Good morning, everybody, and a warm welcome to all of you participating in today's first half 2023 earnings conference call. Thank you for joining us this morning. I'm Daniel Basok, the CFO of hGears, and I'm replacing Christian Weiz, Head of Investor Relations, in the introduction slide due to his unfortunate sickness leave for COVID. On the call today with me is Sven Arend, the CEO of hGears, and we will present our results for the first half of this year, and we'll be also, of course, available for the Q&A session after the presentation. If you have not yet received our relevant earnings documents, you can find them in the Investor Relations section of our website.
Before we begin the presentation, I would like to draw your attention to the disclaimer on slide two, which sets out the legal framework under which this presentation must be considered, and which we assume you have read. Without any further ado, thank you for your attention, and I will now hand over to Sven.
Thank you, Daniel. Good morning to all of you joining today. Before we dive into the review of our operations during the first half of this year, I wanted to spend some time on the market dynamics and more precisely, zoom in on the e-bike market in Europe, as this industry is the main reason for our deviation this year. In this sector, I'm sure you've seen the commentaries from several players in the bicycle industry when releasing their half-year numbers over the past weeks. All of these reflect the same sentiments. In a nutshell, sales across boards are down in double-digit numbers for the European market. The magnitude of the decrease varies, but the unanimous message is that it is a greater decline than expected, and of course, there are different reasons for that.
It seems that due to an array of stock buildups, component suppliers are impacted harder. We know of bicycle models that are delivered from the year 2021 right now. Though the market downturn is disappointing, it is important to flag that what is happening is not isolated to us, but something that is impacting the industry as a whole. As such, and maybe to preempt some of your questions, we have not lost customers or market share. On to the next slide. As you might remember, at the beginning of the year, when we outlined our guidance for 2023, we mentioned that we were expecting, like everyone else in the e-bike industry, a slow start to the year.
The main reason for this is related to stockpiling that took place at e-bike manufacturers and retailers during 2022, and the fact that overall challenging macroeconomic environment and inflationary backdrop would constrain end consumer demand. However, we've seen greater deviation from these assumptions in the first half of 2023. Market inventory has remained at higher levels than anticipated, and stock depletion was slower. Partially linked to the fact that consumer confidence has remained more sluggish than anticipated, but also the fact that sadly, there were somewhat unfavorable weather conditions in early spring, at least until April, and this has further dampened demand. As they say, when it rains, it pours. This had a direct impact on our sales of e-bike components, as we saw more orders, postponements, and cancellations than anticipated. This does not mean we've lost customers.
As I said earlier, what it means is that consumers we acquired over the past 12- 18 months have actually delayed their start of production or started only at low volumes, and that simultaneously, we've experienced greater volume decline from our existing customers. Now, you might ask, why is it that for e-bike retailers, the sales are down, but not in the magnitude of the decrease in sales posted by e-bike manufacturers? The explanation is that in the follow-up of the supply chain shortages, manufacturers started stocking incomplete bicycles to maximize availability. Now that those supply chain topics are easing, these bicycles are being completed and sold off first. In some cases, we are talking about orders from 2 years ago. This means that the suppliers and manufacturers are impacted significantly more than the retail sector of the business.
This is also the main reason why we had to adjust our fiscal year 2023 guidance in June. I hope that this provides you with some clarity on the drivers that have impacted the e-bike industry in the last 12-18 months and the correlation to our performance. Now, if we look ahead, I am sure one of the questions you have is: What should we anticipate for the next 12-18 months, and when will we see a recovery? We will address this in my outlook section. As I mentioned in my quote in the press release this morning, when you talk to the industry experts, the unanimous view is that the e-bike market will grow significantly once the stock situation has cleared up and consumer confidence returns.
In the meantime, we're not sitting still, and we're taking all necessary measures to control costs and improve efficiencies. In the short term, obviously, we are seeing the impact of the downturn in our H1 financials. Please, let's move to slide seven. As I said, the reduced pace of e-bike components, destocking, and the size of the stock are the main drivers behind our sales performance in H1, 2023. Of course, there are also factors impacting the remainder of the business areas, all in all, the good performance in the Conventional is partially compensating for a decline in e-Tools.
If we look at margins for a moment, as we were able to maintain our gross margin for the first half, more or less unchanged compared to the first six months in 2022, the lack of operating leverage had a direct impact on our Adjusted EBITDA margin. While this reflects mostly the external environment, we continue to execute cost and CapEx control, and overall can rely on a strong balance sheet and more than adequate and reassuring liquidity position, which are very important business attributes for our future development. This concludes my comments for the first half, and I will now pass over to Daniel for a more detailed review of the financials.
Thanks, Sven, and again, good morning to all of you. Let's start the review of the financials on slide 9 by looking at sales and profitability. First, sales. As you can see on the left side of the chart, we are breaking down the top-line performance of our three main business areas. As Sven said before, whilst we expected a slow start to 2023 for e-Mobility, the greater-than-expected downturn in e-bikes led to overall 28.6% decrease in this business area, reaching EUR 17.4 million of sales. I don't think I need to add more really on e-bikes, as Sven already provided at the beginning, and we expected a slow start in Q1. We saw a sequential increase in Q2, but at the end of the day, this is where the biggest shortfall lies for us.
Staying in e-Mobility, and this time with some good news. In the first six months of 2023, we continued to see the expected ramp-up of projects in EHV, where sales outperformed our expectations and almost doubled in comparison to the first six months of 2022. Moving on to e-Tools. Sales for the period amounted to EUR 14.9 million, and this corresponds to a decrease of 36.1% year-on-year. The decline in this business area is very much driven by muted end consumer demand and the negative economic and geopolitical environment, with rising interest rates having an adverse effect on the building and construction sector, while some customers still seem to unwind excess inventories. This has led to order cancellations, which in turn impacted the performance year-on-year.
On Conventional, we saw a 9.3% increase in sales during the first half of 2023. This performance is driven by persistently good and resilient demand in the segments within which we are operating, namely premium, luxury, and sports vehicles, and hence a return of volumes to pre-COVID levels, which we had anticipated. Moving on to profitability in the middle of the slide, looking at gross profit and gross profit margins. The gross profit margin in H1 2023 remained almost unchanged at 51.7%, versus 52% that we posted in H1 last year, reaching in total EUR 29.6 million.
The fact that the gross profit margin remained the same as in the previous years is mainly attributable to the following factors: A change in the mix of products, less e-Mobility and e-Tools versus a high portion of sales in Conventional, had a some zero effect on the gross profit margin, whereby the tailwind and the positive impact from the slightly lower raw material and energy costs were offset, unfortunately, by inefficiencies in production processes, driven by low, or in some cases very low volumes. At the Adjusted EBITDA margin on the right side of the slide, we continued to see that negative impact from unrealized operating leverage, that is despite cost improvements and cost reductions that we have been implementing since the beginning of the year.
With these cost-saving measures, we were able to reduce the adjusted personal expenses by EUR 1.8 million and the adjusted other operating expenses by another EUR 200,000. However, as positive as it is, it could not compensate for the lack of volumes. We may see further progression on the cost front, as some measures were only implemented from the second quarter and will have a full impact towards year-end. The decrease in profitability had a direct impact as well on the cash flow, which I would like to comment on in the next slide. As you can see on slide 10, I would like to provide some insights here on the various drivers of free cash flow and zoom in on CapEx and working capital.
Starting with the free cash flow, which was EUR 3.5 million lower in H1 2023 versus H1 2022. The main drivers are the negative cash flow from operating activities at EUR 1.8 million and the negative cash flow from financing activities at EUR 1.9 million. On the cash flow from operating activities, you need to sum up two elements. The decrease is mainly due to a negative difference in non-Adjusted EBITDA between H1 2023 and H1 2022 of EUR 5 million, while the sum of the other components contained in the operating cash flow improved substantially year-over-year and had a positive impact of EUR 3.2 million.
On the cash flow for investing activities, the difference, as you can also see on the bottom left on the chart, is essentially led by an additional CapEx spend of EUR 1.4 million. The rest of the free cash flow components are outlined on the graph, but negligible in terms of variations. Go back to two main factors of the cash flow, namely our CapEx spend and working capital. On the CapEx, as I just said, investment increased by EUR 1.4 million, and this essentially relates to the execution of the investment plan that initiated in the previous year.
While we took all possible steps to adapt our future CapEx to current market conditions, due to extended lead times from manufacturing equipment we ordered at the end of 2021 and the beginning of 2022, we were not able to cancel or postpone further, and this equipment was delivered in the first half of 2023. Maybe to anticipate one of the possible questions in the Q&A regarding CapEx 2023, our budget estimates for 2023 in the last conference were below EUR 20 million. Even more precisely speaking, between EUR 17 million and EUR 19 million. As Sven will detail later, we are focusing on CapEx preservation, and thus we want to maintain our operations and be ready for when growth will pick up again. We are not committing to new growth CapEx at this stage.
This means that you can assume that the overall CapEx envelope will be lower in 2023 than what we originally anticipated, and will be between EUR 10 million and EUR 13 million. Finally, on working capital, a few moving parts that I would like to describe here. Trade receivables decreased in absolute terms between June 2022 and June 2023, as a function of decrease in revenues. The inventory levels have increased versus the end of Q2 last year, this is in part led by a slowdown in call-offs from customers. The group continued to build inventories to deliver during the summer break season. On the trade payables, this has also increased to finance the increase in inventory and due to preferable payment terms we were able to achieve with the suppliers.
In total, as of the end of June 2023, the net working capital was 13.3% of the last twelve months' revenues, which is 0.6% lower than at the same time last year. By year-end, we expect the net working capital from LTM revenues to be below 10%, as it was in the end of 2020, 2021, and also the end of 2022. As a conclusion to this slide, we expect to see very similar phasing of free cash flow in 2023 as in 2022. This implies more or less break even for the free cash flow in the second half of this year. It will be achieved mainly due to the reduction of working capital, which will finance the investing activities that are still planned for the second part of the year.
In this sense, I would like to reconfirm our free cash flow guidance for the full year of EUR -9 million to EUR -12 million, which we're confirming today. Moving on to the balance sheet. Let's flip to the next slide, please. Very briefly here, as a result of the negative free cash flow of EUR 10.9 million in the first half, as of June 30th, 2023, we had a net debt position of EUR 10.2 million and a leverage ratio of 1, which is, in our opinion, and considering the current market conditions, is still very solid investment-grade profile. Additionally, just to complete the picture, we also have total RCF commitment of EUR 40 million, which remained undrawn at the end of June 2023.
Adding back the cash and cash equivalents in the amount of EUR 23.4 million at the end of the period, leaves us with a total available position and liquidity headroom of EUR 63.4 million. Taking also an equity ratio of 55.2% into account, a sound balance sheet profile is a very strong attribute in current times and supportive for our growth model going forward. There is nobody else better to talk about going forward than Sven. See you at the Q&A, and for the time being, I'm handing back to Sven for the outlook and the closing remarks.
Thank you, Daniel. In terms of midterm outlook, how do we look at our industry? While sales have been sluggish in many countries, the sales of e-bikes have overtaken the sales of Conventional bicycles for the first time, and this trend continues. The fundamental drivers for growth remain intact and will continue to gain momentum. Urbanization, coupled with emission-free city center initiatives, the drive for sustainable transportation, and the increased environmental awareness of consumers, and the increased demand for leisure activities, to name a few examples, will clearly drive growth in the e-bike segment. The increasing number of market players seeking co-development expertise, plus the segmentation of the business, will strengthen our position as the key partner for the industry. What about the short-term perspective? The industry in the next 3- 5 months will plan volumes for 2024.
While we see overall caution in the industry due to the unexpected length of the consolidation period, we expect component suppliers to return to retail sale levels within the next 12 months and consumer confidence to return. We have not lost customers. In fact, some of the newly gained customers are planning some noticeable volumes in 2024. At the same time, we're talking to several new entrants that are seeking our support. This confirms our outstanding reputation for expertise, the power to innovate, and to deliver irrefutable quality, making us the supplier of choice for mission-critical components when rapid growth returns to the e-bike market. In terms of identifying triggers of future pickup, we will continue to closely monitor the output from e-bike retailers.
Here, given the unbalanced stock levels between finished e-bike products and e-bike components, it is very likely that the e-bike rebound will fuel an overproportional component demand. This is clearly an accelerator. You've heard me in precedent calls talking about niche and adjacent markets. Niche markets are, for example, cargo bikes and the potential offered here by logistics activities, and we are developing several concepts with customers for this application. Outside of the bicycle industry, we see significant opportunity in the area of e-Mobility components and the electrification of previously hydraulic systems in vehicles, and the increasing use of battery-powered tools and garden tools with increasing battery power available. Last but not least, we are assessing potential in other adjacent markets and new markets like robotics and warehouse systems. I hope this also provides the context for our absolute commitment to our business model and strategic positioning.
Before we conclude this call, I just want to spend a bit of time on our operations and what we concretely do as part of our normal management of the business to protect the business and keep optionality. Moving on to the next slide. As you might remember, during our last conference call, I mentioned that given the current operating environment, it was paramount to see how we can use 2023 as a year of transition to review and possibly recalibrate certain operational aspects. In other words, elements within our control and our future-proofing the business. In essence, it is about efficient cost management, process improvement, and improved capacity utilization. To drive immediate savings and efficiencies first, but also to make sure that we are better fitted for the market dynamics and growth recovery of the various products as we see them.
It is nothing extraordinary in the sense that this is common management practice, and logic applies to a business like ours in current times. To develop a little bit more. In cost control and CapEx preservation, we want to make sure we apply the same discipline through OpEx and CapEx. Focus is on full use of existing assets, also for new projects, even if this results in a slightly lower return. The goal is to lower the spend on CapEx, including replacement, investment, and maintenance, while ensuring full efficiency and availability for existing assets. We will do this by taking a group view and ensuring optimal capacity utilization throughout the global organization. Let's look at development and industrialization processes. With the expected overall growth, but also the segmentation and increase of variance in our customer markets, an efficient and highly professional development industrialization organization is crucial.
While we are recognized for our outstanding expertise and ability to deliver outstanding solutions and flawless supplies, we want to continue to improve in this area. We will, therefore, set up cross-functional value teams that will accompany projects from RFQ through to the industrialization phase. The goal is to shorten response time, increase efficiency, and have a high focus on costs and cost recovery in the development process, as well as flawless launches in cost and quality. All in all, it means, on the one hand, mitigating measures for the short term, but also continuing to ensure that we outperform all others when the market recovers, ensuring future growth. Lastly, a strategy is something that is not set in stone and needs to be permanently tested against assumptions and also market dynamics.
As such, we're obviously looking at how we're organized and how we manage performance to see what can be further improved. No rocket science in this, but necessarily necessities are given the environment. In terms of guidance and midterm targets, they are unchanged. Let me go through quickly to the next slide and give some concluding remarks. After revamping our guidance for 2023 in June, we expect revenues in the range of EUR 115 million-EUR 123 million, which means a slightly better second half versus the first half. The Adjusted EBITDA will be between EUR 5 million and EUR 9 million. The lower or upper side of the range to be mostly determined by product mix and the phasing of growth in the different areas. Daniel talked about free cash flow guidance between EUR 9 million and EUR 12 million negatives.
As just said a minute ago, whilst we're looking at developing our pipeline, we're also very much focused on cost and CapEx control and driving efficiencies where possible. Our mid-term target remains unchanged, along with the supporting factors I outlined a few slides ago. Our existing project pipeline, paired with ongoing customer wins, will drive demand once the temporary slowdown in the e-bike environment and the destocking is overcome. The increasing segmentation of the e-bike market, along with emerging micro-mobility solutions, where our increasing co-development activities can help increase the number of components per system. Finally, we will have a closer look at the other and adjacent industries, not only from a growth perspective, but also from an increased diversification perspective.
Whilst we are in the midst of challenging times, the structural growth of the e-Mobility market remains a core indicator of the inherent demand for our products and solutions. That demand has not gone away. We continue to firmly believe in our positioning and ability to participate in the growing environment of sustainable drive and mobility concepts. We will use these coming months to further future-proof our business from an operational standpoint and position the group for future sustainable growth. Thank you very much for your attention. I will now hand over to the operator for Q&A.
Ladies and gentlemen, at this time, we will begin the question- and- answer session. Anyone who wishes to ask a question may press star followed by one on the touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. Once again, if you would like to ask a question, please press star followed by one. Our first question comes from the line of Fabio Hölscher with Warburg Research. Please go ahead.
Thanks. First, I wanted to touch more on your financial position. I mean, looking at your cash reserves, your current cash burn, you showed it in your slides. I, I wouldn't say the situation is critical already, but the air certainly seems to get thinner with each passing quarter, in these challenging conditions. Yeah, I was just wondering if you could elaborate on what your options are and, yeah, give some color on your approach there.
Hi, Fabio. Yeah, Danny here answering the question. We saw very similar phasing of our free cash flow also last year. I mean, we are usually in the first 6 months of the year, have a more negative free cash flow, and in the second part of the year, it should be balanced by reducing the working capital due to the fact that the inventories will be solved during the summer break. On top of it, we are planning for the second part of the year, lower CapEx than what we have executed in the first.
This, as I said, also in the answer, or during the slide, the working capital of the second part of the year, considering the fact that the revenues and the profitability will remain to be more or less the same, will finance the, the, the CapEx, and as such will then improve or, or at least not further deteriorate the, the cash position.
Then, two more questions, maybe briefly. One, what's your current capacity utilization in percent? Then, third, can you give us your specific personal thoughts on, on the recovery of e-Mobility and e-Tools? I mean, I know it's difficult to say, when and to what extent you see a recovery occurring, yeah, just maybe your thoughts on that and what that means also for your midterm goals. Thanks.
Yeah, I think in terms of midterm goals, obviously, they, they remain unchanged. I think with regards to the, the speed of recovery, honestly, I mean, that's I think I alluded to that in my, in my presentation. We're currently waiting to see the projections for 2024, especially on the e-bike market. We have to wait until we see those to say, how quickly is it gonna be? With regard to e-Tools and gardening, I mean, a little bit same story, but I would expect that to be somewhere end of quarter one, end of quarter two next year, to go back to more normal levels. That very much depends on the customer. You've got customers that have no stocks, that basically just move with market demand.
You have others that basically still have very high stock levels built up, that have to ramp those down. It's very much customer dependent. Again, I would say within 24, but to pinpoint the precise time right now, is too early, as we still need projections from customers for that year.
All right, perfect. Then your, your current utilization?
I mean, it very much depends on the plant. I would say overall, you're probably looking at around 70%.
Okay, great. Thanks.
As a reminder, if you wish to register for a question, please press star followed by one on your telephone. Star followed by one. There were no further questions at this time. I hand back to Sven Arend for closing comments. Sven?
Well, then I would like to thank everybody for participating in the call. Some of you, I think, will have individual calls with us in the days to come. For everybody else, looking forward to reaching out again in three months time when the next quarterly results are published. Thank you, everybody, for participating.