HELLA GmbH & Co. KGaA (FRVIA) Earnings Call Transcript & Summary

Good morning, and a warm welcome to this presentation of the Faurecia-HELLA operation. I welcome you from Lippstadt, and you have with us, Michel in Nanterre. And this is why also we have these difficulties with the live questions. This is why we needed to work with written questions. Let us have a look on the agenda. So the first point we will cover is the transaction overview and the strategic rationale. The second point, building a new global leader. Point three, transaction financing, value creation and time line, and we will close this presentation with the key takeaways before the Q&A. The transaction overview. Faurecia and HELLA are representing a unique and compelling combination with strong sustainable and profitable growth perspective. In fact, when we spoke about our strategy, we said that we want to add fast-growing technology-driven segments with leading position, which is precisely the case considering the lighting business of HELLA, but also considering the electronic business. Electronic. We wanted to have more electronics. We want to have more software. We want to be focused on domains which are aligned with the automotive megatrends. These domains are the electric mobility, the ADAS and autonomous driving and the cockpit electronics. We wanted also to achieve less exposure to ICE powertrains. And again, you will see that this, with this deal, will be achieved. We wanted to prepare the next transformation, and we have created here the life cycle value management, and I will tell you a little bit more about its content. We wanted to be able to grow with a partner which is showing complementarities, which will allow us to achieve significant synergies and cost optimizations. It is clearly the case with HELLA on different domains or on different levels: the product level, the customer level and the geographies. We wanted to have a partner with which we are sharing an strategic vision. We are sharing values. We have similarities in our cultures. We want to be able to share priorities on the ESG domains, which are absolutely critical. All of that for a very strong value creation for our shareholders and all the stakeholders. I might add 1 point, which is the stable and strong shareholder base with the HELLA family with up to 9% of the Faurecia capital. This is, again, a target which will be achieved. On the next slide, we have some details about the transaction. So first of all, a definitive agreement with the family pool and HELLA have been achieved. We will launch a public tender offer at a price of EUR 60 per share. We will acquire separately from the family pool, its 60% stake at a price of EUR 60 per share, paid through a mix of EUR 3.4 billion of cash and up to 13.77 -- 57, sorry -- million of newly issued Faurecia shares. The transaction represents an estimated total enterprise value of EUR 6.7 billion for 100% of HELLA. The family pool, and this is what I just said, to hold up to 9% of Faurecia's capital with an 18-month lockup and Board representation, underlining its strong commitment to the new company. The transaction structure will allow Faurecia to launch execution of the significant projected synergies from day 1. This is mainly related to the specific legal form of HELLA. The deal is, on our side, fully secured. The ratings -- we have worked with our 3 ratings agencies prior to the deal, and we are expecting them to confirm, all 3 agencies, shortly our existing rating. The next slide. So Faurecia, I'm not sure that I need to present it to you. We made, in 2021, and this is the guidance we announced, EUR 16.5 billion of sales. I'll remind you with on a volume level of 76.6 million vehicles. We are counting 266 plants and 39 R&D centers. 1 out of 3 vehicles are equipped worldwide with 1, at least, Faurecia product. We are counting 11 -- 114,000, sorry, employees, 103 nationalities working in 35 countries. We have currently 4 business groups, and the business group is an important entity for us. We have P&Ls at the plant level. And consolidation of plants is corresponding to an division, and an consolidation of divisions is corresponding to an business group. So we have 4 business groups: Clean Mobility, Seating, Interiors and Clarion Electronics. We have positioned, strategically, ourselves on 2 main areas, Cockpit of the Future and Clean Mobility with a clear priority on hydrogen. We have spent more than EUR 600 million of innovation in the last -- in the past 3 years. And we have achieved 1,200 patents, and this only in 2020. I think that when we look back in the last years, we have achieved an solid track record, and we have demonstrated the resilience of the group in difficult periods of times. The next slide is related to HELLA. So here, again, the 2021 guidance for HELLA, EUR 6.5 billion. So you know that this is -- we've not exactly the same calendarized revenues, sorry. So we are speaking here about an year starting the first of June and ending the 31st of May. HELLA is counting 125 plants. They are spending 9.5% on R&D, which is significant, and which is corresponding to their innovative reputation. It's an company which has started in 1899, and the family is leading -- the Hella family is leading this company since more than 100 years. HELLA counts 36,300 employees. And here, we have, again, business groups. It's not exactly business groups we have in HELLA today, but it's the way we are seeing them with lighting, with electronics, with its aftermarket business and its special applications. What is characterizing HELLA for us, it's clearly its technology leadership in all its activities, it's true certainly for electronics. But it's also very much true for lighting, where it is the clearly recognized leading company. Innovation very strong, and HELLA has very talented R&D workforces. German premium, it's mainly with them that you are innovating in this industry. And here, the high intimacy with the German premiums is not a surprise. If we go to the next slide, a few words about the combined group and our intention to capitalize on Hella's strengths, and with Lippstadt continuing to be in an very important position and playing a major role. Three business groups will have their headquarters and their R&D centers in Lippstadt: electronics, lighting, and a new business group, which we will call life cycle value management and which will integrate both aftermarket services and special applications. We will certainly leverage Hella's strong brands. We have a commitment and strong commitment to respect all the current works council agreements and collective bargaining agreements. And we are also very clear to ensure smooth docking of the 2 groups with senior roles for Hella executives in the combined group. So we have started to discuss how we will work together on these topics and how balanced the decisions will be. The next 1 -- so here you have in terms of docking and integration, how it will look like. We are starting, as you have seen, with 8 business groups who will go down to 6 business groups. Three of these business groups will be located in Nanterre, 3 of them will be located in Lippstadt. The ones located in Nanterre are Seating, Interiors and clean mobility. They are not impacted by this deal. Electronics and software, in fact, Hella will integrate Clarion Electronics in its organization. We will care about Asia because Asia is very much complementary to Hella's geographical portfolio. Lighting will not be impacted by this deal again but is located in Lippstadt and should stay located in Lippstadt with its R&D center. And you see here, again, life cycle value management, we will enhance the current organization with our divisions, which are related to materials, which are related to aftermarket products, but which are also related to new architectures, which are allowing an assembling and dismantling, which might be done quickly in the dealerships. The next slide. The combined portfolio of 5 main core activities, each above EUR 3 billion of sales and the strong geographic complementarities are shown here. So you see that Seating stays the biggest business group with 26%, interior, 22%; Clean Mobility 18%; Electronics, 16%; lighting 14% and life cycle value management, 4%. This is based on the 2021 pro forma sales. I think it's important to see that this is very well balanced. And again, with each of them having sales above EUR 3 billion with the exception of life cycle value management. A very strong and focused electric mobility offer on both battery electric vehicles and fuel cell electric vehicles. I think it's important to highlight this, we have now the 2 legs which are needed in the electric mobility business. The sales breakdown by geography, 51% in Europe, 25% in North America, 22% in Asia and 2% in the rest of the world. The leveraging of Faurecia's very strong positions in Asia and especially in China and in Japan, are important to further grow the revenues of the electronics business, but not only. And I think it will also benefit to the lighting activities. The next slide, please. Common values and ambition. This is what I said in my introduction, I think that this is very important. So here, you have the ESG parameters. Environment, we are very clear that we both want to fight against climate change. We both have a CO2 neutrality road map with first steps to be achieved in 2025. It is -- they are related to Scope 1 and Scope 2. Sustainable product solution with Ecodesign, sustainable materials, energy efficiency solutions and circular economy are priorities for both companies. Zero Emission Solutions, I spoke about that, with the strong expertise in battery electric vehicles mainly coming from Hella, and fuel cell electric vehicle, hydrogen mobility, coming from Faurecia. -- Socially, a responsible employer, promoting gender diversity and inclusivity, a learning organization that encourages employee training, supporting local communities with a foundation acting in education, mobility and environment. The governance, robust and transparent governance bodies, a strict respect of our compliance and strong values for ethics, I think that this is critical. A safe work environment to all our employees worldwide, and a responsible supply chain with sustainable partners and suppliers. The next slide. So what we want is to build, as we said, a leader in this industry, which will be the case, ranking at the seventh global position. You see here the main pro forma figures for 2021 with sales at EUR 23 billion, but I can tell you sales in 2022 above EUR 26 billion. An EBITDA margin at circa 14%, an EBIT margin higher or equal to 7% and in excess of 150,000 employees. On the right-hand side, the 4 domains which we believe are the growth domains aligned with the automotive megatrends: electric mobility, ADAS and autonomous driving, Cockpit of the Future and life cycle value management. We had 2 domains previously, which were Cockpit of the Future and clean mobility, sustainable mobility. We are now switching to 4 domains, which are the ones I just presented. On this slide, which is maybe [ uneasy ] to describe, you have these domains again. And you have here represented how complementary we are in our different segments and what the coverage is on the different technologies. Maybe 1 thing which is important, again related to R&D capabilities, we will count together 18,500 highly talented and motivated specialists and engineers, including 3,000 software engineers. We go to the next slide and focus an specific focus on electronics and software. So you see here the combination between Faurecia and Hella Electronics. Sales at EUR 3.7 billion, 24 production sites, 21 R&D centers, 3,000 software engineers and 17,000 -- more than 17,000 employees in the electronic segments. Our ambition here is, in 2025, to achieve EUR 7 billion of sales. The next slide. I said it. We have to reduce our exposure to ICE, with the growth we have in front of us on both sides, on the Hella side and on the Faurecia side. With EUR 33 billion of sales in 2025, we will be able to significantly reduce our exposure, which was last year, Faurecia parameter alone, at 25%, going down at closing below 20% and dropping down to 10% in 2025. Next slide.

Thank you, Patrick. I think I will take now the -- we have made big divisions. We have identified a lot of synergies and optimization. What I would like to insist: this is, of course, on top of the existing program of Hella. You know probably that they have the [ Phoenix ] program with EUR 130 million cost cutting, very well advanced. So we have identified that we'll come back on that EUR 200 million minimum synergies, fully captured end of 2024. That means with the full impact on the P&L in 2025, the cost to implement the synergies have been estimated at EUR 250 million. We have some revenue synergies, mainly in Asia. We have not taken into account this [ the edit ] to calculate the accretion. I want to insist on that. We have a lot of cash flow optimization. I will come back on that as well. What is important to notice, the synergies is less than 1% of the total cost of the new company. You know our track record on the cost cutting. I think we have demonstrated that with Clarion. You know as well our expertise to optimize the cash. So you can see somewhere -- sorry to say that the pleasure we will have to make all these figures a reality and to post, I will say, very, very strong figures. On cost synergies, we have more or less, if I take the different [ I will say ] feed, Purchasing probably more than 15% of the total synergy. Operational synergies, half of it with a lot of optimization between the different plants. R&D -- and I will say other I will say back office, 30%. The last but not least, SG&A, of course, to put together 2 big companies with the global business services, and you know how much advanced we are. And it has made us some, I would say, [ big works ]. We have as well a big IT optimization there on SAP probably less, I will say, focused on us because they have different, I will say, implementation. We have one. So we will leverage that to make a very, I would say, efficient company. What is important, it is the [ horizon ]. We have been cautious our estimation. For me, 10% is a minimum in 2022. 40% P&L impact, so much more advanced, the implementation in 2023; 80%, 2024. And the full impact in 2025. The combination of both companies and here, you know that we have made Investor Day. So we are confirming month after month all our figures. They have made an Investor Day, we add the synergies, and we arrive to these figures with -- sorry for that little [ critters ]. But I think it's normal to have a little [ critters ] as usual. So you see the [ magnificence of ] the figure, as Patrick was saying, was speaking of a company above EUR 26 billion of sales in 2022, above EUR 30 [ million ] of sales in 2025. EBIT margin, very quickly 8%, and more than 8% afterwards, of course. And net cash flow, I think it is a more powerful achievement. We speak of EUR 1 billion of net cash flow next year to go to more than EUR 1.5 billion. You know that we have inside this figure, some [ magic ] figure. We will double the growth of the market, which is estimated here at a little more than 4%. So we are speaking of 8% to 9%. EBIT margin above 8%, and in the future above 8.5%. And net cash flow 4%. You know that it was our big target, and probably we can target much more in 2025. One thing is this, as we said, plan, we want as well to deleverage as quick as possible. Of course, we are using the leverage to make this acquisition. We'll come back on that. So with the pro forma something like 2.5x net debt on EBITDA, we want to be at less than 2 end of 2022 and to converge to 1 afterwards. What is important to do that? Net cash flow, we have in the net cash flow CapEx optimization between the 2 companies, more than EUR 100 million. We have as well as some working capital optimization. You know what we have done in the last [ 2 ] years, and we've said a lot of optimization. For Hella, they want to converge from 15% to, with our synergies, 10% or less, I think at 10%. So we'll be still lagging respect to [ that re scissor kit ]. So we have here a lot of room, and we have a lot of pleasure to work with the Hella team to achieve that. And last but not least, how we are financing that. Firstly, there will be the tender offer, which will be launched in September, for the 40% of the share inside the public. We have acquired -- and acquired by contract 60% of the share of Hella. This will be achieved at the closing date. So this will be probably early 2022, but it is definitive. To acquire that, we are making a 10% capital increase reserved to the family of Hella. What I can tell you is that we are very proud that the family is taking, as Patrick was saying, a share and with a low cap, so 18 months, but a share during a very big time and to participate to this fantastic story. 50%, of course, will be paid cash. In the mechanism, we have agreed with them for the 10% and 13.57 million shares. It is based on a price of [ 42 06 ] and there will be an adjustment according to the share price of Faurecia at the time of the closing. So you see on the right, what it means, 9% because 10 on 100 means EUR 110. So 10 on 110 is 9%. I receive sometimes the question. That is why the family will have up to 9% of the share. [ PUC ] our core shareholders, [ Pojour BPI Exodonfing ] at 14%. How we have financed that? We have secured a bridge with 2 banks, Societe Generale and Natixis. And I would like, first, sorry to say that to thank my team, which has made a very good work and to thank the Societe Generale and Natixis teams. So EUR 5.5 billion of bridge. You see how it is, I will say, split a bridge to equity because we will issue up to 20% in the rights issue. We have a bridge facility of 4.2, which will be refinanced from bonds and loans, [ association ], et cetera. We have EUR 500 million, which will be a term loan if we need it. We'll use our cash. We have a lot of cash for something like EUR 600 million. I will say, we can do more, if necessary. Sorry, what I would like to mention, we have made some rating assessments, of course, to see what will happen. The 3 rating agencies will make the rating committee probably between today and tomorrow, and we expect that they will -- the 3 confirm actual ratings the current ratings, which is demonstrating the fact that through this acquisition, we definitely enhance the profile of Faurecia, things that with EUR 5 [ million additional debt ] we will confirm the rating. And thanks to the rating teams as well because they have worked, I will say, in a very short time, 2 weeks, as we said, to analyze this acquisition. On [ extension our insistence is ] these are made on the synergies of the 2 business plan. EPS accretion, it is after goodwill amortization. If I take before amortization, we are not speaking of 14% and 20% or more than [ 30% ]. We're speaking of 20% and 30%. And you see that it will be accretive. 2022, there will be some cost to implement that, but it will be accretive from 2023 onwards. More important is a net cash flow per share accretion. I believe a lot in this, and you see what it means more than 10% and accelerating. The WACC will be above 10% from 2023 onwards, so much above the WACC of both companies. The WACC of Hella is estimated at 7.5%. So you see that here, we are clearly creating values, [ figures ] are speaking by themselves. [ Per ] the calendar announcement. We will make put tender offer in September, but it will take time because it will be concluded only with the antitrust, I will say, release. So it is why it will be mid-November. And probably for the closing, we'll go to early 2022. Of course, it is linked with all, I would say, the time necessary for the process. In the meantime, Hella will pay the normal dividend for 2021, probably early October.

The takeaways. We are speaking here about the creation of a global automotive supplier with a highly advanced technology portfolio. We are speaking about the second biggest supplier worldwide. It's a combined business, ideally positioned on key verticals: Electric Mobility, ADAS and autonomous driving, Cockpit of the Future, life cycle value management. We are speaking about 2 companies which have common values and culture with an industry-leading ESG approach, which is, I believe, critical. We are speaking about strong profitability growth and cash generating, allowing a quick deleveraging, which will be our clear priority. The net cash flow generated between 2022 and 2025 will be close to EUR 5.5 billion, and strong accretion and sustainable value creation for our shareholders through significant synergies and cost optimization. And finally, a must-own stock, one of the largest free float in the European-listed automotive supplier universe. So -- sorry, I suggest now to start the Q&A.

So I understand that I have to read the questions and that we will try, Michel and myself, to answer them. So the first one is from Gabriel Adler from Citi. Are you considering other divestments in order to accelerate the deleveraging following the deal? Would you consider selling the Clean Mobility division, for example? We are not considering to divest Clean Mobility at this stage. We believe that Clean Mobility is an interesting business, an accretive business for the group for the years to come. Any comment -- any additional comment, Michel?

The list of the divestments. As you can understand, we don't want to give you the names because if we give a name, that will be discount to the price. So it for that. But you can be sure that in the deleveraging, we want to make at least EUR 500 million on both companies. We have as well some divestments to make on Faurecia.

The second one is from [ Salik Ishtiaq ] from Citi, again. Can you confirm if the EUR 300 million 3-year term loan is unsecured? Question one. Question two, do you expect debt that refinances the EUR 4.2 billion bridge term loan to be unsecured as well? Question three, what maturity do you expect the new debt that will refinance the EUR 4.2 billion bridge to be? When do you expect to launch this deal? What is the pricing of the new 3-year term loan on the bridge loan? This is for you, Michel.

Lots of phone calls, and I have to call back a lot of bankers. So don't worry on that. Sorry to be -- so what I can tell you is that all the debt will be pari passu as it is today. And the fact that we are with keeping the same rating is a clear insurance on that. What I can tell you as well, I did not mention that on the [ rally ], but with the figures I show you, of course, we will not stay at the current rating, we'll go back to the, I would say, initial release, that means to improve, and this is our ambition anyway, our rating every 2 years at least, and to that means to become investment grade, I think, late 2024 or 2025. It is our common ambitions. Also the debt will be pari passu. And I think no doubt on that. On the refinancing, what I was mentioning is that we have forecasted we said to issue bonds with different maturities because we want to spread the maturities. As you have seen as well, we have some nice capacity to [ reimburse ]. We have as well some calls on our existing debt. So we have the flexibility to do all of this. I will not today say or to take any commitment on the date. We want to keep the flexibility to do the things at the right time and to optimize the cost of the financing. What we have seen today and what we have seen with the banks is that the global cost of financing, including everything, will be below or much below 3%.

The next one, what is your thinking around the potential for a proportion of Hella minorities not accepting the cash offer? Would Faurecia be comfortable having Hella remain listed? What cost of funding and rights offer discount do you factor into your accretion calculation? So Michel, the second question is for you. The first is for me. We are replacing with the 60% in the Hella family, who was managing the Hella Group. So with 60%, we can execute our cost synergies and our cost optimizations. Of course, we will not stay with 60%. But if we wouldn't be able to delist the company, we will live with this. There is no specific need. We have the control of Hella from day 1. The second question, Michel?

For the cost of funding, I repeat less than 3%, including everything. That means underwriting fees and upfront fees.

We have now a series of questions from Thomas Besson from Kepler Cheuvreux. So could you please clarify the need or not for Faurecia to have a DA over Hella to control its cash flow and synergies? Explain why it would not be needed, and if there is any minimum level of ownership you seek in Hella. Michel?

Yes. So as Patrick was mentioning, it is what is called in German, [ CAGR ]. In French, it is a commodite. So with 60% -- it is why the family was keeping 60%. We have the full control, which means we are nominating the management. Of course, we must do hard things. I'm not [ considering again ] the company, but we can implement all we want and that leads to synergies because the synergies will benefit anyway to the 2 companies. So at 60%, we don't need any domination agreement. It is a fact. Of course, we are making a tender offer. And of course, we will buy all the shares available, and we would be very happy to buy as much as possible.

The second question from Thomas. Could you please quantify your ambitions for the combined entity as presented at the end of your press release? Are they conservative? Do they integrate further potential dilution? Yes. They are conservative. They are prudent. This is what Michel said, and they are not integrating further potential dilutions. Thomas. The next one. Could you please discuss the amount of goodwill, PPA, we should expect the combined entity to have annually? Shall we assume it is excluded from your adjusted EBIT or EBITDA ambition? Michel?

Yes. So we have estimated the goodwill slightly about EUR 3 billion. We consider that it is a rough estimation that half will be amortized according to the IFRS rules, but this will be a deep work to be done with our auditors, which means that on the basis of 8 years, something like that, we have taken into account EUR 190 million of amortization. So the EPS accretion I was giving was with this EUR 190 million amortization.

Could you please -- again, Thomas, could you please elaborate on potential tax synergies between the 2 groups and mention the expected tax rate? Michel?

Our tax rate, it's a little early to speak of that. We have some synergies [ I see ] we have to be clear. We will see how to implement that. It will depend as well on, how we say, the restructuring we make with the 2 companies. We have clearly some big room of [ maneuver ] on that.

[ Gabriel Adler ] a followup from Citi. Aside from interior lighting, where the technology overlaps are clear and the strategic partnership already exists, which product overlaps do you believe offer the most exciting opportunity for Faurecia? So we do not have overlaps and -- which is, I think, a very positive aspect of all of that. But we have complementarities. So where do we have complementarities? When you look at ADAS and autonomous driving, we are coming with our bird eye. We have the parking -- automated parking solutions from assistance to valet parking. And we are working on e-mirrors. We have some sensors. These will be complemented by Hella with its radar portfolio, including the 77 gigahertz, which is critical today. But not only with a significant and interesting portfolio of sensors and actuators. I'm also thinking about new systems like the electric power steering with softwares which are [ allowing ] failure modes, which is, from my point of view, extremely interesting in the next future, and absolutely needed for ADAS and autonomous driving. When you look at interior or cockpit electronics, we spoke about the interior lighting. But not only; we have a significant business on displays, where certainly Hella will be able to complement with the backlighting with LEDs and micro LEDs. I think that this is very important, again. And 60 gigahertz radar for the interior monitoring. HMI, which is also developed by Hella today, sensors and actuators again. And when we spoke about electric vehicles, Hella is perfectly well positioned on the 3 key segments, which are the DC-DC converters on 48 volts, but also on 400 volts on the onboard charging systems, and on the battery management system. While we are on the advanced battery pack, which is including some of these sensors, and on the hydrogen solutions and the fuel cell solutions. So you see that on electronics everywhere, we have possibilities to collaborate on the lighting very clearly, in the interior area very clearly. On lighting, maybe one thing which was also of high interest to us is that some of the new technologies on lighting are also contributing to new solutions on the ADAS side and on the autonomous driving side. So there is no overlap. There are additions to be made. And I think that putting together our highly talented people in Japan and Asia with the ones here in Germany, we will make a great business. The next one from Thomas Besson. Could you please give an indication of the P&L net interest charge for 2022 and 2023 post deal, for the combined entity? Thomas, it's really more the financial part than the strategic part, which is of interest. [Foreign Language] Michel.