hGears AG ($HGEA)

Ladies and gentlemen, welcome to the hGears' AG Full Year 2025 Results Conference Call. I am Mathilde, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christian Weiz, Head of Investor Relations. Please go ahead.

Thank you, Mathilde. Good afternoon, everyone, and thank you for joining us for hGears' Full Year 2025 Earnings Call and Webcast. My name is Christian Weiz, I'm the Head of Investor Relations at hGears. With me on the call today are Sven Arend, our CEO; and Daniel Basok, our CFO. They will take you through our fiscal year 2025 results, and we'll be happy to answer your questions in the Q&A session after the presentation. The earnings materials are available for download in our Investor Relations section of the website should you not yet have received them. 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. With that, I'd like to hand over the call to Sven Arend, our CEO.

Thank you, Christian. Good afternoon, everyone, and welcome also from my side to our Full Year 2025 Earnings Call. As expected, the market environment remained challenging throughout 2025 with continued geopolitical uncertainties, weak macroeconomic momentum and limited visibility across our end markets. Against this backdrop, we delivered results slightly above our guidance and importantly, improved our profitability. This development reflects the consistent execution of our efficiency and cost reduction measures, which helped offset lower volumes and a less favorable product mix. Looking at our business areas, we continue to see a differentiated picture. In e-Bike, ongoing destocking and reduced production levels across the industry continued to weigh on volumes throughout the year. At the same time, e-Mobility remained resilient, supported by our strong positioning in the premium sports segment. And in e-Tools, we are seeing a gradual recovery with volumes moving back towards more normalized levels, supported in particular by continued solid demand for gardening equipment components. Overall, our structural and cost measures are increasingly effective and support our margin development despite low operating leverage. In parallel, we maintained a strong focus on liquidity and cash preservation and continue to operate with a solid balance sheet. Looking ahead, we expect the market environment to remain demanding in 2026, and our guidance reflects the current conditions and limited visibility. At the same time, we are confident that the structural growth drivers in our end markets remain intact and will support demand over the midterm. Let's turn to Slide 4 to take a look at hGears' business area sales performance in 2023 to 2025. On Slide 4, you can see the quarterly sales development across our 3 business areas over the past 3 years. Starting with e-Bike, the chart clearly reflects the weak development over the past quarters, driven by ongoing destocking across the industry. As we have consistently highlighted throughout the year, elevated inventory levels along the value chain continued to weigh on demand and order patterns in 2025. Following the pull forward of volumes into the first half, we saw particularly weak third quarter, which marked the low point of the year. Since then, we have seen a slight sequential improvement towards year-end. In addition, we took targeted operational measures during the year, including a partial shift of volumes into the first half, which helped improve capacity utilization and mitigate inefficiencies related to start-stop costs. While visibility remains limited, our observations suggest that inventory levels have gradually come down and that destocking process has made further progress. That said, it is still too early to assess the timing and the strength of a potential recovery. Turning to e-Mobility. The business shows a broadly stable development across the periods. This is a solid performance, particularly given the continued challenges in the broader automotive industry. As in previous quarters, we continue to benefit from our strong positioning in the premium sports car segments, which remain more resilient. At the same time, we are seeing a more diversified demand profile, including continued demand for components used in conventional powertrain applications. Overall, the development underlines the resilience of the business area and the strength of our product portfolio. Turning to e-Tools, the business has been gradually recovering throughout '25. Volumes are moving back towards more normalized levels, which is an encouraging development for the group. This recovery is supported in particular by continued solid demand for components for gardening equipment. At the same time, we remain mindful that overall macroeconomic environment and the potential trade-related uncertainties could continue to influence demand going forward. With that, I would like to hand over to Daniel, who will take you through the financial performance in more detail.

Thanks, Sven, and good afternoon, everyone. Also from my side, a warm welcome to our Full Year '25 Earnings Call. So let me start by putting the numbers into perspective. While the top line declined and mix remained a headwind, we were able to expand profitability at the EBITDA level. Adjusted EBITDA increased from EUR 0.5 million in '24 to EUR 1.6 million in '25, reflecting the structural adjustments we have implemented and improved cost base. Let me now walk you through the key drivers behind this development. So as you can see on the left-hand side, group revenues declined by around 4%, mainly driven by the e-Bike business area. From a financial perspective, the key point here is the product mix effect. E-Bike carries a significantly higher gross margin, roughly around 10% to 15% points above e-Tools. So the shift in mix would normally have had a noticeable negative impact on profitability. However, as you can see, this effect is not reflected in the gross margin development as we were able to offset it through efficiency and cost measures. And turning to gross profit and gross profit margin in the middle of this slide. As you can see, adjusted gross profit declined slightly in line with the lower revenue base, but at the same time, the gross margin remained broadly stable at around 45.7%. As I just mentioned, given the adverse mix with a significantly lower share of e-Bike, one would normally expect a more noticeable margin decline. The fact that the margin remained stable, therefore, reflects the impact of our operational measures. In particular, we improved production efficiency, including lower scrap rates, lower quality costs and more stable production processes. In addition, the partial shift of volumes in the e-Bike business area into the first half helped reduce start-stop costs and supported capacity utilization. At the same time, lower volumes continued to limit operating leverage, which remains a headwind. Overall, the gross margin development demonstrates that we were able to largely offset the negative mix effects through efficiency improvements. Let me now turn to adjusted EBITDA, which is the most important element in my opinion on this slide. Adjusted EBITDA increased from EUR 0.5 million to EUR 1.6 million in '25. Just as a reminder, the adjustments exclude nonrecurring items, mainly costs related to restructuring and one-off project expenses. Building on the gross profit margin discussion, the key point here is that we were not only able to stabilize margins despite the adverse mix, but also translate this into a meaningful improvement at the EBITDA level. The primary driver of this improvement was the reduction in personnel expenses. Adjusted personnel expenses declined by EUR 2.7 million or around 7.9% year-on-year. This reflects the structural measures we have implemented across our organization. At the year-end 2025, we had 601 full-time employees compared to 644 in the prior year. The reduction was mainly in our European operations, particularly in Germany and Italy, while our workforce in China remained more or less stable. Importantly, these are structural adjustments, which support a more efficient and yet, which is also important, scalable cost base going forward. At the same time, we maintain strict discipline on operating expenses. Overall, adjusted operating expenses remained stable year-on-year at around EUR 9.4 million. But looking at the underlying development, this stability reflects a number of offsetting effects. On the one hand, we achieved tangible savings across several cost categories. For example, maintenance costs declined by around EUR 0.4 million. We saw additional reductions in administrative expenses and operating leasing costs. On the other hand, these savings were offset by external factors. In particular, foreign exchange effects were less favorable year-on-year with FX gains being around EUR 0.25 million lower than in 2024. So on a normalized basis, excluding these external effects, our underlying cost base has further improved. In addition, we benefited in 2024 from subsidies related to R&D activities, which were not repeated to the same extent in 2025. Excluding these effects, our underlying cost base has further improved. So overall, this confirms that we have been able to offset the negative effects from lower volumes and an adverse mix and translate our operational measures into improved profitability. Let me now turn to cash flow and working capital. So let's start talking about the free cash flow first. Free cash flow was broadly stable year-on-year at around minus EUR 3.3 million despite the normalization of CapEx. Operating cash flow improved by EUR 2.2 million, mainly attributable to higher non-adjusted EBITDA, partially offset by a minor increase in working capital. CapEx increased to EUR 2.9 million, reflecting a return to more normal maintenance levels after unusually net low spending in the prior year. In addition, there is a reclassification of EUR 2.1 million between investing and financing as we replaced a planned leasing structure with a debt financed asset purchases. This increases investing cash outflow, but is fully offset by higher financing inflow with, at the bottom line, no impact on overall liquidity. Net working capital remains well controlled at 8.5% of sales within our target range of 8% to 10% from the total revenues. Overall, this demonstrates our continued focus on cash discipline even in a challenging environment. Let's move please to the next slide and talking about the balance sheet and our liquidity position. So overall, we maintained sufficient liquidity and continue to actively manage the balance sheet in a disciplined manner. Cash and cash equivalents amounted to EUR 8.7 million at year-end with available liquidity of around EUR 10.4 million. The decrease in liquidity compared to the prior year is mainly driven by the negative free cash flow and overall net cash outflow during the year. As a result, the net debt increased from EUR 9.4 million to EUR 18.5 million, where at the same time, leverage improved from 18.7x to 11.7x driven by the increase in EBITDA. The equity ratio stood at 31.9% at the year-end compared to 49.4% in the prior year. This primarily reflects the EUR 13.9 million impairment recognized at the end of the year. We are fully aware of the current cash situation and are actively working on measures to both reduce cash outflows and strengthen our liquidity position. This includes operational improvements as well as additional financing and liquidity options currently under evaluation. We expect to provide more concrete update on these initiatives through the year. So overall, we are taking decisive actions to strengthen our liquidity and further improve our financial position. As Sven mentioned in the beginning, liquidity and cash preservation remain our top priority and in particular, my focus as the CFO of the group. With that, I would like to hand back to Sven for his closing remarks and the outlook for 2026.

Thank you, Daniel. Let me shortly summarize the key messages. In 2025, we operated in a challenging environment with continued pressure on volumes and an adverse product mix. Despite this, we improved profitability, demonstrating that our implemented efficiency and cost measures are effective and that we are making progress in adjusting our cost base. At the same time, we remain clearly focused on liquidity and cash preservation, which will continue to be our top priority going forward. Looking ahead to 2026, the overall market environment remains uncertain. Against this backdrop, we expect revenues in the range of EUR 80 million to EUR 90 million, adjusted EBITDA to be between minus EUR 3 million and 0, and free cash flow is expected in the range of minus EUR 5 million to minus EUR 2 million. Our guidance reflects the current market conditions and the continued need for disciplined execution. At the same time, we remain focused on further improving efficiency, cash preservation and strengthening our financial position. With that, thank you very much for your attention and continued interest in hGears, and we are now happy to take your questions. Operator, please open the line for Q&A.

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

Daniel, I have 4 questions. Can you guys hear me correctly?

Yes, we can.

Hi, Martijn.

I'm slightly puzzled by the 2026 guidance. And I understand the geopolitical uncertainty and the question mark with regards to the destocking still in e-Bike. But if I take your Q4 results and just -- and that was not the best quarter for e-bike either, although it was better than Q3. But if I just multiply that times 4, I get to EUR 88 million in sales and a positive EBITDA of EUR 2.8 million, while you're guiding for at midpoint, a negative EBITDA of EUR 1.5 million. So my question is -- my first question is, what have you baked in, in terms of that e-Bike development? What have you baked into automotive? Because I understand your positive remarks about e-Tools. That would be question one.

Okay. With regards to markets, honestly, we so far for 2026 have planned no change on the e-Bike side. And I think we mentioned that previously that also on some of the projects that are starting automotive, but have seen some delays, we've made a conservative plan when it comes to the revenue side. With regards to the EBITDA side, we are, of course, right now facing some challenges on the cost side, looking at energy and whatever. So there, what we've done as in the previous year, if you look at our original guidance, is really to take a prudent view to make sure that whatever we incorporate in the budget is something we can -- we will achieve and live with. So that's where the basis for that comes from.

Okay. So e-bike relatively stable relative to 2025. It's more on the automotive that you see uncertainty. And then it's on the cost side already that you take into account such a -- well, material impact from 2.8% positive pro forma to minus 1.5%. Is there some other mix effect or perhaps another effect that comes...

No...

That we taken into account.

No, I understand your topic and your point, Martijn. And actually, it's something that we also discussed here previously. If we would need to give the guidance maybe 3 or 4 weeks earlier before the current Middle East war, we would probably feel a little bit more comfortable on going into this extrapolating exercise that you have just done. But considering the fact that the energy in Europe after the war in Ukraine is almost impossible to hedge and nobody can really expect -- anticipate by when the war will be -- will end. And we already saw significant increase of our energy costs in March, we decided that we want to be on the safe side in case we are providing the guidance. So, so far, at least from what we see from our customers in all business areas, there is yet no effect on the order book, yes. So the order book, we feel very, very comfortable with the guidance that we just provided. On the profitability, though, yes, it remains to be seen how long and what will be then the effect of the higher energy costs towards year-end, if it will drive inflation in Europe, yes, no and so on. Yes. So that is why the guidance on the adjusted EBITDA is, like Sven said, it's prudent. It reflects our current expectations based on the current order book, and we feel comfortable about it.

That's fair. Just one follow-up. Maybe you can refresh my memory, Daniel. How much of the -- how much of does the energy cost represent in your cost of goods sold, roughly speaking?

We are talking around 5% on from revenue.

Got it. Okay. Another question for you, Daniel. You mentioned in the presentation EUR 1.7 million in unused credit. You have the gross cash. You also mentioned that you're looking for additional sources of financing. What options do you have? You've already pledged assets and the plant and the equipment of Germany. Can you run us through the various options that you have?

Yes. I would really like not to prefer not to go into these details on the options that we have, but we are talking really about external financing, the additional sources, and we are currently in discussion with financial institutes on additional financing. As you said, the pledge of the assets in Germany, but it's not the only plant that we have. And we are also working on -- or nonsecured loans with other financial institutes. We are currently also working on moving liquidity from one plant to Europe, if I may say it like that, that will help the liquidity situation maybe in the European side. So there are currently a lot of moving parts there. But that being said, we are confident that with all these options that are currently on the table, we will be able to secure the financing through 2030 or basically through the whole business plan. Maybe I can also anticipate the next -- or even to provide a slightly broader answer to that. Of course, the audit opinion that was published today with all the -- with the financial statements mentioned it explicitly because we haven't had signed the deal yet for the financing. But as I mentioned before, we are moving in the right direction. We expect to close these negotiations within the next few months and to deliver then the information in a more precise way once we are publishing our financials in the next call.

And then a question again for Sven. More from a commercial point of view. If the e-Bike remains depressed and you have a negative trend in European automotive, which is a realistic scenario. I'm not saying that it's going to happen, but it's a realistic scenario. What is your plan B, especially given that you've already tried for several years now to find additional sources of revenue in the segment? So what is plan B? Could you elaborate a little bit on that?

I think I agree with you that we have been, of course, significantly disappointed by the lack of uptake on the bicycle side. I think in the end, if you look at the numbers, the numbers we saw last year reflect a significant decline in stocks in the industry. Once you've taken that stocking out, we will see a growth in the bicycle industry. But in the end, it's still far from what if you look back a year or two, we had projected for the industry. We still believe that the bike industry is an attractive market. We still think it will contribute significantly mid, long term to the business. But to be honest, we see bigger opportunities in the other 2 industries, Power Tools and Garden, where we have seen some increased activity. And of course, also on the automotive side, as we mentioned, we have got quite a few projects that are in the pipeline. Sadly, again, with the automotive industry going through the reorientation and the question of what products are really going to be in demand going forward, that slowed down some projects. But again, things like the full electric braking and steering components in the end provide a significant potential going forward. So we do expect to see growth coming from those areas, plus we will always continue to look in other industries. But to be fair, I think that when it comes to volume, still the automotive-related industry brings the biggest potential.

Okay. That's fair. And just a bit of housekeeping questions for Daniel. For 2026 in terms of guidance, should we assume a similar lease liabilities cash out and a similar CapEx?

Yes. The short answer is yes, due to the fact that -- and in general, I think we have sort of reached the limit of what we will be able to -- what will be the additional cost savings and measures that we will be able to implement if we still expect and we do expect the growth in the following years. And on the cash flow, 2024 was a significant year due to the fact that we were able to sell some unused machinery and to reduce the CapEx to EUR 0.6 million. We expect '26 and in the following years to come back to the same CapEx maintenance level that is in the region of 3% from the total revenues and the leasing deals that we were able to close at the beginning of -- during 2025 will basically be there also until 2029. So -- and the financing cash outflows should be more or less the same as in '25.

Got it. And I assume that with the guidance on revenue, which is at midpoint is still a bit lower than in 2025, there's no headwind from working capital, apart perhaps if raw mat prices go significantly up. But let's -- if we ignore that fact for a moment, it should be relatively stable.

Correct.

That's...

Correct.

Okay. One more, and then I'll move back into queue. I saw some interesting stuff in the annual report. You mentioned the decline in personnel expenses. But factory workers have gone down from 560 to 510, but office workers and white collar have gone up from 89 to 95, why would you have more people in that segment in 2025?

We are mainly focusing on continuing to develop the business. So this increases represents basically the increase in sales and engineering and...

Project management.

Project management.

That's actually the last one. I'll move back into queue. Maybe I'll have some other questions as well.

There is no queue. You can go ahead, Martijn.

Okay. Yes, it's a silly question to ask probably. But again, it's a similar question. The total wages came down from EUR 28 million -- a little over EUR 28 million to EUR 25 million, but your social contributions actually were relatively stable, and I had a bit of a trouble reconciling that. What have I missed there?

Yes, there are a few effects there. So if you have savings on personnel expenses, which are not structural personnel expenses, but for example, on the short-time work in Germany, you still need to pay social contribution on full salary on one hand. The other -- second effect was basically the increase in social contributions that we pay in China. In China, they have a plan, the 5-year plan when they basically plan to have a pension plan for all the employees by 2030, and you see a gradual increase in the social contributions in the Chinese plan. And this is basically the both effects that are explaining the numbers.

Okay. Got it. And then a relatively tricky one, and I understand if it's a sensible subject that you can't answer. But the lender facility of EUR 50 million for which you've pledged the German manufacturing equipment, which has been extended to 2029, explicitly says that it is cancelable if there's evidence of a significant deterioration of the financial strength of hGears. I wonder how do I mix that statement with the updated guidance for 2026?

I think in general, we don't see a further deterioration from the moment where we signed the extension. So the extension comes only to secure the lender in extreme situations. I think we are far away from being there. And we don't expect -- I mean, it's also a legal definition of what is a significant deterioration. But again, as we assume that when the contract was signed, the current situation of the German plant was already with the lower volumes of e-Bikes, further deterioration is basically almost impossible. We do believe that we reached the turf in terms of e-Bike volumes and sales. And from here, it will only go into the right direction.

Yes. Well, that would be a question for Sven. It is absolutely anecdotal. But if I look at e-Bike sales, there is a growing proportion of brands that are not using the high-end brands of your largest customer in e-Bike. I see a lot of fed bike sales growing still significantly. What type of discussion are you having with your largest clients in e-Bike? And what can you tell us about the assurance that they have that this market will normalize? Because it's been a few years now, as you said. So what assurance is there too soon to get to that restart of growth again?

Maybe a few points on that. I think number one is, if you look at the fact that -- again, these are not numbers that we have scientifically gotten, but this is feedback we got out of the market that at the beginning of 2025, we were at stock levels still in the pipeline of somewhere around 15 to 18 months. We have now gone to 12 months and below. It should mean that we, at some point in future, will reach a stock level that will require people to reorder. And that means that for the first time in 3 to 4 years, we should also see that our demand gets closer to the actual retail sales that you see on the retail side. That will then bring a significant improvement on the sales side. The other one is I think we've already said over the years that we've also already worked with several new players that are positioning themselves in the area of lower power, lower weight, more compact, but also lower cost product, which will target exactly that area where you see increases, which is that you see some people moving from mountain to gravel bike. You obviously have city bike applications that have some electric support in it. And that's why we actually started working with a lot of these customers that have no goal of getting to the numbers that maybe the very big players get, but I think they found a niche. Until now, again, with the stock situation the way it is, I think they've sort of struggled a little bit to get in. When they do sell, we typically have a higher wallet in these kind of products than we have with our large customers. And finally, to basically comment on that, we are working also with some of the aggressive entrants out of far East in order to also there be present in case they take bigger shares. I think in the end, we still think, though, that in terms of real sales for e-Bikes that carry our kind of components, we are looking still at around EUR 4 million to EUR 4.5 million a year.

Yes. So -- and when you mentioned those more niche segments, you are referring to the likes -- this is an example, [indiscernible] that type of specialist segment.

Yes. Again, it's people that have lighter systems that basically maybe have slightly less power, but that are lighter, which will be better also for, of course, the lighter type of bike. So it's more again for gravel bikes, city bikes, cross bikes, this kind of segment. And to be fair, let's face it, the very big players that are out there are seeing these trends, and they will also address this by developing new generations of products that will try and combat that competition or basically follow these changes in market trends. And that would be, I think, including the fact that at some point, we believe, not necessarily in the next 1 or 2 years, but certainly mid- to long term, you will also see more bikes with an automatic transmission. So you need some concepts that basically cater for that kind of requirement. And there, we are also active.

And this is going to be my real final question. On your largest e-Bike client, the assumptions for 2026, looking back at 2025, is that based on the same share of wallet that you normally have from that largest client? Or is there a shift there somewhere as well?

No, it's based on the same. To be honest, that is probably the most discussed and most heated discussion we have in the group all the time because, of course, it's always difficult to clearly understand how can we have this kind of sales development if the wallets don't change. But in the end, we really look at the fact that currently, the e-drive market is probably supplying half or less than in terms of numbers than what is being sold in retail, it explains why we are where we are.

Okay, got it, got it. Those were my questions. Right.

Alright, thank you.

Thank you, Martijn.

No questions...

We'll have you again in the call.

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

Okay. Thank you very much for your questions and the discussions. We appreciate, of course, your continued interest and support, and we look forward to speaking with you again during our next earnings call on May 12, for the quarter 1 results. Again, thanks for your participation. Have a good day, and goodbye.

Ladies and gentlemen, the conference is now over. Thank you for choosing.