hGears AG ($HGEA)

Ladies and gentlemen, welcome to the hGears' Q1 2026 Results Conference Call. I'm Moritz, the Chorus Call operator. [Operator Instructions] At this time, it's my pleasure to hand over to Christian Weiz, Head of Investor Relations.

Thank you, and good afternoon, everyone, and thank you for joining us for hGears' first quarter 2026 earnings call and webcast. My name is Christian Weiz, Head of Investor Relations. With me on the call today are Sven Arend, our CEO; and Daniel Basok, our CFO. They will take you through our first quarter 2026, 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 our 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 our 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 the call over to our CEO, Sven Arend.

Thank you, Christian, and welcome also from my side to our first quarter 2026 results call. Let me start with the key messages for the first quarter. Overall, our performance in the first quarter was in line with our expectations, and therefore, also in line with the framework of our guidance for the full year. The market environment remained challenging with continued geopolitical uncertainties and limited visibility across our end markets. Against this backdrop, we continued to execute with discipline and maintained a clear focus on efficiency, liquidity and cash preservation. With regards to our business areas, we again had a differentiated picture. In e-Bike, volumes continued to be affected by the ongoing destocking in the industry. In addition, the comparison base was demanding as the first and second quarter of 2025 benefited from anticipated volumes in production. E-Mobility again demonstrated resilience. We continued to benefit from our focus on the premium and sports segment, which once again proved more robust in a difficult market environment. In e-Tools, sales declined moderately against a solid prior year base, but the business remained solid overall. The first quarter results underline that our implemented structural changes and cost measures are supporting the business. They helped cushion the effects from the currently low operating leverage, unfavorable exchange rate and an adverse product mix. To sum it up, we delivered a solid quarter in line with our expectation by executing with discipline in a challenging market environment and against the backdrop of continued weakness in the bicycle industry. Based on our first quarter results, we confirm our guidance for 2026. Let us now move to Slide 4 and take a closer look at the sales development across our business areas in the quarter. On Slide 4, you can see the quarterly sales development across our 3 business areas. Starting with e-Bike, the first quarter again reflects the still ongoing unwinding of the massive excess inventories that were built up during and after the COVID pandemic, a process that is taking longer than anyone in the industry would have expected. As a result, production levels remain subdued and order patterns are still affected. In addition, the year-on-year comparison is influenced by the phasing of business in 2025. As discussed before, Q1 2025 benefited from pull-forward effects in production, which makes the comparison particularly demanding. We have seen some sequential improvement over recent quarters, but this should again be viewed primarily in the context of prior year phasing and destocking and not yet as a broad-based recovery of the underlying market. However, our observations suggest that the inventory levels continue to gradually decline, which means that the destocking process has made further progress. It is certainly still too early to assess the timing and the strength of a potential recovery, but industry data suggests that the market is at least starting to stabilize. Turning to e-Mobility. The business area again delivered a very solid performance and achieved a year-on-year as well as sequential growth. This is particularly encouraging against the backdrop of continued challenges in the broader automotive industry, which many major OEMs in the Western Hemisphere are facing with increasing pressure. It underlines the resilience of the end markets we serve and the strength of our positioning, particularly in premium and sports segments as well as in selected mobility applications. At the same time, we continued to see a more diversified demand profile with ongoing demand for components used in conventional powertrain applications as well as EV platforms. Finally, e-Tools declined moderately compared with a strong prior year base. The development remained in line with our expectation, and we continue to manage this business with a focus on efficiency and operational discipline. In summary, the first quarter sales development reflects a challenging, but well-understood market environment. We continue to execute with discipline, focus clearly on the factors we can control and remain mindful that macroeconomic conditions and potential trade-related uncertainties may continue to influence demand going forward. Now I will hand over to Daniel, who will take you through the financial performance in more detail.

Thank you, Sven, and good morning, everyone. So let me now take you through the first quarter financials, starting with the key performance indicators on this slide. As Sven already explained the main business drivers, I will focus on how these developments translated into our financial performance. So the group sales declined from EUR 25.1 million to EUR 23.3 million in first quarter 2026. The main message is that despite the lower sales level, adjusted EBITDA remained broadly in line with our expectations and consistent with our full year guidance. Moving to gross profit. Adjusted gross profit decreased from EUR 11.8 million to EUR 10.5 million this year in the first quarter, and the adjusted gross margin came in at 44.8% compared to 47% in the prior year. In the first quarter of 2026, the margin was impacted by a less favorable mix with e-Bike accounting for less than 10% of our total sales. It is important to note that the prior year margin was also supported by inventory movements. Work in progress and finished goods increased stronger in the first quarter of last year than in 2026. At the same time, efficiency improvements helped partially offset these effects. Turning to adjusted EBITDA. We reported EUR 0.2 million -- sorry, minus EUR 0.2 million in Q1 2026 compared to EUR 0.7 million in the prior year quarter 1. Adjusted EBITDA remained in line with our expectations. And the key point here is that the cost and structural measures implemented last year in 2025 continue to support profitability. Personnel expenses declined by EUR 0.8 million or around 9.1% year-on-year, supported by improved efficiency and the expansion of short-time work in our German plant. The reduction was stronger than the decline in sales, lowering personnel expenses as a percentage of revenue. At the same time, unfortunately, FX had a negative impact of around EUR 0.3 million, corresponding to roughly 110 basis points of margin impact year-on-year. The FX impact was mainly transaction-driven and related to U.S.D -- U.S. dollar-denominated sales in China. Compared with the prior year quarter, the Chinese RMB was stronger, which led to less favorable RMB proceeds and negatively affected adjusted EBITDA by, like I said, EUR 0.3 million. This reflects broader currency market movements, including U.S. dollar weakness and uncertainty around U.S. China trade policy. Overall, the first quarter confirms that our cost base is improving, while the top line remains affected by market conditions, mix and phasing effects. So with that, let me move please to the next slide and on the free cash flow and working capital. This slide is important because cash preservation remains one of our key priorities, if not the most important one. Free cash flow improved by EUR 1 million year-on-year from minus EUR 2.2 million in the first quarter of 2025 to minus EUR 1.2 million in the first quarter of 2026. The improvement was driven by both operating and investing activities. Operating activities contributed EUR 0.7 million to the improvement. This was mainly supported by lower receivables, partially due, of course, to lower sales and higher liabilities compared to the prior year quarter. On the investment side, CapEx amounted to EUR 0.5 million in the quarter compared to EUR 0.8 million in the first quarter of 2025 and contributed EUR 0.3 million to the improvement. This reflects lower CapEx and continued disciplined investment spending. This is currently below our normal maintenance CapEx level of approximately 3% of sales per year and reflects our selective investment approach in the current market environment. Turning to working capital. Net working capital increased slightly from EUR 0.8 million year-end -- or sorry, quarter end last year to EUR 8.1 million this year. However, it remains well controlled and at around 9% of total LTM sales, and therefore, within our target range between 8% and 10%. Overall, this slide shows that our focus on cash discipline is visible in the improved free cash flow development, supported by active working capital management and disciplined CapEx. With that, let me move on to the balance sheet and liquidity position on the next slide. So cash and cash equivalents stood at EUR 7.6 million at the end of March 2026. Including unused credit lines, available liquidity amounted to slightly above EUR 9 million at EUR 9.1 million. This is lower than the EUR 10.4 million that we saw at the year-end 2025, mainly reflecting the negative free cash flow in the first quarter. At the same time, we continue to have sufficient liquidity headroom and remain very focused on cash preservation. Net debt increased to EUR 20.4 million, reflecting the net cash outflow during the quarter. The leverage ratio increased to 28.7%. This is clearly a very, very elevated level and mainly reflects the still very low LTM adjusted EBITDA base. So the key focus remains unchanged. We need to further improve profitability, reduce cash burn and strengthen our liquidity as much as possible. On the equity side, the equity ratio stood at 28.5% at the end of March 2026 compared to 31.9% at the year-end '25 and thereby remain close to our targeted level. To summarize my part of the presentation and before we move to Sven back, our first quarter performance was in line with our expectations and consistent with our full year guidance. The measures implemented last year continue to support our cost base, and we are seeing the benefits in personnel expenses and overall operating discipline. At the same time, we improved free cash flow year-on-year, supported by active working capital management and very disciplined CapEx spendings. That said, and as I said before, cash preservation and active liquidity management remains our top priority and especially my main focus as the CFO of the group. We will continue to manage costs, working capital and investments very tightly, while also working on additional measures to further strengthen liquidity. With that, let me hand back to Sven for the outlook and closing remarks before we move to the Q&A.

Thank you, Daniel. Let me also briefly summarize the main takeaways from today's presentation. Our Q1 '26 results were in line with our expectations and within the framework of our full year guidance. The market environment remains demanding, but our structural and efficiency measures are taking effect and continue to support the business. The measures help cushion the impact of weaker volumes, adverse product mix effects and unfavorable exchange rates, and they also position us well for the medium to long term. At the same time, liquidity and cash preservation remain clear priorities for us. Based on our first quarter performance and the current market environment, we confirm our guidance for the full year. We continue to expect group revenues in the range of EUR 80 million to EUR 90 million. Adjusted EBITDA is expected to be between minus EUR 3 million and 0, and free cash flow is expected to be in the range of minus EUR 5 million to minus EUR 2 million. This concludes our first quarter 2026 presentation. We are now happy to take your questions. Operator, please open the line for the Q&A.

And the first question comes from Martijn den Drijver from ODDO BHF.

And operator, may I ask, am I the only one in the queue or should I limit myself to 3 questions?

That is up to the speakers.

Martijn, feel free. It's Daniel here. You are...

Taking the lead, as always.

All right. I'm going to kick off with some tough questions, Sven. I'm looking at e-Bike sales. It was EUR 51 million in 2022, EUR 42 million in 2023, EUR 19 million in 2024, EUR 10 million in 2025. The tough part of this -- the tough question now comes, how can we be sure that this is only destocking and not a loss of share of wallet? I wonder if you could elaborate a little bit more than usually about this phenomenon.

Well, I mean, in the end, we have agreements on quotas on programs. And as far as we are concerned, that has been repeatedly confirmed that we have kept these. So that's why we have to accept and assume that this is the case. I think also if you really look at the numbers of last year, where we said at the beginning of last year, we still expect it to be there around a pipeline of more than 12 months of inventory and then basically we would still be everything we've seen at around 6 months for this year. And the question is where is the bike market really right now versus where it was 2 or 3 years ago? I mean there, we think that there probably has been a decline in sales of around 20%, 25%, especially in the segment of the mountain bikes and probably more in favor for cheaper solutions, maybe even coming from Far East. So I think in the end, again, we so far don't see any indications that we have lost market share in this, and we just continue to receive the call-offs as normal.

Yes, I appreciate those remarks. I understand the whole decline in the e-Bike market. And yes, you're absolutely right that the import of Asian products is a factor. However, if I look anecdotally at your largest client and their sales level within the various countries, it seems as though, yes, they've experienced a sales decline. And obviously, they are relying more on the inventory that they have, but it can almost not from a mathematical perspective, match the decline that you have got to report...

But please also remember, '21, we were single source. '23, there were several sources. I mean we know and we've communicated this that at the beginning, hGears was a single source, then basically that customer built up in-house production and added a second source to the business. So in the end, if you compare it to '21, you really are looking at 3 suppliers versus 1.

That is a fair comment. That is a fair comment. Okay. I'll move on. On e-Tools, the sales that you have generated in the quarter are in line with what you've done in previous quarters. So that's clear. However, if I look at the latest guidance of Steel, Stanley Black & Decker, who's fun, it's quite positive. In fact, they're guiding for high-single-digit, low-double-digit and low-single-digit organic growth. Now that's obviously across a number of product market segments. But what are your assumptions for e-Tools going forward? What have you baked into your assumptions for 2026?

Honestly, for this year, we're looking at it a little bit in a stable way. One effect that I think we haven't mentioned here is that there has been a bit of a stock buildup on one of our customers at the end of last year for an ERP change. Now that is obviously somewhat impacting especially the first month. But honestly, for us, it's also always the case that especially when you look at the regions, I mean, we -- the product that we produce ends up in all continents, and we sometimes see declines in some regions and not in others. So I think overall, we're planning stable. I think the goal is to grow over the years, but more, I would say, with additional business rather than with just growth in itself.

Okay, okay. Understood. Then moving on to e-Mobility. The highest sales level in 9 quarters, so even though the luxury premium segment of the European car OEMs has not been uniformly in that direction. So can you elaborate on what happened? It's a great performance in a tough market, but what has caused this outperformance in Q1?

I mean, a little bit -- there are some projects that are finally starting to move that hadn't moved in the past. So that is contributing a little bit to that. The other thing is that, honestly, we have premium manufacturers where you read that their retail sales or at least their profits are down in double-digits and our volumes have stayed stable. The way to explain that, I think, is that some of the products we supply into have been extras at an extra charge in the past. And I think to make the product more attractive, they've basically now been added as standard. So even with manufacturers where you read in the press that their volumes are down quite significantly and their profitability is, we see stable numbers continuing for those customers as well.

And do you think that this trend will continue throughout the year?

Yes. I think we have no indication right now that, that's changing. But I mean, we're always cautious on these things. You know that.

Understood, understood. Now taking a step back -- and again, Sven, I'm being a bit tough here. But if I look back at the last 3 years, and we talked about business development and you guys have obviously, if I may qualify it like that, struggled with finding new markets. But I also cover other industrials. And some of these industrials have been able to find new segments within defense, within robotics, internal logistics, human type robots, what is keeping you from finding these new segments? Because you are a high precision, high torque-enabling component supplier. So why is it so difficult to find new markets?

I think we are addressing all of those areas. In the end, what we've got to look at is that we are really working in an area with a technology that requires relatively high volumes to really be efficient. So that makes it difficult in some. And I think to be honest also, I mean, we mentioned that previously, there are quite a few projects. But in the past, we've presented these when we thought they were there and then they were delayed or canceled. So by now, we're really getting to a habit of saying when it's on the bottom line, we will report about it. But let's wait and see, because in the end, there's been too many negative surprises over the last few years. But we are continuously working on these. And like we mentioned in the past, we have over 10 new customers. The question just is between kicking off things with them coming to an agreement and finally seeing this hit the bottom line, there will be some time. And as we mentioned before, sometimes they even disappear, which is why we will mention it when it's there.

That's fair. And I know some of the names that have recently disappeared as well. Okay. Moving on, Daniel, I know it's a tough question, but can you tell us -- can you elaborate a little bit on what you're working on in terms of that additional liquidity?

Yes, sure. I mean, we are currently working on additional liquidity that should come from additional working capital measures that we have in place. We have indicated in the last call and also in our annual report that we will need to have a financing in the second part of the year. Until now, we have certain measures that we have already implemented and will reduce this need in the second part of the year. But on the others, we are working. Mainly it will refer to using the working capital for short-time financing, i.e., factoring, for example.

Yes, okay. So I was thinking along the lines of the tactics that you've applied with the German assets, plant-wise, equipment-wise, receivable-wise, that's still a methodology or tactic that you can copy for the Italian operations. Is that a correct way to think about it?

That is something that we are also, of course, constantly proving, whereby I need to say that it appears to be in Italy much more difficult than it is in Germany due to a difficult -- different type of how procedures are distributed in case that the company will not be able to cover its debt. So it's -- in Italy, this -- and therefore, it makes this asset-based financing in Italy very, very difficult. I mean, that being said, I'm still in discussions with a few financing partners there. But if I'm very honest, that is currently not something that we count on it in our financing through the year.

Understood, understood. Now you just mentioned factoring. And I was thinking your net working capital was right in the middle of where you wanted it to be as a percentage of sales. Was that impacted by a higher level than normal in terms of factoring in this quarter?

No, no, honestly not. It was partially related to inventory -- yes, mainly due to inventory.

Okay. And -- go ahead.

No, no, I just wanted to mention that we had last year a different phasing in terms of sales, and therefore, also the different phasing in terms of inventory and WIP position, work in progress and finished goods position, and that's why we have slightly -- we have a difference in comparison to the previous year.

Okay. And I know I have the detailed information from the 2025 report, but that doesn't give you a full picture of where we stand today. Can you share with us, if possible, the amount of debts, bank debt or loans that are becoming -- are coming due before year-end 2026?

Before year 2026 until the end of the year, all the due to the banks will be paid.

Should I think about that as low-single-digit euro million or...

Yes. Yes, up to EUR 3 million.

Yes. So you can cover that with existing facilities and the gross cash available. Okay.

That's exactly the idea basically is to switch from bank financing and to finance it with receivables factoring.

Okay, okay. And those were my questions actually.

All right. Thanks, Martijn.

So there are no further questions at this time. So I would like to turn the conference back over to Sven Arend for any closing remarks.

All right. Thank you for your questions and the discussion and for your continued interest in hGears, and we look forward to speaking with you again during our next earnings call on August 12 for the first half 2026 results. With that, have a good day, and goodbye.

Ladies and gentlemen, the conference has now concluded, and you may disconnect. Thank you for joining and have a pleasant day. Goodbye.