Hella Gmbh Kgaa Unsp/Adr

Good morning, afternoon, ladies and gentlemen, and welcome to the HeLa GmbH and Co. KGaA conference call regarding HeLa results first quarter financial year 2024. The call will be hosted by Bernhard Schäfer-Barthold and Philippe Viennet. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentations. Let me now turn the floor over to Mr. Bernhard Schäfer-Barthold.

Everyone, welcome to our results call on the first quarter for the fiscal year 2024. I'm very happy together with Philippe to present you our results and to take your questions afterwards. I would like to start with the highlights of the first quarter. So first of all, again, we would like to highlight the refinancing of our bonds, which matures in May 2024. We successfully placed the promissory note, which was significantly oversubscribed, so that we increased the total amount to 200 million euros with very attractive terms. Secondly, we completed the sales on our 50% share in BHTC, which we already commented also before the closing happened on the 2nd of April. Therefore, the effects within our results would only be seen within our half-year results Overall, a very successful transaction. The proceeds were in total 205 million euros. The capital gain which we have with that transaction is around 100 million. On the order intake, we had quite a good start into the year. Specifically in electronics, we were able to book some very decent projects. One highlight is a significant project on lighting electronics for North and South America. But also in energy management, we booked several different businesses. We expect overall a good continuity and a good momentum on order intake in the following quarters to come. Again, to mention the last years were record order intake years. We expect overall that we can maintain this momentum and be around the number we had last year. Lastly, I would like to highlight on our sustainability report, which we also published. We have reached, again, an effort in our CO2 reduction, more than 50% of reduction on CO2 in comparison to the 2019 basis. It's a good step forward. to our target we have in 2025 to be scope one and two emission-free. And we continue to work on our scope three targets in being scope CO2 emission-free until 2045. We put a lot of effort to that topic as well. If we look at the numbers, our sales growth is organically at 2.2%. As mentioned also before, this includes the full consolidation of HVBL. We agreed last year with our joint venture partner in the continuity of our partnership, which lasts already for more than 10 years. So we are fully consolidating now that activities which before was also consolidated, but only at equity. This effect was contributing 77 million two-hour sales in the first quarter. We had a negative FX effect. So overall, I can state that The year was as expected, the start into the year was as expected. We have seen some delays in SOPs on customer side where actually we would now see that the ramp-ups are starting as of now and should contribute to a further growth in the upcoming quarters. We had a slight effect due to a lower number of electrified cars in the produced volumes, but which was not very significant in comparison also to our expectations in the first quarter. So overall, we would see that this quarter should be the lowest one in 2024 overall, so that we are quite confident in terms of our outlook overall on the full year with the expectation of better sales development in the upcoming quarters. So overall, if you look at the different business groups, so electronics with a slightly slower start, the highest impact in terms of delayed SOPs. As I said, a slight impact on lower volumes with electrified cars in Europe. But we see as of now that sales in electronics should be better over the year. Lighting, the growth comes specifically with the fully consolidated activity in China, as I mentioned. And lifecycle solutions, we had a good development again in our independent aftermarket with the growth in comparison to last year. On the other hand side, our special application business was slightly lower in terms of sales in comparison to last year because of weak market environment specifically for trailers, but also less sales for agriculture and construction in comparison to the year before but overall for life cycle a decent development. If we look at the operating income, we are at 5.6%. We expect that the margin should improve and this is again in comparison also to last year where the 5.6 was the lowest margin we had. We have a similar expectation also for this year, so we expect an improvement in the quarters to come, driven by, on one hand side, a better sales development, but also we had, in terms of a path through to the of inflation to our customers. We are still in percentage and in relative terms very comparable to last year where only around 40% of the inflation and price increases were agreed with the customers so far. We expect that we will improve this figure as we have done it also in the last years in the quarters to come and this should specifically improve also our margin in the upcoming quarters. In addition, we increase our cost reduction efforts. A part of it we already mentioned with our European Structural and Improvement Programme that we are enforcing our efforts to reduce the cost as well in the upcoming quarters so that overall We feel confident in regard to our outlook to be between 6% and 7% in terms of operating income margin to the end of the year. On the net cash flow, we are at minus 51 million. We had quite a high level of capex in the first quarter. expect this run rate in the upcoming quarters. So we would see for the full year capex to be around the number we had last year on the working capital. we had an increase in comparison to the end of the year 2023. We are at a level where partially the overdue specifically on the receivables were higher, so we have not been paid to the end of March. This is something where we are working on and we overall expect if we look at our measures we have to further reduce working capital in terms of inventories as well but also on the receivable side to improve there. We see that we should come back in working capital and even improve in comparison to 2023 so that taking that into account, an improvement in profitability, a lower capex run rate in the following quarters, and a working capital coming back to an even better level in comparison to last year, we feel comfortable to reach our guided net cash flow target of around 3%. Having said that, I would like to hand to Philippe for more details on the financials.

Thank you Bernard. Good morning to all. So looking at the sales into more detail, so we posted sales at 2 billion, which is, as I said, representing an organic growth of 2.2%, or 43 million, and we have been impacted by 30 million of negative FX impact. which means that the reported sales are by 0.6%. So I said also the growth is coming mainly from lighting with the integration of the full consideration of HVBL. We continue to have some good positive momentum on the radar business with electronics and on the independent aftermarket with life cycles. So if we go to the profitability per segment, so lighting, we show some sales growth, organic sales at 5.8%. And operating margin going from 2.4% last year to 3% this year. So again, here we have in the cells the consolidation of HBBL. We have the highest demand on Asia and China on some electric vehicles, but slightly negatively impacted in China with some car models which are changing right now. On the operating margin side, so we have the full effect of the consolidation. And we have also seen some SG&A reduction and lower personal cost in lighting. If we go to electronic, so here the organic evolution of the cell is a minus 2.2%. And despite the reduction, we are showing an operating margin going from 5.7% to 6.3% in 2019. So again, on the sales, we still see some good momentum on the radar demand and growth, but we are impacted by lower electrification in Europe and some delay in some ramp-up, which is impacting negatively our sales. On the operating margin side, the profit is improving with a reduction of the material cost and we have also less SG&A cost and less R&D cost in electronics. If we go to life cycle, life cycle is showing an organic growth of 1.4% and operating margin going from 37 to 34, so 13.1 to 12.1%. So here on the sales side, we have growth on the spare part business, especially in Europe, but we have a negative impact coming from the agriculture and in the commercial business, which is impacting negatively the sales trend. And we also enjoyed last year in Q1 the increase of the counter demand, the particle counter demand increase, which is affecting a little bit the comparison with 24. on the operating income side here also we have an increase of the gross margin due to the product mix and material ratio but we have a higher rnd and hdna cost mostly with the distribution cost mostly due to the full integration of the budget business into the lifecycle segment So looking at the sales per geography. So in America, we are showing sales which are down by 1.2% versus market growth of 0.3. In Europe, we are showing a minus 1.5 sales versus a market which is down by 2.5%. And in Asia-Pacific, 8.2% sales increase for EVA versus a market which is down by 70 basis points. Looking at the operating income and comparing it with 23, so again sales up by 0.6%. The gross profit is increasing at 25.3% versus 24.6% last year. This is coming mostly from a material ratio which is improving. Then if we look at the R&D cost, we are slightly above last year with some investments due to the upcoming launches and linked to the ordering tech, so we are continuing to invest on the R&D side. On the SG&A, we are showing some increase, but mostly linked again here to the distribution cost, linked to the lifecycle segment, as I was mentioning before. And we are ending with an operating income at 111 in line with what was posted last year at 5.6%. And leading to an EBIT of 99 million at 5% versus 5.3 last year. Now if we look at the cash flow, so the cash flow was at minus 51 million in Q1 compared to 38 million last year. So as I mentioned by Bernard here, we have some increase in our working capital on the receivable side because of some customer overviews, so as already mentioned, so we have not been able to be fully paid in end of March by some customers. And some decrease in the trade payables. One point to mention also is we have reduced our factoring versus Q123 and we were at 48 million of factoring versus 19 million last year. And we have a high level of capex in Q1 at 9.7% of sales. So this increase was mainly seen in Q1. But also, as mentioned, we are not anticipating to continue on this trend for the rest of the year. So this should be much more normalized for the coming months.

Thank you, Philipp. So if we look at the outlook, so market outlook remains more or less unchanged to the beginning of the year. So we expect a stable market environment of around 90 million vehicles for 2024. We expect also as well as S&P is expecting a decline for Europe and a solid development in America and also a solid development for Asia, specifically for China overall. So that leads us to our outlook. As I already commented, for the full year, which we confirm, so overall we remain with our expectation of sales in the range of 8.1 to 8.6, an operating income margin around 6 to 7% of sales and a net cash flow at approximately 3%. So to wrap it up, We see for us a solid start into 2024 as expected, also in comparison to our internal planning. We see now for the upcoming quarters an improvement in terms of our main financial KPI. sales should slightly be better and also we believe and see that our profitability should improve as well as our cash flow in the upcoming quarters. We continue to work on our cost competitiveness. The main element is our program for Europe we are progressing and detailing it out and in the coming month as said presumably by summer at the latest we will inform you also with the different measures and activities we will implement. Overall we Finally, I just want to comment again that we feel well prepared in these times. We still continue to see and an important element for us is to continue to see that we have a strong connect and also good working together with our customers and we see that specifically in our order intake momentum which still is intact and good and good demand specifically on our high technology products. Having said that, Philippe and myself are happy to take your questions.

Ladies and gentlemen, if you would like to ask a question, please press 9 and star on your phone. If you would like to withdraw your questions, please press nine and star a second time. We ask you that you please submit your questions to three. Now, please press nine and star to register your questions. The first question is coming from Christoph Lascavi, Deutsche Bank.

Hey, good morning and thank you for taking my question. The first one will be on pricing and what to expect. You already said you got some incremental pricing with the 40% coverage ratio in Q1. Should we expect that in Q2 to bump up more materially or is this more a second half thing? And then on the slides, you call out lower materials as well. Should we read that as a statement that semis and electronics are actually fading now and turning into a small tailwind? And the last question would be, could the margin in Q2 already be at the low end of the corridor? with better volumes from SOPs and the pricing. Thank you.

Good morning, Mr. Lascari. So on pricing, pricing incremental, we should see a good next step towards a higher degree on compensation. Specifically, normally if we agree in a pricing change, it also goes back then to the 1st of January. there is a kind of catch-up effect as well. So we assume that the effect with that should have quite an important effect on Q2 only and should support our results to a large extent. And this was a part of your question, should we see to come to the lower end of the margin? Yes. So I would see on... on H1 in total, that we should be around the lower end of the margin end of June, for H1 overall, which would mean a good step forward in Q2 and a better profitability in Q2 only. In terms of materials, we do not really see an improvement on semis. I see stable pricing environment on semis, so no increase but also a slight decrease, but not significant. Where we are able to reduce prices a little more is in all other areas. So semi and active electronics is basically the only one which is not really moving, but in total we are improving in terms of material cost reductions. And this also supports the development of the profitability.

Thank you. And a quick follow-up, if I may, just on the consolidation effect of the German venture in lighting. You had quite a strong start relative to the overall expected effect for the full year. Should we expect for a smaller or lower run rate in the coming quarters now as a result, or is there certain seasonality attached to the business with regards to modeling the consolidation? Thank you.

The effect on sales of HBBL, so on the full consolidation, it was a significant number in Q1. We expect that this number should be a little lower in the following quarters. So they had a strong start. So they are delivering cars to different Chinese OEMs and specifically one customer had a very strong demand in the first quarter. So we are not foreseeing that this should continue, but still it will be probably then if we had 77 in Q1, I would assume perhaps a run rate which could be around 60 in the upcoming quarters, if I only look at this effect. And then in terms of my comments on the sales development overall, so we would now see with some ramp-ups which are now happening, specifically also in electronics, that we should see overall an improvement in our sales development. And the last point perhaps to mention with what I have not commented before is that on the reimbursements, so for tooling, D&D, we would also expect a higher number in the quarters to come.

Thank you. There are currently no further questions. If you would like to ask your questions, please press 9 and star on your phone. 9 and star on your phone. The next question is coming from Sanyai Bhagwani, Citi.

Hello. Thank you very much for taking my question. I have three questions as well. Most of them are actually follow-ups to Christophe's question. So the first one is on the organic growth outperformance. I think if I understood it correctly, the message is that Q2, this is going to improve because Q1 was close to zero. and the key drivers of improvement I think we suggested is better tooling and also the new SOPs in the electronics. So if you could please maybe quantify a little bit here that do we already get to what that 500 basis points organic growth outperformance in Q2? Or this is, let's say, gradually facing in as we go into the Q4? That is my first question. And I'll just follow up with the next one after this, if that is okay?

Yes. Hello, Sonia. It's difficult for me really to predict the outperformance because this depends also on the customer and model mix overall in volumes. So my statement was related to the quarter on quarter development in terms of sales. So we would see that this Q1 should be the lowest quarter in terms of sales and that we now see that specifically with some ramp-ups of SOPs we have, we should see an improvement in terms of our sales development now in the second quarter to come. To then assume what does it now mean exactly in outperformance is very difficult to state.

Thank you. That's very helpful. And a follow-up to that, is this the European customer specific whether ramp-ups are delayed and they are coming in, which could provide some more colors here?

So it's a mix. So the ramp-ups happens largely in the North American market. So there is, for example, a large radar project for customers which are now ramping up, but also to a good extent in Europe. So these are both regions where we have most SOPs happening.

Thank you. That's very helpful. And my final one is on the free cash flow. I think on the profitability, you already mentioned that it gets close to the lower end in H1 already. How should we think of the free cash flow? Do we get to the break Q1 already in H1, given that there may be some sort of lump sum payment in Q2?

So our latest estimate is that we should get positive. We should be positive in H1.

Thank you. That's very helpful.

If you would like to ask your questions, please press 9 and star on your phone. There are currently no questions, so if you would like to ask your questions, please press 9 and star on your phone. As I can see, there are no further questions coming in. I will hand back for the closing to Mr. Bernhard Schäfer-Barthold.

So thank you very much. for joining this call and showing the interest for Hella and very happy to hear you, see you soon, latest with our next call on H1 numbers. Thank you and have a good remaining day.