Good morning, everybody, and a warm welcome to hGears nine months 2022 results presentation. On the call with me today are Pierluca Sartorello, our CEO, and Daniel Basok, our CFO, who will present our nine months 2022 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 copies of 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 our legal framework under which this presentation must be considered, and which I will assume you have read. With that, I'd like to hand over now to Pierluca Sartorello.
Thank you, Christian. Good morning. Good morning to everybody. We go to slide five. Okay. Welcome to our nine months 2022 earnings conference call. As usual, and as in the previous calls, I would first like to provide you with a snapshot of the overall environment and the latest developments. I will then hand over to Daniel for the financial part. The challenging environment that we experienced in the first half of 2022 continued, with macroeconomic headwinds persisting into third quarter. While the effects of the pandemic more or less disappeared on the Western Hemisphere, major restrictions related to COVID-19 remain in place in China as a result of the country's zero-COVID policy. To date, we have seen limited impact on our Chinese plant as the restrictions have been within certain cities, certain regions, although we continue to actively monitor the situation.
As anticipated, supply chain issue eased, but inflationary pressures as a result of soaring prices for energy, non-transferable material, and supply continued to weigh on our results and burden profitability. Due to the strong inflationary pressure, central banks around the globe implemented aggressive interest rate hikes. This will most likely leave lasting marks in global economies. In anticipation of the decline in trade and industrial activity in the following periods, some of our customers in mobility have postponed a few orders, and in e-tools, some clients have canceled orders. As a result, we trim our full-year guidance on October 4, 2022. However, despite the persistent adverse environment, hGears delivered a solid third quarter performance. This solid performance is mainly due to the ongoing expansion on our e-mobility businesses, predominantly fueled by the ramp-up of recently won projects.
Meanwhile, we remain agile and continue to actively deploy our commercial strategy towards existing and new players. We are in talks with customers regarding additional contracts that will support our growth path towards and beyond our medium-term targets. Overall, demand in the e-mobility business area continues to be resilient, mainly due to a continuing and sizable order backlog in the consumer market. We not only see an ongoing segmentation of the e-bike market into major clusters such as cargo bikes, mountain bike or city bikes, but also a diversification within these clusters. This shows that the dynamic e-bike industry is continuously reinventing itself, creating for us new business opportunities. The awareness of climate change is constantly increasing. The United Nations Climate Conference, COP 27, that is taking place in Sharm El-Sheikh as we speak, and climate change is in the news day by day.
Transportation is one of the largest contributors, adding approximately 1/3 of the anthropogenic greenhouse gas emissions. Therefore, it is obvious and inevitable that intelligent means of transport must be found and implemented to tackle this problem. Meanwhile, the increasing urbanization clearly calls for smart concepts for the transportation ecosystem in cities. Many cities around the globe already started to implement new traffic system that favor bicycles, e-bike, cargo bike, and other micro-mobility solutions of all kinds. Here, we would like to highlight again that going forward, our components and gearbox systems will not only be used for e-bikes, but also for other e-mobility and micro-mobility solutions, which will help to solve this problem. Thereby, we will increasingly become part of the solution. With that, I would like to hand over to Daniel, who will give you a detailed insight into our numbers for the nine months 2022.
Thank you, Pierluca, and good morning to all of you. Let's turn to slide seven, which covers the revenue dynamics. In the nine months of 2022, we generated revenues of EUR 103.6 million versus EUR 102.3 million last year, corresponding to a year-on-year increase in group revenues of 1.3%. In the third quarter of 2022, the group delivered a 2.9 year-over-year revenue increase to EUR 32.7 million. Despite having experienced some cancellations of contracts in the e-tools business due to lower demand and sequential slowdown in the conventional business area. As Pierluca mentioned earlier, this slowdown in the e-tools business area was primary factor in our 2022 guidance adjustment back in October.
Q&A.
However, despite some weakening in this business area, which reflects the damping effect of interest hikes on consumer spending, we saw continued momentum in the e-mobility business area in the nine months of 2022, driven by the ongoing expansion and ramp-up of projects. Overall, the e-mobility business area added 17.5% year-over-year in the third quarter, 2022, and this follows a solid 12.2 year-over-year increase in the second quarter of 2022. As you will see, the chart on the right part of this slide shows the solid pickup and ongoing ramp-up of the e-mobility business. Both the temporary setback that we saw in the first quarter, 2021 and the first quarter, 2022 related to the supply chain constraints experienced back then by many OEMs.
This chart supports the structural growth that we are seeing in e-mobility and underpins our strategic focus on drive application in this business area and why we continue to invest in capacity build-out. Turning to slide eight for more details on that and closer look at some P&L items. This slide is relatively straightforward and to a large extent self-explanatory, but let me briefly comment on some of the points here. The lower than expected volumes due to customer-led delays, particularly at the beginning of the year and subsequently some cancellations and postponements in the third quarter, resulted in a slower than assumed top line progression in the nine months of 2022. Overall, revenues increased by 1.3% year-over-year in the period under review. Moreover, in the nine months of 2022, we have gained...
hGears has been able to mitigate inflationary pressures significantly by executing pass-through clauses for raw materials and energy. However, increasing costs related to non-transferable expenses, for example, tools, supplies, trade goods, outsourced manufacturing and lower than expected contribution from operational leverage weigh on the company's profitability. The gross margin continues to be burdened by two major factors. Firstly, the dilutive effect from the pass-through clauses, and secondly, the inflationary pressure on portion of our non-transferable costs, which we are unable to pass on in real time. At the adjusted EBITDA margin level, the benefits from operational leverage that we had expected to see kick in in the second half of the year have not yet materialized. However, we see modest quarterly stabilization reflected in a sequential improvement versus the second quarter of 2022.
Stripping out the impact from inflation and volume mix, the adjusted EBITDA margin would have been 13.4% on a like-for-like basis instead of 11.5% in the nine months of 2022, which gives a better proxy of the impact of the lower volumes witnessed at the beginning of the year and unprecedented inflationary pressure from non-transferable costs. We continue to expect a like-for-like adjusted EBITDA margin improvement once the operational leverage starts to kick in. Moving to the next slide, which covers our cash flow. As in the previous quarter, the year-on-year decline in cash flow from operating activities relates to the lower EBITDA and the higher working capital consumption compared to the previous year.
With regards to the working capital, amid ongoing economic uncertainty and geopolitical backdrop as a precautionary measure, we have maintained the high inventory levels and safety stock at around the first half 2022 level. Meanwhile, finished goods and work in progress has remained at around the same level as the H1 2022. Some of the increase is again led by higher prices. The strong increase in receivables that we saw in the first half 2022 was as stated with the last set of numbers released only temporary, and this position has declined by EUR 2.6 million since then, although remains near EUR 1 million higher than in the nine months of 2021.
The cash used for investing activities of EUR 7 million in the nine months of 2022 was at the previous year's level of EUR 7.2 million, reflecting ongoing investment in new capacity in line with earlier statements as we continued, as promised, to expand current capacity for future growth. We are doing it in a more cautious pace than originally planned. Moreover, we were able to acquire used manufacturing equipment in a very good condition, and that will also reduce our CapEx for this year, thereby supporting our capacities for future growth. Net paid interest decreased by EUR 4.8 million compared to the same period last year and reflects the one-off interest paid related to the repayment of the shareholder loans after the IPO in 2021.
At the same time, there is a positive impact from the refinancing that we concluded at the beginning of the year, where we significantly reduced the cost of external debt to roughly 1% per annum versus the previous level of 3.5%, representing a significant reduction of approximately 255 basis points. With that, I will now hand back to Pierluca Sartorello for some closing remarks and the outlook.
Perfect. Thank you, Daniel. I'll try to speak louder because I understand that my voice today is not perfectly audible. The environment that we have been experiencing since the start of this year with the war in Ukraine and its impact on energy and raw material prices has ultimately resulted in inflation levels that we have not experienced in decades. This follows the burdens that came with the COVID-19 pandemic. In response to structurally higher energy costs and this ongoing uncertainty and challenging economic environment, we continue to focus on improving our resilience while optimizing cost structures to ensure future agility. At the same time, we continue to see substantial opportunities in our e-mobility business area, and we will continue to pursue and win new projects and contracts while continuing to invest and expand our capacity to capture future growth.
With regards to our energy supply, we are very well positioned. Having switched our hardening plants in Germany from gas to electricity, our gas consumption in Germany has become almost negligible. Furthermore, the German government is set to implement gas and electricity price caps that should protect us further. Moreover, the Italian government has alternative contracts in place for gas supplies to Italy, whilst China has stabilized prices and increased domestic production and diversified imports to secure steady supplies. As such, we see limited exposure and also have energy saving programs in place at all three production sites. We are also very well positioned with regards to the supply of our raw materials, with localized supply chains and precautionary inventory levels in place.
We continue to implement operational and efficiency measures such as adjustment to our temporary workforce, cost cutting and budgetary restrictions, and can swiftly adapt the utilization of our plants. Last but not least, we have the added advantage of a very strong balance sheet with a net cash position of EUR 1.7 million, an equity ratio of almost 58%, cash and cash equivalents of about EUR 36 million. With that, let me move to our 2022 outlook and mid-term guidance in slide 12. Here we are. For the full year 2022, we confirm our guidance of revenues of EUR 134-EUR 138 million and EBITDA of EUR 14-EUR 17 million. A free cash flow in the negative high single digits.
In the medium term, hGears continues to target strong growth in product revenues in the e-mobility business area to approximately EUR 150 million. Meanwhile, the company is targeting strong growth in the total revenues to approximately EUR 250 million over the same period as part of its growth strategy. 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. 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. Our first question comes from the line of Martijn den Drijver with ABN Amro - Oddo BH F. Please go ahead.
Yes, thank you, operator. Good morning, gentlemen. I have four questions, and I will do them one by one. You mentioned some order postponements in e-mobility. Can you shortly explain why these postponements have happened? If possible, could you perhaps provide some range as to the impact of those postponements?
Hello. I answer to this. The postponement is first of all hello, Martijn. The postponement is mainly due to product development that took longer than expected. This is the bike industry is very let's say agile, but what we are bringing in it is a solid automotive product development approach. This requires some time, longer time than what is dreamed of by the OEM. What I want to say is no one program has been canceled. It is let's say teething troubles that postpones the introduction of the product.
Okay.
We confirm the product 100%.
Is there any way that you can provide us a bit of an insight into the impact? Can you quantify it? Maybe is it a couple of million? Is it a single digit? Anything.
I would say that, I use your language, low single digits in EUR million.
Okay, thank you. I'll move on to the second question. You mentioned that there are cost-saving measures, and you give a couple of examples in the presentation on temporary workforce and cost control. Would you be able to give us some insight into what kind of savings in euros that should result in and when those savings are actually going to have an impact in the P&L? Yeah, has that already had an impact in the third quarter, or should we expect more coming in the fourth quarter and perhaps 2023?
I will pick it up here, Martijn. Good morning from my side as well. These measures already started in Q3, and we expect to continue with these measures towards Q4 and also the beginning of next year. These measures are mostly related to energy costs and in personal expenses. We expect to see this year an impact of around between EUR 1 million and EUR 2 million . That should also be continued towards Q1 and Q2 in the following years. Depends, of course, on how cold the winter for the European entities will be.
Okay. EUR 1-EUR 2 million in savings this year. EUR 1-EUR 2 million savings then also for next year if we assume steady gas prices. Normally, I would expect that amount to go up because there's a full year effect instead of just a two, three, four months effect.
Yeah. As the consumption of gas is not linear over the year, the most of the consumption of gas, as Luke also mentioned before, is mainly related to furnaces and Italian entity. The problem is that, due to the cost measures, we have consolidated production, some of the components. We're basically using one run instead of using two shifts. Yeah, I mean that in a very simple word. With the deliveries of gas secured in Italy, the prices are still very much volatile. It depends on how the projects that we are planning for 2023 will ramp up, considering that we see a very strong demand also in the new projects that we will expect to ramp up in Padova. The savings will be mainly reflected in Q1 and Q2.
Okay. Just so I understand. You obviously very dependent on gas prices, but if we take that element out, you're talking about adjustments of a temporary workforce, you're talking about cost control measures, budgetary restrictions. These are all elements that are in your control. Again, that EUR 1-EUR 2 million, will that be also EUR 1-EUR 2 million in 2023, or will it be higher? I assume it's higher in 2023. Ignoring gas.
Ignoring gas for the full year if we're just talking about personal expenses. If we would consider a flat top line in comparison to this year, you are right.
Okay. I'll move on. With regards to cost inflation, and obviously you guys are in constant discussions with your customers about that cost inflation, excluding obviously the raw material, heavy steel, which is covered by your contracts. How far are you in adjusting those contract clauses? Have you covered now 50% of outstanding contracts with new clauses? Are you at 25%? Are you near 100%? Can you give us some insight into how that process is progressing?
Okay. I answer here, Martijn. If you want a number, we are over 50%. Okay? That said, what is at stake in this moment is that we are negotiating methods, and we try to implement methods that are, how may I say, predetermining, so that we don't need to enter into negotiation every second month. That is a little more complicated because we need to discuss details that are sometimes complicated. Our plan is to have this, you know, finalized, by year-end because we want to have a 2023 that is more, let's say, easier to plan on and avoid this volatility as we experienced in 2022.
Would it be fair to say, given your nine-month presentation in terms of the reported gross margin and the like for like gross margin, that the delta is roughly 2.5%, that if you finalize all these contract adjustments before year-end or at year-end, that you will have an uplift of 2.5% from those contracts in 2023, ignoring operational leverage, based on top line growth? For Daniel, I guess.
It will be slightly below 2%, but it is correct. When we will target to continue the negotiations, in assuming that we will be successful with all the negotiations, we expect our gross profits to increase by around between 1% and 2%. Okay. Thank you. Because these new prices will of course also have a dilutive effect, right? This, it comes back to this.
Sure. You've managed your CapEx in a flexible manner, adjusting to demands, market demands. You've been able to source some equipment at a lower than expected price. What is currently your CapEx estimate for 2022 to 2023? Just to update us, please.
Of course, for 2022 we are not providing any specific guidance yet. You will need to wait until the end of Q1 2023 when we will provide the guidance for the full year. For 2022 we expect to be lower than what we have planned before due to the fact that, as I said, we were able to get our hands on a very good equipment, very good condition, but also in very attractive price. For the full year, we expect to be below EUR 20 million for this year.
When you say below 20, that actually implies 19 or can it be materially below 20?
It means below 20, Martijn. It very much depends still on when we will get the equipment on board. There are some few equipments that are some that is expensive equipment and therefore you know, two machines, if they will arrive December or January, will make a big difference here. If you want me to be more precise here, I would say it is between EUR 17 million and EUR 19 million.
Okay. I have a couple more questions, but I'll leave some room for others. Thank you.
Thank you.
The next question comes from the line of Mustafa Hidir with Warburg Research. Please go ahead.
Good morning, gentlemen. Even though you don't give a guidance for 2023, how do you expect the newly created capacities to be utilized in the upcoming year?
I'm not sure I understood the question very well. Can you repeat, please? If you can a little louder.
Yes. Even if you don't give guidance for 2023,
Yeah.
Which utilization rate do you expect for your newly created capacities in the upcoming year?
How we expect the utilization of the capacity? Is that the question?
Yes. The newly created capacity for the upcoming year.
Thank you. The capacity is growing according to the business we take in. Imagine that we are in a growing slope, a growing curve, and we have a situation at the beginning when the capacity is higher, but it's planned to be filled in. What we are doing in this moment is to, let's say, trigger the CapEx and the investment according to the real and actual start of the new projects. We expect that the capacity will be fulfilled on the longer term.
I repeat, if the sales change, we are still in a position to postpone investment and wait for the right moment. It is in this moment. It's really, you know, a difficult question to answer because we are growing and there are new business coming in every month or so. The capacity is following the demand. We are in this situation right now.
All right. Thank you very much.
The next question comes from the line of Christian Glowa with Hauck & Aufhäuser Investment Banking. Please go ahead.
Yeah. Hi, gentlemen. Just one question from me, please. You told us about potentially winning new contracts in e-mobility. Can you please provide a bit of color what kind of contracts are these specifically? Are these potentially contracts which is similar to the one you're delivering for the Revonte, fully integrated transmissions, where you basically benefit or are about to benefit from essentially higher content? I'm also asking that question with regard to your confidence in confirming your midterm targets, given that we potentially look at rather a lackluster next year in terms of top line growth. What gives you the confidence, and how do these new potential contracts look like in terms of content per vehicle?
Good morning, Christian. Thank you for the question. What provides me a very strong confidence is the fact that all new opportunities have a large content per transmission. The model that we experience when we start, and as everybody know we have with Bosch are not replicated any longer. For new contracts and new opportunities, we provide a very large content per transmission. The value can vary from you know four to 10 x what is the value that we provide to Bosch, the value transmission. This is what make me very confident that our growing plan is gonna happen. Okay?
There is an overall trend of, let's say, moving to Europe, the production that is actually still outside of Europe, because Europe is the main market and because, you know, the logistics and the supply chain constraints that we experience basically represent a strong lesson to the manufacturer. We are really profiting on this situation. We have been able to place ourselves as a reference in the market, and we represent a privileged, let's say, source for these plants.
I understand basically that the technology you provide for Revonte is kind of becoming mainstream and potentially is also attractive for other customers. Is that the right way to put it?
I wouldn't say technology. It is the let's say it's the supply model that we have with Revonte can be very similar for other type of for other customers, okay? We have a number of opportunities like this that really make me feel confident that our targets are really at reach.
Okay. Well understood. Then maybe just one more question follow up on, supply, you basically said. Now we talked a lot about demand, and previously we talked about supply. Can you confirm that basically supply chains have improved? How is availability of components such as frames, brakes, tubes, has that become significantly better month-over-month? Or how do you look at supply chains at the moment?
Yeah. First, we have to say that this list that you made is affecting our customer or the customer of our customers, okay? We've never been directly affected by shortages. That said, the information we receive from our customer, main customer, but also, I mean, from what we can read in the press and the market is that these constraints are getting smaller and smaller. It is completely over? No, because if you're going to buy a bicycle, you have to wait six months or so. For sure, there is an improvement that is driven by a relief situation on the normal, let's say process, but at the same time is relief, frankly, due to investments that were made in the past 12-18 months in Europe.
There is now production. Of course, there are some situations like, I don't know, Shimano derailleur that represent a limit, but this is mainly affecting the normal, let's say, muscle bike rather than being specific for a e-bike.
All right. Thank you very much.
As a reminder, if you wish to register for a question, please press star and one on your telephone. Star followed by one. We have a follow-up from Mr. Martijn den Drijver, ABN AMRO. Please go ahead.
Yes, thank you, operator. I would like to go back to or like to go to e-tools. Obviously a bit of a step back there. I always understood that you guys supply to the professional tools and garden tools market, yet you say softening market demands. First of all, can you explain how that works? Because, why would that market decline now? Secondly, some customer changes, losses of customers. Can you elaborate a little bit on what happened there and how you view that market going forward? That would be question one.
Luca, you will pick it up?
Yeah. You know that there is a situation where there is a strong pressure or, let's say, within China, that is one important market, a crisis on.
Real estate. This has generated a reduction of spending in the equipment. The market has simply shrunk. The demand has gone down substantially. We see this especially affecting our e-tool production in China. When we speak about e-tool, we mainly refer to the production we have in China that is again affected by this specific situation. How may I say? Going forward, we still think that e-tool is a market that will grow between 2%-3% per year. Once this wave is over, I think it will go on along with this dynamic.
I'm a little bit surprised by your remarks about the Chinese market. I understood you guys supply more the Black & Decker and the Stihls, and the Bosch, and those, at least that's what I assumed, are not the suppliers to the Chinese market. Are you now saying that Chinese brands are a very large component of your e-tool business relative to these global brands I just mentioned?
No. We supply Bosch, we supply Black & Decker, we supply Makita, we supply Stihl in this area, and they are global providers, but it's a wrong statement saying that they don't sell to China. On the contrary, they have China represents a big piece of their market as well. That is what we think. That said, the situation is we see this declining of a different magnitude on all markets anyway. I can tell you that this is affecting linearly and at the same level, basically all the manufacturers. It's a real market situation.
If I may jump here in, Martijn, just to maybe add to what Pierluca said. There is a global uncertainty, as you probably know, right? In terms of constructions, in terms of real estate markets. There is normal in this type of situation. This is also what we have experienced in the previous crisis, like in 2008, that people would like to replace their power tool or replace their gardening tools. They're postponing CapEx or postponing this replacement. They're not doing preventive purchases. Currently we see the e-tools level at a level that is running, you know, on the necessary replacements. But there are no preventive replacements. Let me put it like that, if it somehow helps to understand the dynamic there. That's true, and that's fair.
At the beginning of the year, there was already a fear of recession, and this Ukraine to Russia war was already ongoing. The guidance was still for high single-digit growth. That's why I'm a little bit surprised that the Chinese construction market, of which we're all aware that it's not in optimal shape, is having such an impact. I'll take your answer for now. Moving on to my second question. hGears has invested quite materially in engineering capacity and also sales and marketing capacity. Basically hiring experienced account managers to source projects and customers. Can you tell us how many projects you now have under development relative to 12 months ago? That's basically asking, have those investments been effective or not?
I can answer here, and I tell you definitely yes. I think it's the best investment we've done. Our business pipeline, as we call it internally, so the projects open, has basically doubled versus what we had 12 months ago. Now our main goal and focus is in deployment. We've been able to put a lot of fish inside the net, and now it is time to take the net into the boat. This is where we stand.
This also applies to the sales funnels and not just to development projects that
It's a joy. I mean, in my mind, there is one area that is the so-called business development, that is, engineering working hand in hand with sales guy. Because, you know, we don't sell biscuits or candies and all. Our is a very technical and sales. Our sales guy are always a half engineer guy, kind of person. That is one single entity product. Certainly, we wouldn't have opportunities like Revonte. We wouldn't have the opportunity to address this reshoring wave as I mentioned before, without having a good level of competence and the know-how that we can make available to our customers in this moment, in this challenge.
Okay. Thanks for the elaborate answer, Pierluca.
Thank you, Martijn.
The next question is another follow-up from Mr. Mustafa Hidir, Warburg Research. Please go ahead.
Yes, one follow-up, please. Against the background of the deteriorating macroeconomic situation, what makes you confident to reach your midterm target?
The number of projects I have on my desk in this moment. Very simple. We have more projects than what we planned in June 2021 when we did the IPO, and that's it.
All right. Thank you.
Once again, to ask a question, please press star and one. There are no further questions at this time. I hand back to Mr. Sartorello and Mr. Basok for closing comments. Please go ahead.
I would like to warmly thank you, everyone, for participating. Thank you for the question. I hope we'll be able to provide some better appreciation of what we are doing. In a summary, what we want you to take away is that we have been able to win, and we're continuing to win new projects that will make us to realize our plan, to make our plan possible once this short term, hopefully short-term headwinds will be over.
Thank you, everybody, for participating, and see you in the next call. Have a good day, everybody. Bye-bye.