Dear ladies and gentlemen, welcome to The Fiscal Year 2022 Analyst Conference Call of FUCHS Petrolub SE. This conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity for the analyst of FUCHS to ask questions. May I now hand over to Lutz Ackermann, Head of Investor Relations at FUCHS Petrolub SE, who will start the meeting today. Please go ahead.
Good afternoon, ladies and gentlemen. This is Lutz Ackermann speaking. On behalf of FUCHS Petrolub, I wish you a very warm welcome to today's conference call on the fiscal year figures. With me on the call today, and I'm very happy for the call, and I'm very much looking forward to that, is Stefan Fuchs, our CEO, and for the first time in the conference call, our CFO, Isabelle Adelt. Stefan and Isabelle will run you through the presentation as always, which will be then followed by a Q&A session. As always, all the relevant documents have been uploaded at our IR section of our homepage at 7:00 A.M. this morning, and you can find them there. Having said this, I would like to hand over to Stefan. Stefan, please go ahead.
Thank you, Lutz, hello to all of you. It's nice to meet you again. Also, it's only virtual. We have today published what we think is a really good result for a very challenging year last year. If I say very challenging, we all remember February 24th when the terrible war started in Ukraine, which now unfortunately lasts over 12 months already. We continue to condemn that war. We can only hope that there will be soon a solution, and if it's at the negotiation table. At the end of the year, we had another massive impact on our business, which was the COVID policy in China.
I mean, we had the impact all over the year with the Zero-COVID policy, but then towards the end of the year, they went from one extreme to the other. We had about 98% of our people infected with COVID in the months of December and January, and the country almost came to a complete standstill towards the end. In one of our largest growth markets, we were quite down. All of that led to a further disruption of the supply chain, which anyway had issues after 2020, 2021, you know, with the Texas freeze at that time. We saw significant raw material cost increases all year on, also coupled with energy price increases.
We are not as intensive as some of the other chemical industries, all of that was topped up with high inflation rates of 10% in the U.S. and Germany, more than 15% in countries like Poland. For me, it was really a challenging year. I think bearing that in mind, that we were down in China and made up for it in all the other countries, was for us a very good result. We move on, you know, we have issued a couple of press releases now regarding our board, then we are now complete for the years to come. On the very right, you'll see our colleague, Lutz Lindemann. He was our CTO for many years. He's in the group since more than 25 years. A really wonderful guy.
He's a PhD chemist, but he understood the business in and out. You know, we are sorry to let him go, but it was his wish to always retire when he hits the age of 63, which will be in May. He will move out of the board at the end of March and then stay on for another 2 months. Then we will be back to 5 people in the board. I think we are very happy with Isabelle. I don't want to introduce her again because I think you all met her at the Capital Market Day and at numerous conferences. That was a great addition to our team, as is with Sebastian, our new CTO. You know, they're both fairly young and I mean, Isabelle came directly from the outside.
Sebastian came two years ago. It's also, I think, a good mixture with continuous people who are there for the long term and then also get some ideas from the outside. Yesterday, we made a press release that with Timo and Ralph, their contracts expires normally at the end of this year, and they got another five-year extension from January 1, 2024 until December 30th, 2028. I think it's a good combination of people who were a long time with FUCHS and then with two additions. I think it's a fairly young board, and therefore I can only say we as a team are very happy together. If you go to the next page, you know, diversity is a big matter for us.
We were proud last year because in the year 21, amongst all listed German companies, DAX, MDAX, and SDAX, we hit the place number 3. In the year 2022, we actually hit the place number 1. This is measured with, you know, with the women quota in the board and in the Supervisory Board, as well as with the equal pay principle. I think that is something which Isabelle took into her hands last week and made us very proud, and I just wanted to mention it here. I hand over to Isabelle, and she will run you through all our numbers, and then look forward to that.
Thanks, Stefan and Lutz, and warm welcome from my side as well to what is my first financial results presentation for the FUCHS Group. Very much looking forward to that. As Stefan already mentioned, I think the headline says it all, "FUCHS successfully completes challenging year 2022.
Turning the clocks back a little bit more than a year, I think none of us would have expected what happened during the year with the terrible war in Ukraine and then all the ripple effects we saw. We were able to increase our sales strongly for the first time ever, more than EUR 3 billion worth of sales volume in the FUCHS Group, which is a 19% increase year-over-year. This is majorly price driven since we saw an uptake in raw material costs and goods we purchase of 70% over the last 2 years. Our sales team does an amazing job passing on those price increases to customers, as well as discussing substitution of ingredients in the products with the customers in case something was not available.
I think this is why we were able to, in this challenging environment, to increase our sales by 19%. EBIT is on prior year level. We think this is a good performance due to the circumstances we were looking at. The two things to mention here, to put this into perspective for you, is on the one hand side, the strong price increases. Once we do this, we have two effects. Point 1, we see a lag effect. The moment we increase our prices to the customers, it takes between 8 to 12 weeks until those price increases really hit our P&L.
Of course, on the other hand side, in times where you see unprecedented increase in raw material pricing, for us, it's very important to partner up with our customers to be transparent and somehow share the pain of this increasing price environment. On the other hand side, we suffered a little bit from the continued COVID lockdowns, and then at the end of the year, the easing of the COVID policy in China. In volume sales as well as EBIT, we saw a decline in China, which is one of our three biggest markets in the FUCHS Group and one of our strongest profit contributors. This means the rest of the group was able to compensate for China in the shortfalls we saw because of Russia and Ukraine. To pour a little bit water into the wine, we as well saw our FVA coming down.
Why is that? Well, in times of rising prices, of course, net working capital, so mainly inventories and receivables towards customers go up as well. We saw an impact, negative impact of EUR 200 million this year alone. In combination with the rising interest rates, this had an impact of 16% minus compared to last year. I will now guide you through a little bit more in details, and will come to the outlook and dividends in slides to come. Looking at the next slide, you will see our quarterly sales development. We are quite happy with what happened in Q4. We saw a very, very strong organic growth with good contributions from all regions, especially strong performance by the EMEA region on Q3 level and well above prior year.
What was good to see, saw an uptake in demand from the automotive market in Germany again, which was the first time after the industry had suffered quite a bit. Two things we didn't like was, point one, the impact the loosening of the COVID restrictions had on the economy in China. In December alone, more than 50% of our employees were impacted. This was more or less the same across the entire country. We are now looking into the economy coming back to normal. We think this will be somewhere in the course of Q2. Obviously, this had some effects on our December results in China. Same thing holds for the cold front we saw in the U.S.
A lot of our products over there are water-based. This had quite an impact on our performance on delivery in the US when temperatures dropped that significantly. How does that look like when we look into our EBIT development on the next slide? A strong finish to the year, EUR 85 million, which is on prior year level. Obviously, we have some local mix effects with the same impacts we just talked about when we talked when we saw the sales slide, as well as some impacts on the year-end where we usually do our inventory cycle counts and then the devaluation of the inventories. We think overall, EBIT came out where the consensus expected us to be for the full year. A good result. To look a little bit more into the details, where did the growth come from?
All of the growth we had was organic growth, so almost no contribution by newly acquired companies. Although one thing I’d like to mention, the acquisition of Nye, we did a couple of years back, performed exemplary well and had a very big contribution to our growth. This was a really nice acquisition. In the past year, we saw a strong tailwind by currency, which was more than EUR 100 million or 4%. To give you a little summary of our earnings, how this has developed, we already talked about the sales increase, so I will not go into this again. To share a little bit the view on the other line items. Obviously, gross profit is up, but the margin suffered. This is due to those two effects we already discussed. Point one, we have the lag effect.
Once we increase the prices, it takes a little bit of time to really show in the margin. Part of this, we will now see recovering this year. Of course, part of this was sharing the pain with our customers and meeting somewhere in the middle once prices grew too much. Other functional costs grew as well, at 14%, so slightly under proportionate to sales, which led to a decrease in the EBIT margin, but not at the same level we saw in the gross profit. What were the major contributors when you look at functional costs? Point one, obviously, and looking at personal costs as a whole, we increased our personal costs by more than EUR 40 million last year. Most of that was due to inflation and the salary increases we gave to our employees.
We only increased the number of employees themselves very modestly. This is obviously something we need to absorb. Two other main drivers are obviously, as to all other companies, probably as well, freight, which grew by something around 20%. You might think, well, there was a relief in freight costs. Yes, this is true for sea freight, but more than 80% of the freight we are looking at is either street or rail, and this is still going up slightly. Next thing is energy. Luckily, we are not a heavy energy consuming entity, so the 20% increase we saw in this cost is not a nice thing, but it's not hitting us that heavily.
The biggest effect of the energy price increase and gas price increase we had in Europe, we saw in the raw material pricing because our suppliers passed them on to us. We believe the EBIT margin we see now is the inflection point. We are well set for this year because we have the price increases, we have good cost management in place. We believe the margin will pick up from here on. To give you a little view on the regions, how they developed. EMEA, good organic growth, which I think is really worth mentioning, looking at what the region suffered from. Included in those numbers is the performance of Russia and Ukraine as well. Obviously, both countries with a decline in volumes for other reasons. In them, there's still a little bit stressed automotive market.
I think the sales organization in EMEA did a very, very good job to pass the prices, especially raw material prices, which skyrocketed most compared to other regions, on to the customers. We did another round of price increases, especially in Germany, as of January first, to cater for the higher energy and personal costs we have in our production. Looking into the Asia Pacific region, I think it's really worth mentioning we have a growth in sales despite the effect we saw in China. China is one of the three heavyweights in our company. We always talk about the big three, which is Germany, U.S., and China. China suffered from the lockdowns. Nevertheless, the region, in terms of sales, managed to grow, which I think is a very, very nice thing to say, because we see the...
For us, rather small countries like India, Southeast Asia and Australia are picking up nicely. Obviously, China being one of our major contributors to EBIT as well, we were not able to compensate the entire shortfall we saw there in the Asia Pacific region, as already stated, the other regions were able to compensate that. Most of that came from, last but not least, our Americas region, with the highest pickup in sales. Here as well, we saw really nice pricing by our sales organization. I think what is worth mentioning here, we always talk about Americas being one of our biggest regions amongst Germany and China. This is not our core U.S. business alone, very nice contribution by Mexico, which for the first time surpassed $100 million within revenues.
Nye Lubricants, which is our acquisition from a couple of years back, they developed really nicely. Canada coming along very nicely. I think the development we put into this market in the past years and the efforts is now paying off, and we see that we have a lot of different growth engines in this region, so we managed to grow the EBIT almost as strong as we grew our sales. What does that mean in terms of cash? Of course, we already talked about the new net working capital impact. Rising costs and raw material lead to higher inventories and lead to higher receivables. We'll put a little more detail to that in a minute, but I think those EUR 200 million really hurt our free cash flow.
We still came out at a little more than EUR 60 million, which from my point of view is a good result, taking into account this EUR 200 million net working capital increase. If it hadn't been for this, we would be looking at a cash conversion of almost 100%. I think this is a message to really let it sink in. We still see that with the net liquidity we have on hand, we would have been able to pay our dividend, so only the share buyback program we are doing good is below the line in terms of net liquidity. We had short-term financing last year. We already started to pay this back now in January, and we are very confident that in the course of the year, we will be able to pay all of this back.
To give you a little bit more light into what happened to working capital. Obviously, very huge impact from the pricing increases. We put in very thorough working capital management at the end of the year. This was one of my first tasks when I started in November, and I think the countries sit really nicely in managing inventories, managing receivables to set free some cash. I think good news about that is looking at inventories. This is pure price-driven. We went down slightly compared to prior year in inventory volumes, and the entire increase we see here is price-driven. Receivables, same holds here. We do not any change in payment behavior. We do not see any change in that we do not get our money from the customers.
I think this is good news because this means once prices go down again, this will start to unwind. Having said this, I mean, of course, cash flow is not where we expected this to be for this year, but we think this was really an extraordinary year with a net working capital increase, with a share buybacks. We are proposing to increase the dividend by EUR 0.04 per preference share and per ordinary share. Dividend increase 21 consecutive years in a row. I think this is really good news from my point of view. This means we are increasing the dividend per share as well as the total amount we are paying to our shareholders. How are we looking at the year to come? I think this is what most of you have been waiting for.
We believe we can increase our sales single-digits % organic growth. This is what we promised, and this is what we are looking at. This will be price as well as volume-driven. Of course, we are always aiming at increasing our volumes. I think this is an easy one. Pricing, obviously, we start into the year with a high prices. We gradually increased over the course of the last year, and we are looking at what potentially could be a full year effect. To be very honest with you, this is the number where we see the most uncertainty because nobody really knows what will happen to the raw material pricing.
For the first time in the history of FUCHS, we are in a position where we saw raw material prices coming up and staying at a very high level. For us, it's very hard to predict how they will develop. I will give a little bit more detail to that in a minute once we talked about the other numbers, because the basket we're looking at is a very mixed bag. For us, we need to see how that behaves and what that does to the sales. However, we are very confident with the EBIT number we're giving you. We put in place strict cost management measures, cost monitoring. We will, of course, see full year effects of some of the increases we saw in cost last year, like personal, like freight as well. Energy prices are a mixed bag.
This is why we didn't include them here. In some countries, they are coming down, in some, they're not. I think for us, it's very important we will potentially not be looking at lag effects again. This is why the EBIT margin, I strongly believe, will start to pick up again towards our target we gave ourselves for the end of, let's say, the 2020 years. We believe that we will see a nice growth. FVA, we need to see how that develops, obviously, with the still high working capital to none of the capital employed with rising interest rates. We believe that this will pick up as well, but potentially not that much above prior years we would wish to.
Good news going towards the capital market is that we expect free cash flow to be back to the normal level or even slightly higher of our target to generate a cash conversion of 80%. What is the assumption behind this? Since we don't really know what the prices will do, we said we will not need additional working capital or hardly any additional working capital to cater for the additional sales we are planning to generate. This is why this number is even slightly above 80%. To give you a little bit more insight, last but not least, into what I meant when we talked about raw material prices. Here you can see the comparison of Group I and Group III oils, which is the most frequent base fluids we are using to produce our products.
Be careful, still only catering for a total of the base fluid, 40% of the raw material we buy in terms of value. This picture couldn't look more different. This curve you see at the top, which somehow goes up steeply and then goes down, is the Group I in Europe, which is closest to the crude oil. You can see very high volatility, and that started with the war in Ukraine. When you look how that developed in the other regions, similar but at a much lower level, and you see that the prices are not below the level before a year ago yet. When you look at the Group III, you can still see numbers are stabilizing or even picking up. This is why for us, it's very hard to predict right now how this trend will continue.
Now we'll hand back to Stefan, who will give you a little bit more insight about what we're doing in terms of e-mobility.
Yeah. Thank you, Isabelle. As you know, we spend quite an amount of time within our FUCHS 2025 strategy to look at the three mega trends, mobility change, digitalization, and sustainability. I think here with regard to the mobility change, I want to have a highlight today on e-mobility and within the e-mobility part on the battery itself. Therefore, if you, if you look, we have, I think, a full product offering with regard to all lubricants and performance fluids within the battery in the whole life cycle, and we can provide that all over the world. What is the life cycle of a battery? For us, it's the manufacturing of the battery. It's actually the assembly of the, of the battery, which is quite complex, and then the usage of the battery with the loading and unloading.
The same picture, again, with some more details. You see here in the manufacturing of the battery, first of all, you have a metal shell where we provide stamping lubricants, the metalworking fluids, forming oils, and there we have existing business today. You also need corrosion protection and cleaners. When you go to the assembly of the battery, you have so-called, what we call heat conductive paste, or they call it gap fillers in the industry. When you assemble the electrolytes and the whole of the battery pack into the outer shell, you need thermal fluids.
For the cooling, you have got within the battery pack, you have got the electrolytes, where we have a joint venture, as you know, last year with E-Lyte, where we have now a scaling up of the manufacturing. We need a connector grease. We provide coatings for the screws which are utilized there, and again, corrosion protection. When you then utilize the e-car on the road, you need thermal fluids for the e-loading stations. You again need also for the socket, you need the connector grease, corrosion protection, and cleaners. I think that clearly shows our way of doing business is to have a full system and application approach for our customer and not only like one specific product and we just supply a new drum when the old one is empty.
I think for us it's important that we have a holistic view on the process and help them from the beginning to the end. That is the end of my battery part. To just show one more time the full e-car, you see the other products used. This is mainly the electric drive fluid, which we mentioned before, which you need in the so-called gear of the e-engine. It's also the bearing grease for electric motors, which is very interesting, and the compressor oil for the heat pump and many other more dedicated products.
As you know, all the 30 different pieces for the suspension, for the brake, for the air brake, the sunroof, the seat adjustment, and all of those things, they will stay as in the regular combustion engine car as well, as do the shock absorbers. Those other parts are like new applications. Normally what we see, you have a fewer number of competitors because that is really a high-tech terrain, which is actually quite good for us. I think that leads us to the end of the presentation. Now we look forward to have minimum another good half an hour or longer for your questions and discussions.
Thank you. As a reminder, to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. We will take our first question. Our first question comes from the line of Markus Mayer from Baader Helvea. Please go ahead, your line is open.
Good afternoon, Stefan, Isabelle, and Lutz. I have two questions. First one, of course, is on the how you have experienced the start of the year. In particular, have you seen already opening effects in China? Has this been visible or have they only flagged by your customers so far? My second question would be again on net working capital. Looks like that it's still quite elevated with 25% net working capital to sales. In the past it was more around 21%-23%. Should we expect you to reduce net working capital further over the long run? As far as I have understood, basically in the free cash flow guidance, there's basically 0 net working capital effect included. This is just a clarification question. Thank you.
Thanks a lot, thanks a lot for your questions. How we have seen the start of the year is, you know, as the last year ended a little bit, like in a similar way. We see a strong business in the Americas, continue to see. Also within Europe, especially Germany, if you remember, 2022 was more of a slow start in Germany, then towards the end it was stronger. We see that part. With China, I think we really need to wait until the first quarter is over because last year they had the China New Year in February. This year it was in January, so you need to see it combined. January was still impacted from the Zero-COVID.
Not only our people, but also truck drivers and other people were influenced. All in all, I think the start of the year was improved our outlook we have given for the entire year.
Markus, towards your working capital question, you're absolutely right. The levels are still elevated, and we are planning to further reduce them. To give you an exact number on what our target is in terms of working capital, percentage of sales is quite difficult because the world has changed compared to what we saw in the previous years, but 25% is too high. The right level will be 21 or 22 or 23, we will need to see. We have a consistent approach to challenge our countries to look into how fast it is moving, what do we really need, how much raw material with finished stocks we have on hand. This is managed quite diligently, and we expect that to come further down.
You're absolutely right, in terms of free cash flow, we only anticipated limited additional working capital. I would divide this into two, may I answer? At current pricing level, we expect working capital to come down in % of revenue. This means for those additional EUR 150 million we are planning to do in terms of sales, we do not need massive investment into working capital. What happens with the pricing and the yet working capital is fact related to pricing. On a question we simply don't know, this is why we didn't build it into our guidance.
Okay. Maybe if I can steal another question, Isabelle. When you started, you said that you have also looked at the different kind of business units of FUCHS and that you see also optimization potential, also in terms of forecasting, but also in terms of being more efficient, on a holding level. Can you give us more color on this? How quick do you expect then the effect to come? Is there really something you expect to hit the numbers of FUCHS this year, or is it more something for the next years out? That would be also helpful.
I think in terms of, to the first question, forecasting quality, I think generally the FUCHS Group is quite skilled at doing this because we have strong local entrepreneurs. They really know their markets, they know their business, they know what's happening out there. I think honestly, to improve this will be point one, a stretch, and point one, not my first priority. When it comes to cost management and performance management, I would say as a whole, this is definitely something on the agenda. I believe by really, you know, putting in benchmarks and comparing how our countries are doing specific things, we can for sure put in place some quick wins.
For the big contributions, you know, the likes as S/4HANA implementation, this will for sure take a little longer and will not show in the numbers this year.
Okay. Thank you.
Thank you. We will take our next question. Your next question comes from the line of Martin Roediger from Kepler Cheuvreux. Please go ahead, your line is open.
Thank you. Good afternoon. I have three questions, please. As far as I understand, you were not able to fully pass on increased costs to your customers in last year. You continue with price hikes this year. What is the amount of price hikes you currently implement as we speak? Do we talk about a low single digit, a mid-single digit, or a high single digit price hike? The second question is on your Russian activities. You have a plant in Kaluga. Do you expect any write-downs on that plant because your key customer, Volkswagen, is currently selling its plant in Kaluga? The third question that is in particular for Isabelle, in the past, FUCHS Petro's ratio of raw materials was 60% in additives and 40% in base oil when it comes to the raw material bill, not on the volumes.
Did this ratio change in recent years? Isabelle, you mentioned in your speech that the chart you provided on page 14 about the raw materials basket, that these raw materials represent 40% of your raw materials. As Base oil Group II, Base oil Group IV, and Base oil Group V are missing, is it fair to assume that the ratio has changed? Thank you.
I-
Thank you, Martin. I'm always glad you ask Isabelle specifically, so she will answer the last two question. I will answer the first question. The first question was, you know, with the fully pass on of the raw material cost. Yes, we achieved, I think, to pass them on fully despite the running behind impact. As I've told you already last year, for me, in my 25 years, that's the first time that raw materials went up significantly. Now, for many, many months, they never came down. If you remember 2008, 2009, but also 2020, they skyrocketed and sharply decreased again. This time, the decrease never came. We pushed them all through, you know, and we were early on, and we made numerous rounds of price increases.
We also catered for increased energy and freight expenses. We also know, you know, we have an additional EUR 350 million in working capital on the same volumes. I think, as I was told by my mentor, there are no free lunches. We also need to cater for that, you know, especially when you look at the FUCHS Value Added. We are doing some last rounds of price increases right now. Therefore, the longest discussion we have with regard to the outlook of our sales pipeline, you know, because it's so difficult on the one hand. It should go up because we have the full year impact on the higher prices now.
On the other hand, maybe there comes a time, I don't know when, end of second quarter, third quarter, maybe never, the prices might go down. There will also be a certain giving back. Also the exchange rates are a little bit different. It was really hard for us to put down a top line estimate. Therefore we said we keep this one. At the moment, we have no significant pressure from customers to do something in a big manner. I think also very important when you look at page number 19 of the presentation from Isabelle, you know, the Base oil Group I, you know, going up and down, this was a European picture.
In Asia it was not the same, it was not as deep. In the U.S. it was a little bit less as well. If you look at our entire raw material basket, we see no big change at the moment. Group III continues to be very high. The additives and the chemical providers or suppliers have the same problem like we have got with the capital employed, with the fixed costs. We don't see any huge relief coming up soon. The good thing about FUCHS is we have a very strict valuation method. You know, we say no move of raw materials or finished products for six months is a 50% write-off. No move in 12 months is a 100% write-off, we have a clean book.
The only good thing is with regard to working capital that the supply situation has eased, so we don't need to overstock, you know, certain raw materials anymore. So far from my side with regard to increases, price hikes, et cetera.
No, I will take the, your, additional 2 questions, Martin. On Russia, I think very simple answer. We are currently not expecting that we need to write down the value of the factory. Why is that? Well, I mean, of course, we implemented everything we had to comply with the sanctions, so we ring-fenced the organization. There are no intercompany deliveries into Russia anymore. We have a thorough check of who we deliver to in Russia. They're completely on their own, cut off from the rest of the FUCHS Group. We said we are still, you know, we still have to take care of our roughly, I think, 130 employees we have over there. The volumes are down slightly. However, they are still doing profitable business. They are delivering to their local customers.
Luckily, we have a very broad industry coverage in Russia as well. So far, we do not see that the business is not profitable anymore and that we're looking at an impairment. The second question.
The split between raw materials.
Split between raw materials. Sure. I think the 40-60 is still a good indication. I mean, obviously this somehow is a little volatile month-over-month. Sometimes we buy more base fluids, sometimes we buy more additives, chemicals, but I would say this is still valid for, let's say, looking at the entire group and the entire year.
Thank you.
Thank you. We will take our next question. Please stand by. Your next question comes from the line of Michael Schaefer from ODDO BHF. Please go ahead. Your line is open.
Yeah, thanks for taking my questions. On the first one, just looking back into the Q4, maybe can help us understand basically the very strong finish in Europe, whether you see this as a kind of, any particular major drivers of some of the restocking at automotive which may be not sustainable? Related to the Q4, review as well, in the US, the impact from the freeze, is there anything you can quantify? This would be my first question on the Q4. Certainly on, back to the outlook.
I understand basically, your cautious view when it comes to pricing, but it looks like that you took a cautious view on raw mats, in an evolution throughout 2023 when it comes to your top line, without i.e. taking a bit more, maybe a kind of moderation of prices into the second half. To what extent have you baked in any kind of cost relief, helping the P&L basically then in the second half? This would be my second question. Then maybe in particular on China.
Can you help us understand, maybe the kind of China sales drop you have experienced in 2022, and when it comes to volumes and prices, and hence the kind of base from where we expect them to jump on into 2023? This would be my three questions. Thank you.
Thanks a lot, Michael, for your questions. You know, we saw a pickup of the OEM business within Europe, especially Germany. We don't have a huge stocking potential because our products are there only for a few days, and then they are needed. They can't stock our products for many weeks and have a stock up. What we also see from the car industry, there was a certain backlog on some of the car demand. We don't see that at the moment as a temporary part only. The freeze in the US caught us a little bit, but it's not such a significant thing that you see an additional half month, let's say, within January or February.
We saw a good U.S. business towards the end of the year, also at the beginning of this year. Don't forget we also have an outstanding operation going on in Mexico where we do $100 million in sales, that is also a big part of our Americas. MAI continues to flourish really well. With China, we saw a higher single-digit volume decrease last year, which was probably the sharpest decrease towards the end of the year and the very beginning of this year. We assume that, you know, towards the end of the first quarter they will pick up again in China. I think that's the estimate we can give as of today.
On the pricing part and the raw material evolution and the outlook, Isabelle.
Yeah, sure. Michael, from my side as well, to put the outlook into perspective, we simply don't know what will happen with the raw material pricing. This would be looking into a glass ball. This is why we didn't build it into our outlook. What we said, okay, we assumed the pricing level we have right now, and then looked into the factors we can influence, which is growing the business organically with a segmentation of the market, so organic growth, which is cost management, and obviously the absence of the lag effect we saw in the last year, which in terms of free cash flow is that we figured sorry, only a slight increase in working capital due to better working capital management.
What we did not figure in is the reduction in working capital due to, say, lower prices and hence lower inventory.
Can I just sneak in a follow-up on your raw mat basket? On this 60% chemicals part, how do you see this evolving, basically?
More or less the same as we explained you our pricing. At the moment, they are still in their last stages of trying to either maintain or have slightly increases. Therefore we see our entire raw material basket not moving at the moment. Then, there, I, it's also a crystal ball leading to where that goes.
Mm-hmm. Thank you.
Thank you. We will take our next question. Your next question comes from the line of Oliver Schwarz from Warburg Research. Please go ahead. Your line is open.
Thank you. Firstly, I like to ask on CapEx. You stated that you like to invest in 2023, roughly the same number as in 2022, which is EUR 80 million. Given that we had some inflation, to say the least, in the meantime, and you are trying to make inroads at least into the battery, into the e-mobility market, in actual terms, that seems to be value-wise a lower number than compared to 2022. Is it that you are, let's say, toning down on selected projects, or are there just not a sufficient number of projects to invest in? Why is that number below depreciation also in 2023? That would be my first question.
My second question would be on the 2025 target for FUCHS, which is in EBIT terms, EUR 500 million. Using this EUR 390 million in EBIT as a starting point, that would indicate growth rates, EBIT growth rates, both in 2024 and in 2025 of roughly 13.5%. Can you quickly elaborate how you are trying to climb that hill, please? Lastly, we heard about your activities in Russia. I like to know whether there is for you as the FUCHS Group or the FUCHS SE, any, let's say, way or means to extract cash from your Russian enterprises. Thank you.
Thanks a lot, Oliver. I start with the CapEx number. First of all, I think when you look at depreciation, you need to distinguish between depreciation of fixed assets, purchase price allocation and, and the immaterial part. Either Lutz or Isabelle can give you the exact breakdown. We are not below the depreciation number of the fixed assets when we compare apples with apples. On the other hand, you know, FUCHS was pretty mean with the CapEx, let's say from 2000 until 2015, then we opened the valve. Once you open the valves, you have plenty of projects. We don't miss any projects, so don't underestimate that part.
What we have done is clearly we set the EUR 80 million goal to have a cap on for the time being, because we said this was a message campaign. At the moment, we don't see any additional facilities, like we build Wujiang in China or we build in Sweden a new plant. We don't see that. We have a plant project in Vietnam, but Vietnam is a very small market for us today, so the project is also not so big as in the other countries. The biggest project for this year is the specialty grease plant in China. That's an interesting one. The EUR 80 million itself always allows for some mid-sized projects.
Yes, there is inflation, but at the end of the day, we wanted to keep that goal. We don't do stupid things. Let's say if we see some big opportunity, you know, you can always give something in addition, but that's the budget we have for the moment. With regard to e-mobility, let's say the thermal fluids and the EDFs we do in our regular vending equipment we have today. The electrolytes was something what was part of our press release for E-Lyte. That's all factored in, yeah. Really nothing else to be said on the CapEx.
Obviously, our two poor colleagues from the region, they always want a little bit more, but I think it's good that Isabelle are a little bit strict at the moment because we also made a promise to you and then I think that's very sound moving forward.
Sure. Let me tag on, Oliver, the other two questions. With Clark with the cash from Russia question, because that's the easier one. Do we see that we can extract cash from Russia? Yes, but at a very limited rate. We got the approval to pay our dividend, but this is only possible in installments over the next two years. I think what we see is that moderately it is possible and we're doing what we can. When you look into the
Thanks a lot for your questions. First of all, with regard to pricing, I have quite an aggressive stance because I understand there's always the discussion of how far can you push the envelope, but at the end of the day, if you tell to a salesperson, increase the price, but don't lose a customer, he's not gonna increase the price properly. We really pushed hard, but the good thing is we were out of the gate early on in the year and we did smaller rounds of price increases rather like 6 times 5% than 1 time 30%. The good thing. We're not arrogant to our customers, so we were very transparent, but in a firm manner.
The good thing is last year, the customers couldn't go anywhere because of the availability part. We could actually jump in from the one or the other time when some of our suppliers did not have such a foresight in the planning of their raw materials. All in all, we did not lose any significant volumes last year due to our pricing. When you look at the overall volume development, we have done the study for ourselves, you take the through volume and then you take out China, and then you take out the conglomerate, Belarus, Ukraine, and Russia, because we also export out of Europe in some of those markets.
Actually, all the other countries increased their volume, which satisfied me, because there was a drop in China, you know, once it's still a large COVID contributor, and you are down by a high, single-digit % amount and other countries make good for it, make me, you know, look at it much, much more positive when you do that analysis.
To take your question on SG&A guidance. I believe we will not see the same rate of pick up we saw last year. However, I think same as we saw on a positive note in terms of pricing, that we will not have the lag effects anymore, but the full year impact of the better prices. The same obviously holds for the functional cost as well. I believe we'll have something between a third and half of what we saw last year will add on top to make sure to cater for the full year effect of personal expenses, freight, and energy. Those are the big three to name. What we, what we are doing, we are very carefully looking at where do we add fixed costs. Yeah.
What we do right now is that we do not hire a lot of new people, but we wait how we start into the year. A lot of things we are planning to do, we say we wait for our first forecast to come in. We wait for our first quarter to come in and to really see how that turns out, how the market is developing. There's still a lot of uncertainty, so we are very cautious in terms of adding to our fixed cost base. I do not believe that we will see a pick up like we saw last year again.
Thank you very much. Very clear.
Thank you. We will take our next question. Your next question comes from the line of Riya Kotecha from Bank of America. Please go ahead. Your line is open.
Good afternoon. I have three questions, please. First, on the 2023 EBIT guidance and path to the 2025 target. The guide for this year suggests an incremental EUR 25 million in absolute EBIT year-over-year, which means that in order to reach the EUR 500 million target, simplistically, that incremental contribution in 2024 and 2025 would have to accelerate to more than EUR 50 million annually. I wanna understand what the reasoning is behind this step-up from 2024, rather than have a more evenly phased profit contribution from 2023 onwards. My second question is with regards to the Nye acquisition in North America, that seems to be contributing positively above and beyond just the run rate effects. Can you give more color on how you realize synergies here?
Have the results of this acquisition been in line with your expectations or exceeded them? To this point, can you provide more color on if M&A will be a bit more of a focus in 2023, and if we should expect this soon? My last question is on EVs. Given the specific applications described in the life cycle of an EV, have you been able to better quantify what might be the FUCHS lubricant content in an EV compared to a combustion engine?
Okay. Thanks a lot for your questions. Maybe I start with the last question. You know, we still are not very much in favor to say what's the content of a car in a combustion engine and in the EV, because our market share in the EV market will be higher than in the engine oil market for light vehicles, because it's a much more narrow market with less competitors. Anybody who calls to their Lubrizol can get an engine oil specification. They buy the package from Lubrizol, they mix it with two base oils, and they have an approved product. This is different with the EDFs and the thermal fluids. I can answer you the question.
I think on the EV car, all EUR involved, if you have a 100% market share, might be, it's not sure, below in combustion engine car, but our market share will be higher. I think that will compensate for that. The other part, with regard to Nye significantly outperformed our expectations. That was really a very nice acquisition. It was the first time in my life that, you know, I was shown a hockey stick during negotiations. We paid an earn out on that they succeeded the hockey stick, and we renegotiated the earn out successfully.
They do really outstanding within the U.S., but also now using our worldwide infrastructure outside of the U.S. to sell their products in markets like Europe or in Asia, which they have done through distributors before. Nye is cool. When you say whether there is more focus on M&A, we have never changed our focus on M&A. It's always the same answer. We have a clear list of companies we would like to acquire. The list changes over time, you know, due to the three mega trends and to the external impacts. We continuously talk to many people, and we would hope to conclude something this year, but I can't give you any promise.
It always depends on the specific situation of either the family selling something or whether it's a larger company and they spin off something. M&A, we don't need it for our 2025 plans, but we would love to continue to do M&A as we have done in the past.
To go back to your EBIT question, Ria, you're absolutely right. This is an ambitious target, but same as with our product we're selling, we like challenges. We like ambition. What do we believe will be different in the years to come? I mean, listen, the last two years, we somehow had the issue, raw material prices were skyrocketing and our sales force was really focused on discussing price increases with our customers, discussing the substitution of materials, which sounds easy, but really is not when you approach an OEM and say, "Listen, we can produce the product, but we somehow need to exchange some of the ingredients." They didn't really have a lot of time to focus on volume growth and to focus on developing the segments.
We believe that starting from this year, this will be different again, and our sales force can put on a different hat and really focus on growing the segments and growing the volumes again. Once we see that, we believe that the EBIT will pick up much quicker, and we have it evenly distributed more or less over 2024, 2025. The next thing, obviously, we are taking a much closer look on cost management now with what, for example, already said with hiring less people or really more carefully looking at where do we need additional people with managing our costs, managing our resources, putting in place new standards. I think those two ingredients will be the success to then take the next step towards the EUR 500 million.
Okay. Thank you.
Thank you. We will take our next question. Please stand by. Your next question comes from the line of Isha Sharma from Jefferies. Please go ahead. Your line is open.
Good afternoon. I just have two, please. Could you help us with your specific expectation in terms of volume by businesses and regions, please? Where do you see the most potential here? The second one is, if you could please quantify the impact from the frost wave in North America. I'm just trying to understand the exit rate for Q1 estimates. In this regard, are you expecting your earnings to be more second half weighted in 2023?
I think, with regard to the outlook, we look forward, I think, to a solid first quarter, so it's not that we have all the hopes for the third and the fourth quarter. That's the one part. With regard to specific, coming back to the frost in the U.S., it will not come that we have like 4 months is in the first quarter in the U.S. It will have some impact, but I think if you have a backlog, it takes some time to get rid of the backlog because all of our customers had their backlogs as well.
With regard to specific volume expectations, I think, as we have said before, we really estimate that starting in the second quarter, we see a rebound in China. Otherwise we have budgets for volume increases in Europe as well as in the Americas. As Isabelle Adelt already outlined on our segment approach, you know, we have budgeted in 2022 business development, which we moved 1 year to the right, to 2023 because last year our salespeople were fully engaged with pricing and the raw material availability issues. This year we have none of those. I think they really have time to go out and get their plans executed.
We see some good results already happening now. Therefore, that is, I think, our outlook for this year, which I find more positive because we have significantly less cost challenges as we had last year.
Maybe, Isha, to add on the frost damage. To be very clear, we do not see permanent damage. Like, when you have those pictures in mind of those refineries in Texas, this was really a temporary impact that the moment it's very cold outside. For us, that's a limitation to move the products around, to move them out of the warehouses because they will freeze. It's not that, you know, our plant or our production availability was somehow smaller now and we need to rebuild. This was really pure temporary end of December, beginning of January impact. Once the temperature grows again, we could go back to full capacity.
Sure. My question was only regarding the underlying EBIT for Q4, which then I could extrapolate. It was not that I expect the frost to continue. I was just hoping.
Mm-hmm.
see what your underlying EBIT was in the fourth quarter.
Okay. Are there any more questions from your side? Otherwise, we have come to the end of today's conference call. Maybe this is the last chance to ask a question if you have one.
Thank you. Once again, if you do wish to ask a question, please press star 1 and 1. We have a last question. The last question comes from the line of Lars Vom-Cleff from Deutsche Bank. Please go ahead. Your line is open.
Yes. Good afternoon. I promise to be quick, keeping an eye on the time. I also have questions about your guidance. I mean, is it fair to assume that this is rather a minimum EBIT guidance you published? especially that you have not provided us with a range this time, but rather a single amount. If I do a quick back of the envelope calculation and divide your EUR 390 million by the EUR 3.6 billion sales target, it would imply a margin recovery of round about 10 basis points, which looks very conservative to me, given the qualitative statements you also made during your With regards to the outlook.
I think that's a clear question for Isabelle.
Thanks, Stefan. No, I wouldn't, I wouldn't say this is a minimum guidance, but we said, okay, we somehow do... I mean, I personally like to do guidance a bit differently. This is where it comes from, that we don't have ranges anymore, but rather spot rates, because it's what I like better. That's the only reason behind. You know, EUR 390 is due to our best knowledge of how the market and how the raw material pricing will behave this year. So far, this is, you know, really a glass ball. We don't really know what happened. It can be, you know, the prices do not really recover. We don't see the same lager types in a different direction.
It can be they go down by 20%, we will see, like, a strong uptake in terms of EBIT. This can go into both directions. We saw that last year as well, that suddenly, you know, was very difficult for us to give a guidance. I mean, Stefan did a really nice quote earlier towards the press. In March, I somehow stopped hoping for the prices to go down because somehow it never happened. We still didn't see this. This for us is such a big uncertainty. As you know, I mean, pricing for us is really the core around the raw material prices, how we do our prices, how our EBIT develops. For us, it's really difficult to tell right now.
Understood. Thanks. I saw a Bloomberg headline accompanying your balance sheet press conference, where it says you want to keep your 23 margin stable at around 11%. Is that a figure you mentioned and you explicitly tried to reach, or where does that come from?
Nothing rates have a calculator. No, we didn't mention 11%. This is just, I think, the same exercise we did for the EUR 390 divided by the EUR 3.6 billion.
Excellent. Understood. Then maybe the last one, there was another headline saying, you want to reach your EBIT target of 15% or above 15% by the end of the 2020 years. I guess this is the latest date until which you intend to have reached this margin, and you wouldn't rule out to be able to reach it earlier, right?
We would love to reach it earlier, obviously. I mean, we are talking, and for me this is very important, about a sustainable EBIT margin of 15%. I mean, obviously, once prices go down, we will see this margin now and then. For us, it's really important to think about what do we need to change structurally? How do we want to, you know, put up our sales push in terms of the segmentation? What kind of systems and processes do we need? This takes more than a year or two to implement, honestly speaking. This is why we said 2025 is not realistic, but will be more towards the end of the 2020s.
Understood. Many thanks.
Okay.
There seems to be no further questions, so we'll hand back for closing remarks.
Yeah. Thank you for the participation today. This is the end of the conference call, we would like to thank you very much for the participation. We are looking forward to the next conference call, which will take place on our day of the Q1 reporting, which will be not too far away on 28th of April. Have a good time, and until then, bye-bye.
Thanks a lot.
Thank you. Bye-bye.
Bye.
This concludes today's conference call. Thank you for participating. You may now disconnect.