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

Ladies and gentlemen, welcome to the hGear's 9 Months Results 2025 Conference Call. I am a Moira, the Chorus Call operator. [Operator Instructions] The conference has been recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Christian Weiz, Head of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us for hGear's 9 Months 2025 Results Conference Call and Webcast. My name is Christian Weiz, I'm the Head of Investor Relations. Joining me on the call today are Sven Arend, our CEO; and Daniel Basok, our CFO. They will take you through our 9 months results, and we'll be happy to answer your questions during the Q&A session afterwards. The earnings materials are available on the Investor Relations section of our website, should you not have received them yet. Before we begin, I would like to draw your attention to the disclaimer on Slide 2, which outlines the legal framework under which this presentation must be considered and which I will assume you have read. And with that, I'm pleased to hand over the call to Sven Arend, our CEO.

Thanks, Christian, and good morning, everyone, and welcome also from my side to our 9 Months 2025 Earnings Call. As expected, the economic environment and the overall trends in our industries have not improved, and we continue to operate in a difficult market. Despite this, we managed to improve our profitability. Due to the fact that we brought forward production in the first half of the year, we recorded the weakest performance in the company's history in the third quarter of 2025. But thanks to this tactical shift in production, we were able to increase efficiencies and together with additional cost measures, this had a positive impact on our 9 months profitability. Even though e-Tools recorded a decline in the quarter, the overall recovery and stabilization of the business area continues. E-Mobility is benefiting from renewed demand for conventional engine technologies, and we continue to benefit from the resilience of the luxury and sports car segment. As anticipated, e-Bike was very weak, mainly because revenues had been pulled forward into the first half of the year, while destocking is still ongoing. Our efforts to streamline structures and reduce costs increasingly bad fruit. In fact, they more than offset the effects of the missing operational leverage and the weaker mix. As a result, we were able to raise our 2025 guidance in October. We now expect revenues to come in at the upper end of the previously given range and a better EBITDA landing in a minus EUR 1 million to plus EUR 1 million range. Consequently, we also anticipate a better free cash flow between minus EUR 1 million and 0. This positive development also supported our efforts to preserve cash and liquidity, which is and remains our highest priority. Daniel will explain in more detail what we have achieved here. Let's turn to Slide 4 to take a look at hGear's business area sales performance in the first 9 months of this year. On Slide 4, you can see the sales performance of the different business areas since 2023. E-Bike, as anticipated, was very weak, mainly because of revenues that we had pulled forward into the first half of the year and that were therefore missing in the third quarter. At the same time, demand in the third quarter remained low as expected since the destocking is still ongoing. We continue to see mixed signals from the end market, which seem to indicate that the stock depletion has progressed in recent months, and it may be close to an end. Our observations suggest that we have likely seen the trough and may, and I repeat may, experienced some acceleration during 2026. Meanwhile, E-Mobility is benefiting from renewed demand for smaller diesel and petrol engines as a kind of reality check has set in among consumers regarding the challenges in the transition to the electric mobility, especially in the small car segment. As a result, path for conventional engines, which in the past were insignificant part of our e-Mobility business area in which we thought would gradually phase out are once again in high demand. And as in previous quarters, we continue to benefit from the resilience of the luxury and sports car segment. Even though e-Tools recorded a decline in the quarter, the overall recovery and stabilization of the business area continues. The lower sales in the third quarter are also partly due to anticipated volumes that were shifted to the second quarter as several customers increased their safety stock levels to mitigate uncertainties related to the ongoing trade tensions between China and the U.S. We've covered the key highlights, and now it's time for the numbers. And for that, I will hand over to Daniel for some additional color on the 9-month results and the main reasons behind our upgraded guidance for 2025.

Thanks, Sven, and good morning, everyone. As you've just heard, the numbers are quite encouraging this time. So let's take a closer look and start with Slide 6. Sales for the first 9 months of 2025 totaled to EUR 69.6 million, a decrease of 3.8% compared with EUR 72.1 million in the prior year. Third quarter sales declined by 8.4% year-on-year and by 17% sequentially. Following the full forward of sales into the first half of the year, it came as no surprise to us that the e-Bike business had to digest an anticipated drop of 81.2% in the third quarter year-over-year, while the decline for the first 9 months of 2025 was 42.7%. As we repeatedly said, this reflects the ongoing stock depletion. However, we are seeing signs that the trough has been reached. The EUR 100 million question, of course, remains is when and to what extent we will see the recovery of the e-Bike industry in 2026. While there are still initial indications that the market may have bottomed out, it is still too early to assess the pace and the trajectory of this recovery. E-Mobility recorded in the first 9 months of 2025, 4.1% higher sales in the year-over-year comparison, as the business area added 22.9% in the third quarter compared with the previous year. And as Sven said earlier, e-Mobility benefits of a revival in demand for smaller cars with conventional combustion engines. Besides that, the business area benefits of stable demand from the luxury and sports car segment. And we are quite confident with regards to the medium- to long-term prospects here as we continue to get nominations for a lot of projects in this business area. E-Tools continued to stabilize in the period under review. Although the business had to digest an 8.5% drop in the third quarter. Still, over the first 9 months, this business area grew nicely by 9%. Growth was again driven by gardening tools but power tools showed some weakness, which is not surprising considering that manufacturing and construction markets in the western world, apart from the innovation and refurbishment, remains soft. Meanwhile, existing and potential U.S. trade tariffs through many threat and console the expansion of the business area. Now turning to the middle chart, you can see our gross profit and gross profit margin. The adjusted gross profit amounted to EUR 31.8 million, down 5.7% or EUR 1.9 million year-on-year. This decline mainly reflects 3.8% or EUR 2.8 million decline in revenues, and the noticeably softer sales mix with e-Tools, the business area with lowest gross profit margins, accounting for 37.4% of sales compared to 33% in the prior year. The adjusted gross profit margin declined by 90 basis points year-on-year to 45.6% for the first 9 months, remaining exactly at the margin level of the first half of the year. This stability through the year came despite a softer sales mix, which could be cushioned by a few one-off effects such as tooling contribution and price adjustments. And now last but not least, the chart on the right highlights adjusted EBITDA and margin development. Despite the decline in revenues of EUR 2.5 million with software mix, which resulted in a decline in gross profit of EUR 1.9 million, the adjusted EBITDA improved to EUR 0.9 million in the first 9 months of 2025, more than double last year's figure. This tangible improvement underlines the effectiveness of our cost saving measures and confirms that the structural actions we implemented are delivering evident results. This improvement was primarily driven by savings of around EUR 1.9 million in adjusted personnel expenses and an additional EUR 0.5 million reduction in OpEx. While current volumes continue to limit operational leverage, our results clearly demonstrates the positive effect of our structural improvement and disciplined cost saving measures. Most of the major savings have already been implemented, and we are proud of this progress. Nonetheless, we are from declaring victory just yet, and we continue to identify opportunities for further efficiency gains. The next slide covers free cash flow and working capital. So please let's flip to Slide 7. So this slide shows the key elements that drove our free cash flow in the first 9 months of 2025 compared to the same period a year ago. Let's start talking about the free cash flow. Cash flow from operating activities improved in the first 9 months, mainly driven by stronger nonadjusted EBITDA, up EUR 1.5 million year-on-year and by lower inventories. These positive effects were partly offset by a temporary increase in receivables, reflecting timing effects such as increased sales towards the quarter end. CapEx in the 9 months of 2025 was EUR 1 million lower year-on-year, reflecting the one-off effect from a successful sale and leaseback transaction, but also our disciplined investment approach. After cleaning the one-off effects, net cash flow for investment activities this year is higher than a year ago, but still below the 3% of sales CapEx threshold. Free cash flow ultimately came in at minus EUR 0.6 million, a significant improvement compared to minus EUR 2.5 million last year. This represents a solid achievement given the current trading conditions and challenging market environment. The chart below illustrates the development of our working capital, which decreased from EUR 9 million in the previous year to EUR 8.1 million at the end of the third quarter of 2025. The almost 10% decline in the net working capital once again outpaced the 3.9% decline in revenues. Therefore, working capital declined to 8.7% of LTM revenues compared with 8.9% a year earlier. The reduction in working capital primarily reflects our continued efforts to lower inventories and thereby, ease the pressure on operating cash flow and to further optimize the balance sheet. And speaking about the balance sheet, let's turn to Slide 8, where I would like to give some highlights and some few more details. So the net debt decreased by EUR 2.5 million compared to the half year '25 , mainly due to the selling leaseback transaction that resulted in increase of long-term lease liabilities. As a result, the leverage ratio went up slightly but remained below the peak seen in earlier quarters. We expect this ratio to improve significantly as soon as volumes recover and higher activity level will lead to operational leverage and directly support profitability and adjusted EBITDA. Cash and cash equivalents stood at EUR 8.7 million at the end of September. And when adding the EUR 2 million of undrawn credit lines represent EUR 10.7 million in a like-for-like comparison. The current level of liquidity remains adequate and aligned with our focus on disciplined and efficient liquidity management. The equity ratio stood at 45.1% at the end of the 9 months as of 2025 compared to 49.4% at year-end. This capital base provides us with the flexibility to manage the current challenges and be ready to accelerate once market conditions improve. Now over to Sven, where he has the pleasure of guiding you through the outlook and the closing remarks before we open the line for your questions.

Thanks, Daniel. Let me sum up before we move on to the Q&A. Let's start with the business areas. Yes, we saw a decline in third quarter in e-Tools, but the overall stabilization trend remains and the business remains intact. E-Mobility continues to benefit from our broad product portfolio serving both conventional and electric vehicle production. In the European bicycle industry, stock depletion appears to be coming to an end, and there are encouraging signs that we may have passed the trough suggesting that a gradual recovery could start to take shape over the course of 2026. Meanwhile, our 9 months results clearly show that the structural adjustments and cost measures implemented in recent quarters are successful and are paying off. The better-than-anticipated development of our numbers even led us to raise our guidance in October 2025 through an ad hoc announcement, which you may have seen. Our outlook reflects higher profitability and better cash preservation, confirming that our measures are having a lasting impact. So to repeat it from the ad hoc we issued on the 23rd of October for 2025, we expect group revenues of EUR 87 million to EUR 90 million, an adjusted EBITDA of minus EUR 1 million to plus EUR 1 million and a free cash flow of minus EUR 2 million to 0. This concludes our review of the first 9 months of 2025, and I will now hand back to the operator to open the line for your questions.

[Operator Instructions] The first question comes from the line of -- from Martijn den Drijver from ABN AMRO ODDO BHF.

This is Sam actually speaking from ABN AMRO. I will be taking over from Martin. My few set of questions at the start. Starting from e-Mobility driver, the Q3 was very strong on a quarterly basis, around 30% up. Do you think this is sustainable going forward into Q4 and 2026? My second question would be on e-Tools. Do you, in general, see tariffs as a key factor affecting the segment? So let's start from the first 2 questions, if I may.

Let me start with e-Tools. I think in the end, obviously, we've been monitoring that very closely, where quite a lot of the business that we produce actually gets shipped versus the United States. But what has to be said is that until now, apart from maybe some pulling up and then later on some reductions, we do not see any changes. All discussions with our customers point to a very stable and solid future. So we currently, right now, do not see this whole tariff discussion affecting volumes on our side. And in fact, we see some opportunities even to hopefully grow the business in the years to come. On the e-Mobility side, I think we see overall on an annual basis, a stable situation. There may be some quarterly changes and adjustments, but I would not factor those in for the future. But I think overall, it's a stable business where we also see the opportunity to grow. The 1 thing that always has to be said when we talk about e-Mobility that typically the time from nomination to actually seeing the bottom line as an SOP is going to be somewhere between 2 to 4.5 years. So despite all the success we've had there, we do not see a lot of that on the bottom line yet. We do have a stable order book for the remainder of the year, which honestly is also a good sign because we typically, a lot of times throughout the year in Q4, see stock cleanups at the customer end, and I would say this is the first time in the 3 years that I've been here that we've not seen those reductions at least until now.

Very grateful. Just another question on the e-Tools part. Do you see some effect on pricing also because of tariffs? Or is there also no risk? How you indicated there's no risk on volumes, but on pricing also, if I understand no risk would that imply?

No, we've not had any pricing discussions as a result of the tariffs. And in fact, again, we have been nominated with some follow-up generations that will secure this business over the years to come without really seeing any changes on price pressure or volume changes.

All right. Very clear. And if I may just squeeze in 1 or 2 more questions. Firstly, with regards to the e-Bike bottoming. So you've indicated that the destocking is probably approaching its end. Firstly, what signals do you concretely use? Is it the OEM feedback? Is it the inventory levels? Could you just provide some color there, like as to which signals are particularly pointing towards more or of a trough or destocking finishing?

If you look at the official numbers of companies like Shimano and Giant, you basically see that they see slight signs of recovery. But we also, from our customers and from bike manufacturers hear that the stock that they see at their customers is going down and going down quite significantly. That makes us believe that over the course of the next, I would say, 3 to 9 months, we should, for all these customers reach a normal stock level that is required to keep flexibility. The 1 thing that, yes, it maybe has been missing yet is that we see the bottom line numbers in the call offs change, but that should be the consequence of that once we reach that point.

Very grateful. It's very clear on that part. And maybe 1 current last question and then I will go into the queue. Just with regards to automotive segment market, so the Tier 1 customers, they remain stable. Do you see any risk going forward? You have indicated that the order book remains strong. But the auto sector is going through some headwinds. Do you see that somewhere? Or for you, it's not a concern?