Short Q1 2022 HELLA GmbH & Co KGaA Earnings Call Transcript

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

Question: Sanjay Bhagwani - Citigroup Inc., Research Division - Analyst : First of all, gentlemen, congratulations for the strong order momentum, particularly on the DC/DC converter side, on the high voltage. It's really interesting to see those plants are now coming into orders. With that, I've got -- most of my questions are just around the material cost as well. So could you please maybe provide some color on, let's say, what's basically been the gross material cost headwind? I guess you mentioned 3 main components of the gross margin headwinds that is material costs, energy costs and logistics. So of this, for the full year, what is the gross impact you're expecting from material cost? And what is the kind of net you are expecting? And more importantly, when we think of the next year, because the picture seems to be quite mixed at least for your bucket of material costs given that, let's say, the prices of electronics probably could be -- are probably already normalizing, so there could be some tailwinds. But then indirectly, your suppliers are also going to see energy cost headwinds, which will reflect, again, in the price of the, for example, glass. So how should we think of these offsetting factors for the next year? That is my first question.

Question: Sanjay Bhagwani - Citigroup Inc., Research Division - Analyst : So 100 to 150 basis points impact this year in '23 versus '21. Is that right? That's the kind of... REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 29, 2022 / 7:00AM, HLE.DE - Short Q1 2022 HELLA GmbH & Co KGaA Earnings Call

Question: Sanjay Bhagwani - Citigroup Inc., Research Division - Analyst : So right now, the agreement, let's say, you are entering into with the OEMs, these -- how does it work? Let's say, if there is a further cost inflation from your Tier 2 suppliers, is the agreement already allowed you to pass that on? Or that will again require a renegotiation?

Question: Sanjay Bhagwani - Citigroup Inc., Research Division - Analyst : And just one last question on this one. So let's say, on the positive side, you also see the electronics -- prices of the electronics starting to normalize, also the freight seems to be also, rates -- I mean, at least the part rate for the last 3 to 4 months have been going down drastically. So these tailwinds, these are more going to be reflecting maybe after this May year-end. Is that fair to say? Ulric Bernard Schaferbarthold - HELLA GmbH & Co. KGaA - MD of Finance & Controlling and Member of Management Board - Hella GeschSftsfnhrungsgesellschaft mbH There's a kind of mixed picture if you look at electronic parts. Because on some parts, we see no price drop as of now. So on some microchips, especially, where we look at, let's say, specific generations, still, the demand is very high and price are not dropping so much. So it's -- you have partially prices which go down, but some prices also continue to stay at a very high level. So it depends really on the part. So in general, we expect, let's say, the peak of the price increases as of now to, let's say, to the end of this year and also going into next year, partially. In the logistics, you are right, we see some price drops. And also besides of electronics, we also see some price reductions. So fair to say that our base assumption now is still overall slight continuing inflation if we take everything into the beginning of '23. And from there, we assume that it should not further go up.

Question: Akshat Kacker - JPMorgan Chase & Co, Research Division - Analyst : Akshat from JPMorgan. Just 2 left from my side. The first one on end markets and automotive production into the last 3 months of the year. Can you just talk about your expectations for Q4 versus Q3? And what are you seeing in OEM production schedules, specifically for Europe? I'm obviously REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 29, 2022 / 7:00AM, HLE.DE - Short Q1 2022 HELLA GmbH & Co KGaA Earnings Call seeing IHS forecasting 17% higher production in Q4, Q3, which is obviously because of seasonality. But then they are also forecasting a higher production versus Q2. So if you could just give some comments in terms of what you're seeing in Europe going into Q4, please? That's the first question. And the second one is on cash flow. Firstly, can I understand the net CapEx increase of more than 30% year-on-year. If you could just tell us what elements drive that CapEx number in the first quarter? And if you could also discuss your adjusted free cash flow forecast for the full year, what are you projecting for the full year? And if that includes any contributions from the higher factoring levels?

Question: Akshat Kacker - JPMorgan Chase & Co, Research Division - Analyst : Understood. Any comments on free cash flow for the full fiscal year 2023? Ulric Bernard Schaferbarthold - HELLA GmbH & Co. KGaA - MD of Finance & Controlling and Member of Management Board - Hella GeschSftsfnhrungsgesellschaft mbH Yes, this is what Michel mentioned. So in the -- so factoring is not in the adjusted free cash flow. As I said, it's in the reported free cash flow, but adjusted factoring is not considered. And on the free cash -- on the adjusted free cash flow, we think, on one hand side, higher profitability, but also, let's say, a lower run rate in terms of CapEx and the reduction in working capital. This should lead, let's say, to break even our free cash flow and recover our adjusted free cash flow. The biggest risk comes with the inventory level because also, if we look at -- you asked also for the production -- for our production view. If we look at customer demand, it's at a very, very high level in our systems. So it's increasing or it's much higher than it was in Q1. The point is the reliability of these data. So in the last months, the deviation was 35% to, let's say, what really was then picked up by the customers. And so basically, what we see as the highest reliability actually is in China and also then second in NSA and the highest volatility comes from Europe. So this is why prediction to Europe is most difficult. But if I compare to last months, Europe should increase -- should increase volumes. So as Michel said, we would not say that IHS would be wrong now. But with this risk, I mentioned. And coming back to the inventory topic with these very high volumes, if the deviation remains so high, it's very difficult to manage the stocks. So we are working intensively on it. And to come back to breakeven cash flow, we need to reduce inventories. This is the risk we have. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 29, 2022 / 7:00AM, HLE.DE - Short Q1 2022 HELLA GmbH & Co KGaA Earnings Call