hGears AG (HGEA.DE) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the hGears H1 Results 2025 Conference Call. I am Judith, the Chorus Call operator. [Operator Instructions]. The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over the conference to Christian Weiz, Head of Investor Relations.

Good morning, everybody. This is Christian Weiz, Head of Investor Relations of hGears, and I'm looking forward to present to you, together with Daniel Basok, our CFO; and our CEO, Sven Arend, the first half 2025 results. Then Daniel will walk you through our first half results and take your questions in a Q&A session afterwards. Earnings materials are available in the Investor Relations section on our website if you have not yet received them. Before we start, I'd like to draw your attention to the disclaimer on Slide 2, which sets out the legal framework over which this presentation must be considered and which I will assume you have read. And with that, I'd like to hand over the call to Sven Arend, our CEO.

Thank you, Christian. Good morning, and welcome to everyone joining our first half 2025 earnings call. Despite the fact that overall market conditions remain challenging, hGears delivered solid results for the first half of 2025. We benefited from the production brought forward into the first half, supported by streamlined structures and cost measures. In e-Tools, the positive trend continued, and the business area remained the bright spot in our top line performance. The strong development in the e-Tools business area largely, though not fully, compensated for the slight decline in e-Mobility and the anticipated drop in e-Bike sales. Meanwhile, we continue to streamline our structures and reduce costs, and these measures are increasingly visible in our profitability. In addition, we anticipated some production volumes, originally planned for the second half, into the first half of the year. This allowed us to increase utilization and improve the efficiency of our equipment while reducing start/stop costs, all of which also had a positive impact on profitability. Daniel will later take you through the financials, which illustrate the positive impact of our actions, improving profitability and making us more resilient. But let me be clear here. These volumes will not be available in the second half. So please do not simply double first half results and assume that, that will be our full year performance. At this stage, we want to reiterate that we remain fully committed to our 2025 guidance. Given the challenging environment of persistent geopolitical uncertainty and trade policy hurdles, including the potential new U.S. tariffs, uncertainty remains high. In this context, we do not expect a recovery in our customers' end markets for the remainder of the year as these factors continue to weigh on demand. We stay focused on cash preservation and on our stable balance sheet positions us well to weather the storm. We remain confident about the positive outlook once inventories in the e-Bike industry are cleared and the temporary challenges in the automotive sector are resolved. As you know, e-Tools has stabilized at improved levels. Let's now move to Slide 4 for a look at hGears sales development in the first half of the year. On Slide 4, you can see the sales performance of our business areas in the past quarters. The e-Bike business area remains under pressure due to sluggish development of the overall bicycle industry, which is still struggling to clear excess inventories along the entire supply chain. This process is taking longer and is proving more challenging than most market participants and experts, including ourselves anticipated. We do not expect a meaningful improvement for the remainder of the year. However, we are beginning to see encouraging early signs that could point to a light recovery in the bicycle and e-bike industry during the course of '26. This suggests that we may be close to or have already reached the trough. In a challenging automotive environment, the e-Mobility business area declined only slightly. However, the sector may increasingly feel the impact of structural issues in the Western Hemisphere's automotive industry, and tariffs imposed by the new U.S. administration could further exacerbate these challenges. Our focus on the luxury and sports car segments, which typically prove more resilient, helps cushion negative effects. However, while some inventory adjustments may occur toward year-end, we remain cautiously optimistic about this business area. As in previous quarters, the e-Tools business area remains a bright spot. We remain cautiously optimistic that the business area will hold at current levels. That said, as with the e-Mobility business area, we are aware of potential headwinds from U.S. trade policy going forward. We've covered the key highlights, and now it's time for the numbers. Daniel will do his best to make them as engaging as possible.

Thanks, Sven, and good morning, everyone, from my side. I know that in analyst calls, the numbers are as interesting as the story. So let's dive in. Let's turn to Slide 6, where we will see with revenues before we move to profitability. At EUR 49.5 million, hGears sales for the first half of 2025 were just 1.8% below last year's figures of EUR 50.5 million. Second quarter sales matched the prior year level, thereby showing a slight sequential decline of 2.5%. Revenues in the e-Bike business area declined by another 28.6% in the first half of 2025 compared to the same period last year. And even sequentially, the business area recorded another drop of 14.8%. Given the ongoing depletion in the bicycle industry, we do not expect a near-term recovery, and volumes brought forward into the first half will further weigh on quarterly performance for the remainder of the year. E-Mobility recorded, in the first half 2025, 3% lower sales in the year-over-year comparison and, as shown on Slide 4, sequentially, it lost 4%. That said, our order book in this area has remained very stable since the beginning of the year, and we continue to see a pipeline of interesting future projects, which gives us confidence in the longer-term outlook for the e-Mobility business area. The recovery of e-Tools business area continued in the second quarter of the year. In the first half of 2025, the segment grew by 19.4% compared to the same period last year and posted a sequential increase of 5.5% in the second quarter. The main driver of this solid performance was the gardening segment. However, we remain mindful that existing and potential U.S. trade tariffs could have a headwind and may limit the pace of volume growth in this business area. With that, on the market and demand side, let's turn to profitability and have a look at the gross profit and gross profit margins in the middle chart of the slide. Adjusted gross profit came in at EUR 22.6 million, down 4.1% year-over-year. This decline was mainly driven by a 1.8% drop in revenues, a softer sales mix, and ongoing start/stop inefficiencies. To improve capacity utilization and reduce these inefficiencies, we brought forward production volumes, mainly in the e-Bike business area from the second half of the year into the first one. However, this was not enough to fully offset the less favorable product mix. The adjusted gross profit margin, therefore, declined by 110 basis points year-over-year, reaching 45.6% in the first half, slightly below our 50% target, a gap we are actively addressing. Finally, on the right side of the slide, you see the chart depicting the adjusted EBITDA and adjusted EBITDA margin. Despite lower gross profit and continued lack of operational leverage, we improved our adjusted EBITDA to EUR 1.1 million in the first half of 2025, more than double last year's level, albeit from a very low base, of course. This improvement was primarily driven by savings of around EUR 1 million in personnel costs along with a reduction of OpEx of EUR 0.7 million. These figures clearly reflect the impact of our rigorous cost saving efforts, which led to meaningful structural improvements. That said, that job is not done yet. We continue to look for further efficiencies and opportunities to improve our profitability. The next slide provides us with an overview of the free cash flow bridge for the first 6 months and our working capital. And as I always repeat, cash is king. So the next slide is the Royal Palace. So please flip to Slide 7. Here, you can see what shapes our free cash flow in the last 6 months versus the same period of a year ago. While the significantly better non-adjusted EBIT had a positive impact on operating cash flow, this was partially offset by a seasonal buildup of net working capital, mainly of receivables due to a higher share of e-Tool sales at the end of the reporting period with contractually agreed longer payment terms. The CapEx spending in the first 6 months of 2025 was EUR 1.2 million higher than last year, but the explanation here is actually a very low base of first half 2024 rather than overspending in 2025. In the first half of the previous year, we generated EUR 0.8 million from asset disposals. Excluding that one-off gain, the year-over-year increase would have amounted to EUR 0.4 million. With total CapEx spending in the first 6 months of EUR 1.3 million, we remain below our 3% threshold for maintenance CapEx, reflecting our disciplined approach to investments. At the end of the day, the free cash flow came in at negative EUR 2.3 million compared to negative EUR 1.7 million last year, a respectable outcome, all things considered. Furthermore, we show here the development of our working capital, which decreased from EUR 9.8 million in the previous year to EUR 8.6 million at the end of June 2025. Please note, however, that this year-over-year reduction should not be confused with the seasonal buildup I mentioned earlier between December '24 and June '25. So this decline year-over-year of 12.2% is clearly cheaper than the 1.8% year-over-year decrease in revenues, and it underlines that we continue to optimize our balance sheet. So let's move to the next slide to take a closer look at the additional balance sheet items. Our net debt increased by EUR 0.9 million compared to the previous quarter, primarily due to new long-term leasing liabilities for equipment. Hence, the leverage ratio significantly declined due to increased profitability in the last 12 months. Cash and cash equivalents stood at EUR 9.4 million at the end of June. That's down from EUR 17.1 million at the year-end. But 1 important point to know. In the second quarter, we deliberately made less use of our available credit lines by EUR 5 million to reduce interest costs. These credit lines remain fully available if needed. If we were to include the undrawn credit lines, our cash position at the end of June would have been EUR 14.4 million compared to EUR 17.1 million at the year-end '24, when all available credit lines were drawn. Our equity ratio at 47.8% at the end of the first half '25 compared to 49.4% at year-end '24 remains to be solid. That solid capital base gives us the flexibility to navigate the current environment. And here comes, of course, my mantra, you've probably heard me say the last few years, cash is king, and we will continue to make an utmost effort to preserve it and to remain in a good position to manage the ramp-up once market conditions improve. Now let me hand back to Sven for the outlook and his closing remarks.

Thanks, Daniel. All right. Let me try to bring all of this together in a quick summary. Our balance sheet remains stable and should enable us to navigate the current uncertainty. The structural adjustments, cost discipline and personnel measures we implemented over recent quarters are now bearing fruit as reflected in the figures presented today. That said, we remain committed to driving further efficiency gains with a proactive and hands-on approach. We're seeing a slight and steady recovery in e-Tools, which may, however, stumble due to U.S. tariffs. Meanwhile, our e-Mobility division continues to demonstrate resilience despite increasing pressure in the automotive industry and the market conditions to remain challenging. In the bicycle segment, inventory levels appear to be gradually normalizing. While it is still early, we are seeing some initial signs that the trough may have been reached and that a gradual turnaround could begin to take shape over the course of 2026. And yes, we had a somewhat better first half, but let's be clear, this was supported by production volumes that we were pulling forward from the second half. It goes without saying that these volumes will obviously be missing in the coming quarters. So please don't make the mistake of simply doubling the first half year results and assuming that's our full year performance. Nonetheless, we feel comfortable with our 2025 full year guidance, which predicts group revenues of EUR 80 million to EUR 90 million and adjusted EBITDA of minus EUR 4 million to minus EUR 1 million, a free cash flow of between minus EUR 6 million and minus EUR 2 million. This concludes our review of the first half of 2025. I would now like to hand the line back to the operator to open the call for the Q&A session.

[Operator Instructions] Our first question comes from Jan-Paul van de Kerke of ABN Amro.

Jan-Paul van de Kerke from ABN AMRO. Also speaking on behalf of Martijn. And I would like to take my questions one by one, if that's okay?

Sure.

The first question, can you talk a little bit about destocking in e-Bike and why you assume that it will end in the latter part of 2025? And furthermore, if European stock levels normalize and production at e-Bike Drive Systems improves, what kind of growth in e-bike in 2026 at hGears should we expect versus 2025?

Okay. I mean destocking is taking place. I think there were some publications also of the Bicycle Association in Germany, probably since around the middle of last year. The one thing that was unclear is how much stock is actually in the pipeline, but we are getting feedback from our customers that they see stocks slowly reducing. Of course, that will vary greatly from manufacturer to manufacturer. We have not seen any further reductions in call-offs, and that's why we think things are stabilizing. That was different in the previous years. But of course, we are at a very low level right now. Due to this whole mix of different situations by bicycle manufacturers, I think it's impossible right now to really comment on when will it turn around and by how much. That is something that I think the next few months will show as the planning will take place for all the players in the market for '26, but that will still be a few months before we have some clarity on that.

Okay. And one follow-up question on that. What kind of assurance does hGears have that large clients just don't internalize more? Porsche, for example, has its own facility in Italy.

Yes. But I think it's contractual commitments basically on the customers. Even with the ones that have in-house or alternative production, there is typically a quota tied to the contract. So in the end, we believe everybody is really sticking to those quotes and quotas and to those numbers. And that has been reconfirmed also by all the customers.

All right. Then my next question is how much production volume have you brought forward from H2 2025 or 2026 into the first half of 2025. Can you maybe quantify that a bit even in rough terms?

Yes, it's only out of '25, to be fair, and it's around EUR 3 million.