L'Air Liquide S.A. (AI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Air Liquide Q1 2021 Revenue Conference Call. [Operator Instructions] I will now hand over to the Air Liquide team, please begin your meeting, and I will be standing by.

Good morning, everyone. This is Aude Rodriguez, Head of Investor Relations. Thank you very much for joining our conference call today. Francois Jackow, Jérôme Pelletan and Mike Graff will present the third quarter revenue and answer your questions. In the agenda, after the AGM next week, our next announcement is on July 28 for our half year 2022 results. Let me now hand you over to Francois.

Thank you very much, Aude. Good morning, everyone, and welcome back. I believe many of you have attended our Capital Markets Day on March 27. It's now time to share with you our strong performance this quarter in a very challenging environment. I will let Jérôme explain what is driving growth this quarter and how we managed to deliver record-high pricing in Industrial Merchant. But a strong message that I would like to leave with you is that this quarter, despite the current environment, we have been able to confirm the positive momentum for projects in energy transition and in electronics, which is well in line with our midterm ambition and good for the future. Now let's start. I will come back with Mike for the Q&A session. Jérôme?

Thank you, Francois, and good morning, everyone. We are glad to be with you today to comment about our very solid first quarter 2022 sales and performance overall, with first, the strong sales growth, mainly driven by IM and Electronics; second, an effective response to spike in energy costs with proactive pricing management underpinned by our business model; third, a solid cash flow forced a confirmed momentum in every transition electronics project; and finally, a confirm 2021 -- 2022, sorry, guidance. As I just mentioned, I am now on Page 3. It has been a particularly challenging geopolitical and economical environment this quarter. And it is important to highlight it. A record spike in energy price and inflation overall on top of impacted supply chains in every geography with continued lockdowns in China to fight COVID-19 outbreak and a war in Ukraine and consequences. In such a difficult environment, thanks to proactive actions, especially on pricing in Merchant and to a strong and balanced business model, Air Liquide is demonstrating, again, its ability to mitigate and deliver as follows: A strong comparable sales at plus 8%; a very significant Merchant price increased at plus 11%; a robust cash flow to sales above 23%; and finally, a strong investment backlog of EUR 3.4 billion to underpin future growth. Let's now go into more detail about our sales and performance for the last quarter. We will now review our key figures in Slide 4. As we said, group comparable sales have been strong in Q1. Gas & Services sales for the quarter showed a plus 7.1% increase versus last year following a Q4 2021 at plus 6.7%. Engineering & Construction sales have increased by plus 40% compared to a low base last year, together with strong order intake at EUR 254 million that are mainly supported by group projects in electronics in Asia and some projects related to energy transition. Global market and technology are back to double-digit growth, supported still by strong and continued growth in our biogas business, supporting by the surging natural gas price. So overall, group sales are up plus 7.9% on a comparable basis, while published sales are increasing by plus 29.1%, boosted by a record 16 -- plus 16.4% energy pass-through effect in our LI activity, a positive ForEx impact at plus 4.2% and a significant scope effect at 0.6% for the quarter corresponding to Sasol takeover contribution. It is important to highlight again the strong level of growth delivered in a difficult and challenging environment, as previously mentioned. In regards to the market we serve, I am now on Page 5, we can see that while chemicals is still solid in Large Industries market, still in refining in more mix across our main geographies. Electronic markets and integrated circuits are still very well oriented. Demand in Merchant market was softer in automotive in the last part of the quarter. It's sustained, especially in metal fabrication, food and energy. Finally, Air Healthcare remains solid post COVID, especially in Home Healthcare market. As a consequence, I'm now on Page 6, our main geography of posting a very strong growth for the quarter to reach a plus 8% comparable for Gas & Services sales. As a reminder, this percentage does not take into account the acquisition of the 16 units at Sasol in June 2021, which is not reported in comparable sales, but rather insignificant scope. As we can see, the strong growth is mostly driven by Industrial Merchant and Electronics business line. And it demonstrates, again, the value of our global development strategy, capitalizing on the complementarity among our different business lines. I am now on Slide 7 to comment on our activity by geography. I will start with the Americas. Sales have been very strong in the Americas at plus 9% and this in all business lines. We have sustained activity in Large Industries on top of favorable basis last year due to the U.S. raise in Texas Q1 2021, reflecting strong volumes in air gases in the Gulf Coast, sustained by the very dynamic demand in chemical and steel markets. Hydrogen has already been robust despite some turnarounds. And finally, we also benefited from ramp-up in the U.S. and Latin America. In Merchant, the growth is fueled by solid volume, excluding helium due to shortage, especially at Airgas, where industrial hard goods have started to recover while pricing is accelerating to above plus 9% overall in the Americas. In electronics, we have seen strong sales growth in all subsegments, including equipment and installation. Sales, excluding equipment and installation, are up plus 9.5%. Finally, Healthcare is still up plus 3.5%, despite a very strong base last year due to COVID-19 with high volume and equipment sales. Proximity care is now driving the growth in the U.S. Sales have also been strong in Europe, boosted by Industrial Merchant in the context of both record price in energy and military conflict in Ukraine. In the Large Industries, sales have been soft in refining. In regards to hydrogen, sales have been lower following customer turnarounds performed in Q1 2022. Airgas demand has been stable in chemicals, while volume in steel were softer in March due to customers' raw material supply chain difficulties. In Merchant, sales growth has been exceptionally high, sustained by record pricing of over plus 19%. Customer demand and volume has been strong in all end markets, particularly in food, fabrication and energy, while volume in bulk were gradually softening over the quarter. Finally, Healthcare sales continue to grow despite a very strong base in Q1 2021 due to COVID-19 related sales. While medical oxygen demand and equipment sales reduced due to lower covered impact, Home Healthcare sales have been very strong, thanks to development in diabetes and contribution from a small acquisition in Poland in Q4 2021. On Slide 8, sales in APAC have been robust, sustained by electronics in the region and Merchant in China. In Large Industries, China sales and volume remain impacted by emissions control and saw reduced demand during winter Olympics. Airgases have been progressing well, thanks to Japan for steel. Performance was more contrasted, sorry, for chemicals and refining with low sales in Korea and Singapore compared to high level of activity last year. In Merchant, we have seen a very strong growth in China at plus 9%, sustained by packaged gas sales and small on-site start-up. The rest of Asia is softer, mostly impacted by low activity in Japan with continued portfolio management. Pricing in APAC is at plus 3.1%, with improvements in all countries. Finally, electronic sales are booming. Sales excluding equipment and installation are at plus 15% and benefit from start-up and ramp-up contributions of new units, mainly in China and Singapore. Advanced Materials sales are also very strong with sales from new medical in Singapore and solid momentum in China and Japan. Specialty Materials and services are also growing at double digit while equipment and installation is softer due to high base in China last year. Finally, sales in Africa and the Middle East are stable on a comparable basis with strong growth taking into account Sasol contribution. In Large Industries, sales are soft following lower hydrogen sales to customers on our Yanbu network despite good load from YASREF in Saudi Arabia. Merchant growth is solid, sustained by good volume with a pricing effect that is increasing at plus 4.6%, more than compensating for the two small divestitures in Merchant in the Middle East in Q1. Healthcare is finally impacted by normalizing demand in medical gases versus the spiking of a crisis last year. Impact of Sasol, which is accounted for insignificant scope, has reached EUR 35 million for the quarter and with a contribution, which is fully aligned with expectations. When we look at the activity by business line, I am now on Page 9. We can see that first, Large Industries has been a bit mixed. Growth in the Americas, where we see robust demand, has been offset by lower Europe and Asia impacted by lower offtake in steel and turnarounds in refining. Demand in chemicals has been solid globally. And finally, we see a significant impact contribution from Sasol, delivering again on expectation, again, not taken into account into comparable figures as we classify it at significant scope. Electronic was buoyant with strong growth in all segments and up plus 15% in Carrier Gases, Advanced and Special Materials. In addition, Electronics benefited from a significant contribution from start-up and ramp-up and equipment and installation have been solid despite a strong comparison basis last year. In Merchant, I'm now on Page 10, we have seen high continued momentum with solid gas volume, especially in on-site and cylinders. Overall, our end markets are well oriented, notably metal fabrication with positive hardgoods in the U.S. as well as beverage in -- and energy. We have also seen a record pricing impact at plus 10.7%, successfully addressing the unprecedented spike in energy costs, inflationary trends and benefiting from bulk surcharges and new price campaign in Europe, in the U.S. and in Asia. Health care is pursuing its growth despite a high comparison basis last year, and softening medical gas and equipment sales to COVID-19, however, positively offset by strong proximity care in the U.S. We are also seeing an acceleration in Healthcare, particular and in Europe, sustained by strong diabetes activity and good contribution from a small acquisition. Finally, Specialty Ingredients remain very solid. On Page 11, we have continued to focus on our margin improvement program in a very challenging inflationary environment. First component, IM pricing. It has been very proactive to reach a plus 11% effect versus last year. I will come back in more detail on the next slide. Our efficiencies have delivered EUR 77 million in Q1 in a much more challenging context due to acceleration of inflation, efficiency ramps up progressively during the year as some projects launched at the beginning of the year will deliver in a few months, and we confirm our objective to reach more than EUR 400 million by year-end. In addition, our team were also very focused on avoiding and passing through record inflation in our cost base, which is not visible in the efficiencies. Finally, we have pursued our portfolio management by executed bolt-on acquisition in China. We also announced two small divestitures of less margin accretive activity in Merchant in the Middle East. And just to mention, it -- as it is now a strong pillar of our performance, the deployment of our decarbonization and ESG road maps are progressing well. As you can see on Page 12, our pricing action in Merchant has been, again, very impactful. Our pricing campaigns are now very well organized and have been executed in a very efficient and effective manner, notably in Europe, leveraging on escalation formula and energy surcharge to address inflationary pressures and to pass through this spike in energy costs. As you can see, again, our sales organization are not confirming to be fully efficient to deliver a proactive answer to tackle cost inflation acceleration, requiring as well to constantly adapt to this very volatile environment. Let's now move to project activity in the first quarter. As you see on Slide 13, we have achieved key steps in major projects linked to energy transition. Interestingly, four of them are related to CO2 management and one is hydrogen project. For our 200-megawatt electrolyzer project in Normandy, we have received the official support from the French state, which is a key step before being granted subsidies by the EU. Second, we have been also awarded European subsidies for two major projects linked to carbon capture: 1 joint project with BASF in Belgium and 1 with EQIOM, a cement company in France. We have also announced a collaboration with EMI to explore opportunities in carbon capture and storage in the Mediterranean sea. And lastly, we have announced a joint venture with Sogestran Group to work on CO2 shipping logistics, a necessary component for the carbon capture as value chain. Slide 14. We have a dynamic, at project, [ activity ] in Electronics, which is another strong growth driver. We signed in 3 long-term agreements with major semiconductor manufacturers in the first quarter, 1 project in the U.S. for the supply for high-purity hydrogen, helium and CO2 and 2 other projects in Japan covering 4 states of the hard gas plant for a total amount of more than EUR 300 million of investment. This key achievement for major projects in the energy transition and electronics position Air Liquide very well for future growth. On Page 15, our 12 months portfolio of opportunities remain at a very high level of EUR 3.3 billion despite a strong level of decision for the quarter that mechanically reduced the level amount of opportunities. The majority of our portfolio is supported by energy transition project and a high proportion of projects located in Europe and Asia. Industry and financial decision for the quarter have been very strong at EUR 0.9 billion, boosted by significant electronic decision including, especially in Japan, 1 large -- sorry, 1 Large Industries investment in the Middle East. Finally, our investment backlog is also strong and very diversified. It has increased slightly to EUR 3.4 billion, representing EUR 1.2 billion for additional sales after full ramp-up. A very good result for future growth, aligned with our ambition disclosed in our last Capital Market Day. Please note that the sequential increase of the backlog is attributable to the strong level of decision, and we do expect it to slightly reduce once a few significant investment start-up in the coming quarters. On Page 16, start-up and ramp-up contribution averaged EUR 105 million in Q1, including EUR 35 million of Sasol takeover. For 2022, we confirm that the contribution should be in the range from EUR 410 million to EUR 435 million, including Sasol takeover, again, a contribution significantly higher than 2021. To conclude, on the basis of our very solid performance in Q1 2022, we confirm our guidance for this year, again, with the assumption that [ there ] will be no major economic disruption in 2022. We believe in our ability to continue to improve margin, excluding energy impact and to deliver a recurring increase in net profit at constant FX compared to 2021. Thank you very much for your attention. Before going into Q&A session, I will hand over to Francois who will come back briefly on our Capital Market Day key headlines.

Thank you very much, Jérôme. Indeed, before we start the Q&A session, I would like to come back briefly on our advanced strategic program. This program, overall, has been very well received, both externally based on the investor feedback and also, to some extent, the recent share price trajectory. And internally, as we could measure the engagement of the teams after the public announcement. As you all understood, as far as defining contribution and success, Advanced is looking at the comprehensive performance, including financial and extra financial performance. The extra financial objectives are not only fueling our growth and financial performance, but also, they are giving to the financial performance the meaning. That's why we see such positive momentum. Now let's start the Q&A session with the first question.

The first question comes from the line of Andrew Stott from UBS.

I think that was me. Sorry, it's very echoey, so apologies. It's a pretty simple one. So really just interested in your thoughts on the margin for this year. I know you've got the 4 years map clear to everybody. But if you look at consensus expectations, they are very different. You've got visible output, plus 50 bps. You've got your own website consensus at 110 bps. So there's quite a big range on expectations. I just wondered if you want to sort of maybe set a framework for this year as you see things.

Thank you very much, Andrew. I think Jérôme will answer this. Jérôme, please?

Yes. Thank you, Andrew. Thank you very much for this question. So we communicated our guidance at the beginning of the year. This one is kept and you know what we say, it's pretty clear. We want to continue to improve our operating margin, excluding the energy price that we accounted for in Large Industries indexation. I will not communicate more than that, because it's already quite enough. What we want to say is that in a context when energy is very much increasing and it's impacting a Large Industries. But in Large Industries, we pass through immediately to our customer. In -- we do not communicate on the energy pass-through on Merchant because there is no specific communication on that. But just bear in mind that we will continue to record our three levers: pricing, efficiency and portfolio management. But being able to continue to deliver a profitable increase in operating margin, excluding energy in other industry, when you know there is a significant impact on Merchant as well in terms of energy costs. And we are targeting to pass through all increase in energy to our customers. It's already a very significant, I would say, performance. So clearly, we are still in the framework of what we said in advance, a commitment to improve 160 basis points over the next 4 years. But I will not give another more specific guidance at this stage, bearing in mind that we confirm that we will improve our operating margin, excluding a [ lot in ] energy price that we committed at the beginning of the year.

Okay. Fair enough, Jérôme. Can I follow up with a question for Francois. Large Industries is obviously a bit of a disappointing quarter due to the European and Asian performance. Do we need to reset our expectations a bit for the whole year, in fact? Because it's hard to see how there's an inflection point in those two geographies given the geopolitics at the moment and the macro data. And of course, you've got much tougher comps to come, particularly in Q2. So is it fair to think that we could be looking at a flattish year for Large Industries globally?

Thank you very much, Andrew. I think overall, you're probably correct in terms of trend for the Large Industries, taking into account that there is quite a bit of uncertainty and mixed momentum in the Large Industries. We have seen clearly that Large Industries was soft in Europe and in Asia in the first quarter. Maybe we'll come back to that. But we see also a very strong momentum in the Americas. And maybe, Mike, do you want to say some comments on the Americas and what we see? Because that's an important component also of the Large Industries, and that can impact, overall, the momentum for the year.

Sure. Thanks, Francois. Good morning, everybody. And Andrew, just to continue the comments from Francois. In terms of the U.S., clearly, we see clear strengths in the chemicals market, in the steel market and actually in the underlying refining market as well, except for a few turnarounds in the first quarter, I think volumes were fairly strong there. We also benefit from the continued evolution of a number of start-ups given the level of decisions we've undertaken over the last 3 years. And as we look forward, we expect to see the markets that I just mentioned, chemical, steel and refining to continue their strength as the year moves on. We expect to have a number of new start-ups in the Americas and Large Industries. I think there's a total of 7 startups over the course of the year that will come to fruition kind of ratably throughout the year. So that will help underpin the level of growth that we see. In addition, maybe one last comment on Asia. There's no doubt that the impact in the first quarter is clear. The residual effect of the dual-energy control, the effect of the Olympics in China as well as this was the first year in the last 3 that they were able to fully celebrate the Chinese New Year with the typical migration of people to visit their families and that sort of thing. And we see the impact of COVID lockdown maybe just in the last 2 weeks of the quarter. But clearly, very impactful as we enter the beginning of the second quarter. But I also know that they are very focused on dealing with that, and it puts stringent measures in place to control the spread of COVID. But I have to believe once that wanes and once they're able to restart, as is typical, I would think that they would look to go ahead and restart fully and come back to where they had been and probably make up for some lost time as well. So I wouldn't write off Asia for the year. I think we see that impact in the first quarter and maybe going into the beginning of the second quarter, but I would look for a strong rebound.

The next question comes from the line of Mubasher Chaudhry of Citi.

Just a quick one, first of all, on Electronics. Given the import of Ukraine and electronic-based gases, is the electronics business benefiting from the Russia U.K. tensions as the customers look for alternative supply? Is there any kind of volume gains baked in from that dynamic? And then secondly, Mike just mentioned around kind of the strength in chem-steel refining markets in America. But on a global basis, are you seeing any increased scrutiny or kind of a cautious narrative from customers with regard to their CapEx plans, given the kind of macro environment we're in and the inflationary market that we're in at the moment? So not necessarily for what you've got in the backlog, but just commentary around how they're thinking about incremental investments.

Thank you very much. I will ask Mike to comment on the Electronics, maybe for the refining also in North America, and I will come back, overall, for the overall comments on the refining.

Sure. Mubasher, I think in terms of rare gases and the electronics business itself, it's important to recognize that we have seen disruption in rare gases over the years. So I think back in 2015, there was a significant disruption in supply and pricing around neon. And I think that the industry learned from that. We certainly have really diversified how we source our rare gases around the world. And so we actually produce rare gases on 4 different continents, when you look at how we manage that and what we do. I don't see it necessarily as a volume upside for us. But clearly, we are meeting the needs of our customers. We continue to support them fully in meeting their needs, whether it's for neon or it's for the other rare gases that they have a need for. So that, I think, has continued to evolve, and I think that the industry is going to continue to make sure that they're able to meet the needs of the electronics industry to support it as we think about that. Specifically to refining or inflationary trends and looking at...

Just on the -- not in [ the prices ], but why this CapEx decision, from anything, refining as an example?

Okay. So I think in terms of decisions and what's being undertaken, there are several things that I would point out in the Americas, and then I'll turn it back over to Francois. I mentioned the number of start-ups we currently see. If you went back to the beginning of COVID, there were several projects on the Gulf Coast that were deferred. They were already, basically, committed by our customers. They were already planning to go ahead and build facilities and they just deferred their construction activities until they saw the evolution from COVID and they saw the markets regain their strength, which they see. So there are a number of projects that are now beginning to come out of the ground from a construction standpoint, which will continue to bolster growth in Large Industries as well as in the Merchant business for construction. And we are clearly looking at the energy transition as well as the demand for molecules to support growth, especially in chemicals, but in other sectors as well, seeing continued business development activity. So we have not seen any cessation or any decline in the level of activity despite the current inflationary trends we see. In addition, if you look at the oil and gas industry, actually, I believe, in the Americas, you would see that, that is actually on a significant growth mode at the moment. If you went back to the middle of 2020, we saw the rig count in the lower 48 states drop to about 250. That is currently at 650 expected to grow to 700 by year-end and likely over 750 rigs in operation by the middle of next year. So I think that there's a lot of things that are underway that will go ahead and continue to underpin the growth.

Thank you very much, Mike. Just to come back on the comment on refining overall and what we hear from customers. Clearly, I mean, the refining environment is being challenged and has been soft to some extent, especially in Europe in the past quarter. It relates to the fact that the energy market itself is going through a lot of disruptions. On the supply side, and that's true for European companies, but also there are some kind of domino effects. The sourcing of crude is something that is being reviewed due to the change in the -- some of the crude flows especially coming from Russia. But on the product also, there's quite a bit of movement on the market. For example, in Europe, we have seen a diesel imbalance and then a reconfiguration of some of the production capacity and some of the flow. It's also a question on the jet fuel, where both -- I mean, we see growing demand in many parts of the world, but also changing the requirement and more and more requests for low-carbon jet fuels. So overall, we have a lot of discussion with refiners, and we see that it's quite an active segment in terms of projects to also find new ways to produce new feedstock, new products and to use different feedstocks. So we see projects in biofuels, in SAF, sustainable aviation fuels, but also in renewable. So all in all, there are a lot of things which are happening with large projects in Europe, but as mentioned by also, Mike, large projects related to low carbon energy supply in North America. There's probably more to come. So that's overall for the refining. And for the inflation, of course, I mean, we have discussions with customers regarding inflation, which is impacting many parts of the supply chain. But it's more, I would say, a regional discussion and very specific to the market, even if, "Everybody's overall concerned with both the availability of raw material, to some extent of labor also and the increase in cost." But again, it's specific to the different segments.

We have Laurent Favre on the line.

I think it's me. Sorry, it's very echoey in the line. Running off, my first question is on pricing and on the 10.7% in Merchant. So I was wondering if you could split out the impact from energy surcharges on that 10.7% and whether you've started to see an uptick in helium realized pricing. That's my first question.

Jérôme, do you want to talk about the pricing, please?

So yes, we have a significant pricing. Again, about plus 11% at already significant prices in Q4. So we are clearly demonstrating our ability to pass our cost to our customer. And our objective, again, is to be able to pass 100% of our cost minimum. That's something that we will -- and we will be -- I'm very optimistic on the fact that we will do it. Just on -- come back on the regions, so as you have the split down by region, so I will not come back on that. On helium, when -- on the helium there, it's quite neutral impact of neutral of the of the price of helium in Q1. But it is true that we expect helium price to increase in the coming future due to the current global shortage. When you know the surcharge, so it's a bit difficult to spread especially what is energy in energy. But clearly, what we call surcharge, and it's basically something that we do, especially on bulk, is part of the increase. But we are not very much disclosing about what is specific of energy and on energy. But most of the bulk, clearly, is coming from the energy. And that's something that I want really to highlight again, Laurent, because you understand it very well. Being able to pass through 100% of pricing on IM, out of which most of that is coming from energy and surcharge is a real performance, even though, again, it's mechanically diluting the published operating margin. That's why being able to confirm our guidance to be -- to show operating margin improvement, excluding Large Industries indexation energy price is a performance. So I think now we can be very happy with what the teams have been able to do, and we have a system today, which is fully effective and delivering.

And then as a follow-up, I'll try to -- I'll try my luck asking again, I guess, what Andrew asked on the margin side. The operating cash flow pre-working capital was up 13% in Q1. I was wondering if there was anything we should be aware of in terms of timing of taxes, provisions, bonuses that would, I guess, bring the cash flow out of WAC compared to the EBIT performance in the first quarter.

No, there is nothing specific to mention. Just want you to be aware, Laurent, that the cash flow from what we call from operating activities before change in working capital is at 13% as published, plus 8.7%, excluding ForEx, but there is nothing specific to comment about that. In fact, especially that it's really showing that the effectiveness of the model and the cash flow that it's -- 23.3% of sales is a very significant figure. It's very much -- and it's excluding energy, okay, Laurent, and it's very much aligned what we did last year in Q1. So I would say the cash flow is quite strong and it was a good news overall for the group.

The next question comes from the line of Chetan Udeshi JPMorgan.

A bit more hypothetical question, but maybe not unrealistic in this environment. Can you share your thoughts on how Air Liquide and broader industrial gases companies get impacted if we were to see a ban of gas supply to Europe from Russia? Have you already prepared any contingency planning on what you might do in that scenario? Any thoughts on this topic would be appreciated.

Chetan, thank you for your question. I think, indeed, we are looking at different scenarios, but what you have to keep in mind is that our direct exposure to Russian supply in terms of gas is quite limited. We have different sources on the European market. And actually, we have even reduced our limited exposure to the gas coming from Russia. Of course, there could be some impact, and there would be some impact in that scenario on the market. But for Air Liquide and our own operation, I think we are well protected and well covered. The key question is probably for our customers. And then it's more difficult to say, even if we are engaged in discussion with customers regarding their backup plan. And we know that several companies are actually actively working and sometimes have already put in place ways to compensate for any kind of shortage of gas coming from Russia. So overall, there could be an impact, which could lead to a reduction in volume from our customers, which could impact our activity and which, of course, can increase also the cost of natural gas supply. On those two elements, of course, there could be some impact on the volume. But keep in mind that in Large Industries, we have take-or-pays and commitment for all our contracts. That's one. And also on the energy, in Large Industries, we have the ability to pass through the cost. And if there were some side effect on natural gas price, but electricity price, I think we have demonstrated, again, that we are able to manage the pricing and pass through the cost to our customer. So that's something that we have been looking at, that we continue to look at. But I think, overall, we are quite well protected as a company.

Francois, if I could a follow-up on your response, because my understanding is if you buy gas in, essentially, from the wholesale market, the full source of gas, directly yourself, so really some of the electricity production as well in European Union might be [ candidates ]. So I'm just -- can you clarify where you source gas directly? Or are you guys actually buying from the wholesale market?

We are buying mostly on the wholesale market. When we looked at, at the beginning of the crisis or exposure for Europe, it was indirect exposure, probably less than 20% for natural gas supply. It's even less today. And again, it's not directly. It's through the market and what we can see as an indirect effect of the market. So your understanding is quite correct. It's wholesale purchase.

The next question comes from line of Peter Clark of Societe Generale. Mr. Peter Clark. Please go ahead. We will move to the next question. The next question comes from the line of Alex Jones of Bank of America.

Two, if I may. The first one on healthcare. You're still reporting growth on very tough comps this quarter. I think around Q4 results, you talked about flat moderate growth for the year. Is that still the expectation? Or is the strength in home health care raised your expectations at all? And then the second one, just to follow up on pricing in Merchant. If and when energy prices sort of start normalizing or even falling from here, how should we think about IM pricing? Could that flip negative as the surcharges reverse? Or will you be able to hold pricing such that we shouldn't see material negative numbers there?

Thank you very much, Alexander. On the Healthcare, so let's keep in mind that, overall, the Healthcare growth was quite strong at 2.6% for the group. You have to look at differently from the med gas, of course, and the homecare. Med gas, overall, was flat and you have to put that in perspective with a very high level last year due to the COVID, which in all the region of the world, as far as we speak, is decreasing. We have not seen the latest number in Asia, unfortunately, but very high comparison effect. That's one. We see that continue to normalize basically with the limited organic growth in med gas in the most advanced countries. And still strong growth in the developing economies. You have to keep in mind also that the pricing has been very good in med gas, which is a good news because overall pricing has been solid in North America for many years. But in Europe, especially, that was very difficult to put some price increase in the med gas sector, mostly because you are dealing with hospital and public sectors. We have seen, in major European countries, a new trend where in the new bid actually, there is room for indexation and for price increase. So very positive in terms of the pricing to be able to recover the cost in the med gas. For the Home Healthcare, what we see is basically, I mean, that the organic growth is still there. We are above 4% for the homecare overall, very strong in Europe, and I think that will continue. The pricing is more flat in Home Healthcare as we have seen in the past. All in all, I think the expectation in healthcare is moderate for the year. Again, in comparison with very strong past 2 years due to the COVID. To maybe comment on the pricing on the Merchant. I think if the energy pricing is coming down, we will see some decrease probably in the pricing, mostly in the bulk business because keep in mind that where the energy component is the highest. So we may see, of course, I mean, the surcharges disappearing, but we see also probably the index related to the energy or the energy part of the index going down. But overall, the surcharges, as mentioned by Jérôme, are only a small fraction of the pricing that we are doing. What we are doing is using the surcharges to do the price increase quickly and to make sure that we are not lagging and, I would say, wasting any time. But in all the countries, we have campaigns in place to convert the surcharges into the new indices that will be more robust in the new environment. For the rest of the business, especially in the packaged gas, the energy component is quite small in the pricing part, So we should not expect this to decrease. So all in all, you will see some decrease in the bulk pricing in case of decrease of the energy price, but limited in the packet gas. All right, let's take the next question, please.

The next question is from the line of Jean-Luc Romain.

Okay, there was an echo. My question relates to liquefied natural gas. There is a strong push on natural gas to increase and a strong reorganization as natural gas succeeds. Very strong taking in natural gas as a fuel for oceangoing vessels. In this context, how do you see your sales of equipment for these businesses? And strategies you see this business in Air Liquide portfolio?

Jean-Luc, thank you for your question. As you know, I mean, we don't have, in our portfolio, major technology for the liquefaction of natural gas. Some of our competitors and other engineering companies have that. This is not an area that we have developed. Where we are very strong and we have a unique position is more on the transportation of liquid natural gas and especially to limit the boil-off and to make this transportation more efficient, both in terms of cost, but also in terms of environmental footprint. For this business, we have a unique position with what we call the Turbo-Brayton type of equipment, which allows to limit the boil-off during the transportation. We see an extremely solid business with this, a lot of demand, of course, related to more transportation of the LNG globally. That's the segment that we are focusing on. I hope it answered your question.

The next question comes from Jean-Baptiste Rolland from Crédit Suisse.

I'm hearing an echo as well. I'm just going to try and ask this pretty quickly, a follow-up on the natural gas question that was just asked before. I'm trying to understand, on a net-net basis, how we should see or expect your volumes in, I would say, hard-to-abate industries like chemicals, steel, refining to evolve with the energy transition. I'm interested on this pretty -- very much on the side of the example that you just gave about sustainable aviation fuels. Because obviously, refiners are having a transition to operate. But at the same time, it sounds that you have new opportunities coming up on that side. And I'm wondering what is it going to -- what is this transition going to look like for you given the challenges that your customers are going through, bearing in mind that I'm trying to understand whether how efficient will your take-or-pay contract be? And how you're going to be able to accompany your customers towards this transition? And I'm very interested on the side of aviation fuel.

Thank you very much for your question. I think overall, we see the energy transition as a great opportunity for us. We will be operating in an environment where overall energy is going to be more precious, I would say, either more expensive or more difficult to source. That's one. And then there is another dimension, which is the fact that energy should have less carbon content. If you take those two dimensions, we have a lot of things to bring to our customers to help them actually operate in under those conditions. So you mentioned the sustainable aviation fuel. That's one opportunity, and there's a lot of things to bring in terms of hydrogen, potentially CO2 supply also. But overall, hydrogen being used either as a feedstock, but also as a fuel. And we have several companies, which are actively looking at using hydrogen in -- as a fuel in a chemical complex, for example, being able to use the fuel, which has low carbon and being able to capture the carbon and to sequester the carbon or to use it. A lot of technology also about the carbon capture, which could be opportunities. But we see, actually, in the past few months, even renewed interest in some of the applications like the combustion. Because when you use oxygen in combustion, you can decrease the amount of energy being used because you are more efficient, and you make also the CO2 easier to capture. And we have quite, I would say, a large number, more than ever, number of projects in combustion in the glass, in the cement, in many processes, which are using boiler or furnaces, which come to the combustion as one of the solutions. So all in all, a lot of opportunities. There will be minuses, but there will be much more pluses in what we see.

Can I just follow up with any impact or positive momentum that you're seeing with the U.S. having kick start their hydrogen program earlier this year with the bipartisan law?

We have been very involved in those discussions to comment.

[ Thank you ], Jean-Baptiste for the question. I think that clearly, with the evolution of recent regulation, it's very supportive for the development of hydrogen hubs, both to promote the production and clearly, the use of low carbon or renewable hydrogen in the industrial sector, in the transportation sector and to support the production of hydrogen, along with whether it's liquefaction or transport to the various markets. And we see that as a core enabler to help incentivize some of these projects to evolve and get off the ground. At the same time, there was the bipartisan bill that did not come to fruition. However, there is a lot of effort today on legislation and regulation to promote the specifics to support further hydrogen production and encourage low-carbon and renewable production and use. So there's additional legislation that's currently under consideration yet to be fully developed. But we already see, through the Department of Energy, a very clear focus on incentivizing many aspects of this. I recently had the opportunity to testify before the Senate Committee on energy and natural resources where we spent about 2.5 hours talking about the use of hydrogen, carbon capture and the energy transition. And it's very clear that there's a real drive to look at how we can manage that.

Thank you very much, Mike. Thank you, Jean-Baptiste. I think this -- we will take the last question. Maybe we are arriving at the end of the question list. So I think we'll stop here. Thank you very much for your attention. This ends our Q&A session. We appreciate, of course, your participation today. Maybe just a few words. Let's keep in mind that we posted a very strong sales growth this quarter in what we all recognize as being a challenging environment, but demonstrating, again, our ability to effectively manage pricing, given the spike, especially of energy costs and inflation. In addition, the positive momentum for projects in energy transition and also in electronics is confirmed despite the context, and this is clearly reassuring for the future. So finally, I would like to share with you the fact that we strongly and I strongly believe that the comprehensive mix of businesses and geographies of Air Liquide will be [ entrenched ] one more time in the short term to go through the current environment. On these words, thank you very much for attending the call, and I wish you a very good day. Thanks a lot.

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