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

Ladies and gentlemen, and welcome to the HELLA Investor Call on the results for the first half of fiscal year 2026. This call will be hosted by Professor Peter Laier, the CEO; and Philippe Vienney, the CFO of HELLA. [Operator Instructions] The conference will be recorded. Let me now turn the floor over to your host, Peter Laier.

Hello. Good evening, everybody. This is Peter Laier speaking. A warm welcome to our investor calls to HELLA Half year 1 2026 results. Karen, if you could open the presentation, then we could directly go on the agenda, I appreciate. Thank you. So we have prepared for today's call an agenda where we would like to talk at first about the achievements in first half year, followed by the financial results presented by Philippe Vienney, our CFO. And then we have a special chapter on the agenda today about lighting transformation program, which we have accelerated, followed then by the outlook for the financial year 2026. At the end, then we will talk about key takeaways as usual. With that, let me directly step into the presentation. Let's talk at first about achievements. So in regard of achievements, we have in first half year an organic sales in HELLA, which is above market. On the other side, we are working on cost measures, and I will talk about some additional measures which we have introduced in lighting in the course of the presentation. If you look to this chart, you see on the left side, our organic sales growth, which is at constant FX, a year-over-year growth by 1.6% to EUR 4.040 million above EUR 4 billion. We have in Electronics recorded sales year-over-year up by 6.6% to in total EUR 1.685 billion, driven by radar business, specifically in Energy Management. We have in our Lighting VG sales recorded year-over-year down by 3.6% to now for first half year '26, EUR 1.746 billion, affected by a phaseout of programs and of lower call-offs. While in the Life cycle business, with Lifecycle Solutions, we have an increase of sales by 5.3% year-over-year and have achieved there in first half year '26, EUR 56 million sales driven by specifically strong sales in special OE business, which is commercial vehicles and off-highway business mainly. So that means in total, we have reported sales year-over-year, which is broadly flat at EUR 3.972 billion. There is an FX effect in there in comparison to the constant FX sales, which we have mentioned on the upper part of this column. Please allow me then to move to bottom line. Let's talk about OI margin. We achieved an OI margin in first half year of 5.4%. This is specifically achieved by savings in R&D expenses where we were able to decrease the ratio by 68 basis points to now 8.9%. In addition, we have increasing cost pressure along the whole value chain, and we have a strong focus on cost measures to counter this impact, which we have out of the value chain. And we had in first half year, a negative volume and mix effect, which weighed down our margin in first half year. If we then look to net cash flow on the right side of this chart, we recorded a net cash flow for first half year at EUR 66 million. This compares to EUR 114 million in half year 1 in financial year '25, so a decrease. And we have a net cash flow to sales ratio at 1.7% achieved in first half year in comparison to prior year same time frame, 2.9%. So we have in place continued CapEx governance, and we have here achieved reductions. But we have to say on the other side, our net cash flow is impacted by increased restructuring cash out. That is a cash out of the restructuring measures, which we have introduced. And we have to mention that we have had in Q2 now a positive net cash development, net cash flow on EUR 150 million versus EUR 49 million negative in Q1. So if we go then to the next slide, Kerstin. Thank you. Let me now talk a little bit about acquisition successes in first half year 2026. As you can see in the headline, we had ambitious targets for our order intake in 2026, and we were able to fully meet those targets. But not only the value in regard of the targets we achieved, even more important is we were able to continue our strategy of regional and customer diversification, and we achieved here the related results in acquisition, which is, I think, a very positive signal. If we look a little bit to our business groups, you see here at first the highlights for electronics business. Strong order intake here, specifically in our core growth products, which is confirming our strategy. So you see here 3 examples. On the one side, we were able to acquire a large-scale high-voltage battery management system and a smart car access system and radar sensors for U.S. OEM with SOPs now coming in '27 and '28. Another example here is we have acquired a DC/DC converter order and roll out now this business at a European OEM for different models with SOPs in '28 and '29. And a Chinese example here, we were as well able to acquire a DC/DC converter and the low-voltage battery management system with the Chinese Tier 1 supplier with an SOP in '28. So that shows as well the broad range of acquisitions in all regions, which we were able to get in, in the first half year for electronics. If you look to lighting in the middle of the chart, there, we had a strong focus on international order intake to address our premium OEMs, but as well volume models. And this is a strategy which we have announced before and now we are executing that successfully. You see that here, for example, with the headlamp package and the rear combination lamp, which we acquired for premium and midsized models of a U.S. OEM with SOP 28, 29. Another example is headlamp and combination lamp packages for a European customer for the U.S. and Asian market with SOPs in '26 and '28 or again, a Chinese example here, headlamp projects and current body lights, which we were able to acquire for a Chinese OEM for different models with SOPs in '26 and '27. If I then can direct your attention to Lifecycle Solutions on the lower part of the chart, There, we continued our customer and regional diversification according to our strategy. So we hear examples are in acquisition, we were able to acquire intelligent battery sensors for different platforms for U.S. and European customers with SOPs in '26 and '27. And we were on the other side, able to acquire customized LED headlamp and the related rear lamps for an international OEM of agricultural machinery and buses for the Indian and the European market with SOP '27 and '28 or the third example here this time we selected to show to you is the APS for international truck joint venture. This is a pedal sensor, pedal itself for international truck joint venture for the Asian market with the SOP in '29. Yes. Having that said, then handing over to our CFO, Philippe Vienney, to introduce the financial results of half year 1?

So good evening to all. So looking at the sales, we published sales at EUR 3.9 billion versus the same type of figure for last year at EUR 3.9 billion. So this is representing a drop of 0.2%. But in this number, actually, we have a currency effect, which is negative for EUR 68 million, which means that the growth is really at constant rate EUR 62 million, which is representing 1.6% versus the market, which is down by 1%. So this is basically linked to good momentum on electronics, where we have very good sales, thanks to Radar Energy Management and Smart car access. We also have a very good momentum on Lifecycle Solutions as well with a strong special business and aftermarket. While on the other side, we have a decrease in phaseout of program in lighting, not compensated fully by new ramp-ups, but we will come back on that. So looking at the sales per region, Europe basically is overperforming the market by 4.6%. So here, we have the effect of the electronic mainly with, again, radar and smart car access. We also have some SOPs in lighting and growing special application. On Americas, we are at minus 5.2% versus the market. So here, we have the end of production of several lighting programs, which is impacting the U.S. mainly. And in Asia, we are 3.6% overperforming, thanks to new launches in China, in lighting and also with good momentum as well in electronic with a strong energy management in Asia. Looking at the profitability per segment. So starting with Electronics. So here, we have electronic, again, growing in terms of sales by 6.6% on an organic standpoint. And we have an operating income at 8% at EUR 144 million versus EUR 121 million last year at 7% -- so here, again, we have developed a bit the sales which are basically developing well with a good momentum. And then the OI is at 8%. So here, we have reduced the R&D expenses on the Electronics segment. We have also made some saving on administration and distribution expenses. On the other hand, we have a gross profit, which is a bit deteriorating because of a mix impact with higher basically material content on some new programs. Looking at Lighting. So Lighting is down in terms of sales on an organic standpoint of by 3.6% versus last year at EUR 1.7 billion versus EUR 1.8 billion. Operating margin at EUR 7 million, 0.4% versus EUR 63 million last year at 3.4 -- so here on the operating income standpoint, we are suffering from the decline in sales, close to EUR 100 million in sales decline. We also have a decline in the gross profit as a consequence of the decline of sales, and we have some mix effects, which is also impacting our gross margin. And the flex, which is not fully achieved in terms of fixed cost adaptation, and this is also why we are going to the lighting transformation program that will be developed later on in the presentation. On the life cycle, so EUR 515 million. So it's an organic growth of 5.3% in terms of sales and operating income at EUR 65 million, 12.4% versus 10.6% last year. So here, we have also a good momentum in terms of sales in all areas, specially application, aftermarket and as well on the workshop business. And the operating income here is generated by higher profit on the higher gross profit and also some savings on R&D and SG&A linked to the structural improvements that we have been implementing. So good momentum on the life cycle business. When we look at the EBIT and net income, so first, maybe gross profit 21.6% versus 23.3% as a consequence of what I said, mix effect and not full flex on the lighting performance. R&D down at 8.9% versus 9.6%. SG&A down at 7.4% versus 7.6%. So leading to an operating income at 5.4% versus 6% last year at EUR 215 million. EBIT is at EUR 169 million, 4.3% versus EUR 138 million last year at 3.5%. So the main impact here is coming from less restructuring costs, which have been booked in H1 '26 versus the amount which was booked for very large program announced last year in H1. And this is leading to a net income of close to EUR 99 million, 2.5% versus the EUR 69 million or EUR 70 million last year at 1.8%. Looking to the cash. So again, the cash, as mentioned, was at EUR 66 million in H1 versus EUR 114 million last year. So it's a reduction of EUR 49 million. So here, we have the impact of more cash out and more payments due to restructuring. So this is linked to the P&L effect that was booked last year, but the cash out is really impacting now '26 because people are exiting now. And we have also reduced our CapEx, as you see on the chart on the right, with EUR 164 million of CapEx versus EUR 203 million last year. So it's a reduction of 19%. So we continue to monitor and to have a stringent CapEx governance to benefit to our cash. So with that, I'm finishing the financial part and handing over to Peter.

Yes. Thank you, Philippe, for introducing the financials to us. As you have seen, we have a deterioration of sales in Lighting and as well as deterioration of operating income. And due to that fact, we have decided in the Management Board that we want to accelerate our lighting transformation program and how we want to do that, we want to introduce to you on the next slides. Thank you. So what we are experiencing right now is that we have on the bottom line, further cost pressures, which are intensified in H1. We have further structural cost burden. Capacity utilization in lighting is below our target. And as well on the supplier side, we are experiencing increasing pressure, which need to be then compensated as inflation at our customer sites where we are heavily working on. But not only bottom line is affected, as mentioned as well, top line is reduced in comparison to half year 1 2025. The reason is that we have still a weak European demand in the market. We have an adverse customer and product mix. The EV momentum is still weaker than expected, and we have acquired EV programs, which are suffering. Now we have with the strong pressure in the whole automotive industry, a technology differentiation now which is narrowing because there's a strong focus on costs in the whole industry. And therefore, we focus actually on affordable innovations to support our customers with the right technology to give them what they need to differentiate themselves with affordable innovation in the market. All of that is -- or has led to the decision in the Management Board of HELLA that we want to reshape our lighting transformation program, which was already started in last year. We have now decided that we have we have at first understood that the actual lighting transformation program had a focus on improving our top line to acquire new business so that we can fill our capacities. And on operations performance improvement, based on the results of first half year, we have clearly understood that we have to reshape the Lighting transformation program and have now decided to introduce Lighting Transformation Program 2.0, where we have a core focus on bottom line improvement as well as short-term bottom line improvement and further strengthening the top line, and that will come as well with structural improvements. Basically, we do that the reshaping of the lighting transformation program to safeguard 2026 results, which we are striving for. and then improving '27 further. We have given ourselves a clear target. You see that on the lower part of the top line here of this chart. We have given ourselves a target that we want to return to 2025 operating margin performance in '28. So that means we want to return to 3% in '28. We go to the next slide, please. So what went good in Lighting transformation program 1.0 and where we have room for improvement, you see on the left side. So the focus on growth and on customers already show very good results. The net order intake in lighting in half year 1, '26 is 2x of the order intake, which we had in half year 1 prior year. So here, really positive achievements. And this diversification topic, which I mentioned before is fulfilled. You see here further figure. The net order intake has more than 75% business outside of Europe in H1, and that clearly confirms that the strategy here is going in the right direction, and we see results out of the Lighting transformation program. If we look to operations we see that on the one side, we have a further increased implementation of the FORVIA Excellence system, which is for us a system to track and trace and improve our operations by 9 percentage points from '25 to half year 1, '26. And we were able to reduce direct and indirect headcount in our operations, direct headcount by 7%, indirect headcount by 6% versus half year 1 in 2025. On the cash and capital discipline, positive to be recognized is that we were able to reduce our CapEx by 20% versus first half year in 2025 with a strong focus on building and projects. I think very good achievement. But as you have seen in the report Philippe has shown, we have a decline on net cash flow in comparison to half year 1, 2025. And as well on the bottom line, the OI decline is 89% versus the comparable half year 1 2025. Because of that, as I mentioned, we have decided to further reshape Lighting transformation program to the 2.0 version of Lighting transformation program and that you see on the right side, it's now a more comprehensive program where we have a strong focus on short, midterm bottom line improvement. And we have in principle here 5 different sub-programs now of Lighting transformation program. We have, as you see here, you look in the right box on the left side, we have a bottom line performance improvement program as a subprogram of Lighting Transformation 2.0 where we focus on operational excellence, on commercial excellence on material costs, on cash control as well as on the project costs and SG&A optimization. And we have one bucket where we have enablers, which we are looking on. So we improve further our R&D competitiveness, hourly rates, hours used per program. We look closely to project and product management to assure that we are launching our programs with the targeted profitability rates. And we are working on the target operating model. Then we have a bucket for strategic topics where we work on specifically the turnaround of interior lighting, where we work on growth with Chinese OEMs and where we are working on a tooling and equipment strategy to get better here. And then we have a bucket for growth where we are working on our sales transformation and the related project program execution. And then we work specifically on our footprint to get here as well better. So we work on a U.S. footprint to produce in the U.S. lighting products, and we are working on our India footprint. Important to see is that lighting transformation program, you see that here with the dotted line has a lot of buckets with a strong focus on bottom line and how we are doing that a little bit more in detail, you see on the next slide. So we work strongly on those buckets. And you see here always 2 examples now what we are doing concretely in those areas that you get an impression how we really strengthened the program and have implemented a clear governance and execution system with related structured drumbeat and steering, close financial tracking, assure that we only really have qualified P&L effects and that have a close control of the program. If you look to the different buckets, we work on operational excellence, specifically on workforce and overhead targets, which we have clearly defined for year-end '26 and then as well for 2027, what we want to achieve, and we have implementation program where we are looking to the degree of achievement and with that then monitor that closely. We have for all plans defined OEE and NQC targets. So OEEs overall equipment effectiveness. That means how good you are using your installed equipment and NQC is non-quality cost, so money which we are spending for quality topics, and we work on scrap and that we have clearly defined targets to achieve that until year-end. As well, commercial excellence, we have clearly defined claim targets, which we want to recover in '26 at our customer base and the same is valid for engineering change requests. So that changes which are required by the customer where we have a clear tracking and then ask as well our customers to pay for those changes, and we have a clear loss-making project management now established. On the material cost side, we have clearly defined targets for reduction in '26. And we have for the AVE, which is value analysis and value engineering, that means optimization design to cost on our own products, which we have brought now on track where we will see specifically in '27 results on the R&D competitiveness side. We are working now on rightsizing on the one side with best cost shifts and on the other side, with consequent deployment of AI and all the opportunities which you can gain out of that. And we work on bill of material. So that means the materials which are contributing to product costs improvement via design. On the project and product management, we have on the one side, a clear management of our SKU, stock keeping units where we have clearly targets defined and we want to reduce complexity. And we have a platform governance. That means we want to assure that we consequently use our platform designs in the future and that create the economies of scale. We have a gatekeeper installed so that we assure that nothing is flowing through. On the cash side, I talked already about our CapEx targets, which we consequently managed that went as well okay in first half year, but we have still further to focus on. And we have now introduced as well as strict working capital management. So that means specifically inventories, but as well receivables and payables, which we are managing consequently have strong focus on that. And then if you look to net project costs, we have clearly defined reduction targets here, and we have a design to cost discipline, which we are enforcing and requiring. And on the SG&A side, we have introduced now a focused benchmarking for lighting, where we have a good database right now based on consultants and we'll use that as a base to consequently act on SG&A. And for sure, we will as well in SG&A use consequent AI deployment to improve. So why we have shown all of that to you, this is a very comprehensive program. I personally have used such a methodology successfully before with proven results, and we will introduce that now in the -- or we have already introduced that in the lighting business to achieve the results which we need for improvement second half year in '26 and '27 and beyond. So with that, I would come to the outlook, Kerstin. So if we look to outlook financial year 2026, we see here at first our prediction on further market development. We see a declining market in 2026, and we see that the headwinds even are expected to increase in second half year, specifically driven by China. So that gives us a perspective on the expected global light vehicle production for 2026 on a level of 91.1 million vehicles. You see here in smaller figures, first half year, 44.8 million. second half year, 46.4 million. So as mentioned, first half year, 1% decrease year-over-year. Second half year, we expect 3.2% decrease year-over-year. The expected deterioration of the market in comparison to 2025 will happen in all markets, Americas and Europe, slightly down with 0.7% and 0.9%, a stronger reduction in Asia Pacific by minus 2.9%. That is specifically driven by the expected reduction in China in half year 2. If we go then to the next slide. Despite this market outlook, we are confirming our outlook, our guidance. So that means we still see ourselves ending the year in regard of sales between around EUR 7.4 billion to EUR 7.9 billion. We are seeing ourselves closing the year '26 on an OI margin between around 5.4% to 6% of sales, and we are seeing ourselves closing our books for 2026 with a net cash flow at, at least 1.8% of sales. For sure, all of those figures are still based on the related light vehicle production forecast, which I have shown on the slide before with 91.1 million vehicles. Yes, with that, I would like to come to the key takeaways. Let me summarize in this way. Half year 1 sales deployment was as expected. Sales at constant FX growing by 1.6% to around about EUR 4 billion, outperforming global light vehicle production by 250 basis points. That's great news, I think. The growth was driven by Electronics and Lifecycle Solutions. Our profitability suffered from volume and mix effects. And we have an acceleration of cost reduction to counter the inflationary pressure, which we have. We have a good CapEx governance installed, which has continued and the net cash flow reduced to EUR 66 million was impacted by the restructuring cash out. The outlook, you see that in the middle for 2026, we have confirmed so EUR 7.4 billion to EUR 7.9 billion round about sales, OI margin between around 5.4% to 6% and net cash flow to sales at, at least 1.8%. The outlook is based, as mentioned, on the actual forecast of light vehicle production of EUR 91.1 million. We expect for the second half year increasing headwinds from the market, specifically in China with the light vehicle production down by 4.1%. And we expect further headwinds in raw materials, for example, PCBs or semiconductors, which we consequently have to address at the customer base. Specific focus for us is actually the Lighting transformation program 2.0 as introduced. So we have a strong focus on bottom line improvement now in Lighting Transformation 2.0 with a focus on short and midterm improvements. We have a clear intention to improve the performance through the introduced 8 buckets based on validated impacts on P&L and cash flow and a very close tracking of it. And we have a regionally diversified acquisition focus in volume and in premium segment in lighting with a platform approach, which is very important to create the economies of scale and with a strong focus on affordable innovations to serve our customer needs and further step into the volume segment. Yes, with this, we are through with our presentation. And now operator, let's open for questions.

The first question is from Mr. Christopher Laskawi from Deutsche Bank.

The first one actually on lighting. Last Friday, BW revealed part of the 2030 strategy and within that, actually announced to reduce the component variety of some components significantly. So front lines seem to be cut by around 60%. I was wondering if you could comment potentially on how that changes the competitive environment in your view, especially in Europe when we think about peers, direct peers that are trying to fix and grow the business in lighting too. Would you think that -- if we assume volume overall is not changing from that, but would you think this is increasing the competitiveness in the RFQs or is posing some risk? Or yes, general thoughts on that would be interesting. And then secondly, just on the current trading, Electronics was quite strong in Q2. Could you comment on how that is trending into H2 and overall call-offs at the start of Q3?

Yes. First in regard of your -- your question regard of Volkswagen strategy and Lighting, Christoph, I would like to answer in this way. Yes, this is a trend which we are seeing in some OEMs as well in Volkswagen to reduce varieties in the segment. And for us, this is, from my point of view, a chance. Why is that? We have now consequently introduced our platform strategy, our modular strategy. And based on that, we have the right toolbox to quote in regard of this reduced complexity and variety. So I think that will help us to play to our strengths with our platform approach. And therefore, I think that will help us. We are looking very much forward to that, and we are in close exchange with our customers as well as the mentioned customer to leverage on that. And I think as well the acquisition success, which you have seen in first half year is confirming that we are doing things right in that regard. In regard of electronics, your question was after a strong first half year, '26, how is the second half year developing? We see a continuation of this development in second half year and think with our strong portfolio that we have as well in the future, very good opportunities.