May I now hand over to Lutz Ackermann, who will lead you through this conference. Please go ahead, sir.
Yeah, 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 Q3 numbers. As always, all relevant documents have been uploaded on the IR section of our homepage this morning. On the call with me today is Dagmar Steinert, CFO of FUCHS Petrolub. Dagmar will run you through the presentation, which is then followed by a Q&A session. Having said this, I would like to hand over to Dagmar. Dagmar, please go ahead.
Thank you, Lutz. Good morning, ladies and gentlemen. I would like to start with chart number two, our highlights for the first nine months 2021. Just to state, like, in a difficult market environment, we have performed in line with our expectations in the last quarter. As you can see, our sales are up 22% year-on-year and we report EUR 2.1 billion. Our earnings, our EBIT, are increased 37% year-on-year and our outlook is confirmed. Looking a bit deeper into the figures, we see, looking at the first nine months, that our sales growth is mainly volume driven. In the third quarter, we've seen more positive effects from price increases and less but moderate volume increases.
To give you a more detailed impression, if we compare third quarter 2021 with the third quarter 2020, we have roughly 1/3 volume growth and 2/3 is pricing. Of course, we face as well shortages, supply shortages, in the automotive industry, what affects our sales in all regions. As said before, our performance is in line with our expectations. With that, I would like to turn to chart number three, our quarterly sales development. As you can see, our third quarter this year is on the level of the second quarter of this year, but we have a slight decrease in volume. On the next chart, the quarterly EBIT development, you'll see, like, quarter-on-quarter, we are slightly below previous year.
In 2020, we had a very weak first half, then in the third quarter, the economy picked up and we had our record quarter with the fourth quarter of 2020. The third quarter this year is as well more or less on the level of the second quarter of this year. If we turn now to chart number five, our group sales. We have 22% organic growth. We have a bit of external growth due to our acquisitions in 2020 and the same amount we lose on the currency side. As I said before, 2020 is heavily impacted by COVID-19 and therefore, if you look at 2019, we increased our sales in 2021 compared with 2019, the first nine months, by 9%.
All regions increased this year, previous year, and 2019 as well. On the next chart, number six, our net operating working capital, that's the weaker point of our performance within the nine months. Of course, our net operating working capital increased significantly from the second quarter to the third quarter. In an absolute amount, we report EUR 681 million and that is dominated by an increase in inventory. As you all know, because it's not only us, it's more or less everybody who is facing this difficult market environment. If you think about the shortage of semiconductors and chips in the automotive industry, if you think about the disruptions in the supply chain, it's a normal development that you have higher inventory.
Of course, a portion of the higher absolute number of net operating working capital is the increased volumes. On the other hand, we have higher inventories due to the cancellation of orders of customers as they face disruptions in their supply chain and, of course, disruptions in our supply chain. To give you just an example, if you like, you need for a product eight different raw materials and one is still missing, you are not able to produce and you still have it in your stock. I would like to point out that we are not facing any structural problem. It's just the result of the actual environment.
On the next chart, number seven, our earnings summary for the first nine months, about the sales increase 22%, we already talked. If you have a look at our cost of sales, the cost of sales increased over proportionally. There it was 24%. Our gross profit increased just by 20%. There you still see the impact of increased raw material prices. Looking at the gross profit margin, one result of that, of course, is that our gross profit margin is below previous year. If you look at the gross profit margin Q3 compared with Q2, you see a reduction as well. Our other functions costs increased by 11%. There we preliminarily see higher selling costs.
Of course, one portion of these selling costs are increased freight costs. Our at equity earnings are on the previous year's level, and therefore our EBIT is up 37% year-on-year, and our EBIT margin amounts to 13.1% in the running year. Compared with the pre-crisis year 2019, our EBIT is up EUR 33 million or 13%. Looking at our CapEx with EUR 45 million in 2021, that is significantly lower than in the previous year. As you know, we finished our big CapEx program by the end of 2020. About our net operating working capital, I already talked, and our free cash flow before acquisition amounts to EUR 44 million for the first nine months of this year.
Having now a look at the regions, starting with Europe, Middle East, and Africa. There we see, if I compare the performance with 2019, we can see that the sales are up by 6% compared with 2019. All countries more or less reported, compared with the previous year, a significant double-digit growth rate. The growth is, yeah, it's an organic growth. There's no impact of any acquisition. Very positive was the performance in South Africa and Russia as well as in Southern Europe. Coming to Asia Pacific, that's chart number nine. There we see that sales are up 25% compared with previous year, as well as 19% compared with the pre-crisis level in 2019. This increase is organic as well.
We have a little bit currency effects, but no external growth as well. Of course, China is the biggest earnings contributor in these regions, followed by India and Australia. All companies had a good development. Coming to North and South America, there we see as well higher sales by 22%. Compared with 2019, we have a number which is 8% above 2019. In these regions, we see external growth of EUR 11 million. That's due to our acquisitions of Nye and Simmark in 2020. We have negative currency effects from North and South America in total with -10%. Our earnings are significantly higher compared to previous year and also above 2019.
With that, I would like to come to chart 11, where you see that we face substantial cost-based inflation in the running year. On this chart we have several graphs or lines and we put the development of the base oils for Group I, Group II, and Group III. All increased, Group II with the highest increase. We see that these base oil prices remain on a high level. What we added the first time is a graph for freight and for packaging costs. These two costs are significantly higher compared to previous years. That, of course, is a burden to our margins as well. On the next chart, number 12, just as a reminder, our confirmed outlook unchanged.
We are confident that we will deliver and of course, it's a difficult market environment, but we confirm our outlook with sales at the upper end of the range of EUR 2.7 billion-EUR 2.8 billion. EBIT between EUR 350 million and EUR 360 million, as well as our FUCHS Value Added is EUR 200 million and our free cash flow before acquisitions around EUR 110 million. Therefore, on the chart number 13, you find the bridge for our expectations regarding the free cash flow as we just had a number of EUR 44 million free cash flow before acquisitions after nine months. Our increase of net operating working capital after nine months is higher than our expectations for the year-end.
Of course, we have the burden of these other changes where we have the like reversal of taxes. In 2020, we had a positive impact of less tax payments and in 2021 we had to pay this. We are still confident to deliver our free cash flow before acquisitions, even in this environment of increased input costs and that I just want to confirm. On the last chart, it's just a teaser that we will have our Capital Markets Day in 2022 on June 28, and registration will be open soon. With that short presentation, I would like now to turn into Q&A because I'm sure you have quite a couple of questions.
We will now begin our question and answer session. If you have a question for our speakers, please dial zero and one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question has answered before it's your turn to speak, you can dial zero and two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. We have a first question, it's from Markus Mayer, Baader Bank. The line is now open for you.
Yeah. Good afternoon, Steinert. Good afternoon, Lutz. I have two questions, if I may. The first one is on this net working capital development. Can you shed some light what kind of effect is coming from supply chain issues and that you basically cannot get rid of your material, have problems of finalizing product, and what is coming from the higher price effect? That would be very helpful. Also in this regard, on the cash flow, this other effect you just showed in this cash flow bridge, is it fair to assume that this is a magnitude of around EUR 30 million for this year? The last question, it's actually three questions, is on the guidance.
When I take the upper end of your guidance range at sales, then this implies EUR 670 million revenues for the fourth quarter, which is a 6% sequential decline despite higher price effects, which I guess will certainly have even stronger kick in in the fourth quarter than in the third quarter. My question is here, do you expect a de-stocking in the fourth quarter, or why should we see such a sequentially lower volume growth for the fourth quarter? The same too also for the EBIT, which implies EUR 71 million-EUR 81 million. The question, do you also here expect more the upper end as it is the case of sales? What could be then the main triggers for only be within the range and not at upper end or even above?
Of course, here as well, I think the price increases you recently had, and also what I understood will again raise in the fourth quarter and even in the first quarter of next year, they should also buffer at least a part of the higher raw material cost. That would be helpful. Thank you.
Thank you for your questions, Markus. Well, I would like to start with the expectations or development of the fourth quarter. As we have seen in the third quarter, a negative volume growth, and the fourth quarter is usually our weakest quarter within the year. There are less working days and, of course, quite some customers close their plants for holidays during that time. The range for the full year, the upper end, EUR 2.8 billion, of course, even EUR 2.83 billion would be EUR 2.8 billion. It's within our range, yeah, what we expect for the fourth quarter.
Regarding our profitability, yes, of course, we expect a lower profitability in the fourth quarter compared with the third quarter. That of course goes somehow in line with negative volume growth. Of course, we face massive increasing freight costs, packaging costs and of course there are the difficulties regarding supply chain or disruptions within the supply chain. I mean, if you listen to the OEMs what they announce, that the shortage of semiconductor and chips and so on results in less, well, in smaller numbers of cars produced. So that's all included in our expectations for the fourth quarter.
Regarding our net working capital development and other effects within the cash flow statement, as I mentioned, the major increase of the net working capital is an increase in inventory. There we have both. Of course, we have an increase in raw material where I gave you, for instance, the example where we are not able to produce if still one raw material is missing. On the other hand, we put more safety stock in our inventory of raw materials because there are always disruptions in the supply. Once you are able to get some which you need for production, you might even take more on your stock because you don't know when you get the next delivery.
On our finished products, we have an increase as well. Of course, a portion of that is just the pricing, but we have more volume in stock as well. That is due to cancellation of orders, which come in very short time. We are optimistic that we will see a reduction until year-end. That combined with the other effects, where we have the burden of tax payments that is slightly compensated by positive other effects due to the higher volume. Of course, we have more provisions, for instance, and that is positive on the free cash flow. Overall, it's a mixture of different things.
If you look at our CapEx number, for instance, where we said we want to spend EUR 80 million, and that is in line more or less with our depreciation. But we might even get some million out of that, out as well, just due to a time shift. Overall, I believe we will get into the direction of the number of EUR 110 million free cash flow before acquisitions.
If I can ask an add-on question this. You said safety stock and can you quantify this effect of safety stock and also what you said that for unfinished products then materials are missing and therefore they're longer on your balance sheet, on your cash flow than normal. This kind of magnitude. Can you quantify it?
No, I can't quantify it because the situation changes day by day or week by week.
Okay.
Therefore, sorry about that, Markus.
Okay. Thank you.
The next question is by Martin Roediger, Kepler Cheuvreux. The line is now open for you.
Hello, Steinert, Lutz. Good afternoon. I would like to ask two questions. In the past, you always said that you have a time lag in passing on raw material costs to the customers of around one to two quarters. When I look at your quite good figures in Q2 and in Q3, I have the impression that you have more or less fully passed on higher costs to your customer. What has changed compared to three-four years ago when FUCHS was squeezed on rising raw material costs? The second question is on Q4, the raw material evolution. What is your expectation on your overall raw material basket, so the base oils and also additives on a sequential basis and a year-over-year basis?
Well, thank you for your question. Well, our time lag to pass on raw material price increases, which is in general one to two quarters, that didn't change. Even if you look at our numbers, as we see in the third quarter, a higher number of pricing. If you look at our margin, we still have a time lag and we are still working on that. Of course, for the full year 2021, we will not recover all the price increases we've seen compared with previous years. Of course, it is much easier to pass on price increases to the customers if you have these massive inflation.
If you are talking about 1% or 2% or 3%, of course, it's much more difficult to pass it through. Therefore, Martin, nothing really changed. But of course, our people always try their best. As we've seen already in the last quarter, 2020, price increases they went out to the customers in December, beginning of the year and started all the negotiations. Your second question was. Could you just shortly repeat it? Sorry.
Raw material evolution.
Raw material evolution for Q4 quarter-over-quarter and year-over-year.
Yeah, well, prices remain on a high level. Of course, well, I would say regarding the prices, there won't be a relief, maybe one or the other regarding certain raw materials, but not on average, if I look at our raw material basket in total. Looking at the development of packaging costs and freights, that makes it even more expensive. Therefore, I would say it's on that level. It will stay on that level.
Thank you. Thanks.
The next question is by Matthew Yates, Bank of America. The line is now open for you.
Hi, Dagmar. Couple of questions, please. The first one, I'm wondering if you can talk a little bit about the press release from the other day about Mr. Bock leaving the supervisory board. If you can share any insight into what has triggered that decision and how the company's thinking about succession. Secondly, I think the issues in auto OEM have been pretty well flagged. I wondered if you could talk a little bit more about how the industrial side of your business was trending through the quarter and how it started in Q4. Thank you.
Well, about the press release that Kurt Bock is going to leave our Supervisory Board by the next general annual meeting in 2022, that is something that was longer-term the intention, and it just became concrete on Monday and therefore we published that. Now we have, like, six months' time to see who's going to fill in then the position and the nomination committee will work on that.
Dagmar, sorry, just to follow up on that. I mean, the tenure since joining or taking that role as chairman wasn't particularly long by German standards, but are you saying that was always the intention that there would be a transition next year?
Well, I can't tell you more. It's all said about that.
Okay. Understood. On the industrial side of the business?
Well, the industrial side of the business, of course, looking at the automotive industry, the dynamic is getting less. That's, yeah. I think that's more or less to account for most of the, or all of the OEMs and first-tier supplier. Looking at the industrial business, of course, it's a mixed picture as well. There's not only a shortage for the automotive industry. Now, there's a shortage of magnesium, aluminum, steel. It's supply chains are very difficult at the moment and therefore a lot of industries struggle and got their, like, short-term disruptions in producing and delivering.
Understood. Thank you so much.
You're welcome.
The next question is by Sebastian Bray, Berenberg Bank. The line is now open for you.
Hello, thank you for taking my questions. My first one would be on the outflow for acquisitions in Q3. It looks like it was about EUR 30 million. The only acquisition I'm aware of was the Gleitmo deal, which had about EUR 6 million of sales. Was this just a bit of an expensive deal relative to what's been done in the past, or am I missing something here? That's the first question. The second one is, effectively at this stage, it sounds as if base oil prices are leveling off. Are the price increases at FUCHS done and dusted? I believe there was a fourth round in the U.S. that is being implemented, but are we done aside from that?
On CapEx, if we have, let's say, EUR 75 million this year or EUR 70 million versus the guided EUR 80 million, is there a catch-up effect the next year whereby we're going to have EUR 90 million or EUR 95 million? Thank you.
Yeah. Thank you, Sebastian, for your questions. The first question, you're not missing anything, but I didn't mention it. Of course, our acquisition of Gleitmo wasn't that expensive. We just settled the payment for the Nye earn-out earlier. You might be aware that we negotiated like a two years' earn-out period for our acquisition, Nye. We had to pay for 2020, what we did in the first half of this year and for 2021. We decided to settle that earlier. What you see in our cash flow statement is with EUR 25 million, the settlement of the earn-out out of Nye, which was already in our balance sheet by the end of the year 2020.
Your question regarding base oil prices and if we are done with our price increases, well, we managed to pass through, I would say, quite a big portion of raw material price increases. But of course, looking at our business' price variation clauses, we haven't covered everything by now. Of course, looking at the inflation, there we have to still cover more by next year. Regarding the CapEx number, I expect more than EUR 70 million CapEx for this year. It should be EUR 80 million, but could be as well EUR 75 million or EUR 76 million. It's always very difficult to exactly know what the exact number is.
If we have less than EUR 80 million this year, we will have this amount in the next year above EUR 80 million. If you look at both years, 2021 and 2022, then it should be in total EUR 160 million.
Thank you. That's very helpful.
The next question is by Michael Schaefer, ODDO BHF. The line is now open for you.
Yeah, thanks for taking my questions. Good morning, everyone. Three, if I may. The first one is, since you mentioned it or indicated and highlighted this particular on slide 11, I wonder whether you can shed some more light on the total freight cost you are bearing every single year and the order of magnitude at least. Second one is a particular weakness we have seen in the European market in the third quarter also, margin wise, also compared to, let's say, the levels you reported in 2019 for this reason. Is there any particular reason for this major weakness in terms of margin? And the third one is on the others line.
Looking into the EBIT, you reported something like EUR 5 million, which is unusually high number compared to, let's say, the quarters we have seen beforehand. Any particular effect, any one-off included there? Thank you.
Well, starting with your first question regarding our freight cost, that's like roughly 4% of our sales.
Mm-hmm.
It increased within the first nine months by over 20%.
Okay.
In our region, EMEA, of course, if it is always just like a snapshot, if you compare like three months, a quarter with with another quarter, because there are always different product mix development. But of course, our region, EMEA, is in the third quarter this year more impacted by reduced volume of sales within the automotive industry. Regarding the EUR 5 million other, there is not really a one-off in there. Excuse me. It's very dry air here. Hi, I'm sorry.
Maybe I can take over for the last questions, then Dagmar can take over. I think within the other line, I think it's normally that license fees are being paid from the regions to the holding. I think this is what is included there. Normally, you would have negative consolidation effects, but this is why it varies throughout the quarters a little bit. I think this time it has been this way around. Normally you should see smaller numbers with regard to that.
It's EUR 1 million out of the earn-out of nine, because we had in our balance sheet EUR 26 million last year. We just had to pay EUR 25 million. It's due to our gross margin. It's a bit less compared with previous quarter. The reversal of intercompany earnings due to the intercompany sales.
Mm-hmm. Okay, understood. Thank you very much.
The next question is by Lars Vom Cleff, Deutsche Bank. The line is now open for you.
Yeah, thank you very much. Good afternoon, Dagmar. Many thanks for taking my question. Just one remaining, if I may. Do you have any explanation why your business with automotive customers in China was so strong last quarter? I'm only asking because it contradicts with what my auto research colleagues tell me and what they have seen so far from their coverage universe.
Yeah. Lars, thank you for your question regarding China and our performance in China. Our portion of automotive aftermarket is bigger in China than compared with the other regions and therefore we've seen as well a slowdown overall. As you said, not as much as within the other regions.
Perfect. Thanks.
The next question is by Isha Sharma, Stifel Europe Bank. The line is now open for you.
Thank you for taking my questions. This is for Lutz, please. Just to follow up on the guidance, if I may. Do you expect the current situation to deteriorate quarter-over-quarter in Q4, or is it purely the seasonality effect that you have baked into the guidance? And in that regard, if you could help us a little bit, into the development that you have seen in your order book so far in October, is it in line or better or worse than your expectations? That would be the first one. The second one is on Americas. Looking at the development, do these numbers include some market share gains, given the fire at your competitor that we had talked about in previous quarters, or is that effect not visible because of the whole supply chain disruption situation? Thank you.
Well, I would like to start with the first question regarding our guidance and seasonality. It's our expectations for the fourth quarter are, of course, impacted by the seasonality, and as well by the difficult supply chain and the lesser downturn dynamic of the overall market. If you look at our order books, we have always there a very short visibility. We are talking there not about months or quarters. It's a question of weeks. What we face, what everybody else, I would say, faces in this difficult environment is that you get with a very short notice cancellations from your customers.
On the other hand, we have the situation in one or the other case that we are not able to deliver because we face missing raw materials. Therefore, that's all reflected in our expectations for the fourth quarter and for the full year guidance. Regarding America, we don't see really visible gains where we gain market share resulting from the fire of Chemtool. What we see is, as we had a weaker performance in 2020 in America, that they are now improving. Of course, very positive is the contribution of Nye.
Thank you very much. Just one more. Do you expect going forward some market share gains from the phenomena, or is it something that you are cautious on when it comes to guiding?
Well, I don't expect a little bit, but not a big gain.
Thank you very much. Very helpful.
The next question is by Eleanor Seddon at UBS. The line is now open for you.
Great. Thank you. I've got a couple of questions. Also, hi, Dagmar. Hi, Lutz. First one is, are you happy with the current level of safety stock? Would there be any further additions to that you want to build up, through Q4 at all? Is it also something you'd be looking to maintain through the winter, assuming supply chain issues remain in a similar condition? The next question would just be around those cancellations of orders that you've seen. Do you think those are delays to demand, so that would catch back up next year when your customers are able to produce their products? Or is that effectively a lost period of demand and next year would revert back to normal?
Finally, on a slightly different topic, please could you remind me on your reliance on different forms of energy around the globe? I understand all your electricity in Europe is renewable, but please could you comment on the rest of the world and on what timescale you think that would all be moving towards renewables? Thanks.
Thank you for your questions, Eleanor. Starting with the first one, am I happy about our safety stock? I'm not happy about our stock overall, about the amount, but of course, we need a higher safety stock in this time and but we won't build up even more in the fourth quarter. We will, of course, work on reducing our stock regarding finished products. The question about order cancellation and if we see that this is a delay in demand and will catch up later. I personally believe that a portion of that will be lost and that not everything is being caught up. Your question about our use of energy and what's renewable.
In Europe, we are using 100% green energy and we are working on it in our other regions. On our new buildings and everywhere, and even where possible on old buildings, we put on like solar panels, for instance. We have a lot of activities and projects to improve our own CO2 footprint. As we are CO2 neutral within our own activities gate-to-gate in the last year already, we set the target for 2025 to be CO2 neutral, including our whole supply chain. Yes, we had to buy some certificates, but we carefully look what kind of certificates that are, and we gave the commitment that we want to reduce the portion of certificates year by year.
We are coming there from like two sides and I would say to be CO2 neutral cradle to gate in 2025 is more than a target. It's more a commitment.
Brilliant. Thank you, Dagmar.
You're welcome.
As a reminder, if you want to ask a question, please press zero and one on your telephone now. We have the next question. It's by Markus Mayer, Baader Bank. The line is now open for you.
Yeah, I have a question on the aftermarket market exposure in the automotive part. Am I right that, A, the aftermarket business is bigger in volume terms than the OEM business? B, other competitors in Europe, in particular in Germany, we're extremely bullish on the aftermarket business and also what we hear from other parts of the industry, the aftermarket business, as there are not that much new cars in the market, looks extremely strong. Is this also something you already experience? You said this already for China, but this is also the case for other regions as well? That would be helpful.
Well, Marcus, our aftermarket business is less than our like OEM and first-tier business. We are stronger in the automotive aftermarket in China and there we had still a good performance. I wouldn't say that our aftermarket business is strongly increasing. No.
Okay. Thank you.
For the moment, there are no further questions in the queue.
Yes, operator. Thank you very much. We have come to the end of today's conference call. We would like to thank you for your participation. I would, again, like to highlight that we have announced our Capital Markets Day for the next year, which takes place on 28th of June, and we are happy to welcome you here in Mannheim then. If there are any further questions today or the next days, please don't hesitate to contact us. Otherwise, we would like to wish you a very nice evening and have a nice weekend and speak soon. Bye-bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.