
I have 3, please. First, a clarification question on the previous one. This minus 50% EBIT drop you expect for Q2, what is the related assumption for volume decline? Is that a 25% drop in volumes and then you come to a 50% drop in EBIT? The second question is on your raw material situation and for, going forward, the gross margin. With the oil price drop in recent weeks and knowing that your price valuation clauses kick in with a delay of 3 to 6 months, should we expect that you will sit quite significantly from lower raw material costs in Q2 and Q3, and therefore, gross margin should sequentially rise in Q2 and Q3 compared to Q1? And the third question is on the other costs in your P&L, i.e., the selling expense and the admin costs. When I do not look on a year-over-year comparison but on a sequential comparison, that means Q1 compared to Q4, I see that these costs are up quite significantly. And the only explanation I have is the NYE acquisition because the ZIMMARK acquisition was already in your books in November and ZIMMARK was not that big. So what do I miss here that -- is this cost basis for selling expenses and admin costs increased sequentially in Q1 over Q4?
Okay. Thank you for your question. Starting with the first one, our expected decline of 50% in EBIT in the second quarter. That would go along with, yes, as you estimate, minus 20% in volume. That's a fair estimation. Our raw material development in the next quarter or quarters, that's really a difficult question. Yes, we see a drop in crude oil price, but the market or the market mechanism for this whole industry doesn't really work. And we will see one or the other benefit of lower raw material prices in the quarters to come, I'm sure. But of course, not as much as you see this development of a crude oil price. And what's most important for us is that we keep our supply and that there are no refineries closing and so on. But yes, we will see one or the other benefit, of course, but I can't give you a number for that. The other costs like selling and admin costs, which are -- which you compare with the fourth quarter 2019, in the fourth quarter -- in fourth -- in the last quarter of the year, in general, of course, there are different bookings, year-end bookings, for closing and everything. So it might not always be the right period to compare with. If you compare with the first quarter 2019, it's not only NYE, which is additionally, of course, it's NULON in Australia as well, which we bought in April 2019. And we still had during the year 2019 some new employment within the group. So if you compare 2020 with 2019, we will see slightly higher personnel expenses. We have higher depreciation due to our CapEx. And depreciation is not only manufacturing, it's partly admin as well if we are talking about office space, it's -- if you are talking about warehouses and so on. So even in selling, there are higher depreciations. And the impact of NYE, as it is a company with around or a bit less than EUR 50 million sales but people of 180, of course, there's a high number of sales force included.
The purpose of my question was more to understand if the Q1 figure for these 2 items, expenses and admin costs, are a good run rate going forward. Maybe I rephrase my question and ask regarding the selling expenses, how much of that is varietal, i.e., fuel costs, freight costs, and how much is fixed cost, for example, salaries? So that we can better model, for example, if there is any relief from low transportational volumes in Q2, that there is also relief on the selling expenses in Q2.
Well, yes, if we are talking about, of course, there are freight costs, which are variable. The cost for our -- commissioned for our salespeople and as well as -- that are the most -- that are the biggest portion. And let me say, out of our selling costs, roughly 50% or a bit more than 50% is variable.
The next question is from Markus Mayer, Baader-Helvea.
Two questions from my side as well. The first one is on the recently announced cooperation with BASF. Maybe you can shed some more light on this and also how this -- the future with BASF as well? And then the second question is also on -- again, on this raw material question raised by Martin. I understood you right that support, basically, you have not really seen really raw material cost declines. Base oil prices as far as I can see have not moved much so far. So at our end, we see that your customers are trying to be more hard on the pricing side and to negotiate you down as they might have also liquidity issues and try to save costs wherever they can. So overall, maybe some words on your pricing power right now would be very helpful.
Okay. Yes, thank you, Markus Mayer, for your questions. I will start with the raw material cost issue or topic. If I compare the raw material cost Q1 '20 to Q1 '19, we see lower raw material costs. If I compare it with Q4 2019, there is no large movement. But we will see some savings in the next months, I'm quite sure about that. It will be more on the base oil, and of course, less on chemicals and additives. Our pricing position regarding our customers and their demand on lower prices, that's different. Of course, it depends on the product, it depends on the industries. Looking at OEM or first-tier suppliers, of course, they are always very fast and very strong in asking for lower prices. Looking at our, let me say, specialty business, I think there's a slightly different environment. So that is a mixed picture. Then I would hand over to Thomas to give you some more insights about our sustainability project, which we have with BASF.
Yes, Markus. So this project with BASF is part of our, let's say, sustainability efforts when we're looking at the CO2 emissions or like the impact of our product overall across the life cycle. So what we did so far is we looked also on our corporate carbon footprint. So what are the CO2 emissions we are emitting within our operations. And this one, we said we want to be CO2 neutral. And this project with BASF is regarding hydraulics fluids, where we want to look at the overall, let's say, ecological impact from those products. So looking at cradle to grave. So we look what's the CO2 emissions from the raw materials, what's the CO2 emissions from manufacturing, what's the CO2 emissions during the usage phase of this product, and what's the, let's say, Q2 impact from the disposal of that product. But if you want to have more details, I think we can discuss this after the call.
There are currently no further questions. [Operator Instructions]
Maybe there's one more remark from my side regarding the question of -- or the follow-up question of Martin Roediger. The -- what the proportion of variable costs on the selling cost is? As I said, it's roughly 50%. It's 30%, I have to excuse for this mistake or want to give a clarification.
And the next question is from Andrew Stott, UBS.
Apologies, first of all, I was late on from another company call, so you may have mentioned this, but I'm very curious as to your experiences, Dagmar, in China through -- obviously, through the recovery process more than the downturn, which you've already profiled in Q1. So just really a picture of the last few weeks, what all of your customers in China are doing? And any surprises, positive or negative?
Yes. Thank you for your question, Stott. Well, in China, our company was closed 2 to 3 weeks. So we've been one of the companies which have been allowed to open directly after the lockdown or shutdown. And we took a lot of measurements for our people, for our production, for our customers, of course, as well. And then to ramp up production again, of course, it takes some time. And -- but what we see is that we come back to, let me say, not old levels, but our customers ask quite -- there's quite a high demand for our products and activity is increasing, let me say, week by week. And now in April, already restaurants opened and shops opened. So in China, things come back to normal. As you might know in China, there is -- like people get a bonus paid if they're buying new cars. So the Chinese government tries to support the consume of the people. And for us, everything works quite well -- let me say, still the demand of our customers is still below the level before the crisis, but looks more directly normal faster than I think everybody expected.
And we have a follow-up question from Martin Roediger, Kepler Cheuvreux.
Just one question left from my side. On the Americas region, here, we see that sales were up in Q1 year-over-year because acquisition effects overcompensated the effect from lower organic sales, but the EBIT dropped by 14% year-over-year. Can you explain the margin pressure in Americas? It was down by 230 basis points margin to only 10.9%. And I recall many years ago, that region was the highest margin region at FUCHS. So what's going on there? Is that a mix effect or anything else?
It is a mix effect, but some other things as well. First of all, we've got NYE included. NYE is profitable. But of course, as we've got the amortization of the PPA effect, NYE doesn't deliver the -- like average EBIT of the segment America or the average EBIT of North America. Therefore, NYE is a burden for the margin at the moment. And then, of course, we had higher bad debt provisions. And the mix effect, we have, as I said, lower sales with the mining industry with -- we have a weak automotive market. And there, of course, it's -- looking at the automotive market, it's not only OEM products, but as well as metalworking fluids and so on for production. So it's a mix effect.
Okay. But the bad debt provision you booked in for Americas, that was a very small number, correct?
It's a single-digit number, a lower single-digit number, yes. But as always, one here, one there, and I guess, that's my personal expectations. We will see more or higher bad debt provisions during the year worldwide.
We have no further questions at this point. So I hand back to the speakers for closing remarks.
Thank you all for joining us today. If you have any further questions, please don't hesitate to contact me. We will be back with the conference call on the H1 results on July 30. Thank you, and goodbye.
Goodbye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.