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

Good morning, ladies and gentlemen, and welcome to L'Air Liquide 2022 Interim Results Conference Call. [Operator Instructions] I will now hand over to L'Air Liquide team to 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 and Jérôme Pelletan will present the first half 2022 performance. For the Q&A session, they are joined today by Mike Graff and for the first time, Pascal Vinet, Senior VP in charge of Europe Industries and Africa Middle East. In the agenda, our next announcement is on October 25th for our third quarter revenue. Let me now hand you over to Francois.

Thank you, Aude, and good morning, everyone. It is my pleasure to be with you today to share our strong performance in the first half of 2022. Our business model, not only again demonstrated its resilience to a challenging environment, but delivered growth across a number of metrics, which I will address in just a moment. Before we start, I would like to remind 2 main events of the past 6 months. First, the successful launch of our midterm strategic plan ADVANCE in March, sudden the transition in terms of new governance for the group. Let's start with Slide 3 to show how we delivered a very strong performance in the first half across all criteria. A strong comparable sales growth of 8%, plus 50 basis points of margin improvement, excluding the energy pass-through impact and despite the inflationary context. More than 20% of recurring net profit at constant exchange rate, a strong leverage, a high cash flow above 23% of sales, excluding energy, and the project activity remains strong as reflected by the EUR 3 billion of backlog of signed projects, which positions us very well for future growth. In terms of performance, we ticked all the boxes in the first half. And this is not to mention the return on capital employed at 9.7% at the end of June, very close to the 10% of the ADVANCE objective for 2023. This was thanks to the outstanding commitment of the teams worldwide. Their focus on value creation and thanks also to a business model balance for both resilience and growth. This was, of course, needless to say, despite a very challenging environment. Indeed, we faced many headwinds over the last few months. First, the unprecedented spike in energy prices. It means for us more than EUR 1.8 billion of additional energy cost that we managed to pass through our large industry customers. It is already above the 2021 full year figure. So this is quite substantial. We also faced accelerating inflation. It amounted to more than EUR 750 million additional cost. In the context of high inflation, we have proven our strong reactivity by increasing our prices in Industrial Merchant, reaching plus 14% in Q2 globally, a record high level. We managed to overcome many challenges, to name a few, the COViD-19 lockdowns in China in Q2, the supply chain constraints with limited direct impact on L'Air Liquide, but really creating disruption for some of our customers. Also, workforce shortage in some regions and of course, the war in Ukraine with many indirect implications. Our true performance in such a challenging environment shows one more time, the strong resilience of our business. The performance of this first semester is well in line with the ambition we set out in our ADVANCE plan. I am now on Page 5. Indeed, we delivered on financial performance in H1, as we just have seen, but also on extra financial performance. I will come back to the first one, decarbonizing the planet in more details as we have made very significant progress, but let's talk about the second one, developing new markets through innovation. Electronics is a strong growth driver again in H1, and the portfolio of projects remains very effective. In Healthcare, we are launching value-based offers in selective countries and it is a way to transform the homecare market. As acting for all is concerned and still in Healthcare, the teams remained committed to fight against the COVID-19 in the regions where the virus is still active. Also, our contribution to the global fight against climate change, has been recognized with the SBTi validation of our CO2 trajectory, the first and only validation received in the industry so far. By the way, we just learned yesterday that the Climate Action 100+ initiative has also recognized the significant steps we have taken in the past months towards climate. I would encourage you, if you want to go and check their website. Let me zoom in on the first objective around decarbonizing the planet and supporting the energy transition. I am now on Slide 6, which is crowded, but represents the numerous successes we had. The first 6 months of the year have been very active with tangible projects and many achievements in carbon capture, several projects received European fundings, making them ready to be launched. The development of electrolysis with 2 projects of 200 megawatts each to produce green hydrogen and the announcement of the creation of the manufacturing joint venture with Siemens Energy. H2 mobility projects are expanding not only in Europe but also in Asia and Americas. They deal with the development of infrastructure for airports and for trucks or production of liquid hydrogen. We also signed 2 renewable energy sourcing contracts during the first half in the Netherlands and in Italy. In a time where not only environmental impact, but also security of supply are becoming key we are clearly leading the industry, taking significant position in various industrial markets. Before I conclude, I would like to talk about resilience, that is so important in the current environment. As you know, resilience has been a trademark of Air Liquide, thanks to a strong business model illustrated by long-term contracts, take-or-pay closes, fixed revenue from rentals and also a high diversity of business reach in terms of geographies, activities, end markets, but also customers. ADVANCE is reinforcing this resilience by, first, positioning Air Liquide on growth markets, energy transition, electronics, Healthcare, relying on very strong fundamental drivers, but also ADVANCE is reinforcing this resilience by focusing the entire organization on performance, as illustrated by our results on pricing, cost containment and portfolio management with notables. So to conclude, the key takeaways of this first half of 2022 are: first, we reinforced resilience, thanks to focus on performance and a strong positioning on growth markets of the future. And then we delivered growth and prepared future growth with concrete progress in energy transition and electronics. On this basis, we confirm the 2022 guidance. And now Jérôme, please could you explain in more details the H1 performance. Jérôme?

Thank you, Francois, and good morning, everyone. I suggest that now we review our numbers more precisely. So coming back to the first half year, and I am now on Page 10. Group sales have been very strong overall on a comparable basis, excluding energy pricing, forex and significant scope effect. Indeed, Gas & Services sales for H1 are showing a strong plus 7.2% increase versus last year, following a Q1 at plus 7.1%. The Engineering & Construction sales have increased by plus 29% in H1 compared to last year. Order intake has ramped up to reach EUR 526 million in the first half year, a high level close to what we had end of H1 last year. Global Markets & Technologies have seen a dynamic activity with plus 14% comparable growth, boosted again by our biogas activity. So overall, group sales are up plus 7.7% on a comparable basis for the first half, while published sales are very significantly up at plus 31%, supported by a strong impact of the spike in energy price during the semester, which translate into a 16.8% energy pass-through effect in our activity for the first half. Also impacted by a positive forex effect at plus 5.8%, and with a significant scope effect at plus 0.7% due to the takeover of the Sasol ASU in July 2021. Specific to Q2, we saw very strong comparable growth at plus 7.5% after a very good Q1 at plus 7.9%. So when we look at Gas & Services growth only, and I'm now on Page 11, all our geographies are posting a high growth versus last year to reach 8% comparable year-on-year for group sales. From a business line standpoint, sales growth remained high in Merchant and Electronics, while Healthcare reflected a strong comparable basis last year due to COVID and large industry are more contrasted. To reiterate again, this comparable growth of 8% doesn't take into account the acquisition of the 16 ASU of Sasol in June 2021, which are reported again in significant scope to contribute another plus 0.7%. Let us now review the activity for each of our main geographies. My comments will be mainly related to Q2. I am now on Page 12. After a strong Q1, Americas has also seen a dynamic Q2 with sales at plus 9.5%. Large industry volumes have been strong in the U.S. Gulf Coast in air gases mainly in steel and chemicals, supported by 2 start-ups. Cogen is down versus a high Q2 '21 due to one-off freeze impact last year. Hydrogen sales in Latin America were solidly supported by start-up and ramp-up contribution, In Merchant, sales are significantly -- our pricing power is confirmed with an acceleration at plus 13% versus last year in conjunction with rising inflation. On a volume standpoint, gases and our goods are following end market trends and are well oriented, benefited also from construction recovery in the U.S. with the exception of helium, which is impacting by the shortage in global supply. Healthcare activity has been solid despite a strong basis last year due to COVID. In the U.S., volumes in medical oxygen and proximity care were solid. Finally, in Latin America, oxygen sales have normalized after the COVID peak last year with Home Healthcare still continuing at high levels. Finally, Electronics sales are growing strongly with positive contribution from all segments in carrier gas, equipment and installation and specialty materials. In Europe now, we have seen a strong growth at plus 6%, supported by record pricing in Merchant, offsetting lower demand in Large Industries and despite a strong basis in Healthcare last year due to COVID-19. Large Industries have seen lower demand in all sectors with numerous customer turnarounds, notably in HEICO and some refineries using lighter crude oil with lower hydrogen consumption. In Merchant, the spike in energy costs and overall inflation has again been successfully mitigated with a record historical pricing effect accelerating at plus 22%. Sales have grown in all end markets and on a volume standpoint in Merchants, those are slightly positive, mainly packaged gases. Finally, Healthcare sales have remained robust, thanks to strong Home Healthcare, notably thanks to diabetes, boosted by volume and an acquisition in Poland. And also, we have strong specialty ingredients. Medical oxygen demand is normalizing compared to last year, high basis to fight COVID. In Asia, I am now on Page 13, despite COVID-19 lockdown in China in April and May, we are seeing strong growth overall, driven by high momentum in Electronics, we sell at plus 7%. In Large Industries, sales are back to a positive trend with the still soft China impacted by lockdowns. In Merchant, we have also seen an accelerating pricing effect at plus 7% mainly in China, but also in Japan, Australia and Singapore. On the volume standpoint, China has been impacted by lower volume due to COVID, but in fact, resisted well. We saw improved demand in Singapore. Finally, Electronic sales of buoyant and have not been impacted by COVID lockdowns China, recurring sales at very high, plus 17% driven by strong carrier gas with positive impact from start-up and ramp-up of several units. Advanced Materials sales are also strong across the region, Finally, equipment and installation sales are also booming, especially with our key customers. Finally, in Africa, Middle East. Large Industries sales are up, supported by strong demand in Saudi Arabia in Yanbu Energy. The contribution of the Sasol takeover is strong and aligned with expectations and as a reminder, accounted for a significant perimeter. Sales in Merchant are slightly negative following small divestiture in the Middle East and this with good pricing at plus 5%, while Healthcare is following the normalizing demand in medical gases after COVID impact last year. I will now comment our Q2 activity by business line. I am now on Page 14. In Merchant pricing has been lower growth and volumes resilient. Pricing indeed has continued to accelerate in all geographies to reach plus 14.4% in Q2 to address the unprecedented spike in energy and other costs showing again our strong ability to implement faster pricing campaign that quickly precipitate to pass through this cost. Volumes are resilient, especially in Europe, but are hampered by helium shortage. In regards to the end markets we serve, food and beverage, fabrication and electronic compositions market or dynamic, while craftsman and research are soft. On the large industry business line standpoint, activity has been contrasted Americas didn't be solid with high air gases volume from steel and chemicals, especially in the U.S. Gulf Coast, while Europe has seen lower demand in all sectors impacted by customer turnaround and lower hydrogen demand. Asia has been soft, notably in China due to lockdown impact, lastly in South Africa, Sasol ASU takeover is fully delivering according to expectations. Page 15, Electronics activity is still very much booming. Indeed, momentum in Electronics is very strong in all segments with over plus 17% growth in carrier gas Specialty Materials, equipment and installation. This growth is supported by significant contribution from start-up and ramp-up and to be noted a strong pricing effect in Specialty Materials, driven by rare gases. Finally, in Healthcare, despite a high comparison basis last year due to COVID-19, sales are up, driven by dynamic Home Healthcare. Lower volume overall for COVID-19 in medical gases have been largely offset by strong sales in proximity care in the U.S. Home Healthcare growth continued to be strongly supported by diabetes and the contribution of an acquisition in Poland. Finally, Specialty Ingredients are also dynamic and on a pricing standpoint, this has improved and is positive in all regions. On Page 16, our performance improvement has been again demonstrated by operating margin being up plus 50 basis points for both the group and Gas & Services. This is excluding the impact of the increase in energy pass-through in large industry. Getting into the details, we can see that purchases and other costs have been impacted by the increase in energy price as well as inflation with also an increase in personnel expense. Depreciation is well managed the impact of start-up, including the Sasol impact being well offset by Europe during the year. This has resulted in an operating margin, excluding energy at 18.5%, which is 16.1% as published, of course, due to the energy dilutive effect, again, a significant plus 50 basis point increase, excluding the energy price impact. This margin improvement shows the strength of the business model and our performance overall, all the more that it compares with a high basis effect last year. And despite the mechanical dilutive effect of the energy price and overall inflationary increase in our Merchant sales. Page 17. This margin improvement is supported by our structured margin improvement plan that continues to deliver. As you can see, high in pricing are significantly accelerating again in all regions at a fast historical pace. We'll come back in more detail in the next slide. We have also ramped up our efficiencies in Q2 to reach EUR 167 million in the first half despite a significant adverse effect of inflation on our procurement activity. As you know, avoided costs are not reported in efficiency, and they were significant and contributed positively to the performance in the first half. Portfolio management has been further pursued. We executed 3 divestitures and closed 8 bolt-on acquisitions over the period with our continued focus on profitable and margin accretive opportunity. We keep a strong focus on margin improvement, working on all possible levels. As you can see on Page 18, our pricing action in Merchant have significantly accelerated in every geography to reach plus 14.4% overall in Q2. Our pricing campaign have been again executed in a very quick and inefficient way with record impact mainly in packaged gases, leveraging on our escalation formula, surcharges and pricing actions to address inflation and pass through the spike in energy costs. In Q2 alone, Europe achieved a plus 22% year-on-year pricing impact, a record loan mark with pricing strong in bulk while the Americas delivered a plus 13% and with a notable sequential acceleration in Asia at plus 7%, mainly in China year-on-year. Let us now review quickly the bottom of the P&L. I am now on Page 19. Nonrecurring operating income and expense have been impacted mainly by 2 exceptional noncash items for a net impact of minus EUR 270 million. First, we took a controlling stake in one of our large joint venture in China, which triggered the revaluation of the asset with an exceptional noncash book gain around EUR 200 million. Then we adjusted down the value of Russian assets and recorded an exceptional noncash provision amounting to approximately minus EUR 400 million. Net financial costs are stable following the progressive deleverage cost of debt is indeed close to last year's H1 2021 level at 2.96%. On an effective tax rate standpoint, our ratio is also stable at 25%. As a result, while net profit as published is up at plus 5.3%, recurring net profit is significantly up at plus 20%, excluding major exceptional items that has no impact on the operating income recurring in H1 in line with our guidance. On Page 20, as mentioned before, cash flow has been also very strong at plus 11.5% at constant FX, which is 23.5% of sales, plus 60 basis points versus last year if we exclude the energy effect, which provided the capacity to finance dividends of EUR 1.6 billion and a high industry and financial CapEx at EUR 1.5 billion. Net debt is stable at EUR 12 billion versus last year despite a negative EUR 500 million currency effect. Our gearing is now at 46%. Page 21. The 12 months portfolio of opportunities remain at a very high level of EUR 3.3 billion despite the very good level of decision for the quarter, supported by both energy transition projects, above 40% and a high proportion of electronic project. Our industrial and financial decision for the semester has still been dynamic and selective to reach a very strong level at EUR 1.8 billion. Finally, our investment backlog is still very solid and very high at EUR 3 billion and despite major start-up during the quarter, representing EUR 1.1 billion of additional sales after full offer. I am now on Page 22. We got about EUR 213 million sales contribution from start-up or ramp-up during the first semester, and we expect to read a full year start-up and ramp-up contribution to sales between EUR 410 million and EUR 435 million, including EUR 35 million from Sasol accounted for in significant perimeter. Page 23, cumulative effect of strong results and cash management are delivering a return on capital employed of 9.7% recurring at the end of June 2022. As you can see, we're very well on track to reach our ADVANCE objective to meet double-digit level, ROCE by 2023 as we announced during our Capital Market Day in March this year. To conclude on the basis of our strong performance in the first half of 2022, despite adverse effect in H1, we confirm our guidance for this year. It's totally aligned with our ADVANCE strategic plan objective presented in our CMD last March. Again, thank you very much for your attention.

Thank you very much, Jerome. So now we open the floor for Q&A. So as usual, I mean, we'll take the question in order. And I think we start with Andrew.

I was intrigued by 2 things. Firstly, on Industrial Merchant, I know volumes were down 1%, and you said they were broadly flat excluding the helium effect. Does that mark a slight loss of market share? I'm thinking of the demand destruction from that 14% impressive pricing. Just wondering what your thoughts are on what is obviously a more fragmented marketplace in IM. So that's the first question. And the second question is on the backlog. I hear what you're saying on the -- effectively the effect of start-ups coming out of the backlog. But I saw in the original press release this morning that there's a reference to Russian projects as well being excluded. So I wondered if you could just detail the effects of the 2 things.

On the question on IM volumes, globally, slightly down and flat or slightly up, excluding helium. On the European side, the only comment I can make is that we have slightly up volumes. Globally, we don't see anything that would be any loss of market share. I think despite a very high pricing environment, so no, I don't think we have any pricing -- any market share slippage. Any fragmentation of market, I don't think we see that at all.

Thank you, Pascal. Mike, do you want to give some comments for the Americas and especially North America?

Sure. Thanks, Francois. Good morning, everybody. Good morning, Andrew. Just to build on Pascal's comments, clearly, we saw the very strong pricing. But actually, we saw growth in industrial volumes clearly led by hard goods, but in gases as well, which were offset by the helium volumes, which is why you don't see the full effect. But the reality is, I think we are clearly seeing demand continue in manufacturing. We're clearly seeing demand in metal fabrication and rising demand in construction. I think in each of those areas, there is a very clear driver, some of which for manufacturing comes from pent-up demand that has not been met due to supply chain issues or due to labor shortages. And that demand continues to be there, especially for the durable goods. And in metal fabrication, I think there's a lot of drive right now both in terms of automation, which we initially saw with some of our large customers, but now smaller and medium customers are looking more to invest in automated systems. And in general, I think whether it's fabricated metal products, construction machinery, automotive, everything is continuing to grow, and it looks to be that way going forward. And then finally, in construction in that sector, I think construction starts over the last year of 160% over the prior year, and there is just incredible growth associated in the construction sector. whether that's for the electric vehicle ecosystem, whether that's for semiconductors, LNG restart of some of the chemical projects that were deferred and some new projects coming up, and we haven't even seen what's yet to come with the Bipartisan Infrastructure Act, and we'll probably see the impact of that later this year and clearly in 2023.

Thank you, Mike. And maybe just to complete, I mean, the global view, 1 comment on Asia and more specifically on China because overall, I mean, we see a positive sales growth in China for Industrial Merchant, more in Q1 than in Q2. But if you look at specifically the volume, this is clear that due to the regional lockdowns, the volume has decreased in some cases in China for Industrial Merchant. However, if we just step back, we see that overall, the business has resisted very well. And I think this is due to the fact that we are getting stronger and stronger in packaged gas and on sites, which have resisted much more than the bulk business in China. But -- so slight decrease, but nothing dramatic, again, mostly in Q2 due to the lockdown. So that's for China and for the volume. So all in all, you see that the volumes are holding fairly well in the different regions. We have to be vigilant, of course, but it's holding fairly well. Jérôme, do you want to talk about the backlog?

Yes, of course. Thank you very much, Andrew. So indeed, we have sustained and strong investment backlog in Q2 at high EUR 3 billion, as you noted, versus EUR 3.2 billion in Q4 2021. So the decrease is, as you mentioned, is following is clearly due to the high level of start-up in Americas, and as you mentioned, the exit of 2 Russian projects also from the backlog. That makes a difference in fact.

Thank you, Jérôme. Thank you, Andrew. We can take the next question.

Next question comes from the line of Alex Jones of Bank of America.

I have 2, if I may. The first, just on the energy crisis in Europe. Could you walk us through some of your contingency planning and what you're doing to make the business more resilient such that you can maintain continuity of supply to customers as much as possible through the winter? And then the second question related to that. Clearly, in the first half, you've had a high level of investment decisions as customers look ahead at quite an uncertain macro environment, is that affecting at all their willingness, you think, in the second half to continue sanctioning such projects?

All right. Thank you very much, Alex. I will let Pascal comment about the European situation and what we are doing to make sure that we have a safe winter.

Thank you. Actually, of course, a very good question. On a topic, we pay a lot of attention to and that we currently discuss with our customers and also with the public authorities in the different European countries. Maybe I'm going to make a few comments and explain why we expect to be very resilient in the current environment. First, on the energy prices, as you know, we pass them through. So we are not exposed to the energy price aspect of the current situation. On natural gas, we use natural gas in our operations for our HEICO business and for Cogent business. the way we source currently natural gas in Europe, we have no direct exposure to Gazprom, and we have no direct exposure to Uniper. We actually have a diversified sourcing with, we think, very limited exposure to Russia. Now we also believe that in many cases, our plants HEICO are supplying refineries. Cogent are producing steam and electricity. And there will be, in most countries considered essential or strategic by the public authorities. In terms of geography, we have way more assets in less exposed countries, Benelux, France and Spain than in Germany, which is probably the most exposed country. Now if we were to have some curtailments, we would still be contractually entitled in most cases to invoice our monthly fees. So that's our contracts then that would help us being resilient. So the question becomes also what could be the impact of curtailment not on supply, but on our customers, the ones that are using natural gas. Here again, our contracts will come into play with what you already know with the take-or-pays and the monthly fees. And as we have shown in the past, we should be very resilient even if some of our customers claim force majeure because of lack of natural gas. So at this stage, we think the impact for us should be very, very limited. Our model is very resilient, and we have shown it in the past, and we expect to show it again.

Thank you very much, Pascal. I will address the second question related to what we see in terms of macroeconomics and the investment pipeline and opportunity. I think clearly, there is a disconnect, I would say, between what we hear and what we see and what our customers are telling us. Clearly, in the past few months, few weeks, we had absolutely no cancellation of any projects. So customers are confirming their projects. I would say the pipeline is probably getting stronger as a matter of fact. If you look at the 2 main drivers for investment for us, energy transition and Electronics, they remain very strong. Energy transition in Europe, I think there has been some uncertainty about the -- of course, the energy situation, but it seems, and that's what our customers are telling us that this is an opportunity basically to move forward and not only to address, I mean, decarbonization of their processes, but also get more independence in terms of energy supply and also to find some savings in terms of cost. So we are basically ticking all the boxes with the kind of things we can bring, being oxygen for oxy-combustion or being hydrogen or carbon capture. So we see a confirmed momentum in the project regarding the energy transition in Europe for sure. I think in North America, the situation is maybe a little bit more contrasted. I think the customers are starting to really consider and plan for projects. I was on the U.S. Gulf Coast just a few weeks ago. However, the political environment is creating some uncertainty on the subsidies and the direction to go. So maybe there is a question mark there, but we see a pipeline of project which is quite active. In Asia, I think regarding the energy transition, we may get some, I would say, positive surprises. I was looking at the situation in China just a few days ago, and it seemed that several Chinese companies are, in fact, investing to decarbonize their processes. So that's a good news. Good news for the planet and good news for Air Liquide, I would say. So again, strong pipeline of projects. If I finish up with Electronics, there again, it's very strong, and I would say it's accelerating in Asia, where I was last week. Clearly, we saw in discussing with customers, strong commitment to projects. There will be probably even new projects being announced, not only in Asia, but we have seen that recently in Europe. And just in North America a few weeks ago, we saw that there's a dozen of new fabs, very significant investment which are in the process of either being decided or being designed or constructed. So I think it's getting stronger, clearly in Electronics, and I think that's a good news. What we may see and what we have seen in some cases is delay not for business reasons, but mostly for the availability of workforce and sometimes supply chain constraint. But here, we are talking about a few months of delay, not a fundamental challenge on the project themselves. So again, strong pipeline in spite of what we see overall in the economics. So I think we're quite confident for this.

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

Can I just come back to the question on the management of the energy crisis in Europe? Pascal, I think you talked about the take-or-pay contractual fees, but am I correct in understanding that that's predominantly in large industries? So if you could please provide some comments on the exposure on the industrial merchant side as well, please, that would be helpful. And then the second question is around the outlook for the second half for large industries in Europe. And also in Americas, the growth in large industries has kind of slowed down in the second quarter. I know you talked about kind of turnaround in Americas. Is that a trend that we're likely to see persisting into 2H? Or should the growth be a little bit more like the 1Q in Americas.

Thank you very much for your question. I will ask Pascal to answer the question on industrial merchants and outlook for large industry for Europe. And then I will turn over to Mike for perspective on North America for large industry. Pascal?

Yes. Thank you. So take-or-pay closes, yes, they are large industries contract. So that's a clear point. What exposure do we have on the IM business regarding the spike in energy prices? I would say we have a global environment exposure because we have demonstrated in the past few months that we can very strongly pass through the energy prices to our customers. So we have done that, and we'll continue doing that. We are very confident about this. So the exposure then is what will happen globally in the economy. So far, we have not seen any strong decrease of any type of market on the IM side in Europe. Volumes have remained reasonably solid. You saw that in our Q2 numbers. So I think we'll see what the near future is going to be. But so far, we are very confident and we should keep passing through our energy prices. We should keep passing through inflation. I think that's what is happening. It has happened already in Q1 and Q2.

Just to follow up on that, sorry. So if there were force majeure and lack of gas availability yes, the gas availability -- how does the contractual terms work in that sense of I assume your revenue line is exposed on the IM side, whereas you've got some -- a bit more of a stability in the large industries side, just -- it was more -- the question is more around if price cut in rather than the price remaining high.

Just to clarify, the impact of natural gas on the Industrial Merchant is minimal. There is a very small portion, which is hydrogen supply to IM customer. It's a small business overall. So curtailment of natural gas, a direct impact would be basically a nil for the Industrial Merchant. Keep in mind that the share of energy Industrial Merchant is mostly in the bulk business, where it's 60% of the cost. For the rest, I mean, the share of energy is much smaller overall. And as mentioned by Pascal, we have been very successful in pushing through the price increase overall. So all in all, the impact and the exposure on Industrial Merchant for the natural gas situation in Europe will be absolutely minimal. So maybe, Pascal, do you want to comment on the outlook for large industry for Europe?

Yes. So far, we don't see a major slowdown. We have seen, as you see in our numbers, small slowdown in the steel industry. We have seen turnarounds in the chemical industry. And we have seen some refiners turning to light crudes and using less hydrogen to improve the efficiency of their processes using light crudes in the past few months. Is it going to change? So far, we have absolutely no signal about that. But yes, some of our customers are planning -- contingency plans in case of lack of natural gas supplies. Those are the big chemical customers having to rely on a lot of natural gas as a supply. We'll see what the near future is. But so far, again, no signal of the slowdown.

Okay. Thank you, Pascal. Mike?

So Mubasher, I think for the Americas, we actually saw very strong demand in all sectors. Clearly, that was offset with a number of turnarounds we had in the quarter. And also, there was a high comparable basis given the aftereffects of the freeze events that we had a year ago. But if we look at Airgas, whether that's for the chemical sector or it's for steel, demand was very strong. We also saw a lot of strength in hydrogen demand. And the reality is we saw a number of start-ups of our facilities and our customers' facilities throughout the first half and especially in the second quarter. And that's going to continue as we go through the rest of the year. So we see a lot of strength not only in the current level of business activity. But to the point, Francois mentioned, we see a very strong pipeline of business development activity again, driven by the energy transition and the next phase of chemicals investment. But we do see continuing strength there.

The next question comes from the line of Tony Jones from Redburn.

I've got 2. Both on hydrogen. So you talk about the switch to lighter crude it seems that it could be structural with this move away from Russian supply. So could you actually sort of break out what the exact impact was to Q2 sales and so we can update the model? And how long do you think it might take to offset that with other external growth? And then secondly, on hydrogen, a slightly bigger picture question. With all the big inflation for energy and electricity impacting the cost of hydrogen, could you update us on what you think the cost of blue and green hydrogen is? And do you think that's on any impact on potential investments in the energy transition?

Thank you very much, Tony, for your question. I think the overall, the impact of lighter crude, that's what we have seen in some refineries in Europe means for us that they need less hydrogen to process basically. And typically, they have been doing some kind of arbitrage. So that's potentially for us the impact of less hydrogen being used in the process. However, we are seeing this being fully compensated if not surpassed by the hydrogen demand for biorefineries, which is a huge trend that we are seeing all over the world, not only in Europe, and this is making fuels, especially aviation fuels or meeting the regulation like the rate 2 and the rate 3 regulation in Europe. So we see clearly that there is a switch. I mean the bulk of the hydrogen is still used in "traditional" processes. But the conversion of many biorefineries or refineries in 2 biorefineries is clearly creating new need for hydrogen. Overall, your question also on the impact on hydrogen cost, it's quite significant indeed because in hydrogen production, the 60%, 70% cost is related to fuel cost, natural gas. So you can make your math and your impact. Keep in mind that whenever we are purchasing natural gas, we are not paying the spot price. We are paying, I mean, the price of our portfolio of purchase. We are, as a matter of fact, purchasing in advanced natural gas. That's also what is making us more resilience for the next few months. And we have already purchased most of our natural gas in Europe. So we are not too worried about that. But clearly, that has an impact on the gray hydrogen, on the blue hydrogen also. And then it's making the green hydrogen more competitive. There again, I mean, the cost of electricity today is the first component of the cost of green hydrogen. We see not so much an increase in the cost of renewable electricity, which is used for green hydrogen. So it's making green hydrogen more competitive. As a matter of fact, the expectation is to see that while the renewable capacity for electricity production is going to increase. The cost of electricity is going to decrease. So the cost of green hydrogen is going to be more competitive compared to blue. We are not there yet, but that's clearly the trend that we are seeing.

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

I mean I wanted to follow up on on-site or large industries business. And I wanted to clarify a previous comment because I was a bit confused. So can you clarify 2 things? First, will the take or-pay agreement or contract hold if for whatever reason, LET cannot get gas and can't supply gas to the customers? So will that take-or-pay agreement hold in that scenario? And second, will take-or-pay hold in a scenario where the customer cannot produce because they themselves can't get access to gas, can't they -- can they evoke a post-merger close and not pay you the monthly take-or-pay. And I think the question is actually tied up with the numbers that we have seen in second quarter, right? European on-site business or large industries business sales are down 10% like-for-like. I mean, that's a pretty big number for a business where there is a take-or-pay agreement. So I'm just confused like why are we seeing 10% decline in sales when you have this take-or-pay agreement with your customers?

Chetan, good morning. Maybe I will just comment on that, and I will ask Pascal to come back on the clarification on take-or-pay. But regarding the drop in the volume in large industry in Europe, keep in mind that what we have seen is variable volume going down in some industry. As mentioned before, this is the case for steel in Germany, for example, for refining also, and to some extent, chemical. We have seen turnaround. This is not exceptional, but what we have seen is probably some customers taking the opportunity of a higher energy environment to either make the turnaround in advance, sometimes to make sure that they do all what they can do expand a little bit the period because that's not the best period for them to operate. And we had also, I mean, some impact of conversion of one contract, especially between as available and fixed term contracted volume, which has an impact on the sales part. So that's what all in all is into the minus 10%. We think that in the underlying decrease is probably less than that for the reason that I just mentioned. Pascal, do you want to clarify how the take-or-pay are working in different situations?

Yes. Just to be clear, we have 2 mechanisms. We have a mechanism for normal times. If a customer does not consume what is a normal consumption, it can go down to a take-or-pay, and then that customer has to pay that minimum value, which is the take-or-pay. If a customer cannot produce and claim force majeure, we have another mechanism in our contracts, which is to invoice our fixed fee, okay? So we have 2 mechanisms typically in our allied contract in large industries contracts that are protecting our business in case of downturn. The take-or-pay first and then the monthly fee invoicing second.

And typically, even if the customer is claiming force majeure, they have to pay this monthly fee. So that's why, again, we think that we are well protected. Just let's put things in perspective because we had a lot of discussion, of course, and a lot of question about the natural gas availability. Again, it's quite focused as explained by Pascal, on some customers and some geographies. Clearly, I mean, Germany is the #1 point of attention. But if you take a group perspective, and we have looked at different scenarios for major curtailment and nonavailability of natural gas in Europe for customer. We see that the impact for the group will be in the range of 1% to 2%, 1% or 2% of the sales. So again, let's put things in perspective. It's quite limited at the scope of the group.

Next question is from Laurent Favre of BNP Paribas.

The first question is fairly related to that. It's about your utilization rate. If you could give us an update on the exit run rate of Q2 between Europe and the rest of the world. And I'm asking this as I'm assuming that if we do end up with lower production of your customers in Europe, because of all sorts of the reasons they may have to produce more elsewhere. So an indication there would be very useful. And then as my second question as a follow up.

Okay. Thank you. Maybe, Mike, do you want to say anything about the utilization rate in North America?

So sure. I think today, Laurent, utilization rates are very high. In general, like I said before, we see a lot of strength in chemicals. We see strength in steel. We see a lot of strength in refining from a hydrogen standpoint. So utilization rates are very strong. And even with the new start-ups, as we see the new start-ups, many of our customers' facilities are ramping as quickly as they can to full utilization rates. So I think it's very strong. It continues to look very strong, and I just don't see a real problem there at this point.

Before we go to Europe, just one word on Asia. I think on Asia overall, we see also that the utilization rate is quite high or comparable to what we have seen before. I think the good news is probably on China. Keep in mind that there has been no additional bulk capacity in China in the past few years, mostly because there were very little steel projects. And also, there has been all the governmental efforts of China to rationalize the steel industry, which typically is producing liquid access for oxygen and nitrogen. We are at the stage where we are now considering stand-alone liquid plant for China because of the tight market. So it's really new clearly because until now, there was no stand-alone liquid plant in China. All of them were piggybacks from the large industry, but I think that's a sign of kind of a tension in the market. and probably a much better balance. Maybe quickly a word on Europe, Pascal?

Yes. So in Europe, we have not seen any significant change in utilization rates. As mentioned before, what we have seen is a slightly lower activity on the steel side. We have seen turnarounds on the chemical side and less usage of hydrogen on the refineries. We have had, from what I know, one customer mentioning rebalancing activity between Europe and the U.S. and favoring a bit the of the Gulf Coast plants. But that's it so far. And on the bulk side, our utilization rate has remained pretty high. No real change, and our volumes are still very solid on the bulk side. So nothing significant has been seen in the past few months.

Laurent, we have quite a bit of question, I'm sorry, and we are close to the end. So maybe we'll take the next question, if you don't mind.

The next question comes from the line of Jean-Luc Romain of CIC Market Solutions.

I have a question on electronics. Particularly, an investment like the one which was announced in call for the new fab. What kind of turnover will it generate for Liquid assuming you get your kind of normal share of the equipment and gases and everything?

Jean-Luc, thank you very much for this question. Unfortunately, I don't think we can communicate on this because this is, I would say, a confidential information with the customer. Keep in mind that the capacity is going to be some order of magnitude of what is being built today. So it's quite significant. So I will let you, I mean, make your own calculation, but that's privileged information we cannot share. I think we take the next question, please.

The next question comes from the line of Peter Clark of Societe Generale.

I'm going west. So it's probably a question for Mike. The Americas gases margin, just wondering if you think you can grow that in the second half on the basis that the mix obviously is shifting a bit in the IM business, less package, more hard goods. And it's, again, I think, a tough comp. And then just Mexico, I presume that was tidying up. There's nothing major you've sold there. So those are the 2 little bit questions.

So indeed, we will let Mike answer your question, Mike?

Thank you, Peter. As I mentioned before, industrial volumes are clearly growing. It's led by hard goods, but we also see growth in gases as well. And traditionally, when we see hard goods leading, it's normally a sign that there is more to come. As I mentioned before, we see all of the trends being very positive for manufacturing, for metal fabrication as well as for construction. The -- as I mentioned before, if you look at fabrication, fabricated medical -- metal products are forecast to be easily up 6% or more. If you look at automotive for manufacturing, there's a lot of pent-up demand, and that is forecast currently going forward to grow at about 16%. Even the equipment for transportation in addition to automotive is almost double digit. And automated systems, recognizing the impact of what we see in terms of labor shortages, are driving every size customer to rethink automated systems, and we offer not only the capabilities to support the fabrication, but actually some automated systems as well for our smaller customers. So I think that's very strong. I mentioned the construction starts being up. And if you consider the level of new investments announced, there are 30 battery EV plants that have been announced this year. The top 10 account for about $25 billion in new investment. Francois mentioned the 12 new fabs. In addition, there's 4 expansions. So there's a total of 16 fab-related investments that have been announced. For LNG facilities this year, there has been an announcement that would total roughly $100 billion in new investment. And then we still have the Bipartisan Infrastructure Act yet to come, and there will be strong impact there. So actually, we see good momentum. We see a lot of strength. The fact that we see hard goods leading doesn't bother us at all. It actually is a sign that maybe some of our customers are getting ready to do more.

The next question comes from the line of Andreas Heine from Stifel.

Two questions, if I may. The first is on electronics, with this very strong growth. As far as I know, especially the carrier gases are also energy transfer clauses. Could you elaborate a little bit how much of this very strong growth is related to these energy and what is, let's say, underlying and sustainable? And maybe one word also on health care. If you split out a little bit what you can see as a trend in homecare compared to the medical gases, which are going down. And we have some quantification on these 2 different trends?

Thank you very much. Since we are reaching the end, we'll try to make a quick answer, Mike, on the electronics.

Sure. Andreas very simply for the majority of our carrier gas business, our customers supply the energy. So there is really little escalation to any in terms of that growth. The growth is clearly driven buying new volumes and new start-ups. And we had roughly EUR 2 billion in new investments over the last 2 -- last 5 years, I should say. And we've got a very, very strong backlog of new projects. So that growth trajectory is very strong in carrier gases year-to-date and will continue to be that way.

Just quickly on the health care business. So we see the medical gas business normalizing in terms of volume. We knew that. But clearly, what is new is we see positive pricing for the first time, first time in a long, long time, long history, not new in North America, but clearly, this is something which is new in Europe, and that's a positive news. For the homecare, we see still a very strong momentum. And that's both organic growth and opportunities for bolt-on acquisition. This is true in advanced countries, but also in developing countries. So we are very confident about the underlying trend in homecare. The fact that we develop value-based homecare with new ways to really, I mean, get the reimbursement based on outcome using and leveraging digital is a very strong point for us and is putting us in a good position. So maybe we take the last question, I believe.

The last question comes from Jean-Baptiste Rolland of Credit Suisse.

I just wanted to ask about -- quickly about this contract, big contract, I guess, in large industries, in the petrochemicals where you have seen a reallocation of volumes between Europe and the U.S. Can you confirm that these -- I mean, could you tell us where these volumes have been booked, whether they've been booked in the U.S. region because this is originally a take-or-pay contract in Europe, whether this is actually still booked in Europe? And second question on the monthly fee. Could you give us a sense of what share of the costs between sales and EBITDA does it typically cover?

So Jean-Baptiste, good morning. Just quickly to clarify on the first one. What we said is that we have entertained some discussion with customers, which are considering shifting volume for new projects. For the existing one, I think we don't know. We see the petrochemical industry in North America and especially in the U.S. Gulf Coast, which is working fine. So we assume customers are doing their own arbitrage for many reasons since we have too strong position in northern part of Europe and on the U.S. Gulf Coast, I think we benefit one way or the other. But for the rest, this is just a discussion actually of customers who are considering for their future plan investment location, either in Europe or in the U.S. Gulf Coast. So that has no impact today on the split between the regions. For the monthly fee, I mean, typically, the monthly fee is covering all the fixed costs that we have, plus, of course, part of the profit that we are making. So that's how it is. It varies from one contract with another one, but that's the general rule. I think with this, we will conclude this session. So maybe just to summarize. In the first half, we have been able to reinforce clearly our resilience. So the thing, as you have seen on performance, but also, and I think it's quite important, positioning ourselves on the growth markets. I am confident that we will continue to deliver a strong performance in the second part of the year with concrete progress in energy transition and in electronics, especially. So with this, I would like to really thank you very much for your attention. I know it's a busy period. So I wish also a very good summer to all of you. And for the ones who are taking some vacation, I wish you a good vacation, and we will speak to you soon after the break. Thank you very much.

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