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

Good morning, ladies and gentlemen, and welcome to the HELLA Results First Half of the Fiscal Year 2024. This call will be hosted by Bernard Schaferbarthold, the CEO, and Philippe Vienney, the CFO. [Operator Instructions] and this call is being recorded. [Operator Instructions] So a warm welcome again, and let me turn the floor over to your host, Bernard Schaferbarthold.

Yes. Good morning. This is Bernard Schaferbarthold speaking. A very warm welcome from Philippe and myself. A warm welcome to our results call for the first half of our fiscal year 2024. And we have the following agenda today. Firstly, I will talk about the achievements in the first half, then Philippe will take over to go through the financial results. And then I will detail out the further progress of our competitiveness program, and will finish with the outlook and the key takeaways. Coming to the achievements. So our sales in the first half were at EUR 4.1 billion. This is a growth of 1.6%. Our reported sales were growing 0.9%. We had a negative FX effect. If we look at the different segments, Lighting was growing at 3.3%, taking into account the full consolidation of our joint venture, HBBL in China. This had a positive effect of EUR 114 million on our sales in China. Electronics were slightly down 1%, considering a negative FX effect. Without that FX effect, a slight decline of 0.3%. Overall, Electronics was mostly impacted. We have suffered some delayed SOPs, specifically radar, but also our electric power steering was affected by that. Both products were growing but not as strongly as expected. Additionally, we had an impact out of the slower electrification growth, specifically in Germany. And we had also a negative regional effect overall, and specifically, Electronics, which was impacted by that. Lifecycle was down 2.7%. We had an effect out of workshop products where with the so-called -- particular filter. Last year, we had a significant volume in the last year. But beside of that, independent aftermarket was strong and growing in the first half. Within our SOE business specifically, agriculture and construction in this negative industrial segment -- sentiment were down in comparison to last year. Overall, if we look at operating income and cash, we had solid results. So overall, a slight improvement in operating income in comparison to last year. So 1.4% of improvement in absolute numbers to EUR 248 million, an improvement in operating margin of 0.1% to 6.2% in H1. We managed to pass through at a higher percentage the inflation to our customers in the second quarter, and that improved significantly our margin in H1 overall. Net cash flow was much better in the second quarter. We are at EUR 86 million in the first half, 2.1% at a very similar level in comparison to last year. If we look at the order intake situation, overall, the momentum is continuously good. What is very promising is that with -- we had a good regional mix within our order intakes in the first half. Within Lighting, but also in Electronics, we won a lot of projects in Asia and also in the Americas. Lighting was very solid in terms of business. We won with Chinese OEMs as well with U.S. OEMs, and Electronics also had a strong order intake momentum specifically within NSA. So overall, we are very satisfied with the improvements we are done. Lifecycle, also a solid new business one. So we won additional packages on small cars, e-cars OEMs, which are highlighted here, and we won additional business in -- for a truck for SOE business with SOP in 2027. Further highlights on the first half. So first of all, on the left-hand side, you see the announcement in terms of our restructuring we are now doing at the Lippstadt site, which we published and communicated late in June. So this restructuring program relates to reduction and the rightsizing of our Lighting plant in Lippstadt. We will reduce around 420 permanent jobs and, additionally, more than 200 temporary workers overall. In focusing these plans on innovative headlamp solutions in the future, we strongly believe that this plan, after the restructuring, will be much more competitive in comparison to today's situation. On that measure, we have accrued, overall, EUR 62 million in our half year results, which are adjusted. On the portfolio management, we closed successfully BHTC, and also our People Sensing business. The proceeds out of BHTC were EUR 202 million. the proceeds on People Sensing are at EUR 17 million overall. So this, and considering the net cash flow we achieved, are bringing us to a net cash position overall end of June of EUR 156 million. So a solid amount overall. And on the right side, we are highlighting an innovation we have won in the U.S. This is a product which is called intelligent Power Distribution Module, basically use technology which we will bring into serious production in 2025 with a large OEM supplier. A very -- from our perspective, a very strong technology, which should support our growth path in electronics, and we are proud to get this award. Having said that, I hand to Philippe, who will go through some more details on the financial results.

Thank you, Bernard, and good morning to all. So looking at the financials. So again, the sales were reported at EUR 4.030 billion. This includes a negative FX impact of EUR 30 million. So the growth was EUR 65 million, which means more or less 1.6% organic growth versus a market which was reported at minus 0.2% over the first half. So now looking at the performance per business group, and if we start with Lighting. So Lighting reached a stable operating margin with some growing sales. So the sales are growing by 4% organically. This includes, as it was said, a full consolidation of our HBBL Chinese business. But it was -- the sales were impacted by lower call-offs for certain projects in Europe and also a negative mix coming from China, where we had a very strong call-off last year in H1 '23, with a ramp-up of a strong program last year. So the operating margin (sic) [ income ] stands at EUR 66 million, which is an improvement of EUR 2 million versus last year, still at the same percentage of 3.3%. So this is thanks to gross profit margin improvement, better pass-through also in -- especially in Q2, as it was said. And we have since increased R&D expenses in Lighting to finance or to prepare the new programs and new launches for the coming years. And also, we have started to ramp up our R&D forces in Mexico and in India. Looking at Electronics. So here, we have a margin improvement despite sales which were relatively flat. So as said, minus 0.3% in H1. So here, we have a good momentum on the radar 77 gigahertz in the U.S. But we have some delays and temporary slowdown in electrification in Europe, which is impacting negatively the sales. And the customer mix was unfavorable also in China. So for Electronics, the operating income stood at EUR 127 million, which is an improvement by 120 basis points versus last year and reaching 7.6% of sales. So here again, thanks to an improved gross margin profit and some lower R&D expenses, where we have been able to reduce our use of external providers in H1 '24. Looking at now Lifecycle. So Lifecycle operating income is down with also lower sales versus last year. So the sales are negatively impacted by the low demand and on the segment of agriculture, trailer and construction, but partially offset by growth on the spare parts business in Europe. Operating income reached EUR 63 million versus EUR 74 million last year, which means down 170 points and reaching 11.7%. So here, again, we have an increase of the gross profit, but we are also facing some increased R&D expenses to also develop the program, which have been acquired recently. And we have also an increase on our SG&A and logistic costs, which is also related to the integration of the PAGID business. So globally, as it was said, the group is outgrowing the market globally. So I remind that the market is at minus 0.2% for H1, and the sales [ figure ] is plus 1.6% organic, so which means an outperformance of 180 basis points. And this is visible in each, basically, continent: Americas at 0.8% versus growth of 0.3%; Europe, 0.4% versus growth of -- or negative growth of 3.5%; and Asia Pacific, plus 2.2% versus a growth of 0.9%. So now looking at the profit and loss. So again, sales up by 0.9%, reported at 0.9%. Gross profit is up by 4.4%, which means 86 basis points versus last year, and this is again visible in all business groups. The R&D ratio is increasing a little bit in terms of spend over sales, and this is to prepare the new launches and the new program which has been acquired, and that will be in production next year and a couple of -- in 2 years. SG&A are increasing by plus 7.9%. So here, we have -- we continued to strictly monitor our SG&A, but we also have the impact, as I said, of the full consolidation of HBBL and HELLA PAGID, which is impacting also the specific line of the P&L. On the nonrecurring operating income and expenses, so here we have the 2 effects. The positive capital gain of the sale of BHTC, and we have also booked a negative restructuring costs for EUR 69 million in this line. And the net cash flow, so it stands at EUR 86 million, which is stable versus last year at EUR 89 million, around 2.1% versus 2.2%. So the net cash flow was constantly improving, especially in Q2, with a strong performance in Q2. The cash flow was also impacted by higher CapEx than last year. So we are at plus 23% in terms of CapEx. So here, we have to invest for the new program in the order intake that was booked in the past years. And we are continuing to invest also on the standardization of our processes. But this has been offset by lower working capital. We did also some good progress on the overdues at the end of Q2 versus what was booked or reported at the end of Q1. And we have a reduction of our factoring increase also versus H1 '23, that was an increase of EUR 40 million versus EUR 60 million last year.

Thank you, Philippe. Then I would like to continue on our competitiveness program. Just to remind you, this program we initiated early this year has the target specifically on Europe to improve our competitiveness. Our target is to reach a gross saving of EUR 400 million in terms of cost in comparison to end of 2023 at the end of 2028, and we want to reach at least 40% of these savings end of 2025. So we have further substantiated and detailed out the measures we are working on. I already mentioned one of these measures was the restructuring of our plants in Lighting in Lippstadt, which is certainly a significant measure we announced now end of June. The measures overall are structured in, on one hand side, performance improvements; and on the other hand side, structural improvements we are doing. And they should contribute to improvements within our full value chain. So overall, the operations, our development costs and also SG&A. In terms of structural measures, they will contribute around 1/3 of the gross improvements we are working on. And basically, we are looking at measures in terms of relocation of our people and positions staff, which we will further move into high cost to best cost, specifically go through the full organization that is mostly related to R&D. We will reorganize and rightsize specifically within our operations. So we are facing actually a situation where, especially for Lighting, we have overcapacities where we are actually reducing these capacities, especially in Germany, but also in our Eastern European plants. The reorganization is specifically also related to our Lighting business, where we are working on further standardizations and are focusing the plan so that we are much more efficient and flexible also within our plans in terms of volatilities in the demand. On top of that, we are continuously working on portfolio management and we are revisiting also the expectations on -- and also our investments into further new generations, platforms and also products we are working on, especially within our Electronics business. In terms of performance measures, we are here highlighting a lot of measures, actually, we are working on overall. They should contribute to around 2/3 of the overall improvements we are working on within the operations. We already highlighted in one of our last calls the implementation of our which is our FES, which is our FORVIA Excellence System in terms of shop floor management. So we expect significant cost improvements, for example, in -- within our logistics and flows, but also an improvement in terms of quality and a reduction in terms of quality costs. We are working on several measures in terms of improving our R&D efficiency with the clear aspiration to reduce development times and cycles to a high extent. And already, we have very good pilots and examples where we already have been able to reduce these times significantly and even half it. And now we are working on more and more to roll that out to all programs we are working on. Last, I want to mention is overall simplification efforts we are trying to bring completely into the organization, so reducing complexity, reducing bureaucracy within our processes should also support overall. First of all, being faster, but on the other hand side, also the complexity overall of our organization and reduce our costs. If we look overall on the bridge. So we have, with the further substantiation, already reached the gross savings or have a plan to reach the gross savings. We are working on many of these measures already in implementation. So we are confident to reach the targeted level end of 2025 of EUR 150 million of gross savings we have targeted, and also our target in 2028. We -- a significant contributor to these R&D or to these savings is, on the one hand side, the R&D, where we see a significant potential in terms of reduction of our gross R&D. Where, out of the overall savings, we are working on, 1/3 is related to improvements. We believe we are able to do in R&D and especially reducing R&D development tax. We will invest overall into that program around EUR 200 million. This EUR 200 million are, on one hand side, restructuring costs. So on the reduction of people, but it is, to a high degree, also investments we will do in terms of automatization, standardization, but also the implementation of new tools and also AI-related measures we are working. Then I want to go to the outlook. So on the market outlook, we have now seen in the last month some revised downward numbers. So what S&P is actually assuming is there's a 2% decline in terms of volumes, to EUR 88.7 million, and a further acceleration of decline, especially in Europe. Considering that, we are confirming our outlook, and we are specifying it in a way that we see us, in terms of our sales and also in terms of our operating income margin, in the lower half of the given range. So specifically in terms of sales, we expect actually EUR 8.1 billion to EUR 8.5 billion of sales. And in terms of operating income margin, we believe to be between 6% and 6.5%. We assume that overall, with the revision of the volumes, but also for this year, we do not expect a much higher growth in terms of electrified cars. We see on the ramp-ups that somehow the programs we are in are getting some momentum, but we will not catch up all what we originally had in our plan. This is why we believe H2 who would and should be a little better than H1. But overall, we will not, let's say, be in the upper half with that -- of our range we have given. On the net cash flow, our outlook remains as it was. So we are still confident to reach approximately 3% of net cash flow in relation to sales. So finally, key takeaways. H1 with a slight improvement overall in sales and earnings. Our perspective is that this is a solid result. Overall, in a challenging market environment, we are continuously adapting our business. And we believe that we have, again, proven that we are able to adapt and are very resilient overall. Q2 was -- we reached what we wanted to reach. On the outlook, so we confirm the outlook as I said and specified within the expected ranges. And overall, the competitive program is on track. We have detailed and worked on the measures we are now implemented. Having said that, that's all on the presentation and we're happy to take your questions.

[Operator Instructions] And the first question comes from Christoph Laskawi of Deutsche Bank.

The first one would be on the volatility of production in the call-offs. We just had a warning -- supply chain-related warning of an OEM overnight. Do we actually see the call-off ratios improving in the third quarter to date versus the second one? And then could you comment on current trading in the regions, how the exit run rate in June was and how you expect it to shape up early Q3? And also a comment on the health of your supply chain would be appreciated. And then sort of the second question, just what was the inflation recovery rate in Q2? And then lastly, the HBBL consolidation is down a lot sequentially, should we take that as a run rate with -- in China basically with the international customers? Or could you elaborate on that a bit?

Yes. Thank you for your question, Mr. Laskawi. So first of all, on the call-offs. So basically, what we see is that the volatility remains specifically now to the start of Q3. This is, from our side, now already, let's say, taken into account in our expectation to the lower end. So what we basically see is that on some of our customers, they were expecting higher volumes and the faster ramp-up now starting, let's say, from the summer season and now in H2. So we are not seeing that to that degree. This is that why -- at least I can say that the negative volatility remains still at a very high level. And we are slightly behind in terms of our original plan, what we expected 2 months ago. But again, as I said, it is already reflected in our sales outlook as of today what I see. Regionally, Europe is mostly impacted and, as well, China. Americas is more robust and more at what we expected. On the supply chain, so we continue to see some, let's say, difficulties in terms of some of the semi products, not to this high extent what we had in the past. But I can say that from -- at least from our side, we remain, let's say, very cautious in terms of bottleneck situations we could have, specifically on active electronic parts. And we are working intensively on that. Besides that, I think we have some critical situations on, let's say, financial distressed situations on some suppliers. But as of today, I would say, we are able to manage it. But it is, for us, a very important topic and remains the risk what -- how we are assessing it actually. Then on the -- you had a question on our joint venture, HBBL. So I would assume that you could take the overall H1 sales volume, so the EUR 114 million we had, basically as a run rate also on H2. So they are slightly better in terms of their plan overall. So it's related to their customer mix. So it was clear that would be stronger than Q2. But overall, as I said, for H2, we expect more or less the same level as H1 overall. Have I answered all the questions? I'm not sure...

Just one open. And that would be the inflation recovery share in Q2.

Yes. So we are -- so we caught up somehow in Q2, some of what we were not able to realize in Q1. So overall, we still have not the full recovery in H1 of inflation, we are around 80% in H1. Still the target is to close that gap now in H2. And additionally, what we are now also discussing to a large extent, is in terms of the volume reductions. So the compensation levels on these programs where we have significant lower volumes there. Still we are, as of today, at a low level. So we would still expect some agreements this year, but mostly we believe that this will be compensations, we believe, we can reach next year. But still, some is expected still from H2.