HELLA GmbH & Co. KGaA (OTCPK:HLKHF) Q1 2024 Earnings Conference Call April 25, 2024 3:00 AM ET
Company Participants
Bernard Schaferbarthold – Chief Executive Officer
Philippe Vienney – Chief Financial Officer
Conference Call Participants
Christoph Laskawi – Deutsche Bank
Sanjay Bhagwani – Citi
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.
Bernard Schaferbarthold
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.
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 bonds which matures in May 2024. We successfully placed the promissory note, which was significantly oversubscribed, so that we increased the total amount to EUR200 million to 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 April 2. 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 EUR205 million. The capital gain, which we have with that transaction, is around EUR100 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 America 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 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 HBBL. We agreed last year with our joint venture partner in the continuity of our partnership, which last 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 EUR77 million to our sales in the first quarter. We had a negative FX effect.
So overall, I can state that 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 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 a 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 comparison to the year before, but overall, for Lifecycle 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 of inflation to our customers, we are still in percentage and as 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 increased our cost reduction efforts. A part of it, we already mentioned with our European structural and improvement program, and 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 our operating income margin to the end of the year.
On the net cash flow, we are at minus EUR51 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-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, 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.
Philippe Vienney
Thank you, Bernard. Good morning, to all. So, looking at the sales into more detail. So, we posted sales at EUR2 billion which is, as I said, representing an organic growth of 2.2% or EUR43 million and we have been impacted by EUR30 million of negative FX impact, which means that the reported sales are up by 0.6%.
So, I said also the growth is coming mainly from Lighting with integration of the full consolidation of this HBBL. We continue to have some good positive momentum on the radar business with electronics and on the independent aftermarket with Lifecycles. 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 sale, the consolidation of HBBL. We have the highest demand on Asia and China on some electrical 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 HBBL consolidation. And, we have also seen some SG&A reduction and lower personnel cost in the Lighting.
If we go to Electronics, so here the organic evolution of the sales is a minus 2.2%. And, despite the reduction, we are showing an operating margin going from 5.7% to 6.3% in [2019] (ph). 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 the out 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 Electronics.
If we go to Lifecycle, Lifecycle is showing an organic growth of 1.4% and operating margin going from [EUR37 million to EUR34 million] (ph), so 13.1% to 12.1%. So here on the sales side, we have a growth on the spare parts business, especially in Europe, but we have a negative impact coming from the agriculture and in the commercial business activity, 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 higher R&D and SG&A cost, mostly with the distribution cost mostly due to the full integration of the Pagid business into the Lifecycle segment.
So, looking at the sales per geography. So in Americas, we are showing sales which are down by 1.2% versus the market growth of 0.3%. In Europe, we are showing a minus 1.5% sales versus market, which is down by 2.5%. And, in Asia Pacific, 8.2% sales increase 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 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 due to the distribution cost, due to the Lifecycle segment as I was mentioning before. And, we are ending with an operating income at EUR111 million, in-line with what was posted last year at 5.6%, and leading to an EBIT of EUR99 million at 5% versus 5.3% last year.
Now, if we look at the cash flow. So, the cash flow was at minus EUR51 million in Q1 compared to EUR38 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 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 Q1 ‘23 and we were at EUR48 million of factoring versus EUR90 million last year. And, we continue to, we have had 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.
Bernard Schaferbarthold
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% and operating income margin 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, and 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, and 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, 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 demand specifically on our high technology products.
Having said that, Philippe and myself are happy to take your questions.
Question-And-Answer Session
Operator
[Operator Instructions] The first question is coming from Christoph Laskawi, Deutsche Bank.
Christoph Laskawi
Hey, good morning and thank you for taking my question. The first one will be on pricing and what you 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 small tailwinds? And, last question will 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.
Bernard Schaferbarthold
Good morning, Mr. Laskawi. 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.
Christoph Laskawi
Thank you. 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 fast, 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.
Bernard Schaferbarthold
So, the effect out of 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 EUR77 million in Q1, I would assume perhaps a run rate, which could be around [EUR60 million] (ph) 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 with what I have not commented before is that on the reimbursements, so for tooling, DND, we would also expect a higher number in the quarters to come.
Christoph Laskawi
Thank you.
Operator
[Operator Instructions] The next question is coming from Sanjay Bhagwani, Citi.
Sanjay Bhagwani
Hello. Thank you very much for taking my question. I have three questions as well. Most of them are actually followers 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 of course close to zero. And, the key drivers of improvement, I think, you suggested is better to me. And also the new SOPs in the electronics. So, if you could please, 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 just 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.
Bernard Schaferbarthold
Yes. Hello, Sanjay. So, 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. Then assume now what does it now mean exactly in our performance is very difficult to state.
Sanjay Bhagwani
Thank you. That’s very helpful. And a follow-up to that. Is it the European customer specific whether ramp-ups were delayed and they are coming in, which could provide some more color here?
Bernard Schaferbarthold
So, it’s a mix. So, the ramp-ups 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.
Sanjay Bhagwani
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 breakeven, already in H1? Given there’ll be maybe some sort of lump-sum payment in Q2?
Bernard Schaferbarthold
So, our latest estimate is that we should get positive. We should be positive in H1.
Sanjay Bhagwani
Thank you. That’s very helpful.
Operator
[Operator Instructions] There are currently no questions. [Operator Instructions] As I can see there are no further questions coming in, I will hand back for the closing to Mr. Bernard Schaferbarthold.
Bernard Schaferbarthold
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.
