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Edited Transcript of FPE3.DE earnings conference call or presentation 1-Aug-19 10:00am GMT

Half Year 2019 Fuchs Petrolub SE Earnings Call

Mannheim Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Fuchs Petrolub SE earnings conference call or presentation Thursday, August 1, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dagmar Steinert

Fuchs Petrolub SE - CFO & Member of Executive Board

* Thomas Altmann

Fuchs Petrolub SE - Head of IR

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Conference Call Participants

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* Ben Gorman

UBS Investment Bank, Research Division - Associate Analyst

* Isha Sharma

MainFirst Bank AG, Research Division - Analyst

* Knud Hinkel

Pareto Securities, Research Division - Analyst

* Markus Mayer

Baader-Helvea Equity Research - Lead Analyst of Chemicals

* Oliver Schwarz

Warburg Research GmbH - Chemical Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the H1 2019 Results 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, who will lead you through this conference. Please go ahead, sir.

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Thomas Altmann, Fuchs Petrolub SE - Head of IR [2]

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Thank you. Good afternoon, ladies and gentlemen. On behalf of FUCHS PETROLUB, I would like to welcome you to our conference call on the H1 2019 results. On the call with me today is our CFO, Dagmar Steinert. She will take you through the presentation and then happy to take your questions. The presentation is also available on our website at fuchs.com under the IR section. There, you can also find the fact sheet showing the quarterly figures and also the Q1 to Q4 2018 adjusted figures accounting for the new segment structure.

With this, I would like to hand things over to Dagmar.

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [3]

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Thanks very much, Thomas. Ladies and gentlemen, also a warm welcome to everybody from my side.

On the 1st of July, we released preliminary figures for the first half and lowered our full year outlook. Today, we will provide you with further information. First, I would like to explain the main drivers for earnings decline and the adjustment of our outlook. As you will remember, we conditioned our outlook for 2019 on several assumptions. Many of them did not really materialize. We are operating in an environment with high uncertainty and very low visibility. The growth of the global economy has slowed down, and we see a continuing weakness of automotive markets in Germany and China. Trade conflicts between the U.S., China and the European Union are particularly impacting the automotive sector, which is really important for FUCHS.

Contrary to the original assumptions, global car sales are expected for the full year 2019 to fall by 2% instead of growing by 1%. And we do not expect the global general economic situation to improve in the second half of the year. We no longer anticipate an upturn in the automotive sector, and in this context, we are adjusting our forecast for the current year downward significantly.

If we can now look at our performance in the first half year 2019 at Chart #2, you see that sales in the first half of 2019 were down slightly by 1% and amounted to EUR 1.3 billion. The weak market environment is reflecting a decreasing business. After a weak first quarter in Europe and Asia, the decline in sales in the second quarter has now also impacted North and South America. The lower sales combined with a planned cost increase led to an EBIT of 19% below previous year, and that, of course, is far below our own expectations. Nevertheless, we still achieved a respectable EBIT margin of 12.1%.

For the full year, as I said, we adjust our outlook, and we now expect a growth in sales between minus 3% to 0 -- to nothing, and an EBIT decline between minus 30% and 20%. On a comparable basis, because there was a one-off gain in 2018 of EUR 12 million, there's a decline between 27% to 17%.

I'm coming now to our quarterly sales development on Chart #3. And there it's just visible in the first quarter 2019, our sales have been on previous year's level. And in the second quarter, we are 2% below previous year. And as you can see, the first half 2018 was a really strong half year.

Turning now to Chart #4, our group sales. We report a decline in organic growth by 2% or EUR 24 million. In the first quarter 2019, our organic growth was minus EUR 3 million. And in the second quarter 2019, organic growth was minus EUR 21 million or 3%. And this, yes, EUR 21 million decline in the second quarter was mainly happened in June. The external growth is related to our acquisition of NULON, our Australian manufacturer of lubricant for the automotive retail sector. Closing was on 1st of April this year. We paid -- purchase price was EUR 11 million, and we estimate around EUR 16 million sales in 2019. Due to the integration and, of course, amortization of the purchase price allocation, the EBIT contribution from NULON is expected to be around 0 in 2019. The currency impact on sales is not significant for the whole group with EUR 4 million.

On Chart #5, you can see our performance in our regions, and that varies. There is a continuing weakness in Europe and Asia Pacific, and we have a decreasing sales growth in Americas. Starting with EMEA, there, we record in the first half 2019 a decline in sales of 4%. Organic growth was down 3%. This was largely attributable to the weakness of the German automotive market and to the declining automotive demand in China, which also led to a downturn of the Chinese business generated out of Germany.

In Asia Pacific, we record in the first half 2019 also a decline in sales of 4%. Organic growth was down by 5%. It was 5% in the first quarter and minus 6% in the second quarter. In Asia Pacific, we see a significant decline in sales in China due to the continuing weakness in the automotive industry.

Coming to North and South America, there, we have an increase in the first half 2019 by 7%. 4% is due to the strong U.S. dollar and 3% was organic growth. But looking into the quarter, Q1 and Q2, in the first quarter 2019, organic growth in North and South America was plus 8%. And in the second quarter, it was minus 2%.

I'm coming now to Chart #6, our income statement for the first half year 2019. Sales are down EUR 15 million on a year-on-year basis and gross profit is down by EUR 23 million or 5%. This decrease is larger than the decrease in sales and is caused by product mix and higher manufacturing costs. This higher manufacturing costs are due to higher depreciation and, of course, personnel costs. We got -- we improved our gross profit margin compared with the first quarter. But in the first half 2018, of course, it was much higher. Other function costs are up by EUR 13 million or 5% despite some cost savings. The EUR 13 million increase in other functions costs are mainly personnel costs, depreciation and some freight costs. Of course, the cost of our NULON acquisition are also included in these overall function costs. Equity income is on previous year's level, and therefore, EBIT falls by 19%, as already explained. Our tax rate in the first half year 2019 is 29% after 28% in the previous year, and therefore, earnings after tax are down by EUR 28 million or 20%.

On the next page, #7, you see our quarterly EBIT development. And all I want to say regarding that chart is, in the first quarter, we are down by 16%. In the second quarter, it was 21%. And of course, just as a reminder, you see in the third quarter 2018 with these EUR 104 million that there are EUR 12 million one-off included.

Now I'm coming to Chart #8, our EBIT by regions. Of course, all regions are negatively impacted by the decline in sales and by the planned cost increase as a result of our growth program. In EMEA, there was a 29% drop in EBIT to EUR 80 million. There is a decrease in almost all countries. The biggest decrease is in Germany suffering from the automotive industry.

The Asia-Pacific region's EBIT decreased as well by 21% to EUR 44 million. And there, again, it has happened in all countries but mainly in China.

The EBIT in the North and South America region was down by only EUR 1 million on a year-on-year basis, but we had this weak second quarter. And in North America, we have a significant EBIT decline due to planned higher costs. And of course, we've got the positive currency effects from North America.

Now I'm coming to our cash flow statement for the first half year, it's Page #9. With EUR 16 million free cash flow before acquisition is significantly lower than in the previous year. Reasons for this are mainly reduced earnings after tax and, of course, increased CapEx of EUR 26 million. We've seen some improvements in our net operating working capital. Of course, we gained from higher depreciation and then there is this line other changes that are closing-related and mainly affected by higher tax receivables and lower tax liabilities, and that should just be a timing difference.

Now I'm coming to our net operating working capital development. As we have stable net asset and financial position, we see a slight improvement on the net operating working capital with 23.1% of sales, and that's a slight improvement compared with the year-end 2018 or compared with the first quarter 2019.

To sum it up. We have a decrease in sales in all regions or in EMEA and Asia Pacific in the second quarter as well in North America, and that's mainly due to the weakness of the automotive market. We have a positive currency effect in America mainly due to the strong U.S. dollar. And we've just got this external growth due to our acquisition of NULON. We have planned cost increases mainly in additional depreciation and amortization and, of course, in personnel expenses. And our EBIT, therefore, combined with lower sales is 19% below previous year.

So now I'm coming to our adjusted outlook, it's Page #12. And there you can see we now expect a sales decline in the range of minus 3% to previous year's level. And our EBIT on a comparable basis before this one-off effect in 2018 should come in between minus 27% to minus 17%. On a, yes, not comparable but absolute basis, that means minus 30% to minus 20%. Our free cash flow before acquisitions should come in, in the range between EUR 70 million to EUR 90 million. Before that, it was around EUR 100 million. And of course, our FUCHS Value Added declined. We expect it now to come in between -- somewhere between EUR 130 million to EUR 160 million.

With that, I would, yes, close my short presentation, and I'm happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Markus Mayer, Baader-Helvea.

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Markus Mayer, Baader-Helvea Equity Research - Lead Analyst of Chemicals [2]

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I have 3 questions. First one is on the mentioned product mix effect you said in gross margin, maybe you can shed some more light on those. And then I will ask the 2 other questions afterwards.

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [3]

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Okay. Thank you, Markus, for your question. Well, our gross margin compared with our first quarter 2019 is improving. But for the half year, it's below the first half year 2018. And what we see, we've got a 1% decrease in sales. But there are 2 things. Well, as we don't report about volume but we've got like higher volume decrease, and we see in our sales, of course, compared with the previous year some pricing. On the raw materials side, nothing really much happened. But of course, we've got -- due to missing sales, we've got -- always compared with the previous half year, we've got changes in the product mix, and the biggest impact on the gross profit margin is our increasing manufacturing costs.

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Markus Mayer, Baader-Helvea Equity Research - Lead Analyst of Chemicals [4]

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Okay. Understood. Then the second question, as you said, that the decline in the second quarter mainly happened in June, is this also then even accelerating in July or is this the same kind of momentum you have seen in June?

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [5]

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Well, we've seen the major portion of the decline in June from the top line as, of course, our fixed costs are, yes, coming in month by month. And June was a very weak month. And therefore, we came out with our top release. And if you look at our adjusted outlook, of course, we don't have any visibility, so we don't know how the second half year will perform. But I wouldn't say that the negative June is -- well, I personally won't expect that the rest of the year is as bad as June. But of course, we've got our range for our outlook, and that could be somewhere in between.

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Markus Mayer, Baader-Helvea Equity Research - Lead Analyst of Chemicals [6]

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Okay. Would it be fair to assume that, basically, at the lower end of the range is kind of a worst case scenario of taking the momentum of June they announced in the second half, and to the upper end of the range is somewhat more -- and I wouldn't say normal but less negative development? Is this fair to say?

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [7]

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That's a fair assumption, yes.

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Markus Mayer, Baader-Helvea Equity Research - Lead Analyst of Chemicals [8]

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Yes. Okay. And then my last question was on this mentioned cost-cutting measures and also as far as this hiring freeze. Maybe you can shed some more light on what you have planned there and how this will also then affect the earnings, if they are only short-term measures or they were some more long term, things which we should expect and also how we should model it into the half year and also then the years going forward.

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [9]

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Yes. Well, we've got different measures taken. And regarding our personnel, we made like a headcount freeze. And if you have a look at our staff numbers in 2019, in the first quarter, we employed 43 more people worldwide. In the second quarter, it was 19 plus 65 more people from our NULON acquisition. And there, you see that reflects our, let me say, headcount freeze. Of course, if position is really necessary, we fill it, but we have a look worldwide at our personnel or our planning. And where possible, we just make a freeze. But that means a freeze and we do not intend to lay off people or something like that.

On the cost side, we took different measures. We have a look at larger projects. We have a look at consignment fees. And we also look at our travel policy. And overall, we -- of course, it takes some time, but we already see in the first half year some cost reductions. On the other hand, we've got, of course, additional costs included from the acquisition.

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Operator [10]

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The next question is from Isha Sharma, MainFirst.

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Isha Sharma, MainFirst Bank AG, Research Division - Analyst [11]

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Could you give us some color around organic top line and EBIT decline in North America, where do you see weakness and how do you see this developing? Maybe you can answer this, and then I can go and ask my other questions.

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [12]

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Yes. Well, we've seen in the second quarter an organic decline in North America, and that was by 2%. And that -- as we are very strong in North America, more in the industrial lubricant business and less automotive business, but it was, of course, across all our business.

On the EBIT of North America, of course, if you have a decline in sales, we miss naturally gross profit or EBIT. But additionally, we've got a planned cost increase. And as we have a planned cost increase in the whole group, but we've got like a higher portion of depreciation, for instance, in America compared with other countries. We have higher personnel expenses -- or higher increase in personnel expenses as we employed more people there last year, and that's all due to our growth program.

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Isha Sharma, MainFirst Bank AG, Research Division - Analyst [13]

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All right. And how do you see this developing in the second half?

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [14]

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Well, that, of course, depends on the development of the top line. I mean it's very unsecured at the moment. Everybody hopes that there would be a decision about like a trade conflict between China and U.S. And so...

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Isha Sharma, MainFirst Bank AG, Research Division - Analyst [15]

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Okay. My next question is on the guidance. So according to the public issue, you expect now 2% decline in auto. Is the lower end of your guidance based on this assumption or an expectation of a further decline? Also, the expectation around raw material prices, please. Is it fair to say that so far, they have been stable and you assume similar prices for the rest of the year?

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [16]

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Well, our adjusted guidance is based on the overall economic development and environment as it is today. And if there would be a major change, of course, it's not reflected. Regarding raw material development, it's fair to say it's stable and nothing much happened, no big movement.

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Isha Sharma, MainFirst Bank AG, Research Division - Analyst [17]

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Okay. And the last one, please. The EBIT margin that we have seen in Q2 is sequentially better than Q1. Is there any particular reason? Or is it more because of the seasonality?

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [18]

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That's seasonal and a bit regarding raw material prices.

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Operator [19]

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The next question is from Knud Hinkel, Pareto Securities.

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Knud Hinkel, Pareto Securities, Research Division - Analyst [20]

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One question left. You referred several times to the planned cost increases. Could you give a number for the full year what cost increases are planned? I think you gave a number for the first half of the year, but you did not guide for the entire year. That would be helpful.

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [21]

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Well, we don't -- or won't give you an exact number, but the main portion of our planned cost increase, of course, is personnel and is depreciation and amortization.

Let me start with that. Depreciation is fairly easy. If you have a look at the cash flow statement, you recognize that our depreciation, amortization is EUR 8 million above previous year. And of course, you could easily multiply it by 2, then it will be EUR 16 million. But more, of course, because there will be additional depreciation from projects which will be finished during this year. And out of these, let me say, EUR 16 million to EUR 18 million, EUR 8 million is the result of the IFRS 16 change. And the rest, so let me say roughly 10 -- or EUR 8 million to EUR 10 million is additional planned cost increase just from depreciation.

On the personnel side, I didn't mention it, but of course, we are transparent. And overall, it's a smaller double-digit number in the first half year. And if you just, yes, think about just normal inflation, wages and salary increases, in 2017, we employed close to -- 2018, we employed close to 260 people, and of course the full effect is in 2019. Then there are just some more additional people in 2019 but not as much, as I just explained, as we have a like headcount freeze. And therefore, and of course, we've got planned additional costs for our IT spending, which go directly into the P&L and are not capitalized.

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Operator [22]

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The next question is from Oliver Schwarz, Warburg Research.

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Oliver Schwarz, Warburg Research GmbH - Chemical Analyst [23]

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Automotive sales minus 2% for the full year, that is not perfectly in tune with what I heard from other sources. It's I think more like minus 4% to minus 5% for the full year. Do I miss something here or is your view -- or does your view contradict, for example, BASF's view? Or is that just another sample that this number refers to?

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [24]

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Well, thank you, Oliver, for your questions. It's just we take the same results as we did for our number, which you'll find it in our annual report, because different, yes, [FAUDI or ACEMA], that's what we took. Different organizations maybe calculate different numbers and we just wanted to make it comparable.

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Oliver Schwarz, Warburg Research GmbH - Chemical Analyst [25]

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The weakness in NA in the second quarter, well, it came as a bit of a surprise at least to me given that the U.S. economy is still in a very good shape astonishingly, and it seems like hiring is on its peak and unemployment is still very low number. And still, your numbers do not reflect that strength in North America. Is there some reason for that? Or are you just, let me say it's like that, in the wrong industries to reflect the strength of the U.S. economy at the moment?

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [26]

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Well, with our customers, we might have the wrong customers, but there's no special or big effect. It's just across our customer base, and it's just a difficult environment. Maybe we've got to do a bit as we increase prices, of course, in North America steadily then, of course, we lose maybe temporarily one or the other customer, but yes, it's overall.

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Oliver Schwarz, Warburg Research GmbH - Chemical Analyst [27]

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Okay. Looking -- third one, last one. Looking to your outlook, the second half of 2018 has already reflected at least in Q4 the impact of the weakening of the automotive industry. Transport costs increased due to the drought in Central Europe and the related higher transportation costs. But still the run rate implied by your outlook for the full year is on the same level as it was after 2 quarters now or in the first half year. So something seems to get worse along the road to get to the 20% to 30%. I fully understand the 30% may reflect the acceleration of the worsening in June. But still the 20%, that also implies that something is going to get worse along the road when we look at it sequentially due to the fact that, as I said, the comps in 2018 second half of the year became easier. And things you're related to, for example, the hiring spree in 2018 and then peaked in 2019, those factors tend to get smaller towards the end of the year because by then, all people that you took onboard in 2019 were already onboard in the previous quarters as well. So what, from your point of view, is expected to get worse in the second half of this year?

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [28]

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Well, I wouldn't expect the second half of this year to get worse. But on the other hand, I don't expect the second half of the year to improve or to get better. And always compared with the previous year, in the third quarter last year, we had this one-off effect. So if you take that out, it looks in comparison a bit different. And of course, the other thing is if we are missing top line, if we've got less volume and less sales, then of course, we are missing gross profit. What we need to cover are not only our cost, of course, I mean that we easily do, but to significant EBIT margin.

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Operator [29]

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Your next question is from Ben Gorman, UBS.

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Ben Gorman, UBS Investment Bank, Research Division - Associate Analyst [30]

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Just a few quick ones from me. First of all, on the U.S. weakness and obviously outside of automotive. Can you comment on the industrial businesses outside of the U.S.? So is it quite a broad-based slowdown in other businesses as well? And that's the first one.

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [31]

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Well, as I mentioned earlier, it is across our customer base, and there's nothing major popping up or are coming to my eyes. So it's more like on a broad base for us.

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Ben Gorman, UBS Investment Bank, Research Division - Associate Analyst [32]

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And then just on the content growth as well in auto particularly in China. Your exposure in terms of new platforms, I think you commented a few years ago at the Capital Markets Day, it wasn't particularly sort of quick wins with some of the local players. Is some of the weakness versus the market still your overexposure to OEMs? And how can that sort of reaccelerate versus the underlying market?

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [33]

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Well, in China, you're absolutely right. Our business is dominated by automotive lubricants. And within these automotive lubricants, a bigger portion is business with the OEMs. And we are there doing business with Chinese OEMs but not as much as we do business with, let me say, the Western OEMs in China. And that business is going down. And then additionally, regarding automotive aftermarket, we got quite some business in China. And there, we've got -- we see decreases as well.

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Ben Gorman, UBS Investment Bank, Research Division - Associate Analyst [34]

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And just one final one from me in terms of the new plant ramping up, can you give an idea particularly in the U.S. grease plant where you're at in terms of breakeven and if these plants are maybe taking longer to fill in the current environment?

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [35]

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Well, within the U.S. with our grease plant, we are still negative regarding our FUCHS Value Added, but we are earning money. We are positive regarding our running P&L, but it's not filled with capacity as it is built much bigger for the future.

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Ben Gorman, UBS Investment Bank, Research Division - Associate Analyst [36]

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Most of your plants over the course of '17 and '18, would you describe it still as a drag in terms of return on invested capital? Or are you starting to deliver above the group level?

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Dagmar Steinert, Fuchs Petrolub SE - CFO & Member of Executive Board [37]

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Well, as we've got our investment program for -- yes, for 6 years, well, we've got another 3 years or 3.5 years, but it's running altogether for 6 years. And it's a huge effort what we are doing to modernize, to expand, to get additional capacity, to get capacity for new technology, to improve efficiency, to set like a general standard, that's something which is really unique in the group, what we are doing now. And of course, it's a burden for our capital employed, and of course, that's something what has a negative impact on our FUCHS Value Added. But we are really confident that we are on the right way to save FUCHS for the future to do all that. And that's one of the reasons why we don't cut our investment program, and we intend to spend this year the EUR 180 million and to continue to finish that.

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Operator [38]

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At the moment, there are no further questions. (Operator Instructions) There are no further questions. I would like to hand back to the speakers.

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Thomas Altmann, Fuchs Petrolub SE - Head of IR [39]

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Thank you, Judith. Thank you all for joining us today and your interest in FUCHS. If you have any further questions, please don't hesitate to contact me. We will be back with the conference call on the Q3 results on October 30. Thank you, and goodbye.

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Operator [40]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.