hGears AG (HGEA) Earnings Call Transcript

Ladies and gentlemen, welcome to the hGears H1 2026 Results Conference Call. I'm Lorenzo, the Chorus Call operator. [Operator Instructions] The conference is being recorded. 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, sir.

Good afternoon, everyone, and welcome to hGears' First Half 2026 Earnings Call and Webcast. My name is Christian Weiz. I am the Head of Investor Relations. With me on the call today are Sven Arend, our CEO; and Daniel Basok, our CFO. They will walk you through our first half of 2026 results, and we'll be happy to take your questions in the Q&A session afterwards. If you have not yet received the earnings materials, you can find them in the Investor Relations section of our website. Before we get started, I would also like to draw your attention to the disclaimer on Slide 2, which sets out the legal framework for today's presentation and which I will assume you have read. With that, I hand over to our CEO, Sven Arend.

Thank you, Christian. Good afternoon, everyone, and welcome to our first half 2026 earnings call. Let me start with the key messages for the first 6 months. Overall, our performance in the first half of 2026 was in line with our expectations and therefore also consistent with the framework of our full year guidance. The market environment remained challenging with continued pressure across several of our end markets and limited visibility on the timing and strength of a broader recovery. Against this backdrop, we continue to execute with discipline, with a clear focus on efficiency, profitability, liquidity and cash preservation. Looking at our business areas, we once again saw a differentiated development. E-mobility remained resilient and continued to provide stability to the group. Our focus on sports and luxury vehicles continues to support the business in what remains a demanding environment for the broader automotive industry. E-Bike, on the other hand, continued to be affected by weak market conditions as well as what we perceive as structural changes in the market. In addition, the year-on-year comparison remains demanding as the first half of 2025 benefited from the phasing of production volumes into the first 6 months of the year. In e-Tools, demand softened compared with the strong prior year period, particularly for gardening tools. At the same time, the structural adjustments and the efficiency measures we implemented continue to support our profitability. This is particularly important given the lower volumes, unfavorable product mix and negative currency effects. We also continued to place strong emphasis on liquidity and cash preservation. The improvement in free cash flow in the first half demonstrates that our measures in this area are having an effect. So to sum it up, the first half of 2026 developed in line with our expectations. We are operating in a demanding market environment, but we remain focused on the factors we can control and continue to execute with discipline. Based on our performance in the first 6 months and the current assumptions, we confirm our guidance for the full year of 2026. Let us now move to Slide 4 and take a closer look at the sales development across our 3 business areas. On Slide 4, you can see the quarterly sales development across our 3 business areas. Starting with e-Bike, the overall market environment remains difficult. [ Dontin ] is led by the quarterly progression. Compared with earlier years, the business remains very weak, and unfortunately, we expect this to continue for the time being. As discussed in previous quarters, the bicycle industry has been dealing with elevated inventories and subdued production levels for an extended period of time. However, while the destocking process has made progress, we have not yet seen a broad-based recovery in underlying market demand. As mentioned earlier, last year, we brought forward production volumes into the first half to improve capacity utilization and to reduce start-stop inefficiencies. As a result, we are facing particularly high demand in comparison to the base in the first half of 2026. Turning to e-mobility. The business area once again demonstrated its resilience. Sales increased year-on-year in the first half and remained at a stable level from the first to the second quarter. This is a solid performance considering the continued pressure on the broader automotive industry. As in previous quarters, we continue to benefit from our positioning in sports and luxury vehicles where demand has proven more resilient. Overall, the development confirms that e-mobility remains an important stabilizing factor for the group. Finally, in e-Tools, sales declined compared with the prior year period. The first half of 2025 represented a strong comparison base. And in the current year, we have seen softer demand, particularly for gardening tools. The development from the first to the second quarter also reflects this weaker demand environment. In summary, the sales development in the first half reflects the market conditions we anticipated, continued weakness in e-Bike, softer demand in e-Tools and resilient performance in e-mobility. We will, therefore, continue to manage the business with a high degree of discipline and remain focused on efficiency, flexibility and cash preservation. With that, I would like to hand over to Daniel, who will take you through the financial performance in more detail.

Thank you, Sven, and good afternoon, everyone. So let me now take you through the financial performance for the first half of 2026. As Sven mentioned before and covered, I will not focus on the business areas, and I will mainly focus on gross profit and adjusted EBITDA. Group sales declined by around 6% year-on-year from EUR 49.3 million to EUR 46.5 million. Looking briefly at the business mix, e-Mobility grew by 7% to 25.5%, while e-Tools declined by around 12% to EUR 15.9 million and e-Bike by around 31% to EUR 5.1 million. So, turning now to adjusted gross profit in the middle of the slide. Adjusted gross profit decreased from EUR 22.6 million to EUR 21 million, while the adjusted gross margin declined by 70 basis points from 45.6% to 44.9%. The main driver of the margin development was the unfavorable product mix. In particular, the higher share of assembly business within the e-mobility increased the material intensity of our sales. This mix effect is also expected to continue in the second half of the year. At the same time, the higher share of assembly activity is less energy intensive, which partly mitigated the effect of somewhat higher energy prices in the first part of the year. Lower outsourced production costs, lower other material expenses such as tools and supplies, and further efficiency improvements provided additional support. Overall, this allowed us to limit the decline in gross margin despite the lower revenue base and unfavorable mix.  Moving to the adjusted EBITDA. We generated positive adjusted EBITDA of EUR 0.4 million compared with EUR 1.1 million in the first half of 2025. This corresponds to an adjusted EBITDA margin of 0.8%; for me, this is the key message on this slide. Despite lower volumes and an unfavorable product mix, negative net FX effects of approximately EUR 0.4 million, adjusted EBITDA remained positive. This demonstrates that the cost and structural measures we have implemented are working.  Personnel expenses decreased by EUR 1.9 million or around 11% year-on-year. The reduction reflects the structural measures already taken, but also our active and flexible management of capacity in line with demand. Around EUR 0.3 million of the year-on-year reduction resulted from short-time work implemented in the European plants. In addition, the higher share of assembly activity is less labor-intensive and therefore had a positive impact on personnel expenses from total revenues.  We continue to monitor demand very closely and adapt capacity where necessary and possible. On foreign exchange, the effect was broadly consistent with what we discussed already after the first quarter. The negative impact was mainly transaction-driven and related to USD-denominated sales in China, with a stronger Chinese RMB resulting in less favorable RMB proceeds. So overall, the first half results confirm that the measures we have taken are supporting profitability. At the same time, at the current revenue level, the scope for additional savings without further structural measures is naturally more limited. A more meaningful improvement in profitability will also depend on the development of our top line and business mix.  Let's move to the next slide and talk about the cash flow and working capital. So Cash preservation remains one of our key priorities, and the development in the first half shows that the measures we have taken are working. Free cash flow improved EUR 3.4 million year-on-year from minus EUR 2.3 million in the first half of 2025 to EUR 1.1 million positive in the first half of 2026. The main driver was operating cash flow, which improved by EUR 3.8 million compared with the prior year period.  This improvement was supported by active net working capital management. As you can see on the bottom right, net working capital decreased from $8.6 million to $5.1 million. The reduction in net working capital was mainly driven by lower receivables, reflecting both the lower sales level and our active management of working capital.  Inventories meanwhile remained broadly stable compared with year-end. This is a positive development, actually, particularly given the higher share of assembly business in our current sales mix, which would normally tend to increase inventory requirements. The fact that inventories remain stable, therefore, reflects disciplined inventory management despite the changing production mix.  We currently expect working capital to remain around this level over the medium term. However, after the significant improvement achieved over the past periods, we do not expect working capital to provide the same level of additional cash contribution going forward.  Turning to investments. CapEx amounted to EUR 1.6 million compared to EUR 1.2 million in the prior year period. The increase mainly reflects investments related to a new brakeway wire project in our E-mobility business area. At the same time, maintenance CapEx remained below our normal level of approximately 3% of sales.  So despite our strong focus on liquidity, we continue to invest selectively in new projects where we see attractive future business opportunities while maintaining strict discipline on maintenance and discretionary spending. Overall, the development shows that our focus on cash preservation is having a positive effect, both in our operations and in the way we manage investments.  Let me now move to the balance sheet and liquidity position on the next slide. Cash and cash equivalents amounted to EUR 7.2 million at the end of June compared to EUR 8.7 million at year-end 2025. The reduction in cash position mainly reflects repayment of financial liabilities during the first half, partially offset by positive free cash flow and other financing measures within the group. Based on our current assessment, liquidity remains sufficient to support ongoing operations. At the same time, we continue to manage our liquidity position very closely and are actively evaluating additional measures to preserve and further strengthen liquidity.  Turning to the net debt. We saw an improvement compared with the end of the first quarter. Net debt declined from EUR 20.4 million at the end of March to EUR 18.8 million at the end of June. This reflects the positive free cash flow generated during the second quarter as well as the measures taken on the financing side. Leverage decreased from 28.7x at the end of March to 22x at the end of June. As we have explained in the previous quarters, the leverage ratio remains extremely elevated, primarily due to the low level of LTM adjusted EBITDA. Therefore, relatively small movements in EBITDA have a significant impact on the ratio.  Finally, the equity ratio stood at 27% at the end of June compared to 31.9% at the year-end 2025. Overall, we continue to manage the balance sheet and liquidity position very actively. In the current environment, we are continuously evaluating all, and I mean all, available operational and financing measures that can help us preserve and strengthen liquidity. Cash preservation and active liquidity management, therefore, remain our top priority and, in particular, my key focus as the CFO of the group. With that, I would like to hand back to Sven for the outlook and some closing remarks.

Thank you, Daniel. Let me briefly summarize the key messages from today's presentation. Our first half results were in line with our expectations and remain consistent with our full year guidance. The market environment continues to be demanding, and we still see limited visibility across several of our end markets. Meanwhile, the development of our 3 business areas remains differentiated.  Against this backdrop, our structural adjustments, efficiency measures, and disciplined cost management remain very important. They continue to support profitability despite lower volumes and unfavorable product mix and negative currency effects. At the same time, liquidity and cash preservation remain clear priorities for us. The improvement in free cash flow in the first half is encouraging and confirms the importance of our continued focus on working capital, investments and overall cash discipline.  Based on our performance in the first 6 months and our current assessment of the market environment, we confirm our guidance for the full year 2026. We continue to expect group revenue 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 finally, our free cash flow is expected to be in the range of minus EUR 5 million to minus EUR 2 million. We will continue to execute with discipline, focus on the factors within our control, and preserve liquidity while positioning the business in our end markets.  With that, thank you very much for your attention and your continued interest in HGS. We're now happy to take your questions.

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

I have a list of questions. Sven, could you talk a little bit about e-mobility in light of what we've seen in European automotive production? It is quite resilient. But can you elaborate a little bit on what drove that resilience? Is it market share gains? Have you been supplying successful models? Is pricing an element? Could you elaborate a little bit on that aspect?

Yes, sure. I think it's a mix, to be honest. I think number one, I think that's known in the supercar segment: a product that is running extremely stable. And so that's something that basically has been sold out virtually for one year, 1.5 years. Then we basically have some products actually even in conventional automotive that are running very stable. I think that's in smaller engines, for example, on a turbo diesel, where I think consumers are now making decisions on what car to buy and at least until now have been actually consuming these products at quite a good rate. And the last one, in the end, is really gaining market share or entering into new segments like the brake-by-wire business that Daniel mentioned, that after quite some development time and delays, at least has started and is starting to hit the bottom line. That obviously is something that we aim to expand. It's not been smooth. It's been bumpy. It continues to be bumpy. But I think in the end, we're at least finally seeing that it's taking hold in the business.

And was pricing an element in this development at all?

No, honestly not.

Then a similar question on e-Tools. What drove the decline in gardening? And you also mentioned in the press release that you basically expect a relatively stable e-Tools in the second half. So what gave you that confidence given the decline in H1?

I think the forecast, honestly, that we have for the year, which is normally relatively stable, we believe we will fulfill. Also, there are some newer projects that are starting up, especially in the Far East area. I think what happened in Garden Tool is we, of course, never have clear visibility on the end market. But there was also an issue that we were not fully aware of: a bit of a stock buildup at a customer when they were changing their ERP system, where they had been confident that they would basically maintain demand regardless, and that hasn't happened. So they were probably, again, working out of relatively high stock levels, made some adjustments that hit us in the first 6 months and hopefully will start to disappear as we move along.

And you just mentioned new projects. Is that with existing customers? Or are those projects with new customers?

Both.

Both. That's encouraging. And then on e-Bikes, I know you've mentioned before the difficulty in the e-Bike market. You referred to destocking. Is it really destocking? Isn't it just that the European consumer is unwilling to pay EUR 3,500, EUR 4,000 for an e-Bike from a traditional brand that uses your particular client as an engine provider? Because I just have this anecdotal evidence left and right that it's bikes that are powered by non-Bosch, non-Bros, non-Male engines that are taking market share away from your traditional European brands. How would you feel about such a statement and analysis?

To be honest, number one, I think what is clearly happening is that a larger and larger proportion of bikes, I mean, you're probably referring to things like Head Bikes that I believe in the Netherlands, for example, have taken a huge market share, and we see the same in some other countries. I would not even say that they are grossing or taking market share from the customers that we have worked with in the past. It's just that when you look at the sales numbers, they include these types of bicycles. And I think what we may find is that if we look into bicycle sales by segment, we will see still very depressed numbers on things like High-end mountain bike drives. The next thing that is happening is that, and that's what we said with market changes. We see people turning from the very heavy mountain bike to more things like gravel bikes and lighter bikes, which, again, in some cases, use different systems. If you look at the announcement of Bosch that came out saying we're now going to provide hub drives, which is, again, for light bicycles, which, as far as I understand, even source from China, it shows that the mix in the market is changing as well. I think in the end, numbers still have an opportunity to get better. But I think we're, again, far away from the numbers that we saw a few years ago. And that's why we say we continue to expect that this will not change dramatically.