hGears AG (HGEA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the hGears Full Year 2024 Results Conference Call. I am Yousuf, your Chorus Call operator. [Operator Instructions] This conference is being recorded. [Operator Instructions] The conference must not be recorded publication or for broadcast. At this time, it's my pleasure to hand over to Christian Weiz, Head of Investor Relations. Please go ahead.

Yes. Good morning, everybody, and welcome to hGears Fiscal Year 2024 Results Conference Call. Thank you for joining this morning. I am Christian Weiz, Head of Investor Relations. With me on the call today are Sven Arend, our CEO; and Daniel Basok, our CFO. They will present the full year 2024 results and will be available for the Q&A session after the presentation. If you have not yet received our relevant earnings documents, you can find them in the Investor Relations section on our website. Before we begin the presentation, I would like to draw your attention to the disclaimer on Slide 2, which sets out the legal framework under which we consider this presentation and which I will assume you have read. And now let me hand over the call to our CEO, Sven Arend.

Thanks, Christian, and good morning to everyone joining us today for this full year 2024 earnings call. As in the previous year, hGears was again able to navigate another tough year. As expected, market conditions did not improve the economic weakness with ongoing destocking in the e-Bike industry and structural problems in the automotive industry continued to weigh on our sales and earnings during the year. e-Tools was able to stabilize and thereby a bit of array of light. Despite the tough environment, we were able to deliver sales slightly above the 2024 guidance while the adjusted EBITDA and free cash flow were within the guided boundaries. The geopolitical situation remains a roller coaster with the situation in the Ukraine and the Middle East. Since the new President in U.S. took the Oval office, uncertainty with regards to global trade has increased. While we have not seen any impact yet, we are currently evaluating potential consequences for our business. However, the new situation also served as a wake-up call for Europe. Germany has set a strong precedent by establishing a massive budget for infrastructure and defense in this context. Other countries may follow suit, potentially turning this into a stimulus program for Europe. Realistically, we do not yet anticipate any short-term positive or negative effects from this. But long term, infrastructure investments could drive increased consumer confidence and ultimately demand which would also benefit our products and us. For the time being, destocking in the bicycle industry continues and even big players in this market continue to struggle with the market conditions. With a much more cautious approach, this year is expected to be the weakest of the last few years, but with significant upside potential once the stocks have finally been depleted. Meanwhile, we have no reason to doubt that e-Bike production will recover in the medium term, but unfortunately, nobody knows exactly when. According to the latest statistics, car sales in Europe continued to decline, while European cars face growing competition both in and from China. Unfortunately, we must acknowledge that the European automotive industry is in crisis, something that is impossible to overlook when you open any newspaper. Naturally, this also impacts our [e]-Mobility business area. The e-Tools business area experienced a strong second half and as a result declined only by a marginal 2% year-over-year. It is fair to say that e-Tools solidified its stabilization at low levels. The positive sequential development of the first 3 quarters could not be sustained in the final quarter. Nonetheless, the business division saw an 8.5% increase year-over-year in the fourth quarter 2024. We remain cautious and continue to tailor our organization to withstand the storm. This means adapting capacities, [indiscernible] costs and taking precautionary measures to preserve cash. In 2024, we reduced our workforce in China, implemented a short time program in Italy and introduced a 35-hour work week in Germany to cut cost. Given the continued absence of signs of demand recovery in the ongoing automotive crises, we will further adjust our workforce and introduce another round of short-time work in Germany in 2025. In a moment, Daniel will present numbers for the year, which demonstrates the successes of already implemented measures. However, we could not fully offset the volume shortfall resulting in negative operational leverage and inefficiencies from stop-and-start costs, while the deteriorated mix also weighed on our results. Our guidance for 2025 must be seen in this context. I will provide more details at the end of our presentation after Daniel has walked you through the financials. This concludes my short summary of 2024 highlights and the guidance. Now I would like to give you now some more details with regards to sales. On Slide 5, you see the quarterly evolution of our sales performance by quarters. The [e]-Mobility business area declined year-over-year but recorded a sequential decrease in the fourth quarter. This is a solid outcome among the ongoing crisis in the automotive industry and further underscores our strategic focus on the more resilient premium sports and luxury segments. As previously highlighted and expected, there was no measurable relief in the global e-Bike industry. The prolonged and more severe than anticipated destocking process across all levels of the bicycle industry supply chain continues to weigh heavily from the e-Bike business area. We remain cautious and avoid extrapolating the recent positive sequential development. The e-Tools business continued to stabilize, offering array of light. If there's a caveat, it's that the stabilization remains at relatively low levels, and the positive sequential streak came to an end after 3 consecutive quarterly improvements, which is, however, normal in any calendar year. Now let me hand over to Daniel, who will give you a deeper insight into the 2024 financials.

Thanks, Sven, and good morning to all of you also from my side. So let's start with a review of the financials on Slide 6, and let's continue with the details on the sales performance before we have a closer look at the profitability. As Sven said earlier, on the group level, we experienced a further deceleration in 2024 and the results were below our expectations. Total revenue in 2024 were EUR 95.7 million (sic) [ EUR 95.2 million ] a decrease of [ 14.9% ] from EUR 112.5 million (sic) [ EUR 111.7 million ] in the previous year. In the full year, the e-Bike business area sales declined by 36.1%, which, of course, also took its toll on profitability as being the more profitable business area. Our customers in the e-Bike industry are still working through excess inventories. Nonetheless, we recorded an 8% sequential increase in the fourth quarter, but it was slightly supported by the seasonal effects. On a year-over-year, the e-Bike business area faced a 54% quarterly sales decline. In the full year comparison, [e]-Mobility recorded 11% lower sales. However, we have shown resilience, thanks to our focus on premium and luxury cars, as Sven mentioned earlier. The e-Tools business area experienced a rebound in the second half of the year, finishing the full year with only a 2% decline in sales. This recovery was also reflected in the final quarter, which saw 23.9% year-over-year increase. However, at the same time, the business area ended its sequential growth straight after 3 consecutive quarters of improvement. Now moving to the gross profit and gross profit margin, as shown in the middle chart on Slide 6. hGears achieved an adjusted gross profit of EUR 43.6 million in 2024. As expected, the deteriorated mix and reduced production volumes further impacted operational leverage, while start stop related inefficiencies continued to weigh on performance. The adjusted gross profit margin declined by 450 basis points to 45.5% for the full year, which we still consider a solid achievement given the challenging conditions. In absolute terms, the adjusted gross profit declined to EUR 12.6 million year-over-year in the full year. The decline was offset by successful cost optimization and ongoing savings programs, limiting the decrease in adjusted EBITDA to just EUR 5.1 million. We achieved a EUR 3.5 million reduction in adjusted personnel expenses year-over-year, a 9.3% increase that reflects our disciplined cost management. As of the end of the year, we employed 644 people based on full-time equivalents, excluding ourselves, Sven and me, compared to 724 the year before. However, with no immediate market recovery in sight, we've had to make difficult but necessary decisions and to further reduce our workforce in January 2024. We will again introduce short-term work in Germany and are carefully considering further personnel-related measures across other locations. These steps are part of broader effort to align our cost structure with current market realities and safeguard the company's long-term competitiveness. In parallel, we succeeded in reducing adjusted net operating expenses, OpEx by more than EUR 4 million, which is a significant improvement of nearly 30% year-over-year. The majority of these savings came from areas like cutting the maintenance costs, advisory fees and other personnel costs such as recruiting. This reduction in OpEx exceeded the decline in revenues, which fell by 14.5% over the same period. This result reinforces that our determination to reevaluate every aspect of our operations has paid off, and we are not stopping here. We will continue pushing forward with the same focus on cost savings. Overall, we successfully mitigated impact of EUR 12.6 million decline in adjusted gross profit by implementing countermeasures that I mentioned now, totaling to more than EUR 7.5 million. As I said, adjusted EBITDA for the year came in at EUR 0.5 million, down from EUR 5.6 million in the previous years, but clearly demonstrating the effect of our decisive actions to stabilize profitability in a challenging environment. Please turn to the next slide, which provides overview of some balance sheet items. So with total financial liability of EUR 26.5 million, our net debt stood at EUR 9.4 million at year-end. To support our cash flow, we continue to actively manage our balance sheet and successfully reduced net working capital by 22.1%, bringing it down to EUR 7.2 million. This represents 7.5% of revenue at the year-end 2024 compared to 8.2% the year before. It's important to note that this reduction in working capital occurred against the backdrop of 14.9% in revenues, further underlying the effectiveness of our management efforts. The balance sheet remains stable. We closed the year with an equity ratio of 49.4% and a cash position of EUR 17.1 million. This capital base gives us the resilience we need to navigate current difficult market environment with a certain level of confidence. As I said, net debt stood at EUR 9.4 million at year-end, which includes EUR 7.8 million in leasing liabilities for IFRS 16 and our total financial liabilities consisting of EUR 11.2 million in current and EUR 15.3 million in noncurrent liabilities. Looking at our overall financial position, we believe our debt structure remains manageable. While we have a portion of short-term obligations, the majority of our financial liabilities are not current, which helps ease near-term pressure. Combined with our solid cash position and a strong equity ratio, we consider ourselves well positioned to weather the current environment. Preserving liquidity remains a top priority, and we will continue to take disciplined and cautious approach moving forward. So before I hand back to Sven and the outlook and closing remarks, let me repeat what I said during our last webcast during '24. Cash is king, and our focus is and will remain clearly on cash preservation. So now Sven, I would like to hand over back to you for outlook and closing remarks.

Thank you, Daniel. No doubt, 2024 was a tough one. But once again, we are navigating the storm and we'll continue to do so. Let me summarize. Throughout the year, customers continue to reduce volumes, cancel or postpone orders, which have impacted our performance. However, we are seeing stabilization in the e-Tools and we see stocks decline in the bicycle industry and small signs that indicate that the point of turnaround will be reached this year. The structural changes, cost saving efforts and personnel measures we implemented throughout the year are paying off and that is clearly reflected in our numbers. This by no means implies that we're stopping here. We will continue to reassess our structures and cost base, and we are prepared to implement further even tougher measures if necessary. And finally, we still have a stable balance sheet, which will help us to weather the storm. We need to remain patient, stay in our stringent, diligent and disciplined course. We continue to see substantial growth potential once our business areas recover, which reinforces our confidence in our business model. With that -- nevertheless, we remain realistic given the highly volatile economic and political environment, we stay cautious and anticipate anything but a steep recovery. This is clearly reflected in our 2025 guidance, which forecasts 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 between minus EUR 6 million and minus EUR 2 million. Ladies and gentlemen, thanks for attending our full year 2024 results and '25 outlook. With that, let me hand the line back to the operator to open the call for the Q&A session.

[Operator Instructions] The first question comes from Martijn den Drijver from ABN AMRO.

I'll take my questions one by one, and there will be a part about the business and the outlook, and then we will do some financial elements as well. On the e-Bike segment, can you tell me as far as you are able to do so, what are your clients saying in terms of your share of wallet? Has that changed? What is going on in terms of pricing? Are there any contracts that need to be renegotiated in 2025? Just a bit more color on these 3 elements, please?

Okay. No. I mean to start with the share, our share has not changed. I mean that's been confirmed. I think, honestly, the surprise that everybody had in this industry was that everybody expected 2025 to see a slight recovery. We sort of ran a model internally last year where we realized, look, if you look at all the numbers in detail, what we see is that in 2022 and '23, significant stocks were generated that, again, are throughout the whole pipeline. So from the drive manufacturers through the bicycle manufacturers, wholesalers, retailers, and that is something that obviously needs to be cleaned out. In 2024, we basically reached production levels that were equal to the retail sales. And what is happening now also due to -- as far as we are concerned, due to the significant financial restrictions that, that whole industry is seeing from a financing side, people are really, really cautious. I mean also, I think we've discussed that several times in the past. Typically, the industry committed to volumes in September, October for the complete following year. That is something that's just gone away. People -- the companies now give a relatively short forecast and really just buy on spot also knowing that the capacity in the supply base is available. So that's why '25 is even lower than '24, but that also means that once that's cleaned out, and that's where we get signals from everybody saying, look, we are starting to see people reorder. We also have a quite a significant number of players that, in the last few years, have taken nothing from us because they were not able to enter the market. And these companies are all now basically starting to schedule small volumes for '26, but they are scheduling. And that is really suggesting that the cleanout will take throughout this year. And then we would expect that we see bike sales go back at least to 2024 levels in '26, which would be a doubling of what we have today for '25 and then also start increasing again. So that's where we really see that we are finally through that cycle. In terms of share, again, we've maintained share with all the companies that we work with. I think one of the projections in the past, of course, was with having 6, 8 new players on board that would buy from us that would have positively impacted our share in the overall market. Now with these guys not getting a foothold in the market yet, that may have overall impacted a little bit our total market share. But with these now coming on board, that will change again in '26, '27, '28. I think -- I mean, also to give you an overall perspective, maybe that's something that we did not touch that much in the presentation here. I mean, of course, the focus of the company despite from all the focus on cutting costs and having a leaner organization has been on developing new business. And I think we've discussed that with quite a few of you that also the automotive industry has delayed some projects, things have not ramped up as planned. Some things have even been canceled. But what we -- if we look at the overall statistics in the last 2 years since we've gone into this, we've managed to gain 6 new customers that going forward will provide double-digit millions in revenues. The issue is, again, it will only start in '26 rather than earlier because of the delays we've seen with some of these projects.

Understood. Just one small follow-up. You mentioned spot sales. Do these spot sales have an impact on the pricing of your overall product portfolio?

No. In the end, no. I mean we've not made any price adjustments. I think in the end, let's be fair, we've at least maintained pricing stable simply because with the low volumes, the inefficiencies that we have, we did not even do contractual savings to customers. So in the end, we've maintained pricing levels as they were.

Got it. Got it. Moving on then. On e-Tools, you mentioned yourself that Q4 was slightly weaker again than Q3 and that it was sort of normal, meaning that it can be lumpy. Understood. But how should we think of 2025 then? And what do you see in terms of competitive pressure? Again, the same question on share, market share. And if there is something like a stabilization or perhaps even a slightly positive outlook, what's the driver of that? That would be question two.

To be fair, I think the sales volumes will be relatively flat in '25 versus '24 because '24 did see some slight recovery. But in the end, I think the one thing we need to watch, of course, is that is the issue, again, on the trade discussions, especially with the U.S. I mean, a portion goes into the United States, and we have to see how is this going to be impacted with any tariffs or not, although we have gone through an exercise in the past and major customers of ours that were anticipating this kind of situation, and they finally concluded even with tariffs being put on imports, for example, out of Far East or out of Mexico into the U.S., it would still be cheaper to keep that route than to try and localize. So we've gone through that exercise. And of course, it may impact the final demand in some way, but I don't think it's going to significantly impact the setup of how this is going to be produced.

That's clear. And then on [e]-Mobility, you mentioned automotive struggling projects delayed, some even canceled. Could the relaxation of the European CO2 emission targets have a positive effect, if any, on that's -- on those moving parts within automotive and conventional automotive, particularly?

I mean to be fair, what we see at the moment, for example, is some components out of conventional, so combustion engines are actually running relatively well, especially on the lower segment. I mean we've got a product that goes into a 1.5-liter diesel engine. There are the numbers -- they've done a consolidation of the supply base, expecting numbers to decline. And in the end, that's actually running well. I think the biggest impact we have at the moment is things that new developments and new projects for all kinds of reasons have been delayed. I think we mentioned and we are working on a brake-by-wire project that was significantly impacted by the fact that Conti had a quality issue in the U.S. and this kind of product is currently banned on the U.S. market that focus of that manufacturer has now been moved more into Europe and into China. So we are continuing to work on projects, but the launch date has been changed and the volume. But of course, also things like if you take example, Mercedes that we are not working with, but that went out and said, look, we're going to stop the pure electric platform and the combustion platform like the EQE, EQS, but that meant that changing that strategy, all platforms will be now launched another year, 1.5 years, 2 years later. That is just impacting our ability to increase sales in that segment with new projects because of the delays that in some cases we see.

Okay. So no real impact for any possible relaxation. It's just the industry going through this phase currently, there's nothing that could change that.

I mean, let's face it. I think in the end last year, we even had the opposite effect that a lot of countries took away the incentive for e-vehicles and that meant that the sales of electric vehicles significantly declined in most countries last year. Whether that's going to be picked up again with any new incentives, let's wait and see. I think there's a general hesitation in the market right now to say, okay, what do I finally buy? At some point, buyers have to make a choice. And as far as I'm concerned, as a lot of the product, again, that we make is relatively independent also now on e-hybrid or combustion, if you take, again, brake-by-wire, steer-by-wire components, that mid- to long term will not be affected in any way.

And then my final question on the business and markets. Is there any chance of you benefiting from increased defense spending, production ramping up new plants, new projects. Is that something that is realistic? Or is that too far out or too far out of your comfort zone?

I mean, honestly, of course, it's something that everybody asks us. We ask ourselves as well. I think the potential would be extremely limited due to the volumes that typically are behind defense industry products. There are 1 or 2 things that we may look at when it comes to well, let's say, ammunition. I think what will be more important for us is the trickle-down effect, of course, with the boost in the European economy, consumer confidence going up, spending ability going up, and very clearly, the infrastructure programs that hopefully will be boosted that especially with urban concepts will boost bicycle traffic in the cities. So that in the next 2 to 3 years will hopefully push this market a little bit further.

Got it. And my next questions are for Daniel. Daniel, in Q4, you had a higher e-Bike sales than in Q3, but your gross margin was actually lower. Can you help me understand that development, please?

Yes, it is mainly due to 2 factors. One factor is that we tried to cut costs in December, and therefore, there were a lot of sales that were generated in December, but basically went out of the finished goods and preproduced goods, and that somehow had a negative impact on the gross profit. And then at the year-end, we also needed to devaluate some of our inventory in the size of EUR 0.5 million for basically business for which we see a lower demand in 2025 than what we have already in stock.

Got it. Got it. And then you've mentioned that on the OpEx front, you've done a good job in terms of reducing that. You mentioned that there were some other developments ongoing. Can you elaborate a little bit? What have you done in the latter part of 2024 that could still have a positive effect on OpEx in 2025? And if you need to do more, which was suggested if necessary, what should we be thinking of? Is that in terms of size? What are we talking about? Can you provide a little bit of color on that?

Yes, sure. I mean the majority of the savings that came in 2024 came basically from the savings on positions that are semi-fixed, semi-variable, right? So we are talking about maintenance costs for sometimes that were just postponed towards '25 or just canceled due to the fact that the volumes are lower, and therefore, we needed to spend less. On the other side, advisory fees which were basically in sort some of the activities that are related to PR, some activities in ER, which Christian also overtook to himself, which we had maybe in the previous years, slightly with other advisers and recruiting, of course, we are not recruiting any people. So there were significantly less recruiting costs in 2024. But also on restricting the traveling expenses, I mean, even for, I would say, small things like when we know that there are groups of 2 people traveling between the German plant and the Italian plant, they usually take the car and not flying, right? So we are saving the parking costs and the flying ticket costs and so on and so on.

No, that's really detailed. There wasn't a specific program, let's say, in Q4, whereby you reduced FTEs by 10, 20, 30 which would still have a positive effect in 2025. So all of these have already...

We will have on the -- you asked about the OpEx, that's why I didn't touch the personnel expenses. But on the personnel expenses, as I said, we already introduced the program in 2025. We basically laid off more than 30 employees in the German plant for which we will see a positive impact on the personnel expenses also in 2025. So as of today, we are around 600 employees in comparison to 644 that we had at year-end. So it's another 7.5% or 6. 6% less than what we had at year-end, and we expect to see the positive impact also in 2025, plus on top, we are going to implement short-time work in the German plant in the following months. We are currently considering what can be additionally done in the plant in Italy. In China, I think we are running in a very efficient way, and we will stay around 200 employees. So we are still seeing some positive development on it in 2025. So I would say that in terms of money, if we need really to break it down, we will see around EUR 1 million, EUR 1.5 million less personnel expenses in 2025 in comparison to '24.

That's perfect. That was the answer I was looking for. Then 2 final questions. On the working capital, what should we assume for 2025? Is still a slight improvement as net working capital of sales? And the same question for CapEx, what should we expect for 2025?

No. Really in terms of net working capital, I think we pretty much dried it up. I mean we're talking about 7.5%, which basically reflects 1 month of working capital. I think it is already very sporty and I don't think we will be able to get anything that is really material out of it going forward. And of course, considering also that our mix changed slightly towards more assembly, this reduction in the net working capital is even more significant, because assembly usually requires higher net working capital than the loose components business. And on the CapEx side, we expect 2025 to be more or less like 2024. So we are currently really at the maintenance CapEx level. We always said that we are around 2% to 3% CapEx per year that we need only for the maintenance, and that is also our expectation for 2025.

[Operator Instructions] Ladies and gentlemen, there are no further questions. I would now like to turn the conference back over to Sven Arend, CEO, for any closing remarks.

Okay. Well, then thanks, everyone, again for joining the call. And yes, we'll probably catch up with you in the meantime, and then we'll see you all again in the next call in a few months. All the best. Thanks again.

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