Gerresheimer AG (OTCPK:GRRMF) Q2 2022 Earnings Conference Call July 13, 2022 4:00 AM ET
Company Participants
Carolin Nadilo – Corporate Director, IR
Dietmar Siemssen – CEO
Bernd Metzner – CFO
Conference Call Participants
Falko Friedrichs – Deutsche Bank
Oliver Reinberg – Kepler Cheuvreux
Sven Kuerten – DZ Bank
Daniel Wendorff – ODDO BHF
Carolin Nadilo
Hello, everybody. Nice to have you on this call today as we released our Q2 and half year results, respectively. With me today here in Dusseldorf are our CEO, Dietmar Siemssen, as well as our CFO, Dr. Bernd Metzner.
As usual, we are presenting a set of slides accompanying the management’s notes followed by the Q&A session. Please note, this call is webcast live and will be filed in our website, too.
Before we start, I have to remind you that the presentation and the discussions are conducted subject to the disclaimer. We will not read the disclaimer, but propose taken it as read into the records for the purpose of this conference call.
And now it’s my pleasure to hand over to you, Dietmar. Thank you.
Dietmar Siemssen
Yes. Good morning from my side. And welcome, everybody, and thank you for joining us this morning. Bernd and I will now run you through the highlights of our strong second quarter. As always, we will then be happy to take your questions.
Yes, second quarter results ’22, another strong quarter that confirms that the strong momentum in our business continues. We are at an inflection point of our transformation towards sustainable, higher and profitable growth. We are actually navigating the business through a broad spectrum of ever-changing opportunities and also challenges.
Demand for our products and services remain strong. Our business model shaped by our formula G strategy process, again, proved its resilience. We will show you today — in today’s call the details of our development in the second quarter ’22.
Yes, transforming Gerresheimer. This chart actually demonstrates very well what we are doing to transform our Gerresheimer. We have been fostering a culture of innovation in our business, and that is powering our transformation into a solution provider and system integrator. A provider of high-value solutions to current and emerging client needs, which is translating into a structural high rate of revenue growth and profitable growth for Gerresheimer.
Let’s now plan to see in our financial results. ’21 was a record year, and after the strongest first-half year in our history in terms of organic revenue growth, we are well on track for another record year in 2022. In more detail, we delivered organic revenue growth of 13% in the second quarter, building on our strong Q1 performance. This was supported by the current dynamic pricing environment. The organic growth in adjusted EBITDA came in at 5.1%. High Value Solutions again grew by around 13% with revenues for ready-to-fill and Elite vials doubling. In short, we are performing in line with our expectations. We are successfully managing inflationary challenges and we firmly on track to deliver on our guidance for the year. In addition, our strong strategic and operational progress gives us even greater confidence in realizing our medium-term and long-term financial ambitions for the business in general.
Let’s turn now to market dynamics and the external environment. Geopolitical tensions have risen significantly this year. Our thoughts are with all those affected directly and indirectly by the war against Ukraine. We hope that a peaceful solution will be found quickly. At the same time, however, COVID-19 is far from being over, and many people around the world are getting infected every day. These factors are causing supply chain challenges and adding to inflationary pressure.
As an international company with a global footprint of 36 plants in 15 countries, we are well positioned in such a dynamic market environment. We have been very successful in managing these developments, particularly since the second half of fiscal year 2021, when inflation intensified and especially energy costs rose significantly.
Looking at the intense discussions around gas supply situations in Germany, there are four points I would like to highlight. We have long-term and diversified energy supply agreements as well as hedging contracts in place with both investment banks and a leading European utility company. This protects us well against energy price volatility. We entered into these energy price hedges at levers significantly below today’s pricing. This offers a unique competitive advantage.
We have proven in the past months that our strong market positions allow us to pass on price increases to customers even at short notice. The German government enacted new laws just recently or just yesterday, which gave an ample flexibility in stabilizing the energy market and to set up protective shields for energy companies. As a consequence, we expect a levy on all gas consumers instead of the activation of a general price adjustment clause. Bernd will actually elaborate on this later.
Very important, as highlighted, clearly, by the COVID-19 pandemic, our products and services are an essential part of the health care delivery system, in clinics, doctor offices or vaccination centers and therefore, an important part of the critical infrastructure. Our medical systems and pharmaceuticals containments ensure the availability of medicines and vaccines. We are aware of and accept our responsibility for the health of millions of people. As such, we are confident in being granted priority access to gas supplies in the event of restrictions. In addition, we assume that the glass industry per se is one of the industries worth protecting, particularly the pharma glass, of course. We are actively monitoring the evolving situation and will respond appropriately to guide Gerresheimer safely and effectively through these changes or challenges.
Now let’s focus again on Gerresheimer and the status of our transformation that is now showing strong progress. In the second quarter, we delivered another quarter with double-digit profitable growth. The resilience of our business model was reconfirmed another time, and our market position gives us significant pricing power. We made clear progress in our journey towards a leading solution provider and system integrators for pharma, health care and cosmetics. And we clearly see the changes in the customer perception paying off. We kept focusing our investments into great opportunities for profitable growth, setting the foundation for sustainable profitable growth for the coming years.
We are very pleased with all our activities in the second quarter, but I am particularly proud that the benefits of our sustainability strategy are being recognized and highly rated. In June, we were, for the first time, awarded the EcoVadis Gold sustainability rating. This is a major milestone for us. A warm thank you to the whole team and the team effort behind the success.
This is significantly more than just a badge for us. We want to be good corporate citizens, no doubt, but it is much more than that. Sustainability is one of the 5 pillars of our strategy for growth. On the one hand, we help our clients realize their own sustainability ambitions as they need to see awards like this, the one from EcoVadis to prove their supply chain credentials. On top of that, sustainability-produced products are in high demand and help us to clearly grow our business.
We are deeply integrated with our customers’ processes and focus on supporting them in even more steps along the entire value chain. Let’s start with the journey along the key milestones of the drug development process at our pharma and biologic customers. Gerresheimer is actively involved from the outset. Once the active pharmaceutical ingredients have been identified, and while the drug is being formulated, as regulatory approval is required for the combination of the drug, its containers and its delivery solution, we are, therefore an essential part of the process from the start in concept and design, prototyping, clinical trials and also stability testing during the drug formulation phase and, of course, in the commercial production.
Along these three steps, we also offer a number of value-added services. Among them, project and quality management or a clinical and regulatory support as well as engineering support. These are particularly relevant for our biologic customers, which are often smaller than the traditional pharma companies and therefore, depend on these values and services.
Thanks to the deep integration in our customers’ processes, we have unique insights of their needs, which inform our development of new products and also services. Elite Glass and ready-to-fill vials are important examples of our innovations, which help make our customers’ production significantly more efficient. Even more important for the future is the extension of the value chain on the right side of the chart. Our comprehensive understanding of the needs of our customers of patients and of the health care sector enables us to enter highly attractive business areas with new small med tech devices and related services. Above all, these areas include treatment support and treatment adherence. We are developing devices such as smart inhalers and micro pumps which track treatments and allow physicians to monitor progress online.
These next-generation devices will bring significant quality of life improvements for patients. They improve the treatment as well as the patient monitoring. At the same time, physicians will be able to monitor if patients actually adhere to the prescribed treatment. This, in turn, helps to reduce costs in the health care system in general.
There are three dimensions of our approach to expand our solution offering: One, the focus on customers; two, the focus on strategic partnerships; and three, focus on next-generation technologies. Focus on customers and their specific needs led to the creation of our Gx Biological Solutions team. Biological Solutions is our one-stop shop for biotech customers where they can take advantage of the expertise of all our business units in one place. Through its focused approach in 2021, alone, we attracted 3 of the top 10 biotech companies as customers.
Strategic partnerships help us to expand our expertise and our client reach. They are mutually beneficial when it comes to product development and entering new markets and client segments. Recently, for example, we joined forces with Portal Instrument, a developer of next-generation needle-free drug delivery technology. Together with the spin-out from the Massachusetts Institute of Technology, the MIT, we will transform the administration of injectable medicines which will lead to significant improvement in the patient experience, especially for those with chronic diseases.
When it comes to next-generation technologies, we partner with universities, startups or also hospitals. Currently, we have several such agreements in place. In June, we invested in the Finnish medtech startup Adamant Health, with the aim to revolutionize the treatment of millions of Parkinson’s disease patients. Adamant Health already holds a unique position in the field of monitoring this neurodegenerative chronic diseases. While current generation technologies only collect patients’ physical movements data, the sensor developed by Adamant Health links this function with technology called surface electromyography EMG — the local measurement of electric neuromuscular activity.
With the partnership, the aim is to combine this technology with personalized medical treatment solutions, such as the existing pump manufacturing by Gerresheimer and to make it available to all Parkinson’s patients. This will allow the real-time collection and analysis of data together with precise adaptive drug administration at home, a solution, which will be significantly improve — in which we’re able to significantly improve the lives of millions affected people. Both our systematic approach to partnerships and our deep integration into our customer processes illustrate how we successfully increased our capabilities, our business scope and services and with this grow our businesses.
And now, I hand over to Bernd, who will walk you through the financials in detail in the second quarter. Bernd?
Bernd Metzner
Thank you, Dietmar, and welcome, everybody, also from my side. Let’s dive into the analysis of the key financials for the second quarter 2022.
We showed a solid quarter with continued double-digit organic revenue growth. Reported revenues increased from EUR 377 million in Q2 2021 by 17.9% to EUR 445 million in Q2 2022. We had an FX tailwind of around EUR 19 million, mainly coming from a stronger U.S. dollar. The organic revenue increase amounted to 13%. Compared to the last year’s quarter, this organic revenue growth rate includes tailwinds from pass-through effects as well as sustainable here-to-stay price increases. I will come to this in a minute. Worth to mention, Q2 is another proof point of our strong pricing power.
The adjusted EBITDA increased from EUR 82 million by 10% to EUR 90 million in Q2 2022. FX support was EUR 4 million, resulting in an organic adjusted EBITDA growth rate of 5.1%. This was a solid performance as we continue to absorb the headwinds of higher energy costs and COVID-19-related expenses of around EUR 3 million. For the second half of the year, we expect good adjusted EBITDA growth with a strong margin improvement compared to the first half of the current financial year.
As just mentioned by Dietmar, we are well hedged against the strong increase in energy prices, especially gas. Here, we have a long-term hedge in place with leading investment banks as well as a price fix with one of Europe’s leading utility providers, which together cover more than 90% of our gas and electricity needs in molded glass Europe for several years. And our hedges are intact and valid in detail.
Last week was quite busy for the German government in its efforts to stabilize the gas market. Until recently, the German government plan for special regulation, which would have allowed gas suppliers under very strict and not fulfilled conditions to pass on higher gas prices to their customers regardless of existing price fixes. As you can imagine, we would have had this all means strongly opposed such a contract breach. It is now understood that this is not the right way to avoid gas supplier potential insolvencies and the German government has now practically decided to start bailing out the system-critical German gas suppliers. In addition, a new regulation has been introduced this week to enable the German government to impose higher gas costs in form of a levy to all German gas consumers. In our comprehensive scenario analysis, we expect this levy to be applied, if at all, in autumn this year or later. The government plans to apply it only in a scenario where gas supply reduction from Russia will undermine gas storage preparations for the winter. In this hypothetical scenario of this gas levy, we are prepared to pass it on to the customers.
Let’s continue now with the figures. The adjusted EPS increased from EUR 1.28 by 4.7% to EUR 1.34. Stripping out the FX tailwinds, organic adjusted EPS growth amounted to 0.8%. Two comments on the exceptionals. We halved our EBITDA exceptionals from EUR 7 million in Q2 2021 to EUR 3 million in Q2 2022. COVID-19 costs in the magnitude of around EUR 3 million are not booked as exceptionals. Second, we had to face U.S. tax audit results for the years 2013 to 2016 with an additional potential burden in the magnitude of around EUR 7 million. This occurrence is treated as exceptional for 1/3 as financial exceptional expense, for 2/3 as exceptional tax expense. We are in discussion to reduce this amount with the U.S. state tax authorities.
Before we come to the divisional performance, I would like to zoom in to the pricing effect that supported our revenue development. In Q2, our organic revenue growth rate for the group was 13%. The strong revenue growth can be divided into volume and price effects. For the price component, we can separate two effects. First, the tailwind from contractual pass-through effects mainly related to higher resin prices and the effect; secondly, from the renegotiated sustainable here-to-stay price increases that we implemented as a result of higher energy and other input costs. The tailwind from pass-through price increases amounted to around 2 percentage points in Q2. These effects are rather volatile and hard to predict. Adjusted for this effect, our revenue growth would have amounted to around 11%. Looking at the price volume mix in the underlying revenue, we see that around 1/3 of the growth comes from volume. The remainder from price effects.
Let’s zoom in to the adjusted EBITDA margin of Q2 2022 of 20.1% and look through the inflation top line effects at the same time. As you know, we pass the inflation on to the customer without additional margin. If you take the additional inflation revenue contribution without EBITDA out of the equation, you’ll see a stable adjusted EBITDA margin of 21.9% in Q2 2022 compared to 21.8% in Q2 2021. So the EBITDA margin is in line with the previous year, but distorted by the technical effect of inflation revenues without EBITDA contributions.
Back to the top line. For the first half of the financial year, we grew around 16%. Around 8 percentage points of this growth was driven by volumes. Slightly more than 5 percentage points was supported by sustainable price increases, and 2 to 3 percentage points resulted from contractual pass-through price adjustments. This shows again our strong underlying revenue growth dynamic plus our excellent pricing power.
Let’s have a closer look into the divisions, Plastics & Devices. Reported revenues in Q2 2022 grew from EUR 202 million by 12.9% to EUR 228 million. We had an FX benefit of EUR 10 million. The organic revenue increase was therefore 8.0 percentage points. This includes support from contractual pass-through of higher resin prices of a high single-digit million euro amount.
In Q2, we had a strong contribution from our Plastics business and contract manufacturing. The Syringe business experienced some temporary phasing effects. Three items to highlight. First, our primary plastic packaging business including Centor, achieved strong underlying volume growth in the second quarter, which was again also supported by a pricing tailwind from passing through higher resin prices. Second, our contract manufacturing business again showed strong high single-digit revenue growth. The sustained high revenue momentum clearly shows that we execute on the back of a record order book level. Third, our syringe business still face a strong structural demand for our RTF syringes. Following a strong comparable period, syringe’s growth was restrained by temporary phasing effects. These were due to later shipments to customers and the ramp-up of new lines.
The adjusted EBITDA was stable year-on-year at EUR 53 million. We had an FX benefit of EUR 2 million, which resulted in organic development of minus 4.2%. The adjusted EBITDA of our Plastics & Devices division was adversely impacted by temporary weaker product mix. As mentioned, our profitable syringe business had some phasing effects in Q2. We expect a strong second half with Q4 performance to be even stronger than Q3.
Primary Packaging Glass. The Primary Packaging Glass division showed another impressive quarter. Reported revenues increased significantly from EUR 174 million by 24.3% to EUR 216 million. FX support was EUR 8 million, translating into an organic revenue growth rate of 19.4%. This is the fifth consecutive quarter of high single to double-digit organic revenue growth for Primary Packaging Glass.
Both business units, Molded and Tubular Glass showed double-digit revenue growth rates. The strong growth in the Tubular Glass business was once again fueled by the high demand in High Value Solutions, especially RTF and Elite Vials. On an as-reported basis, the adjusted EBITDA increased from EUR 38 million by 12.6% to EUR 43 million in Q2 2022. Excluding a high single-digit million euro FX tailwind, we achieved an organic growth rate of 8.3%. Our sustainable here-to-stay price increases are taking hold and our long-term hedging measures are starting to pay off.
Advanced Technologies. Advanced Technologies is running on plan. Reported revenues increased slightly to EUR 3 million in Q2 2022, and the adjusted EBITDA was at minus EUR 1 million. Also in Q2, we had a high focus on R&D in this segment. For the full year 2022, we expect a slight increase in revenues and a negative adjusted EBITDA in the magnitude of approximately EUR 10 million.
At Advanced Technologies, we continue to strive to establish Gerresheimer as an innovative original equipment manufacturer for smart and connected devices in the health care industry. To give you some examples, we entered into a strategic participation with Portal Instruments to develop a needle-free autoinjector with Adamant Health to revolutionize the treatment of Parkinson’s disease. Advanced technology is becoming increasingly relevant and will clearly, clearly contribute to our growth and margin acceleration.
Let’s turn to the cash flow. We showed solid cash flow development in the second quarter. We achieved a cash inflow from operating activities of EUR 2 million despite an EUR 18 million increase in cash-out for working capital. This net working capital increase relates particularly to our strong revenue growth of EUR 74 million quarter-on-quarter and to the buildup of safety stock.
One more comment to help understand movements in our net working capital. Typically, for seasonal businesses, we strongly increase net working capital in the first half of the year. In the second half, the picture then reverses and we generate a high cash inflow from the reduction of net working capital. We expect to see this in the second half of the current year.
Net CapEx increased by EUR 7 million to EUR 47 million as we continue to invest in global injectable capacities and further ramp up contract manufacturing projects. Despite the absolute increase, our net CapEx to sales ratio come down to around 10% to 11%, as indicated in April. Overall, and as planned, the free cash flow declined from minus EUR 26 million to minus EUR 45 million in Q2 2022. For the second half of 2022, we expect strong cash generation according to the typical seasonality of our business.
Looking at the full year, we plan with a strong cash performance in the second half of the year as usual. Whether we are free cash flow neutral will depend, like last year, on the further execution of our investment program and profitable growth. We have successfully further implemented our refinancing strategy and have already fully refinanced the promissory loans of around EUR 306 million maturing in the second half of the year.
At the same time, we were able to reduce our borrowing costs slightly with our two-step refinancing approach. This is a great result that reflects the confidence of our credit investors in our financial profile and our resilient business model.
What did we do? The first step was the issuance of the promissory loans in November 2021, amounting to EUR 150 million. The second step was the agreement of a new revolving credit facility of EUR 150 million with our banks. We announced this on July 4. As per end of May and without this new EUR 150 million RCF, we had available liquidity of EUR 250 million. So we feel very comfortable with our existing financial headroom.
On this positive note, I now hand back to Dietmar to elaborate on the promising outlook for the current year. Dietmar.
Dietmar Siemssen
Yes. Thank you, Bernd. Yes, we had a good first half, and there’s strong momentum in the business going into the second half of the year. A little more detail on what we see by division, I think you already heard Bernd talking about this.
In a couple of words, Plastics & Devices, we are currently executing on a record order intake, particularly for drug delivery devices. In PPG, we see strong volume growth in both tubular and molded glass as well as further contributions from, you heard it very well, from the dynamic pricing environment. Looking at GAT, GAT will integrate new strategy, strategic investments in projects, like you heard it a couple of times now, the partnership with Adamant Health and also Portal. We will contribute or continue to evaluate new projects, which will further enhance our portfolio.
As you can see, there’s a lot of dynamics in our business since our last Capital Markets Day. We successfully transformed our Gerresheimer into a sustainable and profitable growing company. Towards the end of this year, we are hosting our Capital Markets Day 2022. We will give you a deep dive into the progress achieved with our formula G strategy and our transformation into a solution provider and system integrator. We will confirm the exact date and send you the invites in due course.
For 2022 and beyond, we are very optimistic as our business model, again, proves its resilience. We are managing the challenges of the market environment and are consequently implementing our growth strategy.
Looking at our developments, and after this strong first half, we expect an even stronger second half of the year, leading to another record year with revenue growth of at least 10% and adjusted EBITDA and adjusted earnings per share both growing, at least high single-digit rates. In other words, we confirm our 2022 guidance as well as our midterm guidance. We are at an inflection point of our transformation towards higher sustainable and profitable growth.
With this, we’re now happy to take your questions. Thank you.
Question-and-Answer Session
A – Carolin Nadilo
Thank you, Dietmar. So let’s enter in our Q&A session. The lines are now open for your questions. [Operator Instructions] And the first question comes from Falko Friedrichs from Deutsche Bank.
Falko Friedrichs
Three questions, please. Starting on the gas topic. So if this Paragraph 26 is chosen by the German government and your gas hedges remain in place, but you would have to pay that surcharge or levy, if I believe what you called it, are you able to quantify the potential financial impact to your business in that scenario? And also, are you confident that you would be able to pass all of this surcharge on to your customers?
And second question, considering the very worst case, and there’s an imminent gas supply shortage because this Nord Stream 1 pipeline doesn’t go back online in 10 or 15 days, how are you prepared for such an extreme scenario? And are there any alternative ways to potentially keep your production going?
And then my last question is on free cash flow. Bernd, you said you don’t know if it will be positive this year, but is it a fair assumption that you should, at least get quite close to a positive number this year?
Dietmar Siemssen
Yes, I think I can take the first question on the gas supply. You mentioned about this Paragraph 26, which is the potential of the levy on the spot. We expect that it will take a couple of more months before the government will really decide for such a levy. If it actually comes, I don’t see any problems. We will clearly pass this on further to the customer as it comes in. That’s why I’m not expecting impact on the business actually.
The second quarter is in regard of — you always say, this worst-case scenario, there is a shortage in the gas. And with regard to the gas shortage in Germany, I have to tell you, as we mentioned before, Gerresheimer has great responsibility for the health of millions of people out there. Our products are critical, as I mentioned, for hospitals, doctors, patients worldwide, chronic ill patients and so on. Only our insulin pens, the micro pumps, the syringes, the injection vials, the ampoules, bottles and containers ensure the availability of these important medications. As such, we’ve been proven, the systematic relevance during the COVID pandemic, not only in Germany, by the way, but worldwide, but we are for the gas only speaking about Germany. And as such, without our individual solutions, the availability of many important medicine would not be guaranteed.
In short, the health of millions of people depend on our medical supplies and this means we have to deliver. We are system relevant. And we do not expect that a shortage of gas would be applied to Gerresheimer.
And I think the third one is probably someone — a question for you, Bernd.
Bernd Metzner
Regarding the free cash flow, whether we get close to a black number to zero to neutral. Just to answer today — big picture today, we have, so far, in the first half of the year, minus EUR 110 million free cash flow. And it’s basically because of our investments and the working capital build up. But now if you look now in the second half of the year, you should really see a very strong cash contribution.
First, we will have more earnings obviously, in the second compared to the previous year. And we’re doing this on the back that last year, we had, in the second half of the year, EUR 100 million positive free cash flow. And also, we expect a very strong outcome for the second half of the year. So practically, yes, indeed, depending on our basically, our CapEx program execution, we think that we will be very close to zero.
Carolin Nadilo
Next question comes from [indiscernible].
Unidentified Analyst
You have the cosmetics business, too, and this is not systemically relevant. So why do you — why are you so sure that the gas shortage would not affect you?
And my second question is, could you comment on rumors in June that Bain Capital was interested in a takeover? Were you in talks with Bain?
Dietmar Siemssen
Yes, I think the first question is — it’s relatively easy. There is quite some cosmetic business. There are two facilities that actually are producing cosmetic. One of them is in Momignies, Belgium, where we have a 100% electric power-driven furnace and the government already guaranteed the suppliers if we need it. So there’s no risk at all. The other one is in Tettau.
To be mentioned here is that this is not a pure cosmetic facility, so there are other products like health care and also pharma produced. As it’s a regulated market in pharma, you cannot relocate businesses from one facility to the other. That’s why we will enjoy the same protection for Tettau as we will for any other facility of molded glass here in Germany.
And the next question is with the rumors around the Bain. Yes. In the end, it’s difficult for me to comment on these market rumors, which we actually can’t comment on. But I can give you some more general comments on this. If you actually look at our current share price, it would come to no surprise to us if Gerresheimer looked attractive to, for example, a financial or any other industry investor. Gerresheimer is on a clear growth path with unique solution offering. And we believe that the equity market has not yet caught up with what we actually have achieved in terms of transforming our business.
And there’s no doubt, and this is maybe a little bit political question, but it’s clearly — if the Board is, of course, mindful of its responsibilities to the company and its stakeholders and would consider carefully the merits of any serious offer, if it would come. But I think third most important, what we are doing is we keep being focused on delivering on the opportunities of our formula G strategy. We have a lot of confidence that we will grow the company very successfully, and that will — this will also deliver value for our shareholders. That’s hopefully answering your question.
Carolin Nadilo
All right. The next question comes from Oliver Reinberg from Kepler Cheuvreux.
Oliver Reinberg
And three, if I may. Firstly, on this kind of gas shortage situation. I mean I assume there’s quite limited with regard to Gerresheimer. Still, I would like to understand this kind of process a bit better. So can you just share what kind of dialogue is actually between corporates and the Federal Network Agency? So do you get more insight from Klaus Muller in terms of the prioritization? And also, is the Federal Network Agency having a kind of closer evaluation, so is there any kind of questionnaires that you have to answer in terms of what plans you use for what kind of purposes? Or is there any kind of detailed inquiries going on at the moment? Any kind of color on this kind of process will be helpful.
The second question on cosmetics. Obviously, cosmetics clients are in molded glass and hence, to some extent, at the heart of the current price increases. Can you just share some kind of reaction, how they’re going to react on this kind of subject? I’m sure there’s a broad-based understanding because it is still a matter of fact, that costs are going up. But in theory, mid to longer term, there could be manufacturers in other countries that have a different cost for energy. And here, also one could think about alternative ways of packaging. So any kind of color here would be appreciated.
And the third question, just on cash flow, probably something that is easier to answer. Can you just guide us there, give us any kind of guide for the gross CapEx plan that you have for next — this year and probably also for next year? And to what extent are these kind of plans impacted by inflationary pressure?
Dietmar Siemssen
Yes, I’ll take the — I’ll try to answer the questions. If I don’t answer everything, you have to follow up. Maybe to the gas supply, and it fits to the cosmetic thing. Very important is, of course, we are in contact with different authorities and are discussing with them about the relevance of the business, which is clearly proven also in the pandemic. I think what is important is that the decision of the government goes in the direction of protecting and securing the universe of this world, honestly spoken, which is very good. And it’s — we spoke about paragraphs, this Paragraph 24, which is a price increase or 26, which is more a levy. The decision now goes in the direction of a levy, which is a very important decision for us because this means very clearly that our hedges and these — we are talking long-term hedges are actually intact and in place. And this actually gives us a very strong competitive advantage.
I have no doubt that if the levy comes, we will just pass on these increases to the — to our customers. And it fits to the question you are raising towards cosmetic. Yes, we have competitors worldwide. But actually, as the hedge is in place, we are in a very strong competitive position. Most of our competitors actually are hedged in ’22 as we are, but they most likely do not have this long-term hedge, which gives us a very strong competitive position from ’23 onwards, which is very helpful.
To the cash, for this answer, I hand over to Bernd.
Bernd Metzner
Just to answer your question briefly, on the gross CapEx plan for — inflation impact for 2020 — this year, actually, we assume around 12% to 13% CapEx to sales in the ballpark.
And how is inflation actually impacting it? In the end, our CapEx is actually growing with the — also with the inflation. And if you see that we have a top line growth also impacted, as we highlighted partially about passing through inflation effectively. Then practically also that our investment programs in a certain way, we have this kind of inflation impact there, obviously.
Regarding the outlook for the next couple of years, we, actually we always — in the autumn of the year, we are preparing our 5 years plan. And we want, and this is our idea, to talk about this mid- and long-term view in our Capital Markets Day in more detail. That’s our thinking. For the time being, we stick to our concept to say, investment program 2021, 2022 relatively high and payback of the — start paying back our debt, end of the next year. That’s our actual plan.
Oliver Reinberg
Perfect. And just a follow-up, Mr. Siemssen. So the discussion with the government, I mean, are they inquiring specifically on a plant-by-plant basis?
Dietmar Siemssen
No. We can provide this, but it’s not the level of discussion we actually have. There is a strong protection on the glass industry in general. And then, of course, the pharma, there’s quite some — more protection on the pharma. That is why we — you hear us being pretty confident that our facilities are system-relevant and system critical.
Carolin Nadilo
Next question comes from Sven Kuerten from DZ Bank.
Sven Kuerten
There’s just one question left, and that’s on syringes. Could you please quantify, you mentioned phasing effect in syringes and revenue and EBITDA? And how high would the — High Value Solutions grows in Q2 have been, including those delayed syringe deliveries?
Bernd Metzner
Regarding the syringes, we talked about it — about the description of the business performance of the units. In the end, they have a certain phasing effect in the magnitude of low single-digit euro amount for sales, maybe 5 for EBITDA, maybe 3. And you will see a strong outcome rebound of it in the second half of the year with a stronger Q4. That’s basically what we are planning.
Regarding the implication if this would have been included in High Value Solutions in the second quarter, I need to calculate this but it would be definitely more than 10% High Value Solutions. We have now 12. It would be probably 13, 15, something like this, I would assume.
Carolin Nadilo
Next question comes from Daniel Wendorff from ODDO BHF.
Daniel Wendorff
And three also from my side, if I may? On the net working capital development in the second half of the year and maybe also beyond, how should we think about this in the current uncertain economic environment? You mentioned, Bernd, that also inventory buildup has played a role to secure supply chain decisions? Any more color you could provide here would be helpful.
Second question would be on Elite Glass and RTF vials. You mentioned that the revenue’s doubled year-on-year in the second quarter. Maybe you could give us a few numbers here? And how should we think about this going forward? Is this pace to continue for a certain period of time?
And my last question is also related to the gas topic. Can you talk maybe a bit more about your goals to become more independent of gas in your furnace network, in particular in Europe? And has the current crisis changed your plans here at all? So any more color you could provide here, I would much appreciate it.
Bernd Metzner
Thank you, Daniel, for your question. And just to tackle the first 1 regarding net working capital. Indeed, if you look at the second quarter, and I think it’s a quite representative quarter, you see that the net working capital is actually normal times, basically in line with the sales growth. And we grew and increased on working capital by around EUR 17 million. And 2/3 of it is linked to the growth of the business. And 1/3 of the net working capital increase is due to the fact that we want to have a certain cushion in times of these uncertainties. That’s basically the concept, what we are applying and then deciding what to do basically the 6 months forecast outlook. That’s our — how we are doing our bets as far as our inventory is concerned.
Dietmar Siemssen
So then I take the last one, which is a great question. I really like it because it’s supporting the trend that we in here planned for us. So you spoke about, are you changing your strategies, more independence from the gas. I think that we do not change our strategy, but you clearly see that there is confirmation. We have already planned in our sustainability strategy to step-by-step go into new technologies like hybrid ovens, more hydrogen capabilities. What we had so far was very little awareness and support coming from the government, for example.
The whole situation, as bad as it is, actually is stimulating the interest of the government to push in this direction that gives us significantly better access to government support and will give us also support coming from the government in regard of the new furnaces. As an example, the furnace, we are now planning for Lohr at the moment, and we will install over the loop of the next 12 months. It’s actually also the next hybrid oven, which has the ability to switch more and more towards electric, but especially also to other gas opportunities, for example, like hydrogen, that would be very strong. And here, there’s availability of support coming from the government in this regard. And also the next furnace that we are planning in Tettau will probably even be supported, but even the hydrogen technology will be accelerated. So I see this as bad as it is at the moment, as a very positive trend, very helpful for us in regards of our sustainability strategy.
Daniel Wendorff
Okay, very good. And may I ask, the Elite Glass and RTF vials question again. Is there anything — any number you can give us here?
Dietmar Siemssen
Elite and ready-to-fill glass actually is developing very strongly. Actually, above our expectations, not only in selected quarter, but you clearly see a trend that is faster than expected for not only — it started in principal end of last year. We had enjoyed the first sale last year. Now it’s really moving upwards in ’22, and this trend will clearly go on over the loop of the next years. And that’s very good. It’s a clear trend, not only in biologics, you see more and more interest also of the classic pharma producers to switch their classic vial business into ready-to-fill.
And you wanted to see some figures. I now getting some figures here from the support team. Thank you, by the way. We have — it’s probably units or is it millions? Vials, yes. Instead of planned prior year, 20 million, we now shipped 40 million of vials here, which you’ll see that’s doubling the amount.
Carolin Nadilo
Now we have a follow-up from Oliver Reinberg from Kepler.
Oliver Reinberg
First, on gas, overall, what you use within the kind of group. Can you just provide us with a split term, how much of this is used for power generation purposes and how much is really an embedded part of your production process?
Secondly, in terms of price increases. Can you just share with us what share of the planned price increases have now been supportive in the second quarter and how much are still to come in the remainder of this year, assuming that there’s no Paragraph 26 to be applied?
And then the third question, just in terms of personnel cost inflation. I guess it’s not really a topic so far, but we’re obviously seeing increasing demand from unions and all kind of countries. So any kind of thoughts on personnel cost inflation to what extent this can become a topic in the second half or into next year?
Dietmar Siemssen
I take the first one. You can take the second one. The gas supply, we don’t produce energy with gas. We actually use the gas to heat our ovens. That’s how we use it. And that’s why I’m so eager to get the hybrid ovens because they have a higher flexibility to switch to all kinds of energy supply.
Bernd Metzner
Let’s take over the third question, Oliver, regarding the inflation, what we see. Actually, we see overall, for the top 3 cost items in our company, inflation of its raw material, energy and personnel costs around 7% for the remaining of the year, where we have basically calculated and so far, it’s justified for the remaining of the year, a 4% personnel cost increase.
Oliver Reinberg
And any color on the pricing in terms of what share you have already embedded in the second quarter and how much more price increase is still to come?
Bernd Metzner
Practically, what we always try that — we pass on this last contributions of price increases around 80% of the inflation is covered by the price increases. That’s something also as an outlook for the second half of the year, the sustainable price increase. And then you have on top pass-through price increases that is something you can basically calculate in your numbers.
Carolin Nadilo
Are there any further questions? Yes, this is not the case. We would like to thank you for joining us today. All the best, and talk to you soon. Goodbye.
Dietmar Siemssen
Goodbye.
Be the first to comment