hGears AG (HGEA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q1 2024 Results Conference Call. I am Shari, the Chorus Call operator. [Operator instructions] And the conference is being recorded. [Operator instructions] At this time, it's my pleasure to hand over to Christian Weiz, Head of Investor. Please go ahead.

Good morning, everybody, and welcome to hGEA's First Quarter 2024 Results Conference Call. Thank you for joining us this morning. I am Christian Weiz, Head of Investor Relations. With me on the call today, I have Sven Arend, our CEO; and Daniel Basok, our CFO, who will present our first quarter numbers and be available for Q&A after the presentation. If you have not yet received our relevant earnings documents, you can find them in the Investor Relations section of our website. Before we begin the presentation, I would like to draw your attention to the disclaimer on Slide 2, which sets out a legal framework under which this presentation must be considered and which I assume you have read. And now, I'd like to hand over the call to Sven Arend, our CEO.

Thank you, Christian. Good morning, everyone, and thank you for joining us today for this first quarter 2024 earnings call. With regards to the overall market conditions, the situation has not changed much since we met online at the end of March. In line with what we expressed at the time and in line with our expectations, we witnessed a rather slow start into the year. Destocking is ongoing in the e-Tools and e-Bike segments. However, there has been a certain stabilization in the e-Bike segment, albeit at still very low levels. Meanwhile, e-Mobility proved resilient. We observed a decline in the conventional automotive business here, but this has been offset by positive developments in EHV now part of e-Mobility under the new business area structure. We have adjusted our structures and implemented operational measures in order to tackle the current adverse market conditions, which continues to have a negative impact on our operational leverage and continue to cause inefficiencies, for example, in the form of stop/start costs. But as you may have already noticed, while reading our press release, the absolute decline in adjusted EBITDA was significantly less than the decline in gross profit. This indicates that our streamlining efforts and operational measures are beginning to yield results. Nevertheless, we will continue to review our structures and operations while securing our agility for the moment when the markets return. At the same time, we continue to preserve cash and the fact that we have a very solid balance sheet is reassuring in the current conditions. While reviewing our strategy and organization, we felt that it does make sense to redesign our business areas that are now even better aligned with industry-specific requirements and dynamics. As a result, the sales organization has been adapted to these business areas. This will ensure that we are agile, efficient and optimally positioned to benefit from a recovery in the end markets as soon as it materializes. But let me dig a little bit deeper on this, on the next slide. The new business areas allow us to focus on meeting specific industry needs from a product development process and standard view. Dedicated sales teams concentrate on the industry-specific needs and requirements. Furthermore, the new business area structure also provides better transparency internally as well as externally. Thereby, it facilitates for you cross-referencing with newspapers, industry-specific news or reports from other companies and particularly those in our customer industries. Let me quickly give you a rundown of the new business areas. The e-Bike area now focuses on all bicycle-related drive components. Our production capabilities in this field and our knowledge are highly respected throughout industry. Due to our long-term experience, which we gathered over several years as the first major industrial full-scale supplier, we have become the preferred partner in the industry, also with regards to our co-development activities. We provide simulation capabilities, are able to help and support our customers to improve or noise vibration and harshness, and we see that the product diversification continues to increase. This will drive this business area going forward. The e-Mobility business area supplies the automotive industry, both electric vehicles, internal combustion and recreational vehicles according to the highest quality standards and thereby fulfilled all necessary certifications such as IATF and TSX. The dynamics in this industry are very specific. The development times are normally the longest among all of our activities and working to these higher standards increasingly becomes a competitive advantage in our other business areas. This means that the current trend of the rising quality standard is clearly an opportunity for us. Finally, the e-Tool business area summarizes our activities in the field of electrically powered craftsman equipment and gardening tools. Here again, we are able to supply our customers globally at industrial scale, while our engineers provide support and the development process to improve our noise vibration and weight issues. Against the backdrop of the increasing importance of ESG criteria, durability and recyclability have emerged as a prominent requirement. And this is true for all business areas, not only e-Tools. With that in mind, we continue to develop and deploy our ESG strategy. This strategic initiative underscores our commitment to sustainable business practices and responsible corporate citizenship. In 2024, our ESG strategy stands as a testament to our dedication to mitigating risks, fostering long-term value creation and meeting the expectations of our stakeholders. Recognizing the increasing importance of ESG factors in investment decisions and regulatory compliance, we are confident that our proactive approach will enhance our competitiveness and resilience in the marketplace. As a cornerstone of our ESG strategy, we established the ESG Committee, this dedicated committee comprises of management board members, cross-functional experts from within the organization and supervised by the Chairman of the Supervisory Board and will oversee the implementation, monitoring and continuous improvement of our ESG activity initiatives. With a focus on transparency, accountability and stakeholder engagement, the committee will play a pivotal role in integrating ESG considerations into our decision-making process, operations and reporting frameworks. This means in summary that we already are actively tackling the issues and hurdles that are related to ESG. All of our high-precision products are fully recyclable. Nevertheless, we keep up the momentum and clearly continue our effort in order to improve and accelerate the process towards the circular economy. Before handing back to Daniel for the financials, allow me to stay for a few seconds on this Slide. On this side, you see the historic development of our newly defined business areas, e-Bike, E-Mobility and e-Tools. First and foremost, we provide you with the historic evolution of our quarters, the business segment in order to facilitate your financial modeling for upcoming quarters. The chart also shows a certain stabilization of e-Tools and e-Mobility at low levels in the last 3 quarters, while e-Bike continued to remain volatile. Without providing explicit previews per quarter, our defensive base assumption would be that we continue to hover at about current levels in the next few quarters, thereby implicitly confirming our 2024 outlook. With that, I would like to hand over to Daniel, who will run you through the first quarter 2024 financials.

Thanks, Sven, and good morning to all of you from my side. Let me start the review of the financials on Slide 8 by looking at the revenue and profitability. Against the background of still challenging conditions, we had to start in line with our expectations. The e-Bike business area saw an increase of 14.2% to EUR 6 million, which should, however, not be over interpreted or extrapolated. We had a strong base effect here in the first quarter of 2024 as the sales of the business unit moved from a very low level in the previous year to a low level in the current year. The environment in the e-Bike industry remained volatile as destocking is still ongoing in all channels. However, we assume that we are in the tool and hope to see a similar recovery in the second half of the year. The e-Mobility business area, which now includes automotive for all kind and recreational vehicles, benefited of the resilience of the premium and luxury car segments and saw some support from our new EHV activities. This led ultimately stabilization in the form of a slight 2.7% increase in sales to EUR 12.6 million in the period under review. Meanwhile, e-Tools declined to EUR 7.3 million as recovering demand in power tools could not compensate the weakness and gardening tools. Sales of the business area remained at the third quarter 2023 level and were slightly up versus the fourth quarter of 2023. Therefore, we assume that sales should stabilize at current levels in an environment that is still characterized by overstocking and big demand in end markets. Moving on to gross profit and gross profit margins in the middle chart of Slide 8. Gross profit decreased by 23.6% to EUR 11.6 million in the first quarter 2024. Primarily, lower volumes and production have introduced inefficiencies characterized by, like Sven mentioned, stop/start costs, which have impacted our gross profit margins. These interruptions disrupts workflow continuity leading to increased operational expenses and reduce profitability. Furthermore, the transition to higher portion of assembly projects within the e-Mobility business area has introduced a negative mix effect. And lastly, in the first quarter, we were able to reduce the inventories, particularly work-in-progress, WIP, and finished goods because the change in WIP and finished goods and corporate hourly rates, which in turn encompass personnel expenses, maintenance costs and depreciation, these expenses are typically accounted for below the gross profit line. Therefore, a decrease in WIP and finished goods affects the composition of the cost of goods sold, ultimately negatively influencing the reported gross profit and gross profit margin. As a result, as I said, the gross profit margin in Q1 was only 44.8%. This means that in absolute terms, the gross profit declined by EUR 3.6 million to EUR 11.6 million. However, the charge on the adjusted EBITDA on the right side of the Slide, and this is the point I would like to make here, shows that our adjusted EBITDA only declined by EUR 1 million, which shows that our efforts with regards to organizational and structural changes are paying off. We have reduced our personnel expenses by EUR 1.3 million and net other operating expenses by another EUR 1.3 million versus the first quarter of last year. Still, the adjusted EBITDA declined from EUR 1.5 to EUR 0.5 million in the first quarter of 2024. Now, flip to the next slide to review our liquidity and balance sheet. And, as you know, usually companies of our sites do not provide balance sheet information at Matrix in the first and third quarters. But considering the challenging and volatile times, we believe it is necessary to provide it to offer you a comprehensive undertaking of our financial position and performance throughout the year. By including this information, we continuously aim to enhance transparency and accountability and to demonstrate our financial strength amidst the current economic conditions. Additionally, providing quarterly updates allows us to proactively address any emerging concerns and demonstrate our commitment to open communication and proven financial management. We would like to highlight that we have successfully concluded the refinancing for the next 3 years. Concluding the 3-year refinancing arrangement offers several advantages for our organization. Firstly, it provides stability and predictability in our financial obligations over the medium term, reducing uncertainty in mitigating the risk of short-term liquidity challenges. Secondly, securing the practice terms in the refinancing allow us to optimize our capital structure, potentially lowering interest expenses and improving cash flow management. At the same time, we decided to discontinue the undrawn EUR 40 million in revolving credit facility, which we previously held as an up or sleep for further growth investments. But given the current additions, it simply does not make sense to hold on to this expensive potential funding for growth CapEx. In our opinion, a 3-year horizon, offers strategic flexibility, enabling us to align our financing with long-term business objectives and investment plans while maintaining financial agility. This decision underscores again our commitment to prudent financial management and allocating resources where they can generate the highest returns. Our balance sheet remains exceptionally robust with an equity ratio standing at remarkable 53.6%. Design equity ratio affords greater flexibility in pursuing strategic initiatives and weathering unforeseen challenges. Our net debt of only EUR 4.9 million remained at low levels in absolute terms but also in relative terms with 1.1x net debt to adjusted EBITDA leverage, which is about in the previous year's levels, i.e., includes the usual seasonal swings. And finally, as of the end of March, we had EUR 24.7 million in cash on hand, providing us with a significant level of security and monitorability. That would be it from my side on the numbers, and I'll pass it back to Sven for the outlook and closing remarks.

Thanks, Daniel. Let me move to our current market overview and outlook. As we all know, the destocking cycle in the e-Bike industry takes longer than anyone in this industry assumed. Ordering will likely continue to be slow until we observe a certain stabilization probably in the second half of the year when the bike producers begin ordering for the 2025 model year. Nevertheless, and undoubtedly, the overall growth prospects in this industry are significant, but we need to be patient. In the e-Mobility business area, where we expect demand for premium luxury cars to remain resilient, while some conventional automotive projects will be compensated by accelerating EHV projects. The transition from hydraulic systems to powerful high-voltage electric systems in various automotive applications such as power steering, electronic braking, will drive demand for both electric and conventional combustion engine cars. While we already saw some positive signs in the power tool business, the gardening segment remains weak. However, we assume that e-Tools reached the lowest point at current levels and should therefore continue to stabilize. While a mild recovery in the building and construction segment appears to be supporting the demand for power tools, favorable weather conditions in Europe would undoubtedly bolster the trends for gardening tools. Finally, the long-term prospects remain intact for both categories as combustion engine power tools are gradually being replaced by electric appliances, driven in part by increasing regulation. As Daniel pointed out earlier, our strong efforts to streamline the organization structures and costs are bearing fruit, as you can see in our EBITDA compared to the gross profit, but we will not stop here and continue to optimize our organization whilst cash preservation remains the name of the game for the time being. At the same time, we remain cautious and will not cut too deep in order to remain agile and have our capacities ready when recovery occurs. With that said, let me come to the outlook on the next Slide. First and foremost, we reiterate both R24 guidance and our midterm targets. This means that for 2024, we expect group revenues between $100 million and $110 million, adjusted EBITDA between $1 and $3 million and a negative free cash flow of between EUR 0 and minus EUR 3 million. For the medium term, we anticipate group revenues to range between EUR 150 million and EUR 180 million, largely driven by the expected recovery of our SPAC business. Thank you, ladies and gentlemen, for your attention. And I would now like to hand the line back to the operator to open for the Q&A.

[Operator instructions] The first question comes from the line of Martijn den Drijver, ABN.

I have 4 questions, if I may, and I'll take them one by one. On the operating expenses, you've done a great job in Q1. Is there some sort of seasonal effect in there? Or is this a sustainable level going forward?

Yes, it's sustainable. There's no seasonal effect.

And could you quantify those perhaps? Or perhaps a bit more color as to how that will phase in the rest of the year then?

Yes. We had in total OpEx that is EUR 1.3 million lower than the previous year, and we expect to be at more or less on the same level of expenses also in the following periods, i.e., being between EUR 2.4 million, EUR 2.6 million in average in the following quarters.

And then usually, there is some sort of, from a collective labor agreements, there is a component usually, I'd say, it's not necessarily this year as well, whereby you have to pay a fixed amount next to a salary in fees. This year, that salary increase or that fixed amount fell in Q4, is that perhaps likely gain in Q4 may it also be Q1 2025?

First of all, what you see on the labor side is that, obviously, in order to reduce costs but keep flexibility. Last year, we had a short time program in Germany that ran out at the end of March. And what we basically introduced is a voluntary working hour reduction from 40 to 35 weeks hours, where we had a take rate of well over 85%. In the end, that includes Daniel and myself to basically be a good example, but also the complete management team basically voluntarily here in the German facility basically opted for that. Again, that allows us to reduce the cost and at the same time, have the manpower available when market recovery happens. In Italy right now, we're mostly working at the moment with Tigo, which is a type of short time in Italy that is helping us to compensate that. In terms of onetime payments, I don't think there are any right now here in Germany and also on the increase side.

No, we still have the same basically inflation bonus that was allowed to be paid in Germany starting from late this year and going into this year, which is a monthly payment that the employees are receiving this net amount, gross amount, net amount, and it will phase out by the year-end. And then as Sven mentioned, I mean, we are reducing the work in our share of the employees trying to keep them on board for the time when we will meet them at full time.

But I think the first potential increases that would then obviously be negotiated later would be in '25, not in '24.

You mentioned some stop/start-up costs. Would you be able to quantify that perhaps a range? And should we also count on those start-up costs to impact Q2 and perhaps even Q3.

Yes, the stop/start cost, you mean, right Martjin? We mentioned Stop/start costs that are basically what we also said during the annual call, is the cost that we have due to the lower volumes. In a lot of the cases, our machines needs to run few hours before we can now...

As revenue obviously continues to go down in the last few months, that impact gets bigger and bigger, which is why we see that deterioration.

I'm sorry. I thought it was a startup was related to new projects, but no, I understand this element now. Then in e-Mobility, you mentioned a negative mix. I assume that, that is because of the relatively low volumes right now in EHV. Well, you mentioned in the tax and also in the presentation, there was a negative mix effect on margins in e-Mobility or sales effect and therefore also a margin effect. So, I was assuming that premium luxury will have been relatively stable. So, a negative mix effect must have come from EHV. And if that is the case, assuming that those volumes gradually move up, that's an assumption, shouldn't that negative mix effect eventually become more modest? Is that the right way to think about that?

I think we should really maybe have a point here about the new business areas. As you rightly understood, the business area now e-Mobility includes all type of automotive customers and recreational vehicles. This includes internal combustion and each, whereby in a lot of projects, we are in the majority of the projects, we are not even in the drive trend, therefore, it makes this split more artificial. But we mentioned with regard to the mix, it's not the mix between the internal combustion and the EHV. It's basically the mix in terms of technologies that we have. So, we have now a slightly portion of components for which we are doing also subassembly versus loose components that we are selling to our customers. And in Q1, we had a higher portion of subassembly business, and therefore, it basically moves the profitability from the gross profit to the EBITDA level. Yes, because in assembly, it is more labor-costs than the raw material.

And then my final question, perhaps you can update us on your CapEx guidance for 2024.

The CapEx guidance, we haven't provided an explicit guidance for CapEx. We will strive to stay on the target that we set for ourselves in terms of free cash flow, which would basically be to stay neutral on the free cash flow. So, it will be between what we have just reiterated between 0 and minus 3%. And we will in January.

But you have several moving elements in there. So, I can make a pretty good estimate of interest and tax and EBITDA, but then I have 2 other moving parts, which is CapEx and working capital.

Correct. The working capital target remains to be the same as we have finished in the previous 3 years, remains to be around 10% and hopefully below 10%. We were able to finish in the previous years in this range, and that is, definitely remains to be also the target for this year. And the CapEx will very much also depend on the new project wins that we may see in the second part of the year.

The next question comes from the line of Fabio Holscher, Warburg Research.

Two questions for now. I'll start on e-Bikes, you kept telling us is e-Bike was weak, but by destocking, now we see a 14% increase year-over-year. Can you elaborate a bit on that?

Yes. I think in the end, if you look back, the first quarter in 2023 was a particularly weak quarter, which is why if you compare the quarters, you see an increase. But overall, it's still significantly below the expectation. If you look at the quarters of last year, we started with $5.2 million, then we had 6.9 million, EUR 7.9 million. So, of course, by far the weakest quarter, normally, that's not the case. Normally, the first quarter is where you start to ramp up for the season but that was a particular situation last year. In the end, as we said, we see this year more a continuation of the level of quarter 1 for '24. So, not really a recovery overall for the year.

And then to follow up on that on e-Bikes. You mentioned in your slides, we expected e-Bike market growth midterm to 10 million to 12 million units. The market is currently at around 4%, at peak, it was around 5% to 6%. Half of that has been Germany probably and the diffusion or the adoption in Germany is already high. So, outside of Germany, where do you see opportunity in the future for e-Bikes?

Yes. I think the adoption is first, like you mentioned, but it's not over yet. For example, all the government employees in Germany, I will now find a union agreement that they need to have an opportunity that needs to be offered in job Yap, they work in bicycle in Germany. When we are talking about that end market, we are talking about 5 million employees in Germany. So, even if only 10% of them would opt in into this offer, it means additional 500,000 e-Bike that can be potentially sold in Germany itself. Then on top of it, I think we also mentioned in the previous calls, the next big driver of e-Bike markets will be the adoption of e-Bikes in the South countries of Europe. In Italy, Spain, France, where the penetration rate is still very, very low.

And also, overall, if you look at it, despite the fact that the market was relatively slow, I'd agree with you around the 4 million, maybe 4.5 million MAX retail sales last year. One thing to keep in mind is that our sales in terms of components in the industry were probably more around 3% to 3.5%. So, that is a recovery possible even with constant markets. And then last year was the first year when many countries, if you look at Benelux, if you look at Germany, but I think also the U.K. and quite a few other countries, at least in terms of euro value, the e-Bike business overtook general bike sales. Then, of course, the cargo bike segment is something that is seeing significant increases with more and more derivatives going in there, really carrying anything from your normal shopping as a private person, but also professional cargo biking in terms of delivery of goods from supermarkets or delivery companies. So, that's a segment where we expect mid long term to see around 1 million to 1.5 million units.

And is there room in content target for you?

I think, again, that highly depends on the customer itself. But, yes, on the new entrants on average, we also have a slightly higher wallet.

And then moving on to e-Tools, what's going on with gardening in particular? And when do you see from today's perspective, the recovery of the segment as a whole, when it could unfold considering that e-Tools has been underperforming just as much as e-Bikes, if not more?

Yes. I think in the end, we have to accept that globally, there probably still is a little bit of a post-COVID effect in the sense that people in that period really bought a lot of new equipment that, in some cases, probably still packaged on shelf. I think what we will see more is that more on the professional side, replacements will at some point be necessary, and that's when the market will recover. I think we always mentioned that we do not expect to see significant growth rates in that area, but at least the normalization and growth may be similar to GDP growth rate as we go forward, which will still make it a significant business for us.

[Operator instructions] There are no more questions at this time.

All right. In that case, thanks again, everybody, for attending the call. Looking forward to some of the discussions in the next few weeks and probably reach out to most of you when we have the General Shareholder Meeting in June. Thanks again for your attention and talk to you soon.

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