Hella Gmbh Kgaa Unsp/Adr

This conference will be recorded.

Good morning, ladies and gentlemen, and welcome to the Hella Investor Call on the results for the first half year of fiscal year 2025. This call will be hosted by Bernhard Schäfer-Barthold, the CEO, and Philippe Vignier, the CFO of Hella. 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 your host, Bernhard Schäfer-Barthold.

Very warm welcome to our earnings call for the first half of 2025. I'm here together with Philippe, CFO at Hella, and Kathleen Dode, who is heading investor relations. So, starting immediately on page four of our presentation, if we look at the key figures and the key achievements in the first half. So, looking first on the sales side, so our organic sales are at 4 billion, largely at previous year level, minus 2.4% year on year. Reported sales are at minus 1.3%, with some headwinds specifically in the second quarter. If we look specifically on our business groups, lighting was down in the first half, 7.4%. Specifically, the end of larger volume projects were the reason on that sales trend. Electronics is with a continuous good momentum, a growth of 6.6%, and now at 1.6 billion on the first half. Specifically, our radar business, but as well business related to our energy management division is growing quite decent. Life cycle solution. was impacted by a weak demand on commercial vehicles. So overall, on the first half, year-on-year, down 6.6%. On a positive note, specifically on our special application business, we are now seeing that the negative trend is now ending, and we are more optimistic in terms of the development on the second half. And if we look at our operating income margin, we are largely stable to last year. We are at 6%. Our gross profit is slightly down in comparison to last year with on one hand side, some negative mix, but in comparison also to last year, we're apart. of the positive within our gross profit was also related to the sale of our people-centred business where we recognise 17 million. So the comparable we need to remind on that one as well. We're working intensively on our costs. So we see with a strict cost discipline and cost reduction, we see a continuous improvement. Our competitiveness program, which we as well accelerated, is showing step-by-step strong cost improvements in all areas, but specifically also within our R&D. So we reduced in the first six months had counts by around 3.4% overall. So this will now continuously lead also to further cost reductions in the upcoming month. We also said that within R&D, we were targeting to be below 10%. And we already see that now for the first half of the year that we reached that number. On the net cash flow, we are turning from a negative in Q1 to a good positive momentum now within the second quarter. We ended the first half year with a positive number of 114 million euros, which is an increase of around 34% in comparison to to last year. We have higher funds from operations. We are continuously managing to improve in our CAPEX spending, and as well, the factoring, which is within that net cash flow, is at 23 million and is a lower amount in comparison to prior year. In terms of our guidance, we are confirming the guidance to the end of the year. We see sales between around 7.6 to 8 billion. Our operating income will remain, well, will be between around 5.3 to 6%, and we assume to be at least at 200 million of net cash flow to the end of the year. If we move to the next page, on page five, we are quite pleased about the development in our order intake. We were able to win in lighting important new projects, specifically also in North America, but as well in China. with Chinese OEM, and this should support our growth specifically in these two regions. Even more pleased, I'm with a strong development within our electronics business. We want very important acquisitions on a lot of our new product offerings, specifically, If it comes to our solar module business and the intelligent power distribution module which we offer, we were able to win another order. And the same also on the smart car access. And to highlight as well, here on the high-voltage side, we were able to win another big business, and as well, another one on the zonal control modules with an SOP in 2028. So important acquisitions in terms of new products we have established into the market, and as well, important acquisitions the regional distribution, which we are also targeting, as you know, so that we are more balancing out and getting more resilient also going forward. Lifecycle solution is also showing a good trend in terms of order intake. So especially in the important area of trucks, but also buses, we were able to further win businesses and as well outside of of europe which will also support that that trend coming to coming to the next topic on on page six so we we started with our competitiveness program specifically on Europe early 2024, which we announced, and I made the comment that we also accelerate on the measures and add additional measures. What we have in addition now launched is the project Simplify. Simplify is focusing, is a global program. is a program where we also leverage and work together with Forvia. And the target is really to streamline specifically in all functions and as well the administrative functions our processes and our organizations, and to get leaner, more efficient, and less complex. This program should lead to gross savings of around 80 million euros until the year 2028, and we will have and as well restructuring costs, which will be up to around 100 million euros. So we believe that this program will bring us into a best-in-class organizational setup in the upcoming years. We did an intensive benchmark to leverage really on the opportunities we still have. We already have started on that program, and we believe that the combination of the competitiveness program for Europe the activities in Simplify will significantly improve our competitiveness going forward. Having said that, I would hand over to Philippe to give more details on the financial results.

Thank you, Bernard, and good morning to all. So, yeah, looking at the sales, so we reported sales of 4 billion 30. which is 1.3% below last year. In this number, we have a negative impact of 36 million due to exchange rate negative trend versus last year. And we have a volume reduction of 15 million, so 0.4% in terms of organic decrease. So if we look at BG, so lighting, We posted sales of 1.8 billion versus more or less 2 billion last year. So it's a 6.8% year-on-year organic decrease. So here we have some difficult situation in Asia and China mostly, where we have the Tesla Model Y, which is ending in Q1 2025. and which is replaced by the new model, but the ramp up is only starting and we have not the full, the same content either in China, which is also impacting the sales in China. We have some good ramp up in Europe, especially with headlamps and rear combination lamps with Volkswagen, for example, and Audi, but not enough to offset the decrease we have observed in Asia. The operating income at 3.4% versus 3.3% last year. So here we have a relatively good adaption of our fixed cost and our material ratio. So the gross margin has been kept at a decent level versus last year. And we are also reducing our R&D cost and fixed cost and SG&A, which is also linked to the program, which have already been announced. So leading us to be slightly better than last year in operating income by 10 basis points. For electronics, so we posted sales of 1.7 billion versus 1.6 last year. So it's an organic growth of 7.2%. So here I said, we are helped a lot by our radar business, especially in America, where we have We also have some growth in Europe with new programs, which are offset by a lower electrification in Europe. And we have also a very strong growth in Asia, thanks to the battery management system and car access, which have been taking off in Asia. Here the gross margin is still impacted by some write-offs that have been booked due to the slow electrification in Europe, but we are offsetting part of it by lower R&D expenses with less use of external resources and also some impact from the cost cutting plan which has been announced, which is already visible. Life cycle, so we posted 500 million of sales versus 537 last year and operating income at 10.6 versus 11.7. So here for life cycle, we are very much impacted in terms of volume on the special application side with a reduction of the market on the commercial vehicle business and the trailer and construction. On the other side, aftermarket is relatively stable versus last year after a fixed restatement. So yeah, we are really suffering from the special application domain, which has also led to a lower gross margin because we are not completely able to offset this volume drop. But still, we are also decreasing our R&D expenses and SG&A, which is a favorably impacting lifecycle. Looking at the sales per region, Europe. So Europe, our sales are more or less stable, which means an outperformance versus the market of 230 basis points. So here we are, again, we have the nice development on the radar business on the electronic and partially offset by lighting again here with the Tesla model, which is impacting the three continents, the run down and the end of production of the Model Y. And we have also some German OEM in lighting. For America, we are at plus 1.9%. which means an outperformance versus market of 430 basis points. Here we have also, again, the electronic radar, which is a business which is helping us. And we have also some ramp up in North America with lighting, especially with GM, partially upsetting, again, the decline we have with Tesla. Asia Pacific, here we have a decrease of 7.6. So that's a under performance versus the market. Here again, we are very much suffering from the Tesla business in lighting, which is going down. And on the other side, we have some growing sales with the battery management system in electronics. So looking at the P&L. And so again, sales going down by 1.4%. The growth profit is at 23.1% versus 24.1% last year. So here we have the lower growth profit, which is also linked to, as I said, to electronic with some lower R&D margin and also some write-offs which have been booked in electronic. Lighting and life cycle are showing slight improvement on the gross margin level. The R&D, we are at 9.6% versus 10.4% last year in H1. So we are below the 10% we wanted to reach. On the LTNA, we are also seeing some reduction, which is in line with the sales at 1.5%. If I take only the administration cost, we are down by 6%, so 10 million less than last year. So here on R&D and SG&A, we all again see the benefit of the cost cutting program which has been launched. Leading us to an operating income of 6%, versus 6.2 last year. On the EBIT, we are at 138 million versus 317 last year. So here we have on the non-recurring OI minus 95 million are booked, which is mostly represented by the restructuring costs, which have been booked in H1-25. And for last year in H1-24, I need to remind that we had the benefit of the capital gain on the BHTC sales, which was booked in H1 last year. On the net cash flow, so we have... posted 114 million of net cash flow versus 86 million last year. So it's an increase of 29 million. And so here again, we have an increase of the ABDA versus last year, which is helping us. And we have also good momentum on the capex, which have been reduced. You can see the capex have been reduced by 15% versus last year. So we are starting to see the monitoring and the control on the capex we want to have, which is benefiting to our net cash flow. With that, I will end the financial presentation and over to Bernard again for the output.

Yeah, thank you, Philippe. If we come to the outlook, then on page 16, the view on the market. So we assume, similar to IHS, that the market should be around 90 million cars this year, which is very comparable to last year, a slight increase. with a continuous downward trend in Europe and as well in the Americas, and still a positive growth for Asia Pacific coming especially also out of China. On page 17, again, our outlook. So we still see, as I said, sales around 7.6 and 8. We had 4 billion at the first half, so we are quite confident really on that range as of today, also looking at the current trading. The operating income margin between 5.3 and 6, having been at We are well on track on this as well. And as I said, net cash flow of at least 200 million. So to sum it up on page 19, so first we look at H1. Overall, in our view, a solid performance. We are on track also to our own expectations. The market was demanding with a lot of uncertainties. So we are working very focused on continuing on our structural and performance measures where basically we already see, as I said, that step-by-step, it pays off, and we see our cost structure going down. And on the order intake side, especially on the electronic side, we were able to win very strong businesses, which should support our growth paths also in the upcoming years. We, as I said, confirm our outlook, and still we see that H2 will remain very dynamic and with a lot of uncertainties, but as of today, we see that the positive trend in terms of Our sales evolution is continuing so that we feel confident in terms of the outlook we have given. And lastly, as I said, on the competitiveness program, we are well on track. We are accelerating on the measures. We are adding measures also to further streamline our structures. added and started the new project Simplify to improve the processes and the organizational structure specifically on all corporate functions, supporting functions overall. And as I said, it's a global program and we anticipate a saving of around 80 million until 2028. So having said that, we are happy to take your questions.

Thank you very much, ladies and gentlemen. We will now move on to your questions. Questions can only be placed via telephone keypad. If you would like to ask a question, please press 9 followed by the star key on your telephone. If you wish to cancel your question, please press 3 followed by the star key also on your telephone. At first, questions are limited to three per person. You can now press nine and star to state your question. The first questions come from Sanjay Bhagwani. I'm sorry. Please go ahead.

Hi. Thank you very much for taking my question. My first one is on the FI guidance. When I look at the first half, And if I just break into your commentary that you are still seeing the positive evaluation in sales is continuing, then it seems like you normally are trending towards the upper end of the guidance range for both sales and margins. And usually H2 margins tend to be higher because of the R&D reimbursements and stuff like that. So are you able to provide some color? How do you feel about H2 margins and in that context, do you think the guidance probably more towards the upper end of the range is a 3ML or not? Or what could be the other factors which you think could be the headwinds? That's my first question. Thank you.

Good morning, Sanjay. So you're right. The sales, at least if I look also at Hela in the last years, it's very comparable in the second half of the year to the first half. So, if you take basically history, then it brings us automatically to the upper end. And with that, we would also be confident to be in the upper range of our OI margin. So this, I think, is a fair view on it. It remains, let's say, what is basically the risk for us. Still, it remains uncertain how demand will continue. And with all uncertainties we have in the marketplace, specifically also on the tariff side, I think we remain somehow a little cautious. So still, I would say we do not see that in the demands of our customers. As I said, we see still the demand quite good, no big changes. But also, we want to see how now when it is after the summer break. Do we then see some changes also on the OEM side? We are not anticipating that, but we know how dynamic the market actually is. And this is why we are a little more cautious in our tone. But it's a fair view you have.

Thank you very much. And so my second one is on the electronics. So the gross margin decline in H1, I think you mentioned it's partially because of the electronics, and I think you mentioned some write-offs. Could you please maybe provide some more color on that? Because yesterday, like, one of your peers reported, and their gross margin increase was driven by material cost improvement and electronic costs. So just trying to reconcile what this write-off pertained to. And if you are also seeing any tailwinds from the electronic cost deflation.

Yes, so if you do the year-on-year comparison, first the comment I did last year, we sold a small business. It was an asset deal, so our people sent for business. And this was a $17 million gain, which was in the gross profit last year. So this is the first element if you really compare both. And secondly is we had one program where we had significantly lower volumes. And there, because of these volumes, we have written off the equipment related to that was an extraordinary write-off, which Philippe mentioned. And this was in the first quarter where we took 10 million into the gross profit as a negative. So this is basically the main change. If we look... Other than that, on our target, if it comes really to material cost reduction, I said that we are looking at around 4% of material cost reduction overall we are targeting. And we are well on track on that number now. And we also assume now for the second half that this will continue.

Thank you. And then just the final one. I know it's probably a bit early for the Q3, but are you seeing the Q3 margin holding up same level as the Q2 or improving? Any indication there will be very helpful.

So as you said, it's a little early. It depends a little bit. So normally from a sales perspective, because of the summer break, it is slightly lower sales overall. So the third quarter is normally one of our weakest also if we look at the previous years. But we do not anticipate that we should be also incomparable of last year. There should be a significant deviation to last year. So it should be around that area.

Thank you. And is it the same for the margins? Yes. Thank you. Very, very helpful as always.

Thank you very much. At the moment, there seem to be no further questions. Once again, this is your chance to ask your questions. If you would like to do so, please press 9 and star on your telephone. We're going to give you a couple of more seconds to state your question if you want to. That seems not to be the case, which is fine. I would like to hand over once again to the management for some final words.

Thank you very much to show interest in Hella and in our earnings call. And thank you for joining. And I wish you a very pleasant day and hope to hear you or see you soon. Bye-bye.