Ladies and gentlemen, welcome to the hGears Q1 Results 2025 conference call. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a question-and-answer session. You can register for questions at any time by pressing star and then one on your telephone. For operator assistance, please press star and zero. 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.
Good morning, everybody, and welcome to hGears' first quarter 2025 results conference call. 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 our first quarter results and be available for the Q&A session following the presentation. Should you not yet have received our earnings documents, you may access them in the Investor Relations section of the website. Prior to starting the presentation, I would like to draw your attention to the disclaimer on slide two, which sets out the legal framework under which we consider this presentation and which I will assume you have read. I would now like to turn over the call to Sven Arend, our CEO.
Thank you, Christian. Good morning to everyone joining us today for our first quarter 2025 earnings call. hGears was once again able to navigate a tough quarter. Market conditions have not improved since we last spoke. The ongoing market weakness, together with the continued destocking in the e-bike industry and structural problems in the automotive sector, put further pressure on our sales and earnings in the first three months of the year. However, as in previous quarters, e-Tools continued to stabilize, and once again, it was a bright spot. Despite the rough start to the year, which we had expected, we were able to improve our EBITDA. This shows that our structural adjustments and strict cost-cutting measures are working and paying off. The geopolitical situation remains very volatile, with the wars in Ukraine and the Middle East and rising trade uncertainty under the new U.S. government.
So far, we have not seen any direct impact on our business, but we continue to monitor the situation closely and are evaluating possible consequences for our business. As we mentioned in our last call, the infrastructure investments announced by the German government could help boost consumer confidence and, in the end, demand, which would also benefit our products and our company. To be clear, this will not impact the short term but will drive mid- to long-term demand in our end markets. Destocking in the bicycle industry is ongoing, creating challenges that all players face, including the big ones. We expect this year to be the weakest in years, but there's strong upside once inventories are cleared. We are seeing signs that suggest this inventory cleaning is now underway.
Therefore, we remain confident that 2025 will mark the trough year for e-bike production and expect a recovery in the medium term, even though the exact timing remains uncertain. The automotive industry remains in crisis, as seen in the recent first quarter 2025 results of U.S. and European car makers. Despite this, we achieved a solid result in our e-mobility business area. However, given the geopolitical and economic volatility, we do not expect an improvement. The e-Tools business saw a solid year-over-year recovery and also improved sequentially in the first quarter of 2025, though still at low levels. Nevertheless, we certainly appreciate this recovery and expect the business area to continue delivering solid sales and earnings at around current levels. Daniel will present the financials in more detail, which clearly show that our measures are working, supporting profitability and making us more resilient.
However, lower volumes continue to drive negative operational leverage and start-stop inefficiencies, while a weaker mix also weighs on our results. We do not expect a short-term recovery in our customers and markets, as political uncertainty and unclear trade policies continue to weigh on demand. We, therefore, do not anticipate a major uplift in our top line in the coming quarters. This means we may not have reached the trough yet, and our 2025 guidance reflects this cautious view. However, we remain confident about the good prospects once inventories in the e-bike industry are cleared and the temporary crisis in the automotive industry has been resolved. As you know, e-Tools is stabilizing at current improved levels. Our clear focus remains on cash preservation, while our stable balance sheet enables us to weather the storm.
Now, let me turn to slide four for some comments on hGears' sales progression in the first three months of the year. On slide four, you can see the historical quarterly development of our sales performance. As expected, e-bikes remained weak, and as we noted on our last call, it would have been wrong to extrapolate the sequential development seen in the fourth quarter last year. The business area dropped by one-third year-over-year and declined sequentially as well. Although demand for bikes and related products seems good this spring, the industry continues to sell off inventories, and I'm afraid we may not have seen the worst yet, meaning the trough likely still lies ahead. As in the previous quarter, the e-mobility business area declined year-over-year but recorded a sequential increase in the first quarter of 2025.
This is a solid outcome given the ongoing crisis in the automotive industry, whose negative impact has likely not yet fully materialized. Therefore, we would caution against extrapolating this positive sequential trend. The e-Tools business remained a bright spot for us. It has been recovering in recent quarters, and we are cautiously optimistic that it will hold steady at current levels. That said, as with the e-mobility business area, we are mindful that U.S. trade policy could present a potential headwind going forward.
Now, let me hand over to Daniel, who will expertly walk you through the highlights of our first quarter 2025 financials.
Thanks, Sven, and good morning, everyone. Great to have you with us, so let's jump in. Let me start on slide six, and let's continue with the details on the sales performance before we have a closer look at profitability, gross profit, and adjusted EBITDA. As we mentioned earlier, the first quarter results represent a solid start to the year in line with our expectations. At the group level, hGears recorded an 8.6% sequential revenue increase, but compared to the previous year, revenue declined by 3.5% to EUR 25.1 million from EUR 26 million. In the e-bike business areas, sales declined by 32.1% year-over-year, impacting the group sales mix and placing additional pressure on profitability. This development reflects the industry's ongoing efforts to normalize inventory levels, as Sven mentioned before. Compared to the fourth quarter, sales were down only by 2.6%, indicating that the adjustment process is still underway.
As previously mentioned, signs of continued market volatility remain, but we believe these are part of a necessary transition toward a more balanced and sustainable demand. E-mobility recorded 3.8% lower sales in the year-over-year comparison, but as shown on slide four, sequentially, the business area was able to add 17.3%. Let me repeat what Sven also said before: we would caution against extrapolating this positive sequential trend. After a steady recovery throughout the past year, we are encouraged to see that the e-Tools business area is holding firm at current levels. In Q1 2025, the segment grew by 2.6% versus Q4 2024, and marked an impressive 20.4% increase compared to the same quarter last year. These results reflect solid momentum, and while we remain prudent in our expectations, the current trend is a positive indication of underlying strength. Moving on, let's look at the gross profit and gross profit margin.
In the middle of the chart, despite a 3.5% decline in revenues driven by lower volumes, a softer sales mix, and continued start-stop inefficiencies, our adjusted gross profit rose slightly by 0.7% to EUR 11.7 million. This positive development was supported in part by changes in work in progress and finished goods. These changes reflect a time-shifting effect where production costs absorbed in prior periods are now contributing to margins as inventory moves through the system, temporarily supporting gross profit despite current revenue headwinds. The adjusted gross profit margin improved by 190 basis points year-over-year, reaching 46.7% in the first quarter. Given the ongoing challenging environment, we view this as a solid result that reflects disciplined execution and careful cost control.
It also marks a positive step toward our target of returning to gross profit margins above 50% and indicates that we have made progress in addressing inefficiencies related to ramp-up of new projects. Despite a 3.5% year-over-year decline in sales, we achieved an increase in adjusted gross profit of EUR 0.1 million, supported by a stronger margin and operational discipline. Additionally, cost optimization efforts and ongoing saving programs contributed another EUR 0.1 million. As a result, you can see it on the right side of the slide, the adjusted EBITDA improved to EUR 0.7 million in Q1 2025, up from EUR 0.5 million in the same period last year, demonstrating again enhanced profitability even in a lower revenue environment. The cost savings and adjusted personnel costs result from further workforce reductions, as indicated during the full year 2024 release.
These measures are a necessity due to declining volumes but also a consequence of improved capacity allocations. Net operating expenses declined by only EUR 0.1 million year-over-year. However, this comparison is somewhat distorted by a one-off gain from disposal of fixed assets recorded in the prior year period. Adjusting for this effect, the underlying improvement in operating expenses in the current year would amount to approximately EUR 0.5 million. This means that the underlying impact of our structural and cost savings measures was much stronger than the numbers initially suggest. Let's now turn to the next slide, which provides an overview of the key balance sheet items. Once again, we actively managed our balance sheet and successfully reduced networking capital by EUR 1.2 million year-over-year, bringing it down from EUR 8.4 million. This represents a 12.9% reduction, clearly outperforming the 3.5% decline in group revenues.
As a result, networking capital accounted for 8.8% of revenues over the last 12 months, remaining virtually unchanged from last year's 8.7%. Importantly, this reduction also had a positive impact on our free cash flow, emphasizing the effectiveness of our working capital management. Total financial abilities stood at EUR 28.1 million, with net debt at EUR 13.8 million at the end of the first quarter. The net debt-to-EBITDA ratio stands at 21.8 times due to temporarily low profitability. However, we are confident this ratio will decrease rapidly as our leaner organization optimal cost structures begin to show stronger results once market conditions normalize. We reported a net equity ratio of 47.2% and closed the quarter with a position of EUR 14.3 million of cash. This capital base gives us the flexibility to navigate the current environment with confidence.
Preserving liquidity remains a key priority, and we will maintain our prudent financial approach. As you've heard from me many, many times in the last year, and I'll keep saying it, cash is king. It's a simple truth, and it remains at the core of our priorities. Our focus continues to be on preserving liquidity.
Now, let me hand back to Sven for the outlook and some closing remarks.
Thanks, Daniel. Therefore, let me summarize. We have a stable balance sheet, which will help us to weather the storm. The structural changes, cost-saving efforts, and personnel measures we put in place over the previous and current quarters are paying off, as clearly reflected in the numbers presented. Nevertheless, we will continue to proactively drive efficiency improvements. We are seeing stabilization in e-Tools, and our e-mobility division remained resilient despite an increasingly challenging market environment. In the bicycle industry, inventories are declining, and we're seeing small signs that may indicate a turnaround could be reached towards the end of this year. Yes, we've had a good start to the year, but one swallow does not make a summer. We have good visibility for the next quarters, but we remain realistic and cautious and do not expect a short-term recovery.
Therefore, we reiterate our 2025 outlook, which predicts group revenues of EUR 80 million-EUR 90 million, an adjusted EBITDA of EUR -4 million to EUR -1 million, and a free cash flow of between EUR -6 million and EUR -2 million. This concludes our review of the first quarter 2025.
I would now like to hand the line back to the operator to open the call for Q&A.
Ladies and gentlemen, we will now begin the question-and-answer session. Anyone who wishes to ask a question presses star and one on the touch-on telephone. You will hear a tone to confirm that you have entered the queue. If you wish to move yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and then one at this time. We have our first question coming from Emma Romy Korkman from Oddo BHF. Please go ahead.
Good morning, all. Thanks. I'm also speaking on behalf of Martijn den Drijver from ABN AMRO- ODDO BHF. I have a few questions, so I'll cover them one by one if that's okay. I'll start off with a question on the cost. Following the implementation of various cost-cutting measures in 2024, have you taken any additional actions during the first quarter of 2025? Do you also expect to take further measures later on in the year?
What we've done basically at the moment is due to adjust to any cyclicality in the business is that we've agreed a short-time program in the German plant where basically we are able to flex labor costs throughout the year depending on demand. The other one is that we're still implementing final stages of a productivity or efficiency improvement program in Italy that will show some effect throughout the year.
Okay. Thank you. I will move over to some questions that are specific per division. On the e-biking sector, the CEO of Bosch e-bike system expects the first line of recovery already in 2025. Do you share that expectation? You also mentioned some signs that the inventory is on the way again. What are your thoughts on that?
I think in the end, let's face it, we've now become very cautious because over the last few years, people kept saying that the recovery was going to happen. I think at the end of last year, we saw, looking at numbers that we basically calculated, but also at numbers published by the Bicycle Association in Germany, that really any cleanup of inventory had only been started in 2024. Now, it is unclear how much inventory still needs to be cleaned out in 2025 before we go back to having supplies into the system being equal to retail sales.
We do expect that at some point we will see a recovery, but let's face it, customers right now for the season have basically done call-offs so that they have product available throughout the season, albeit at low levels, because I think financing in this industry is becoming more difficult for stocks and inventories. I think we will really only see in quarter three, quarter four, the extent and the point of time when things come back. When it does come back, we do expect a significant recovery because we feel that this year the drop in demand we see is primarily driven by the selloff of inventory.
Okay. Clearer. Thank you. Do you also foresee any impact, either positive or negative, from the acquisition of Brose e-bike systems by Yamaha?
I mean, we've worked with both companies. It's too early to tell where this will lead, but we're in close contact with both customers as they now merge to understand which systems will go ahead and how this will also impact their success in the industry.
All right. Thanks. Moving over to e-mobility. Normally, the premium and luxury segment is pretty stable, but Ferrari, for example, already indicated that tariffs will have a material negative impact on the sales volumes. What are you seeing in terms of order intake or backlog for this segment?
Honestly, it's relatively flat. In fact, we see on some conventional business actually quite some strong demand. It seems to us, and again, we don't have really data to back that up, but that on certain segments, customers have waited now several years to make decisions on what kind of vehicle they buy, and they're now finally going ahead and buying especially smaller, more economic vehicles. That's what we see on one product. In the luxury segment, honestly, we don't really see any declines happening yet and don't really expect that to happen either.
All right. In the non-premium and luxury segment, you mentioned the delay of project launches and overall weak demand. What kind of customer behavior do you see here?
Like I said, on the current projects, we actually have a relatively decent demand. I think the one issue we do have, and again, this is not one of our customers. We're not dealing with Mercedes, but Mercedes basically changing the strategy on e-vehicles and conventional is basically delaying vehicle launches by up to two years. That means for us also, especially on certain components that we're involved in, that if we got a nomination, the SOP may be moved up somewhere between 6 and 18 months. That was impacting, of course, the midterm perspective, which is still good overall, but it's basically slowing down progress.
Okay. Great. Thanks. Then moving on to the e-Tools segment, a number of clients such as Hilti, STIHL, and Bosch have European production locations, but they export to the U.S. Some of your China-based customers also export to the U.S., although most of the sales will be local for local. STIHL reported 9% sales decline in its Gardena division. Given the macro backdrop, what do you expect from the e-Tools segment?
Honestly, I mean, of course, the hope is there that these things will not be impacted. I mean, maybe two things. One, even in the whole discussion when the import duties from China to the U.S. had reached close to 150% or slightly higher, we saw no change in call-offs of our customers in China. I think basically because they were probably holding back shipments to try and, I think, see things getting resolved. Of course, we have now a 90-day window with an agreement in place, so that could even lead to increased demand. We have to wait and see that. Maybe the other thing is one of the very big players a few years ago did an analysis to see what would happen or what would need to be done if China was not a viable source anymore.
The conclusion in the end was even with some tariffs and issues, it was still a highly economic country. I think in the end, what we would most likely see is that then all the customers we have in the end have production locations in Europe or in China or in the U.S., and they would probably just move final assembly from locations like China to maybe Europe or to even South America or Eastern Europe and then export from there, which would then again have no significant impact on our shipments to these customers. It would just change the location we ship to.
Okay. Do you assume that interest rate cuts will help the construction side of the business in Europe?
Yes. I think so.
That's the macroeconomic books, yes, but it is not going to happen in the short term.
Okay. Clear. Those were the questions from my side, so thanks for answering them all.
Thank you.
Thank you.
The next question comes from Marie-Therese Grubner from HAIB . Please go ahead.
Yes. Good morning, and thank you for taking my question. I think they focus rather on the balance sheet, and I would like to better understand where you stand with this level of COVID, this level of net debt to EBITDA, which is close to 22 times. What are the banks saying? That is one question. The second one is if you indeed are not seeing really the cross yet, should we brace for some impairments, be it on your fixed tangible or intangible assets or inventories? How is the situation within that? Those are my two questions, please.
All right. Yeah. Hi, Marie. Daniel here. On the first question regarding the financing that we have in the balance sheet, all of our current financing, which sums up at EUR 28 million, is without covenants. We already started initial discussion with additional financial institutions to see if we can get more flexibility and more liquidity in the future. For the time being, we do not see any urgent need in that. That being said, there are current discussions ongoing, and we already received some non-binding offers for additional financing if will be required. We do have in our plan, of course, the ramp-up towards 2026 when we expect the markets to start to recover, and this is something that we will be able also to finance internally with the liquidity that we have.
I think that in a way will answer question two. I think when we're talking about troughs, it's really the question of have we seen the lowest month yet? I think there what we have to expect, especially if you look at things like power tool, but especially the e-bike business, the highest months are typically the first 4-5 months of the year. We do have to expect that we will see some declines throughout the year before then the market 2026 starts feeding into the pipeline, and that's why we say we've not seen the lowest months, and that's why we hold on the current year plan.
Okay. Thank you.
Thank you.
Thank you.
As a reminder, if you wish to register for a question, please press star and the one on your telephone. There are no more questions at this time. I would now like to turn the conference back over to Sven Arend for any closing remarks.
Perfect. Thanks, everyone, for joining the call today. Yeah, we look forward to speaking to you or seeing you in the next few months, and all the best.