Good morning, everybody, and a warm welcome to hGears first half 2022 results presentation. On the call with me here today, I have Pierluca Sartorello, our CEO, as well as Daniel Basok, our CFO, who will present an overview of our first half earnings and will also both be available for the Q&A session after our prepared remarks. If you have not yet received our relevant earnings documents, you can still find copies on the Investor Relations section of our website. Before we begin with the presentation, I would like to draw your attention to the disclaimer, which sets out the legal framework under which this presentation must be considered. With that being said, we all consider the disclaimer as having been read. With that, I'd like to hand over to Pierluca Sartorello, our CEO.
Okay. Thank you, Christian. Good morning, everyone. Very much welcome to our first hGears 2022 earnings conference call. I would like to start by giving you a bit of color on our overall operating framework and performance up to today's date, while Daniel will later cover the financials in more detail. As a whole, like in many industries, and as communicated on previous earnings calls this year, the operating environment in the first half of 2022 has been characterized by unprecedented challenges. At the beginning of the year, the ongoing impact of the pandemic led to persistent disruptions at some of our customers' operations, and this has been compounded by supply chain shortages. More generally, the industry has seen volatility and fluctuations in demand and delays in deliveries.
The war in Ukraine has brought with it geopolitical turmoil in its wake, characterized, let's say, on the one hand by rising inflation as a whole and on the other hand, generating a greater scrutiny on the energy transition and energy security, in general. The latter aspect, energy transition and energy security, is directly and indirectly impacting us both in a positive and in a negative way. In a negative way because like everyone else, we are seeing the direct consequence of higher energy prices in our cost base, but also in a positive way and on a longer term basis, as we see the pace of investment towards greener energy and e-mobility solution definitely accelerating. All of these exogenous factors have been impacting our performance in the first half of the year.
As we already communicated, there are mitigating measures that we have implemented since the beginning of the year, and Daniel will cover that later. Namely, most important, the pass-through of the major portion of increases in raw material and energy costs directly to our customers. We also saw, at the same time, some lower volume year-over-year, in particular at the very beginning of 2022. As a result, the revenues were slightly up by 0.5% year-on-year. What is encouraging, though, is that we have seen a clear acceleration of revenues in Q2 versus Q1, 2022. This trend ties back to our previous expectations of revenue phasing, let's say more, how might I say, skewed to the second part of 2022.
Our order book today continued to support this trend, in turn, upholding our 2022 revenue guidance. Having said that, and to go back to the comment I made earlier about the green energy and e-mobility transition, the secular trends that underpin our business are very favorable, and our positioning has been strengthened in the first half of this year with two prominent customer wins, as well as, contract expansion with one of our biggest customer. These new wins and contract expansions, which I will cover on the next slide, reinforces our midterm growth agenda and provides us confidence to reach our midterm targets. Turning to slide six. Here, I will focus on our commercial achievement in the first half of the year.
As you will see, we have managed to first, add new projects in line with what we promised at the time of IPO, signing contracts with both new and existing customer and fueling, you know, future growth. Second, we have increased our share of wallet or scope of supply, if you have a different language, across both new wins. Third, we have done all of this while maintaining ongoing dialogue with our key existing customer in these challenging times, and which is reflected in a major contract extension I mentioned earlier. The first customer win outlined in the slide was announced early this year in 2020 and relates to a French blue chip tier one automotive supplier. The addition of this customer demonstrated the strong positioning of our company and further solidifies our status as a leading European manufacturer of high precision gears and components for e-bike.
For this particular contract, production has already started. Our latest addition is Revonte, a Finnish bike industry player. We are really very excited about this deal. In the search for a reliable manufacturer, Revonte, through a demanding supplier evaluation process, chose hGears as being on the top of the rank. Due to our evident commitment to the bike market, our unique design and co-development capabilities, our ability to fulfill the highest quality requirements according to the best automotive standards, and last but not least, our proven ability to manufacture very demanding components and systems at a scale. What is more important here to underline is that hGears will be the sole supplier, sole and single supplier for the entire transmission system. Our scope of supply here will be 100%.
Our role here will be instrumental in helping to industrialize a highly novel product with great potential. Both new projects will play an important role in contributing to medium-term incremental sales, with the first project having started production in June, and the second project set to start production in the second half of 2023. Last but not least, in the first half of 2022, we saw great success with an existing customer. We are pleased to announce that we successfully secure a multi-year contract extension with a major e-mobility customer way beyond 2024 to produce the next generation of mission-critical gears and components, making us the preferred supplier going forward. These new and existing customer wins, along with those secured in 2021, will play a critical role in achieving our mid-term targets.
Furthermore, we were prominently represented at the Eurobike 2022 in Frankfurt, one of the largest, I would say the largest and most important bicycle industry trade fair worldwide. My team and I met with existing customers and business partners while also making interesting new contacts and forging promising new ties. Some of the new contacts were the result of discussions that spun off with regards to Fazua's and Revonte's latest innovative transmission that we presented at our stand, which drew a lot of attention. All in all, what I want to underline here is that we are not resting on our laurels and are continuing to deploy our commercial strategy towards existing and new players in the e-mobility sector. More generally, our role as a leading supplier of mission-critical components is evolving together with our customers.
This can be in terms of evaluating new addressable markets, but also stepping further up in the design roadmap of our customer and therefore in the value chain. Let me give you some practical examples on the next couple of slides. Starting with Revonte's development and manufacturing process. Revonte has designed a truly innovative transmission which has the potential to change the micromobility market. This innovative transmission concept will create a new breed of e-bikes and, as I said, can potentially both change the e-bike design and become a transmission system of reference for the other micromobility solutions in the future. The deal with Revonte reflects the strength of our strategic position, the evidence that we have the engineering capabilities and the ability to successfully industrialize a complete innovative transmission.
At the same time, we can fulfill the highest quality standard now required in the e-bike industry that clearly derives from the automotive industry. Finally, we have the know-how and the financial resources to scale up volume. These three points are key elements of our competitive advantage. I spoke with many CEOs and big OEMs, and it is clear that the product will be very well accepted, and I would say anticipated by the market. The system has huge potential and may even be a game changer for the whole industry. More important for us is the fact that OEMs explicitly mention that they are pleased to know that Revonte choose hGears as their industrialization partner, which with hGears providing the manufacturing credibility to the whole Revonte project.
For me, this clearly shows how our reputation as a market leader for high quality gears and components in this e-bike industry pays off for both our customer and ourselves. It goes without saying that we are very proud to be the sole and single supplier for the entire transmission system, including complete gearbox and motors. This means a dramatic increase, as I said, in scope of supply. I would like to turn to slide eight now with another example of the company formerly known as Fazua, that since three days has changed the name to Porsche eBike Performance GmbH, having been acquired by Porsche only a few weeks ago. We have been talking about Fazua several times before. In 2021, we quickly understood the product potential.
We are impressed, though not surprised, by the quick changes and the positive progress that we are seeing. At this point in time, we think that Porsche will also sell the light and compact e-motor to other e-bike OEMs, but of course, we'll use it for a proprietary product offering, thereby using and smartly leveraging its strong Porsche brand and distribution network. Clearly, the future sales volume that we expect for this customer have now a greater potential. However, Fazua, now Porsche eBike Performance, is another example how we can work with our customers in the early development stage of their product by providing ideas and supporting the industrialization process at a later stage when the product is no longer a prototype.
Since the start of our collaboration not long ago, the Munich-based company has become an established new player in the e-bike industry, mainly focusing on compact and lightweight e-motors, predominantly, but not only for special category among e-mountain bike. The new product benefits from an increased segmentation of e-bike market, resulting in a diversification into various segments and categories such as, you know, e-mountain bike, cargo bike, road racing bike, et cetera. Porsche, recognizing this context exactly as we did before, the potential demand for a light and compact but powerful e-bike motor, above all, for one special e-mountain bike category. Of course, the application of the motor is not limited to one segment and can easily be adapted for other categories, for example, for light road racing bike. In the racing bike motor is only about to start.
As a matter of fact, the renowned Italian race bike manufacturer, Pinarello, already offers a road race e-bike called Nytro that is equipped with the new Porsche e-motor. The important point about this relatively young e-bike industry segmentation trend eventually implies that the industry is expanding further, resulting in more medium-term potential for us. Meanwhile, the acquisition of such an influential customer with a strong brand name also means, of course, a further diversification of our reliable customer base. I hope these examples provide you with an overview, not only of our technical and commercial approach, but also with the variety of opportunities at play that support our growth strategy. I will come back to provide a bit more details on the short and medium term outlook, and will now hand over to Daniel for the financial review.
Thank you, Pierluca, and good morning everyone, also from my side. We're starting on slide 10 on the revenue dynamics. In the first six months of 2022, we generated revenues of EUR 70.9 million against EUR 70.5 million in the same period last year, corresponding to a year-on-year increase of 0.5%, as Pierluca mentioned before. The main components of this performance were price increases, which were partially offset by lower volumes. The price increases stem from the application of pass-through clauses from the beginning of the year. The lower year-on-year volumes mainly reflect lower volumes at the beginning of the year as a consequence of COVID-19- related shutdowns and continued constraints in global supply chains, causing delayed acceptance to some customer deliveries.
Delving a bit deeper into the business areas, you can see that the trend I have just described was most noticeable in the e-mobility business area, where revenues decreased from EUR 24.8 million in the first half of 2021 to EUR 24.4 million in the first six months of 2022, reflecting a 1.8% decrease. The dynamics were slightly different in other business area, which speaks to our diversification and shows how this can be a competitive advantage and helps provide downside protection in challenging times as we are experiencing them now. In the e-tools business area, revenues increased 3.3% year-on-year to EUR 23.3 million, with the growth primarily attributable to higher prices.
Finally, despite supply chain problems and semiconductor shortages, and as we had expected in the conventional business area, we delivered revenues of EUR 22.3 million, remaining almost unchanged compared to the previous year's EUR 22.4 million. This performance reflects again the company's focus on the supply of components for the upper mid-range and luxury segments of the automotive industry, which are always prioritized by the OEMs due to the higher profitability. Turning our attention to the right part of the slide, we can see that overall revenue has improved sequentially quarter-on-quarter, and the most noticeable jump is in the e-mobility business area, with revenue grew over 29% versus quarter, versus first quarter 2022.
This development is as expected, reflecting our order book visibility, which is combined with the price increases, supports the trends that we are seeing here. As of today, we still expect an acceleration of revenue growth in the second half of the year, supported by orders received to date and our ongoing discussion with our customers. This is also the reason why you will see an increase in inventory of finished goods and work in progress, which has increased as a result of the operational stock build-up for the expected sell out in the second half. More to come on that on the next few slides. It is important to note, though, that this sequential acceleration in revenue has yet to make a significant impact on operational leverage, as inflation-related headwinds to our overall cost base has continued to weigh on our profitability.
Now turning to slide 11 for more details on that and a closer look at some P&L items. Here the message is pretty clear, and I will not comment on all the items here in details, but essentially the combination of lower volumes due to customer-led delays, particularly at the beginning of the year, and inflationary pressures on the cost base could only be partially mitigated by the implementation of our pass-through clauses. This is reflected in the variation of both our growth and adjusted EBITDA margin year-on-year. In the gross margin, the effect is visible. On the one hand, there is a dilutive effect from the pass-through clauses, and then there is inflationary pressure on a portion of our non-transferable costs, which we are unable to pass on. For example, tools, supplies, trade goods and outsourced manufacturing.
If we go further down the P&L, there are other costs which have increased year-on-year. For example, as a result of the HR strategy to hire the required staff for the ramp ups that we expect to see this year and next year, resulting in an increase in FTE year-on-year and this further weighs on our adjusted EBITDA and adjusted EBITDA margin. If we strip out the inflation and volume mix impacts on the like-for-like basis, the adjusted EBITDA margin would have been 14.2% instead of 11.6% in H1 2022, which gives a better proxy of the impact of the lower volumes witnessed at the beginning of the year and unprecedented inflationary pressures from non-transferable costs. We should expect an improvement of the like-for-like adjusted EBITDA margin in the second half versus the first one, as operational leverage will start to kick in.
I think the rest is pretty self-explanatory here. Let us move to the next slide, which covers the main positions of the cash flow. A few comments on this slide. The decline year-on-year in the cash flow from operating activities is, on the one hand, directly derived from our EBITDA variation and on the other hand, a greater working capital consumption. On the change of working capital, there are several factors. First, an intended increase in inventory of raw materials, consumables and supplies as precautionary measure, which is all about having safety stocks to be able to deliver to our customers towards the second half of the year. Second, as I mentioned before, is a higher level of finished goods and work in progress in anticipation, again, of higher deliveries in the second half of the year.
Third, simply due to the fact that the increase is led by higher prices for raw materials and supplies. Additionally, we saw a temporary increase in receivables because of higher sales at the end of respective period. We expect, though, our working capital to decrease to historical levels between 8% and 10% of total revenues by the year end. Looking at the other free cash flow components, we see that cash used in investing activities amounted to EUR 3.3 million from January to June 2022, compared to EUR 3.7 million in the same period of the previous. We will see a major increase in the second part of the year, which is mainly related to the ongoing investment in machinery and equipment for new projects to facilitate future growth.
Finally, I would like to draw your attention on the net paid interest, which decreased by close to EUR 5 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, and the positive impact of the refinancing that we concluded at the beginning of the year, and where we significantly reduced the cost of external debt by approximately 255 basis points from the previous level of around 3.5% to roughly 1% per annum. This concludes my review of the financial highlights for the first half of 2022, and I would like to hand back to Pierluca for the outlook and conclusion. Pierluca, back to you.
Yeah. Thanks, Daniel. Thank you. Before we go into the short and midterm outlook, I would like to illustrate the expected conversion into revenues from our contracted project pipeline as it stands today. The diagram shows the expected revenues contribution in a cumulative manner as per the size of the bubbles on the Y-axis and on the X-axis the expected start of production. Not only we are seeing a diversification of our customer, but also a holistic effect due to the higher volumes expected in some contracts. Contracts which all together give us a good visibility and confidence going forward. Additionally, we are also well-positioned to play a major role in the growing micromobility environment, offering a potential new addressable market in the future, as we'll expand on in the next slide 15. Here we are.
Urbanization and climate change are impacting the overall transportation ecosystem in cities. It is important to highlight that our components and application can be transferred to other devices other than the ones that we are currently working on today. What you are seeing here on this slide are the e-cargo micromobility solutions, which to be very clear and upfront, we are not servicing today, but which will certainly come as one of our markets in the future. As we look to capture growth and remain competitive, we naturally look at the complementary fast-growing markets that present opportunities, while also remaining focused on executing on our current pipeline. Before handing over back to the operator for the Q&A session, I would like to provide you with some elements of outlook in the next couple of slides. Here, to go back to my opening statement.
We are currently navigating unprecedented macro and geopolitical challenges. The key for us, like for many other companies, is to maintain an open and constant dialogue with our customers and suppliers to be able to understand and if possible, anticipate any change in their operating pattern that could affect the phasing of our revenues and growth. This is business as usual, of course, with an increased attention as current times require. Given our current setup, we have a good degree of visibility into our order book, as I mentioned before. The order book we started the year with and its quality has remained almost unchanged to date. The same goes also for the most projects for which we are starting production, and this is the framework upon which we base our revenue guidance.
Additionally, we continue to execute on our commercial strategy and project pipeline, and as mentioned earlier in the presentation, the secular trends that underpin our business are more favorable. We invested for growth at the end of last year, be it through the planned capacity expansion to be able to accommodate the upcoming start of production and ramp up, as well as in people, talents, to service our customer and more broadly support our growth agenda. Finally, we are agile and with an equity ratio of 57% and net cash position, have the means of financial backbone to deploy more CapEx and capacity if and when required. I hope I have been able to show you that our market dynamic and support is dynamic and supportive. But from an operational standpoint, we are also well-positioned to address the micromobility market as a whole.
All of this strengthen our competitive advantage and provides a solid framework for our business prospects. Of course, we are acutely aware of the possible deterioration of the operating environment that could present itself through various components such as potential energy limitations and shortages, further inflation and/or trade disruptions. Our job remains to continuously monitor and mitigate these risks wherever and whenever possible. Our strategic setup with a diversified and localized supply chain give us leeway while our contracts have pass-through clauses and we manage our production facilities in a flexible and efficient way. Moving on to the guidance slide, page 17. Here we are. For the full year 2022, we reiterate our guidance of high single-digit revenue growth.
The pathway for this expected revenue trajectory will be the expected acceleration of volumes in the second half, allied with pass-through clauses as per our current order book. This revenue growth is in turn expected to support operating leverage and an improved adjusted EBITDA in the second half of this year compared to the first half, allowing us overall to reach a profitability level on par with the last year's level in absolute terms. Finally, as said at the beginning of the year, the operating business should generate a positive cash flow in 2022 comparable to the previous year. However, to create additional capacity for projects with the new customer, we will also make use of the proceeds from our IPO, which is expected to result in negative free cash flow in the mid-single digits. All of this remains unchanged.
In the medium term, hGears is targeting strong growth in the product revenues in the e-mobility business area to approximately EUR 150 million. In addition, the company is targeting strong growth in total revenues to approximately EUR 250 million over the same period as part of its growth strategy. With that, being said, I would like to thank you, all of you for your kind attention and hand back the line to the operator to open the Q&A session.
Thank you, sir. Dear participant, if you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Please state your name and company before posing your question. We'll just pause a moment to allow everyone an opportunity to signal for question. We'll take our first question from Christian Glowa from Hauck. Your line is open. Please go ahead.
Hi. Good morning, Pierluca. Good morning, Daniel. Christian speaking from Hauck . I have three questions, if I may. My first two questions relates to your free cash flow. My first question, Daniel, is you made some initial comments on your working capital. However, what I find striking is the development of receivables in the first half year, which is actually up 50% despite basically flattish sales. Is there any more specific reason to that? Any specific customer in a particular business division which is stretching payments? Or is it because of higher sales exposure potentially in China? How do you look at the receivables development in the second half year, given that you expect a substantial increase in sales?
Yeah. Thanks, Christian, for the question, and good morning from [myself also personally now]. The development of the receivables is mainly due to the fact that we saw higher sales in the second part of the second quarter coming in the conventional business area that we are mainly delivering from Italy. As the Italian payment terms are much longer than the other two locations that we have, that basically deteriorated the receivables at the quarter end. That being said, by the year end, we do expect to see a normalization in total of the working capital, including also receivables, due to the fact that we expect to see more flattened sales in the second part of the year. Of course, we expect to see a reverse of this negative effect in the first six months, in the second six months of the year.
Okay, that's clear, then thank you. My second question related to free cash flow is on CapEx, actually. We have seen about EUR 3 million in the first half year. I think market and I expect rather EUR 20 million plus for the full year due to substantial capacity expansion. Is that to come in the second half year or are there potentially any postponements of CapEx into next year? How do you look at your CapEx for the full year?
No, absolutely. That is, mainly relates to the fact of, the payment terms for machinery and equipment that usually is applying in, our type of business, whereby the biggest portion of the payment for CapEx being done when the machines are on site. As we also anticipated in the previous calls, the machines will be on site during the end of Q3 and the beginning of Q4. After the acceptance on site, this is where the biggest portion of the CapEx will be then deployed and paid to our suppliers.
Therefore, we still expect the CapEx for this year to be more than EUR 20 million, and we will see normalization in the second half, which of course will also help to balance the total free cash flow with the improvement in receivables from one side or from working capital from one side, but then more expanding on the CapEx on the other side.
Yeah. Okay. Fantastic. That's clear. Then my last question before I jump back into the queue is on your ramp up. I've seen that you have hired four full-time employees in R&D in the first half year. How about the other divisions? Where do you stand in terms of your ramp up to execute your order book? Do you need additional headcount, or is that pretty much done now, your ramp up to execute your orders?
Hi, Christian. Pierluca here. Hello from my side again. I think we reached the level that we believe at this point in time, of course, to be the right one for us. We don't expect further growth unless some maybe very, very marginal going forward. I would say that what we see is a flat curve going forward. No further FTE increase. Maybe one guy or something.
All right. Thank you very much.
Once again, ladies and gentlemen, please press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for question. We'll take our next question from Christian Glowa from Hauck. Your line is open. Please go ahead.
Yeah. I'm sorry. Allow me to follow- up. Pierluca, you just mentioned that you have been at the bike fair where we actually met recently, and there you had a lot of opportunities to talk to your customers. What is their idea about the timely ramp-up of the new series production? Is that coming as initially planned, or are they becoming more cautious? Do you see potential delays in the new startup of new series production in e-bikes or, what's your take after the fair?
It is, let's say, I would say diversified. It's not a single statement coming from the OEMs. If I may derive a general, let's say comment or position, I would say attitude. [Beckon], that's the right word. A general attitude is that there is still confirmation about the on-time, let's say, startup or the launch of the product. I haven't seen or heard of any postponement of feasible magnitude, but rather more cautiousness in predicting the ramp-up of the volume, mainly due to concerns regarding the macro environment.
What is really now the headache of these guys is that, you know, there is no security yet on the supply of, what can I say, frames or brakes or other things. You know, the situation is improving on a daily basis, actually, but there are still a lot of concerns. I think that we have a few months in front of us of, let's say, expected, hopefully expected improvement before we can firmly state that the supply chain is stable and we can trust on it. There is a major reshoring activity taking place. It affects, I would say, almost every single part of the final product. But you know, this cannot be finalized overnight. It's a process.
If I may say, make a statement, I think that sometime 2023, they expect to be back to a normal situation, let's say. Today, still, there is a lot of fight to procure materials and components. Projects are confirmed. In a summary, projects are confirmed, they are gonna start, but there is less firm certainty about the ramp-up curve.
All right. If we put the supply constraint aside, what are your customers telling you in e-tools? Are they becoming more cautious because on the demand side, or is that still quite unchanged?
Okay, here we need to highlight one point that is often forgotten. We are focused on the professional side of the power tool industry, okay? If I look at the overall power tool industry, we see a certain, let's say, slowdown. If you look at the professional side of the industry, the side that we do supply product to, we don't see this, okay? There is more confidence that we stay at the level we were last year.
All right. My last question really is for Daniel. Can you remind me what was the postponement of sales in the first quarter due to COVID? Also, is it possible for you to quantify potential postponement of supply chain constraints in the second half in Q2 in China or as well? What's in Q2 your potential sales postponement?
To remind you about the performance related to COVID, one of our major customers or the major customer in the e-mobility business area needed to close their assembly for almost three weeks completely due to a high percentage of COVID- infected employees. This postponement drew basically a postponement of around EUR 3 million revenues from first quarter towards the year.
Regarding Suzhou, we saw a postponement of around EUR [1.1] million, ER 1.5 million due to the lockdowns of the Shanghai port at the end of first quarter and beginning of quarter two. But also there, we see now a sort of stabilization of the supply chain in China. They're always impressing us how quick they are recovering from this type of impact. We expect by the year-end to reach basically the same level of sales from this plant as we expected at the beginning of the year. The total order book for the full year for this plant has not changed so far.
That's very clear. Thank you very much.
There are no further questions on the line, sir. Please go ahead.
Yeah. I think this is it. Thank you very much for listening and your questions. With that, I'd like to wish you a very nice day and look forward to talking to you very soon. Have a good day, everybody. Thank you very much for joining.