A warm welcome to all of you participating in today's full year 2022 earnings conference call. Thank you for joining us this morning. I am Christian Weiz, the Head of Investor Relations at hGears. On the call with me today are Sven Arend, our CEO, and Daniel Basok, our CFO, who will present our full year 2022 earnings and will also be available for the Q&A session after the presentation. You have all received the relevant earnings documents, and you can find copies on our investor relations section on the 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 I will assume you have read.
Now it's a great pleasure for me to hand the call over to Sven Arend, our new CEO.
Good morning, everyone. From my end, a warm welcome to everyone joining us today for this full year 2022 earnings call. As many of you will be aware, I joined the company on February 1st this year, I'm indeed a newcomer to hGears but not to the industry. Before going into the presentation, I wanted to take this opportunity to properly introduce myself and share some of my early impressions, having had the opportunity over the past few weeks to meet with some of our key stakeholders, including colleagues in the various plants, as well as some of our customers. Let's shortly touch on my background. I have more than 30 years of experience in the automotive and in on and off highway vehicles industries, both for B2B and B2C.
I'm accustomed to automotive production standards, which is important in this industry and bring a lot of know-how in execution and managing operations. I have a successful, proven track record in managing and streamlining operations. Furthermore, I have a lot of international experience and already globalized pro-production capacities in a multicultural environment. Last but not least, I'm German, but having worked for an Italian company for some years, I can communicate in Italian, which will certainly help in my position as CEO of hGears. With that being said, let's turn our attention to hGears. I assume that most of you will want to hear more about my initial insights since joining the company, and so I will try to do this, but I hope you understand that these are still first impressions. Why hGears? What attracted me to the hGears story?
The company, apart from having outstanding expertise and processes, brings in-depth knowledge on key products we supply, for example, to the power tool and e-bike industry, hGears is clearly driven by innovation, and we have a strong pool of experienced engineers that drive our R&D. This is an important differentiator that sets us apart from the competition and makes us the perfect partner for our customers for joint development. The group's business is diversified in three business areas and has a broad base of loyal customers. We are all aware of the current market conditions that companies across the globe are facing due to the unprecedented economic and geopolitical situation, but we know that these challenges will be resolved over time, and they are only temporary.
As outlined earlier, we are supplying end markets that will benefit from strong megatrends, providing sound growth prospects above all for our e-mobility business area. Meanwhile, I have the supervisory board mandate to take hGears to the next growth phase. What are our future priorities? The intention is to strengthen and expand the company's position in the industry and improve our position as the preferred partner to our existing and new customers. At the same time, expand our share of wallet while exploring opportunities in adjacent markets, creating additional growth opportunities for hGears. We will continue to drive operational excellence and optimize our processes further, and we will follow this path stringently and thereby generate values for all stakeholders. We are well aware of the economic and geopolitical hurdles that companies across the globe have had to face over the past two years.
In all honesty, if I look at my previous experience, I don't think anyone can claim that they were fully prepared for what was coming. As such, like any business, hGears has had to adapt, sometimes react more than anticipate, and this is all very normal. As said before, we have made great progress, and our performance definitely demonstrates our resilience. Having said that, I think we have tremendous opportunities to continue deploying best practices and harness further benefits from that. Looking at hGears, we started implementing countermeasures in 2022 to offset the cost pressure that we were experiencing, and we clearly have been successful in some areas. One example that Daniel will detail later is how we have managed to keep our working capital stable in an environment where stockpiling is distorting the balance sheet of many other companies.
However, there's always room for improvement, and this is part of our agenda for 2023 and beyond. We will continue to relentlessly drive improvements in all areas of the business while also focusing on growth and diversification. Given the ongoing macro uncertainty, it's only prudent that we look at 2023 cautiously. That is why I see 2023 as a year of transition and enhancement of best practices to ensure that we are optimally positioned to drive further future sustainable and profitable growth. In the midterm, we will ensure to maintain our leading position in the e-mobility market through world-class processes and technologies whilst growing both organically and inorganically in our core and new industries. I'm still forming my opinion on the detailed strategy to drive the business forward.
As such, I look forward to further exchanging with you over the course of the next set of earnings, as I'm personally committed, together with Daniel and Christian, to dialogue with our analysts and investors. With that being said, I'm now handing over to Daniel for the review of 2022.
Thanks, Sven, and congrats for your entry into the equity market. Good morning all, and a warm welcome to everyone also from my side. As usual, and as in the previous calls, we would first like to provide you with a snapshot of the overall environment and latest developments before going into our financials. The challenging environment that we experienced in the first half of 2022 continued, with macroeconomic headwinds unfortunately persisting into the second half. The recovery of world economies following the pandemic years did not materialize in 2022, as many of us had hoped and expected, with COVID-19 lasting longer than anticipated. While the effects of the pandemic more or less subsided on the Western Hemisphere during the summer, major restrictions remained in place in China, and as a result of the country's strict zero-COVID policy till the very end of 2022.
With these restrictions limited to certain cities and regions, we saw limited impact also on our Chinese plant. However, these restrictions nonetheless had repercussions for worldwide production and ultimately global supply chains, which had only started to recover in the second half of 2022. Moreover, Russia's invasion of Ukraine saw energy and raw material costs rise to record levels, resulting in a steep surge in inflation, causing recessionary fears and impacting markets thereafter. Nevertheless, in these challenging business conditions, the e-mobility business area expanded further, reflecting our strategic condition. The positive performance achieved in this business area fully compensated for the slowdown we experienced in the e-tools business area and the relatively flattish performance in the conventional business area. This again reflects the advantage and strength of our diversified business activities.
In anticipation of the decline in trending industrial activity in the following periods, the back half of the year saw some of our e-mobility customer postpone orders and some e-tools clients cancel orders. As a result, we were forced to adjust our full year guidance on the 4th of October 2022. In Q4, despite recording very solid revenues in the e-mobility business area at close to EUR 13 million, we started to experience the effect of stockpiling by certain customers, mainly in the e-tools business area, which in turn negatively impacted our top line and margins accordingly. Overall, and despite persistently adverse market conditions, hGears delivered solid results in line with the adjusted guidance. Furthermore, we secured 2 additional contracts with new customers and extended a major contract well beyond 2024 with one of our key blue chip customers.
This further proves that we keep our word and continue to implement our strategic goals. With this contract, additional cornerstones of our growth agenda. The solid performance is mainly due to the agility of our business model, the company's strong market positioning, and the long-standing and close customer relationships. As of today, the macroeconomic environment continues to be characterized by high degree of uncertainty. Amidst this backdrop, we will continue to focus on operational excellence and stringent financial discipline. With this in mind, we are actively monitoring market trends and assessing potential risks and opportunities for our company. While we remain confident in our ability to continue delivering strong results, we acknowledge that there may be some challenges ahead that could impact our business. With the countermeasures taken in 2022, we entered 2022 on a stronger footing.
As Sven has mentioned, we will look to build on this further in 2023 as we embrace a proactive mindset and adopt best practices across the businesses. Turning to slide seven for more details on the e-mobility business area. As mentioned, despite business conditions remaining tough in Q4, e-mobility continued to showcase its growth ambitions. Expansion in this business area continued, with e-mobility revenues climbing 21.7% year-over-year in the first quarter 2022. The main reasons behind this increase are firstly, the ramp-up of newly acquired customers, and secondly, the increase in volumes of a low base Q4 2021. Q4 performance followed a strong third quarter, driven by a certain recovery. e-mobility revenues fell subsequently by 8.4%, reflecting a weaker end consumer market and subsequently postponement of orders.
Still, overall for the full year 2022, e-mobility revenues increased by 8.3% from EUR 47.5 million in 2021 to EUR 51.4 million in the reporting period. While this resilient performance supports the company's strategic goal of expanding business activities in the e-mobility business area and sees e-mobility now accounting for 38% of total revenues versus 35% in 2021, it nonetheless fell short of the group's expectations, especially in the 1st quarter of 2022 due to COVID-related delayed acceptance of deliveries, while global supply chain constraints continued to have a slowing effect on HBS customers' production towards the end of the year.
On this slide, you also see that the decrease in e-tools weighed on the overall performance of the hGears Group. On the next slide, you will see the breakdown of the hGears Group revenues across the different business areas. In 2022, hGears Group generated revenue of EUR 135.3 million, reflecting a slight increase compared to the previous year, 2021, with EUR 134.9 million. As highlighted earlier, the increase in revenue is primarily attributed to e-mobility, which compensated for weaker demand in the e-tools business area and relatively flat demand in the conventional business area. As you see in this slide, in absolute terms, e-mobility gained EUR 3.9 million despite the adverse market drop.
In the e-tools business area, revenue fell by EUR 2.8 million to EUR 41.4 million in 2022, representing a 6.3% year-on-year decline. The negative economic and geopolitical environment took its toll on consumer confidence, while rising interest rates had an adverse effect on building and construction. As a result, especially in the final quarter of 2022, demand for electric tools for craftsmen and gardening experienced a decline after exceptional demand and inventory building in the previous years. Due to the focus on the premium and luxury segments of the automotive industry, the conventional business area proved highly resilient in 2022. Overall, revenues fell EUR 0.7 million to EUR 41.1 million, reflecting a marginal 1.7% decrease.
However, the business area's performance should be viewed in light of the automotive industry's slow recovery towards the end of 2022 after a pronounced slump predominantly caused by the semiconductor shortage. I will now move to the financial review. Slide number 10. Tough conditions experienced in 9 months of 2022 continued in Q4, affecting revenues and profitability. The burdens related to the COVID-19 pandemic and the steep increase in energy and raw material prices caused by Russia's invasion of Ukraine had an overall adverse impact on global economies and ultimately the group's business evolution. Meanwhile, a pronounced cooldown in the e-tools industry in the final quarter of the year also took its toll on the company's development, resulting in high inventory levels amongst our customers.
In 2022, hGears Group generated EUR 135.3 million, with reflecting a slight increase of 0.3% compared to the previous year. As stated earlier, e-mobility was able to fully compensate for the shortfall in e-tools and only marginal 1.7% decline in conventional. Revenues in full year 2022 reflect the impact of COVID-related shutdowns in some of our customers in early 2022, which alongside supply chain constraints throughout the year, had an effect on customers' production. While temporary overstocking led to some order performance and cancellations towards the end of the year, the increase in revenues primarily attributed to existing customers and new projects continued to ramp up.
While the pass-through clauses, which are an integral part of hGears contracts with customers, protected the group to a large extent from the steep increase in raw material and energy costs, they could only partially compensate for the inflationary pressures on the non-transferable costs. For example, tools, supply, outsourced manufacturing. This is reflected in our gross profit, which took an 8.6 hit year-over-year. Consequently, the adjusted EBITDA also suffered, but was additionally burdened by service costs, which were of course not covered by pass-through clauses and slower than anticipated revenue progression, meaning we were unable to realize the expected positive effects from operational leverage on profitability. As a result, the group achieved an adjusted EBITDA of EUR 15.3 million, also within the guided range of between EUR 14 million and EUR 17 million. Moving to the next slide, which covers our cash flow.
As in the nine months of 2022, the decrease in operating cash flow was mainly due to a lower EBITDA, while we intentionally kept somewhat higher inventory levels as a precautionary measure against the current uncertain economic conditions in anticipation of the ramp-up of new projects. We took the opportunity and purchased production equipment in very good condition at a very favorable price in the third quarter, while strictly adapting our investment CapEx to reflect the cooldown experience going into the first quarter, thereby ensuring appropriate and responsible capital allocation. This is reflected in the virtually unchanged investment CapEx versus the previous year. Net paid interest benefited from the refinancing of our debt, which became effective in 2022.
The increase of the received leasing contracts reflects the renewal of a building rental contract in Germany, which must be fully capitalized and reflected in the balance sheet under IFRS 16. Ultimately, our cash flow of minus EUR 8.3 million is also in line with our guidance for 2022, which predicted a negative high single-digit amount. Flipping to slide 12, and before handing over to Sven, I will also want us to go back to a comment he made before about our means to execute. If you look at our balance sheet profile at the end of the year, it is very solid. We appreciate the security margin in the current economic and geopolitical environment, which inevitably results in very volatile trading conditions. As such, we think that a solid balance sheet is an absolute must in these times.
We have managed to maintain our working capital stable as a percentage of sales compared to full year 2021, despite the precautionary increase in our inventories. We were able to achieve that by negotiating favorable payment terms with our suppliers. If you look further at our indebtedness, it is very low, as net debt stood at -EUR 2.7 million, which reflects a net cash position at the year-end. Moreover, the equity ratio remained almost unchanged versus 2021 at solid 56%. Finally, you might remember that we achieved the refinancing in 2022, and we still have EUR 14 million of undrawn revolving facilities that is untapped. Through this refinancing, we were able to secure way better conditions and hence lower our interest expenses.
If you combine this with the existing cash and cash equivalent of EUR 36.3 million at the end of the year, this means that we have potentially available liquidity of EUR 76.3 million, which provides full financial maneuverability. This is, in my view, further testimony of what we mean when we talk about very sound financing. As you all know, in volatile times, cash is king. With that being said, I would like to hand over to Sven for outlook and closing remarks.
Let me move to our 2023 guidance on slide 14. We expect challenging market conditions to continue in 2023, with structurally higher energy costs, continuously rising interest rates, slower than anticipated resolution of supply chain constraints, persisting geopolitical risks and high inventory levels amidst ongoing shifts in demand trends, we take a cautious view on 2023. This is, by the way, not a unilateral view, but an approach that is taken by most of our peers and clients in the industry for the short term. We continue to work hard to mitigate these pressures. This will only partially protect from sorry, protect profitability in the current uncertain economic environment as ongoing inflationary pressures continue from costs not covered by pass-through clauses.
Due to rising interest rates and lower consumer confidence, demand in e-tools and e-mobility continues to be held back by temporarily elevated stock levels, and it will probably take some time for these inventory levels to unwind. The adverse trading conditions we experienced in the fourth quarter of 2022 continued into the first quarter 2023. Our cautionary guidance for full year 2023 must be seen against this background. The good thing is that we have already factored somewhat a weak start on to the year into our outlook for 2023. For the full year 2023, the group targets are group revenues of EUR 129 million-EUR 137 million, adjusted EBITDA of EUR 12 million-EUR 15 million, and a negative free cash flow between EUR 6 million and EUR 9 million.
Against this backdrop, management will continue to focus on operational excellence, execution and deployment. Meanwhile, we will continue to chase new customers and contracts in order to capture future growth. We will make good use of our strong market position and leverage our engineering and co-engineering, co-development capabilities. In the medium term, hGears is targeting strong growth, mainly in the e-mobility business. Overall, we expect group revenues to reach approximately EUR 180 million-EUR 200 million. In line with this growth target, the e-mobility business area is expected to account for approximately 55%-60% of the group's total revenue, in line with the group's business expansion ambition and strategic focus. Our existing project pipeline, paired with ongoing customer wins, will drive demand once the temporary slowdown in the e-bike environment and destocking are overcome.
Meanwhile, the increasing segmentation of the e-bike market will generate additional demand. The emerging micromobility solutions are, from a technical and know-how point of view, the next revolutionary step on our growth path. Without increasing co-development activities, we will be able to increase the number of components per system. Finally, we will have a closer look at other and adjacent industry segments, not only from a growth perspective, but also with regards to an increased diversification of our business. However, for the time being, hGears strategic focus remains on sustainable drive and mobility concepts and management sees the company very well positioned to participate in this growing environment. With highly motivated employees, a sound infrastructure and a strong balance sheet, the company is well equipped to look for the future with good confidence. Thank you, ladies and gentlemen, for your attention.
I would now like to hand the line back to the operator to open the Q&A session.
Ladies and gentlemen, at this time, we will begin the question and answer session. We have the first question from Mustafa Hidir from Warburg Research. Your question, please.
Good morning, gentlemen. I have three questions that I'd like to ask. The first one is on how the guidance that you gave for 2023 should be evaluated in the context of the current macroeconomic environment.
The current macroeconomic environment is fully reflected in the guidance for 2023. Therefore, we expect, with the cautious that we have said several times during the call to reach the guidance for 2023, i.e. the slow start that we have mentioned before and what we currently see is already reflected in this guidance.
All right. Thank you for that. My second question is regarding the e-bike business. What we've seen recently is that the demand side in the e-bike business is slowing down. I would like to know how your view is on the medium-term growth prospects that we can expect from the e-bike business.
I think honestly, we of course, see the same trend at the moment. Overall perception still is that it is a growing business going forward. We have some stock issues at the moment, I think, throughout the whole pipeline because of this unexpected slowdown. What we do see is that going forward, we have significant number of projects coming in. We see growth potential, especially if you look at what we call micromobility. If you look at cargo bikes, where especially, you know, companies like the DHLs, UPSs of this world are changing from trucks to these kind of concepts going forward. That will be a new market in that area that will continue to drive the growth. Overall, the expectations are still positive.
We believe this is a temporary thing for this year. Again, that's incorporated in the guidance and then a positive outlook going forward.
If we'd translate that into a CAGR that we can expect over the upcoming, let's say three to five years, what would you say?
Sorry, Mustafa, can you please repeat the question? I think your line is not 100% perfect.
Yeah, sure. If you would translate what you said if your CAGR that we can expect over the upcoming three to, let's say three to five years, what would that be?
I mean, we are expecting the e-mobility business area to reach between 55% and 60% of our total revenues. That will be between EUR 180 million and EUR 200 million. That being said, we see also that there is adjustment on the number of e-bikes that will be present on the market. In the research that was published by CONEBI, they expect to see 9.5 million e-bikes in 2024 versus 12 million e-bikes that they expected to see. Sorry, 9.5 million e-bikes in 2025 versus 12 million e-bikes that they expected to see when they published the research in 2021.
That just shows you also that the market is, the ramp up of the market is in general slower than everybody expected two years ago.
I think, that's why our forecast is the way it is, that we're basically rebasing from a lower level and then seeing the growth going forward at the same, I would say percentage change as before, but again, from a lower base.
All right. Thank you both. My third question is to you, Sven. It's first, congratulations to your new job, once again. My question would be what geostrategic focus will be in the upcoming years? I'd like to know where you exactly see upside potential and if there are specific areas in the operations where you see decent upside potential.
You know, again, we're at very early stages. I'm getting an overview. I think one thing where I see potential from an internal process point of view is on the development side through to industrialization. I mean, we have a significant increase in the number of projects. That's what we're addressing right now and defining what steps we wanna take to improve. Obviously, on a day basis, we need to work on, you know, basically efficiency within the normal operations. I would not say that I'm gonna right now have major changes in direction. I think we're very well set if you look at the, again, e-bike sector in the sense that we are pretty much working with everybody that is trying to get in.
The challenge always is to pick the winning horses on that one. I think we're very well set in that sense. The one thing we will investigate, as we mentioned, probably in the next, yeah, six to 12 months, is, you know, what other activities out there could we incorporate and add on in order to continue our growth, that would be an additional potential in the end to what we've just given as a guidance.
All right.
Thank you for asking. Yeah. Sorry.
No, that's fine. Go ahead.
The next question comes from Anne Van Lie Peters from ABN. Your question, please. Ms. Peters, maybe unmute your phone. We're not hearing you right now.
Thank you very much for your presentation. I'm taking over from my colleague, Martijn den Drijver, today, who is not in the office. I would like to ask if you could elaborate a little bit more on the changes of your medium-term target, and more specifically, for the e-mobility segment. You used to guide for e-mobility sales of EUR 150 million, and now you're using a 55% new target of EUR 180 million-EUR 200 million, which gets us to around EUR 100 million. Is that only lower growth or also lower market share for the company? What are you seeing in terms of price pressure? That will be the first question. Thank you.
I think honestly, as we said, we're starting from a lower base, and I think we're taking a prudent view going forward, because also in my past jobs, there aren't people that sort of say, "Well, it's just a dip, and we will recover." Typically, what you see is when you have a situation like this, the market just starts from a lower level, and that's the key driver with regards to our projection right now. Also there may be allow me after seven weeks to really take a prudent view. You know, I still lack the experience of how these markets behave after a slowdown. That's what we're going for. By way, we're making that projection going forward. There is no loss in market share.
I mean, in the end, again, that's just that sector. We are working with just about every player that is key in this business, and independent on who will finally succeed at taking more market share, we will participate. The goal is to, as we move along, increase the number of components per system and hopefully generate some additional growth.
Thank you. Then my second question, would it be possible to sort of split the guidance within the different divisions of the company?
No, unfortunately not. We are not providing guidance on the different business areas. As we mentioned several times ago, and just maybe to provide a little bit more light on the different business area, as you would see historically and also our expectation on the conventional business area. Let me start with the conventional because it's the easiest one. It's a business area that, considering the fact that we are delivering to premium and luxury vehicles, shall remain relatively flattish over the next year at around EUR 40 million, as we saw it also in the previous years, and with the time to transform to e-mobility, as we are already working on different potential projects there that will make the transformation.
On the e-tools business area, we expect to see further growth, starting from second part of the year once the companies and the OEMs will resolve the stockpiling topic. The main driver for our growth, as Sven mentioned before, and as we also mentioned in our previous calls, will be then really the growth and increase of wallet share in our e-mobility business area.
Thank you. Thank you very much. I was wondering, in terms of CapEx, what should we take into account for 2023/2024?
Yeah. Again, 2023 and 2024 will remain to be very tricky in terms of CapEx, because if we want to continue and generate growth in the mid-term, we still don't have all the capacity available on our plans. From the other side, as we saw in the second part of 2022, when we saw a slowdown in ramping up the new projects in terms of demand, we reassessed the CapEx very quickly, and therefore we ended up with a CapEx that was much lower than what we have originally predicted for 2022.
cover in the way that we expect them to recover the second part of the year, and we will see that this is a sustainable recovery. We will start to invest in the second part of the year. That guidance is based on this further investment that needs to be done in order to reach the midterm guidance. On the other side, I can tell you that for the time being, in the first part of 2023, we are almost, I would say, I wouldn't say close to zero CapEx, but we are really focusing only on maintenance CapEx. There are currently no investment in new projects that we are doing because we expect. We don't know when the markets will recover
My final question. How should we think of the phasing in 2023 in terms of sales and EBITDA? You already mentioned the slow start of the year in the first quarter, how should we see sort of the remainder of the year? Thank you.
Yeah. We continue to focus on things that we have implemented already in the second part of last year. Basically consolidating production shifts, making sure that we are reviewing almost on a weekly basis the number of FTEs that we need to have in production. Mr. Arend came also with some other great ideas that we are currently evaluating and trying to implement. We will continue to generate savings during the year as well. We expect this also to be reflected in our financials. That being said, as we mentioned, I mean, the environment is currently still not very positive and therefore we are just compensating on the cost side.
Thank you very much.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star followed by one. We have a question from Roberto [Uldumari] from [Orginia Partners] . Please go ahead.
Yes. Can you hear me?
Mm-hmm.
Hello.
Hi, Roberto. Yes, can. Yeah. Yeah. Hi.
Listening to what you said about the CapEx for 2023, I struggle to understand if your CapEx is gonna be so low, why you expect to generate negative free cash flow in 2023. Can you please expand on that?
Yeah, I haven't said that the CapEx will be low. I said that for the time being it is low. In the first half of 2023, we are definitely going to see and wait until we see very good signs from the market and from our customers on the long-term recovery and really ramp up. At the end, in order to reach the guidance that we have provided, the midterm guidance, we will need to continue to invest. That's why the guidance is basically based on that. Assuming that we will have EUR 15 million EBITDA to reach the target that we will need to have, we will be closer to around EUR 20 million CapEx.
There will be also a negative impact, of course, from the working capital once we will start to increase the sales going forward.
In the meantime, when you say maintenance CapEx, let's assume you have only maintenance CapEx. What is your estimate of maintenance CapEx on a run rate?
It is between 3% and 4% of total sales.
Sorry?
It is between 3% and 4% of total sales.
Okay. This is what you are seeing yourself spending at least in the first month?
Yeah.
Okay. Thank you.
Thanks.
There are no further questions at this time, and I hand back to Sven Arend for closing comments.
Yeah. Thanks, everyone. It's been a great opportunity for me to communicate with you, and obviously I look forward with Daniel and with Christian to be involved in further meetings as we move throughout the year and I get a picture of where we're heading and what our strategic maybe changes will be. Again, thanks for your time and looking forward to the next opportunity