Yes, good morning, everybody, and a warm welcome to all of you participating in today's first quarter 2023 earnings conference call. Thank you for joining us this morning. I am Christian Weitz, Head of Investor Relations, and I have here on the call with me Sven Arend, our CEO, and Daniel Basok, our CFO, who will present our first quarter 2023 earnings and will also be available for the Q&A session after the presentation. If you have not yet received our relevant earnings documents, you can find them on 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. Now I'd like to hand over the call to our CEO, Sven Arend.
Thank you, Christian. Good morning to everyone from my end, and a warm welcome to everyone joining us today for our first quarter 2023 earnings call. Let me start off with a few highlights from the quarter. As you will recall, we stated in our full year 2022 results that we expected the challenging market conditions and trends that we saw in Q4 2022 to continue into 2023. This is what we did see in the results that we present today. The environment continues to remain challenging for our customers and consequently us, which is a direct result of the sustained uncertain economic and geopolitical backdrop. These are known issues, and they're not new.
They are impacting our customers and many other companies across the globe, as such, the magnitude of the year-on-year variations for both our top line and profitability in the first quarter is as we had anticipated. It is the unfortunate outcome of the ongoing situation and therefore should come as no surprise. As such, it is important to highlight that this slow start to the year and anticipated phasing of performance is already embedded in our full year 2023 guidance, which we are reconfirming today. We also reconfirm our midterm guidance for strong growth, mainly driven by e-mobility. Naturally, we do not derive any satisfaction from the expectation for 2023, it reinforces the message that we communicated earlier on this year, which is that we expect 2023 to be a year of transition.
We cannot influence external factors, but we can most certainly influence internal ones. We will turn our attention to elements within our control. This will help to optimally position the company for future growth when market conditions improve. For me personally, the last three months have been very important, specifically to get to know operations, employees, and the team, but more than anything, understanding what value we as hGears provide to our customers and how we can maximize this going forward. That work is ongoing, and what I can say is that we are starting this transformation journey with everything that we need to win, which is a great place to start. I will talk about this in a little more detail in the next slide. Moving to slide six, where I will share some further observations on the business.
Since starting in February of this year, I've been through each business area. I visited our plants and even had the chance to go to our plant in China after three years of COVID lockdown. I've talked to employees, customers, investors, and analysts about how they see the business and where they think the challenges are. What has struck me the most in going around the business is the strength of our diversification, which in challenging times affords offsets in one business area with another, which you will see in this set of slide results. In e-mobility, we saw a greater ramp up of EHV projects. While this was not big enough to compensate for the decrease in e-bikes, it nonetheless provided some insulation. The sustained strength and resilience on the conventional business area continues to cushion the declines that we're seeing in other business areas.
This reaffirms that our strategic focus on the premium luxury and sports vehicle segment is the right one. Moreover, hGears' reputation in the market for quality and engineering expertise is unprecedented. This positions us well to play in the ongoing development of electric and hybrid vehicles, and this reputational status is not something that you can be created overnight. It is something that has been cultivated and built over many years and something that is invaluable to our positioning in the market today and going forward. Which means that when people hear hGears, they know that they're dealing with a company that has strong co-development capabilities, leading process engineering solutions, state-of-the-art global facilities, and a highly skilled employee base. This underpins our ability to meet demanding customer requirements and making us the partner of choice for many.
Furthermore, with co-development activities, you are much more involved in the strategic plans of your customers and hence confidentiality and trust is a key aspect in choosing a manufacturing partner. This reputation led to a strong, loyal, and growing customer base. This is reflected in the existing pipeline of the new business that we secured in 2021 and 22, which even if temporarily postponed due to current economic environments, remains fully intact. On this basis, I'm convinced that we have great business attributes to succeed, and I will continue to inform you as we find ways to maximize the impact of these attributes. When I say 2023 is the year of transition, it is twofold.
Firstly, it's the year of transition from a market dynamic perspective. Whilst the timing of that transition continues to remain uncertain, expectations remain for the high inventory levels that we currently see as customers to unwind in the second half of the year, which will subsequently help to drive demand. Secondly, from an operational standpoint, to prepare for the times when the markets will recover, we will continue to improve the utilization of existing equipment in order to reduce future CapEx spendings, above all, reduce the time between inquiry and industrialization. This concludes my section on the highlights. I will now hand over to Daniel for the financials.
Many thanks, Sven, and good morning to all of you also from my side. As Sven mentioned before, our Q1 performance is a direct reflection of the trends we outlined earlier this year when discussing that 2023 outlook. What we are currently seeing in order book and our expectations for phasing for the remainder of the year. There are different factors impacting the results. Let us go through the various business areas. In e-mobility, e-bike volumes were lower year-on-year, the main driver being the high level of inventory. There is a small element of price effect, but to a lower extent than a year ago, as inflationary pressures have eased a bit and the impact here is only based on certain raw material and logistics items.
On the positive side, we saw a faster than expected ramp-up of some EHV projects, which is not sufficient in size to fully offset the declines we saw in e-bikes volumes, nonetheless, provided a small cushioning effect. In e-tools, we also continue to see high inventory levels at our customers and weaker end markets. Here we have seen some order cancellations linked to lower end consumer demand. In conventional, we are pleased to see sustained strong and resilient performance with the business area continuing to benefit from its focus on the premium luxury and sports vehicle segments. We are also equally pleased to see volumes here return to pre-COVID levels, which supports the high single-digit revenue growth that you see.
These are the main drivers behind the Q1 performance, and this is also what drives for a large part the decrease in profitability in comparison to Q1 2022. To a lesser extent at the gross profit level, because if you look at the gross margin level, you will see an increase of 550 basis points over the past three quarters from 48.9 in Q2 2022 to 54.4 at the end of Q1 2023. One of the main factors is a stabilization and slightly decrease in manufacturing costs, especially energy costs, but the margin improvement is mainly attributable to our ability to pass through also non-transferable costs, i.e. general inflation since the beginning of the year.
That being said, at the adjusted EBITDA margin level, we see a significant downturn from unrealized operating leverage, and that is despite cost improvements that we were implementing in the first quarter. We were able to reduce the personal expenses and the other operational expenses by more than EUR 1 million in comparison to Q1 2022, but of course, it was not enough. We will of course, provide a full set of our financials alongside the H1 report. That basically concludes the short review of the main financial KPIs for the first quarter, and I will now hand back to Sven for the outlook and to conclude.
Thank you, Daniel. Let me turn to our outlook, which I will cover over the next couple of slides. Moving to slide 10. As we've already mentioned, in terms of outlook, the dynamics remain the same, our guidance for the full year of 2023 is based on this. With a weak start to the year already embedded in our 2023 outlook. We expect the challenging market conditions that we see today to continue in the short term, including the impact from temporary elevated stock levels and the lower consumer confidence in the e-tool and e-mobility business. It will take some time for these inventory levels to unwind, and we will be monitoring this closely. As such, our view into 2023 remains unchanged. You see this degree of caution reflected across many of our peers and clients in the industry today.
Whilst our pipeline remains robust and intact, orders remain very sensitive to market conditions and the sentiment about the economic outlook. Against this backdrop, we continue to work hard to mitigate external pressures, and our near-term future focus remains on execution efficiency within these normal operations. Our midterm target also remains unchanged, along with the supporting factors that we outlined at our full year 2022 results, including our existing project pipeline paired with ongoing customer wins, which will drive demand once the temporary slowdown in the e-bike environment and destocking is overcome. The increase in segmentation of the e-bike market, along with emerging micro-mobility solutions, where our increase in co-development activities can help increase the number of components per system. Finally, we will have a closer look at other 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, and that demand has not gone away, and 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 this in the coming months to future-proof our business from an operational standpoint and position the group for future sustainable growth. Thank you very much for your attention, and now hand over to the operator for Q&As.
Ladies and gentlemen, at this time, we will begin the question and answer session. The first question comes from the line of Martin Den Drijver from ABN. Please go ahead, sir.
Yes. Good morning, gentlemen. I have three questions, if I may. With regards to that, gross profit margin was significantly better than I had anticipated. You mentioned that the key drivers was passing on cost inflation and lower headwind from energy. In terms of that passing on cost inflation, how far have you gone with, or how far have you been able to go in terms of amending contracts? In other words, should we expect some further tailwind from passing on of the amendment of contracts in the second and third quarter, and perhaps also for energy costs as these have continued to come down? That's question one. The second question is with regards to your discussions with customers. Obviously, you've highlighted that there's inventory in the channel.
There has been some order postponement. What are your customers saying about end market demand? Is there still growth? Is it a stable market that we're talking about? Perhaps a bit more color on the end market in e-bike specifically. I'm sorry, I should have said that. Those are my two first questions. Thank you.
Yeah. I mean, with regards to price increases, we've pretty much closed the negotiations also on the, on the non-contractual pass-throughs. Obviously the discipline now, if you know, energy costs continue to go down, to make sure that we don't give away more than needed, I think that's the challenge going forward. I think we're confident to do that. We do not expect the margin increase to come over the next months, you know, from that area. I think there really more we're gonna have to look at burden as markets recover. With regards to especially the e-bike market, I mean, you get mixing feedback out of, you know, also the publications.
Overall, consensus is that this market over the next few years will still grow from a current around 5.5 million e-bikes to around 9 million, 9.5 million e-bikes in a period of four to five years. Close to a doubling still in the foreseeable period. That is obviously where we also see the confidence that we will continue to grow, not only sales volume, but also then with the market share that we get with the new entrants.
Okay. Clear. With regards to OpEx levels, obviously, there are collective labor agreements. Sometimes there's a one-off payment. Can you share with us what type of wage inflation we should actually expect in the remainder of 2023? When do you actually raise salaries? Was that already in March, or do you do that in the second quarter? Perhaps a bit more color on that element.
Hi, Martin. Good morning. Daniel here. Sure. Let's split, of course, the question to the three plants that we have. China, of course, we will not see any changes also in the following months. In the Thailand plant, we also don't expect to see any increase in salary. What we can see is that the Q1 level of personal expenses will also continue towards the year. For the German plant-
Mm-hmm.
As I mentioned also in our previous calls, we are not part of IG Metall. The workers here are not unified in IG Metall. We were able to conclude the negotiation with them already in November last year, agreeing on two years. 2023 and 2024 are agreed. Basically, what we have agreed is that we are going to pay the so-called one-off inflationary bonus that was allowed to be done in Germany.
Mm-hmm.
There will be small addition to the salaries in the last quarter of the year, which is not significant. It is way below of what has IG Metall agreed with the employees. We will see an increase, but it will be in a very low single-digit % for the German plant.
Okay. Clear. Thank you very much. Those were my questions.
Thank you.
Thank you.
The next question comes from Fabio Hölscher from Warburg Research. Please go ahead, sir.
Good morning, everyone. Thanks for taking my question. My first question is regarding capital employed. You mentioned in today's press release that you plan to use your capital employed more efficiently or more disciplined. Could you maybe elaborate on the specific steps you're taking to optimize the capital usage going forward?
Yeah. I mean, in the end, obviously, we come from a period where lead times for capital investment was, were very long. To be also maybe direct and open, in the past, we really looked at every project and invested in the optimal equipment for that specific project.
What we're doing at the moment is really to put a focus on utilizing what's there, maybe even at the beginning at cost of efficiency in a way, to basically say, "Look, let's utilize equipment that exists, and then maybe later on in the project, switch it over to a, you know, higher efficient one on the way." I mean, we basically, you know, always give the example that if you own a Volkswagen Bus, and you then only wanna go and get some bread from the local shop, don't go and buy a Polo on top of the bus if the bus is standing unused. Of course, once the bus is utilized fully, you know, you may wanna get a second vehicle.
It's a little bit that way that we're saying, you know, let's first of all use what we have, irrespective of whether that is currently the most effective way or not, and then going forward, make the investments to improve further.
All right. Secondly, maybe similar note and ongoing topic is how you want to become faster in your processes and become an overall more agile organization. Can you give us some color on this, and how exactly does this play into execution operations and deployment, as you like to put it?
I mean, it's very early, honestly. I mean, in the end, it's something I did in the last company that I worked at. We see a significant increase of projects and developments. Of course, you know, having a very smooth and efficient development process, also getting to the point where we monitor costs and once we go into access costs, charge them back to a customer, but also making sure that in the industrialization phase, we really are at a point where we get a smooth transition and introduction into the plants. That's one of the key things.
We're kicking off a project that will start in quarter three this year, where we'll assess where we are today and then really also with some external help, go into a kind of benchmark to say, how can we improve on that? We still obviously lack the exact, you know, details of, okay, what do we finally after an assessment see as the potential, but I'm convinced there will be some potential going forward.
All right, thanks. Final question. Obviously, you have confirmed your guidance outlook for 2023, but I was wondering what are you currently observing in terms of prospects for the remainder of the year for the different segments, and what are the specific drivers to margin improvements you're seeing for H2? Thanks.
I mean, again, what we're looking at is that, you know, the order books that we have from the customers really reconfirm, you know, the guidance that we've given. We're full within that. Sorry, the second part of your question was with regards to?
Specific margin drivers for H2.
Yeah, I mean, volume, honestly, because in the end, if you look at it, I mean, that's why also we're looking at that capital side of things more intensely than maybe in the past. If you look at it's a highly capital-intensive business. The optimum use of that capital is key, which basically means burdening the facilities. You know, being more cautious on the capital expense side is one of the key drivers from now going forward to improve, you know, the performance. If you look at, you know, I think we discussed that last time. At the moment, our expectation still is first half of the year, around 45% of the total sales revenue, and the second half around 55%.
All right. Thanks a lot.
As a reminder, if you would like to ask a question, please press star and one on your telephone. There are no further question. Excuse me. We have a last-minute call in from Martin Den Drijver . Please go ahead, sir.
Yes. Thank you. I was intrigued by the remark that you look at adjacent industries. Can you share with us what you're thinking about? Perhaps give an example. The second question is, you've done now 54% gross margin while taking a significant hit in e-mobility, specifically e-bike, which you have always said is generating the highest growth and therefore highest EBITDA margin. Would it therefore be fair to assume that if you have a stronger second half of the year, plus the operational leverage that comes from that, especially if it is in e-bike, that you will go well above the 40%, 54%, 55% that you've reported in this quarter and last year's first quarter? Thank you.
Yeah. Maybe, Sven here to comment on the adjacent industries. I mean, in the end, obviously, our intent is to grow. I think the question there has to be, as we grow, and also at some point, look at expanding locations, building locations, buying locations. We also wanna look at other industries, again, from a point of diversification and balancing of other industries out there, you know, that again, have the similar requirements. You know, co-engineering, highly complex machining, high capital requirements. We see those. It's too early to really say, you know, this is the specific area that we wanna get into. You know, you see gears, for example, in other applications and companies active in those, and I think that's what currently assessing.
Maybe we'll be able to tell more in quarter three, and quarter four of this year. Obviously, right now, focus has been really to assess the internal situation.
Mm-hmm.
We're keeping an open eye to this opportunity.
Maybe just a little bit of color. Are these nascent, fast-growing, smaller segments, or are we talking about more established markets where you see an opportunity?
I mean, medical, for example, is an area which again has high requirements. There are some players out there that, you know, I think would be...
Mm-hmm.
Would be a good opportunity. At the same time, you know, certain markets like, if you now look at the, the change in the heating industry, there could be some potential in that area. That's what we're basically monitoring.
Mm-hmm.
Basically looking at potential targets.
Okay. Got it.
I will jump maybe to answer on the second part of the question about the margin.
Mm-hmm.
It is, as you said, and we are reconfirming that. Of course, e-mobility remains to be the more profitable business area from our side. Also, as mentioned before, we think that we will, once the mix will change, we will be able even to increase the gross margin in comparison to what we see today. We are still striving to reach the historical, the historical margins that we saw in the past, which is basically around 58%-60% of gross margin.
Mm-hmm. The 58 or 60 remains the target, at least for the near term?
Yeah.
All right. Got it. Thank you very much.
Thank you.
Thank you.
There are no further question at this time. I hand back over to Christian Weitz for closing remarks. Please go ahead.
Yes. Thank you everyone for joining our first quarter 2023 earnings call. With that, we'd like to conclude the call. Have a nice day, everybody. Bye now.