HELLA GmbH & Co KGaA Investor Update Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Akshat Kacker - JP Morgan Chase & Co, Research Division - Analyst : Hello, can you hear me?

Question: Akshat Kacker - JP Morgan Chase & Co, Research Division - Analyst : Akshat from JPMorgan. Three questions from my side, please. The first one on impairment. It's been a sizable chunk of operating assets. I'm wondering if you can share some details on -- if this is related to some specific division or product segment within automotive. The second question is on recent activity levels and capacity utilization in Europe in May. Can you talk about the ramp-up of OEMs in Europe in May, please? And how is June looking like? Also the trends in China in looking your fourth quarter, and does June look any different? The third question is on the research without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. MAY 26, 2020 / 7:00AM, HLE.DE - HELLA GmbH & Co KGaA Investor Update Call and development expenses. Can you talk about the levels that you have cut this to in the fourth quarter? And when you budget for 2021, given that you tell us that it was -- an order intake was at all-time high in FY '20, what level should we expect for FY '21, please? Rolf Breidenbach - HELLA GmbH & Co. KGaA - Chairman of Management Board, President & CEO of Hella GeschSftsfnhrungsgesellschaft mbH Yes. First, I'll start with the second question, and then, my colleague, Mr. Schaferbarthold, will answer the first and the third one. With regards to the ramp-up activities in Europe, there is a -- there are -- there is not a clear pattern. So some of our customers try to ramp up, first of all, the first shift. And then, one or the other, also the second shift, but then stop them again. Totally, their operations are -- again, went back to the first shift. So there is, from our perspective, not much on production in May, or there has not been much production in May in Europe. Our customers, from our perspectives, of course, are trying out their lines and, of course, produced vehicles. But they are, from my perspective, more in an observation mode to see whether a real market demand will occur or not. And I think the current discussions with regard to incentive programs, especially in Germany but also in other European country, or with regard to a general European program is, yes, currently not supported for generating a real demand in the market because many of the end customers are waiting for such incentives. So yes, we see no significant production in May also in Europe. With regards to really reacting to a real demand on the market, it's more a try out and being prepared, a slow start. And this, from our perspective, is true for, more or less, all the European car manufacturers. Of course, in general, we see -- but this is true for all the market, that a premium is a little bit stronger than in the other segments. Yes. And the perspective on June, we think June will be a little bit stronger in Europe than in May. And the same, of course, was true for May compared to April but not a level which, let's say, is even close, yes, to a level where we can talk about acceptable utilization in our customer plants as well as within the HELLA plants. So I think after an incentive program, when everything is set, also when the end consumer, step by step, looks a little bit more positive to its personal future, then perhaps, I don't know, in July orders, a significant market demand could come up, but not earlier. So we expect also in June and perhaps also in July difficult months in Europe. With regard to China, we see that China is continuing -- the Chinese market is continuing following the V Shape, yes? China went down in a very fast way, but now it's ramping up step by step. But significantly, from our perspectives, there's also a real demand in the market. And here, again, the pattern that premium is stronger than the other car segments is, from our -- yes, is also true from our perspective and all our experience we made. Yes. Just those are some remarks with regards to the market development. And of course, also in June, China will continue its recovering path from our perspective. Yes, then allow me to hand over to Mr. Schaferbarthold to answer your first and your third question. Ulric Bernard Schaferbarthold - HELLA GmbH & Co. KGaA - MD of Finance & Controlling and Member of Management Board - Hella GeschSftsfnhrungsgesellschaft mbH Coming to your question regarding the impairments, in general, all products groups are impacted. What I can say is that lighting is somehow more impacted because of the natural of the business. The production lines and significant parts of, for example, the toolings are especially model-based, and the possibility of reuse is somehow more limited in comparison to the electronics. In addition, in electronics, we have, partially, the possibility to use different lines also on a broader variety on customers, and this gives us somehow more flexibilities. So lighting is -- has a higher risk on volatility on volumes, and that is why the impact there on the assets is more towards the lighting business. But overall, as I said, all impairments are impacted. On top, we're also looking at our joint ventures. So especially, if it comes to joint ventures we have in Germany, but also, we have looked at the joint ventures we have in Korea. There, we also see risks. In Germany, it's purely, I would say, the same reasoning. So looking at market volumes and the expectations, especially on HBPO but also on BHTC, which is the -- which are the most important joint ventures we assume, basically a very similar market impact on both joint ventures so that we, here also, look at partially impairments on the equity value we have. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. MAY 26, 2020 / 7:00AM, HLE.DE - HELLA GmbH & Co KGaA Investor Update Call The third detail is related to a goodwill impairment we are looking at. So as of the -- we have no significant numbers of goodwills in our balance sheet. The highest is related to our workshop product business, where we are looking at the goodwill of EUR 38 million. Within our test and the expectation on how the transformation of workshop products will continue, we will -- what we see basically also mid and long term, the business -- the risk also related to this specific goodwill, which from the acquisition many years ago whereas goodwill was related to basically another asset reason, we see the need here also to impair that number. So that perhaps adds additional details to our impairments. If it comes to R&D, as Mr. Breidenbach was saying, we have, as of today, stopped all projects, which are not related to book business. So yes, on one hand side, and this is very positive, we have one significant project in the recent weeks and months. So that based on that, there is certainly R&D activities which are related to these businesses. But on the other hand, we also have focused really on these and reduced significantly also on different other R&D activities we were planning and doing. So this led also to a situation that's already in -- now in the last month, we were able to reduce significantly our R&D costs, and we're also below prior year levels in these months of April and May. But overall, still, the number on the full year will be higher in comparison to last year, as you have already seen in the -- within our Q3 numbers. For next year, we will see from that basis that we plan with a small increase as of today but, as said, focusing purely on book business.

Question: Akshat Kacker - JP Morgan Chase & Co, Research Division - Analyst : Akshat from JPMorgan. One follow-up, please. Can I just ask a housekeeping question on the total CapEx number for fiscal year '20? And if you haven't split between tangible and intangible. And just some guideline on how should we think about FY '21 in absolute terms on total CapEx, please. Ulric Bernard Schaferbarthold - HELLA GmbH & Co. KGaA - MD of Finance & Controlling and Member of Management Board - Hella GeschSftsfnhrungsgesellschaft mbH So we will end up somewhere below EUR 600 million this year. The intangibles are somewhere -- I do not have the clear exact number, but it's around a 20% or less of that overall number, overall. The expectation on next year is to be around EUR 600 million.