HELLA GmbH & Co KGaA
XETRA:HLE

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HELLA GmbH & Co KGaA
XETRA:HLE
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Price: 86.8 EUR 1.05% Market Closed
Market Cap: 9.6B EUR
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Earnings Call Analysis

Q1-2024 Analysis
HELLA GmbH & Co KGaA

HELLA starts 2024 steadily with core projects progressing

HELLA GmbH & Co. KGaA launched their 2024 fiscal year with solid results. They noted organic sales growth of 2.2%, raising total sales to EUR 2 billion. Segment-specific highlights included a 5.8% growth in lighting sales and a 6.3% rise in operating margin for electronics. Despite facing delays in new project ramp-ups and adverse currency impacts, HELLA anticipates stronger performance in upcoming quarters. They project year-end operating income margins between 6% and 7%, along with a net cash flow target of around 3%, while striving for cost reductions and sustainability goals.

Strong Start to 2024 and Key Financial Highlights

The beginning of 2024 marked a solid start for the company, with organic sales growth of 2.2%, reaching EUR 2 billion. This growth was slightly overshadowed by a EUR 30 million negative FX impact, reducing the reported sales increase to 0.6%. The profitability per segment showed improvements, particularly in the Lighting segment, which experienced a rise in the operating margin from 2.4% to 3%.

Segment Performance and Growth Drivers

In the Lighting segment, organic sales growth was 5.8%, primarily driven by strong demand in Asia, particularly China. Despite facing some model change impacts in China, the segment benefited from the full consolidation of HBPL. The Electronics segment faced a 2.2% decline in organic sales but managed to increase its operating margin from 5.7% to 6.3% due to reduced material and SG&A costs. Life Cycle Solutions saw a modest 1.4% growth, though its operating margin dipped from 13.1% to 12.1% due to higher R&D and SG&A expenses.

Geographic Sales Trends

Sales performance varied across regions. In the Americas, sales decreased by 1.2%, despite the market growth of 0.3%. Europe saw a 1.5% decline in sales, faring better than the market's 2.5% drop. Conversely, the Asia-Pacific region posted an impressive 8.2% sales increase, outperforming the market decline of 70 basis points.

Operating Income and Cash Flow

Operating income remained steady at EUR 111 million, with an EBIT of EUR 99 million at 5%, compared to EUR 5.3 million the previous year. However, the cash flow was negative EUR 51 million, mainly due to increased working capital on the receivable side and a high level of CapEx in Q1, accounting for 9.7% of sales. The company does not anticipate this CapEx trend to continue throughout the year.

Market Outlook and Future Projections

The market outlook remains stable, with expectations of approximately 90 million vehicles for 2024. The company anticipates a sales range of 8.1 to 8.6 billion, an operating income margin between 6% and 7%, and a net cash flow of around 3%. Management highlighted a strong order intake momentum, especially in electronics and high-technology products, which should support continued growth.

Cost Management and Investment in R&D

The company achieved an increase in gross profit from 24.6% to 25.3%, primarily due to better material ratio management. Investment in R&D remains slightly above last year, driven by upcoming launches and order intake, signifying a commitment to innovation. Although SG&A costs saw an increase, these were mainly linked to distribution and the integration of the Pagid business.

Strategic Initiatives and Sustainability Efforts

The refinancing of their bond, achieving an oversubscribed promissory note of EUR 200 million, and the successful sale of their 50% share in BHTC, reflecting a capital gain of EUR 100 million, were significant financial milestones. Additionally, the company reached a 50% reduction in CO2 emissions compared to 2019 levels, aligning with their sustainability targets for 2025 and 2045.

Future Financial Expectations and Measures

Looking forward, the company aims for improved sales, profitability, and cash flow in the upcoming quarters. With continuous efforts on cost competitiveness, especially within their European operations, they anticipate better financial performance. The company also expects to improve working capital and reduce CapEx, aligning with their net cash flow targets.

Earnings Call Transcript

Earnings Call Transcript
2024-Q1

from 0
Operator

Good morning, afternoon, ladies and gentlemen, and welcome to the HELLA GmbH & Co. KGaA conference call regarding HELLA Results First Quarter Financial year 2024. The call will be hosted by Bernard Schaferbarthold and Philippe Vienney.

[Operator Instructions]

Let me now turn the floor over to Mr. Bernard Schaferbarthold.

U
Ulric Schäferbarthold
executive

A very warm 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. So 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 bond, which matures in May 2024. We successfully placed the promissory note, which was significantly oversubscribed so that we increased the total amount to EUR 200 million with very attractive terms.

Secondly, we completed the sales on our 50% share in BHTC, which we already commented also before the closing happens on the 2nd of April. Therefore, the effects within our results would only be seen in the -- within our half year results. Overall, a very successful transaction. The proceeds were in total, EUR 205 million, the capital gain, which we have with that transaction is around EUR 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 project. One highlight is a significant project on Lighting and Electronics for North and South America, but also in Energy Management, we booked several different businesses. So 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 -- we've 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 1 and 2 emission-free, and we continue to work on our Scope 3 targets in being CO2 emission-free until 2045, we put a lot of efforts 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 HBPL. 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 EUR 77 million to our sales in the first quarter.

We had a negative FX effect. So overall, I can state that the year was as expected, although 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 further growth in the upcoming quarters. We had a slight effect due to lower number of electrified cars in the produced volumes but which was not very significant in terms -- in comparison also to our expectations in the first quarter. So overall, we would see that this quarter should be the lowest 1 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 in electric -- 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 life cycle solutions, we had a good development again in our independent aftermarket with a growth in comparison to last year. On the other hand side, our special application business, we were slightly lower in terms of sales in comparison to last year because of a weak market environment, specifically for trailers, but also less sales for agriculture and construction 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 pass-through to the -- of inflation to our customers. We are still in percentage, and as in relative terms, very comparable to last year. We're 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 increased our cost reduction efforts. A part of it, we already mentioned with our European structural and improvement program 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 EUR 51 million. We had quite a high level of CapEx in the first quarter. We do not expect this run rate in the upcoming quarters. So we would see for the full 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 the 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.

P
Philippe Vienney
executive

Thank you, Bernard. Good morning to all. So looking at the sales into more detail. So we posted sales at EUR 2 billion, which is, as I said, representing an organic growth of 2.2% of EUR 43 million, and we have been impacted by EUR 30 million of negative FX impact, which would mean that the reported sales rose by 0.6%. So I said also, the growth is coming mainly from Lighting with the integration of the full consideration HBPL. 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 the operating margin going from 2.4% last year to 3% this year. So again, here, we have the -- in the sales, the consolidation of HBPL. We have the highest demand on Asia and China on some electric vehicles, but slightly negatively impacted in China with some car model, which are changing right now.

On the operating margin side, so we have the full effect of the NVIDIA consolidation. And we have also seen some SG&A reductions and lower personnel costs in Lighting. If we go to Electronics. So here, the organic evolution of the sales is minus 2.2%. And despite the reduction, we are showing an operating margin going from 5.7% to 6.3% in '19. So again, on the sales, we are -- we still see some good momentum on the other demand and growth, but we are impacted by lower electrification in Europe and some delay and some ramp-up, which is impacting negatively our sales.

On the operating margin side, the gross profit is improving with a reduction of the material cost. And we have also less SG&A cost and less R&D cost in other income. 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 [indiscernible] in the commercial business team, which is impacting negatively the sales trend. And we also enjoyed last year in Q1, the increase of the counter of demand, 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 higher R&D and SG&A costs, mostly with the distribution cost, mostly due to the full integration of the Pagid business into the life cycle segments. So looking at the sales per geography. So in Americas, we are showing sales which are down by 1.2% versus a 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 Asia versus the 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 costs, we are slightly above last year with some investment due to the upcoming launches and linked to the order intake. 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 on the distribution cost linked to the life cycle segment, as I was mentioning before. And we are ending with an operating income at EUR 111 million, in line with what was posted last year at 5.6%, and leading to an EBIT of EUR 99 million at 5% versus EUR 5.3 million last year.

Now if we look at the cash flow. So the cash flow was at minus EUR 51 million in Q1 compared to EUR 38 million last year. So as mentioned by Bernard here, we have some increase in our working capital on the receivable side because of some customer overview, so as I already mentioned, so we have not been able to be fully paid end of March by some customers and some decrease in the trade payables. I'm going to mention also is we have reduced our factory versus Q1 '23, and we were at EUR 48 million of factoring versus EUR 90 million last year. And we continue to -- or we have had 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.

U
Ulric Schäferbarthold
executive

Thank you, Philippe. 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 solid development in Americas 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 of around 6% to 7% of sales and the 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 KPIs, so 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. A main element is our program for Europe. We are progressing and detailing it out, and in the coming months, 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, we are -- Philippe and myself are happy to take your questions.

Operator

[Operator Instructions]

The first question is coming from Christoph Laskawi, Deutsche Bank.

C
Christoph Laskawi
analyst

The first one would 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 called 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 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?

U
Ulric Schäferbarthold
executive

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. So that 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 to -- 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 H1 in total that we should be around the lower end of the margin end of June for H1 overall. So which would mean a good step forward in Q2 and a better profitability in Q2 only.

In terms of pricing -- in terms of materials, so we do not really see an improvement on semis. So there 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.

C
Christoph Laskawi
analyst

And a quick follow-up, if I may, just on the consolidation effect of the joint venture in Lighting. You had quite a strong start relative to the overall expected effect for the full year. Should we expect 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?

U
Ulric Schäferbarthold
executive

So we -- the effect out of -- on sales of HBPL. 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 the different Chinese OEMs. And specifically 1 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 last point, perhaps to mention 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.

Operator

There are currently no further questions.

[Operator Instructions]

The next question is coming from Sanjay Bhagwani, Citi.

S
Sanjay Bhagwani
analyst

I have 3 questions as well. Most of them are actually follow-ups to Christoph'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 0. And the key drivers of improvement, I think we suggested is better tooling and also the new SOPs within the electronics. So if you could please maybe quantify a little bit here that do we already get to towards that 500 basis points organic growth outperformance in Q2? Or this is, let's say, gradually facing 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.

U
Ulric Schäferbarthold
executive

So it's difficult for me really to predict the outperformance because this depends also on the custom 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.

S
Sanjay Bhagwani
analyst

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

U
Ulric Schäferbarthold
executive

So it's a mix. So the ramp-up happens largely in the North American market. So there is, for example, large radar projects 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.

S
Sanjay Bhagwani
analyst

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 breakeven already in H1 given that there may be some sort of lump-sum payment in Q2?

U
Ulric Schäferbarthold
executive

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

S
Sanjay Bhagwani
analyst

[Operator Instructions]

As I can see, there are no further questions coming in. I will hand back for the closing to Mr. Bernard Schaferbarthold.

U
Ulric Schäferbarthold
executive

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. So thank you, and have a good remaining day.

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