HELLA GmbH & Co KGaA

XETRA:HLE

Q1-2025 Earnings Call

[Operator]

Good morning, ladies and gentlemen, and welcome to the HELLA Investor Call on the results for the first quarter of fiscal year 2025. This call will be hosted by Bernard Schaferbarthold, the CEO; and Philippe Vienney, the CFO of HELLA. [Operator Instructions]

Let me now turn the floor over to your host, Bernard Schaferbarthold.

[Ulric Schäferbarthold, executive]

Yes. Very warm welcome. Good morning from my side. I'm sitting here together with Philippe, our CFO, and we will present to you our first quarter 2025 results. We have prepared the following agenda. I will start with the key highlights on the first quarter before Philippe will then take over with more details on the financial results on the first quarter and then I will finish with the outlook and key takeaways.

So first quarter in our view was solid in -- within our internal plan. So we finalized with a sales level of around EUR 2 billion, more or less on a similar level in comparison to prior year. A very different development in the different -- in our business groups. So lighting was down by 5.7%. No surprise for us because as I mentioned also in previous calls, this quarter was very much impacted by large discontinuation of a series projects, which impacted especially the regions in the Americas and Asia.

Positively, Electronics was quite strong again. So it's now the third consecutive quarter that we are showing a good growth momentum driven by some areas like the radar business to mention one. So a growth of 8.9%. This is an outperformance to the market of 7.5% and in line also with our internal expectations. Lifecycle Solutions is also down by 8.7%. Here, we have a very different development in the different businesses of our Lifecycle Solutions.

So aftermarket is stable in comparison to prior year. The independent aftermarket was even growing. Workshop products was down. But overall, aftermarket was stable and the negative impact comes out of our special application business, which in comparison to prior year, where the first quarter was still with a very strong growth momentum in our different customer segments and there, especially for agriculture and our construction business here because of the very negative sentiment and growth momentum in these sectors, the sales development was significantly down.

So year-on-year, special application was around minus 25%. So what we now see in this market is a stabilization. So we already have seen that in the fourth quarter that we are stabilizing at a low level, and we expect that it should improve in the following quarters in Special Applications, especially in comparison now to this very low first quarter.

In terms of our results, so the operating income is at 5.5%, very close to prior year. Electronics had a lower gross profit, but this was also because of a one-off effect we had in the first quarter with the impairment of some assets related to a program for one of our customers, which is related to electrified cars, where the volumes are much lower and have now even dropped further in the first quarter. And this was an amount of around EUR 11 million, which is also in our results.

Overall, what we continue to see is a good trend in terms of our cost reductions, and this supported overall our results we could achieve. Net cash flow is as expected on the first quarter, negative, very comparable also to last year. We see an increase in our funds from operation, a slow increase in working capital. The factoring is at a lower variation in comparison to prior year. So we expect here also on our half year results that we will turn the net cash flow to a positive number.

The order intake momentum was good in the first quarter of the year. So we show here some of our highlights only to mention single ones in lighting. I think very positively, we couldn't win important strategic projects with different Chinese OEMs, which shows the ability also to be competitive in such an important growth market for us.

In electronics, I would like to highlight two very important programs for us. The first one is a significant program for our new intelligent power distribution module. So our e-Fuse, where we won with an important European premium OEM, a significant program in a mid-3-digit million overall order volume, which was a very important strategic program also for our area of study.

Additionally, I want to highlight, again, a strong order intake we won for our radar business with an SOP of 2027. On Lifecycle, we also were quite successful in our initiatives to grow further, especially in the truck and bus segment, where we won for us important strategic projects as well.

Looking to our structural measures, we are in line, especially on our European transformation program. Overall, here, we highlight the decisions we have taken in the first quarter and where we are in execution. So we announced the closure of our development center in Berlin, HELLA Aglaia with around 175 positions working there as of today. We are quite advanced now in the finalization of the negotiation with the unions and workers' council. And this will be executed now in the upcoming 18 months in 2 different waves. So we expect to finally close this office end of 2026.

Additionally, we announced the structural adjustments on Lifecycle Solutions, where here for our Special Application business, one of the main plants we have in Austria will be significantly adapted, and we will relocate a significant part of this facility to Romania, and this will reduce in Austria around 225 positions where we will use our facilities we have in Romania, and this should lead to a significant cost reduction impact for us also going forward.

For Germany as well and here for Lippstadt, we're also running a voluntary program, which will be now finalized in the next weeks with around 200 positions we will further reduce. Overall, just to give you a sense, on a year-on-year comparison, we reduced globally already the number of headcounts by 5.8% considering a more or less flat sales development. So it shows the efforts we have already done and what already we have realized, and this should also now in the following quarters, support our overall cost reductions and the ambition we have in improving our profit situation for this year, but as well for the next year.

If we look at another aspect, the tariff mitigation. So tariffs for us have one main impact, especially the tariffs on parts we are buying in China and which are imported into the U.S. So this is something where the overall tariff of [ 145% ] and the impact is here, especially on active electronic products is something which has the highest effect. Overall, we calculate this with an amount, which is around $30 million. This is something where we are in discussions also with our customers that this has to be taken over by our customers.

Besides that, the tariffs related to imports from Mexico into the U.S. or the European Union into the U.S. are overall not very significant amounts, especially because the Incoterms are in such a kind that customers have the responsibility of importing the parts. Overall, if we look at effects related to volumes as of today, we have not seen any real impact on our volumes. So, so far, our sales development is very stable.

But we also, for sure, cannot foresee now the development, especially now in the next months and especially in the second half. We would expect somehow a negative effect on volumes, which would, for sure, then as well impact our sales development. What we assume so far is that it should remain somehow at a level that we would remain in our range of guidance in sales, which we have given.

With that, I want to hand over to Philippe for more details on the financial results.

[Philippe Vienney, executive]

Hello. Good morning to all of you. So sales, we published sales at around EUR 2 billion, which are mostly stable versus Q1 last year. So at constant rate, the sales are down by 0.8%, and we are benefiting from the EUR 12 million of FX impact positive versus last year. So sales are, as I said, basically pretty strong with electronic, especially with the radar business, but also a bit in lighting in Europe with some main lighting business. But we are suffering in China, as it was mentioned, due to lighting and end of production and end of series, which are impacting mostly lighting in Asia.

Looking at the performance per business group. So lighting sales are down by 6.4%, again, with some growth, for example, in Europe with Porsche, but a strong decrease in Asia and China, mainly with end of production with the Tesla model Y, for example. At the end, lighting is at 3.2% of operating margin versus 3% last year. So lighting is benefiting and has improved the material ratio, so benefiting to the gross profit. And they are also doing some cost savings to offset partly the volume drop, leading to an improved operating margin versus last year.

On Electronic business, here, we are looking at the growth in terms of sales at 7.9% increase versus last year, mostly coming from radar business in Europe, from tariffs in North America, but also radar and management -- battery management system in China. So here, the operating margin is at 6% versus 6.3% last year. And here, we have the effect, which was also mentioned from the write-down of assets linked to the energy management or electrification in Europe for the amount of EUR 11 million. So this was partially offset by lower R&D and SG&A as well to go to the 6% operating margin versus the 6.3%.

Lifecycle Solutions is down in terms of sales by 7.3%, mostly driven by special application and agricultural and construction business. On the other side, we are stable or even having growth in spare parts and especially in Asia. And here, the profit, operating income is at 10.8% versus 12.1% last year, where we have seen some cost savings to counter affect the volume effect, but we still have an impact of the volume, which is leading us to the 10.8% of operating margin.

Looking at the sales per region. So in Europe, we have sales which had 1.7% increase versus last year versus market which is at 6.7% down versus last year. We also have growth in Americas of 8.1% versus a market which is down by 3.6% and in Asia, we are at minus 12% versus the market, which is at 6.6%, again, mostly explained, as mentioned earlier by the lighting business and series projects, which have ended up in China.

Profit and loss account. Looking at Q1 '25 gross profit, we are at 23.3% versus 23.7% last year. So here, we have the effect of the volume for special application, which is impacting us. And also, again, the write-down of electronic, which was mentioned several times.

On the R&D, we are at 10.4% versus 10.7%. So here, we are reducing the R&D portion in our P&L. And SG&A are mostly stable or slightly improving, 7.4% versus 7.5% and even improving more on the admin side, going from 3.8% to 3.5% with a decrease of EUR 6 million on admin costs. So showing already here the reduction in terms of fixed cost and the benefit of the measures which have been taken.

So operating income at the end is at 5.5% versus 5.6%. EBIT is at 2.5% versus 5%. So here, we have the effect of the restructuring costs, which have been booked. You see EUR 52.8 million versus EUR 5.6 million in nonrecurring, which is mostly the booking of all the measures which have been already announced in Q1. And we are ending up with a net income at EUR 23.9 million, 1.2% versus 3.3% last year.

Looking at the cash. So net cash flow, we are at minus EUR 61 million versus minus EUR 51 million last year. So here, we have less contribution of the factoring variation. So we have a EUR 14 million impact versus EUR 48 million in Q1 '24. And we have a small increase on the working capital as well impacting the cash. And we have a slight increase of the restructuring cash out also in Q1 versus Q1 '24. On the CapEx, we are starting to see the reduction. So it's tangible CapEx. So we are at EUR 135 million versus EUR 150 million last year, which is in terms of sales lower also than what was spent last year. We are at EUR 6.7 billion versus EUR 7.5 billion. So here, we start to see the benefit also of the standardization and automatization and the more frugality on the spend in terms of CapEx.

[Ulric Schäferbarthold, executive]

Good. Coming to the outlook. So we confirm our outlook for the full year. So sales being between around EUR 7.6 billion and EUR 8 billion, the operating income margin being between 5.3% and 6% and a net cash flow of at least EUR 200 million. With the comments I made on the tariffs, with the tariffs, which are in place as of today, we still assume that we should be within these ranges we are confirming today.

So key takeaways. Overall, a solid start into the year according to our plan. We have initiated additional cost reduction measures, which should mitigate the risk of a reduction on sales volume, especially for the second half of this year, but also to prepare ourselves for an even less cost run rate also into 2026.

On the tariff side, so internally, we have task forces implemented in all regions, and we are working intensively with our customers, but also with -- on the full value chain, also with our suppliers to mitigate the risk as much as possible.

On the outlook, we confirm the outlook. And looking also into the second quarter, what I can say is that we had a solid month of April, which was absolutely in line with our expectations. And we assume until end of June that we should see the profit margin improving from Q1 -- in comparison to Q1 results. And as I said, we would expect net cash flow to turn positive on the full 6-month half year period.

So that's all from our side, and happy to take all your questions you should have.

[Operator]

[Operator Instructions] The first question comes from Christoph Laskawi, Deutsche Bank.

[Christoph Laskawi, analyst]

The first one would be a bit also following up to your comments that you just made on the Q2. It looks like you have been outperforming in Europe and Americas in Q1 quite strongly. Was there any sort of free production that you saw in those regions potentially driving that? Or as you said, April looks relatively stable versus Q1. Should we continue to see that outperformance coming through also in the second quarter?

And then you highlighted, obviously, the exposure to goods from China into the U.S. in terms of cost. Is there any disruption to the supply chain as well? Or do you see longer waiting times at customs or anything of that regard? If you could comment would be appreciated.

And then just the last question on the semi cost. Have they been already a tailwind in Q1? Could you quantify that? And again, what do you expect for the full year?

[Ulric Schäferbarthold, executive]

So what -- on Q2 sales, so what we see is a continuous good momentum in electronics. So there it's every time not easy to quantify exactly what would be then our outperformance because then we also have to -- we have -- would have to need visibility on all programs globally. But what we can say is that on our programs and on our sales expectation, especially on electronics, there is a good momentum. So this is continuing.

We do not expect a very significant change in lighting. So some of our important new programs are now in the ramp-up phase, but we should continue to see still a difficult sales development for lighting in comparison now to the market.

On the disruptions on the supply chain, there is no effect yet. So -- but we see the risk. So this is why we are intensively working together as well with all our -- with the selected suppliers we see as a risk, which are apparently the ones which are mostly in Asia. But as of now, no issue on that one.

On the semi costs, so there is no big change, let's say. So what we have, as I said, especially for the PCBAs on our side, the additional tariffs on the PCBAs, we are buying -- we are still buying in China. So there, we are working on -- together also with the supply chain to find ways and to move more outside China. What we have, to a larger extent, already done in the last years. But this is something which where we try now really to reduce on the cost side.

Other than that, on the cost overall, so what we have now been able to negotiate as a certain price decrease now on the semis in comparison now to prior year, which should support also our electronics business now going forward. But we are still on a level which on some of our parts is still higher in comparison to before the pandemic.

[Operator]

The next question comes from Sanjay Bhagwani, Citi.

[Sanjay Bhagwani, analyst]

Three questions from my side. The first one is on -- I think you already alluded that sequentially, the Q2 margins are likely to be better. Can you maybe walk us through what the key drivers are? Is it just the material cost or cost savings? Or there is also an element of incremental organic growth outperformance? That's my first question. And I'll just follow up with the next one after this one, if that is okay.

[Ulric Schäferbarthold, executive]

So it's -- there are different elements. So we do not expect that there is more outperformance or the sales momentum is even higher. So it's more on the cost side. So we see that month by month, we are able really to reduce our cost and the impact of our cost-saving measures is increasing as well on the material side, we see with the negotiations, which we were able to finalize on the material side. So normally, if you have new prices and the way now it's more now on the accounting side. Still we have the average price. So that step by step, if you have a decrease with the average price evolution, you see over the coming months that there is a positive impact then on the material cost ratio. And this is month-by-month improving.

So there is also effects coming out of an improved material cost ratio. And the other -- third element is that we also expect from commercial settlements where we expect a more positive effect in the second quarter in comparison to the first quarter.

[Sanjay Bhagwani, analyst]

And then maybe I think you already mentioned, so the H2 margin is better than H1. Is this an element of, again, the costs? Is that fair to say?

[Ulric Schäferbarthold, executive]

I have not really said something to H2. So I said Q2 will be better than Q1. So H2, I think what I said is that still there is the uncertainty on the volume. So what I said is that I'm confident even with all tariff measures they are and also with the risk there is on volumes going down perhaps especially for the U.S. impacted by the tariffs so that we should remain within our sales range. And that the cost reductions and what we are now doing to mitigate this effect, this should certainly also lead to the fact that we are also confident to remain in our operating income margin also we have guided. So -- but I have not now -- and that is very difficult to predict what would be then exactly our OI margin on H2.

[Sanjay Bhagwani, analyst]

That is very helpful. And the second one is on the material costs. I think could you please highlight what materials these are? I think electronics, you already mentioned, but are there any other materials as well? So the reason for asking this question is also because what's kind of bigger part of the FORVIA where there is a gross like material cost synergies, if there is any more color on that?

[Ulric Schäferbarthold, executive]

So in general, I can say that for all material groups, we see improvements. So we have plastic parts, we have metal parts. We also have services. So this is not material. But overall, we reached quite a good reduction. So what we reached gross is around 5% overall commodities. Then for sure, there is a part where we also have commitments to our customers. So on price reductions, as you know, the LTAs, which are contractually committed for the different programs, which net -- which gross are also in an amount of around 3%. But if you take the net, so there is an improvement of around 2%, we reached in comparison to last year.

[Sanjay Bhagwani, analyst]

And my final one is on the tariff impact. I think the key element you mentioned is the electronics that travel from China to the U.S. And about others, is it largely because from Mexico to the U.S., the parts that we supply are USMCA and maybe from the Europe to U.S., there is not much exposure? Or there is also an element of like the recently announced exemptions, which can mitigate some of these risks, which would have been before the mitigation like these exemption announcements?

[Ulric Schäferbarthold, executive]

So for us, the main point is that our contractual obligation is basically that we deliver Ex Works. So that the customer is in charge, if there is a tariff to pay, this is a customer -- this is on the customer side. This is one thing. But the other thing as well is that to a very large extent, so I can say around 85% of our products are USMCA compliant. So this is something where also we are intensively working on. So also on working on the part, which is not USMCA compliant, but also to make it compliant that our customer has also not to take any tariff risk overall. But these are the main reasons.

[Operator]

At the moment, there seem to be no further questions. [Operator Instructions] And we have one more question coming from Akshat Kacker, JPMorgan.

[Akshat Kacker, analyst]

Mr. Schaferbarthold, Akshat from JPMorgan. I have a couple of questions, please. The first one on China. Could you remind us on the performance of the business across business divisions in Q1 specifically? And how do you expect that performance to evolve throughout the rest of the year, please? So just mainly talking about lighting and electronics in China, please? That's the first question.

And the second question is on the North American business. I completely understand that we have an exemption for USMCA compliant products in the near term, and we do have a rolling relief, which lasts for the next 2 years. But it looks like the administration basically wants more local U.S. capacity. And we have heard from a lot of U.S. OEMs during this earnings call that eventually, they will be talking to suppliers to increase their local U.S. supply. Could you talk about what are your -- what have your discussions been with your customers in terms of the medium-term structural changes that you might have to make to the business in North America, please?

[Ulric Schäferbarthold, executive]

Thank you, Akshat, for your questions. So on China, we had a very different development. So on electronics, we had a decent growth, which was above 10% in the first quarter, which was very promising, and we expect to continue to grow in the electronics. For China, we had a significant reduction, which was largely above 20%. This was because of 2 or 3 reasons. One was that we mentioned one change in product. So there was a discontinuation of a very large program for us in China. This was one reason in comparison to prior year.

The second reason was that some of the programs were developing slower than expected. And the third reasons were some delays in ramp-ups, especially for Chinese OEM programs. So these were the major reasons. So for lighting, we expect that this very negative momentum. So this should improve now over the quarters with the new ramp-ups, which are now ongoing, but we do not expect overall for lighting to grow this year in comparison to electronics where we will grow.

On your second question, so we are as well in discussions with our customers. There is very, let's say, different customer interest, I would put it like that, also depending on the different programs. Some of our customers are interested in at least having the option, how would we -- which option we could offer if they would like us to produce in the U.S. And there are others who still are not really interested that we move towards the U.S. So it depends also where their production location is, and it depends also on the customer.

So for us, for electronics, as you know, we have production facility in electronics in the U.S. So there, we are flexible to offer also out of the U.S. if this is something which the customers would like. So we are discussing now, as I said, both options. For lighting, we are doing that as well. But as you know, we do not have any lighting facility today in the U.S. What we are envisaging and these are options we have proposed is that within the overall FORVIA production network, there are options for us to move into the U.S. if that would be needed, and this is something for lighting, we are discussing if that would be something from interest for our customers.

But I can confirm that this is something all OEMs now in the programs we are negotiating are discussing with us. And we are looking, as I said, for all different options, but mostly no decisions are taken yet.

[Operator]

And as there are no further questions from the audience, I hand back for closing remarks.

[Ulric Schäferbarthold, executive]

So I want to thank you for joining this call and for the interest you are showing to HELLA again. And thank you for your questions. I wish you a pleasant remaining day and hear you, see you hopefully soon. Bye-bye.

[Operator]

Your conference call has come to an end. Thank you for attending.