There is a YouTube video of Fuchs Petrolub employee making a presentation(https://bit.ly/3OziYKC). You may have watched it. At 9 minute mark you can see global lubricant demand in volume regressed from 2007~2016. And @ 9:52 the share of Asia Pacific increased from 45% to 53%, that probably means ASP went down. Also in that video he mentioned American consumer basically chose the cheapest lubricant as they see it practically as a commodity. Maybe in mission critical application end users will demand quality over price, however the industrial equipment and machinery segment is only 11%, so perhaps that doesn't move the needle.
Also the trends pointing to lubricant usage will continue to go down: 1. Efficiency improvement in fluid transmission design in machinery 2. Advancement in lubricant technology 3. Electrification of automobiles. You can also see it in BP Castrol KK’s (5015 JP) numbers. BP Castrol KK is a lubricant company in Japan, one can observe revenue and bottom line decline over the years.
From a moat point of view, big part of lubricant manufacturing process is mixing and blending, there is no secret sauce. The process is a mature one what's left is efficiency gain. I don’t see how Fuchs have advantage over major oil companies in that regard. Oil companies have other advantages such as sourcing, scales of economics, pricing power, sales channels, R&D budgets…etc. In other words being independent is probably a detriment instead of a merit.
Further, despite the "American example" you mention, the presenter is quite clear that there is a a general trend towards more technically advanced, longer-lasting high-quality lubricants which also saves costs/time in the longer term.
So, I agree, that the use of lubricants in kilograms/tons will likely go down, but the value of the lub market is probably at least stable. Further, in my view the EBIT margins and capital return margins indicate that this is no commodity business. They have come under pressure as described above and we will see if they can climb back, but they are still consistently double-digits. Next, electrification is clearly a challenge but also an opportunity for the company and they are approaching it proactively (see slide 55-57 of the presentation I linked above). I cannot yet say though how much they will suffer or benefit.
Finally, on the moat: You are right in that oil companies have advantages when it comes to sourcing and scale. Still, there is a lot of space to be inventive here (Fuchs have 10K products) and they use some 120 additives to oil to make them. Also, base oil is only (?) 40% of the value of Fuchs' ingredients. I assume that can source some of these additives easily from the BASF factory on the opposite river bank. Moreover, being independent also has advantages such as the clear focus (think spin dynamics) versus an integrated multi.
So, these are just some thoughts and I may be very well wrong. Again, highly appreciate the constructive comment.
Yes Sir, I noticed you mentioned growth in revenue. However in terms of EBIT, the CAGR is unimpressive - in 2021 EBIT is €363M and in 2011 it is €264.2M, which means CAGR is 3.23%. This is under the backdrop of multiple acquisitions over last 10 years, such as Pentosin, SFR Lubricants, Nye...etc. I think 3.23% CAGR is quite unsatisfactory and indicates Fuchs is probably not doing well in gaining market share.
Also 10,000 products is concerning. For many times I have fallen into this trap myself. In 2011 the inventories is €230M and in 2021 the inventories is €507M. Inventories grew much faster than EBIT and also faster than revenue. There is a optimal number for product offering and not necessarily the more the better. Too many SKUs you sacrifice quick turnover(i.e. profits) for inventories and sales & marketing effort is now spreading itself too thin. Lastly you also add complexity in purchasing, production & logistics. This is probably part of the reason gross margin deteriorates from 2011's 36.7% to 2021's 33.6%, it's hard to exert pricing power when you have many products.
High SKUs for distribution business like Fasternal or Ferguson make sense. As some of the products are sold on consignment or suppliers give them long paying terms. Nevertheless even for them there is always a rigorous process of controlling SKUs so the products are competitive in quality and price, as well as it is operationally efficient to carry this many SKUs.
Actually I am quite interested in Fuchs Petrolub myself and it is a pity that I do not live in Germany, otherwise I can visit the company and ask them questions. I am curious on how the management answer to questions on success of acquisitions and SKUs management. Please do not take my comment as I am casting aspersions on Fuchs or your analysis. Thank you for sharing your idea!
So yeah, EBIT has been disappointing and that is due to EBIT margins. Todaythey announced a target EBIT of 500mm for 2025. Let's see if they can execute here - I personally found their plan on EBIT margin improvement a bit unclear (other than "stuff will revert to mean")
Also, I agree your point on inventories and their working capital need is a weakness (though I am not sure if the # of products are really to blame). In today's presentation, they are at least addressing the Working Capital issue and name some measures to improve cash generation.
Thanks again for challenging me, it really helps to shed light on potential weak spots of the thesis.
Hi, so if I understand this right, Fuchs say that their EBIT level in a year without external shocks should be around 15%. In the CMD today, they stated that 2022 is the fourth consecutive year with external shocks - I think this is true for the Covid years 2020/21 but less clear for 2019.
Raw material costs, supply chain issues and logistics cost have weighed on the EBIT margin. That said, I found the presentation slides today a bit thin on what they will do on EBIT margins (did not attend the presentation though).
Hello Carsten,
There is a YouTube video of Fuchs Petrolub employee making a presentation(https://bit.ly/3OziYKC). You may have watched it. At 9 minute mark you can see global lubricant demand in volume regressed from 2007~2016. And @ 9:52 the share of Asia Pacific increased from 45% to 53%, that probably means ASP went down. Also in that video he mentioned American consumer basically chose the cheapest lubricant as they see it practically as a commodity. Maybe in mission critical application end users will demand quality over price, however the industrial equipment and machinery segment is only 11%, so perhaps that doesn't move the needle.
Also the trends pointing to lubricant usage will continue to go down: 1. Efficiency improvement in fluid transmission design in machinery 2. Advancement in lubricant technology 3. Electrification of automobiles. You can also see it in BP Castrol KK’s (5015 JP) numbers. BP Castrol KK is a lubricant company in Japan, one can observe revenue and bottom line decline over the years.
From a moat point of view, big part of lubricant manufacturing process is mixing and blending, there is no secret sauce. The process is a mature one what's left is efficiency gain. I don’t see how Fuchs have advantage over major oil companies in that regard. Oil companies have other advantages such as sourcing, scales of economics, pricing power, sales channels, R&D budgets…etc. In other words being independent is probably a detriment instead of a merit.
Curious on what you think.
Andy
Dear Andy,
thanks a lot for the pushback - highly appreciate this kind of feedback and you make great points. I did not know video, but agree that the market is essentially not growing (Check Slide 10 of a recent investor deck https://fuchs.azureedge.net/fileadmin/Home/Investor_Relations/Finanzpraesentationen/2022/220623_FUCHS_Investor_Presentation.pdf ) . Despite this market, FPE managed to grow its revenues quite a bit over the last 10 years (unlie BP Castrol)
Further, despite the "American example" you mention, the presenter is quite clear that there is a a general trend towards more technically advanced, longer-lasting high-quality lubricants which also saves costs/time in the longer term.
So, I agree, that the use of lubricants in kilograms/tons will likely go down, but the value of the lub market is probably at least stable. Further, in my view the EBIT margins and capital return margins indicate that this is no commodity business. They have come under pressure as described above and we will see if they can climb back, but they are still consistently double-digits. Next, electrification is clearly a challenge but also an opportunity for the company and they are approaching it proactively (see slide 55-57 of the presentation I linked above). I cannot yet say though how much they will suffer or benefit.
Finally, on the moat: You are right in that oil companies have advantages when it comes to sourcing and scale. Still, there is a lot of space to be inventive here (Fuchs have 10K products) and they use some 120 additives to oil to make them. Also, base oil is only (?) 40% of the value of Fuchs' ingredients. I assume that can source some of these additives easily from the BASF factory on the opposite river bank. Moreover, being independent also has advantages such as the clear focus (think spin dynamics) versus an integrated multi.
So, these are just some thoughts and I may be very well wrong. Again, highly appreciate the constructive comment.
Carsten
Yes Sir, I noticed you mentioned growth in revenue. However in terms of EBIT, the CAGR is unimpressive - in 2021 EBIT is €363M and in 2011 it is €264.2M, which means CAGR is 3.23%. This is under the backdrop of multiple acquisitions over last 10 years, such as Pentosin, SFR Lubricants, Nye...etc. I think 3.23% CAGR is quite unsatisfactory and indicates Fuchs is probably not doing well in gaining market share.
Also 10,000 products is concerning. For many times I have fallen into this trap myself. In 2011 the inventories is €230M and in 2021 the inventories is €507M. Inventories grew much faster than EBIT and also faster than revenue. There is a optimal number for product offering and not necessarily the more the better. Too many SKUs you sacrifice quick turnover(i.e. profits) for inventories and sales & marketing effort is now spreading itself too thin. Lastly you also add complexity in purchasing, production & logistics. This is probably part of the reason gross margin deteriorates from 2011's 36.7% to 2021's 33.6%, it's hard to exert pricing power when you have many products.
High SKUs for distribution business like Fasternal or Ferguson make sense. As some of the products are sold on consignment or suppliers give them long paying terms. Nevertheless even for them there is always a rigorous process of controlling SKUs so the products are competitive in quality and price, as well as it is operationally efficient to carry this many SKUs.
Actually I am quite interested in Fuchs Petrolub myself and it is a pity that I do not live in Germany, otherwise I can visit the company and ask them questions. I am curious on how the management answer to questions on success of acquisitions and SKUs management. Please do not take my comment as I am casting aspersions on Fuchs or your analysis. Thank you for sharing your idea!
Andy
Andy,
So yeah, EBIT has been disappointing and that is due to EBIT margins. Todaythey announced a target EBIT of 500mm for 2025. Let's see if they can execute here - I personally found their plan on EBIT margin improvement a bit unclear (other than "stuff will revert to mean")
Also, I agree your point on inventories and their working capital need is a weakness (though I am not sure if the # of products are really to blame). In today's presentation, they are at least addressing the Working Capital issue and name some measures to improve cash generation.
Thanks again for challenging me, it really helps to shed light on potential weak spots of the thesis.
Best Carsten
Hi Carsten, very much enjoy your substack. Thank you.
Do you see catalysts that would bringt Fuchs Margins and Return on Capitals back to previous highs?
Hi, so if I understand this right, Fuchs say that their EBIT level in a year without external shocks should be around 15%. In the CMD today, they stated that 2022 is the fourth consecutive year with external shocks - I think this is true for the Covid years 2020/21 but less clear for 2019.
Raw material costs, supply chain issues and logistics cost have weighed on the EBIT margin. That said, I found the presentation slides today a bit thin on what they will do on EBIT margins (did not attend the presentation though).
Thanks for your kind words on the substack