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

Good morning, ladies and gentlemen, and welcome to the Air Liquide Third Quarter 2024 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 attending the call today. Francois Jackow and Jérôme Pelletan will present the third quarter revenue. For the Q&A session, they will be joined by Emilie Mouren-Renouard, Group VP overseeing Air Liquide operations in Europe, Africa, Middle East and India; and by Adam Peters, Group VP, CEO of Air Liquide North America. Adam will be on the phone with us from the U.S. In the agenda, our next announcement is on February 21 next year for our full year 2024 results. 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 the highlights of the third quarter of 2024. In a few words, once again, we demonstrated remarkable resilience delivering a strong performance fully on track in a challenging environment while actively driving business development to build for the future. Let's start with the financial highlights of our performance on Slide 3. The numbers speak for themselves. First, the 3.3% comparable sales growth. This underscores the resilience of our business model in soft markets. Notably, we have seen sequential improvement in comparable sales growth both with and without the effect of significant devaluation in Argentina. Jerome will come back to the detailed momentum between regions and business lines. Some are confirming their sequential improvement, clearly, others are slowing down. The second figure highlights our 100 basis points of OIR margin improvement, excluding energy pass-through, by the end of September. It remains ahead of target. This reflects our strong commitment to performance we deliver on our promises. The 100 basis point expansion also marks an acceleration from previous periods, demonstrated our strong focus on execution in terms of efficiency, pricing and portfolio management in spite of macroeconomic headwinds. To sustain this improvement of our profitability, you know that we have launched significant transformation initiatives of our organization and operations. Those initiatives will be more and more visible as they bring structural improvements in 2025, 2026 and beyond. The third figure is our EUR 4.2 billion backlog, which exceeds again, EUR 4 billion. This is a solid indicator of future growth when the projects currently under construction will start up. In summary, Q3 reflects our unwavering commitment in three areas: resilience, performance and business development. Let's move now to Slide 4. At EUR 1.4 billion investment decisions are at a record level this quarter. These investments include various midsized projects, and I'm excited to highlight some of the major long-term agreements signed this quarter. Let's start with the most recent one in the U.S. where we will supply oxygen to LG Chem for their electric vehicle battery plant in Tennessee. It is a USD 150 million investment in Air Separation Unit, a liquefier, storage equipment and small pipeline, which will enable us to more than double our local liquid capacities for the industrial merchant market. We will also source renewable electricity to offer our low carbon products to customers. This project highlights the group ability to leverage our traditional business model in supporting customers with the emerging energy transition markets. The second project is in China, where we announced the takeover of an Air Separation Unit and the signing of a long-term contract with Wanhua Chemical Group. This is a EUR 60 million investment that also includes a new liquid argon production unit to serve the local industrial merchant markets on top of oxygen and nitrogen. This is also our first contract with Wanhua, the largest polyurethane supplier worldwide. And we look forward to establishing a mutual beneficial long-term relationship with this customer. Let's finish with Europe with a renewed partnership to supply Aurubis, a leading copper producer, with large volumes of oxygen and nitrogen. We will invest EUR 100 million in an Air Separation Unit in Bulgaria to replace older units consuming 7% less electricity, and we will work with the customer to source part of the energy from renewable electricity. The investment also includes the modernization of existing Air Separation Units in Germany. These plants will also support the development of industrial merchant markets in both regions. These three projects announced this quarter across key major economic regions illustrate the strength and adaptability of Air Liquide's business model to the current environment. I will now turn over to Jerome to present the details of the Q3 performance. Jerome, please.

Thank you, Francois, and good morning, everyone. We'll now review our activity numbers in more detail. So coming back to Q3 sales. I'm now on Slide 6. Group sales have remained resilient on a comparable basis, excluding energy pass-through and ForEx. There are no significant scope effect this quarter. Gas & Services sales for Q3 achieved a plus 3.6% increase versus last year. In the smaller segment, Engineering & Construction sales remained stable with order intake rising to EUR 1 billion year-to-date, 80% of which attributed to group project. Global Markets & Technologies are down minus 4.6% due to a scope effect following the divestiture of our Aerospace and Defense business, while order intake, which is a solid EUR 573 million year-to-date. So overall group sales are up 3.3% on comparable basis for Q3 year-on-year, while published sales are down minus 0.7%, as a consequence of the energy price during the quarter, which translates into minus 0.9% energy -- energy pass-through effect, which, as you know, has no impact on the operating income. Additionally, a negative ForEx effect of minus 3.1% was mainly due to the Argentina devaluation over the period. Argentina contributed to plus 2% to the group plus 3.3% comparable sales in Q3. Again, Argentina has no impact on published valuation. There is no significant scope effect, as I said, over the period. The plus 3.3% comparable growth in Q3 shows a sequential improvement after plus 2.6% in H1 is also the case when you exclude Argentina. Slide 7 now. You see that all Gas & Services business line delivered growth in Q3, led by Healthcare and improved electronics. Geographically, both the Americas and Asia have been dynamic. This highlights again the value of our global development strategy and the resilience of our business model, capitalizing on the complementary nature and optimal balance between our geographies and business lines. Let us now review the activity for each of our main geographies. My comments will be mainly related to Q3. We are now on Page 8. After an already good Q2, sales in the Americas have been strong and have grown in all business lines to reach plus 8% on a comparable basis. That includes plus 5% from Argentina, mainly because the impact of hyperinflation is not offset by the devaluation when we exclude the currency impact. Large industries in the U.S. are benefiting from major status and market contributions, driving the recovery. Base volume has been growing and were very solid overall in chemicals in both air gases and hydrogen, while we faced some customer turnarounds mainly in LATAM. In Merchant, sales were driven by a continued solid pricing effect of plus 6.9% year-on-year, supported by active pricing management and campaign at Airgas, which is 60% of the pricing impact in the Americas and in Argentina, 45% of the pricing impact to counter local hyperinflation. Gas volume at Airgas remained resilient overall, excluding outcomes. Growth in Healthcare was sharp, supported by solid volume and high pricing in Proximity care in the U.S. with again a strong pricing in Argentina and increased number of patients in LatAm. Finally, Electronic sales were strong, supported by growth in Carrier Gases and strong equipment and installation activity, while materials remained low. Sales in Europe now are slightly down with sustained growth in Healthcare. In large industry in Europe, demand from customers still remains stable, while hydrogen volume for refining and chemical improved. In addition, as mentioned in H1, comparable sales continued to be adversely affected by the sale of the Cogen units in Germany in general. In Merchants, as explained, sorry, in the last 2 quarters we saw a decrease in bulk pricing due to the energy indexation in our contract in the context of the decline in energy pass-through. On the other hand, excluding this energy component, thanks to proactive action, pricing has stayed positive and strong, offsetting almost all the indexation impact, which is a remarkable performance. Volumes remain soft, but slightly improving compared to the previous quarter. Finally, Healthcare growth was very solid at plus 3%, sales have been supported by strong Home Healthcare activity, notably in diabetes and sleep apnea, with an increased number of patients. Growth in Medical Gases remained solid with both volume and sustained pricing action in response to inflation. On Page 9, activity in Asia returned to growth in Q3. In Large Industry, the activity increased in China, benefiting from a major hydrogen startup in March. On the positive side as well, volumes were less impacted by customer turnaround, especially in China. Sales in Merchant were slightly negative, mainly impacted by helium in China. Activity excluding EL has been quite soft in China, and but strong in packaged gases, benefiting notably from the contribution of bolt-on acquisitions. The rest of Asia experienced better volume year-on-year with stable pricing. Sales in Electronic are improving compared to a low base in Q3 last year with growing sales in Carrier Gases supported by start-up contribution and in Advanced Materials with double-digit growth, while equipment, equipment and installation also posted high sales. Only Specialty Materials remain soft. In Africa, Middle East sales are up plus 6.5% excluding the divestiture of 12 countries in Africa. In Large Industry, the activity was resilient across the region. Merchant growth, excluding this divestiture were dynamic, thanks to strong pricing at plus 6.7% and robust volumes in bulk and packaging gases. Healthcare has been strong as well. I will now comment on our Q3 activity by business line. I'm now on Page 10. You see that in Merchant, we continue to see solid pricing, albeit up plus 6.5% last year. Overall volumes remained soft. Pricing is still strong, especially in the Americas, while flat in Europe for the reasons I explained earlier. Markets such as Food, Technology, Research and Chemicals in the America, IC Packaging and Fabrication in Asia are posting volume growth. In Large Industry activities improving through trends -- sorry, trends vary by geography. Start-ups are positively contributing in China and the U.S. from a market standpoint. Chemicals that improved in the U.S., refining in Europe, while steel has been soft overall. Again, activity was impacted by the sale of the Cogen unit in Europe in Q1 as well as turnaround, however, less than in Q2. I take the opportunity to highlight a planned large turnaround at Yanbu, Saudi Arabia in Q4. Page 11. Electronics is growing with solid contribution from start-up and ramp-up. Indeed, we have a very solid contribution from start-up and ramp-up during the quarter. In addition, Advanced Materials have improved. Equipment and Installation have been at record level in the U.S. and in Asia as well, while overall Specialty Material are still low. Finally, in Healthcare, we still pursue strong trends with growth in both Med Gas and Home Healthcare with high pricing and volume increase. Home Healthcare was again very robust, with sleep apnea, oxygen therapy and diabetes growing. Med Gas activity, sales growth was solid with steady pricing, addressing inflation in the Americas and Europe and solid volume. On Page 12 now, this plus 100 basis point of margin improvement year-to-date is supported, as said by Francois, by our plant structure around 3 pillars, and that continues to deliver. First, IM pricing remains solid despite a high comparable base, as you can see. We have also significantly ramped up our efficiency year-to-date, reaching a record EUR 353 million, up plus 10% versus last year. We are very well ahead of our annual target. Thanks to an acceleration of structural efficiencies as mentioned by Francois earlier. While procurement and industrial efficiencies continue to deliver. I'll take the opportunity to bring you more visibility on severance costs expected for 2024 linked to the transformation plan and new organization, which should be close to EUR 200 million for the year. Moving now to portfolio management have been further pursued and accelerated. We closed 14 bolt-on acquisitions over the period and executed 5 divestiture, with a continued focus on strategic, profitable and margin accretive opportunities. As Francois highlighted, we remain deeply focused on margin improvement, working on all possible levels. As said before, on Page 13, our pricing action continued to deliver to reach plus 4.1% over Q3. The decline in pricing for our bulk activity was expected, because it is linked again to the energy cost decrease due to the indexation. However, we experienced continued accretive margin contribution as spread between pricing and cost has stayed positive. The Americas is also strong in pricing and in Asia, pricing would be slightly positive when we exclude helium. On Page 14, the 12 months portfolio of opportunity below one year, as you see, disclosed, stable at a high level of EUR 4 billion. This portfolio, again, is very well balanced between energy transition, electronics and also traditional business. Our industrial and financial decision for the quarter reached a record high level of EUR 1.4 billion. And finally, our investment backlog remains also very strong at EUR 4.2 billion, well balanced across geographies and business line. As you can see, we achieved EUR 185 million of sales contribution from start-up and ramp-up year-to-date, and we expect to reach a full year start-up contribution to sales between EUR 230 million and EUR 250 million this year. Thank you very much for your attention. Francois, back to you.

Thank you very much, Jerome. I am now on Page 15, where we summarize the key takeaways from this third quarter. As you see in the third quarter, we continue to deliver according to our advanced strategic plan. The sequential sales growth, demonstrating our strong resilience, enhanced performance driven by the ongoing structural transformation of the group, which will lead to sustainable efficiencies and a strong backlog, consistently exceeding EUR 4 billion, laying a solid foundation for the future. In that context, we confidently reaffirm our guidance for 2024 and the updated ambition for 2025. Thank you very much for your attention. Now we will open the floor for Q&A.

[Operator Instructions] And the first question comes from the line of Alexander Jones from Bank of America.

Two, if I may. The first on Electronics. Other players in the sort of equipment value chain have talked about customers deferring orders and even plant start-ups. I'd be interested in what you're seeing in your conversations with customers and whether that might affect growth in future quarters, particularly in Carrier Gases? And then the second question on margins. Continued very impressive improvement this quarter. Can you talk about how, if anything, the changes you've made in sort of incentive structures in the organization have contributed to that? Are you now incentivizing more employees on margins or adding margins to scorecards where previously they might have been focused on something else?

Thank you very much, Alexander, for your two questions. Let's talk first about Electronics. So as we were expecting before, we have seen in Q3, clear signs of recovery globally in the Electronics business. And if we look at this from different angles, clearly, I mean, we have seen growth in some key regions, namely, the U.S., Taiwan, China, Japan, Korea, were quite strong. Looking at the products, the Carrier Gas was in the high single-digit growth, which basically reflects, I mean, our strong portfolio in the Carrier Gas and the new projects also coming online. And we have seen also clearly strong growth in the Advanced Materials and the E&I business with double-digit growth for those two segments. Finally, if we look at the type of customers and what we have seen in the different submarkets of the electronics. Clearly, we have seen the logic segment with a very strong growth, double-digit growth in most of the geographies. The memory market also was growing quite strongly. However, the analog business for our customer, which is a smaller share of our business for semicon, saw a decrease in the quarter. So what we can expect and what we hear from customers, and we have frequent contact with customers. I was in Asia last week. Clearly, we see a continuous recovery in the Q4 and looking forward, being fueled by the Carrier Gas business. Again, more than 40% of our portfolio and also the development of Advanced Materials in that segment, reflecting basically the sequential recovery of this segment. Let's keep in mind, however, that for us in our business, we have a fairly high comparable for the Q4 with one-off sales last year in E&I and Advanced Materials. But again, the underlying trend is growth looking forward. Finally, I'd like to mention the confirmed acceleration in the projects and for new fans and expansion. This is a global trend, and we have seen in the past few months and past few weeks, a continuous acceleration, new requests for quotation coming in different parts of the world, again, that illustrate, I mean, the trend of the Electronics segment. For the margin, clearly, what we have said is an overall plan for margin improvement and Jerome mentioned some of the key elements. You had a specific question about incentives and how we are driving this performance culture in the group. Yes, we have adjusted our way we incentivize our teams and especially the management with margin being one of the key criteria for the bonus and long-term incentive.

Thank you very much. Next question, please.

[Operator Instructions] And the next question comes from the line of Chetan Udeshi from JPMorgan.

My first question was on this Wanhua takeover. If I'm not mistaken, Wanhua, I think from what I've seen, they typically use Linde as a supplier of industrial gases. So I'm just curious, this plan that you are taking over, is that something that was built and operated by one who are themselves, but maybe the engineering part. Is it from Air Liquide? Or is it from Linde? And if it's from Linde, how do you manage the transition to maybe Air Liquide equipment over time? I'm just curious, how does the value accretion economics work for such projects where maybe the original equipment might not be actually be supplied for -- by Air Liquide. And maybe if you can give any sort of indication of what is the revenue or earnings or potential of this project is to understand the value creation upside that you might have from this business. And the second question I had was just looking at your Large Industries business, especially in the U.S. or Americas almost 11% growth organic just seems quite strong. And you are calling out rebound in chemical volumes. It just feels like the chemical demand in general, isn't that great. So I'm just curious if you can shed some light on what might be happening in your U.S. on-site business? And just broadly speaking, what are the trends that you see in Q4 or just at the moment across some of your key divisions?

Thank you very much, Chetan, and good morning. I will speak about Wanhua takeover in China, and Adam will comment on the U.S. Large Industry momentum that we see. So the Wanhua takeover is a great success. The unit that we are taking over has been engineered and supplied by Air Liquide Engineering. So that's Air Liquide technology. Let's keep in mind that we have a strong engineering business, especially in China, where we do some third-party sales, and that's one example, where we have developed the intimacy with the customer and convince the customer to switch from the captive production to the over defense model. Clearly, we were able to demonstrate, I mean, the know-how of Air Liquide in terms of operation with this customer. And also, we have been able to leverage our position in the Merchant business in China to add merchant side of this business. And as I mentioned before, to add on column to be able to supply the local market. So that's a great success with a leading customer in its segment and clearly strengthening our position in China, both in Large Industry and in the local merchant market. Regarding, I mean, the contribution, Chetan, you know very well our business. So I will let you, I mean, make your own calculation. It's typical capital intensity. We said that we invested around EUR 60 million. So you can do the math. Keep in mind that the nice thing with this kind of project is we have limited CapEx risk, because we are taking over our plant, which is almost completed, meaning that the start-up will come sooner and contribution will be during the year of 2025. And also we limit the risk in terms of construction risk. So that's for Wanhua. Let's talk about the U.S. Adam, do you want to give some color on what you see in the Large Industry in North America?

Absolutely, Francois. Thanks for the question, Chetan. So in the U.S. in Large Industries, we've got a very strong presence for the chemical sector along the Gulf Coast in Texas, Louisiana in particular, but not only there. And I would say that what we've seen probably benefiting a bit from the low price of natural gas and the favorable conditions that we have on the Gulf Coast is a nice rebound in terms of overall activity for chemicals. I think a lot of this has to do with the customer mix that we have. And I think it also has to do a bit with the start-up that we saw in Q1, reflecting a bit of the growth that we've seen. So overall, when we look at our volumes, particularly in the chemical sector, but not only in the chemical sector, we're pretty happy about where things are and kind of the overall growth that we've seen. So I would say that, that's probably the overall picture that I can provide.

Thank you very much, Chetan. Next question, please.

And the next question comes from the line of Peter Clark from Bernstein.

I've got two questions. The first one is on the hard goods which you called out a marked decline in the third quarter. My understanding was, it was already down mid-single digits. So I'm assuming it's clearly a lot worse than that, maybe high single digit, whatever. Just wondering, I presume that's mostly the market. I know you were doing some rationalization there, but that's just a reflection of what's going on in the market. And then the second question, there's been a lot of contrasting news flow, particularly in Europe actually on the green hydrogen development and the blue hydrogen development over the summer. So just your take -- I know, you're pretty positive on both really. But effectively, just your take on what's going on, on the green and blue hydrogen development in Europe.

Thank you very much, Peter. I will ask Adam to talk about what we see, especially in Airgas' hard goods market. And then we'll come back to the green hydrogen, giving you perspective green and blue hydrogen, giving a perspective from Europe but also from the U.S. on Emilie and from Adam. Adam, do you want to start with the hard goods in Airgas, please?

Sure. Absolutely, Francois. So Peter, thanks for the question. So yes, certainly, when we look at hard goods, keeping in mind that hard goods in the U.S. and for our Airgas business represents just a little bit more than 25% of our sales on a year-to-date basis. And so when we look at that, we definitely see a volume decline, I would say, sort of mid-single digits in terms of comparable growth in hard goods in Q3. We think that there is some effect of this being driven by the uncertainty, by the higher interest rates, really kind of having an impact on overall demand, I would say. I would say that, when we look at this compared to our peers, because we definitely follow this in terms of how our peers in hard goods are doing. And I would say that the same trend is notable for all major players in the hard goods market in the U.S. We have a really good pricing campaign. Last impact that we had on the pricing campaign was in March of this year. And I would say, overall, we're managing that well. We continue to manage the pricing point well to make sure that we watch the volumes well and then also take a look at the impact that we see from our main competitors to make sure that we're tracking that well. So a little bit of a decline there, like I said, mid-single digits. When we look at Q4 and kind of an outlook on hard goods, we see sort of the same situation continuing. However, our outlook for 2025, we feel a little bit better about because of expected interest rate cuts. We think this is this, along with the election uncertainty being behind us is going to create a bit of a tailwind effect especially in certain areas like defense spending, energy transition, affecting electrical equipment and the like and heavy machinery spending. So I would say overall, we're watching it closely, and that's kind of a picture of hard goods. Keeping in mind that our gas volumes remain quite resilient overall in Airgas.

Thank you very much, Adam will come back to you for the green and blue hydrogen development in the U.S., but let's turn over to Emilie to speak about what we see in Europe. Emilie, please?

Thank you, Francois. Good morning, everyone. So in Europe, regarding green hydrogen, I would say overall, we continue to see this momentum. Now if I give you a few examples, maybe we have started this year Trailblazer in Germany. Our first electrolyzer -- PEM electrolyzer in Europe of 20 megawatts. This electrolyzer is serving both the industry and the mobility sector in Germany. And as you all know, we also have in construction right now, the Normand'Hy proton exchange membrane electrolyzer, 200 megawatts that will be up and running in 2026. And this electrolyzer will both serve the industry, the oil and gas customers we have in the basin as well as the mobility around [ AxoGen ] light-duty, heavy-duty mobility. So very happy in terms of business development as well active project development, good pipeline in projects. We're still waiting like our customers do for strong clarifications around regulations, but overall, to conclude still very good momentum in green hydrogen development in Europe.

Yes. And clearly, what we continue to see in Europe is what we mentioned before is that the refining biofuel market is the one which is driving this demand short term. We see potential in the chemical industry maybe in the steel industry, but that's more our midterm. But again, most of the opportunities today are driven by the refining and the transformation of the refining market in Europe, and that's quite active. Then Adam, what do you see in North America?

Yes. So if we take a look at the development in North America around hydrogen, and I'll be just a little bit broader beyond green hydrogen. I would say that we're very active in the space for sure. So certainly, in terms of looking at the infrastructure that we have along the Gulf Coast, the impact that can have on blue hydrogen for instance, is quite strong and the development continues to be very, very good. When we look at the upcoming election, I think, this is going to create some certainty around investment decisions that will take place in the 2025, 2026 time frame, which I think will be great. When I think about 45V, for example, which I'm sure everybody is following quite closely. We should have clarity around 45V at the end of the year is what we're anticipating based on our conversations with officials in Washington, D.C. When I think about the hydrogen hubs that we're part of, so we're certainly part of 6 of the 700 hydrogen hubs that have been part of the DOE program in the U.S. and we're prudently watching those. Where projects are more aligned with blue hydrogen development, I would say those are moving forward quite well. On the green side, things are a bit delayed and certainly, that will clear up with the clarification around 45V. But overall, we remain prudent in our approach until the uncertainty clears, but very bullish in terms of the developments overall. And I think we're well positioned with our customers and with potential customers in this space.

Thank you very much, Adam. Thank you, Peter. Next question, please.