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

Good morning, ladies and gentlemen, and welcome to the HELLA Results 9 months FY 2024. [Operator Instructions] This call will be hosted by Bernard Schaferbarthold, the CEO; and Philippe Vienney, the CFO. So let me now turn the floor over to Bernard Schaferbarthold.

Very warm welcome, and good morning from my side. I'm here with Philippe, our CFO, and very warm welcome to joining that call on our 9-month results. First of all, I would like to highlight 3 things. One is in terms of our new outlook. We confirm our outlook to the end of the year. Secondly, and we will present on the 9-month results, as expected. The third quarter, and also, we expect continuous volatile environment in the fourth quarter, was a challenging one. And despite that, we maneuvered in a -- with a quite solid profitability. And the third is that I will highlight that in our view, we are well on track in terms of the implementation of our strategy and the structural changes we already have commented to increase our competitiveness. But let's start into the results. So overall, sales grew at 0.8%. So we are at EUR 6 billion after the 9 months. This is an outperformance of 240 basis points. The group reported sales are at EUR 5.9 billion. If we look at the different segments, Lighting showed a growth of 4.3% at EUR 2.95 billion. As mentioned before, this year, we are fully consolidating our activity in China of HBBL. Within Electronics, we had a negative growth of 3.2% after 9 months, so we are actually at EUR 2.22 billion. The reason for this negative development is, on one hand side, the customer mix, and this impacts us, especially in China as well as late SOP or delayed SOP, which with a significant impact on our sales this year besides the fact that numbers of electrified cars are also much down in comparison to our original plan. But the most relevant in terms of the deviation and electronics is related to the delayed SOPs. We expected around EUR 300 million more sales for electronics in our original plan and around 40% of that deviation is related to these late start of projects. Lifecycle is also down. And here, specifically the third quarter was very weak and was impacting our sales development quite much and with that also within our 9 months. Within Lifecycle, our 3 businesses have developed quite differently. On one hand side, the independent aftermarket is still showing a growth trend. So we are growing there, still in 9 months with 2.9%, but we see that especially in our workshop products as well as in the SOE business, the sales development was weaker. So we see hesitation, specifically in workshop products, in terms of investments, but even the more, let's say, impact was in our SOE business, where especially the third quarter was significantly down by minus 20% because of the low demand on important customer segments like agriculture, but also construction, which have a high importance. Overall, if we look at income margin, we are at 5.8% in comparison to 6.1% in the prior year. The reason is a slightly lower gross profit margin with the lower volumes and also the negative mix effects, especially. On the R&D, we improve. So we are working on higher effectiveness on our R&D ratio, especially on the external services, we have been able to reduce significantly, and we are working on continuous improvement in that area. Net cash flow is still at a slight negative so we -- that we expect to catch up, especially now in the fourth quarter, the same pattern as we had last year, so significant cash inflows we expect also from the agreements we had also on the customer side, which are not cashed in, in a significant magnitude. This is a relevant sector and as well reduction in working capital, especially on the inventory side, but also on the receivable side, we expect to the end of the year. If we look at the order intake side, we are quite satisfied with the development here and especially on the mix. So we are working on getting more resilience and robustness in terms of the diversification of our order intakes going forward. So it's from utmost importance to have a global and more balanced portfolio in terms of our order book. And again, we are able with around 2/3 of our order intake outside of Europe to work towards that direction. Around 45% of this business outside of Europe is related to APAC. So the rest, around 55%, is for the Americas. If we look at the different segments, so especially within Lighting, so we are able to increase our footprint towards North, South America. But also for China, we are quite successful in terms of our Lighting business, where we are able to position now our new technologies within China, specifically. In Electronics, we won significant business. For the U.S. here, we mentioned 1 big radar business. On the other hand side, we also have been quite successful within that year now for APAC, Japan, India and as well, for sure, China. And Lifecycle, so we continue on our activities in growing with our Electronic portfolio within Lifecycle. And in addition, we also continue in terms of our headlamps, so -- or Lighting business to grow within our customer segments, here, 2-wheeler, 3-wheeler, which is a very interesting market for us as well in India, where we have quite a decent growth perspective also in the future in that segment. If we look at further aspects, so one here on the left-hand side is an example of newest technology we are selling to and implementing to China, where, first of its kind, more and more is already sold to China here. One example on the Lighting side with our newest RGB LED rear lights, which is now introduced into midsized sedan car within the Geely Group. So this is one example to show you how we are also adapting our product portfolio to the global market immediately and selling it basically as first of its kind, and they are more of kind of these projects to come in the future. The second one is -- we want to highlight is, again, a recognition on the workshop product. On our workshop product brand, where we have been awarded best brand, it shows that here within Lifecycle, within our product scope, we are recognized here with Hella Gutmann as one of the best commercial vehicle worth looking here in growing that business and leveraging our competency also to -- with our independent aftermarket offering we have. Another aspect is on the commercial vehicle parts within Lifecycle. So we have a clear focus within that business to grow in the Commercial Vehicle business, especially on the Truck segment, where we have been quite successful in the recent times. And during the IAA, this is clearly -- has been -- clearly been recognized also by a lot of different customers. And so we believe having quite a decent position also going forward in that segment. And lastly, on the right-hand side, again, we want to point out that the point of sustainability remains a clear priority and focus topic. We are or have been recognized as FORVIA at all with the A score for transparency on climate change. We are working intensively now on Scope 3 reduction measures. So that is a clear focus and also being recognized on customer side and certainly something which will continuously gain on importance in the time to come. So if -- lastly, I want to highlight now on what are the key points and initiatives for us going forward. As I mentioned at the beginning, we have 4 areas of priorities for us; one, in terms of the market. As I said, we want to get much more balanced globally. So we are well on track, as I said, with 2/3 of the order intake outside of Europe. We have as a focus our business opportunities in the Americas, but as well in Asia with India, Japan and China, and we are seeing that step by step, we are growing our business portfolio in these countries and these 2 regions. Secondly is in terms of our competitiveness and our profitability. So we are intensively working on measures to improve our net cash flow and improving our operational excellence. So with the measures we have implemented, we see a strong -- or we are well on track to reduce our CapEx ratio already next year and to improve also working capital next year to a significant level. We are working on the operational excellence, especially on the -- with the different initiatives, new excellence system we are implementing in all our plants as well as the automation efforts we are doing and flexibilizing of our plans. We are working on despite on the fact, and this relates then to the competitiveness program where we are adapting capacity and reducing our structure, especially within Europe. And lastly, in terms of our cost -- on our cost side, so we see that we are able to even increase on the synergy side, especially towards next year so that we see EUR 400 million of cost synergies, we will be able to reach to the end of next year. In terms of our competitiveness program for Europe, we are well on track. And I can here say that especially on the -- on our target to the end of 2025, we see us that we are able to accelerate even the realization of these measures to a level of above 40% of realization of our EUR 400 million target until 2028, so a clear focus on further cost reductions and even being faster. One element is also -- which is here also under Engage. The clear ambition as well to -- and focus to reduce R&D costs and to improve here our effectiveness in that. We see that in adapting our way of work in using state-of-the-art tools, implementing AI use cases, many different measures we are doing, but also shifting resources towards best-cost countries, we are able step-by-step to improve on our R&D cost base. And we see us in the position to come to this target level we had of below 10% already in next year. So overall, this should give us and -- the ability to step by step continue on improving our profit and cash position in the years to come. Having said that, I hand over to Philippe.

Thank you, Bernard, and good morning to all. So looking at the sales, so we have sales at EUR 5.9 billion reported sales, which is composed of EUR 45 million growth which is corresponding to 0.8% increase. And we have a negative impact of the FX of EUR 42 million, leading to a reported sales, which are similar to the level of last year. Looking at BG now, so Lighting, as I said, the growth is 4.9%, excluding the exchange rate with an operating profit at -- operating income at 3.5% versus 2.8% last year. So the sales are upon completing the full integration or consolidation of the HBBL, but we have also -- the sales are explained by, let's say, good ramp-up of new programs in Americas with headlamps for Ford, for example, and -- but on the other hand, we have -- we are penalized by the end of high volumes program, especially in China with Tesla also, for example. Operating income is growing versus last year. So here, we have an increase of the gross profit, which is linked to the mix and the integration of HBBL, which is accretive to the results, and we have improved SG&A ratio in Lighting. Looking at Electronics. So Electronics is a minus 2.7% growth with an operating income of 6.8% versus 7.1%. So here, we have on the sales on the good part, some good launch with the Radar business, mainly in the U.S. and Europe. We have a lot of delayed SOPs, as mentioned already by Bernard, and we have the slowdown of the electrification in Europe, which is impacting us largely. And we have also a product mix, which is not favorable, especially in China. So operating margin at EUR 165 million is slightly down versus last year, so mainly linked to the volume and the mix effect. And we are also improving on the other side the R&D expenses with the reduction of the external services provider mainly and some constraints on the R&D side. Looking at Lifecycle. So Lifecycle is minus 4.3% on sales, 10.2% of operating margin versus 13.1% last year. So here, we have also, as I said, the aftermarket, which is still growing versus last year after 9 months, but we have the special application and special product sold to the agriculture or industrial business, which is going down and impacting our operating margins. And we have in Lifecycles, the integration of PAGID for the full year now, which is also increasing our SG&A ratio and in absolute value as well. Now looking at the sales per continent, so we are still growing everywhere, in every continent, and we are basically in every continent above the market with -- and then you have the split of the sales per continent. So Europe is still at 57%, and Americas and Asia Pacific more or less at 21%, 22%. And you can see now that we are growing in every part of the world versus the market. Operating income details. So the gross profit is at 25% versus 25.3% last year. So here, we are impacted by the mix and especially the mix between BG with electronics going down versus last year. On the other hand, we have R&D ratios, as mentioned, which is improving at 10.7% versus 11.1% overall for HELLA, again, thanks to some less use of external resources. SG&A is increasing in values and in percentage. So with the full consolidation, again, of HBBL, which is impacting the values of SG&A and PAGID as well, which is also the brake business, which is impacting our expenses and the logistic cost. On the EBIT side, we are ending at 6.9% versus 6.1% last year. So this includes a capital gain from the sale of BHTC, which was recorded in H1 and also the restructuring costs for the Plant 2 restructuring. In terms of cash flow, so we are ending after 9 months at minus EUR 8 million versus EUR 40 million last year. So here, we have basically 2-way impact. So we have a lower increase of the factoring versus last year, so which is increasing by EUR 53 million versus EUR 91 million last year. And we have a slight increase of the CapEx at 4.7% -- by 4.7%, mainly linked to the new projects, which have to be launched, and we are investing for the launch of this product.

Thank you, Philippe. So lastly, I want to comment on the outlook. So on the market side, we see the market on the full year on 88.5 million, as S&P is showing the prediction in October. So this is a further deterioration in comparison to the 9 months. And basically, all regions are negative in terms of volume development, and Europe specifically. This brings me to our new outlook as we changed it in September, which we confirm also today. So we see our sales currency and portfolio adjusted between around EUR 7.9 billion and EUR 8.1 billion, the operating income margin between around 5.5% to 6% of sales and the cash -- net cash flow to sales between around 2.2% and 2.7%. So to sum it up, overall, a solid performance in a challenging market, as mentioned, still an outperformance in all regions. So a net cash flow where we still expect, especially to the end of the year, a significant improvement. We confirm the new outlook. And as I said, we see us good actually in the implementation of our strategy, also the customer response still we are getting on our products and technologies. Well on track also to balance more out our business globally and especially on the acceleration of our initiatives. We are -- and confirm that we will be faster in terms of the implementation of our cost measures we are working on. We already have now reduced, end of September, 1,300 positions in comparison to last year, and we will continuously reduce now month by month. That's all from our side for the presentation part, and we're happy to answer your questions you would have.

[Operator Instructions] So first one comes from Christoph Laskawi from Deutsche Bank.

The first one will be on LCS, which was quite weak in Q3, as you've highlighted. Do you see a change in trend ahead? Or is the level of activity that you see for ag, for example, that you highlighted basically the same in Q4? And then peers have highlighted for production volumes deterioration into Q4 from Q3 with schedules that have been reduced, especially into December. Do you see the same? And how do you see current trading in the various regions?

Mr. Laskawi, so, unfortunately, the trend in SOE is the same actually in Q4 as it was in Q3. So -- and this is the biggest impact on Lifecycle. So still independent aftermarket is stable. Workshop products is slightly negative, but in comparison to last year, so year-on-year, a big or a strong difference, as I mentioned, in SOE. So no major further deterioration in comparison to Q3, but very comparable. On the production volumes, October was slightly lower than what we were originally expecting, November as well. December, we still also see a risk that it could be lower than expected. Still it's not absolutely visible. So we are in discussions also on the OEM side, where it could be that some of the OEMs have a few closing days more. So that if we look at the range on sales, the impact or the uncertainty is around EUR 100 million. So I would -- as of today, I still see us in the range, but more, let's say, towards EUR 7.9 million to EUR 8 million. So with the lower volumes, which I can confirm, we as well see -- I don't think that we will be in the upper half as of today. But I would also not see us below the range, so to give you somehow an indication. Regionally, still the bigger impact is -- or biggest impact we now see is Europe. China is not, let's say, worse for us as it was now in the 9 months. So still for China, we see that especially on the customer mix, so the western OEMs are still at lower levels, but continuously in comparison to the 9 months, so no further deterioration. Americas for us is quite stable in terms of what was expected.

One follow-up then if I may. If you sort of get closer to the lower end of the topline guide, it's probably fair to assume that it will be the same on the margin. Or do cost-cutting measures and cost flex already help you to be closer to the midpoint?

We are also better on the cost side. So there as well, we are accelerating in terms of cost savings. We are still working on getting to the midpoint, but it somehow now really depends on the lending point on the sales. But we will also be -- I do not see that we will be below the range, so -- but it's fair to say that the midpoint would probably be the best case.

So next question comes from Akshat Kacker from JPM.

Akshat from JPMorgan. I have 3 questions, please. The first one on all the self-help actions and cost measures that you have highlighted. So if you sum up all of these initiatives across the organization and also the synergy element with FORVIA, what should we expect as the net positive impact on the business, please, as we think about 2025 versus 2024 as a year-on-year impact, please? The second question is on total investments and expenditures. So you have clearly mentioned that the R&D ratio will probably fall below 10% for 2025. How should we think about the net CapEx number, please? And the last one is on electronics. Now you have frequently highlighted that this business division has been impacted by delayed SOPs and a downturn in electrification. But as all of these OEMs prepare to meet the CO2 targets next year, how should we think about this business or these delayed SOPs picking up in the first half of next year, please?

So we see that all the measures -- so first question on the cost side. So we see that on the cost reduction side, with the measures we have implemented, we will be able to reduce the fixed cost base even in absolute terms next year in comparison to this year. So this year, we will be in comparison to 2023, even, let's say, more or less stable, even a little higher. And next year, we will, in absolute terms, be lower. So this is something where with the measures we have worked on, we clearly see that even we still consider inflation, salary increases with the decline. So there will be 2% to 3% of fixed cost decrease in absolute numbers. In terms of synergies, the -- besides, let's say, on the admin side, what we are doing together, but what is the lower part, the biggest part is in terms of material cost reductions where we are working together on the supply side. So we assume that this will benefit -- we will benefit much more also out of the collaboration also next year towards savings in terms of our material ratio. So we expect on the material ratio or on the material expenses quite a significant reduction. We have somehow -- also, we have to watch a little bit the mix development. But in terms of material ratio, we see here an improvement, and this is much related also to the synergy efforts we are doing. On CapEx, so if we look at tangible CapEx, we will be -- in terms of level, new investments related to depreciation, we will be below 100%. So actually, we even see we will be below 90%. So this is quite a significant reduction also in comparison to this year. A lot of additional investments we were already planning in terms of automation. In terms of extra CapEx we have done is already made now so that we are now also able to reduce the CapEx levels in percentage. It will be somewhere slightly above 5% in terms of tangible CapEx to sales what we expect for next year. And in terms of electrification, yes, it's still, let's say -- it's our base assumption is, as you said, so the number of electrified cars should increase, and we should benefit out of it for electronics. This is what we also would expect, but it somehow certainly also depends on decisions on regulations. But if there would be no significant change, we would also expect that this number should go up in terms of volumes for these battery electric cars, and we should benefit from it.

So next up is Thomas Besson from Kepler Cheuvreux.

Thomas from Kepler Cheuvreux. I have 3 questions, please. Could you talk about the discussions you have with your clients currently on what I would expect is about the sharing of the savings you're discussing? Thanks to the restructuring actions you've taken. I mean, their average margins is crushing, and typically, in this kind of situation, they aim at sharing the burden with suppliers. So are we already advanced in the move from compensating you for inflation to asking you for compensation -- sharing your benefits? That's the first question. The second question is, could you discuss where you stand on potential Volkswagen strike risk and discussions on salary increase in Germany? And third question, could you talk about potential disposals of any kind to contribute to limiting the FORVIA debt burden?

So on the client side, so on the -- so for sure, I can confirm that the discussions with our clients in terms of compensation, we are asking for -- on one hand side, we are asking for inflation compensation, but we're also asking for volume compensation. And as you said, it's clear customers are asking us for their -- for our contribution in terms of competitiveness. So I think this is something -- yes, the discussions are very intense. We will -- we continue to get to agreements. So I think for us, it's important to at least get a certain alignment also with our customers that it's a win-win situation. So there are still, let's say, big issues in terms of programs we have invested in where the volumes are not -- or the volume commitments on the customer side are not fulfilled, where because of the inflation, we have new situations. So this, for sure, is something where we need agreements with our customers, and we are still getting to such agreements. On the other hand side, it's clear that in terms also of new business, in terms of competitiveness on our side, the structural changes we are doing are very relevant for us also to be competitive, but also to bring the customers into a competitive situation on their business. So it is -- I think, for sure, sometimes it's a little mixed up, but we try really to separate the discussion in these terms. As of today, I would say we are coming along with the customers to find there the right agreements, and it is appreciated that we are -- on the customer's side that we are intensively working on our competitiveness and reducing the cost base. So you're right, it is getting more intense, but it is key for us to work on our competitiveness and to find the right balance. On VW, we see that strike risk. On the other hand side, and you're also asking on the negotiation side, I see also that on the union side, there is an understanding on the difficulty of the market. So I think, and I hope, that as I feel negotiations are ongoing, intense and the willingness, let's say, to find a solution. Now VW is a special case, but in general, with IG Metall in Germany is there. So let's see if there will really be a massive strike that could have an impact. But as of now, as I said in our outlook, I think we already price in somehow lower volumes of VW. In terms of the expectation of -- on salary increase, it's difficult to judge. What -- I think it's clear that it will not be 7%, at least this is -- it's for me clear. So what negotiations are, as I said, ongoing I hope that we will find a quick solution, which is reasonable and which is more on a lower end. The offer which is on the table company-wise, so 1.8%, plus 1.6% in more or less for 24 months, probably will also not be enough, so it will be, I think, a little more. But by far, not this level they are asking for, but difficult to predict for me now as of today. On the disposal side, so no major business I can comment on is now, let's say, from our side, from the portfolio, we are looking at -- we are looking for a disposal. But for sure, let's say, I can say that overall, we are looking at our portfolio continuously in terms of competitiveness, but there is nothing I would like to comment further at this point in time.

There are no further questions now. We'll wait a few more seconds if another one comes in. So that's not the case. So I will hand back to your host, Bernard Schaferbarthold, for the conclusion of the conference.

So again, thank you very much for joining our call on the 9 months' results, and thank you for the interest in HELLA, and I wish you all a pleasant remaining day. Thank you very much, and see you soon.