Evonik Industries AG (OTCPK:EVKIF) Q2 2022 Earnings Conference Call August 10, 2022 5:00 AM ET
Company Participants
Tim Lange – Head of Investor Relations
Christian Kullmann – Chief Executive Officer
Ute Wolf – Chief Financial Officer
Conference Call Participants
Matthew Yates – Bank of America
Martin Roediger – Kepler Cheuvreux
Charlie Webb – Morgan Stanley
Nicola Tang – BNP Paribas
Markus Mayer – Baader Bank
Jaideep Pandya – On Field Research
Geoff Haire – UBS
Chetan Udeshi – JP Morgan
Operator
Good day and welcome to the Evonik Industries AG Second Quarter 2022 Earnings Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Tim Lange. Please go ahead, sir.
Tim Lange
Thank you very much, and good morning here from the Evonik side to our Q2 earnings conference call, this time, one of the last in the reporting season and so that I hand over directly to Christian for the presentation.
Christian Kullmann
Thanks a lot, Tim. And ladies and gentlemen, warm welcome from my side and thanks a lot for joining our call today. It is another strange and important season for us. We are once again reporting a record quarter, actually record first half, best first half in the history of Evonik Industries and at the same time, challenges around us are increasing quarter-by-quarter.
Depressive war in Ukraine as human tragedy for the people there continues. China is going through COVID lockdowns, supply chain and logistics remain stressed and we are facing an energy crises in Germany and in Europe too. But as you know me, and I guess you know me very well, this is not the time to bury the head in the sand. The strength of Evonik and as a chemicals industry in Germany has always been our employees. We have outstanding knowhow and unmatched innovation power with competitive advantage and sustainable solutions.
Our recent efforts to cut Evonik’s gas consumption in Germany by 40% is another proof of what makes us strong. The relentless efforts and creativity of our employees to deal with any kind of crisis and to make Evonik better every day, today and tomorrow. Those are my short and, please forgive me, passionate introduction.
Let’s turn now to the facts and figures, before Ute dives into the numbers a bit more, I would like to start with some strategic remarks. At our Capital Markets Day a few weeks ago, we embarked on our journey towards next generation Evonik. With this changes that we fully integrated sustainability into our strategic pillar. The current developments in the world are just another proof point, but we are setting the right priorities here. So also during this time it is crucial to execute our strategy, let me give two examples on how we made further progress towards next generation Evonik. In our business line Care Solutions, the management team has done an excellent job in transforming the portfolio and establishing ourselves as a leader in active ingredients. After several very successful bolt-on acquisitions over the last few years, we are now divesting our Betaine business with sales of $50 million, which is not fit to our portfolio criteria anymore.
The transformation of Care Solutions has resulted in clearly accelerated growth and EBITDA CAGR of 15% and a higher margin of 400 basis points over the last five years. And we are not done yet. There are more steps to come in Portfolio Management and not only in Care Solutions.
In Healthcare, we are building a new highly flexible global scale production facility for pharmaceutical lipids in the United States. The new plant at Evonik’s Tippecanoe site will position us for future growth in novel mRNA-based therapies beyond COVID-19 vaccines. Construction will begin in early 2023 and the plant is scheduled to go on stream in 2025. This is the time for the expected acceleration in growth in new mRNA-based drugs. Total investment amounts to $220 million. The US Government is funding the facility with up — with up to $150 million making it as a highly attractive investment both strategically and financially.
With that, ladies and gentlemen, let us turn to the dominant topic of the last month, the gas situation in Europe and Germany. You have for sure read our press release earlier this week. So, I would keep it short here. With the measures we are implementing at our German sites will substitute 40% — 40% of our gas consumption in Germany and make our energy production at our main sites effectively independent from the Russian gas.
Our site in Antwerp is benefiting from favorable infrastructure set up with good access to LNG terminals. Marl will replace natural gas for energy production by liquefied petroleum gas. At current gas price levels, the price differential between LPG, natural gas and naphtha makes this step also financially sensible for us. An additional — and as an additional benefit, the levy we have to pay for gas consumption in Germany will be 40% lower. This will be a mid-double digit million euro benefit for next year. This combined with the extended run time of our coal power plant will allow us to maintain energy supply for our Marl site regardless of any further gas cuts in German emergency plants or levels, or to put it differently, we are convinced that we will not be affected any more from a potential gas rationing under alarm level three given the already significant savings we are executing now and proactive.
Ute will summarize on our energy costs now.
Ute Wolf
Thank you, Christian, and good day from my side as well. Since the beginning of 2020, we had to cope with more than EUR3 billion of higher raw material costs. We have been quite successful in passing them on over the last two years and are continuing to do so. In contrast to this big number, the expected increase in energy costs for 2023 will be much smaller. We expect to limit the increase to around EUR300 million, even assuming today’s elevated gas price levels. This is below this year’s increase of our energy bill and supported by the measures we have already put in place.
Our hedging rate of around 70% for next year, both via physical forward buying and direct pass onto our customers, as well as our substitution of natural gas by LPG and fuel oil. And we will continue to pass on the remaining higher cost to our customers. Of course, I hear you say that we will be facing a different economic environment than over the last two years, but we have proved to be resilient in the crisis and we are confident to manage this smaller number as well. This brings me to the second quarter performance.
Sales again moved materially higher, driven by the mentioned further acceleration in price increases. A plus of 24% in Q2 is a clear sign that pricing power is intact. And as we negotiate prices directly with our customers, price increases typically come — typically come with a time lag. This affects the support sales and earnings also in the next quarters. Volumes on the other hand were slightly down on group level. Specialty Additives continues to face logistical difficulties which is limiting volume. Nutrition & Care experienced the impact of lockdowns in China in their Animal Nutrition business.
Smart Materials had a planned maintenance in our polyamide 12 plant in June and Performance Materials could have sold even more but was limited by raw material availability. You have already seen all the other financial KPIs, so maybe worth mentioning is our debt level. On top of that driven by a higher discount rate, pension provisions almost half to EUR1.8 billion at the end of June, bringing down our leverage to 2.1 times.
Jumping a few slides ahead to free cash flow. As already experienced in Q4 ’21 and Q1 of this year, the high net working capital outflows both for inventories and receivables have a temporarily negative impact. The outflow was more than EUR900 million in the first half of 2022. That resulted in a negative free cash flow of EUR106 million for the first six months of 2022. We are working on all levers to reduce net working capital in the second half and the first effects are already visible for the start into Q3. More details from Christian on that in the outlook part and with that, Christian, back to you.
Christian Kullmann
Thanks a lot, Ute. And as we have seen, we have a strong first six months in the books. Nevertheless, and even if we do not see broad base across our businesses today, the economic environment around us is not getting easier. Macroeconomic indicators are facing downwards. As of today, we see a continued solid demand from the start into the third quarter. Order books remain well fit and there are still quite some backlog in our systems. However, first signs of slowdown in growth of Nutrition customer cautiousness are visible here and there across our businesses, but it’s still a very mixed picture as of to-date.
So it makes sense to apply a certain level of caution in our outlook statement and assume gradually slowing performance in the next two quarters. Quite a bit more pronounced than the usual seasonal pattern in those two quarters. In terms of gas supply and energy costs, we have assumed the current high spot price levels and given our implemented measures, we should see only very limited direct impact on our production even in case of complete gas stop from Russia. We have also factored in levy for the additional stocking and storage cost of German gas in process. Based on the latest comments from the German Government, we estimate that [indiscernible] it would result in a low double-digit million euro burden on EBITDA in the fourth quarter.
So, as you can see, we have considered everything we know today for our outlook statement, both on the macro as well as on the energy side, and still we see EUR2.6 billion of adjusted EBITDA is well underpinned. Of course, what we cannot assess is the indirect effect of further gas cut on our raw material suppliers, on our customers, on customer’s behavior and it goes without saying on the overall economy.
Ute already discussed the challenges around free cash flow. Part of the EUR900 million net working capital outflow in the first half of this year will be reversed already in the second half of this year. With an expected inflow of EUR400 million to EUR500 million in the third and fourth quarter combined, we will deliver a cash conversion rate of around 30% this year. This lower cash conversion rate is temporary. For next year, we aim to return to our target of 40% that we have been delivering over the last two years. The only partial reversal of net working capital outflow in the second half of this year is further net working capital potential and free cash flow support for the next year.
To sum it up, we keep on delivering on our promises, both in the long-term with continued strategy execution and in the short term, with strong financial results. At the same time, we are preparing our business as well as we can against challenges around us and feel well prepared for potentially choppier environment ahead.
With that, ladies and gentlemen, thank you very much for your interest and your time so far and we are now ready and happy to take your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We will take our first question today from Matthew Yates of Bank of America. Please go ahead, your line is open.
Matthew Yates
Hey, good morning. Thanks for taking the questions. A couple if I can. The first one is around the gas mitigation plans and the switching to LPG, which I must say sounds — sounds a very good solution and then you mentioned it may actually be a lower cost solution. I was just wondering, is there any downside here operationally in terms of how the plant is configured and has to run.
My second question is around the negative volumes that we saw and I guess, to be fair, your peers equally seem to have struggled with logistics and raw material constraints last quarter, so perhaps no surprise here. But just thinking forward, the Group is pretty tough comps for Q3. So you’re expecting a sort of catch up on the unfulfilled demand from Q2 or does the softer economic backdrop you referenced in your introductory remarks set us up for perhaps another quarter of volume declines in Q3. And I’m particularly interested how you’re seeing the evolution in the Nutrition business and what’s happening with the vaccine revenue there in the second half. Thank you.
Christian Kullmann
Hi Matthew. Good morning. Christian speaking. I take your first question about the LPG. Maybe if — you have asked about the potential downside here on our operations and first of all, it is to say — it is a two letter message and the message is, no. And to give you maybe a little bit more color about it is to say, first of all, it is not to go into rhapsodies about the quality of the engineers of Evonik, but here it is fair to say that our new power plant was equipped, just beforehand with the option to also use LPG instead of natural gas.
So hereby considering to this opportunity we do not have any additional costs for example in respect of additional CapEx or something like this. We are just here, the lucky charms of the situation having really good engineer staff, which has prepared running our new power plant with both LPG and LNG and here it is, for example, after having since mid of July successfully tested this power plant in respect of running it with LPG is now paying off for us. So in a nutshell, there is no downside for us. There is only upside in respect of securing and saving our production facilities makes them running in our sites — on our sites in Europe and in particular in Germany too. With this, I hand over to Ute.
Ute Wolf
Yeah, on the volumes, I think what we see overall, of course, that demand is flattening out a little bit. So, if we look at Q3, we will be most probably similar pattern like in Q2. The reasons were different and multitude, if you look at Nutrition & Care, we had, of course, the major impact in the timing mainly driven by the COVID lockdowns. Of course, as they are now eased, that gives a slight chance here, Healthcare and there, the volumes follow the pattern in the drug delivery.
So there is a clear catch up in the second half, but that’s more really the specifics of their contract landscape. For specialty additives, supply constraints were an issue for lower volumes as well. Some products are still under allocation that might ease here and there a little bit in Q3 as we see some relief in some of the raw materials. Specialty — Smart Materials, sorry, had a positive development, could have been even higher. And of course we see good demand in the whole wind turbine industry and others, PA12 sees good demand.
So I think that’s the mix we see. Performance Materials also could have been higher in volumes, but here also raw material constraints and I think that’s pretty much the picture we also expect for Q3. Pricing will be still supportive. So as I said, the price initiatives are now still going on. They have some, of course, some lagging element in that. So, that is what we see regarding volumes in Q2 and Q3.
Matthew Yates
Christian and Ute, thanks very much for your time.
Ute Wolf
You’re welcome.
Operator
We will take our next question of Martin Roediger of Kepler Cheuvreux. Please go ahead.
Martin Roediger
Yes, good morning. I have three questions. You talked about the continued solid demand and well [filled] (ph) order books at the beginning of Q3. But you also mentioned first signs of cautiousness, I’m in particular interested in the demand patterns in Specialty Additives as well as in Smart Materials at the beginning of Q3 versus the end of Q2. Can you provide some color here. Also on the regional perspective for these two segments.
The second question is on the LPG supply in Marl and here I’m putting on the technicalities, you’re right that LPG is a side product in your C4 production network. How does the collaboration with the refinery of BP engaged in [indiscernible] work practically.
And the third question is on natural gas. Thanks for the transparency in your slides, you used 11 terawatt hours energy source and 4 terawatt hours as raw materials, this natural gas. In which product is gas a raw material. I guess methane is a gas and a precursor in your methionine production, Monosilane is a gas and used as a precursor for tungsten silanes and advanced silanes. Anything else I’m missing eventually in silica as well and maybe you can roughly give us a split of the four terawatt hour into these key pockets. Thanks.
Christian Kullmann
Good morning, Margin. Let me start with your questions about how we deal with BP and how the collaboration is working here. As you know, LPG was mostly handed back to the BP cracker in Scholven which is close to Gelsenkirchen and also right here. BP in Scholven is very much — is very much supportive to replace the natural gas in Marl. that means, they do we have eternity of stored LPG in their own cracker, which means LPG was normally handed back to them and used as cracker feed, but as you know BP is our partner in our [indiscernible] Marl Scholven and therefore, they also had an interest in continuing the operations of our C4 chain in Marl, reason is as simple as it could be otherwise, there would be no outlet for their abstract C4 and then that would definitely lead to a matter of fact that they have to shut down their cracker.
So to sum it up and in a nutshell, Martin, here, we are once again on the lucky side of life because here it is a win-win situation between BP on the one side and Evonik on the other side and we are really blessed that Scholven with the cracker and we in Marl are so close geographically here that we could exchange, and I’ve tried to describe the raw materials and to keep our capacities in Marl running by making use of LPG. With this, I hand over to Ute.
Ute Wolf
Yeah, okay. I’ll continue with the natural gas question. So I think the natural gas based feedstocks, of course, the biggest share is methanol, which is relatively easy to be imported, ammonia that’s of course, a little bit difficult in transportation, but it’s a very small portion in our EU raw material spend plus the main ammonia consumer is methionine and they sit in Antwerp. Then of course hydrogen and active oxygen’s, they are depending on natural gas as a feedstock, but also here, there is not so much in Germany, it’s in other countries in the EU or even outside Europe. So, from that point of view, I think that should be all manageable, given that the reduction we need is fully delivered by energy generations. We’ve just saved nearly all gases in energy generation.
So, if we assume like a 15%, 20% cut or savings target for the whole country, we are well ahead of that. And of course that we’ve then room for natural gas in the — as a raw material. I think that should not be forgotten that we talk about 15% to 20% replacement or savings need. Then you asked about the two divisions Specialty Materials, Specialty Additives, how there is — how the current picture is. Again we have some signs of slowdown and an increased customer cautiousness. So — but our order intake is very good, the picture is somewhat mixed, if you look across the sectors.
For instance, if you look at paintings and coatings, private market is somewhat weak, industrial market is in good shape, auto is also mixed. Here, we have some — we had some better development in the US, although production is not so good there. So, we really see also different developments. China now after the lockdown should also be stronger. Smart Materials order books are really well filled, all business demand remains robust. As we said, some cautiousness or maybe short term order behavior, a little bit more we observed but again that can also be caused by logistical problems and others at our customers part.
If you look at our forecast overall, given the very strong first half, there is some slowdown incorporated into our outlook and I think that is I think a very realistic view and overall a very confident view as well.
Martin Roediger
Thank you.
Operator
Our next question will come from Charlie Webb of Morgan Stanley. Please go ahead.
Charlie Webb
Good morning everyone, thanks for letting me ask some questions. Maybe just first off, a clarification one, just to be very clear on that, around your energy mitigation measures, certainly sounds like you are on the front foot but. But in terms of what would have been, if you talk about a EUR300 million increase year-on-year 2023 in terms of energy costs versus 2022, what would that have been without the mitigation efforts you are putting in. Just to understand what the magnitude of benefit from that is. That’s question number one.
Question number two, just on methionine you mentioned of the ammonia and methanol and then some of these raw materials and the challenges maybe — maybe we don’t face in Europe, just kind of wondering what is the current kind of health of the market in Europe in terms of spreads and in terms of kind of utilization rates when you look at — you’re fortunate to have a global footprint in methionine, but just trying to understand how the regions compare and what measures you’re taking to optimize that.
Christian Kullmann
Okay. Hi, Charlie. Good morning. Maybe, let’s start with a little bit more about methionine. Yes, first of all, it is to say that overall in this year, we have a very stable business, and it is much more independent of macroeconomic developments in particular in slowdowns than most of our other businesses and now maybe split it up.
First of all, let’s talk about the volumes. Volumes in the second half of this year, we do expect them to continue on, let’s say, a little bit, slightly — slightly below the levels of previous years. The reason for this is that we are, let’s say, cautious in respect of the impact due to lockdowns in China are having. On the other side, it is fair to assume that we, as of today, see some kind of recovery since end of June going into July, especially in China.
So, here in respect of volumes, first message is, we will see, we expect continue slightly below the levels of the previous years because of the lockdowns in China. On the other side, worthwhile to mention that in particular these lockdowns have been started to be eased and therefore we do see some recovery. So, question will be about this, would this kind of recovery be sustainable and then we could may be expect a little bit higher volumes if it would not become like this, so the volumes would stay as it is and we expect that they will, as mentioned, slightly below levels.
Now, it is to say in this maybe about the prices, yeah, it is worthwhile to mention that spot prices have come somewhat down in the end of the last quarter, but please and therefore is worthwhile, you have to reckon to say and acknowledge that our contract prices are definitely less volatile. Thus, our prices are steadier, definitely steadier than those you sometimes could read in feed info — on feed info.
Last question about or last answer about your question about methionine was, what is — are there any kind of big differences in the region and here, I can keep it short because the answer is no. There are no — so far no big differences in the region. So in other words, we do benefit from our geo-strategical footprint having capacities in all of the three growth markets and growth regions, North America, Europe and in Asia too. With this, to Ute.
Ute Wolf
Yeah. On the energy measures. So one measure was to continue to run the coal-fired power plants that is also a small positive effect. Overall, of course, we have higher fixed costs as we have to reactivate the plant, but overall, that’s a double-digit advantage and then from the LPG, as Christian said, that’s also financially reasonable. Also here a smaller double digit amount as a financial advantage plus we avoided levy, which of course can be — can be also a higher double digit amount on that portion, but again, we don’t know the real number in the end, and that’s why, this is hard to really define today. But these are the three components where we have financial or economic advantages from these energy measures in the current setup.
Charlie Webb
Would it be fair to assume that at current prices, as you see them today, if you haven’t taken these measures, your energy year-on-year costs would be up, maybe a triple-digit amount more than what you’ve kind of guided to, more than the 300.
Ute Wolf
Yeah, I think that that’s a fair assumption.
Charlie Webb
Okay, thank you very much. Pretty helpful.
Operator
We will take our next question from Nicola Tang of BNP Paribas. Please go ahead.
Nicola Tang
Hi everyone. Thanks for taking the questions. Firstly on portfolio and you mentioned in the prepared remarks, some of the smaller portfolio clean-ups that you’ve been working on, but I wonder whether you could give us an update on some of the bigger ones. So, on the C4 side and also on the [indiscernible] side that would be really helpful.
And then the second question was on the lipids business and you talked about the developments, your partnership with the US Government. I was wondering if you could remind us of the expected contribution from lipids in 2022 and also the kind of pause that you expect over the next couple of years. I think in the prepared remarks you talked about bigger development in 2025. So, perhaps you could just walk us through how you get from today to 2025. Thank you.
Christian Kullmann
Hi. Nicola, I will take the first questions — the first question about the portfolio management and the news on the update on the planned divestments. First of all, it is to mention that all projects we are talking about and we are tackling are showing good progress, but on the other side, fair to say that there are no major news compared to our Capital Market Day info.
In detail, the baby care will start with the divestment process within the next month. That is what we have given to you a couple of weeks ago and that is what still remains, right. So, here we do expect a signing in the course of next year. Functional Solutions, several parties have shown strong kind of interest and expected to join the due diligence now, transaction structure is already finalized and for the second half of this year as a consequence from this start in due diligence process is planned and we assume to do so.
In respect of the C4 chain, our C4 business, here the preparations for the carve-out are ongoing and that 20 and progressive [depositors] (ph) way, and with this, I hand over to Ute.
Ute Wolf
Yeah, hello Nicola, also from my side. LNP and business — lipids business, last year we had around EUR100 million of sales in that business. For this year, it will be a similar level, its well on track. We have a good share in service and R&D revenues as well in that business. The R&D pipeline has been filled also in the years before the vaccination, of course. So we are well prepared for next-generation LNP drugs. They will come to market from 2026 onwards and of course until then this facility is up and running. So we feel very well prepared here.
Nicola Tang
Is it fair to assume that after this year, perhaps with some normalization or reduction in vaccines, it might normalize in the short — come down a little bit year-on-year in 2023 before it picks up later in a couple of years’ time.
Ute Wolf
Yeah, I think that’s a fair assumption, but you have to see that our Healthcare is working with the portfolio of projects and has a pipeline so that is all of course not unexpected. So we would see that coming through our pipeline then with other products. So overall to grow the business step-by-step over the years. From that point of view, it’s like any other normal healthcare project, nothing very specific about that.
Nicola Tang
All right. Thank you.
Operator
We will take our next question from Markus Mayer of Baader Bank. Please go ahead.
Markus Mayer
Good morning, Ute, Christian and Tim. I have several questions from me. Firstly on the destocking, you said, in Animal Nutrition. Can you quantify what products you saw destocking and has this something to do with the ramp-up of Adisseo’s new plant in Nanjing and also if you expect this to continue in the second half. That’s my first question.
And then my second question would be on the strong Crosslinker Business. Did this mainly come from the strong earnings or margin contribution or had it also to do with strong demand from the wind energy industry or do you see a better outlook for this business due to this wind energy exposure.
And then the last question is just a clarification question, Christian said that the carve-out of the C4 business is going well. I thought it was already carved out, are there any further carve-out measures which have to be done to for the preparation of the divestment? Thank you.
Christian Kullmann
Hi, Marcus. Let me start with your last question, I guess you have mixed here the C4 business with the Baby Care business. Baby Care business, the carve out is already done. Here, you are right. And in respect of C4 business that is what we have announced earlier this year and that is now ongoing. And I guess you have mix it up, but never mind.
About destocking, yeah, let’s keep it like this. The demand — first of all, the demand has definitely picked up in the last months and that is what we do see in July — what we have seen in June and in July. Let’s keep it this. Second, the higher inventory level, there is a higher inventory level because the supply chains — the supply chains are really unchanged and this is maybe the second element here to mention. Ute, this is to you.
Ute Wolf
Yeah, good morning, Markus. On the question for the Crosslinkers Business. So, we see overall healthy demand. Of course wind is one strong element on that. Keep in mind that Crosslinker, they had some production difficulties also in the first half, which of course also influences volumes overall, but I would say, it’s a very healthy volume development, plus a good pricing contribution.
Markus Mayer
Okay, thank you so much.
Operator
Our next question comes from Jaideep Pandya of On Field Research. Please go ahead.
Jaideep Pandya
Thanks. The first question is on your C4 business actually. This year is a very strong year for this business. So when you think about actually divesting, how do you think about sort of the multiples and valuation, do we think out for an average for the last three years or are your buyers willing to look at this year and then tied to that really is the question, you’re potentially sitting on a decent cash inflow and at least to me, it doesn’t seem like you are in a hurry to do any big acquisition. So what is the chance, Christian, that you tell your large shareholder RAG that the next time they want to place a block, you have the money and you are going to buy the shares rather than them placing the block in the market.
And then just finally, on PA12, what are the plans for ramp-up and are you worried at all that some of the big players in China are going to ramp-up next year as well and therefore, there could be some over-capacities in PA12.
Christian Kullmann
Good morning, Jaideep. Maybe let’s start with the third question about the PA12 business. As you know, the market in PA12 is well structured and the market participants are only a very few. And we are one of the very strong ones, what you can see in our numbers, in our figures and all the more, the quality of our products. So here we are not afraid and instead the opposite. We would really highly appreciate a strong competition, because that is what would underpin the quality of our business right here. And as you could see and we have done it in respect of building up and ramping up the capacities down in March, despite — despite the corona pandemic impact, so that underpins once again that we are a strong and straightforward player in this.
And now you have talked about, first question about C4 business valuation and multiples. Jaideep, I’m an everyday man, but as an everyday man I know it is prudent, let me say, first of all to make your — let me say decent, diligent and disciplined homework and then to bring the news to the table, not to disappoint you, instead of to surprise you. So having said so, I guess it is not very prudent, from my point of view, now to speculate about valuations, multiples and so on. But one thing you can really take for granted, one thing is, in other words, that certain that we will get the highest price and the highest multiple and best valuation ever because it is our job and we are really keen on doing as good as we could.
High cash inflow from C4 and then talking about RAG, it is always good and looking to Ute, I can see bright and broad smile in her face. It is, it is always good having piggy bank which is filled up with good amount of money. And having said so, I do — I feel there is no interest on the side of RAG foundation to sell their shares currently because there’s no reason for them, I feel so. So that is, I guess the question — the answer to your questions. I really appreciate having the chance to give you a little bit more color about how we think and think about this.
Jaideep Pandya
Thanks a lot for the clarity.
Operator
We will take our next question from Geoff Haire of UBS. Please go ahead.
Geoff Haire
Yeah. Good morning and thank you for this opportunity to ask some questions. I was wondering if we could discuss the water levels in the Rhine, I assume the coal-fired power station at Marl probably gets on some of its coal from — from river transportation, are there any risks that you see in that in the second half of the year. And also would you be willing to tell us what the energy hedge rates are that you have in place for 2020 and 2021 in terms of the actual price of the gas in the hedges.
Ute Wolf
Yeah, Geoff, good morning. The hedging rates are quite stable over the years as we’ve just executed a hedging program. So, the share of hedged volumes does not change over the year. So it’s up to — around 70% for gas mainly in Europe for the next year. And then of course for the years after accordingly lower and we build up the hedging rate over the quarters, and up to 80% for electricity also mainly in Europe. So, to remind you on that.
Rhine water levels, yeah, that’s critical. We are less impacted compared to other companies because we are more in the northern part here in comparison to the Rhine. So if we look back at financial year 2018, where it was also quite a challenge there we only had an effect of EUR25 million and [indiscernible] the major bottleneck, that’s for South going delivery.
So from that point of view, we are not as much affected from that. And we have learned of course from 2018, we had established alternative logistic routes and booked already early when we see it rising. We secured more ships not to really get along with reduced loads, but of course, it will put additional stress on the transportation and logistics in Germany, truck drivers, railcars. So I think that is a stress for the system as well, but again this obstacle we have experienced and we have some countermeasures for that, also increasing storage here and there in advance. So this is how we do that, it’s not nice but I think we are as well prepared as we can be.
Geoff Haire
Thank you. Would you be willing to tell us what the actual prices of the hedges are on average in 2022 and 2023 or is that something you don’t want to tell us.
Ute Wolf
Normally, we don’t disclose that.
Geoff Haire
Okay, thank you.
Ute Wolf
But you can maybe if you see that we do hedging program, quarter by quarter, you can more or less calculate it yourself.
Geoff Haire
Okay, thank you.
Ute Wolf
It’s a hedging program and you see the price and then you know it.
Geoff Haire
Thank you.
Operator
We will take our next question from Chetan Udeshi of JP Morgan. Please go ahead.
Chetan Udeshi
Yeah, hi, thanks. Few questions. First, maybe for Ute. If I look at the presentation Slide 32, it clearly shows that the pension provisions have come down, but then the other provisions somehow have gone up a lot. Sorry — not the provision, but the financial debt. Is it just a function of, I guess the working capital outflow we’ve seen in the — in the first half of this year. I’m assuming that’s what is driving that.
The second question was, when I look at your energy cost increase guidance for next year, which is EUR300 million and then probably you have the German gas levy on top as well. The question here is like how do you plan to pass it on? Are you seeing the appetite from customers to still accept higher prices? Clearly, given that this levy is something which is new, and also the cash price impact is coming through in phases for different companies.
And maybe one question for Christian, bit more high level, like what is the mood at the moment within the European chemical industry given that you are, I believe, the Head of the Association of Chemical Industry in Germany, given — given the cost inflation that we are seeing from gas possible curtailments and I think the high level view is just to make the European chemical industry structurally disadvantaged and in the scenario that we or in the context of re-shoring that we keep hearing, does this — does this make re-shoring a challenge in general. Thank you.
Christian Kullmann
Hi Chetan, let me tackle the third question. Yes, it is kicking, it is sticking into our eyes that we are in a situation where we are a little bit suffering from the higher energy costs all over in Europe. And that is a challenge, no doubt about, but this challenge is in the same time — at the same time a chance, a chance to enhance, to lift up the transformation process of Specialty chemicals industry in Europe to become more energy efficient, to become in respect of being provided with energy green, making here and with respect to more use of green energy and those companies who have really set their sales over the course of the last one or two years to focus on green energy, to focus on more resource efficiency, to focus on those products and markets, for example, Ute, talked about the wind energy and our contribution in respect of our Crosslinker Business to those markets, and they will benefit from this in due course tremendously, because here we just see great difference.
In respect of this, let me say, innovative power because we are — of course, we are under pressure and that is what is activating this kind of innovation power we do need to stand to pace and to maybe — and to get looming at. So, yes. As of today, it is a challenge, but also it is in future, if we do now make the right decisions, that is a great chance for us to come — to come better out of this situation than maybe companies in other regions, all over the world. And with this, you see, and there is — there is confidence in that we will come out of it in a better constitution, than we are now in this particular situation and maybe with this, I hand over to Ute.
Ute Wolf
Yeah, thank you Christian. Energy cost outlook as I said, the increase will be much, much smaller in comparison to what we have seen in the past two years. So, I think to pass that on is maybe less of a challenge than to do the big steps. On the other side, we see some relief here and there on the raw material, so overall I think that could work out quite okay.
On your questions on financial debt, of course in the second — in the first half, we had a negative cash flow. In the second quarter, we paid out the dividend. So these two numbers together I think already explains quite the move. If you just look at the gross numbers in the balance sheet, we had issued a bond earlier this year, relatively early to be really here in a good liquidity set up, and of course that influences the gross numbers, very much. So, I don’t know what you’re referring to net or gross, but these would [Multiple Speakers]
Chetan Udeshi
I think it’s clear now. Thank you, Ute and Christian.
Christian Kullmann
Okay. Ladies and gentlemen, this ends our call for today. We do thank you very much for your attention. Great for us having had you. Take care and enjoy the rest of the summer and hope to meet you soon in person. Bye, bye.
Ute Wolf
Bye.
Operator
This concludes today’s call. Thank you for your participation. You may now disconnect.
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