Fuchs Petrolub SE (OTCPK:FUPEF) Q3 2022 Earnings Conference Call October 28, 2022 6:00 AM ET
Company Participants
Lutz Ackermann – Head-Investor Relations
Dagmar Steinert – Chief Financial Officer
Conference Call Participants
Martin Roediger – Kepler Cheuvreux
Markus Mayer – Baader Bank
Riya Kotecha – Bank of America
Sebastian Bray – Berenberg
Andrew Stott – UBS
Michael Schaefer – ODDO BHF
Lars Vom-Cleff – Deutsche Bank
Operator
Welcome to the Analyst Conference Call for Fuchs Petrolub SE. At our customer’s request, this conference is being recorded. As a reminder, all participants will be in listen-only mode. After the presentation, there will be an opportunity for analysts or folks to ask questions. [Operator Instructions]
May I now hand over to Lutz Ackermann, who will take you through the presentation?
Lutz Ackermann
Yes. 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 nine months figures. All the relevant documents have been uploaded at 7:00 a.m. this morning, and you can find them on the IR section of our homepage.
With me on the call today is Dagmar Steinert, CFO of Fuchs Petrolub and as always, Dagmar will run you through the presentation, which is then followed by a Q&A session.
Having said that, I would like to hand over to Dagmar. Dagmar, please go ahead.
Dagmar Steinert
Thank you, Lutz, and ladies and gentlemen, yes, a warm welcome from my side. I would like to start with our highlights of the first nine months 2022, and we report a strong third quarter. Despite the continued strong headwinds from high raw materials and inflation of other costs, we achieved with €100 million, a strong EBIT in the third quarter 2022.
For the first nine months, our group sales reached €2.5 billion and that’s 19% above last year. EBIT came in at €280 million, that’s on previous year’s level. Overall, the market environment remains challenging and there are not really indications of improvement from the market in the short-term. We face increasing inflation, bottlenecks in our supply chain, and of course, we see a sharp increase in energy prices, particularly in Europe.
China continues with the zero-COVID strategy. And overall, the global crisis situation remains a factor of uncertainty. Nevertheless, we remain optimistic about the last month of 2022 and confirm our earnings forecast and increase the sales forecast due to inflation.
On the next chart, number three, you see as always, our quarterly sales development. And that reflects our sales price increases, what we’ve managed, what we’ve done the last year. So if you just look at the third quarter year-on-year, sales are up €184 million or 20%. If we adjust that for currency effects, it’s still up by 13%.
On the next chart, looking at our EBIT development quarter-by-quarter, you can see that with the third quarter with an EBIT of €100 million, we are quite close to our record quarter, which was the fourth quarter 2020 and even close to the earnings of the first quarter 2021. And what you can see as well is that we had a strong first half last year and a little bit weaker second half year. And in the running year, you can see the impact of our sales price adjustments there, we made a big step forward.
With that, I would like to turn to Chart number 5, our group sales. Our group sales are price and currency driven up, and that’s up by 19%. All our regions show a mainly price-driven organic growth. Of course, China is in a difficult market environment and as a result of the continued zero-COVID strategy, we see there a noticeable business decline.
During the course of the year, we increased our organic growth. So just to remember you, in the first quarter, our organic growth was 12%; in the second quarter, it was 11%; and in the third quarter, it was 19%. And of course, we have increasing tailwind from positive currency effects.
So now I would like to turn to Chart number 6, our earnings summary. After nine months, our gross profit is up 9% or €63 million. This increase is compared to sales under proportional as we see there the sharp rise in raw material prices and that results as well in a lower gross margin. The gross margin is down by 3.1 percentage points to 31.4%.
Looking at the other function costs, they are up by 13% or €61 million. Personnel, freight and energy, that – just to mention a few, go up significantly. But thanks to a very good third quarter, we achieved the earnings level of the previous year with an EBIT of €280 million.
CapEx is slightly lower and the net operating working capital significantly higher. On that, I will comment later. Coming now to the regions, starting with Europe, Middle East and Africa. There, our sales are up 18%, and that’s mainly price-driven. The majority of companies show a double-digit growth rate. Above average is South Africa, Great Britain and Sweden. We have positive currency effects out of Great Britain, South Africa and Russia, and this offsets negative effects from Poland and Sweden.
Looking at the earnings, our EBIT is lower, 6% year-on-year. And that’s due to a decline in earnings, mainly in Germany and Southern Europe. Coming to the region Asia-Pacific. In Asia-Pacific, our sales are up 11% and that’s mainly driven by currency effects. Of course, we have the sharp decline in China, which is the biggest supporter of the region, and they are affected by the difficult economic environment and I already named it, zero-COVID strategy.
On the other hand, we see organic growth in India, Southeast Asia and Australia. We have positive currency effects and they increased over the course of the year. Our EBIT is 5% below previous year figures and that’s due to the lower contribution from China. On the other hand, we see earnings growth in India, Southeast Asia and Australia.
On the next chart, in our region, North and South America, we have the strongest sales growth. Sales are up 40% year-on-year. And that’s a strong organic growth, of course, a positive currency effect as well. Our organic growth in North America is – overall in the region is price-driven, but what we see in North America as well, a really pleasing business growth. With that, yes, significant sales growth, our EBIT is up 28%, partially currency driven. Of course, we see some – quite some currency effect as well.
With that, I would like to come to Chart number 10. Our net operating working capital. So if you look at the, yes, pure numbers, our net operating working capital and absolute numbers amounts to €965 million at the end of the third quarter. Compared with December 2020, we nearly doubled our net operating working capital.
During that period of time, on the other hand, raw material prices increased by roughly 70% and our sales prices more than 40%. So these significant increases in raw material costs and which are offset by our sales price increases that of course, drives the increase of net operating working capital. And that explains the strong increase.
On the next chart, number 11, our net liquidity bridge 2022, there you can see that the massive increase in net operating working capital, explains our free cash flow before acquisitions which amounted to minus €31 million after nine months of the year. That’s the most important figure.
And if you go a little bit deeper into it, on Page number 12, where we compare where we have a bridge from the deviation of our free cash flow before acquisition of the last year, the nine months 2021 to the number today, as you can see, the earnings after tax are more or less unchanged previous year’s level. We have a little bit plus out of our depreciation, amortization after CapEx. And we have €88 million higher tied-up capital, net operating working capital compared to previous year. And of course, that’s something where we are working on the remaining months this year to bring that number down.
So overall, Page number 13, it’s still a very uncertain environment and there are high uncertainties regarding the business development. On the one hand, we have this war in Ukraine and sanctions against Russia. We see further increases in raw material prices. We have a significant cost inflation. There is an impact on potential reduction of gas supplies.
And on the other hand, looking to Asia, China’s zero-COVID strategy, which is still ongoing even if there are no signs that they might open up likely again. And of course, last but not least, we have a very tight supply chain situation and ongoing difficulties with the availability of raw materials.
So looking a bit deeper into raw material price development on Chart number 14. You see our graph, as you know it from the previous earnings call presentation and as you can see, Group 1 prices are slightly softer. But anyhow, if you look at Group 3 prices, they remain firm. And they are based on healthy demand, and there is slightly limited to no capacity extension foreseen. There’s still a price difference between Asia and the rest of the world. And overall, we expect our basket of raw material prices there – some will be flat or slightly increase.
With that, I come to my last chart, our outlook for the full year, which reflects the uncertain environment. And we are confident regarding the remaining months of the year and we confirm our earnings figure. We expect our EBIT unchanged, to be on prior year’s level, therefore, on the lower end of the range of €360 million to €390 million.
On sales, we increased our expectations due to the inflation, we see there a number above €3.3 billion. And all the other expectations regarding Fox value-added and free cash flow remain unchanged.
And with that, the floor is yours, and I’m happy to take your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Martin Roediger at Kepler Cheuvreux. Please go ahead. Your line is open.
Martin Roediger
Hello. Good day. This is Martin Roediger from Kepler Cheuvreux. Yes, I have three questions, and I would like to ask them one by one. The first is on Chart 14 about the raw materials. Thanks for that. Can you please talk about the dynamics between the regions, Europe, U.S. and Asia. Is there – is the energy cost item, the main reason or the only reason for the high level in Europe? And besides the base oil prices you show, can you also talk about the additive prices in their evolution?
A – Dagmar Steinert
Well, Martin, thank you for your question. Regarding the different raw material price development in the region, of course, in Europe, it’s – yes, it’s harder due to high energy costs and the difficulties within the supply. But anyhow, as we just show here graphs for base oil, I would just like to remind you that additives make up roughly 50% plus of our – yes, total raw material basket.
And therefore – and their prices are tending to be higher and – but there are no graphs or charts available. And looking at the price development of the base oil, of course, that’s something which we are able to show, which is available. But that’s just a portion of our raw material basket and Group 1 base oil are overall for the group maybe between 20% and 25% in our raw material basket. So for us, if we look at our development of raw material prices, it’s not only based on – on the majority based on the Group 1 development.
And regarding the availability of raw materials, it’s still difficult worldwide. We have worldwide shortages and yes, pricing, of course, is a bit different due to local availability, local demand and of course, currency exchange rates.
Martin Roediger
Thank you. The second question is about inflation of salaries and wages. In the U.S., unemployment rates are rather low, which when salaries are rising, and you may have eventually a higher fluctuation rate there.
In Germany, there is now a new agreement with the IGBCE Union with 6.5% higher salary split over two years. Also in other countries, salaries are rising. Among those things, what is the biggest headache for you and how you think you can compensate for these higher costs?
Dagmar Steinert
Well, the biggest headache is how much do we have to increase our sales prices to adjust for these inflation costs. And yes, you’re absolutely right. In North America, we see a – yes, close to full employment. We have a higher fluctuation. And of course, if you look into our numbers, the first nine months 2022 compared with previous year, we already see looking at personnel expenses, they are up 10%, 11%, and that doesn’t reflect all the wage increases, of course, which will have first of January.
And in Germany, there with the unions, there’s agreement. It’s for two years. Each year, rates go up by 3.25%. And there are – yes, one-time payments of €1,500 each year. So that regarding the inflation rate seems to be quite reasonable. But today, I can’t give you an indication about the whole figure for the group. What we expect as wages and salary increase, we are close to finish our budget.
Martin Roediger
Thanks. The third question is regarding your guidance for free cash flow before acquisitions, which is significantly below the €220 million level. Based on what you expect for earnings this year and net working capital release in Q4 due to seasonal patterns, what is your best guess for free cash flow this year? I recall you mentioned last time, a figure of around €110 million, €120 million, €130 million. Is that still the case?
Dagmar Steinert
Well, we report a negative free cash flow before acquisitions after nine months due to these ongoing inflation and that’s more than we expected. Therefore, on the sales side, we increased our expectations for the full year. On the other hand, of course, that means that there will be some more impact on – yes, net operating working capital.
And of course, by year-end, the absolute number usually is a bit less. And now it’s a negative free cash flow. It will be definitely positive by year-end. But I can’t give you today an indication about – yes, about the number.
Martin Roediger
Okay. Thanks, Dagmar.
Operator
Thank you. Our next question comes from the line of Markus Mayer at Baader Bank. Please go ahead. Your line is open.
Markus Mayer
Hi, good afternoon. I have three questions from my side as well. Dagmar, I also want to ask one by one as Martin did. First of all, I mean just in the business environment in October, you’ve had different kind of indications the companies they see significantly slowing of the business environment other not. Your order book is it is not that long, but maybe you can shed some light how October was so far?
Dagmar Steinert
Well, I – yes, would comment more on the third quarter than just on October because you always have like a better month and then a month, which is not as good and better month again, so the view on the third quarter is more reasonable than just looking at one single month. And let me start with the region Asia-Pacific. As already mentioned, of course, China is difficult. There, we’ve seen a – yes, little bit weaker demand from the automotive business.
On the other hand, our like specialty business, and for instance, wind had a really nice solid development. Australia has a really strong demand in mining and agriculture. In mining, for instance, that’s a positive effect out of the, yes, Ukraine Russian crisis due to the sanctions because there is – yes, supply from Russia missing.
Agriculture is doing really well due to the weather. And on the other hand, what is challenging there, it’s still logistics, which is not such an easy situation. Looking at the U.S., where we had really strong – yes, performance there. Overall, our demand is fine. It’s working. And I mean, as already mentioned, what is more concerned is the inflation and the tight labor market.
Coming to Europe. There, we see a slightly lower demand in Germany. From the automotive industry as well in Germany, and we have still solid demand for our specialty business. And – yes, South, Southern Europe is a bit weaker as well. And like Eastern Europe is a little bit stronger. But of course, in Europe, we have quite an impact to strong rising energy costs. And looking at – yes, steel or agriculture in Europe, where our demand is still intact. I hope that answers your question.
Markus Mayer
Yes, to some extent. But to summarize, would it be fair to say that, so far, the demand trend you have seen in Q3 has not significantly changed so far in Q4, is it fair?
Dagmar Steinert
Yes, yes, that’s fair.
Markus Mayer
Okay. And also from the price level, if I did the math correctly, then you had 20% price effect year-over-year in the third quarter. Here, the price level is also looks like that this has not yet changed really into Q4. So basically, this is high priced we’re also growing in the fourth quarter. Is that also correct?
Dagmar Steinert
Yes, that’s correct.
Markus Mayer
Sorry. .
A – Dagmar Steinert
Well done, your calculations.
Q – Markus Mayer
No, not that complicated. And then the last question. I’ve seen that the inventories went up 42% year-over-year, which is in line with 20 we’ve seen the quarters before. And given this high inventory level, which is maybe – was mainly triggered by the higher prices, in particular, do you see a risk of inventory devaluation in the fourth quarter? And what are you doing in the fourth quarter to mitigate these risks?
Dagmar Steinert
Well, of course, there’s always a risk of – yes, prices are very volatile that you might have to write-off some inventories, especially on the raw material side. But of course, we have programs in place to reduce our inventories. And they will work by year-end. And of course, looking at our finished products, they have to be our people have to bring them down and looking at the raw materials, of course, we will remain some effect due to these difficult supply chain because it’s better to have some raw materials in stock, where we know we need it in the first quarter next year instead of not taking it and then having a shortage again. So there will be some compared with normal years, some a little bit higher inventories, but on the other hand, there are lots of programs in place to reduce our inventories.
Markus Mayer
Okay. Thank you so much. And I guess, this was the last call as the CFO at FUCHS, good luck in your new position.
Dagmar Steinert
Thank you.
Operator
Thank you. And our next question comes from the line of Riya Kotecha at Bank of America. Please go ahead. Your online is open.
Riya Kotecha
Hi, good morning. Thanks for taking my questions. I have a couple, please, and I’ll take them one by one. So my first one is, how should we think about the run rate of earnings going forward? Now you delivered a strong third quarter EBIT of about €100 million. So simplistically, you annualize that, that sort of €400 million already. Now of course, fourth quarter is going to be seasonally weaker and you might have some weakness or softness on the volume side. But presumably, your price increases should be relatively sticky. And then you seem to have capacity ramping up and perhaps you get some relief on the raw materials into the first half of 2023. So I’m wondering about your thoughts on sort of sustaining this earnings momentum going forward?
Dagmar Steinert
Well, talking about the run rate, the – I can’t give you any statements about 2023 by now that will be done as usual with the – when we publish our annual report. And looking at our high inventories and the question of how developed raw material prices. Of course, if raw material prices come down, it’s good for our margin.
On the other hand, you face write-offs and it’s a difficult environment. And I mean, as I said before, I’m confident that we bring down our inventories by year-end. And that, of course, will help us. Our fourth quarter is usually weaker. And I mean, what you see – looking at the quarterly sales development is the strong sales price adjustments we managed. And of course, there’s more to come.
Riya Kotecha
Okay. Thanks. And my second question is, you mentioned that you have some pleasing business growth in North America. Can you please give some more color about this? It sounds like you’re winning some new business here. And am I right in estimating that you achieved double-digit volume growth in this division for the third quarter?
Dagmar Steinert
Well, in North America, we had a weaker period in the previous year. Therefore, of course, the increase of sales by 40% is great, but looks maybe a little bit more positive than it actually is. But we have our core business and Nye is making really good progress, and we have good development business in both areas in automotive and industrial business, specialties as well.
And it’s – yes, it’s across all industries, everything and there’s nothing really outstanding and North America comprises, of course, Mexico and Canada and Mexico is developing very good but they are the same, yes, applies what I said to North America as a whole. It’s across all industries, automotive and industrial. So that’s – yes. Looking at that region, it’s a nice development this year.
Riya Kotecha
Okay. But – and I have another question about China. Can you please speak to a little bit on the past to recovery? And I want to look at about auto OEMs say and some other chemical companies, they actually speak positively on this end market. So I’m just wondering why it’s different for you. Is it to do with sort of your mix in autos? Do you have a higher exposure to the aftermarket here versus the OEM fill?
Dagmar Steinert
In China, we have, in general, a higher exposure to automotive lubricants compared with industrial lubricants or specialties. That’s a little bit smaller portion of our business. And yes, I mean, we’ve seen a weaker demand from the automotive side, and that’s both its aftermarket as well as the OEM business.
Riya Kotecha
Okay.
Dagmar Steinert
But China is a difficult situation with the zero-COVID strategy and all these like partial lockdowns, which would clear.
Riya Kotecha
Yes. Yes. I get that, but say, for example, Volkswagen and even BASF a couple of days ago, mentioning sort of volume growth of the rebound has been quite sharp in terms of new production. So is it more on sort of securing the raw materials that you’re not able to fulfill those volumes? Or is it sort of just broad-based demand weakness? Just trying to understand why there’s a dichotomy and the views there?
Dagmar Steinert
Yes. Well, it’s – I mean, there are months or weeks when China seems to pick up again. And then it’s like cut due to lockdowns again. And of course, we compare ourselves this year with a very strong development of the last two or three years in China, where they’re almost a double-digit growth rate.
Riya Kotecha
Right. Okay. Thanks. And just a quick follow-up question. Did you mention that you expect to implement further price increases? And to that point, sort of how far along do you think we are in terms of putting all the price increases through? Like are we sort of 75% of the way there or closer to 90%? Thanks.
Dagmar Steinert
Well, if you look at our performance as our increase in sales is price driven [Technical Difficulty]
Operator
Apologies. It seems to be having a technical issue. Bear me one moment.
Lutz Ackermann
Can you hear us? Sorry.
Operator
Yes, sir, we can hear you now.
Lutz Ackermann
So we may continue now, okay. So hopefully, we are back now.
Operator
Yes. We have in.
Lutz Ackermann
Okay. So we can continue.
Dagmar Steinert
Okay. So I’m – did you get my last answer? Or do I have to repeat?
Riya Kotecha
Sorry, if you don’t mind, repeating, please?
Lutz Ackermann
Yes. Maybe you can repeat the question. Once again, sorry, we just – we just dropped off. Maybe you can repeat the last question that we can answer.
Riya Kotecha
Yes, sure. It was about price increases, I said, was I right in hearing that you saw are going to implement more price increases. And to that point, sort of how far long are we? Are we sort of 75% of the way there or more like 90% in terms of that coming through? Thanks.
Dagmar Steinert
Yes. Well, I just – if you look at our sales growth, which is price driven and currency. And that means, on the other hand, that our volume is not growing. And with that reporting an EBIT on previous year’s figure or level means we manage in absolute numbers to cover all increases and prices we faced. But of course, we have to increase our prices again and more because on first of January, a lot of other function costs will increase, personnel costs more or less everything. So to cover that, we have to act now. And that’s why I said there will be more price increases. And we already are across all countries, across all regions out with the announcement.
Riya Kotecha
Okay. Thank you very much. And Dagmar, all the best for the new role. Thanks.
Dagmar Steinert
Thank you. Thank you.
Operator
Thank you. And our next question comes from the line of Sebastian Bray at Berenberg. Please go ahead. Your line is open.
Sebastian Bray
Hello. Good morning and thank you for taking my questions. I have two, please. The first is on the working capital. The receivables balance has been going up at Fuchs for a while now. And I’m wondering, are you cutting your customers some slack in Q3 and Q2 of this year? Or is this all raw materials related? And are we – should we effectively be thinking about getting this money back in 2023? Or – are you focusing a little more on growth in the balance between growth and cash flow?
My second question is on the progress in the electric vehicle market since we start – okay, starting water helicopters to go and not continue. The second question is on the growth in the electric vehicle market at Fuchs, in particular, EV-related sales. Since you gave the update at the Capital Markets Day in June, has Fuchs actually signed any genuine new contracts with electric vehicle makers or batter makers? And not so much the magnitude, but the existence.
And the third one is on operating leverage. By the end of the year, you’re going to be a €3.3 billion sales company roughly, a 1 percentage point increase in volume gives you €33 million of sales. But how much EBIT would that give you? Historically, Fuchs has talked about a 15% margin on new business, but I imagine given that the utilization is low, it could be a bit higher, maybe, let’s say, 25-ish percent drop-through. Is that right? Thank you.
Dagmar Steinert
Well, Sebastian, I will start with your first question, the working capital and the development of our receivables, yes, which increased. And that’s just normal course of business, nothing special. And of course, we are working on improving our cash flow and that means not only to bring inventories down. But anyhow, it’s always a question of mix because different customer, different term and we don’t see there any risk.
The progress in the electric vehicle market, I mean, what we are able to tell you, what we already did regarding, for instance, batteries is that we acquired the sale of ELI, that’s making progress. We are ramping up the production in [indiscernible] to be able to scale that. And I think that’s an important and big step into this overall electric market.
And regarding electric vehicle market or e-mobility in special, I’m not aware that we signed a new bigger contract, but of course, that’s something which is for us a medium, long-term strategy and not a quick win. And of course, it’s definitely a big net opportunity and our margin for new business, the 50% EBIT margin do you refer to, where we very stick to, but where is that we don’t know when we are going – when will be there again due to inflation.
So first, we have to overcome that. We work on improving our margin and every additional volume, every additional business, of course, you have some variable costs for that, but with our structure and everything we are fine. So for every additional business, you have, of course, additional variable costs. But we don’t really need to increase significant your fixed costs, and therefore, a significant portion of profit from additional business will show up.
Operator
Sorry, Sebastian, I had to mute your line. There was a bit of background noise. And if you had any response, I’ll just unmute you now.
Sebastian Bray
I was just going to say, well, sorry about the background noise and Dagmar, all the best for your new role. Thank you for taking my question.
Dagmar Steinert
Thank you. Thank you, Sebastian.
Operator
Thank you. And our next question comes from the line of Andrew Stott at UBS. Please go ahead. Your line is open.
Andrew Stott
Yes. Good morning. Thanks for taking my two questions. So firstly, just on the energy package that the German government have put forward and I know it’s not signed off yet. But on the assumption it is, would FUCHS be taking those subsidized energy rates or not. There’s some discussion, obviously, the context here is there’s some discussion that if you do as a company, you may have to hold back on other things, for example, dividends. So that’s the first question. And second one is…
Dagmar Steinert
May I answer your first question immediately?
Andrew Stott
Sure. Okay.
Dagmar Steinert
Make it easier. Well, as we have like only roughly 1% of sales energy costs within the whole group, we don’t get or we won’t get any benefits from the government, either in Europe or in Germany, for increasing energy costs. And therefore, there will be no issue regarding anything else.
Andrew Stott
Okay. So you just won’t apply for the subsidies?
Dagmar Steinert
Yes. But it’s – we won’t, but it’s not – it’s worthwhile doing it. I mean if you look at our energy cost that hardly nothing compared with other industries.
Andrew Stott
No, I understand. But at the same time, you could get cheaper energy, so I’m guessing you’re thinking about the – yes, the flip side of this, which is what you might have to change from a capital allocation standpoint. Is that right?
Dagmar Steinert
Yes. But I think – I’m not sure – I’m not aware about the rules of the packet, but we don’t intend to apply for. And I’m not even sure if we would be able to apply because we don’t save high energy price.
Andrew Stott
Okay. I got it. Thank you very much. And second question was on pricing, the 21% that you’re booking in Q3. I mean how much of that is negotiated prices? And how much of it is surcharge, if any? So I’m just trying to think of what you retain as we go forward and as and when raw material costs come down?
Dagmar Steinert
Well, what we benefit from the adjustment of our selling prices, that’s all negotiated, what you see in our figures and that’s sustainable.
Andrew Stott
Okay. Perfectly clear. And also best wishes for your next move.
Dagmar Steinert
Thank you.
Operator
Thank you. And our next question comes from the line of Michael Schaefer at ODDO BHF. Please go ahead. Your line is open.
Michael Schaefer
Yes. Thanks for taking my two questions. I’ll ask them one by one. So I’d like to come back on Q3 reporting and looking at the various regions, it strikes me basically that Europe has been the only region which we’re not showing EBIT margin improvement sequentially. So I wonder whether you can talk us through the key challenges you have there in Europe, whether this is the slowest region to pass on prices and how we should – or higher costs and how we should think of, let’s say, just this kind of acceleration, which you nevertheless have shown in sort of organic sales growth in the region, how this basically should evolve heading into 2023. So this would be my first question.
Dagmar Steinert
Yes. Thank you, Michael, for your question. Looking at Europe, of course, is for us the most complex region with the highest numbers of countries and therefore, companies as well. And we see a different development. We see a like weaker Germany and Southern Europe development. And a little bit more solid development in Eastern Europe. So that’s just regional differences due to the market environment. And of course, I mean you Europe with these high energy prices with Ukraine and Russia conflict sanction and everything at the highest impact compared with other regions, what they faced as a result of this conflict. And that makes it somehow a bit, I wouldn’t say difficult, it’s just challenging. And of course, we increase our prices. We are in a really good way. We see, as I mentioned regarding our Specialty business, a solid business and even increasing demand. Automotive aftermarket, that’s something which is somehow weaker in Europe.
Michael Schaefer
Okay. Thanks for that. My second and last question would be on China. Again, coming back to what you elaborated earlier on that China is, let’s see preparing for or let’s say, is easing pressure and there are some signs of improvement. So can you just provide us some more evidence there, what you’re seeing, how things are progressing sequentially? I mean Q2 obviously has been a disaster quarter, Q3 look better from what you reported there. But what should – what are you seeing there heading into the fourth quarter? Are things turning to the better?
Dagmar Steinert
Well, it’s just what we hear from our people in China. For instance, now they approved Western vaccination, but I’m not sure if they’re really going to use it. I mean, it’s very difficult for a big country like China, who stick to a zero-COVID strategy for two years and then somehow to open up again, but it seems to getting better. I mean like days of quarantine are shortened if you want to go there. And so it seems to somehow open up a little bit, but that’s what our people tell us.
Michael Schaefer
Okay. Appreciate it. Thank you very much and also from my end, all the best for your future career. Thank you very much.
Dagmar Steinert
Thank you.
Operator
Thank you. Our next question comes from the line of Lars Vom-Cleff of Deutsche Bank. Please go ahead. Your line is open.
Lars Vom-Cleff
Yes. Thank you very much. Good afternoon. Two quick questions, if I may. Looking at the 14% organic growth for the first – sales growth for the first nine months, would you be able to split that into the price and the volume effect, we understood that it’s – the majority is a price effect, but was volume still positive or maybe even negative?
Dagmar Steinert
Well, volume is negative. And we don’t report our volume figures because we believe it would be misleading without explanation. If you compare volume figures over some period of time because the like overall lubricant market volume figures is flat or shrinking in decades. But year-on-year, the first nine months, our volume is slightly down in a lower single-digit percentage.
Lars Vom-Cleff
Okay. Perfect. Understood. And then your financial result in the third quarter was – it seems interest expense rose compared to earlier quarters. I assume this is mainly triggered by your higher short-term debt, which you need to fund the net working capital? Or is there any specific reason for the increase?
Dagmar Steinert
No, there is no specific reason for the increase. Yes, you’re right. We had to take a little bit more net debt on our balance sheet due to finance the net operating working capital. But looking at our financial position, even if our net debt – now it’s net debt and not net cash anymore is €100 million. Our equity ratio is over 70% and we can sleep well.
Lars Vom-Cleff
Yes, absolutely. Not worry. It was only rather for my model. Okay that covers my question then finally also from my side, many thanks for your cooperation and support so far and all the best for your restart at Rheinmetall.
Dagmar Steinert
Thanks, Lars.
Operator
Thank you. And we have one final question in the queue. That’s from the line of Riya Kotecha at Bank of America. Please go ahead. Your line is open.
Riya Kotecha
Hi. I had a follow-up question on the Eline JV. Now I saw a press release about a month ago on the production ramp up saying that you would produce several thousand tonnes of electrolyte this year and then ramp up further than that for 2023. And I’m just wondering, have you sort of – is that going to also OEMs or maybe the battery industry in terms of EVs? Was it more, say, energy range and to that point, is it sort of just give you an indication of what the pricing and margins can be relative to your sort of autos lubricants business today? Thanks.
Dagmar Steinert
Well, that is done for like all high technical batteries who need to be charged or recharged very, very fast. That means you have a lot of applications. It’s not only electric cars, it’s everywhere where you need or you have the need that a battery is very fast recharged. And looking at the expected margins out of that business, they are very nice.
Riya Kotecha
Okay. Thank you. Just the last one, if I could squeeze it in. So I know you have about a 28%, 27% stake and you can build this up to either say 51% JV or acquire 100% of the company. And is that sort of a time line on this that you need to make this decision by?
Dagmar Steinert
There’s a time line on it. It’s between two and three years, something like that, it’s midterm because, first, of course, we want to develop, commercialize the business. And we already like agreed on the mechanism of pricing. So it’s then up to us how we decide if we want to increase our share and to fully consolidate that company or not? We have all options.
Operator
Thank you. And there are no further questions in the queue at this time, I’ll hand the floor back to our speakers for the closing comments.
Lutz Ackermann
Yes. I think with this, we have come to the end of today’s conference call. So thank you very much for your participation. And if there’s anything we can do for you after this call or over the next days, just give me a call, and we will come back to you. Thank you and bye-bye.
Dagmar Steinert
And I would like to say thank you as well to all of you. And as I’m not retiring, I hope we will meet again on one or the other conference, and I wish you all the best. Thank you, and goodbye.
Operator
Thank you. Thank you for your attendance, ladies and gentlemen. This call has now been concluded. You may disconnect.
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