Market Topics

Making Gains or Growing Pains?


Making Gains or Growing Pains?

The lubricant industry boardroom has over the years been a setting for countless mergers, acquisitions and realignments. One company that stands out for its ability to navigate the sturm and drang is German independent Fuchs. Sydney Moore takes a look at this Teutonic titan.

Amidst flatlining demand for its products, the business of lubricants is constantly changing, and every day new opportunities and disruptors emerge, according to one U.S. industry consultant. Her comments are borne out by frequent announcements of mergers, acquisitions and expansions.

Companies that are flexible, willing to change, are fast moving and have the ability to take risks will not only survive but thrive, Geeta Agashe, an independent industry consultant based in New Jersey, told LubesnGreases.

One company that has thrived while others have withered is Germanys Fuchs Petrolub, the worlds largest independent lubricant manufacturer with 58 operating subsidiaries dotted around the globe. The Mannheim-based company has been snatching up competitors and investing hefty amounts into developing facilities and technology.

According to an investor presentation by industry consultancy Kline & Co., 45 percent of Fuchs revenue derives from automotive lubricants, a segment that will be vulnerable to the inexorable disruption of e-mobility over the next two decades. That said, Kline emphasizes that Fuchs has managed to make a name for itself in the industry because of its ability to build a large international presence that it has combined with a made-in-Germany brand image and rare family heritage selling point. These have allowed the company to punch well above its weight with major corporate oil companies that are diversified in the base oil or upstream businesses.

Fuchs has grown over the years to establish a presence in every major lubricant market in the world, said Kline. However, the length of time to develop specialized capabilities can be prohibitive, hence why an effective inorganic strategy is also key to scaling up and growing market share, Kline explained.

Agashe added that Fuchs carefully done acquisitions give it access to technology as well as new critical applications. The companys addition of United States-based synthetic lubricant manufacturer Nye Lubricants in October 2019, for example, was attractive to Fuchs because it brought access to technology and expanded the companys presence by providing it with engineering skills and design partnership.

The companys acquisition in November 2019 of Zimmark Inc., a technical process management, fluid optimization and fluid disposal company based in Ontario, Canada, also gave Fuchs the opportunity to grow its service component, Agashe explained.

Agashe thinks that sometimes there is simply no substitute for being in close proximity to customers, an idea that Fuchs has adopted, as seen in the companys presence in numerous countries.

For instance, Fuchs entered Switzerland late last year by signing agreements with local distributors. The company had previously sold its 50 percent share in a joint venture in the country in August 2018, but it has since opted to serve the Swiss market directly through trading partnerships with Aseol Suisse AG, Laveba and S. Affolter. By solidifying these partnerships, Fuchs thus ensures complete market coverage across all customer groups in Switzerland, the company said in a press release from December 2019.

While much of Fuchs dealings are conventional, others initially had some industry players scratching their heads. One was Fuchs acquisition of Australian automotive retailer Nulon Products in March 2019 that appeared to be outside the companys usual business-to-business scope. In fact, Wayne Hoiles, managing director of Fuchs Lubricants Australasia, told LubesnGreases that taking over Nulon was one of the first times Fuchs had branched out into the retail market. However, it in fact complemented its existing automotive, mining, industrial and original equipment manufacturer businesses in the country.

The industrial market [in Australia] has declined significantly over time. Weve had to adapt to whats available in the marketplace, so us moving into the automotive retail sector with a secondary brand is probably a little new in the Fuchs Group, Hoiles said.

Despite the risk and unconventional appearance, the move seems to have paid off. The Australian market is a tricky one, with a marked decline in local manufacturing over the years. Kline confirmed that most major oil companies have left local manufacturing in Australia. Kline then explained that this type of purchase was more of a distribution play and that if Fuchs can competitively source raw materials while efficiently operating its plants in the country, Australia offers significant opportunities for growth.

However, Kline also warned that acquiring capabilities is only one factor contributing to growth.

The ability to identify the right targets, correctly assess value and integrate and roll out the acquired capabilities across the businesses … are all challenging tasks and the ones that Fuchs will increasingly have to grapple with on its continued path to inorganic growth.

The company has a very strong track record of buying diamonds in the rough and polishing them and successfully integrating them into their fold, said Agashe.

It is not relying solely on inorganic growth to facilitate its progress. Its business model also promotes organic growth through the construction of new facilities as well as the expansion of existing ones.

Fuchs is now in its growth phase, said a spokesperson for the company. Its about achieving healthy, profitable growth close to where our customers are and sustainably adapting to a changing world. Therefore, Fuchs intends to invest more than 100 million in organic growth annually up to 2021.

Show Me the Money

Fuchs began this extensive investment initiative in 2016 and has spent money on new plants and expansions, laboratories and infrastructure to build up production capacities. It has made multi-million-euro investments in new or expanded facilities in Turkey, Kaiserslautern, Germany and China in 2019; South Africa, Australia and Mannheim in 2018; and in Illinois, U.S., in 2017.

Even so, profit flow in this business climate can be unpredictable. According to Kline, achieving sustained growth takes a combination of a clear strategy regarding where to win and how to play, strong management capabilities and decisive investment to combine effectively the inorganic and organic strategies in a financially sound way.

While Fuchs appears to have these characteristics, the balance sheets paint a fuller picture. In its year-end report, Fuchs saw record sales of 2 billion in 2015, up 11 percent from the previous year, attributing 6 percent of that to acquisitions made that year, including lube company Deutsche Pentosin-Werke GmbH in May and Sweden-based Statoil Fuel & Retail Lubricants in August. By contrast, that years organic sales grew by a more modest 0.3 percent.

A year later, Fuchs reported another record 9 percent increase in sales of 2.3 billion, which it credited to the 2015 acquisitions in the first half of the year and organic growth in the second half. This was despite a small loss due to foreign currency transactions and another big spend on Chevrons U.S. food-grade lubes business in 2016.

At the time of writing, the company stated that the earning power of the companies it acquired in 2015 was below its average, accounting fora deficit of 41 millionand demonstrating a certain degree of financial lag after completing the deals.

In its 2017 report, the company posted earnings of 373 million, up fractionally from 371 million in 2016. Fuchs spent 168 million on consolidation activities that year, including the purchase of Romanian lubricant distributor Lub Asyst, up from 119 million the year before. However, it reported that its acquisitions accounted for a deficit of 2 million, still indicating a lag in payout.

In its 2018 report, earnings were 383 million, up 3 percent from 2017. That year, the company spent 171 million on consolidation activities, up 3 million from the previous year. This time, the payout from its acquisitions clocked in at 12 million, up 14 million from 2017, sending the companys acquisition numbers into the black.

While Fuchs spending did not slow in 2019 – as demonstrated by its acquisitions of Nye and Zimmark, as well as facilities investments – its financial showing did tap the brakes. In its 2019 second quarter earnings report, the company said that earnings for the first half of the year were down 19 percent from the previous year. Fuchs indicated that its investment initiatives would continue despite the drop.

Fortunately, the companys 2019 third quarter report said it was much more pleased with its performance in the years third quarter, having achieved total earnings of 246 million.

Keeping Up withthe Fuchses

With the exception of the oil majors, keeping pace with Fuchs has been challenging for competitors but the company has not been the only one to experience a growth phase. Italmatch, a specialty chemicals supplier headquartered in Genoa, has closed its fair share of deals in recent years. It completed the acquisition of American additives company Elco Corp. in December 2017; Chinese phosphonate producer Jiayou Chemical in March 2018; and Afton Chemicals metalworking fluid additives division in May 2018, among others. Italmatchs acquisition spree seems to be on pause for now and it has made few significant acquisitions since 2018.

Fuchs remains the leader of the acquisition pack of finished lube marketers and according to Agashe, no other independent manufacturer is demonstrating the same stamina that Fuchs is.

Related Topics

Market Topics