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

Dear ladies and gentlemen, good morning to all of you. Thanks a lot for dialing in. This is as Rolf Breidenbach speaking. Welcome to this extraordinary investor call following the announcement on Saturday that the HELLA owner family has decided to sell its 60% stake in HELLA to the French automotive supplier, Faurecia. Also as always, of course, a very warm welcome from my colleague, Mr. Schäferbarthold, to all of you. Allow me to first start with some details of the transaction on Saturday. On the one hand, the pool signed and the share price agreement, at the same time, the company signed a business combination agreement with Faurecia. As part of this transaction, Faurecia will acquire the 60% in HELLA from the pool shareholders. And furthermore, Faurecia has announced a public -- a voluntary public tender offer to acquire the remaining HELLA shares. The offer price amount EUR 60 per share. Assuming a dividend of EUR 0.96 per share, the gross offer price amounts, therefore, to EUR 60.96 per share. The corresponding -- this corresponds to a premium of 33% on the closing price of HELLA on the 26 April 2021, which represents the last share price unaffected from the market rumors. Yes. The value of the transaction, I think this is well known is at EUR 6.8 billion. We expect that all details of this transaction being public with the start of the tender offer around mid-September after approval of the offer document by the German Federal Finance Supervisory Authority. And the HELLA management, the Shareholders Committee and the Supervisory Board welcomes the transaction from a strategic standpoint. The combination of Faurecia and HELLA, from our perspective, makes a lot of sense. What are the key aspects with this transaction? A new global champion in the automotive industry will be created. HELLA, I think, has a good starting point to expand its market position, especially in areas like electrification, automated assisted driving and also the vehicle interior design. We see a significant growth potential within this combination of both companies, also the general thinking on how both companies are driving their business, how they think about strategic principles from our perspective is very similar, which, of course, will make the integration and process much easier. And both companies are thriving for market and technology leadership and also believe in strong business divisions with a clear P&L responsibility. In our business combination agreement, which was negotiated between Faurecia and HELLA, we agreed to continue our multi-pillar business strategy focusing on lighting, electronics, aftermarket and special applications. And it was also agreed that the 3 of the 6 business groups will be headquartered in Lippstadt and will be led from the Lippstadt location. To make sure that the integration process is carried out in an effective and efficient way, an integration committee will be created to supervise the whole approach. And in addition to that, a monitoring committee consisting of the Chairman of Faurecia, the CEO of Faurecia, the CEO of HELLA, and I think an important member of the shareholder pool will then also monitor this whole integration process as a last, let's say, decision body. The pool shareholders of HELLA will become a relevant shareholder of Faurecia, which, of course, is also a good sign of continuation. And therefore, the pool will also join -- one pool member will join Faurecia's Board of Directors. Having a short, let's say, look on both companies at the next chart. I think HELLA is well known and the same is true for Faurecia. HELLA with EUR 6.5 billion sales, more than 36,000 people in 35 countries. Faurecia much larger, it's a top 10 automotive suppliers worldwide with EUR 16.5 billion sales, 250 locations worldwide and more than 114,000 people. When the integration process has been finished and the integration is finished, a new group with more than 150,000 people and EUR 23 billion sales will occur with more than 375 production and R&D and admin sites. And as I said, the seventh largest auto supplier worldwide will be formed. Also a result of our negotiation with regard to the business combination agreement is that from our perspective, we can continue our profitable growth strategy. This is true for our electrification initiatives, with our battery management systems, our DC/DC converters and many others. The same is true for our autonomous driving activities with a focus on radar and software items. Also our lighting activities with the focus on, of course, headlamp technology on the one hand, but also design elements in the taillamp, new applications in interior lighting and car body can be continued. And we also discussed this, our special focus now on our growth activities -- our special growth activities in China, from my perspective, can be continued and implemented. Of course, also other, let's say, guiding principles like our strict cost control approach, our digitization and automation approach was, at first glance, well perceived by Faurecia. And here, I think also continuity is very likely. In addition to that, from the perspective of the HELLA Management Board, we will benefit from the combination of both companies. One important area will be electrification. We can combine our initiatives, I mentioned before, for example, with the fuel cell activities of Faurecia. Also when I look at driver assistance systems, the activities at Faurecia, Clarion Electronics and our activities in the area fit very well together. And I think Faurecia already announced that they intend to merge their electronic activities together with the HELLA activities to one business group, which then will be led here from Lippstadt, and we see good opportunities together, continue the growth path we have defined and even could grow even stronger in the years to come. I can imagine and I believe that one important focus of the activities of the combined group will also be in interior. Here on the one hand, Faurecia is a market leader for interior parts like panels, cockpit, consoles, seats, on the one hand, and our experience and our products in interior lighting and also our sensors for interior fits very well together. And together, we really can offer a quite convincing range of subsystems and products in this area. Also, HELLA, of course, will benefit from the very good customer access of Faurecia in Asia. Here, I think the network, the Faurecia network in Japan could be of special importance. And when I look at our Aftermarket and Special Applications, Faurecia intends, and this is also, let's say, described in the business combination agreement to build up a new business division called Lifecycle Management, where we combine our, for example, aftermarket activities with the activities of Faurecia in the area of repair -- of repairing products and also with regard of the activities in sustainable materials to form this life cycle group, which from my perspective, has a huge growth potential in the past, when I look at the importance of ESG and sustainable management in the future. Both companies, I think this is true for Faurecia and HELLA, will continue to benefit from the general market trends. We very often discuss them here in this round: electrification, automated driving, connectivity and so also individualization. The HELLA portfolio fits very well to these trends. It's supported with regard to the growth performance of these trends. And the same is true, from our perspective, for the Faurecia portfolio, naming, for example, their fuel cell activities, activities with regard to ADAS, parking systems and others. Their cockpit activities, of course, cockpit of the future for connectivity and digitization is of highest important for the market. And when I look at individualization, also many Faurecia products and also our lighting products fits well into this area. So from a product portfolio, I think a good combination and a very strong portfolio when I look at the link between the products and the general market trends. To sum it up, I think both groups are a very good fit with regard to the product portfolio. We can benefit from each other. We can support each other with regard to the profitable growth aspirations we both have. There's also an agreement that with regard to the HELLA business division that we can continue to invest consistently into the development of our technologies to secure our positioning with regards to our market coverage on the one hand and our technology leadership on the other hand. Yes, an integration process will now be defined. I already mentioned the Integration Committee, the Monitoring Committee. We will build up different work-streams to detail the integration process, which, from my perspective, when I look at the business division, should not be so complicated because the logic, how the business divisions are steered, are very similar in both companies and to adapt this should be possible. Lippstadt and, of course, this is very important for the HELLA people, will remain a central location of the joint group. These 3 business divisions I mentioned: lighting, electronics and Lifecycle Value Management will be -- the headquarter of this group will be located in Lippstadt, and I already also mentioned that the HELLA pool shareholders will become a relevant shareholder of Faurecia. Of course, we also had intensive discussions with Faurecia with regard to the financial concept. Mr. Schäferbarthold personally had a deep view into it. And we think that the whole financial structure is very sound and reliable. What are the next steps? The decision was made at the 14th of August. The publication of the offer documents, we expect at the end of September, and then the start of the acceptance period will occur. The end of this phase, we assume, will be beginning of November. Of course, these dates are estimations. And yes, a rough estimation -- as a rough estimation, we think the closing will occur early 2022, but you all know this is very difficult to predict. Yes. Having said this, now Mr. Schäferbarthold and myself are looking forward to answer your questions.

[Operator Instructions] And the first question is coming from Gabriel Adler, Citigroup.

Gabriel Adler from Citi. And thank you very much for the presentation and finding time for questions this morning. I have 3 questions, please. First, whether you could, please, confirm if there will need to be a domination agreement in order to generate the announced cost and revenue synergy. My second question is on antitrust. Could you just confirm whether the founding family sale is contingent on Faurecia receiving all the antitrust approvals? And also, which jurisdiction antitrust approvals will be required in? And then my third question is on R&D. When I look at both of your businesses, one of the most notable differences in how the two companies operate is this approach to R&D retailer spending, around 10% of sales in gross R&D compared to about 6% for Faurecia? Do you expect this to change as a result of the transaction? And could you confirm how much R&D savings is contributing to the synergy target?

Perhaps starting with your last question with regard to R&D, of course, I now cannot confirm a special rate. We will discuss this with our colleagues from Faurecia. With regard to special synergies in R&D, of course, here also we have to discuss this. I cannot comment on that. But allow me to say, overall, we have an agreement with Faurecia that our technology leadership strategy will go on. And that we will also continue to significantly invest into R&D in the years to come because we think -- and I think this is also true for Faurecia that this is one important element of the success story of HELLA in the last years. But of course, we have to look how the discussions are going on and whether there will be and how much of synergies can be realized. With regard to the domination agreement, I hand over to Mr. Schäferbarthold.

At least we can say that there is no decision taken as of today, but it has been pre-discussed that if it comes to the synergies, no domination agreement is necessary to realize the discussed synergies. And at the end, the mentioned Integration Committee will be the predominant premium, let's say, to discuss how to work going forward and to, let's say, work on the integration concept. Yes. And I've not really understood your second question if it comes to antitrust. Can you repeat?

It was just whether the family sale is contingent on antitrust approvals being reached by the time line of the sale being done before or after antitrust approvals. And also if you have any insights into where antitrust approvals are required. So can you make a specific one in China, for example?

Yes, at least, preparations have been done. And the expectation is that there is no, let's say, critical topic or a country where we see any issues as of today, for sure. Let's say, it is -- there is an agreement that antitrust needs to -- we need each acceptance in the different countries. So that is, let's say, the mentioned time line and uncertainty. Mr. Breidenbach mentioned if it comes to the expectation on closing early 2022. But as I said, we do -- from all reexaminations, which have been done by the lawyers, there is no problem, which we would foresee.

The next question is coming from Akshat Kacker at JPMorgan.

Akshat at JPMorgan. Two from my side, please. The first one is on growth and strategic direction for HELLA. Thanks for the presentation this morning. I think you covered a lot of the topics. I just want to come back on that in terms of what are the biggest opportunities for HELLA coming out of this transaction? Operational synergies when it comes to ADAS are very understandable. I just want to understand how you're thinking about energy management and electrification? Does this combination allow you to accelerate into a high-voltage product portfolio? The second question is on the cost synergies. Obviously, both companies are very high quality in terms of how they've been run over the last few years. What is the low-hanging fruit in terms of cost efficiencies and synergies? Is procurement a big part of that synergy target? Those are the first 2 questions, please?

I think starting with the second one, of course, the Integration Committee has to work this out. And from our side, we will not now comment on synergies. But of course, we see very attractive synergies, especially in the area of purchasing from our perspective. But we have to discuss this with the Faurecia colleagues; therefore, we today will not be too specific on this topic. The Integration Committee will prepare this. I already mentioned these work-streams, and I can imagine that purchasing will be a very important one. With regard to our growth perspective, ADAS, you mentioned. With regard to electrification, I think, the access to Japanese customers could here create additional momentum from our side, and it could also be that when we have to offer portfolio of different technologies, electrification, combined with fuel cell, to our customers, this could also be additional add-on Faurecia can bring to the HELLA growth rate. The same is true for components you are using for both, [ batts ] and fuel cell cars or vehicles. Here, I also see, let's say, an additional possible way to accelerate our growth. And of course, from my perspective, not most attractive, but very attractive growth area is a whole area of interior. Here, I expect a boost for our interior lighting, and the same should be true for parts and components for Faurecia. When we are offering the right integrated subsystems and parts and components, we already started this with our open cooperation. But of course, here, when we really combine the forces, much more is possible.

Just one quick follow-up on the domination agreement as well. You mentioned that it is not necessary to realize discuss synergies, but can you talk about cash pooling? Can you optimize tax and cash without domination agreement?

Yes, that is possible. So you do not need a domination agreement at the end to do cash pool. So at least in the -- also in the pre-discussions we had, there is, for sure, in the overall, let's say, optimization and take out options. We would then have also a discussion ongoing how then to optimize the financing going forward. So as you know, we -- there are also change of control clauses in our financial agreements. We will have to see how they would be used, especially on the bonds. As you know, we have quite attractive terms. So we will try also, let's say, to optimize this in a way together with Faurecia that we have then the best possible outcome out of it. But again, back to also your original question, cash pooling is possible.

The next question is coming from Giulio Pescatore at Exane.

So it is my understanding that you had several offers on the plate. So what made you choose Faurecia? So what was the thinking process there? And the second question is, have you discussed any potential business divestitures with Faurecia yet to maybe accelerate the deleveraging process? And then the third and last one on ADAS. So you're basically combining 2 businesses with pretty strong positions in low-speed ADAS. But when it comes to higher level, more sophisticated systems, do you see an opportunity after the merger is completed to redirect investments in this field?

Starting with the selection of offers. This was not the task of the HELLA management because this was, let's say, a clear decision from the shareholder family. We did not, let's say, assess this. This was the clear responsibility of the shareholder families -- family and the pool and the leadership of the pool. With regard to divestments, nothing is discussed so far with regard to divestments with Faurecia. And with regard to ADAS, as you said, we are quite strong together in the area of low-speed ADAS. Here also, of course, the strategic discussions with Faurecia are at a starting point. But I can imagine that the HELLA strategy to step-by-step integrate into the mid-range area can be continued doing special investments for long ADAS systems. I have an opinion, but we have to discuss this with Faurecia. Therefore, as I said, this is currently at a starting point, this discussion.

The next come in from Michael Raab at Kepler Cheuvreux.

Michael Raab, Kepler Cheuvreux. If I got that right, you basically just stated a few minutes ago, you don't think Faurecia needs to strike a domination agreement to have access to your cash pool and free cash flow. If that's the case, could you please explain the background because the angle I'm coming from is that I believe, typically, that was my understanding, you basically need a 3/4 majority at the AGM to impose a profit transfer and domination agreement on a company. So which regulation is it? Is it perhaps regulated to the pooling agreement of the pooled shareholders, i.e., the family? Which regulation is it that makes you think Faurecia does not need to strike a profit transfer and domination agreement, please?

We were talking about the cash pool. For cash pool, at the end, you don't need a domination agreement. And also, as you said, it's different -- it's easier, let's say, if you have a domination agreement and a profit transfer agreement, but you don't need it to have a cash pool. At the end, for a cash pool, for sure, we need to make sure that at the end, there are some, let's say, rights on HELLA's side to make sure that, let's say, the terms we have are at arm's length principles and that at least sufficient securities are given to HELLA. But on cash pooling, it's not a necessary condition, as said again, to have a domination agreement.

All right. And how about profit transfer?

Profit transfer is different because there, at the end, it comes to the point -- first of all, if you look at pure, let's say, from an accounting principle view, with the, let's say, control of the company, and this is given with a 60% share transfer, you can, let's say, fully consolidate the numbers. And with that, at least, you have then the sales and profits within your accounts. So that's one. But at least as long as HELLA is then stock listed and Mr. Breidenbach mentioned that the corporate bodies will stay, also after closing, in place and as long as the stock listing is out there, for sure, then the, I would say, normal game rules are still given. So that there can only be, let's say, a dividend distribution as it is also now in place. So there, as long as this is not given, this stays in place.

The next question is comes from Sanjay Bhagwani from Bank of America.

This is Sanjay Bhagwani from Bank of America. My first one is, as a follow-up to Gabriel's question, maybe I missed this one. Could you maybe clarify which countries or jurisdictions you would need the antitrust approval? That is my first question.