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

Good morning, ladies and gentlemen, and welcome to the Air Liquide Third Quarter 2025 Revenue Conference Call. [Operator Instructions] I will now hand over to the Air Liquide team. Please begin your meeting, and we'll 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 third quarter revenue. For the Q&A session, they will be joined by Emilie Mouren-Renouard and Adam Peters, both Group VP overseeing, respectively, EMEA and North America. Adam is on the phone with us from the U.S. In the agenda, our next announcement is on February 20 next year for our full year 2025 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 walk you through the very solid achievements of the group in the third quarter of 2025. Of course, we are still operating in the same turbulent environment that has defined the market since the start of the year. But despite these conditions, I'm glad to report that Air Liquide is maintaining a very strong momentum. We are delivering consistent sales growth that demonstrates far more than just resilience. We continue to grow. Also, we are firmly confident in achieving our margin improvement target, driven by the structural transformation underway across the group. At the same time, we had again significant success in business development, securing new contracts and reaching a new record high backlog. Let's turn to Slide 3. The numbers speak for themselves. Sales grew plus 2% on a comparable basis, maintaining the same positive trajectory in spite of everything. All the key indicators are very well positioned and reflect our strong performance again this quarter. IM pricing remained accretive, increasing above 3% in Q3. This shows a sequential increase versus Q2 2025 demonstrating effective management in a demanding environment. The momentum on efficiencies remained very positive, with more than 20% growth compared to Q3 last year. This means that over the 9 months, we have already delivered 15% more efficiencies than in the whole year 2022. This performance is highly encouraging as it clearly validates that the structural efficiencies from our major transformation program are delivering. I personally like this very much as it allows us to positively improve the margin while accelerating our investments for the future. Cash flow remains extremely robust, growing plus 7%, excluding the currency impact and our ESG KPIs remain on track in Q3. Finally, our investment backlog reached a new record high level, approaching EUR 5 billion for the first time in our history. This is a solid tangible indicator of future growth, which will begin to flow through as the projects under construction are going to start up. In summary, this has been a very solid quarter, perfectly aligned with the positive trend of the first half. These results provide clear evidence that we are firmly on track to deliver our commitments in terms of both current performance and future growth. You remember that last quarter, we introduced the 4 growth engines of the group. This is not just a concept. When we look at the Slide 4, we see concrete wins and illustration this quarter of how those 4 growth engines are in action. First, we're talking about low CapEx growth by getting more out of our existing assets. This quarter, we signed, for example, new contracts to supply hydrogen to the 2 of the largest U.S. refiners. This is a great example of low CapEx growth and the benefits of Air Liquide assets. We will leverage our existing pipelines and infrastructure for new additional sales. While limiting the investment to only USD 15 million. We're simply integrating new compression and distribution gear. Capital intensity is around 0.5% for this project. These types of projects are clearly a reservoir of growth in a lower volume environment because it let us boost sales without the usual capital expenditure. Our second growth engine is investing in our core activities. Our electronics leadership is a key part of this. We closed 2 major long-term contracts with the leading semiconductor manufacturer this quarter. First was a EUR 250 million investment in Western Germany, our largest ever electronics investment in Europe. The second was EUR 130 million investment for 2 Carrier Gases units in Singapore. An additional illustration is in home health care, which is another growth driver of our core activities. In Q3, we signed a new large contract in Spain to provide home health care for patients with chronic respiratory conditions. We're investing in an innovative approach, where using unique proprietary digital and AI solutions to ensure cost-effective personalized care. In the current very variable environment, we expect home health care to be a steady growth driver for the group. The third engine is the energy transition. A great example, confirming our leadership position in this market is the EUR 500 million investment we decided this quarter for the ELYgator project in the port of Rotterdam. This massive 200-megawatt electrolyzer will notably supply TotalEnergies with green hydrogen through a long-term contract. Finally, our fourth growth engine is acquisitions. In Q3, we announced the agreement to acquire DIG Airgas in South Korea. This is highly strategic because it gives us a stronger foothold in the world's fourth largest industrial gas market, which is expected to double in the next 10 years. Critically, DIG's footprint and operations are also a perfect complement to our current activities in Korea. At this stage, the closing process is going as expected. We also continued making small targeted bolt-on acquisitions to increase density in our existing operations, like the announcement yesterday of an acquisition to strengthen our footprint in India. All in all, the first 3 growth engines are currently fueling our EUR 5 billion backlog. When you add the major DIG acquisition and our bolt-on operation, that figure gets close to EUR 8 billion in total capital deployment securing future growth. Return on investment remains, of course, a key priority for the book. In spite of the increased investment in the past 3 years and thanks to the improved margins, our recurring ROCE remains at plus 11% at the end of September, above the 10% threshold of the advanced target. I will conclude on Slide 5, showing the robustness of Air Liquide equation in the current environment combining very strong delivery of today's performance and steady ability to invest for the future. We proved once again in Q3 that we are on track, thanks to our proactive management of our transformation and strong position on growth opportunities. We are highly confident in our ability to navigate the evolving global landscape and continue delivering value to our shareholders. Thank you very much for attention. I now ask Jerome to present the details of the Q3 performance.

Thanks, Francois, and good morning, everyone. I will now review our numbers in more detail. So coming back to Q3, I'm now on Slide 7. Group sales have been resilient overall with a growth of plus 1.9% on the comp basis excluding energy pass-through and ForEx. There is no significant external scope effect in Q3 2025. Published sales are down minus 2.4%, widely down by a negative ForEx effect of minus 4.2% mainly due to USD and nearly neutral energy pass-through energy effect of minus 0.1%. So Gas & Services sales achieved a plus 1.9% increase year-on-year and Engineering & Technology external sales increased plus 1.7%, while resources are still mostly dedicated to building the many internal projects in the backlog for industry and electronics. I am now on Slide 8. Growth in Q3 for Gas & Services has been driven by the Americas, while EMEA and Asia were broadly flat. On a business line standpoint, we can see that Healthcare and Industrial Merchant growth in Q3 and electronics also a strong growth driver if you exclude the sales of equipment and installation. This, once again, highlights the value of our diverse development strategy, capitalizing on the complementarity and right balance among our different business lines and geographies. This resilience, coupled with existing capacity, strong growth driver and increasing performance as explained earlier by Francois, positions Air Liquide very well for the future. Let us now review more specifically the activity of each of our main geographies in Q3 2025. I am now on Slide 9. Driving growth sales in the Americas delivered a strong plus 5% on a comp basis. Large industry posted strong growth despite a high comparison basis in Q3 '24. The business line benefited from a continued ramp-up in air gases from a major air separation units started in February 2024, solid start-up contribution as well as lower turnaround during the period, which more than offset lower base business, especially hydrogen with less import of EV fuels. As a side note, you may expect a few more turnarounds in Q4. In merchant sales were driven by a positive pricing effect of plus 4.5% year-on-year, which improved sequentially from Q2. Pricing was driven, especially in North America by adjustment on cylinder rental in some regions at Airgas. Gas volumes were flat and showing improvement were less negative. Bolt-on acquisition also contributed to growth. Strong growth in health care was achieved through higher pricing in the U.S. and LatAm, coupled with the growing base of home health care patients. This growth was further supported by deployment of the Intelli-OX differentiated solution. It offers a digital gauge that provides caregivers with a direct reading of the remaining oxygen time, an excellent example of value creation for innovation. Finally, Electronic sales posted normalizing E&I sales versus the record high level last year, offsetting strong growth in Advanced Materials and Specialty Materials, Carrier Gases were resilient. Sales in EMEA were resilient with continued solid growth in health care. Large Industries posted a slight drop. Hydrogen sales were down in Germany as were cogen in Benelux. However, positive air gases overall and robust hydrogen in the Middle East provided a partial offset. In merchant, sales were flat, with still a solid plus 1.5% pricing despite lower energy indexation in bulk. Volumes were driven down by liquid CO2 and helium as anticipated. Bulk volume showed resilience as did packaged gas. To be noted, excluding the negative impact of helium, merchant sales in Europe were up plus 1%. Finally, health care steady plus 4% growth was supported by an increasing number of patients in home health care, which serve diabetes, sleep apnea and community care needs in Germany. Med gas sales remain stable. Asian sales were resilient. In Large Industries, there was a continued contribution from start-up and ramp-up in China and Korea, but offset by low base business on a high comparison basis in Q3 '24. Sales in merchant were down minus 1% or up slightly excluding the impact from helium. The region saw improving pricing at minus 0.5% versus minus 1% in the second quarter of this year. China posted a positive plus 2% sales growth and plus 4%, sorry, excluding helium, with the growth mainly driven by bulk and on site. Pricing remains weak in China hampered by helium and the deflationary environment as anticipated. Activity in the rest of Asia was more mixed. Electronic sales were flat overall, but were above plus 6% excluding E&I, which is normalizing after a record year. Carrier Gases maintained a double-digit sales growth and Advanced Materials show growth while Specialty Materials were soft. I will now turn to Slide 10, where I will comment on our Q3 activity by business line. In merchant, we saw an increase in pricing to plus 3.1% compared to plus 2.7% in the second quarter. Overall, volume in gases were slightly up, including bolt-on acquisition and hardgood volumes were less negative improving sequentially. The main end markets posted volume growth were secondary in electronics and packaging globally, materials and utilities in the U.S. and automotive in Asia. In Large Industries, start-up and ramp-up contribution offset lower demand, major ramp-up indeed have positively contributed in the U.S. and Asia, offsetting lower demand, mainly in EMEA and Asia while the base business was more resilient in the Americas. Slide 11, Electronics, where we continue to build our leadership position continues to grow at plus 6% excluding E&I. Carrier Gases delivered indeed strong growth with 8 main start-ups year-to-date, mainly in China, Taiwan and Japan. Carrier Gases and solid Advanced Materials in China and U.S. almost fully offset normalizing E&I sales, which are more cyclical and compared to a record high in 2024. Electronic Specialty Materials were flat overall. Finally, Healthcare continued strong growth trends, again high -- sorry, high comparable rates last year. Growth mainly come from home health care, notably in Europe and South America, for medical gases in the Americas and from Specialty Ingredients. On Slide 12 now. As a reminder, our margin improvement objective is supported by a structured plan, leveraging our unique strength and based on 3 pillars. First, IM pricing continued to be solid despite a high comparable basis as you see on the graph. To be noted, we have an uptick in pricing from Q2 to Q3 despite the lower index in bulks in EMEA, and we continue to focus on price management and pass-through price versus cost dynamics. Regarding efficiencies, as Francois mentioned, the strong performance of plus 23% increase demonstrates that the structural initiatives from our major transformation program are delivering and strongly supplementing our ongoing efficiency program. This is -- this impact is, of course, positive on our margin as it helped to compensate for some headwinds such as unfavorable currency impact. Lastly, we have continued to actively manage and optimize our portfolio. We have indeed closed 8 bolt-on acquisitions year-to-date as well as announced our agreement to acquire DIG in Korea, in South Korea, as Francois mentioned. Meanwhile, we executed 3 divestitures, Air Liquide continued to focus on strategic, profitable and margin accretive opportunities. On Slide 13 now, the 12 months portfolio opportunities remained stable at a high level of EUR 4.1 billion. Our total industry and financial decision for the quarter were also higher at EUR 924 million, this including the FID for the ELYgator in the Netherlands, the electrification of an air separation unit in China and a large carrier gas project for a leading electronic customer in Germany. Finally, our investment backlog reached a new record level of EUR 4.9 billion with investment decisions entering the backlog more than [indiscernible] leaving the backlog. Projects in Electronics represents 1/3 of our total backlog in line with our growing leadership in the segment. We achieved EUR 233 million sales contribution for start-up and ramp-up year-to-date, and we remain confident to deliver at least EUR 310 million by year-end. To conclude, in spite of the current turbulent environment, thanks to the ongoing demonstrated resilience of our business model and our disciplined self-help actions, we confirm our guidance. Thank you for your attention. We can open the Q&A session. Back to you, Francois.

Thank you very much, Jérôme. So let's start the Q&A session. Thanks.

[Operator Instructions] And now we're going to take the first question. And it comes from the line of John Campbell from Bank of America.

Two, if I can, quickly, I wanted to get a sense for the feeling you maybe have on the activity levels in the fourth quarter. It looks to me like organic growth in the third quarter was slightly stronger perhaps than some had expected, et cetera. It looks like in several areas, such as Large Industries or Healthcare, the year-on-year comparison basis gets sequentially noticeably easier in the fourth quarter relative to the third quarter. So any comments you could perhaps give on the fourth quarter and even looking further ahead, perhaps into 2026 for the Electronics segment, where organic growth has been perhaps slightly solid by normalizing equipment sales? That's the first question. Second one, if I can, relates to any of the latest details you can give us on amendments related to the corporate tax rate in France. I noticed there were some potential revisions in an amendment yesterday evening.

Thank you very much, John, and good morning. So regarding the trend, I think, overall, we are in the same kind of environment. What we are seeing in Q3 is to some extent, an acceleration of the growth in some segment at the end of Q3. So to some extent, Q3 was better than what was maybe expected at the beginning of the Q3, so that's positive news for sure. We do expect Q4 to be above Q3, but again, in the current environment, we have to be cautious. I mean there's so much valuation in the end market and so many things happening from 1 week to another one, I would say. But overall, the trend should be positive. We do expect, I mean, momentum to continue in the Americas overall and also some comparison effect being positive in Europe overall. Regarding the key markets, indeed, as we mentioned, I mean, large industry should see some pickup and we do expect the same probably for industrial merchants, mostly driven by the U.S., as we have seen in the past quarter. Electronics overall is probably likely to be flat. Let's keep in mind what Jérôme has mentioned about the comparison effect, which is still quite strong. And Healthcare is remaining very strong and should continue its progression. So all in all, Q4 should see, I mean, continuous momentum and improvement. But again, in the current environment, let's be careful. You know very well that our strategy has been very clear in that -- in the current environment and regardless of environment, we are determined to improve the margin with many actions which are self-help actions, the transformation program that we are doing is contributing clearly. So that should give us good visibility and good confidence for Q4 regardless of the environment. Jérôme, comments on the French effective tax.

Thank you very much for this important question. I would say for the question you raised on what's happening right now, it's a bit difficult to comment. It's, I would say, discussion. We have potentially amendment, but nothing has been voted yet, so I will not comment on the impact of 2026. What I can tell you at least for 2025 and something we already mentioned, the effective tax rate that we can expect for the year -- for year 2025 should be around 26%, which is something which is coming mainly from the impact of the [indiscernible] 2025. But for 2026, it's a bit early and of course, we'll come back, I would say, later when we have more certainty on the topic.

We are going to take our next question and it comes from the line of Alejandro Vigil from Santander.

The first one is about the investment backlog you highlighted in '25, the contribution of this backlog is about EUR 300 million, EUR 340 million. If you can give us some guidance or some outlook about next year, your expectations of the contribution from the new projects from the start-ups. And the second question is about the self-health programs you mentioned about efficiencies. We have seen this acceleration of more than 20% year-to-date. If you can elaborate about which are the sources of these additional efficiencies and the outlook for next year as well, if you can continue to generate these efficiencies.

Jérôme, do you want to take the 2 questions?

Yes, Francois, I can take it. So as related to the backlog, you're right, the backlog is a record high, nearly EUR 5 billion. It's a historical backlog. And of course, just to remind you, is made by projects that are signed so that will deliver growth in the coming years. And we are pretty clear that for this year, the impact will be at least EUR 310 million. And that's where we stand right now for the confirmation. So it's -- as you see, it start to be significant contribution on the top line. As related to efficiencies, are you right also, we are very happy with the trend on the efficiency and plus 23% versus last year. As Francois said, we are at a number that represented the full year impact of 2022. Just have in mind that these efficiencies are rising. There are multiple. That's the result of the transformation program that we have -- that we are executing right now, that we already commenting many times. There are different holders. There is, of course, an acceleration in industrial efficiency. You know that we have created the group industrial efficiency -- group industrial direction. And this is accelerating, and we are very happy with the trend, it's coming. We have also an acceleration in procurement as well, which is also delivering and we have also a contribution for all the restructuring measures that we are setting, which are also delivering. So all in all, plus 23% is a strong number, and it's much better than what we are able to do in the past, and we can be very happy with the, of course, the impact on the margin that we're translating into.

Now we'll go and proceed to our next question, and it comes from the line of Thomas Wrigglesworth from Morgan Stanley.

Two, if I may. Firstly, on the Large Industries Europe, you call out hydrogen in Germany. Is that purely the force majeure? Or are you seeing other impacts weighing on that market? And then secondly, kind of more of a longer-term question. Obviously, CBAM coming in next year, do you think that will drive an acceleration and -- in the investment opportunities that you see? Do you think people are going to start to react now to CBAM and there's been a wait and see? And alternatively, do you think people now start to look to shift capacity out of Europe into other geographies because of CBAM and the fact that it's actually more efficient to do more -- environmental/green/renewable projects in the Middle East and the U.S. Any comments there would be very helpful.

Thank you very much, Tom. I will ask Emilie to speak about the hydrogen in Germany, and I will comment on the CBAM.

Yes. Thank you, Francois. Good morning, everyone. So on the hydrogen in Germany, so it's mostly related to events at our customers indeed. So we shouldn't read too much into that. Overall, in Germany, the business and the activity was resilient, which given the current context is already a good news. And you've seen some good level also of project development. And you've seen recently the [indiscernible] announcement where we are investing EUR 250 million in Germany in the semicon industry. So you see the economy, despite the headwind is resilient. We also hope that the infrastructure fund driven by the government, the German government, will deliver results and positive impact on us. So we shouldn't read too much into this hydrogen mostly due to customer requirement.

Thank you very much, Emilie. So regarding CBAM, you're absolutely right, this is coming into force in Europe. So it's going to create new environment. And it's a little bit early to say exactly what's going to happen in the industry, but if I step back and I look at the impact for Air Liquide, I think overall, it's going to be a positive trend because at the end of the day, it's really putting value on carbon and low carbon products. So today, we see industry which are getting organized in Europe to drive decarbonization for sure. But what we see also, and I had many discussions with customers in different geographies that they are starting to decarbonize their own processes to be able to import to Europe. And this is the case for sure in China, which is driving decarbonization opportunities in China, but also in the Middle East and in the U.S. And as you know, that we are clearly, I mean, a leader in terms of solutions to decarbonize the manufacturing processes, we will capture the opportunities being in Europe or being in the other countries. So all in all, I think it's a very positive signal towards the decarbonization of the industry.

[Operator Instructions] And the question comes from the line of Tony Jones from Rothschild & Co.

I've got 2 questions, if I may, too. On comparable growth, good results at 2%, but I just wanted to break it down into the growth factors. So if I weight a price from merchants, that gets me to about 1.3%, 1.4% of the group. New projects just over 1%. So that implies underlying volumes down around 1%. I think firstly, is that correct? And then secondly, is that the right sort of run rate we should be thinking as we go into early part of 2026. And then secondly, my question is on uses of cash. And L'Air Liquide has not got a lot of debt and your choices are either cash return or CapEx. But instead, we've seen more acquisitions, could you talk a little bit about the selection criteria for that? And when you're making your acquisitions, is this about accessing new growth or accretive margin expansion?

Thank you very much. For the first question, Jerome, do you want to comment on that, and I will make some comments on the strategy for the acquisitions.

On the comparable sales, we are basically having -- I can break into that rapidly by subsegment that would be helpful. then. In merchant, we have plus 2.7% growth with pricing at plus 3.1%, with import volume and large industry we have basically start-up contribution that offset low demand. Electronics, we have growth, but it's negative because we have a stronger E&I comparable last year and health care is growth really coming from volume and price. So as regard to volume coming in the months to come, it's a bit difficult to say. We are quite cautious. But overall, we see better, I would say, better volume, especially in our goods. We're still negative range in the U.S., for example, but it's much lower than last year. So all in all, you can see that the trend in Q3 was better than -- now maybe you want me to talk about the cash.

I will talk about the more -- I mean, the strategy for the acquisition. So the first thing is that thanks to all the improvement in the profitability, as you mentioned, I mean the cash flow, the group has increased significantly. So we have basically the means to deliver and to execute our strategy. The first priority is to invest in our core business, and you see and Jerome mentioned it, we are deciding on new investment. We have a very strong backlog, and we can afford basically to take the opportunity and to seize the opportunities in our core markets and core opportunities. So that's #1. #2, clearly, I mean, we have also the means to make acquisitions. When we are making acquisitions, there are different types of acquisition. There are the bolt-on acquisitions, which are mostly present in IM and in home health care. The purpose is to increase the density to take position to consolidate some key markets or sometimes to enter into new areas, which can complement what we have. typically what we have done in India is the illustration of that, a very good complementarity to our existing footprint, allowing to cover better, I mean, some key markets. At the same time, I mean, there are some strategic opportunities, whether we see, I mean, the opportunity to take position in key markets. The one that we have done in Korea is exactly this, it's positioning us for the future and for the growth. But as I mentioned and Jerome mentioned that previously, of course, when we look at an acquisition, there is a strategic fit and the opportunity to grow and our acquisitions are there to grow the business and to develop the business. But of course, we are looking at a positive contribution of those acquisitions either because those are existing business with good profitability or because we see synergies and integration and typically, the bolt-on acquisition, for example, the one that we are doing in the U.S. or in China, in this category, we can improve the profitability because of the integration in a much larger and more efficient organization. So once again, I mean, this is part of the capital allocation of the group targeting growth, but of course, contributing positively to the net profit improvement of the group.

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

I had a couple of questions. First is on your pricing in merchant in the U.S. You're noting some of that is because of the higher cylinder rentals. So I'm just curious whether this is more a pass-through of higher running costs because I suppose you also have to pay more for sourcing the cylinders? Or is this real incremental sort of benefit for L'Air Liquide from higher rising in the U.S? And the second one was in your large industries business, I'm a bit surprise that Asia underlying is weak because especially in chemicals, when we look at the production of chemicals in China, it's been growing very, very strongly at the expenses, of course, Europe. So I was surprised that Asia is actually not up in terms of on-site. So any indication on dynamics in Asia?

Thank you very much, Chetan, Adam, can you speak a little bit about what we see in the merchant in the U.S. and the good momentum overall?

Yes. Absolutely, Francois. Chetan, thanks for the question. So looking at the IM business in the U.S. in particular, and I'll speak to the pricing point as well. But I think we've seen, obviously, a resilience in the gas side which has been great, and that's maintaining well. And we've seen sort of an inflection point on a hard goods piece. And this is a positive piece that we've seen, particularly towards the end of the quarter. And a little bit early to say that there's a trend in terms of volumes on the hard goods side, but certainly a nice inflection towards the end of the quarter, which is great. On the pricing, in particular, we always try to stay ahead of the cost curve. And so what we do is we monitor very closely, as you know, price pass-through and making sure that what we do from a pricing standpoint contributes positively to margins. So this is very well ingrained into our normal operating model for all of our associates across the U.S. in terms of our pricing campaigns, our pricing tools and the like. And we maintain a good momentum in that regard. So even when we think forward about cost increases related to inflation and the like, our goal is to stay ahead of the cost curve and make sure that what we do from a pricing standpoint is accretive to our margins.

Adam. Regarding the large industry in Asia, I think, Chetan, what you should look at is clearly, I mean, the different impacts, we have seen a positive contribution of start-up of the business. But clearly, there has been a significant turnaround in some key facilities impacting us. So I think what you should read there is mostly, I mean the impact of the outage and the maintenance at some key customers, especially on the HyCo business, but also areas in some cases, especially in China. So that's probably the reason for the uncorrelated performance of a large industry in Asia compared to what we see from the demand side. But again, it's mostly related to specific maintenance and turnaround at customer sites.