Good morning, ladies and gentlemen. Welcome to the HELLA Investor Update regarding the first half of the fiscal year 2022. At this time, all participants have been placed on a listen-only mode. The floor will be open for your questions following the presentation. Today's call will be hosted by Michel Favre, the CEO of HELLA, and by Bernard Schäferbarthold, the CFO of HELLA. Now, I hand over to Michel Favre.
Thank you very much. Good morning, ladies and gentlemen. It's not too late to wish you a very happy new year, 2023, and a lot of success for this new year. As you know, we disclose today as the first half of results for HELLA, as I will say, ending end of November. As you know, we have changed our fiscal year, we come back to you next month with, I will say, the full fiscal, we say the size, which is seven months. Please don't forget to attend our meeting, I will say next month. Thank you for attending us again. I will start with the slide four. Now, what is, I will say, obvious, we are comparing this year a year of recovery on the volumes. A partial recovery.
You know that we are still low volumes. We are still some disturbance from semiconductors. Of course, we are still some global disturbance linked with energy crisis and Ukraine, I will say, war. Whatever, we have much better volumes respect to a period last year, which was strongly impacted by the semiconductor crisis. In this context, we posted a 25.7% growth of our group sales, which is, I will say, very important for us, and we continue to drive. It is a very strong growth in Asia, mainly China, but as well, we would like to mention North America. We have a lot of new products, ramp-ups, and we are more and more global.
When you take, I will say, the balance of sales, more and more overseas, which we say overseas, that it means outside Europe, will go to 50% of our sales. We have, of course, a strong demand of our two flagship activities, electronics on one side, and of course, lighting on the other side. Lifecycle is more, how we say, due now to the aftermarket sales, more stable. On the profitability side, Bernard will comment deeply. We have, I would say, achieved EUR 202 million, up 29.5%. We are recovering some margin. I know that we would like to do even more. Of course, we have some big difficulties with the inflation. Inflation is a measure, I will say parameter to manage, I will say today.
We try to mitigate the inflation. We have, of course, some tough discussion with customers. Pass through as much as possible of this inflation is very important to try to mitigate the impacts. I think we were not bad, I will say this period. Of course we continue to work on our work cost management. We'll go back on that. We have as a good asset, of course, a fantastic reservoir of synergies. Cash flow, probably a good achievement this, I will say, this first half. We now are reaching, I will say, the goal to reduce or to, I will say, have no growth of inventories in a period where there is a strong inflation. It is a clear improvement, and we'll continue to work on that, to work on the working capital.
The fact that we are generating cash flow, and you know that we have some big commitments on this, is a key, I will say, priority for HELLA. Page five. I wanted to highlight, it is of course some very important, I will say, new order intake. I will not give you the figure today. We'll probably with Bernard give you the figure next month. What I can tell you is that with this technology, with, I will say, the fantastic involvement of our people, we have a very good figure on this side. You have some example here. We were inside the umbrella FORVIA, of course present in the CES. I will say with a discriminant booth. I was amazed to see how FORVIA is present on different functions.
Our electronics, we are, I will say, energizing a lot of things. As you know, energy management is a key motto for HELLA. I think, sorry to be a little arrogant that HELLA and inside FORVIA was very present, very successful, and we have shown some discriminant technologies. It was, anyway, the feedback of our stakeholders. We are very proud as FORVIA to have made, I will say, this very strong presentation and very strong presence. In the period, you have noticed, of course, that we have closed now the transaction of HBPO, it was announced late, I think July, if I remember. Everything is done.
We have received the cash and we have, I will say, propose a special dividend, which will be paid probably after the shareholder meeting, probably in May, but to be fine-tuned. Last but not least, because this is the key, we have is the growth story. We have a fantastic, I would say, momentum on electronics. To do that, we need more and more resources. You know that it is, sorry to use this word, a war.
We have opened two new technical centers, mainly focus on electronics, in order to be able to continue to drive the growth. Page six is already, I will say, a pre conclusion, which we will continue to do, we are in between for the, for the seven months, it is to improve the operational performance, to mitigate the inflation, to be proactive on all what is the synergies and cost reduction. We will continue to improve our balance sheet and Bernard will be quite talkative on that, to reduce the working capital. Of course, we'll continue to optimize our portfolio. I think, you know HELLA, you know that it is a kind of our daily efforts, for a long time. I pass the floor to, Bernard.
Thank you, Michel. Good morning, ladies and gentlemen, also from my side and also from my side, I wish you a very good and successful year 2023. I would continue on page eight. Looking at our sales development, reported sales in the last six months is at EUR 3.8 billion. There are no portfolio changes in 2022. Around one third of the organic growth is related to price increases and the pass through of inflation to our customers. The FX effect is as well positive with around EUR 150 million, mainly with the US dollar and China currency relation to the euro in comparison to prior year. The FX adjusted sales is with that at EUR 3.7 billion.
Positively, we are growing in all regions, specifically in NSA by 33% and Asia by 46% in the first six months of our period. We are now very close to have around 50% of our business in Europe and 50% in NSA and Asia. With that, we are getting more and more better balance, which is good from our perspective. The growth in the first six months on a comparable FX is at 20.8%. In our second quarter, it was even higher at 25.1%. Going to page nine, looking at the segments, starting with electronics. Electronics is growing organically by 25.9% and reaches an external sales volume of EUR 1.5 billion of sales.
Highest growth rates regionally are also in NSA and Asia, specifically in China, where we are growing by 50%, considering also the FX effect. We are growing within all product centers. Mentioning autonomous driving, body electronics, sensors, actuators, and also energy management in a very similar manner, around 30%. With that, you can see we are very much balanced within our product portfolio overall in electronics. This makes me also very confident, looking also to the upcoming periods that we can maintain a sustainable growth speed also in the future. The EBIT in electronics improved to EUR 113 million compared to EUR 65 million in the previous year. This is an EBIT margin of 6.8% compared to 5.1% on a year-on-year comparison.
The gross margin in electronics was at a similar level compared to last year at 25.5%. The inflation compensation improved and also increased to a level of around 80%. Positively, the additional volumes, and with that also the increase in efficiency and productivity supported the solid gross margin development and also R&D and SG&A. Even they increased in absolute terms, but under proportionally, they decreased in relative terms and supported the EBIT improvements. Going forward, I expect also inflation management to be stronger. In addition, we also had in electronics some warranty cases we had to take, which had a negative impact on our result. All in all, I believe we can continue to improve our electronics margin going forward in the upcoming periods.
Coming to lighting. Lighting is growing organically at 21.6% and reaches external sales of EUR 1.8 billion. The growth in lighting is specifically related to NSA, with a growth of above 30% and China with a growth of above 50%. The growth is specifically related to several ramp-ups on headlamps, but also rear combination lamps, mainly in China but also in Mexico. The EBIT improved to EUR 37 million. The EBIT margin is now at 2%, which is a slight improvement compared to previous year. The gross margin in lighting decreased by around one percentage point due to the inflation and compensation, which in the first six months is around 70%, with that slightly lower compared also to electronics.
Here also we expect to improve this compensation rate in the near future that it will at least be on the same level as electronics. R&D and SG&A ratio improved significantly compared to prior year. Overall, electronics and lighting were both significantly impacted by the bottleneck and the high volatility in customer demand, as we explained also in recent calls. Overall, as said, the compensation rate should continue to improve in both segments going forward, which I assume will improve the profitability in both segments in 2023. Going to Lifecycle Solutions on page 10. Lifecycle Solutions is growing organically by 5.7%. Positively, our independent aftermarket and SOE grew by 3%, respectively by 12%.
Independent Aftermarket benefited from a solid demand on spare parts in especially some countries like Turkey, the U.S., and also Mexico. The business with workshop products had a slight decline of 2% due to a high comparable number in the last year with the introduction of the new diagnosis tool in the last year. SOE benefited strongly also from a continuous solid demand, especially on our customer segment agriculture, also buses and trucks especially. EBIT is at EUR 53 million, the EBIT margin at 10.6%.
The reduction in EBIT and EBIT margin is related to the especially to the investments in our sales network in aftermarket, but also in R&D investments, especially in diagnosis, but also into our SOE product portfolio, especially to electronics applications. In addition, we had a and a negative product mix and also some inflationary effects which were unfavorable in Lifecycle Solutions. The impact from Russia was only in the independent aftermarket, but had only a slight negative effect. Looking at page 11 to the outperformance, we outperformed the market in all three regions.
The strongest outperformance is related to NSA and Asia, globally around 5 percentage points of our outperformance is due to FX, mainly in the regions NSA, but also in China. Around EUR 200 million of our growth as said, are related to price increases and inflation pass-throughs this we have to consider. Europe is outperforming at a level of around 3%, there are some reasons to that. On one hand side, as I said, sales last time, sales on tools and R&D was at a higher level in the previous year. The comparable is here higher in 2021.
The bottleneck situation and the reduction on buffer stocks on the OEM side in the last six months had a negative effect on Europe as well. The last topic are that we have seen some volume effects on some of our nominated car lines. Going forward, we expect Europe in the future again, to be stronger also in comparison to the volume growth. If we go to our P&L on page 12, our adjusted EBIT is at EUR 202 million. The adjusted EBIT margin is at 5.3%. On Q2 only, the adjusted EBIT margin is at 5.5%. The improvement in EBIT and EBIT margin comes from higher volumes and lower R&D and SG&A ratio. Negatively, the inflationary effects impacted our results.
On one hand side, the comparison or the compensation on inflation end of November was slightly below 80%. Also, we have to consider that the effect from the one-to-one compensation of inflation, but also, the path through to our customer have a negative effect overall on our gross margin and respectively also then on our EBIT margin ratio. In addition, we had in lighting, and as I said, also in electronics, some warranty provisions overall of around EUR 20 million, which negatively impacted our results, which I would not assume to come again in the future. Also, we hadn't these kind of events and effects also in the last periods.
On the short fiscal year ending in December, we expect to be around an adjusted EBIT margin of 5%. The month of December had especially in Europe lower sales with the Christmas and New Year's period. Also related to China, we were slightly impacted in December on sales due to a high number of COVID cases on our side, but also on the customer side. On the adjustments on the full seven months period on our fiscal year, we expect the book gain out of the disposal of HBPO of around EUR 250 million. On the negative side, in addition, we will have most probably to accrue provisions on impending losses around two digit mid EUR million amount net, so around EUR 50 million.
This is related mainly to lighting projects, with in which volume reductions, but also the inflations on these programs have a negative impact. Overall, this will lead then to adjustments on the seven months periods, which will then be at a level of EUR 160 million positive. Going to page 13, on the cash flow, we had a strong second quarter. We are now in the six months at EUR -9. We improved strongly in our working capital. On the other side, we also invested more in the six months period, especially with the high level of acquired projects, and the preparations we are now doing on the upcoming launches.
Here on the outlook on adjusted cash flow to the end of the year, I can say that we had a very strong month of December on our operational free cash flow. With that, I can confirm that we will be positive, and strongly positive, also then in the seven months period, on our fiscal year 2022. Having said that, I hand back to Michel with the outlook and happy to take your questions.
Thank you, Bernard. Slide 15 is still complicated to I will say comment on the outlooks for volumes. We see a partial recovery, 80, 84, 85 million cars is a big improvement respect to the year before, but it is still below the historical level which was more 89-90 million vehicles. Normally for the next years, including 2023, we still continue to see recovery because of these low years since 2020. Second, because inventories are low. Not to forget, waiting time to get a car or to get some cars is still very high. On the opposite, there are semiconductors, but we see things smoothing. The only limit I will say is probably the pricing.
To comment the very short term because the guidance is made until end of May. We have two months, January, February, where we know, you know, that China will be low due to the COVID. This what they called first wave of COVID, which was quite harsh, apparently improving. Improving quite quickly, but we will see. We have this, I will say downside. It is why in our figures we want to remain cautious due to these two months of China and the visibility, which is still, I will say, low for China. Whatever the fact that we think that there will be like last year, I will say a strong recovery afterwards.
Saying that, you see slide 15 that we maintain as a range 80 million-84 million cars. 80 million is probably very conservative, huh? If you go to page 16, that means more than EUR 7 billion of sales, and probably here will be in the upper range, mainly because our sales are boosted by the Forex on one side, and mainly as well by the pass-through, and we made our homework. I want to insist, we have to mitigate as much as possible the impact of inflation. On EBIT margin, 5.5%-7%. Here we take the position which will be in the low range. We have seen the 5.3% anyway, which is slightly below this range.
The second thing, of course, China being weak has an impact, it has a mixed impact, which is why we want, and we have always been conservative, on our guidance. Page 18, if I make a quick wrap up, I think we have a strong momentum of sales. We are recovering now the profitability. We are making our homework to mitigate the inflation through pass-through and through accelerating the cost management and the synergies. We continue to globalize our business, HELLA is more and more global. China and North America are becoming strong contributors. We continue with Bernard to improve the operational cash performance. Cash generation will improve, is a key priority, was and it is a key priority for HELLA.
With our technology, I will say, leveraging the CES, leveraging what we see with customers, we can continue to be very optimistic to our capability to gain market share and to have an active order intake. Saying that, now, I would like with Bernard Schäferbarthold to answer to your questions.
Ladies and gentlemen, if you would like to ask a question, please press nine and star on your telephone keypad. In case you wish to withdraw your question, please press nine and star again. Please ask a maximum of three questions in the first place. Thank you. First up is Christoph Laskawi from Deutsche Bank. Over to you.
Hey, good morning, and happy new year to you as well. Three questions if I may. The first one will be on the guidance and you pointing to, I'd say, softer start into calendar 23. I totally hear you on China, a lot of uncertainty, but could you comment on other cost items such as semis, energy wages, et cetera, et cetera? Is there anything in that which moved up higher than you thought and is an additional headwind, or is it really just caution on the regional mix there? The second question on factoring. You did quite a lot in H1. Is there more to come, or is the level now basically expected to be flat?
Just on media reports and headlines that people continue to leave HELLA, is this, in your view, creating, a bit of, well, uncertainty or execution risk in certain programs which you're currently ramping up, or more or less, digestible and manageable for the overall group? Thank you.
Okay. I propose that Bernard will take the second question, and will take the first one and the last one. I don't know if you have a soft guidance, of course, but we have a potentially of conservative guidance. Semiconductors, inflationary, it is still inflationary. No discussion on that. Potentially less than we were budgeting, if I can give you a flash, is more than that, but it is not completely secured, because of course it is an ongoing items. Probably, and it is the same for the raw material, probably the inflation is slowing down. Even we will see some small, I would say, recovery. It is what I can tell you today, to be confirmed in the next week.
On factoring, we had now a net effect of around EUR 110 million in the 6 months. The program now we only have in Europe is up to a level of maximum EUR 200 million. We are working on a program on Mexico, which would be an additional EUR 100 million. This would be signed, the negotiation would be signed most probably end of January, so that the overall program would be EUR 300 million, we can work with. I would assume that most probably we will run with the factoring volume in this year, which could be EUR 200 million-EUR 250 million, so that there will be an increase of around EUR 100 million. In the adjusted free cash flow I have shown, there was no factoring effect.
Just to be clear on that, this was not considered in this number.
Christoph, you were mentioning as the people, some people leaving HELLA. Probably you are referring to two members of the management board. Unfortunately, they have some change of control clause due to their contracts and mainly given by the previous shareholders and not by Faurecia, it is their personal decision. I cannot comment on this. What I can tell you is that. Firstly, on the figures, we are at our, I will say, objective about what you call the turnover of people. We are in a world where there is a strong competition to attract engineers and mainly electronics engineers. For the moment, and that's true, we are at our goal and we thanks to the HELLA image, we continue to be very attractive.
Inside HELLA, of course, we have succession plan. We are able with the current, I would say, move to fill positions with our HELLA people, which is very good.
Thank you. Just one follow-up, if I may. I know you give guidance next month. I'll still try just on the expectation of recoveries from the cost that you incur in early 2023. That is very likely to come in only in the second half of 2023 calendar, right? Could it be quicker this time around?
If you speak about raw material, et cetera, due to some aging, due to, I will say, the fact that the picture is progressively improving. Yes, better, it is what we think with Bernard. If we have a very good upside, it will be second half. The first half, probably, we have to remain conservative.
Understood. Thanks a lot.
Thank you.
Next up is Akshat Kacker from JPM. Over to you.
Morning, Michel. Morning, Schäferbarthold . Happy New Year. Akshat from JP Morgan. Three questions from my side as well, please. The first one on raw materials and input costs. Higher semiconductor costs have burdened your results over the last few quarters. Can you just talk about how your discussions with suppliers here are handling, and if you're still buying microcontrollers or chips in the market? What is the overall margin headwind that you're seeing here, and how do you expect this to evolve specifically on semiconductor space? The second one on R&D expenditure. We have previously talked about overall higher spend supporting the strong order intake that you have. You have also talked about an increased effort for R&D standardization, as well as finding more synergies between the organizations. Initially, you guided for a 7% higher spend this year versus last year.
Is that now going to be higher, or do you expect that to remain in that range for FY 2023, please? The last one on lighting. One of your French peers, Plastic Omnium, have just bought Varroc and created a bigger competitor for you in lighting and electronics. Can you share your views on the competitive landscape here? Also, just discuss a few drivers that could help improve the margin profile for this business. I'm seeing that it has stayed at that 2% level for the period of time. Thank you so much.
Sorry, good morning. I am not completely with you for your last question on lighting. Can you repeat exactly what is your question?
Yeah. Just your comments on the competitive landscape in lighting as Plastic Omnium has bought Varroc and created a bigger competitor for you in lighting and electronics, and also the margin profile specifically for lighting?
Okay. Thank you. Thank Thank you very much. I will start with your last question. Varroc was a competitor. Plastic Omnium buying Varroc is a competitor. It doesn't change the landscape. The only thing that it change that of course, Plastic Omnium is a very powerful and very efficient group. I think they have a nice challenge with Varroc, but I think they will build we say very good competitor. It will take time. I will not comment more. What you can see on lighting is that we are turning around I will say the profitability of this activity, and we have a fantastic team and I think Yves Andres with his team is making the breakthrough. I am very confident that we will see, you will see better figures.
I can tell you again, the CES, what we have shown was, I will say, judged by our customers as discriminant. Going back to your question about semiconductors, is we say we not go into all the details. What I can tell you is that we receive a lot of semiconductor supplier in our booth of the CES. When you want to get prices and good prices, you have to show that you are a very good customer and you have, I would say, offering a lot of potential. I can tell you that on this side, the CES was a breakthrough. I am convinced, I know that semiconductor suppliers were, I would say, taking advantage of the crisis and to increase prices, et cetera, and to, I would say, rebalance things.
My conviction is that we will enter in a much better cooperation point of view, and HELLA, FORVIA, with the growth in electronics as a fantastic asset. It is why I am confident that things will improve, of course, on the pricing side, but as well on our global efficiency side, integrating logistics. R&D expense, on one side, you are very right. We have a very strong order intake. The top of that, if you take the mix, by more and more electronics, which is more R&D consuming. Naturally, we have an increase of R&D. In value, no discussion, we have an increase, I will say, in value.
We will continue to add actual efforts. Of course, on the other side, we try to be as efficient as possible to standardize, to use platform, to leverage platforms and to mitigate that. It is, sorry to say that, a permanent race to control the R&D and to avoid to overspend in R&D, to have the right resources. I think we are on a good way again, and it is probably one of the major expertise of HELLA. On expenses?
Perhaps, to add on the R&D expenses, no? We had also a negative effect, no, in terms of we have taken a lot of people on board, but in addition, we also had then in parallel many services we bought, you know, to cover also the development of the projects, no? To onboard the people. In parallel, we had more resources to cover also the projects we have acquired, no? Step by step now we will reduce that with the people we have now on board and do more on our own and reduce the external services, no? By that, I think we will also be able to be more efficient, no, in terms of now the actual expenses you have seen, no?
We also had a certain effect, no, if you look at really the absolute increase in value with the US dollar and renminbi, so with the FX translation effect into EUR, so that in absolute terms, we also had a higher number that we originally also expected. That was also an effect, no, on the higher increase.
Understood. Thank you both.
Thank you.
The next in line is James Schuster from Bank of America. Over to you.
Hi. Good morning. It's actually Michael Jacks from Bank of America. Thanks for taking my questions. The first one is just with regards to the current production environment. Can you comment please on the current situation in relation to customer call activity or downward volume adjustments, in contrast to what you've seen over the last few quarters? My second question is, assuming that your light vehicle production assumption does perhaps prove to be too conservative, what is a fair drop through rate on EBIT that you think we could work with for the coming quarters? My final question is with regards to the recent FORVIA CMD, where they announced cost cutting measures of around EUR 400 million, and I think if I'm not mistaken, EUR 150 million for their fiscal 2023.
How much of this, if any, relates specifically to HELLA? If some of this does relate to HELLA, I would imagine it's not included in your current guidance as this was set before FORVIA CMD. Thanks.
You want to take?
Yep. On your last one, we said also in the CMD that our target is to reduce the SG&A ratio, but also the R&D ratio, no, by 1% at least each, no? R&D specifically also even a little more. This comes certainly with a lot of measures in terms of efficiency we just discussed in R&D. We are working on platform standardizations and so on. In SG&A, partially also with the measures we already also have taken, so having leaner approaches, but on the other hand side also with the synergy measures we are working on to benefit also from out of the working together from FORVIA.
We, this target, we stick to and I think that we will see, with that, also partially cost reductions and operations will also contribute. Especially in indirect, we will see the improvements in margin, bringing us then to the EBIT target levels we have communicated. This is part of our plan, is also part of our, let's say, step-by-step improvement in profitability, we would expect. On your first question, the customer demand, I still see a very similar volatility and deviation, actually what we had also in the last 12 months. No change to that. We still are working with deviations of 25%-30%, a little depending on the regions, highest deviations in Europe.
I still also see that now with especially for Europe, no, with the change from last or with new year and also the vacation periods of some OEMs, that most of the changes will most probably be, being also made now when all are back into operations, so in the second half of January, no. There we would continue to expect a high volatility in the demand portals, you know. This remains for us and for our operations continuously, you know, very challenging and makes it, as Michel was saying, very difficult to our prognosis, you know, to sales. Beside of China, I think, which is, let's say, separate in the reasoning, you know, with the development of the COVID cases, no.
On the pass-through, on the if we would see higher volumes, no, I think we should then see, you know, at least, yeah, a range, around, let's say, 20%, I would assume.
That's very clear. Thank you. If I could just maybe just squeeze in one last question. Is it fair to assume that the main reason for now orientating the margin guidance towards the lower end of the range is driven mainly by the dilutionary impact of pass-throughs and the warranty claim, or is there perhaps something else there?
No, that's very clear. That's the reason.
Thank you.
You can consider that the pass-through is something like 50 basis point dilution.
Understood. Thank you. Thank you, Michel. Thank you, Bernard.
Thank you.
The next question comes from Pierre-Yves Quemener from Stifel. Over to you.
Yes, thank you. Thanks for taking my question. First let me wish you, Michel and Bernard, a happy New Year on my side as well. I would have three questions if I may.
Pierre-Yves, good morning. Can you speak closer to your micro? We have some difficulties with you.
Sure. Is this better?
Yeah, it's better. Thank you very much, sir.
Sorry. Three question on my side. Lighting is still very weak, and you mentioned some explanation to that to respect it. What could be the recovery trend going forward of that subdivision of Autos? What are your expectations is to reach, I would say a more normative level? Is it something that you can see already in the calendar year 2023, or should we think more of a step up, steep and step up in 2024 and 2025? That would be the first question. Second one would be on Electronics on the other way around. I found that the margins have reached a very solid level, 7.5% in the first half. Is this surpassing your expectations?
Do you think we could think about this division going to double digit at some point in time? Last, my key area of interest, like you, I guess, is free cash flow. Have I rightly understood Bernard comment that free cash flow should significantly step up into the calendar year 2023? Could we have maybe some more color to that respect? Thank you.
Thank you. Thank you, Pierre-Yves. Lighting, we see strong improvements, and our first contributor, sorry, was because we were impacted in the first half, which was the second half for that, we were impacted by inflation. First thing is that, of course, to recover, to pass through the inflation. Second, we have some operations topics in North America. Today, I can tell you, we have made the breakthrough. Third, it is the quality of the inaudible take. It will be progressive, you're right, anyway, we have given some, we say, very positive figures at the CMD, which if I not mistaken, as we speak of 6% minimum, and we are convinced that we can do even more.
The second point, you will see, I will say, a breakthrough in the figure, this year. The momentum, I can say, has been built by Yves Andres and his team. Electronics, very sweet margin, very sweet business, very good competence and expertise inside HELLA. The current margin is not the one we expect. You have understood that we have given at the, beyond two years, have given at the, I will say CMD, much higher expectations. The expectation of his team is to go back to a high single-digit margin. Double-digits in some families, I think it's a good target, but potentially a tight target. We may not commit to double-digit, but high single-digit, I am very comfortable to commit on that. On cash flow, Bernard?
On cash flow, my comment was on one hand side related already to the December result. The first seven months where we will be significantly positive with a strong year end in cash flow, strong months of December, you know. What I also can say, you know, is that our expectation or our plan on 2023 is to be significantly positive. Cash generation will be key. We will on one hand side, you know, we are working on a much stronger EBITDA expectation on 2023. In addition, we will also work on further working capital reductions.
There can certainly be volatilities, you know, also especially to the start of the year, so the first months where I mention, you know, the very high demands we have in the system, where we are a little cautious now about how will it come and will we see some volatility. We will manage that during the year, you know, so that overall to the year-end 2023, we should be strong again to comparable levels we had at HELLA in the years before.
Just to squeeze a follow-up. Thanks very much. Should I think of the free cash flow for the HELLA component of the FORVIA, of the FORVIA group as the 1.5%, at least the free cash flow margin that has been set during the CMD could also apply to HELLA in 2023? Thanks.
It's too early to answer, but like this figure, it's stupid, huh? It is too early to confirm this figure. If you don't mind, wait, next month.
I don't. Thank you very much, guys. Thanks.
The next question comes from Sanjay Bhagwani from Citi. The floor is yours.
Hi. Thank you very much for taking my question also. Congratulations on delivering the improvement in the free cash flow, and also for confirming that this is not impacted by factoring. With that, I've got three questions as well. My first one is, I think you provided really good details on your inflation pass through that as it stands now in H1, you've got 80% recovery on electronics, 30% in lighting. I understand that your full year target is somewhere around 80%. Can there be a possibility? Because if I go back to, let's say, 2021, you had like this huge inflationary headwind, which were not compensated at all at that time. In 2022 as well, that's your last fiscal year, you just got 30% compensation.
Can there be some of those retrospective compensation coming through as well in this year? That is my first question, and I'll just follow up with the next one after this, if that is okay.
It's a key point, huh? Because of course, if we don't pass through, huh, that means our profitability will be impacted, and of course, we will ask more to our people, which will be unfair. It is very important for all the suppliers to make their own work and to pass through the inflation. Our target is of course 100%. Now, 100%, no discussion about the raw material price, the semiconductor price, the figure very close to that for energy. Of course, on salary we can discuss, huh, but we have some, I would say, unbelievable impact. We will maintain the objective as is, as a fashion objective, to be as close to 100% as possible. Bernard, you want to add something?
No. I think on your first one to the factoring, it's, as you said, I was talking about, let's say this year's expectation, and this was all without considering factoring.
We have one good asset for the pass through, is the technology.
Yeah. Yeah.
We are strategic for suppliers. Sorry, I don't want to be arrogant, but I consider today that respect to our positioning, we are strategic for our customers in both electronics and IT. This helps us to pass through and to pass through. Nobody, it's not something that we are, we say demanding for nothing. We must pass through. We are legitimate, and we get a high figure thanks to our positioning.
Thank you. That is, that is very helpful. I can follow up with my second question. That is basically on the mechanics of pass through. I think you already mentioned that the inflation on electronics is reducing, but that is still going to be there. First thing is like, are you basically doing a price reset that is basically, let's say, the customer will be paying higher prices going on, like, on a product, or this is basically you incur the cost and then you go back to the customer for a compensation? Also on electronics, if you see that probably remains sustainable, are you also planning to get this included in the new contracts? That is, that is my second question.
You have different questions. The first one, compensation normally, is when you have a specific cost, one-off, and you ask of course the customer to compensate you. This could happen on some, I will say, transport, urgent transports, on the request of the, of our customers. This could happen for some inventories today on electronics because they ask us to store, some products for them. Of course we must be compensated if there is a specific demand. When we speak of pass through, we speak of actual price increase, which could be some reference, whatever. We speak of frequent price increase. If we don't do that, we'll be killed. This is a very important topic, for all, the suppliers. We need actual price increase, actual adjustment.
I don't know if I am clear on that.
Thank you. That is very clear. Are you probably considering adding, let's say, electronics costs in the new contract? For example, metals are already included.
Yeah.
Right?
Sorry. I forget that. I forget. Of course. It is same thing. I have been in this industry, not because I have 12 years outside the industry, but since 1988. Since 1988, I can tell you for the raw material, I was at the time in Valeo, of course we have a reference price with the customers. We were adjusting this price not only for the current business, but as of course, for the other book. When we speak of pass-through, we speak as well of our other books. Which is a permanent, I would say, rating, but it is a priority because if you don't do that, of course by one moment, firstly, you don't give to the customers the real, I would say reality.
They need that for the project. It's secure, but of course it will be a disaster. When we speak of pass-through reference price, whatever, we speak of course for both current business, other books.
Thank you. That is super helpful. My last question is just to confirm that I think previously, you know, the messages were for FY 2023, the free cash flow is gonna be more like breakeven. Now if I understand, that is going to be significantly positive, right? Given that you're already breaking even and if anything, H2 is going to see improvement.
Oh, 2022.
That's right.
Sorry.
For, for-
Found it.
For FY-
2022.
Mm.
Was, there we were originally guiding for a break even, but even in 2022.
Okay. Yeah.
Seven months now we will be significantly positive, no? 2023 we will even improve, no? with a higher EBITDA.
Yeah.
Also a continuous working capital reduction with the comment, that it can still some volatility expected over the year, no? To the end of the year. The major contributor will be the EBITDA.
Mm-hmm.
Strong optimization of working capital, I can tell you that Bernard and his team are working, they're taking some big initiative inside. If we have to continue to improve in percentage, not in value, because in value it will increase. To improve in percentage our CapEx plus R&D.
Yeah. Thank you. That is very, very helpful, gentlemen.
Now we're coming to the next question, and it comes from Giulio Pescatore, from BNP Paribas Exane . Over to you.
Hi. Thanks for taking my question. I'll try to be briefly. I just have a question on demand, more long term from car makers. I mean, we are hearing commentary of car makers cutting prices. I'm just wondering if you're seeing any changes in the level of orders, not very much in the short term, but how car makers are thinking about the potential growth in production in 2023, given the demand seems to be weakening somewhat in both Europe and North America. Thank you.
Good morning, Julio. we can say, excuse me. You can say that the start is smooth, but it's normal, huh. January is always like this. We have on one side some countries starting late, Germany for instance, and usually the first week is a not working week in Germany. you know that the new year Chinese, anyway happens between January and February. This year I think it will be next week for the week after 23rd of January. No? it's normal. January is one of the lowest months of the year. you have January, you have August, less July, but July is a little affected. Of course, you have December. No? January is the low month. nothing special except that we have some uncertainty in China due to the COVID. we cannot...
If it is the same for you, we think that things are improving today. We need, as usual, clues that from March onwards we will have a, I would say a strong recovery, which is usually what is happening in China when there is a big event. The second thing, what to say about pricing, et cetera. For the moment, we don't see big discounts from our customers, so they can sell what they want. Some cars could have some difficulties, so they could make some, I would say, very targeted discounts. For the moment, the pricing of customers remain high. I don't think that they will put further price increase, if it is a question.
They will have some inflation, but it will be limited because if there is one topic, is that price of cars are today quite high.
Just to follow up on that, you're saying that the market as things stand today, remains supply driven, with supply constraints still driving production growth. We are not in a place where you can basically, you know, car makers can produce whatever they want to sell.
No, it will be still restricted due to semiconductors. It will improve. We must not be mistaken. This continue to improve. There are more volumes of semiconductors. On the other side, cars are consuming more semiconductors like the EVs, so we have this double impact. We think that things will continue to improve. Anyway, you're right, there will be some restrictions due to, due to semiconductors. It is for the moment what we think. Hmm?
Yeah. I mean, yes. And then just briefly on the calendar year 2023. Will you be aligning yourself with the 81 million units that FORVIA and yourself presented in at the CMD in terms of kind of base scenario for 2023? Because, you know, if I try to reconcile the 81 million units with the upper end of your current outlook of 84, I know it's a different, kind of, you know, period, but it just would imply a very, very weak H2 in 2023. Will you be aligning yourself, or you could be using a different market outlook?
No, no, we are aligning progressively everything between the two groups because it will be a non-value to have a different way to communicate. We'll align. We align. We are aligning. There will be no difference. For volume it will be the same. You know, besides the volumes, what is important as well is the mix. You know, like me, that for FORVIA itself, for HELLA itself, we have of course some imbalance position between customers. We are, as HELLA, very strong, and I would like to use the word partner with the German customers. We're a partner for HELLA. We are making breakthroughs currently with some, for us, but new customers. Not traditional customers, but anyway, some new customers for us.
Speaking as well from the Chinese EV, but, I can mention Stellantis, Renault, GM, Ford, et cetera. We are, I would say, through our global deployment, through our gain of market share, huh, we are becoming more and more global. Anyway, today, our business is still very much linked with the free German and Tesla.
Perfect. Thank you very much for the detail.
At the moment, there are no further questions. If you have any additional questions, please press nine and star. Please press nine and star if you have any additional questions. We have a question coming from Philipp Koenig from GS. Over to you.
Hey. Morning, guys. I just got one final question, which is on the disposals. I know that was something that we discussed last year, and I think also back then, your former Special Applications business was always, sort of the major part of the talk. There was an article in the press today about a potential sale of your joint venture together with Mahle in the, in the climate business. I don't know if there's anything you can tell us today or when we potentially can think about an update as the broader strategy of FORVIA to get to that EUR 1 billion of disposals. Thank you.
Good morning, Philipp. It's a very good question, as usual, we will not comment any press release for press comments, et cetera. We, as always, I will say, the optimization of the portfolio. Sorry to remain vague. We cannot comment that.
Okay, no worries. Thank you.
There are no further questions.
Okay. Firstly, I would like to thank you again for your attendance. I would like to repeat with Bernard our best wishes for this new year. You have in the page as the next, I will say, step. It was a strange exercise to make only these six months, as Bernard has already anticipated with some guidance for the seven months. We will announce our preliminary figures the 16th of February. 21st of March as usual, you will have the complete document. There will be, I will say, a conference call. What is important, first quarter, 27th of April. Our AGM, 28th of April. We have already the date for the disclosure of the first half. Thank you again and see you soon.