HELLA GmbH & Co. KGaA (HLE) Earnings Call Transcript

Good evening, ladies and gentlemen, and welcome to the HELLA Investor Call on the results for the first 9 months of fiscal year 2026. This call will be hosted by Professor, Peter Laier, the CEO; and Philippe Vienney, CFO of HELLA. The conference is being recorded. [Operator Instructions] The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Professor, Peter Laier.

Yes. Thank you very much, and good evening, everyone. Thank you for joining us today for our 9 months call 2026. As usual, I'm presenting in this call together with our CFO, Philippe Vienney. Let's have first look to the agenda. Thank you. As usual, we at first want to talk about our achievements, then followed by the financial results presented by Philippe. And then I will talk about the outlook and the key takeaways. Next one. So let's first talk about achievements. As you can see, we have on the sales side, on the left side, achieved a constant FX sales growth year-over-year of 1%, reaching EUR 5.925 billion year-to-date after 9 months. This is splitted into our electronic sales year-over-year, up by 6.8%. We have reached now EUR 2.543 billion specifically driven by our RADAR technology and our energy management products, which contributed over proportionately to that. On the lighting side, the sales is down by 5.7% year-over-year, now to EUR 2.535 billion. This is specifically affected by the phaseout of programs and lower call-offs -- in our third business group, Lifecycle Solutions, the sales is up year-over-year by 4.8%. And -- we have achieved now EUR 763 million, specifically driven by a strong special business. This is our commercial vehicles and off-highway business. So reported sales is year-over-year, broadly flat at EUR 5.883 billion. Let me then move to OI margin in the middle. We have achieved after 9 months in OI margin at 5%. We are seeing adverse volume and mix effect -- and on the other side, we are facing on the cost inflation side continue that is influencing our margins. We have specifically increasing costs on the PCB side and the semiconductor side. and this is an intensified pressure across the whole value chain. On the Lighting business, we were affected in the third quarter by the launch of some new complex products. We are actually focusing on reimbursements for the material inflation and we are in intensive discussions here with our customers, and we have further cost measures in place to counter the impact I described. On the R&D side, we were able to save our R&D expenses that brought our ratio down by around 46 basis points now to 9%. Moving now to cash. Net cash flow was negative after 9 months on a level of minus EUR 99 million. versus prior year 9 months EUR 68 million positive. This led us to a net cash flow to sales ratio of minus 1.7% versus positive 1.2% prior year. We have continued CapEx governance and a clear CapEx management in place. On the other side, our net cash flow was impacted by increased restructuring cash out and higher level inventories after 9 months. On the other side, I think the net cash flow development follows a typical seasonality, which is always bringing a pressure on cash flow after third quarter. Yes, that's -- please move to the next slide. Let's have a look to order intake. We have continuously a strong order intake in the course of the year. And this confirms clearly our consistent execution of our Ignite strategy, which we have announced earlier this year. If you look a little bit more in detail, what we can see that after 9 months, we have out of our overall order intake 66%, so 2/3 achieved in Asia Pacific and NSA, North and South American regions. So that means 2/3 of the order intake is outside of Europe, and that shows clearly that we are executing our strategy to diversify our regional mix and have here as well a significant increase in comparison to the same time last year. If we look a little bit to the right side of the blue part of the chart, we see that nearly 1/4, so precisely 24% of our order intake we achieve these Chinese OEMs or ODMs out of the JIKA regions or Japan, India, Korea and ASEAN, so that again confirms that we are executing our strategy of specific targeting growth with Chinese and Asian OEMs. And here, the share increase as well in comparison to the same period of time last year. As we have announced, Electronics is our growth driver is as well, therefore, positioned in the growth segment in our strategy. And we confirm that 58% of all our orders, which we could take in, in the first 9 months are coming out of the Electronics business group. So that means we are here with the strong order intake, confirm our growth strategy. Let me now move a little bit to the right side to look a little bit to some highlights of order intake after 9 months in this financial year. In Electronics, we could gets a mid-3-digit million order from highly integrated energy core solution. And this from 2 international OEMs in Americas and in Europe with SOPs in '27 and '28. So this is again confirming our strategy that we have as 1 of our innovations, integrated energy core solutions. And here, we get now the confirmation with orders from the customers. Another topic in Electronics are to major series orders from leading Chinese OEMs for our latest generation of 77 gigahertz radars with the SOP already next year. This confirms our strategy to grow with our RADAR technology globally and as well penetrating further into the Chinese market, and this is now confirmed with those 2 orders. Let me now move to lighting as well. Here, we have brought 2 examples of order intake today on the 1 side. order intake of headlamp from a premium OEM from in the U.S. And the Chinese -- for the U.S. and the Chinese market is an SOP in 2028 or another example is the headlamp CBL and the realm order for several midsized car models from a volume OEM for the European and the U.S. market with SOP 28 and 29. So you see the diversification as well as working in lighting and as well, not only the diversification on the customer side as well, the diversification moving into the volume segment is working out and executing our strategy. In regard of life cycle solutions as well here 2 examples -- sorry for that. On the 1 side, you got an award from a commercial vehicle business for Electronics. We received her 2 awards from European truck OEMs and 1 additional award for the Indian market with SOPs in 26 and 28. So as well here the movement into electronics in our SOE business is developing. And on the other side, we are moving further into the Indian market with electronics for commercial vehicles, which is another success story. In addition, we got another award for lighting in commercial vehicles for crossover SUV from a U.S. OEM for the U.S. market, with an SOP in '26 already. So there is a significant step in the right direction as well. So then let's move to the next slide, please. Now bringing us to financial results. And with that, I'm handing over to Philippe Vienney to present that to us.

Yes. Thank you. So looking at the sales, we continue to deliver organic sales growth in 9 months, we are at plus 1%, excluding exchange rate versus the market, which was -- so yes, clearly, we see the strategy orientation as specifically in electronics is fruitful and positive. So electronics is maintained by the strong growth momentum, especially as we said, by Rawa, Energy Management and PotyElectronics. And if we look at Energy Management, it would be mainly coming from low-voltage DCDC and converter and intelligent battery sensors, which are contributing a lot to the increase in terms of sales for electronics. In '19, we are selectively ramping up programs across region, but partially offsetting only the phaseout of existing program and lower customer call offs. And life cycle, we continue also to enjoy some growth supported by strong special OE business, as mentioned, and aftermarket business as well. So basically, electronic and life cycle continue to drive the group positive organic sales development for the 9 months. So now looking at the next slide on the sales per region.

Sorry. But it was difficult to understand you, at least for me. Now let's try it again. Maybe you repeat the last two sentences.

Okay. Yes, I was saying that we are outperforming the market globally by 170 basis points, and electronic is the key driver for this outperformance. So in Europe, the sales growth is at 1.6%. So particularly strong with the radar and as well, especially in aftermarket. In North America, we achieved 250 basis point performance versus the market, where the market -- we see the market declining by 0.5%, and this is reflecting also strong electronic sales momentum despite some headwinds from some programs fading out in. In Asia Pacific, performance is aligned with the market. So we see a strong energy management business in Asia Pacific. -- and selective launches in China where the market was characterized by a strong negative development. China itself is market is at minus 5.5%. So -- now looking at the performance per business group. So if we take electronic first. So electronics is showing strong growth in terms of sales. 7% versus last year at EUR 2.5 billion. Again, Radar, as we said, ramp up and new launches in Europe energy management are the key contributor. Asia Pacific, we have strong energy management sales as well, which is contributing to this growth in terms of sales. So -- and this is offsetting the weak market environment in China. Operating income for Electronics is growing by 5% at EUR 205 million, and it's remaining stable versus last year at 7.6%. So here, we have the product mix and some material costs, which are putting pressure on the margin and limiting the margin benefit from our sales growth. but we are also countering this pressure with cost measures, and we are reducing our R&D expenses by lower use of external services. We are also benefiting from the structural adjustment we have started. And we also have the same effect on the administration costs, which are also going down for electronics. Looking at Lighting now. So lighting, we have external sales going down by 5.7%, so at EUR 2.55 billion of sales, which is reflecting, again, program phase out and lower customer call-offs. So this was expected, and we also have the seasonal development of the regional product volume. So -- the decrease in terms of sales was again expected for the year. So this directly impact the operating margin, which sales to minus EUR 2 million with an operating margin of minus 0.1%. So here, we also had to manage the volume decrease, but also complex launches, as I mentioned earlier as well, and some additional costs linked to the inflation and especially on plastics, which are putting some more pressure on the profitability. So we are also working on the improvement and savings -- we are also lowering external spending and head count in R&D, and we are accelerating the rollout of the LIC transformation program which is expecting to bring visible impact in OI for the last quarter. So for lighting, we continue to stick to our commitment to improve the margin and coming back to the around 3% until 2028 with a comparable level of what we were actually in 2025. Life cycle now next page, also continue to show sales increase with 4.8% increase, sales reaching EUR 763 million, Here, we have Specialty, which is remaining a growth driver, supported by recovering demand in agriculture, construction machinery and truck and bus. Aftermarket is also showing a growing path which is also contributing to the growth. And the workshop business is also stabilizing, which is also a positive momentum. So here, the higher volume is driving February including favorable product mix is driving the positive and increase on the operating margin going to 11.5% versus the 10% of last year. Now looking at the P&L or full P&L. We would like to stress a couple of points here. So earnings before interest and tax increased by 13% at EUR 236 million. and the net income also rose by close to 23% to EUR 133 million. So the key driver for this EBIT increase is basically a reduction in our restructuring costs to around EUR 35 million compared to EUR 111 million. So we have booked less cost structuring cost this year. And at the same time, we have some efficiency measures and cost savings that are continuing to support the earnings. And we also see the benefit of the cutting program on the R&D side and SG&A where we are also lowering our spend in percentage of sales. Now going to the cash flow. So as said, we are porting use of cash of EUR 99 million versus EUR 68 million last year for the 9 and 12 months. So the cash flow is following a typical seasonal, but this year, we also have some effects on the working capital and restructuring, which is cash out, which is higher than what we have spent last year. So first coming to the working capital, we have built some additional part of...

Philippe now you broke up again. Can you repeat the last 2 sets, please, again?

Yes. So on net, we have increased our inventories due to trees and also to secure our products. And we also have segued our launches with additional inventories. On the receivables side, we also have less contribution from the factoring than we had last year, which is also contributing to a deterioration of the working capital. And again, as I said, we have more cash out on testing we had last year in the 12 months. This is offset partially with better CapEx governance where we see the CapEx going down and representing a total of 4% of our sales. So all this discipline should also help us to improve the -- the Q4 cash, we are also expecting to improve the working capital again in Q4 with close monitoring on the inventory optimization. We are also expecting some cash in from the customer and sales reimbursement, so that should also benefit to the contribution to the cash. And we also have less restructuring cash out in Q4 than what we had seen in the 12 months of the year. With that, I'm finishing the financial presentation, and I hand over to Peter again.

Yes. Thank you very much, Philippe. That brings us to the outlook as Chapter 3. Next chart, please. So let's have it first a look to the market. So we are actually expecting for global vehicle production that we will see a decline of 1.7% year-over-year. So we expect this year a total light vehicle production of 91.6 million vehicles in comparison to 93.1 million in last year. After 9 months, we have now seen 67.8 million vehicles produced, which is a reduction of 70 basis points in comparison to last year. And what we are seeing right now is that in Q4, this reduction of global vehicle production will accelerate. So we are expecting the fourth quarter on 23.8 million light vehicle production which is minus 4.2% in comparison to the last year, and that is specifically driven by the Chinese market, which is experiencing a reduction of minus 8.4% in the forecast for Q4. If you look a little bit to the regions on the right side, we see Americas as well as Asia Pacific, Rest of the world being down in comparison to the year before by minus 0.8% in Americas and minus 2.6% in Asia Pacific. Rest of the World. Europe a little bit up by 0.7%, but still on a level of just 17.2 million units. So that brings us to our company outlook. So despite the market headwinds coming from both from volumes and from costs. We are confirming our outlook for the full year, but with some further specification within the ranges. So if we are looking our outlook. Again, that is for sure, based on the mentioned global vehicle production assumed on a level of 91.6 million light vehicles -- we see on the sales side, we had up to now a guidance in the market between around EUR 7.4 billion to EUR 7.9 billion. We confirm that guidance and specify that our sales will be in the upper half of this range. Coming to OI margin, we confirm our guidance between around 5.4% to 6% of sales, but now specifying that we will be at the lower end of this range. And in regard of net cash flow, we just confirm our guidance with at least 1.8% of sales. So the specification of the OI margin on the lower end of the range as the following reasons. We are seeing an increasing impact of material cost inflation. We are negotiating this actually with our customers and assuming here compensation until end of the year, but we are actually in the middle of the negotiations. We see a pretty uneven volume development with a negative customer mix. And as mentioned before, we have additional costs for complex launches in lighting, which we have to compensate. -- with our measures. So if we look to the remainder of the year, where do we focus on as key deliverables for the upcoming 2 months. We are working on recovering of the material cost inflation, as mentioned in close discussion and negotiation with our customers. We have a rigorous cash and working capital management in place to achieve our cash flow guidance, and we have to work on our lighting transformation program execution, including an improvement of the launch management. So these measures and the execution of them are our clear focus for the remaining months of the year. Overall, and I would like to confirm that our introduced Ignite strategy is in full execution mode with a clear discipline and that is helping us in the challenging market environment. So as introduced before, Ignite strategy has 3 pillars where we, as HELLA working on to deliver our strategy on the one side, best-in-class performance where we are working on ensuring and enhance our competitiveness and to deliver our financial targets where we focus on the recovery of cost inflation in close alignment with our customers -- and with our lighting transformation program, where we are working on the turnaround of our lighting business. On the business transformation side, we are executing the diversification of our customer base and intensify our business outside of Europe. I have shown to you today the acquisition successes and the distribution of them are showing clearly that we are on a good path to execute as well this topic. And we align further our portfolio with major mobility trends like automated driving, electromobility and software-defined vehicle architectures. I have shown to you on the highlights of the acquisition today. Two examples for that. So we have received further orders for our radar business, executing the automated driving trend, and we have received the power management awards in the integration units where we are innovations in the electronic mobility trend. Third pillar is invigorating culture in our Ignite strategy. Here, we are working on speed up the decision making in our organization and developing processes for our expanding non-European regions specifically to give them the decision authority and empower them in the related need to be successful with customers outside of Europe. We are here in a very good execution, and we have started actually in the company, a project, which is called blueprint, where we are adjusting our target operating model accordingly. Next one. That brings me to the fourth part of our presentation today. The key takeaways. So key takeaways after 9 months, if we look to our development out in the market, we continuously outperform the market. We have a sales growth in a declining market, that means our strategic orientation, our strategic direction is confirmed. And with the significant acquisition as well in electronics, we confirm here for the future of the growth and as well for this year, the growth with the figures after 9 months. We had a very successful order intake, which is fully consistent with the execution of our Ignite strategy. As explained, our OI margin suffered from volume and mix effects as well as from inflation cost pressure and from the launches I explained. We have further intensified our cost reduction measures, and we are in continuous and intensive negotiations with our customers in regard of pass through of the additional material cost inflation. Cash generation is following a typical seasonality and we are expecting further improvements of our performance in Q4 based on the measures based on successes of the customer inflation negotiation and based on the further grip of our late lighting transformation program. We concern our outlook despite the market headwinds we have explained today. So we have confirmed the outlook with some further specification, where we are saying the sales outlook with around EUR 7.4 billion to EUR 7.9 billion is now being expected on the upper half of the range. In regard of OI margin, where we have an outlook between -- around 5.4% to 6%, we specify now that we expect that at the lower end of the range, net cash flow to sales with 1.8% is confirmed, and we are working on the key deliverables for the coming months, which is recovery of the cost inflation with our customers. rigorous cash and working capital management to achieve our net cash targets and the execution of our lighting transformation program and the launch management, including our cost management. In regard of our strategy, we are in full execution mode of our Ignite strategy for our long-term success. With that, we see ourselves well positioned for the future to benefit from the major trends in automotive and this debt capture the growth. We are amplifying now our Ignite strategy execution in regards of best-in-class performance because of the intensified competition and we have the right measures in that regard in place. We ensure and enhance further our competitiveness through our global cost structure improvements and through the uplift of our functional excellence. And we are working on the turnaround of our lighting business with execution of Lighting transformation program, transferring our business and diversify our customer base and the acquisition success is confirming that. And we are further transforming our product portfolio in alignment with the major trends. And last but not least, we execute invigorating culture by simplifying our structures and processes and that empower our regions and speed up the decision making. Yes, that's -- we are coming to an end of the presentation and would now -- if you go to the next slide -- or we can as well stick with that? That's okay. I would now open the floor for questions.

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

The first one would be if there have been any exceptional negatives in Q3, like onetime items that you had to book and also if you would basically say that the launch costs or the cost of the complex launches in lighting are digested fully in Q3 or if they will repeat in the fourth quarter. And then the second question would be on the Q4, the implicit Q4 margin that you guide, which is around 7%. With Q3 at 4.2%, obviously, there's quite a substantial step-up needed in the final quarter. Could you help us bridge from the 4% to the 7%? Is this essentially the cost recoveries that you seek to get from the OEMs because costs I think, keep on increasing the production volatility is not improving in Q4. So there will be further sequential headwinds. If you could basically help us bridge there are around 3 percentage points of margin that you target for Q4 and how you get there, that would be appreciated. .

Yes. Thank you very much for your questions, Christoph. I propose first questions, the exceptional negative bookings in Q3, maybe Philippe, you want to talk about that, and then I'm talking about the launch cost.

Yes. So in Q3, we had some headwinds on the material cost because we start to have the impact of the material cost increase but the recovery is still to be negotiated as mentioned by Peter, and we are working on it for Q4. So all the negative is impacting Q3, positive will come in Q4. So in a way, it's a time of onetime, I would say, not onetime, but impacting negatively into Q3. Then the second topic is the launch costs, which have also impacted strongly and Peter will come back on this for Q4. But this is in a nutshell what I could mention for Q3. Yes. .

Yes. So in regard of launch cost, the majority is digested in Q3. There is a little bit in Q4, but the majority is digested. Question number two, what is driving the 2.83% improvement of margin in Q3 -- Q4 versus Q3, Yes, Christoph, you're right, material compensation on the customer side is 1 of the drivers, but there is as well further improvements assumed on the cost side in -- where we have clear measures in place and as you know, usually, Q4 is a strong quarter in comparison to Q3. So overall, it's a mix, strict cost management. inflation recovery on the customer side, where we are in intensive negotiations and some year-end performance, which is driving then us to this improvement needs to keep our guidance.