Earnings Transcript for AI.PA - Q2 Fiscal Year 2021

Operator: Hello, and welcome to the Air Liquide First Half 2021 Results. My name is Josh, and I will be your coordinator for today’s event. Please note that this conference is being recorded. All participants are currently in listen-only mode until we conduct a Q&A session and instructions will be given at that time. I’ll now hand you over to your host, Aude Rodriguez, Head of Investor Relations, to begin today’s conference. Thank you.

Aude Rodriguez: Good morning, everyone. This is Aude Rodriguez, Head of Investor Relations. Thank you very much for joining our conference call today. Benoit Potier and Jerome Pelletan will present the first half 2021 performance. As usual, Francois Jackow, Executive VP, supervising Europe, Africa, Middle East and Healthcare hubs. And on the phone from Houston, Mike Graff, Executive VP, supervising Americas and Asian hubs and the Electronics business line. They will both participate in the Q&A session. In the agenda, our next announcement is on October 22 for our third quarter revenues. Let me now hand you over to Benoit.

Benoit Potier: Thank you, Aude, and good morning, everyone. Thank you very much for attending this call. The first half 2021 has been a special semester by many aspects. After first quarter mark by sales growth recovery in all our activities, we saw an acceleration in the second quarter. With Q2 sales not only growing double digit compared to a low Q2 2020, but also showing growth above 2019 in all regions and all business lines. Overall, we have been able to deliver an outstanding financial performance, thanks to a higher demand with a strong margin improvement as well as a high cash flow, which allowed us to invest in growth, to close the Sasol takeover, to pay the dividend, of course, while significantly reducing the gearing ratio compared to the first half of 2020. Our performance must combine our financial and sustainable components. And while this first semester was still impacted by the COVID-19 pandemic in some countries, our teams have been fully mobilized to put in place alternative supply chains to deliver medical oxygen sometimes in remote areas or in regions where the group is not or almost not present. We’ll come back on that. And despite this unusual environment, we’ve been able to reinforce our backlog, and we will provide you with more granularity as well as some update on the key achievements regarding the energy transition projects. On Slide 4, to start with, I wanted to highlight the closing at the end of June of the Sasol 16 ASUs acquisition, which, as you know, is the largest air gases production site in the world in Secunda, South Africa. It is also the first time we signed an agreement with a customer to jointly commit to the reduction of CO2 emissions, which is fully aligned with the objective we disclosed during our last sustainability day in March. This is truly a first of its kind deal in the energy transition area – era. So a major contract for the group that has started to contribute on the 1st of July. On Slide 5, a few key figures to illustrate the financial performance in the first half. I’ll start with comparable sales growth is plus 9% in the first half, showing an acceleration in Q2 at plus 15%. Obviously, this is compared to a low basis last year. So now compared to the first half of 2019, sales are growing by 5%, which clearly shows the good recovery of our markets and activities. Margin also increased by a significant plus 100 basis points, excluding the energy pass through impact, and we’ll see later that energy impact was pretty high. It reflects the long-lasting efforts we’ve made on pricing, on efficiencies, be it operational or structural efficiencies, on portfolio management and cost containment plan that we put in place last year, which is progressively in line with the recovery. The recurring net profit is up plus 19%, excluding foreign exchange, and the cash flow is still very high at 23% of the sales. On Slide 6, the graph shows the acceleration of the growth since the beginning of 2020, up plus 15% for the second quarter of this year, whereas last year, it was only down by 7%. We also provided you with growth figures by business line on the right part of the slide compared to 2020. And as you can see, we enjoyed a double-digit growth for LI and IM that where the activity is the most impacted by the pandemic last year. But Healthcare and Electronics also posted close to double-digit growth this year, while these activities were both growing in Q2 2020, slightly for Electronics and at a higher pace for health care. On Slide 7, you can better evaluate the strength of the recovery when referring to 2019. In Q2, all business lines and geographies are posting growth compared to 2019. Americas plus 4%. The main driver being LI and Healthcare. Europe plus 7% with a strong Healthcare and solid Industrial Merchant and Large Industry and Asia at plus 6%, driven by China and all activities. Middle East and Africa is plus 8% above Q2 2019 sales. By business line on the right, figures show an outstanding Healthcare, of course, high Electronics and Large Industry and IM sales are now 1% above 2019. All in all, group sales are plus 6% above Q2 2019, which demonstrates the strong resilience of our business together with its ability to pick up quickly when the economy recovers. In addition to our strong financial performance, you know that sustainable growth is also at the heart of our strategy as previously explained during the Sustainability Day in last March. As a matter of fact, we all know the pandemic is not fully over yet. So we brought the continued support to several countries severely affected by COVID-19. On Slide 8, you can see an overview of this major healthcare societal contribution to fight against pandemic. Not to mention them all, we highlighted here a few examples of countries or sometimes regions where the group has a limited oxygen capacity and where we put in place dedicated crisis supply chains, either by air, by sea and sometimes with the support of the French or the local army in order to supply medical oxygen to COVID patients. Thanks to this tremendous efforts, 30,000 patients per day received oxygen in India, 10,000 in Russia. We also supplied thousands of oxygen concentrators in Brazil and South Africa. And we are – we have been also very active, and it is still the case now in Tunisia or previously in Egypt. And I take this opportunity to warmly thank all the teams that were deeply involved in the management of these critical situations. I would also like to highlight the solidarity of our industrial customers who accepted to reduce or stop their oxygen consumptions so that we could medicalize the oxygen and redirect the volumes to hospitals. Also in terms of sustainability, the first semester was also very active in the field of energy transition, as I said earlier. On Slide 9, in the continuity of our Sustainability Day last March, we want to share with you our key achievements in energy transition projects in the first half. In Europe, first, more than 50 projects are currently under development, be it for carbon capture, electrolysers hydrogen mobility. For these projects to succeed, you need to develop local ecosystems by combining several key factors, such as technology, customer relationships, but also availability of renewable energy or fundings to help in first stage of the competitiveness of new technologies and partnerships, as detailed in March during our Sustainability Day to develop hydrogen mobility. In the first half of 2021, we signed more than 10 MOUs or partnerships. We were awarded six national or European fundings and were preselected for more than 10, and we signed two PPAs, and we are currently working more than 10 now. In Asia, hydrogen mobility is developing quickly, especially in Korea and Japan, and we signed four MOUs or partnership this first half. Air Liquide technology is recognized by customers and has been chosen as an example in China recently for the world’s largest hydrogen station. In Americas, the legislation is being introduced to promote new technologies and solutions for energy transition like the Hydrogen Shot program or the Clean Hydrogen Production Act, which are not fully validated yet. But no doubt, projects were developed quickly as well in the U.S. as soon as these new regulations are implemented. But we already started in North America. Just to remind you, we are operating the largest PEM electrolyzer in Canada since the end of 2020, and we plan to start a major hydrogen liquefying in the fourth quarter of this year to supply the hydrogen mobility market in California. So energy transition really is taking place in Americas as well. To conclude, a very active semester in the front of energy transition. Now these energy transition projects will soon be added to the backlog. On Slide 10, we provide you with some granularity in our backlog at the end of June. It stands right now at €3.1 billion and these projects under construction will deliver growth in the next few years. It is of very good quality, the portfolio, and well balanced, be it by end markets, geographies or investment size. Indeed, Large Industry represents close to 60% of the total, mostly, as you can see, Chemicals, with only 8% of projects in refining. If you add Electronics, you reach more than 80% of total backlog that are under long-term contracts. By geographies on the right part of the slide, Americas come first with 41%, projects being mainly in Chemicals; Asia with 34%, includes most of the Electronics projects and the backlog is made of around 70 projects, having an average size of €45 million. Therefore, our growth doesn’t rely on a few large projects. Such a diversified and well-balanced backlog considerably reduce the risk – the level of risk for our future growth. So the financial performance, combined with the strong backlog, made the first semester a very good start of the year, and I will now let Jerome to comment the financial performance. Jerome?

Jerome Pelletan: Thanks, Benoit, and good morning, everyone. I’m on Page 12, and I suggest we review our numbers more precisely. So coming back to half year, we can see that comparable Gas & Services sales for H1 show plus 8% increase versus last year. So of course, contrasted between Q1 and Q2 with a favorable comparison effect in Q2. For the semester, all geographies and business lines, including Large Industry and Industrial Merchants that were most impacted during the crisis are posting a very strong growth in Q2, as explained by Benoit. We’ll review that in a moment. Engineering & Construction consolidated sales have increased by plus 66% in H1 in connection to the active development of group projects and a low base last year. There is a pursuit order intake picking 13% in Q2, representing €257 million. Global Markets and Technology are also accelerating and are now showing a plus 35% in H1, boosted by biogas activity as well as last year base effect. Overall, comparable gross sales are up plus 9.2% for H1, while published sales at plus 5.6% impacted by a negative ForEx impact of minus 4.8% and a negative significant perimeter effect of minus 2.8%, balanced with a very significant impact of the increase in energy price plus 4% over the first half year. Now for Q2, as I said before, a very strong growth with the market recovery. We are then at plus 6% above 2019 level of sales for the group and even sales for the business line that we are the most impacted by the crisis are now above 2019. I’m on Page 13, and I’m getting back on geographies. We can remember that Q2 last year was the most impacted for the Americas due to lockdown in place everywhere and due to our footprint in Industrial Merchant. The comparable basis, growth has been strong in this geography this year, and sales are above pre-COVID crisis 2019 level. The industry volumes have accelerated and underlying air gases capacities on a fully loaded in June 2021 in the U.S. while Latin America continued to grow, also supported by the contribution from ramp-ups. In Industrial Merchant, gas sales are growing and are above pre-COVID-19 levels, as all industrial and services markets are posting strong growth, except construction that is still lagging behind. Our goods are still below the COVID level, but overall, in IM plus 3.2% price increase is above the Q1 level, thanks to pricing campaign launched in late Q1 2021. Electronic sector also improved, thanks to better carrier gas, specialty materials and advanced materials, which is getting back to growth. Healthcare sales are strong due to med gas sales in Latin America, but also from Home Healthcare recovery. In North America, there is a significant contribution from medical gases during the peak of the COVID crisis, med gas proximity care and elective surgery are progressively taking over. In Europe, we have seen an acceleration of growth in the last three quarters, with sales significantly above pre-COVID levels. Large Industry air gases has benefited from a significant increase in steel and Chemical markets in Western Europe while returning it is soft, especially in the southern part of Europe. Eastern Europe is also strong with a takeover in Kazakhstan during Q1. In Merchant, all markets are well oriented with good sales volume and good pricing dynamics. Western Europe remained well above 2019 level, while growth from being strong in Eastern Europe. Finally, while Healthcare sales are still supported by strong medical gases at plus 13% due to COVID crisis, Home Healthcare has accelerated with a significant development of diabetes treatment and sleep apnea. I’m on Page 14. And on Asia. Asia it contrasted with China continuing to show high momentum in all business lines, while the rest of Asia is progressively improving. As a reminder, China started to recover at the end of Q1 2020 as the rest of Asia and more impact still in Q2 2020. In Large Industries, China sales and volumes are supported by strong chemical and steel demand, while hydrogen and CO volume are improving in Korea and in Singapore. Industrial Merchant in China, all end market well oriented, especially in Metal Fabrication and electronic components and contributing to post a plus 15% growth with all product lines contributing while the rest of Asia is improving still impacting by the pandemic with some lockdowns. Finally, Electronic sales are strong with a good level in recurring growth and in E&I. Carrier Gas in China are strong and Advanced Material growing sustained by some exceptional sales in Korea in June. In Africa Middle East, IM sales are recovering progressively despite the continued impact of the ceramic while health care is supported by medical gases. As mentioned, Sasol takeover and Large Industry has been closed in June 2021 with no impact in sales in H1. I’m on Page 15. In terms of business line, and as a reminder, Industrial Merchant and, to a lesser extent, Large Industry sales in Q2 last year were the most impacted by COVID crisis, contrary to Electronics and Healthcare that we are still progressing. Healthcare has been at the forefront of the pandemic side and is still benefiting from high medical gases in various geography despite a high comparable basis last year related to equipment sales in particular. Activities also benefited from the ramp-up of elective surgeries that were on hold during the crisis. We are seeing an acceleration in Home Healthcare, particularly in Europe, sustained mainly by diabetes and sleep apnea. In Industrial Merchant, bulk and on-site or strong growth driver, and all end markets are recovering now above 2019 level, except Construction in the U.S., which is a bit slower. Pricing overall is picking up at plus 2.4% with a limited impact of helium price at minus 0.1%. I’m on Page 16. In Large Industry, we have seen air gases benefiting from good recovering Chemicals and steel, while refining and HyCO were contrasted being soft in Europe while catching up in the U.S. To be noted, a significant contribution of the start-up and ramp-up into the first half growth. Electronics is pursuing growth, thanks to carrier gas activity at plus 10%, supported by the start-ups and ramp-ups. E&I is growing as well and Advanced Materials are growing with an exceptional sales in June, in Korea. I’m on Page 17, looking at margin improvement. Getting into the details, you can see that purchases and external cost have been strongly impacted by the increase in energy price and improvement of the activity, while personal expenses are under control and have only very slight increase, excluding ForEx. Depreciation is only slightly hurt, excluding ForEx, following the impact of start-up during the first half and benefiting from last year’s portfolio review impact. To be noted, all our published figures are significantly impacted by a negative ForEx effect from minus 4% to minus 5%. This has resulted in an operating margin at 18% compared to 17.6% last year, plus 40 basis point increase as published and an outstanding plus 100 basis points increase, excluding the energy price impact. As you can see, the energy pass-through has a significant mathematical dilutive impact on the as-published margin this semester that is not reflecting the strong underlying margin improvement. This impact needs to be taken into account in your financial models. I’m on Page 18, on structural performance. This is still delivering. The focus on our structure improvement is indeed impactful. Pricing is accelerating in particular in the Americas, with campaign at Airgas and in Europe. Efficiencies are very high at €206 million. We are then confident to reach our target of more than €400 million for the year. As last portfolio management has been pursued, we executed five divestitures in H1 and closed about 11 bolt-on acquisitions over the period. On Page 19, we can comment on the margin improvement, which is supported by both our structure and structural plan, relying on pricing efficiencies and portfolio management as well as the impact of the cost containment implemented last year that has still delivered effect in H1. This combination of structural existing plan and cost containment in fact, have contributed to deliver this plus 100 basis points margin improvement in H1. And along with the activity recovery, the progression will soften in H2 comparing to an already very high level basis last year. I’m on Page 20, let us now look quickly at the bottom of the P&L. Non-recurring operating income and expense have decreased compared to last year, as 2020 was impacted by €45 million of exceptional COVID expenses that did not repeat this year and were accounted in operational expenses. Net financial costs have also decreased following the progressive deleverage. Effective tax rate is slightly down, benefiting from a lower income tax in France. As a result, net profit as published significantly up at plus 15%, same for the recurring net profit at plus 19.3%, excluding ForEx, as the recurring net profit in 2020, excluding the exceptional costs related to cost. I’m on Page 21, and I will comment on thanks to the effort on cash and debt management and our collection, we have managed to reduce – to continue to reduce our gearing since last year. Net debt is at €12 billion, minus €1.2 billion versus last year in June, following H1 dividend payments and strong CapEx including Sasol payment in June. Gearing has then dropped to 56% versus 65% last year. As I mentioned before, cash flow has also been very strong at 22.9% of sales, a plus 70 basis point versus last year improvement if we exclude the energy effect and has allowed to well finance our high industrial CapEx at €1.97 billion, including the CapEx linked to Sasol at €480 million and well financed dividend payment, which is at above last year level. Consequently, with this, Standard & Poor has upgraded our credit rating from previously A- to A stable that supports the high level of trust in our cash model and balance sheet structure. Benoit has already commented about the dynamics of our investment and backlog activity. The 12 months portfolio is also very strong at €3 billion, still supported by energy transition project and including high stack of LI and Electronic projects. Industrial decision for the semester have been also very strong at €1.9 billion, including €400 million for the Sasol deal only. Our backlog is strong and very diversified and has increased to €3.1 billion. On Page 24, we can see that the level of start-up and ramp-up contribution to sales has reached €130 million in H1 2021, with a Sasol takeover that will start to precipitate in July 2021. This should reach about €320 million for the full year, including a €70 million contribution from Sasol takeover in H2. I’m on Page 24. As discussed, we have the right – we have right now a very strong investment momentum. The recurring return on capital after tax is now at 9% at end of June, and we confirm our objective to reach double digit by 2023 and 2024. To conclude on the basis of our excellent performance in H1, we confirm our guidance for the year in the context of recovery in the second half. We remain confident in our ability to continue to improve margins and to deliver recurring net profit increase at constant FX. Thank you very much for your attention, and we will now open the Q&A session.

Operator: Thank you very much. [Operator Instructions] And our first question comes from the line of Gunther Zechmann from Bernstein. Gunther, please go ahead. Your line is now unmuted.

Gunther Zechmann: Hi, good morning. I’ve got a couple of questions on margins, please. So the first one, pretty straightforward. On the full year guidance, you used to comment on earnings calls that quantitatively we should look at about 70 basis points of operating margin improvement. Is that still the case given what you’re saying about the H2 comps and the results on profitability that you’ve delivered now in the first half? And then secondly, if we could look at the European margins a little bit closer, please. That’s the region that’s been lagging the other areas geographically with 30 basis points improvement, excluding energy. Could you help us deconvolute the moving factors within that and why that’s been lagging? I know that Schulke divestment has been a slightly more profitable business than the rest, but then you divested also operations in Greece and France. So that should be accretive. The growth is very good, so there should be some operating leverage. Pricing is good. So if you could just give some color around what has been going on there and what we should expect going forward, please?

Benoit Potier: Yes. Thank you, Gunther. Maybe Jerome will take the first question about the guidance, and we’ll give you more insight into the European margin together with Francois. Jerome?

Jerome Pelletan: All right. Good morning, Gunther. So effectively, we communicated last year, a significant margin improvement in 2020 plus 80 basis points. On the margin for the second half of the year, you have to have in mind that last year was a significant improvement in our margin at 100 and percent – 110 basis points, which was the result of the starting – the coming back of the activity and also the fact that we have the full impact of the cost containment that was started to be implemented last year. So for the year, what do we expect? We expect the second half year that will – where the impact of the cost containment will start to decrease. However, we’ll have the full benefit as well of the efficiency that we are continuing to develop, and that would reach more than €400 million for the year. So basically, overall, for financial year 2021, we target a margin improvement, I would say, at least aligned with the recurring part of the improvement we delivered last year at the same period. I would say this way.

Benoit Potier: Thank you. So maybe for Europe, specifically, Francois can take over, and I’ll make a global comment about what we saw in the first half. Francois?

Francois Jackow: Yes. Thank you, Benoit. Good morning, everybody. So in Europe, overall, we had a good performance. In comparison, this is true that the margin improvement is, to some extent, lower than what we have seen in other parts of the world. But there are a few specific factors that can explain that. Overall, there has been a very strong energy impact. Rise of the energy has been very significant. Maybe not everything is captured in what we call the energy impact, but we have seen that clearly, both on natural gas and on electricity in Europe, that was quite fast also and sometimes not being catched by some of the index in our pricing. But overall, the main reason for the lower improvement, again, in comparison to the rest of the region is due to the mix of the activities. To some extent, the Large Industry has seen less improvement than the Industrial Merchant and also the Healthcare, which has been growing very fast and growing again in some of the activities like the homecare, had a little bit dilutive impact for that growth on the overall. The mix for Large Industry is due to – mixed in terms of regions and mixed also in terms of product lines with the HyCO seeing some growth in some area, but very little growth, especially in the southern part of Europe. Overall, we are quite confident about the roadmap for the margin improvement in Europe. There are several things that are going to contribute, especially in Industrial Merchants, which, overall, is very well oriented in terms of growth, but also in terms of margin. And you mentioned the pricing. The pricing in Europe, especially, I think, is something which is positive. You remember that in first quarter, we have seen a 1% pricing increase. And in the second one, we are registering 1.7%. I think more is to come, probably in the same trend. So we are more optimistic than, I would say, at the beginning of the year regarding the pricing in Europe. And this is mostly due to the fact that we have some indexes, which are a little bit lagging behind in the bulk in terms of energy recovery, and the energy increase is going through as we speak into the pricing. And also, we had a very active pricing campaigns in several countries in Europe. You remember that at the end of last year, we launched campaign in the Nordics, in Iberia, for example. But beginning of the year, France, Italy, Benelux, UK, Germany, have seen price increase campaign being launched, and we are seeing the effect and we will see more in the second part of the year. Benoit, you want to comment?

Benoit Potier: Yes. Just to supplement what Francois and Jerome said when we look at the business lines in this time in the first half of this year, overall, IM did very well, and this is across the board for – in the full regions, meaning Europe, Americas, Asia Pacific and Africa and Middle East. Large Industry is more or less the same to the exception of Asia Pacific, where we saw the effect of the pricing structure because growth was more volume growth. So people just took more volume within the framework of their contract. So the margin ratio for additional volume in a contract is under the average of the margin. There’s no impact of the fixed part of the invoicing. So that’s what we see. In Electronics, we still have this impact of the transformation of short-term sales into midterm sales. So I think we made this comment already in the first quarter. So we have the impact in Advanced Materials of a slight transformation, positive transformation of the model from short-term to midterm sales, and we had to accept some price decrease in specific molecules, but this impact is actually temporary. And finally, I think Francois made the comment on Healthcare. Healthcare was okay in three regions. And only in Europe, we had two impacts. One is the price pressure that we see in Europe, but also the divestiture of Schulke, which impacted negatively the margin. So overall, I would say that apart from those specific points in LI and IM and Healthcare, except Europe, we had positive margins. And Electronics is positive in Asia, but we have a slight negative effect due to this transformation of short- to midterm contracts. So that’s a business line comment in supplement. Thank you we can take the next question.

Operator: Thank you very much. Our next question comes from the line of Andrew Stott from UBS. Andrew, please go ahead. Your line is now unmuted.

Andrew Stott: Good morning, everybody. I have two questions, please. Thank you for Slide 7. It’s a very interesting math of the recovery. I was slightly surprised, though, to see that Asia-Pac was the third worst of the four regions in terms of that two-year stack. Are you surprised? Or is there a good explanation? I’m just wondering if it’s around that equipment sales phasing on that base of 2019. So that’s the first question, your performance in Asia. Second question was back to margin. Can I just clarify that I heard correctly that you’re saying you’ll do at least the same as last year on recurring margin? And in other words, is that the definition on ex-energy so that 80 basis points, which was last year ex-energy. I’m sorry, I’m going to steal another 2.5 I think. Just a very quick one on the investment ops. It seems to have gone down from €3.2 billion to €3 billion. At least that’s how I read it. I wanted to check that, that’s the case? Or has Sasol dropped out and gone into the backlog? Thank you.

Benoit Potier: Okay. As Mike Graff is online, I would like to ask Mike to comment on the Asia Pacific. Actually, Asia Pacific is doing very well. I mean, overall and during crisis, so maybe the interpretation of this lagging growth compared to the others need some clarification. So Mike?

Mike Graff: Thanks Benoit. Good morning, everybody. Andrew, I think in terms of Asia, we see very strong fundamentals. And I think I would start by saying that part of the differentiation in Asia that Benoit and Jerome mentioned earlier, is the fact that in Asia, China, obviously, was mostly impacted in Q1 of last year and recovery there started to begin clearly in Q2. Whereas the rest of Asia really started to feel the more significant impacts later in Q1 and continued to feel those impacts into Q2 and, in some cases, into Q3. But if we look at the numbers across the business, all the business lines in all the geographies are clearly posting growth in the first half. I think that if you look at Large Industries, sales are up double digit. We see a lot of strength continuing in China in terms of demand for steel, demand for chemicals. And also now we see the resurgence of growth in steel for Japan. We see very strong hydrogen volumes evolving in Singapore as well as for HyCO and South Korea. So I think the demand there is very strong and is really recovering and certainly, volumes are above where they were in 2019 very significantly. A lot of that initially driven by China, but then South Korea and then picking up elsewhere in Asia. In terms of the Merchant business, we’ve continued to see very strong growth, clearly driven by China. The numbers are up 14% in the second quarter. Volumes in China, if we compare it to the first half of 2019, are up very significantly. We see clear growth in Metal Fab. We see it in electric components. In China, I think the recovery there began with a lot of investment in construction and infrastructure. And I think as we get towards the end of Q2 of this year, we see that very significant double-digit growth benefit begin to wane a little bit because of the year-over-year comparator and the fact that much of the infrastructure spend has started to evolve to a more normal basis. And at the same time, we see anything tied to technology, manufacturing, looking at automobiles, looking at secondary electronics and primary electronics. Everything is starting to grow very significantly if we look at China in that regard. So across all segments, bulk on sites and packaged gases, very strong growth. If we look outside of China to the rest of Asia, the volumes are all improving. And I think all the volumes now are basically back up in general above 2019 levels. And clearly, we see that exceeded when we look at Liquide in the developing economies, especially is very strong. And then from an electronic standpoint, as was already mentioned. I think it’s very strong. It was very strong last year, continues to be very strong this year, close to double-digit growth in the second quarter. I think that clearly, we see some differentiation between the various sectors there. The Carrier Gases are strong. Equipment and sales are a bit off. But I think that in general, things will continue to grow and be very strong. So I think actually, Asia is clearly in the recovery mode. China back to a more normal year-over-year kind of comparator as we see the continuing growth and significant growth there and the rest of Asia is caught up.

Benoit Potier: Thank you, Mike. Second question, maybe more clarification on, Jerome.

Jerome Pelletan: All right. So let’s go back to margin. As you can recall, last year, there was about – in 2020, there are about 80 basis points of margin improvement. That was broken down in two ways. First, 20 basis points, which was coming from the cost containment specific impact that we mentioned and more, I would say, recurring part of 60 basis points that we had last year. So what we see this year, as you know, we are still committed to improve and continue to improve our operating margin, which was a very strong in H1. For the full year, you have to have in mind that, as I said before, there will be – start to have a decreasing impact of the cost containment in second part of the year, which is totally aligned. And that’s a good thing with the good recovery of the activity that we start to see in Q2 in H1, and that will start to continue in H2. So this impact of the cost containment will start to slow down. So what can we say? So overall, for financial year 2021, we target a margin improvement, as I said, aligned at least with the recurring part of the improvement we delivered last year. To be a little more precise, last year, the recurring margin improvement, as I said, was around plus 60 basis points. That will be my answer.

Benoit Potier: Well, thank you. On the investment side, you’re right, we had a EUR3.2 billion portfolio in the first quarter. We have a EUR 3 billion. When I look at the breakdown by geography, there’s absolutely no change in Africa, Middle East, in Americas and Europe. The numbers are pretty comparable, which means that the projects we won actually were compensated by other projects that were added to the portfolio. The only difference is Asia Pacific, where one specific project was removed. This is more hydrogen liquefier. So that is related to the hydrogen energy business, which is not as accurate in terms of forecast as anything else we have. So this project may be materialized, but probably later. And so we removed that unique project out of the Asia-Pacific portfolio. If we don’t do that or if we put it again, this is exactly the same. So no change in the portfolio in a nutshell. And by region, we were able to compensate all the signed project by new projects. We can take the next question.

Operator: Thank you very much. Our next question comes from the line of Mubasher Chaudhry from Citi. Please go ahead. Your line is now unmuted.

Mubasher Chaudhry: Hi. Thank you for taking my questions. I’ve got two, please. You’ve talked about the recovery in Healthcare and Electronics from an Asia perspective, particularly. Could you widen those comments for – on a group level for the second half of the year? And how should you see that trending given the strong performance in 1H and whether that strength is likely to continue? And the second question is a little bit more longer term. Could you provide your thoughts on potential implications following the announcement of the Fit for 55 initiative and how that impacts your thought process into the energy transition. Thank you.

Benoit Potier: Okay. So the question will be split between Francois on Healthcare and Mike on Electronics for the second part of the year. I think they are well positioned to answer. Francois, maybe you start with Healthcare and Mike then.

Francois Jackow: Yes. Thank you very much. As we mentioned before, health care overall had a very strong quarter and a very strong first half of the year and more than 9%. And we are well above 2019 overall. So that’s a mix of different effects by geography, but there are some common trends. I would say, overall, we see that the medical oxygen demand is still very high. And this is true in many, many countries. If you just take the example of Europe and the medical oxygen volumes in the first half of the year, they were 40% above what we have seen in 2019. So you see even if there are some progress in the reduction of the pandemic, overall, the consumption of oxygen is still very high. As mentioned by Benoit before, in many developing countries, we see still a very strong demand. And unfortunately, with the new wave coming, we probably should expect some – quite high level of consumption for medical oxygen. This being said, we do expect also things to come back to normal in terms of normal use of oxygen, especially for surgeries. And that’s something that we have seen in the past few months where many of the elective surgeries, which were postponed, actually are taking place. So we do expect something more normal to see across the world. What we have seen also is the Healthcare activity, which had a very strong recovery. You remember that last year, during the – especially the first wave of the COVID, we had many patients, which did not go to the doctor to get their prescription. So we saw a decrease in terms of new patients coming for the homecare treatments. And in many geographies, we have seen this underlying demand coming back to normal. On top of that, we see the results of our strategy in terms of development, especially in diabetes in many Europe countries, but also in sleep apnea. And those two therapies are enjoying very strong growth. There’s maybe even a little bit of a catch-up, which is happening. So clearly, double-digit growth for those segments in Europe, especially. So that’s, again, a strong momentum both for the medical gases and the homecare activities. Again, we’ll come back to the normal trend, but probably at a higher level for the rest of the year. If just a comment in terms of geographies, I mentioned Europe. Overall, we see this momentum being stronger in Europe for the two segments in the med gas and the homecare. In the Americas, there is a special mention to North America, where we see, thanks to our position in Airgas, a very strong med gas growth for the hospital and for the clinics. And in Latin America, we see a combination of a very strong medical gas demand and strong homecare demand, which is something that is that we have seen for many years, but which is now picking up very strongly in several Latin American countries. So overall, for the second part of the year, good growth. Keep in mind that the comparison with last year is very high. So we need to have that in mind. But overall, the underlying growth is very strong.

Benoit Potier: Thank you, Francois. Mike, if you could make a comment also on what you see in the U.S. right now in terms of investment from Asian companies and also what we see in Asia? And then how it will look like in the second half. Mike?

Mike Graff: Sure. Thanks, Benoit. And Mubasher, thanks for the question. I think before I get to the investment piece, I think the first thing I would talk about are the global drivers from a market standpoint. Clearly, we saw across the board, every market for Electronics, whether that's end use PCs and smartphones, servers, cloud data, IoT, automotive, 5G, everything last year continued to grow despite the pandemic. And we saw similar growth trends in the first half of this year. And as we look to the second half of the year and more importantly, looking out to the next several years, we see those trends and those drivers actually continuing to accelerate and beginning to look later in the year and going into next year, double-digit growth drivers everywhere. And I think as a result, to Benoit's point, we see these as very significant drivers for new investment in the industry. It was already very strong. It was already growing significantly. And I think the combination of the continuing and growing demand for devices, especially those that use the more advanced logic and memory chips will continue to be very pronounced going forward. And as a result, we have seen a very active development of new projects and a resurgence of new investment in the U.S., almost every one of the major producers of integrated circuits, be that for logic, be that from memory or for analog are all looking to grow significantly. And there's a lot of support even from the government thinking about security of supply chains and a variety of other things to drive that. We see the same efforts in Asia as well. A very significant level of new business development on top of what was already very strong, looking at Carrier Gases, looking at Advanced Materials. And as you also saw, the European Union announced a very strong ambition to produce roughly 20% of global demand by value in the integrated circuit and semiconductor space by 2030. So there are the market drivers, I think there's the geographical drivers and the investment drivers that are all very strong. And as a result, if you look at the forecast for logic, for memory and for analog, as we get closer to the end of the year and into next year, you see everything in strong double digits in terms of the actual markets themselves. And obviously, production will follow that. And so for our own investment, obviously, we continue to go ahead and drive that from a business development standpoint. And in addition, one of the things, obviously, that occurred as a result of the pandemic was that our customers as well as our own new investments in terms of construction in the field were delayed because of the impact of COVID, because of the impact of the pandemic. And there were several projects that were slated to start up in the first half of this year that got somewhat delayed to the second half. And so we'll see the benefit of that. The rest of the industry will see the benefit of that, and that will help go ahead and drive the industry forward in terms of the level of growth that I mentioned. So Carrier Gases, Advanced Materials will continue to strengthen as we get into the fourth quarter and beyond.

Benoit Potier: Thank you, Mike. Maybe an additional comment from Jerome?

Jerome Pelletan: Thank you, Ben, and thank you, Mike. Just to come back on figures on Electronics as for the group also, as you noticed, Q2 was very strong and 8% for total Electronic versus last year, and we had a significant impact on Carrier Gas from start-up and ramp-up. But basically, both recurring sales and E&I were strong in Q2. What would you expect for the next quarter is still growth? And that will be very much sustained by the Carrier Gas that will be also very close to double digit. So basically, we will -- we are confirming a growth in Electronics for the Q# period.

Benoit Potier: Thank you. The third question was related to the Fit for 55. I have to apologize because the report is about 1,200 pages. So I'm not as accurate as I could be. I'm not sure I will read the pages, but let's look at what is inside and what may impact Air Liquide? The red renewable energy directive is setting a new target. And that will be -- that will translate hopefully into more renewable energy being invested and available to the market. That's good news because we need that for our scope to target. We need to buy cleaner energy. And second, because it will help developing the hydrogen market based on electrolyzers. So that's one point. The energy efficiency directive and the land use for us to enhance agriculture will have a great impact on us. On the contrary, when we look at the regulation for new cars, coming down by 55% for new cars from 2030 and 100%, meaning no industrial combustion engine cars by 2035, will have a huge impact on electric cars, be battery-based or hydrogen-based. Now I just want to highlight one thing, the Hydrogen Council actually issued very recently a new study on what is the optimum in terms of infrastructure if we compare batteries and fuel cells for cars? And the conclusion is pretty simple. The optimal is to do both. And there are a lot of facts and numbers behind. So if you have time, I invite you to just read that because the consequence of that Fit for 55 new regulation might be that we see a development not just of battery-based vehicles, but also hydrogen for cars. There's also in the alternative fuels infrastructure regulation. A very important point for us is the installation of new charging points, be it electricity or hydrogen. They are talking about 60 kilometers for every electric charging stations and every 150 kilometers for hydrogen. If it is implemented, it will mean a lot of investment in infrastructure, but also the development of a huge market. Two other points. One is the ETS allowances. It's -- the system is being transformed. There would be more market actually covered by that. The only impact we have to mention for Air Liquide is the fact that we have now more or less in all our contracts, a pass-through close in our contracts so that the CO2 cost might be passed through to customers. Now it will fluctuate the way energy today is fluctuating. So that's an impact. And finally, I want to mention the CBAM, which is a mechanism at the border of Europe that is a new system. We don't exactly know how it will work. It is good if it comes in supplement to the existing free allowance system that more or less works today. So that's the position that we will take as far as the CBAM. As we could spend hours on that, I think I will stop there and take the next question. Next question?

Operator: Our next question comes from the line of Tony Jones from Redburn. Tony, please go ahead. Your line is now unmuted.

Tony Jones: Yes, good morning. Thanks everybody. I have got two. Firstly, on merchant pricing. Should we now be thinking that the new range for the year is going to be more like 2% to 3% rather than the 1% to 2% you used to talk about? And maybe also related to that, could you split out the volume and inflation component for the 12% purchase inflation in the first half? So that's my first sort of question. And then the second one was a bit more high level on the energy transition projects that you've got on Slide 9. Can you help us understand a little bit more about how some of the contract structures might work? So hydrogen particularly. Are most of these projects going to be long-term take-or-pay contracts? Or will they more be supplied a little bit similarly to the Industrial Merchant level?

Benoit Potier: Yes. Thank you. As far as the IM pricing, it's actually related to markets. We have three different continents where -- actually more than three, but three main. U.S. has a market behavior that is pretty agile. I mean, when market changes, it's rather easy to explain and pass through costs. So typically, the U.S. market shows higher price increase than others, and I think it will continue. Airgas now is the main player for us in North America. So we've launched in the course of the first half a price increase that will have to be implemented is being implemented as we speak. And so on that issue, I mean, I think we will be more, as you say, in the 2% to 3% range. That's for the Americas. For Europe, it is always a little bit more complex. I think it will be higher than we saw in the past. I think Francois explained that country-by-country we've launched since September last year up to July this year, a series of price increase campaigns that should result overall in a higher price increase. And Asia-Pacific is always more tricky to predict because it's more linked to a demand offer situation. So -- by the way, that's the region right now where price increase is the lowest because the market situation demand offer is what it is. So overall, I say yes, we should now see a slightly higher price increase. It's never a guarantee. It takes time. It's not applicable in all contracts, but it's -- with the inflation we have, we should be able to pass on through cost to customers, better than in the last 6 or 12 months. That's a global answer. The volume, maybe I could pass on this question to Jerome? Jerome, with the volume?

Jerome Pelletan: The volume part below of the electric offer Industrial Merchant it was very strong overall, in the first half, except what we said on the construction – non-residential construction in the U.S., which is the overall market that is still lagging behind. But basically, it's mainly impact of hardgoods. And you know that this is basically better for our mixed product because the hardgoods margin is lower than the rest of the gas and so on. So the margin is benefiting from that, but we expect still have a significant volume in the second part of the year in Merchant, in general, with still a question mark again related to the construction, non-residential, especially in North America, but the rest should come as well.

Benoit Potier: For the contracts, for Slide -- Page 11, I think it's differentiated. If you think about the supply of hydrogen to large Industries, Steel, Chemicals, Refining, clearly, the contracts related to energy transition will be typical Large Industry contracts, same business model. So those industries, the CO2 deals will probably be the same because we will have to invest at least in the capture part of the CO2 supply chain, probably also in the supply chain, be it pipeline or liquid. And then there is a downstream part of the chain where you have to transport and sequestrate, which is not part of our business model. So CO2 might be also long-term contracts. On the hydrogen energy part, which is essentially related to mobility, I think it will be more Merchant type of business, and we will have to link those contracts with sources of high pressure or liquid hydrogen, the way we link it in IM today to large industries. So the name of the game will be build ecosystems where we have a critical mass so that we can justify significant investment in production and packaging, meaning either liquid or high pressure. And then it will enter into a typical Merchant market type of business model. So the answer to your question is both, both Large Industries and IM, but depending on the segment. I hope I answered your question.

Tony Jones: Yes, that’s pretty helpful. I appreciate it.

Operator: Thank you. Our next question comes from the line of Peter Clark from Societe Generale. Peter, please go ahead, your line is now unmuted.

Peter Clark: Yes, good afternoon, everyone. I think it's a question for Mike, although Jerome sort of answered part of it. I think, Mike, you predicted that the underlying growth against the 2019 basis in Airgas and the Americas IM would be up about 3% or 4%. It sort of was in the second quarter. I thought it would be better actually because of the winter freeze effect. Are we saying now because construction is very slow in recovery, it's starting to momentum now that we then to see a kicker perhaps in the second half, maybe even 3Q, where you grow above that 3% to 4% improvement on the trend line against 2019? And then the second question, perhaps Francois, I don't know. But the Healthcare price deflation, you say in the statement was only very modest. And then I think Benoit mentioned actually Europe still has a drag factor. I’m just wondering when we come out of this COVID-19 pandemic stuff, how the pricing moves from there, will it – has this deflated a little bit? Is it a bit better when you look forward where you see healthcare price moving forward or is it definitely the COVID pandemic has helped it temporarily? Thank you.

Benoit Potier: Okay. Thank you, Peter. You have allocated the questions already. So it’s easy to do it. So Mike you start.

Mike Graff: Thanks, Benoit. Good morning, Peter. Maybe just to build, what’s your own set? Because I think you’ve said it well. Clearly from a merchant standpoint in the U.S., the sales continued to show very significant improvement given the comparator with last year. But clearly, after the effect of the winter storm that you mentioned that we saw in February, the gas sales continue to recover, and now they’ve returned to levels that are higher, that we saw in the first half of 2019. So, gas volumes are filling back up, liquid well beyond where it was in 2019. Packaged gas is basically back to recovered, very close. And probably where there’s the lag still is in hardgoods. I think that the markets that are referenced there, clearly construction is one of those. And actually heavy equipment or heavy machinery manufacturing is still yet to fully recover. In that market, think about major heavy equipment for oil and gas for construction and for mining. I think on the construction piece, there’s a number of factors there. Clearly, with COVID last year and a variety of other things. Some projects were somewhat delayed and continue to be reengaged as we speak. There’s been a few announcements recently on some projects that were basically stopped or deferred for a period until things sorted themselves out. And we see those now starting back up in terms of construction and finalization. At the same time, a number, major projects came to a close, and I don’t think we’ve seen the next wave of investment yet evolved from a chemical standpoint or even an LNG standpoint in the U.S. markets, which will all be big drivers for Airgas as well as for the rest of our business. So I think from a second half standpoint, we will continue to see sequential recovery in both the construction markets, as well as in heavy machinery. And again, it’s really the hardgoods piece that is lagging a bit more because those areas are far more hardwood intensive. So, we’ll see clear benefit from a gas standpoint as they recover. But the hardgoods will have another level of recovery to come as well as, as that evolves. So, I think that kind of covers it. I think structurally, with long-term views on all this, you’ve got reinvestment in the industrial infrastructure in the U.S., I think you see localization or reshoring on certain activities. There’s also a drive to further modernization, think about automation of the U.S. manufacturing base, and even some of the things in the energy transition as these new markets open up and the new builds begin to evolve will help drive that as well.

Benoit Potier: Thank you, Mike. Healthcare, Francois, you take it.

Francois Jackow: Yes. Good morning, Peter. When we talk about pricing in healthcare, basically we have to really look at, I would say metrics with two dimensions. One, which is a geography, Europe and basically the rest of the world. And on the other side of the metrics, I would say the Med gas and the Home Healthcare. And the situation is quite different in those different segments, I would say. If we look at the homecare overall, we have seen price, negative price impact in Europe, which was compared to what we have seen in the past, recently quite moderate. This is clear. However, for the homecare, especially in Latin America, we see a much more positive pricing impact. For the Med gas overall, we see a pricing which for the group is positive, taking into account that Europe remains slightly negative less than what we have seen in the past. And it’s quite positive or very positive in the Americas, both in the U.S. and in Latin America. Now, if we look forward and we try to see what could be the impact of the current situation and the COVID, we do expect overall a kind of a pause in the pricing pressure that we have seen in some geographies, I think it’s clear, it’s also the recognition of the contribution of the sector through the crisis, and the importance to maintain, I would say, a healthy and robust sector – Healthcare sector to cope with such a situation. Specifically in Europe, we probably will see some pressure, but again probably pause from the governments and also the impact of the value offered that we are developing, which tend to really promote value based healthcare and provide some savings to the social security, which enabled to provide the same quality or even better quality of service at a lower cost. So all in all, if you take a historical perspective, we doing – we do expect some of the same trend that we have seen, but probably on the decreased side, less than what we have seen in the past.

Unidentified Analyst: Thank you. Understood.

Benoit Potier: Thank you. Thank you, Peter. We’ll take the last question.

Operator: Okay. Thank you very much. Our last question comes from Chetan Udeshi JPMorgan. Please go ahead. Your line is now unmuted.

Chetan Udeshi: Yes, hi, thanks. Two questions. First is on electronics. So, I think there was a reference earlier on the call that, there is a price decline for certain products this year with the aim of having a better sort of prospects in the future. So, can you maybe talk about what changes in the future with the price declines that you have accepted? Is it the – is it that the market share of Air Liquide rises in some of these molecules? Is it the growth is faster in these molecules, which you aim to benefit in the future? I mean, just wanting to understand what is the upside in the future by accepting prices which are lower today? And the second question is more just around the topic of cost containment actions continuing in first half. And I was just looking at some of the numbers in the P&L, but it seems to be like the other purchases, the other operating expenses, all these numbers are actually rising faster than the revenue growth on a constant currency basis, or at least in line with the revenue growth. And so I’m just wondering, does it not actually signify that some of these temporary cost savings are actually coming back rather than being held at second half levels? Or is it just the lag between like, I think one of you mentioned lag between the raw material prices versus indexation on merchant prices. I mean, just to specifically highlight few points here. So sales have resident about 6.5% on constant currency, but the other expenses are up 9.7% and purchases are up 17.5%. I think half of that may be energy, but just wanting to understand the dynamics between different lines moving into P&L. Thank you.

Benoit Potier: Okay. Thank. The second question, clearly, Jerome will address it because I think we have more details. On the first one, Mike, just on the alarm [ph] pricing and the consequence – the positive consequences of this transformation, if you could just clarify that?

Mike Graff: Sure. Thanks, Benoit, and good morning, Chetan. With the Advanced Materials business, we have an entire portfolio of molecules. It continues to evolve, continues to grow, and you’re continually developing and introducing new molecules that grow and evolve with their use over time. Other molecules will mature over time. And, and so you’ve always got this kind of mix as things evolve. And I think the continued growth in Advanced Materials for the advanced nodes, a lot of the drive last year because of supply chain issues along with growth and likely the deferral of some projects that normally would have come on stream early in benefited in the overall mix for price and for volumes were somewhat delayed because of COVID. So, you’ve always got that balance that’s there. And specifically to the point that Benoit and Jerome articulated earlier, we have some molecules that over time will mature and they reach a very high volume of demand, and we want to preserve those volumes long-term. And as we renew those contracts in order to securitize the long-term volumes and the long-term perspective for those molecules we may agree to a slightly lower price long-term given the very high volumes that we are delivering in order to go ahead and prolong the life of those molecules and continue to benefit from the previously made investments and all the technology that we have put into that. So, I think that that’s just the evolution of what we see here and absent the start up of new molecules. It’s probably a little more obvious in the overall portfolio and the normal.

Benoit Potier: Thank you, Mike. On the second question, the cost containment, Jerome?

Jerome Pelletan: Yes, Benoit, thank you very much. Thank you, Chetan. So basically just to come back on the cost containment. What we say is quite simple. We said that the cost containment impact will start to diminish in terms of impact for the second half of the year. But I was expecting, we are seeing now some recovery in our activity and some costs like furlough that we had last are starting to very much diminished as well that travel expense, even though they are still content, but we have a recovery in the activity. So we have discussed with start to decrease. Now, it doesn’t mean that we are not pursuing our structural plan. You see that we have been able to deliver plus €206 million in efficiency, and we are totally today very much confirming our objective above €400 million for the year. So this efficiency will be structural, and will be a significant part of our operating margin improvement that will continue to deliver. And that’s clear about that. Now to come back more precisely on the cost in the P&L. Basically we see purchase increase this half year, but it’s totally aligned with the increase of the Energy. And we have a 4% of impact of Energy. And its’ a pass through you buy it, and you would say, pass it through the customer. So there is no impact on the underlying margin improvement. As a regard to personnel expense, they are quite well-contained and we are at the only plus 2%. And when you look at personnel cost to sales ratio, we are basically at 19.6% in H1 2021, 20.4 excluding energy versus 21.2 last year. So clearly we see an influence cost as well and the structural cost organization. Finally other expense also increases plus 6% in published, plus 9.7% excluding ForEx, clearly this is due to three things. First, Maintenance has a little bit increased this year, especially in the Americas is a consequence of the freeze that we are at the beginning of the year, I don’t know if you recall, but that was significant in the U.S. and we had also some other costs like your insurance, which is a little bit picking up as well. But basically, it’s still under the – because when we look at the revenue, which is plus 10.4% excluding ForEx, we are quite below in terms of cost. So that would be my answer.

Chetan Udeshi: Very clear. Thank you.

Benoit Potier: But overall, if I may, we will keep the sort of continuous improvement programs that have been in place for years, number one. Number two, our efficiencies, and the way we produce them by investment, by working differently, operating differently will stay. And the more structural or transformational programs that were put in place in the past few years will also stay. The only thing – and they will produce, all of them will produce. The only thing that will change and this is just understandable is the cost containment program that was put in place last year for the exceptional situation where we needed froze half of what we were doing and no traveling, no marketing, nothing, and a workforce reduction. We need to readjust the base to the recovery. And that’s the only thing we will do in the second half. So the impact of the cost containment will be of course, lower than what it was since last year first half. But we are really focusing on costs. You cannot increase your margins issue, letting your costs go up, and we know that very well.

Benoit Potier: So thank you very much for all your questions. Again, good set of numbers. We are confident in our ability to increase number one, our operating margin, and also in our ability to deliver a recurring net profit growth. And as Aude said earlier, we will have Q3 conference later in the year and the full results in February. Thank you. Have a good day. And for those who can go on holidays. Good holidays. Thank you. Bye-Bye.

Operator: Thank you very much for joining today’s call. You may now disconnect your handsets. Hosts please stay on the line. Thank you.